Going Boldly
Forward
2019 Annual Report
LETTER TO SHAREHOLDERS
To Our Shareholders:
Without a doubt, First Interstate is poised for continued growth, scale, and service
excellence as a regional community bank. Looking back on 2019, it’s important to
celebrate the many victories — large and small — that produced an exceptional year.
First Interstate continues to thrive in a dynamic, changing environment; much of that
success is owed to our dedicated and hardworking team. I am continually in awe of what
our employees can accomplish. In April, we completed the acquisition of two Idaho-based
banks: Idaho Independent Bank and Community 1st Bank. The seamless integration of
both banks at the same time speaks to the talent and tenacity of our 2,500 employees
who came together across our six state footprint to make great things happen.
We introduced several new platforms providing clients the digital tools and access
they crave alongside our traditional delivery channels. Each new platform is being
embraced by clients, and we will continue seeking opportunities to accelerate
growth in this area to meet the needs of our consumer and business clients.
While we embrace the changes necessary to remain a high-performing organization,
we hold true to the principles that got us here: our commitment to our people and the
places we serve. We proudly maintain a community banking model that empowers local
employees to make the business decisions that are best for their specific community.
This approach truly drives our success and is key to our financial vitality.
Given the transformational changes First Interstate accomplished in 2019, I feel
confident the Bank remains financially strong and able to meet any tests of a new year.
Yet I recognize there’s always opportunity for improvement. Decisions for the Bank
will continue to be made with an eye toward the future and a focus on delivering a
differentiated client experience; however, wherever, and whenever our clients choose.
Sincerely,
Kevin P. Riley
President & CEO
First Interstate BancSystem, Inc.
2019 Annual Report | A
A Year to be
Proud Of
Relevant in Today’s
Environment
2019 saw the launch of three exciting
new platforms offering our clients
extraordinary access to services: Digital
Wealth Management, Online Mortgage
Applications, and Online Consumer
Credit Card Applications. Creating a
variety of delivery channels for our
clients ensures we remain a useful and
valuable part of their everyday lives.
Building for the Future
Upgrades and investments in our
business processes keep over
50 years of full-service community
banking ready for what our communities
need. This year, we upgraded our
Business Online Banking Platform
and transformed many financial,
operational, and core systems,
providing enhanced experiences
for our clients and employees.
B | 2019 Annual Report
Financially Strong
First Interstate has historically provided strong financial
performance, and that trend continued in 2019. This is
a direct reflection of our commitment to excellence and
the strength of our community banking model.
Return on Average Assets
2019
2018
2017
1.28%
1.27%
0.98%
Return on Average Equity
2019
2018
2017
Return on Tangible Common Equity
2019
2018
2017
9.53%
10.50%
8.57%
15.02%
16.70%
12.76%
Net Interest Margin
3.99%
3.88%
Loan to Deposit Ratio
3.64%
77.43%
79.62%
76.64%
2019
2018
2017
2019
2018
2017
Efficiency Ratio
59.65%
61.31%
Diluted Earnings Per Share
64.77%
$2.83
$2.75
$2.05
2019
2018
2017
2019
2018
2017
2019 Annual Report | C
Taking Care of Our Communities
Our foundational commitment to community
comes alive in philanthropy, volunteerism
and leadership, community development,
sustainable practices, financial education,
and community relations. These are
demonstrations of our Company’s Mission,
Vision, Values, and strategic goals at work.
OUR CONTRIBUTIONS IN 2019 AT-A-GLANCE:
Over $5.2 million donated to over 1,400 local
nonprofit organizations in our footprint
55% of nonprofits focused on poverty and
served low to moderate income individuals
Nearly 28,000 hours volunteered by First
Interstate employees in local communities
$190,000 raised across our six states as part of
our Neighbors Feeding Neighbors program
Employees gave 254 “Teach Children to Save”
presentations to almost 13,000 school-aged kids
On September 11, the Company closed its doors for the afternoon to allow
every employee to volunteer for projects in their community. Almost $204,000
worth of volunteer hours supported 97 schools and 123 service organizations.
Our 2020 Volunteer Day will be held on Wednesday, September 9.
D | 2019 Annual Report
Our Mission, Vision,
and Values
As we continue to grow and evolve as a Company, it’s natural for
our Mission, Vision, and Values to evolve as well. While the focus
of what we’re doing hasn’t changed, the words we use to convey
it to the world have.
Refreshing our Mission, Vision, and Values in early 2020 aligned perfectly with
the launch of our new strategic plan. With a continued focus on remaining
financially strong and technologically relevant, these guiding principles
keep the human element of our business at the forefront of our minds. Just
as they’ve always been, our Mission, Vision, and Values are the meaning
behind each of our interactions with clients, co-workers, and communities.
Mission
The focus of every action we take each day.
We help people and their money work better together.
Vision
Our North Star and ultimate goal.
To be the most relevant everyday experience our
clients have with their money.
Values
The principles we live by and hold ourselves
accountable to along the way.
People First, Always
Seek Greatness
Integrity
Celebrate Success
Commitment to Community
2019 Annual Report | E
Our Four
Strategic
Pillars
Our Company’s Mission is supported
by four key pillars that fuel, organize,
and align internal strategies for
business success.
These pillars build long-term shareholder
value; they guide Company operations,
delivery, and, ultimately, our success within
the communities we serve.
We believe engaged employees produce
happy clients, which in turn support their
communities, and lead to growth for
our Company.
Our Mission depends on our investment in
— and accountability to — what drives us.
OUR PEOPLE, OUR PRIORITY
RELENTLESS CLIENT FOCUS
FUTURE-READY, TODAY
FINANCIAL VITALITY
F | 2019 Annual Report
Form 10-K
DECEMBER 31, 2019
Moving Ahead
Our resilience and eagerness to take on
change will be the marker for our success,
just as it was this past year. We are proud
of the way our Company is positioned —
ready and willing for what’s to come.
Financial detail of our performance for
2019 follows. We invite you to review
it for additional perspective on our year.
2019 Annual Report | G
Form 10-K
DECEMBER 31, 2019
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission File Number: 001-34653
FIRST INTERSTATE BANCSYSTEM, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Montana
81-0331430
(IRS Employer Identification No.)
401 North 31st Street
Billings, MT
(Address of principal executive offices)
59116
(zip code)
(406) 255-5390
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Class A common stock, no par value
FIBK
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Class B common stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Smaller reporting company
Accelerated filer
Emerging growth company
Non-accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
Yes
No
The aggregate market value of voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity
was last sold, based upon the closing price per share of the registrant’s common stock as reported on the NASDAQ, as of the last business day of the
registrant’s most recently completed second fiscal quarter, was $1,791,530,989.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2020:
Class A common stock
Class B common stock
43,173,724
22,110,620
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 5, 2020. The information required
by Part III of this Form 10-K is incorporated by reference to such Proxy Statement.
Documents Incorporated by Reference
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Index
December 31, 2019
PART I
Page Nos.
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15
Exhibits and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Exhibits
Item 16
Form 10-K Summary
1
12
26
26
27
27
27
29
32
61
63
63
63
66
66
66
66
67
67
67
68
70
71
72
73
74
76
136
138
PART I
Item 1. Business
The disclosures set forth in this report are qualified by Item 1A. Risk Factors included herein and the section captioned
“Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results” included in Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. When we refer to “we,”
“our,” “us,” “First Interstate” or the “Company” in this report, we mean First Interstate BancSystem, Inc. and our
consolidated subsidiaries, including our wholly-owned subsidiary, First Interstate Bank, unless the context indicates that we
refer only to the parent company, First Interstate BancSystem, Inc. When we refer to the “Bank” or “FIB” in this report, we
mean only First Interstate Bank.
Our Company
We are a financial and bank holding company incorporated as a Montana corporation in 1971, headquartered in Billings,
Montana. Our Class A common stock is listed on the NASDAQ stock market, or NASDAQ, under the symbol “FIBK.” As
of December 31, 2019, we had consolidated assets of $14.6 billion, deposits of $11.7 billion, total loans of $9.0 billion, and
total stockholders’ equity of $2.0 billion. We currently operate 152 banking offices, including detached drive-up facilities, in
communities across Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming in addition to online and mobile
banking services. Through our bank subsidiary, FIB, we deliver a comprehensive range of banking products and services to
individuals, businesses, municipalities, and other entities throughout our market areas. Our clients participate in a wide variety
of industries, including agriculture, construction, education, energy, governmental services, healthcare, mining, professional
services, retail, technology, tourism, and wholesale trade.
Our mission is to help people and their money work better together. With that as our guiding focus, we strive to be the
most relevant everyday experience our clients have with their money. As a community bank, we adhere to common values
that have long provided a foundation for our growth and success. They are: (1) put people first, always; (2) seek greatness;
(3) act with integrity; (4) celebrate success; and (5) commitment to our communities. These values support our commitment
to our employees, our clients, our communities, and our shareholders.
Four key pillars fuel and align pivotal strategies for our business. These strategies build shareholder value and guide our
Company’s operations, delivery, and ultimately success with our clients and our communities. The first pillar is Our People,
Our Priority. The success of our Company is a reflection of our people. We are building a diverse company of the right
people, in the right jobs, who are informed, capable, and resilient. The second pillar is Relentless Client Focus. Our client
loyalty is cultivated by focusing on every interaction, every time. By nurturing a relationship with each individual, we are in
the unique position of connecting their needs, goals, and dreams to the products and services that can serve them best. The
third pillar is Future Ready, Today. We live in a world in constant motion, which requires resiliency and adaptation. Robust
and relevant systems and processes create a foundation for our employees to excel - not only in their personal performance,
but in the delivery of our products and services to our clients. The last pillar is Financial Vitality. Our goal-oriented financial
rigor keeps us a top-performing bank in which the business results of our approach to community banking flourish, thanks to
the combined effect of each of our pillars in action.
We have grown our business by adhering to a strong set of values; our long-term perspective emphasizes providing high-
quality financial products and services, delivering exceptional client service, influencing business leadership through
professional and dedicated bankers, assisting our communities through financial contributions and socially responsible
leadership, and cultivating a strong corporate culture. In addition, we plan to continue our business in a disciplined and prudent
manner, fueled by organic growth in our existing market areas and expansion into new and complementary markets when
appropriate opportunities arise.
1
Acquisitions
On April 8, 2019, we completed the acquisition of Idaho Independent Bank (“IIBK”), a community bank headquartered
in Coeur d'Alene, Idaho with 11 banking offices across Idaho. Consideration for the acquisition totaled $157.3 million,
consisting of the issuance of 3.871 million shares of the Company’s Class A common stock valued at $40.64 per share, the
closing price of the Company’s Class A common stock as quoted on the NASDAQ on the acquisition date. Holders of each
share of IIBK common stock received 0.50 shares of First Interstate Class A common stock for each share of IIBK common
stock. Previously unvested IIBK restricted stock awards outstanding immediately prior to the close of the transaction vested
and were considered issued and outstanding at acquisition close and included in consideration. All outstanding IIBK stock
options vested and were settled by IIBK prior to the close of the transaction.
On April 8, 2019, we also completed the acquisition of Community 1st Bank (“CMYF”), a community bank headquartered
in Post Falls, Idaho, with three banking offices in North Idaho. Consideration for the acquisition totaled$18.8 million, consisting
of the issuance of 0.463 million shares of the Company’s Class A common stock valued at $40.64 per share, the closing price
of the Company’s Class A common stock as quoted on the NASDAQ on the acquisition date. Holders of each share of CMYF
common stock received 0.378 million shares of First Interstate Class A common stock for each share of CMYF common
stock. Previously unvested CMYF restricted stock awards outstanding immediately prior to the close of the transaction vested
and were considered issued and outstanding at acquisition close and included in consideration. All outstanding CMYF stock
options vested and were settled by CMYF prior to the close of the transaction.
For additional information regarding our acquisition activity, see “Management’s Discussion and Analysis — Recent
Trends and Developments” included in Part II, Item 7 and “Notes to Consolidated Financial Statements — Acquisitions”
included in Part IV, Item 15.
Community Banking
Community banking encompasses commercial and consumer banking services provided through our Bank, primarily the
acceptance of deposits, extensions of credit, mortgage loan origination and servicing, and trust, employee benefit, investment,
and insurance services. Our community banking philosophy emphasizes providing clients with commercial and consumer
banking products and services locally using a personalized service approach while strengthening the communities in our
market areas through service activities. We grant our banking offices significant authority in delivering products in response
to local market considerations and client needs. This authority enables our banking offices to remain competitive by responding
quickly to local market conditions and enhances their relationships with the clients they serve. We also require accountability
by having company-wide standards and established limits on the authority and discretion of each banking office. This
combination of authority and accountability allows our banking offices to provide personalized service and be in close contact
with our communities while at the same time promoting strong performance and remaining focused on our overall financial
vitality.
Lending Activities
We offer real estate, consumer, commercial, agricultural, and other loans to individuals and businesses in our market areas.
We have comprehensive credit policies establishing company-wide underwriting and documentation standards to assist
management in the lending process and to limit our risk. Each loan must meet minimum underwriting standards specified in
our credit policies. Minimum underwriting standards generally specify that loans: (i) are made to borrowers located within
our market footprint with the exception of participation loans and loans to national accounts; (ii) are made only for identified
legal purposes; (iii) have specifically identified sources of repayment; (iv) mature within designated maximum maturity
periods that coincide with repayment sources; (v) are appropriately collateralized whenever possible; (vi) are supported by
current credit information; (vii) do not exceed the Bank’s legal lending limit; (viii) include medium-term fixed interest rates
or variable rates that are adjusted within designated time frames; and (ix) require a flood determination prior to closing. In
addition, our minimum underwriting standards include lending limitations to prevent concentrations of credit in agricultural,
commercial, real estate, or consumer loans. Further, each minimum underwriting standard must be documented, with
exceptions noted, as part of the loan approval process.
2
While each loan must meet minimum underwriting standards established in our credit policies, bankers are granted levels
of credit authority in approving and pricing loans to assure that banking offices are responsive to competitive issues and
community needs in each market area. Lending authorities are established at individual, branch and market levels. Credit
authorities are established and assigned based on the credit experience and credit acumen of each branch loan officer. Credit
authority is under the direction of our Chief Credit Officer or such officer’s designee and is reviewed on an ongoing
basis. Credits over the authority of bankers are approved by our credit risk management group.
Deposit Products
We offer traditional depository products including checking, savings, and time deposits. Deposits at the Bank are insured
by the Federal Deposit Insurance Corporation, (“FDIC”), up to statutory limits. We also offer repurchase agreements primarily
to commercial and municipal depositors. Under repurchase agreements, we sell investment securities held by the Bank to our
clients under an agreement to repurchase the investment securities at a specified time or on demand. All outstanding repurchase
agreements are due in one business day.
Wealth Management
We provide a wide range of trust, employee benefit, investment management, insurance, agency, and custodial services
to individuals, businesses, and nonprofit organizations. These services include the administration of estates and personal trusts,
management of investment accounts for individuals, employee benefit plans and charitable foundations, and insurance
planning.
Centralized Services
We have centralized certain operational activities to provide consistent service levels to our clients company-wide, which
helps us gain efficiency in management of those activities as well as ensure regulatory compliance. Centralized operational
activities generally support our banking offices in the delivery of products and services to clients and include marketing, credit
review, credit cards, mortgage loan sales and servicing, indirect consumer loan purchasing and processing, loan collections,
and other operational activities. Additionally, specialized staff support services have been centralized to enable our branches
to serve their markets more efficiently. These services include credit risk management, finance, accounting, human resource
management, internal audit, facilities management, technology, risk management, compliance, and other support services.
Market Area
The following table reflects our deposit market share and branch locations by state:
Deposit Market Share and Branch Locations by State
Idaho
Montana
Oregon
South Dakota
Washington
Wyoming
Total
(1) Source: FDIC.gov-data as of June 30, 2019.
(2) As of December 31, 2019.
% of Market
Deposits (1)
5.13
17.72
2.39
0.12
0.32
Deposit
Market Share
Rank (1)
6th
2nd
11th
13th
32nd
15.43
1st
Number of
Branches (2)
23
48
33
14
18
16
152
We operate in markets with a diverse employment base covering numerous industries and we believe our community bank
approach to providing client service is a competitive advantage that strengthens the Company’s ability to effectively provide
financial products and services to businesses and individuals in its markets.
3
Competition
There is significant competition among commercial banks in our market areas. We also compete with other providers of
financial services, such as savings and loan associations, credit unions, financial technology companies, internet banks,
consumer finance companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual
funds, and certain government agencies as well as major retailers, all actively engaged in providing various types of loans
and other financial services. To remain competitive in this congested industry, we continue to develop our omni-channel
experience. Some of our competitors have greater resources and, as such, may have higher lending limits and may offer other
services that we do not provide. We generally compete on the basis of service and responsiveness to client needs, available
loan and deposit products, rates of interest charged on loans, rates of interest paid for deposits, and the availability and pricing
of services such as trust, employee benefit, investment and insurance services.
Employees
We recognize quality, engaged employees are critical to our ability to serve our clients and to the success of our
Company. We are building a diverse company of the right people, in the right jobs, who are informed, capable, and
resilient. At December 31, 2019, we employed 2,473 full-time equivalent employees, none of whom are represented by a
collective bargaining agreement. Annually we participate in an employee engagement survey conducted by Gallup and we
consider our employee relations to be good.
Regulation and Supervision
Regulatory Authorities
We are subject to extensive regulation under federal and state laws. A description of certain material laws and regulations
applicable to us is summarized below. This description is not intended to summarize all laws and regulations applicable to
us. Descriptions of statutory and regulatory provisions and requirements do not purport to be complete and are qualified in
their entirety by reference to those provisions. In addition to laws and regulations, state and federal banking regulatory agencies
may issue policy statements, interpretive letters, and similar written guidance that may impose additional regulatory obligations
or otherwise affect the conduct of our business. Additionally, proposals to change laws and regulations are frequently introduced
at both the federal and state levels. The likelihood and timing of any such changes and their impact on the Company cannot
be determined with any certainty.
As a public company with our securities listed for trading on the NASDAQ, we are subject to the disclosure and regulatory
requirements of the Securities and Exchange Commission (“SEC”), including under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and NASDAQ.
As a financial and bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as
amended, and to supervision, regulation and regular examination by the Board of Governors of the Federal Reserve System
(“Federal Reserve”).
The Bank is subject to supervision and regular examination by its primary banking regulators, the Federal Reserve, the
Montana Department of Administration, Division of Banking and Financial Institutions (“Montana Division”), and the
Consumer Financial Protection Bureau (“CFPB”).
The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) administered by the FDIC in the manner and to
the extent provided by law. The Bank is subject to the Federal Deposit Insurance Act (“FDIA”) and FDIC regulations relating
to deposit insurance and may also be subject to supervision and examination by the FDIC.
The Company and the Bank are currently subject to the regulatory capital framework and guidelines reached by Basel III
as adopted by the Federal Reserve. The Federal Reserve have risk-based capital adequacy guidelines intended to measure
capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused
portions of loan commitments, letters of credit, and recourse arrangements.
4
The extensive regulation of the Bank limits both the activities in which the Bank may engage and the conduct of its
permitted activities. Further, the laws and regulations impose reporting and information collection obligations on the Bank.
The Bank incurs significant costs relating to compliance with various laws and regulations and the collection and retention
of information. As the regulatory framework for bank holding companies and banks continues to grow and become more
complex, the cost of complying with regulatory requirements continues to increase.
Financial and Bank Holding Company
We are a bank holding company and have registered as a financial holding company under regulations issued by the Federal
Reserve. As a financial holding company, we may engage in certain business activities that are determined by the Federal
Reserve to be financial in nature or incidental to financial activities as well as all activities authorized to bank holding companies
generally. We may engage in authorized financial activities, provided that we remain a financial holding company and are
“well-capitalized” and “well-managed.” We do not currently engage in significant financial holding company business or
activities not otherwise permitted for bank holding companies generally.
Under federal law, we are required to serve as a source of financial and managerial strength to the Bank, which may include
providing financial assistance to the Bank if the Bank experiences financial distress. Under existing Federal Reserve source
of strength policies, the Federal Reserve may require a bank holding company to make capital injections into a troubled
subsidiary bank. The Federal Reserve may also determine that the bank holding company is engaging in unsafe and unsound
practices if it fails to commit resources to a subsidiary bank.
We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of voting shares of any bank, if, after such acquisition, we would own or control more than
5% of its voting stock. The Federal Reserve considers a number of factors in evaluating acquisitions including, but not limited
to, the financial and managerial resources and future prospects of the parties, the convenience and needs of the communities
served, and competitive factors. Under the Dodd-Frank Act, when considering an application, the Federal Reserve is also
required to evaluate whether the transaction would result in more concentrated risks to the United States banking or financial
system. Under federal law and regulations, a bank holding company may acquire banks in states other than its home state if,
among other things, the bank holding company is both “well-capitalized” and “well-managed” both before and after the
acquisition.
Banks may also merge across state lines. With additional changes made to federal statutes under the Dodd-Frank Act,
banks are also permitted to establish new interstate branches if a bank located in the target state could establish a new branch
at the proposed location without regard to state laws limiting interstate de novo branching. A state can prohibit interstate
mergers entirely or prohibit them if the continuing bank would control insured bank deposits in excess of a specified percentage
of total insured bank deposits in the state. Under Montana law, a bank cannot acquire control of a bank located in Montana
if, after the acquisition, the acquiring institution would control, in the aggregate, more than 30% of the total deposits of insured
depository institutions located in Montana. As of June 30, 2019, based on publicly available information provided by the
FDIC, we believe the Bank controlled approximately 17.7% of the total deposits of all insured depository institutions located
in Montana. As such, the state limitation may limit our ability to directly or indirectly acquire additional banks located in
Montana.
In order to assess the financial strength of the bank holding company, the Federal Reserve and the State of Montana may
conduct periodic on-site and off-site inspections and credit reviews throughout the year. The federal banking agencies, including
the Federal Reserve, may require additional information and reports from us. In addition, the Federal Reserve may examine,
and require reports and information regarding, any entity that we control, including entities other than banks or entities engaged
in financial activities. In certain circumstances, the Federal Reserve may require us to divest of non-bank entities or limit the
activities of those entities even if the activities are otherwise permitted to bank holding companies under governing law.
5
Dividends and Restrictions on Transfers of Funds
Dividends from the Bank are the primary source of funds for the payment of our operating expenses and for the payment
of dividends to our shareholders, and are limited by state and federal laws and regulations. The Company and the Bank are
also subject to various regulatory restrictions relating to capital distributions, including dividends, regulatory capital minimums,
and the requirement to remain “well-capitalized” under the prompt corrective action regulations summarized in the “Capital
Standards and Prompt Corrective Action” section below. In general, the Bank is limited to paying dividends that do not exceed
the current year net profits together with retained earnings from the two preceding calendar years unless the prior consent of
the Federal Reserve is obtained. In addition, the Bank may not pay dividends in excess of the previous two years’ net earnings
without providing notice to the Montana Division.
The capital buffer rules adopted by the federal banking regulators in accordance with the Basel Accords impose further
limitations on the Bank’s ability to pay dividends. In general, the Bank’s ability to pay dividends is limited under the capital
buffer rules unless the Bank’s common equity conservation buffer exceeds the minimum required capital ratio by 2.5% of
risk-weighted assets.
A state or federal banking regulator may impose, by regulatory order or agreement of the Bank, specific dividend limitations
or prohibitions in certain circumstances. The Bank is not currently subject to a specific regulatory dividend limitation.
The Federal Reserve has issued a policy statement regarding the payment of dividends and the repurchase of common
stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings
and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital
needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect
to capital distributions in certain circumstances such as where the company’s net income for the past four quarters (net of
previous capital distributions) is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is
inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends
may be restricted if a subsidiary bank becomes under-capitalized. The policy statement also states that a holding company
should inform the Federal Reserve supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred
stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net
reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of
the quarter in which the redemption or repurchase occurred. These regulatory policies may affect our ability to pay dividends,
repurchase shares of common stock or otherwise engage in capital distributions.
Capital Standards and Prompt Corrective Action
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal
banking agencies, which involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weighting, and other factors. The capital requirements are intended to ensure that banking
organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments and are applied
separately to the Bank and the Company.
Federal regulations require FDIC-insured depository institutions and bank holding companies to meet several minimum
capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio
of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital
requirements were effective January 1, 2015 and are based on recommendations of the Basel Committee on Banking
Supervision and certain requirements of the Dodd-Frank Act.
6
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common
stockholders’ equity and retained earnings and is reduced by substantially all of the regulatory deductions including items
such as goodwill and other intangibles and certain deferred tax assets. Tier 1 capital is generally defined as common equity
Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and
related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital
(common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments
and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual
preferred stock, mandatory convertible securities, intermediate preferred stock, and subordinated debt. Also included in Tier
2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions
like us that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”),
up to 45.0% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.
Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including
unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to
deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including
certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk
weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are
required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and United
States government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-
family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is
assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests,
depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting
of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based
capital requirements.
In assessing an institution’s capital adequacy, the Federal Reserve takes into consideration not only these numeric factors,
but qualitative factors as well and has the authority to establish higher capital requirements in individual cases where deemed
necessary. The Federal Reserve has not established individual capital requirements applicable to us or the Bank.
The Dodd-Frank Act and the revised regulations limit the use of hybrid capital instruments in meeting regulatory capital
requirements, including instruments similar to those which we currently have issued and outstanding. At this time, we meet
the criteria for grandfathering under the Dodd-Frank Act, therefore, the limitations on use of hybrid capital instruments do
not apply to our outstanding instruments. However, in certain circumstances, once the Company surpasses $15.0 billion in
assets, we may lose Tier 1 qualification of trust preferred securities.
Federal law requires the federal banking agencies to take “prompt corrective action” in respect of depository institutions
that do not meet minimum capital requirements. The law sets forth the following five capital tiers: “well capitalized,”
“adequately capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.” A
depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures
and certain other factors, as established by regulation. The relevant capital measures are the common equity tier 1 capital
ratio, total capital ratio, the tier 1 capital ratio, and the leverage ratio.
A depository institution is generally prohibited from making any capital distributions (including payment of a dividend)
or paying any management fee to its parent holding company if the depository institution would thereafter be under-capitalized.
Under-capitalized institutions may be subject to growth limitations and other restrictions and are required to submit a capital
restoration plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly under-
capitalized.”
“Significantly under-capitalized” depository institutions are subject to additional requirements and restrictions, such as
orders to sell sufficient stock to become “adequately capitalized,” to reduce total assets, restrict interest rates paid, remove
management and directors, and cease receipt of deposits from correspondent banks. “Critically under-capitalized” institutions
are subject to the appointment of a receiver or conservator.
7
The capital stock of banks organized under Montana law, such as the Bank, may be subject to assessment upon the direction
of the Montana Department of Administration under the Montana Bank Act. Under the Montana Bank Act, if the Department
of Administration determines an impairment of a bank’s capital exists, it may notify the bank’s board of directors of the
impairment and require payment of an assessment on the bank stock. If the bank fails to do so, the Department of Administration
may, among other things, take charge of the bank and proceed to liquidate the bank.
Restrictions on Transactions with Affiliates, Directors and Officers
Under the Federal Reserve Act, the Bank may not lend funds or otherwise extend credit to us or any other affiliate, except
on specified types and amounts of collateral generally upon market terms and conditions. The Federal Reserve also has
authority to define and limit the transactions between banks and their affiliates. The Federal Reserve’s Regulation W and
relevant federal statutes, among other things, impose significant limitations on transactions in which the Bank may engage
with us or with other affiliates, including per affiliate and aggregate limits on affiliate transactions.
Federal Reserve Regulation O restricts loans to the Bank and Company insiders, which includes directors, certain officers,
and principal stockholders and their respective related interests. All extensions of credit to the insiders and their related interests
must be on the same terms as, and subject to the same loan underwriting requirements as, loans to persons who are not insiders.
In addition, Regulation O imposes lending limits on loans to insiders and their related interests and imposes, in certain
circumstances, requirements for prior approval of the loans by the Bank board of directors.
Safety and Soundness Standards and Other Supervisory and Enforcement Mechanisms
The federal banking agencies have adopted guidelines establishing standards for safety and soundness, asset quality and
earnings, internal controls, and audit systems. These standards are designed to identify potential concerns and ensure action
is taken to address those concerns before they pose a risk to the DIF. If a federal banking agency determines that an institution
fails to meet any of these standards, the agency may require the institution to submit an acceptable plan to achieve compliance
with the standard. If the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any
material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency
and may take other supervisory action.
Pursuant to the Dodd-Frank Act, federal banking regulators impose additional supervisory measures on banking
organizations when they exceed $10 billion in assets. These include enhanced risk management and corporate governance
processes specified by the regulators.
The Federal Reserve has authority to bring enforcement action against a bank or bank holding company and all “institution-
affiliated parties” of a bank or bank holding company, including directors, officers, stockholders, and under certain
circumstances, attorneys, appraisers, and accountants for the bank or holding company. Formal enforcement actions may
include measures such as the issuance of a capital directive or cease and desist order for the removal of officers and/or directors
or the appointment of a receiver or conservator. Civil money penalties cover a wide range of violations and actions, and can
range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1
million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the Federal Reserve that
enforcement action be taken with respect to a particular bank. If such action is not taken, the FDIC has authority to take the
action under specified circumstances. Montana law also provides the Montana Division with various enforcement mechanisms
and, ultimately, authority to appoint a receiver or conservator for a Montana bank.
Deposit Insurance
The FDIC insures our client deposits through the DIF up to $250,000 per depositor. The amount of FDIC assessments
paid by each DIF member institution is based on financial measures and supervisory ratings derived from a statistical model
estimating the probability of failure within a three-year period, with banks deemed more risky paying higher assessments.
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The FDIC was required by the Dodd-Frank Act to take actions necessary to cause the DIF to reach a reserve ratio of 1.35%
of total estimated insured deposits by September 30, 2020. Consequently, effective July 1, 2016, the FDIC revised its system
to impose surcharges on institutions with $10 billion or more in assets and credit smaller institutions for any future payments
toward reaching the 1.35% ratio. On September 30, 2018, the DIF Reserve Ratio reached 1.36%, exceeding the statutorily
required minimum reserve ratio of 1.35% ahead of the September 30, 2020, deadline required under the Dodd-Frank Act.
FDIC regulations provide for two changes to deposit insurance assessments upon reaching the minimum: (1) surcharges on
insured depository institutions with total consolidated assets of $10 billion or more (large banks) will cease; and (2) small
banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio
between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. In November 2019, the FDIC amended
the regulation to apply small bank credits to quarterly deposit insurance assessments as long as the ratio remains above 1.35%.
All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued
by the Financing Corporation, or the FICO, an agency of the Federal government established to recapitalize the predecessor
to the DIF. The assessment rate is applied to total average assets less tangible equity, as defined under the Dodd-Frank Act.
The assessment rate schedule can change from time-to-time at the discretion of the FDIC, subject to certain limits. Under the
current system, premiums are assessed quarterly.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank
Act”), the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged
with respect to certain electronic debit transactions are "reasonable and proportional" to the costs incurred by issuers for
processing such transactions which alters the competitive structure of the debit card payment processing industry and caps
debit card interchange fees for banks with over $10 billion in assets.
Interchange fees are charges that merchants pay to us and other card-issuing banks for processing electronic payment
transactions. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated
networks for routing transactions on each debit or prepaid product. As our assets exceed $10 billion we are subject to the
interchange fee cap. For more information on interchange fees, see "Part I, Item 1A. Risk Factors—Further reductions in
interchange fees will reduce our associated income."
Client Privacy and Other Consumer Protections
Federal law imposes client privacy requirements on any company engaged in financial activities, including the Bank and
us. Under these requirements, a financial company is required to protect the security and confidentiality of clients’ nonpublic
personal information. In addition, for clients who obtain a financial product such as a loan for personal, family, or household
purposes, a financial holding company is required to disclose its privacy policy to the client at the time the relationship is
established and annually thereafter. The financial company must also disclose its policies concerning the sharing of the client’s
nonpublic personal information with affiliates and third parties. Finally, a financial company is prohibited from disclosing an
account number or similar item to a third party for use in telemarketing, direct mail marketing, or marketing through electronic
mail.
The Bank is subject to a variety of federal and state laws, regulations, and reporting obligations aimed at protecting
consumers and Bank clients. Failure to comply with these laws and regulations may, among other things, impair the collection
of loans made in violation of the laws and regulations, provide borrowers or other clients certain rights and remedies or result
in the imposition of penalties on the Bank. Certain of these laws and regulations are described below.
The Equal Credit Opportunity Act generally prohibits discrimination in credit transactions on, among other things, the
basis of race, color, religion, national origin, sex, marital status, or age and, in certain circumstances, limits the Bank’s ability
to require co-obligors or guarantors as a condition of the extension of credit to an individual.
The Real Estate Settlement Procedures Act (“RESPA”) requires certain disclosures be provided to borrowers in real estate
loan closings or other real estate settlements. In addition, RESPA limits or prohibits certain settlement practices, fee sharing,
kickbacks, and similar practices that are considered to be abusive.
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The Truth in Lending Act (“TILA”) requires disclosures to borrowers and other parties in consumer loans including,
among other things, disclosures relating to interest rates and other finance charges, payments and payment schedules and
annual percentage rates. TILA provides remedies to borrowers upon certain failures in compliance by a lender.
The Fair Housing Act regulates, among other things, lending practices in residential lending and prohibits discrimination
in housing-related lending activities on the basis of race, color, religion, national origin, sex, handicap, disability, or familial
status.
The Home Mortgage Disclosure Act requires certain lenders and other firms engaged in the home mortgage industry to
collect and report information relating to applicants, borrowers, and home mortgage lending activities in which they engage
in their market areas or communities. The information is used for, among other purposes, evaluation of discrimination or other
impermissible acts in home mortgage lending.
The Home Ownership and Equity Protection Act regulates terms and disclosures of certain closed-end home mortgage
loans that are not purchase money loans and includes loans classified as “high-cost loans.”
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, generally limits lenders and
other financial firms in their collection, use, or dissemination of client credit information, gives clients some access to, and
control over, their credit information, and requires financial firms to establish policies and procedures intended to deter identity
theft and related frauds.
The Fair Debt Collection Practices Act regulates actions that may be taken in the collection of consumer debts and provides
consumers with certain rights of access to information related to collection actions.
The Electronic Fund Transfer Act regulates fees and other terms on electronic funds transactions.
The CFPB has promulgated numerous regulations relating to consumer financial services-related topics, such as mortgage
origination disclosures, mortgage servicing practices, and others.
The Community Reinvestment Act (“CRA”) generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods.
In addition to substantial penalties and corrective measures that may be assessed for a violation of fair lending laws, the federal
banking agencies may take compliance with such laws and the CRA into account when evaluating applications for such
transactions as mergers and new branches.
In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of
“outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.” The Bank received an “outstanding” rating
on its most recent published CRA examination. Although the Bank’s policies and procedures are designed to achieve compliance
with all fair lending and CRA requirements, instances of non-compliance are occasionally identified through normal operational
activities. Management endeavors to respond pro-actively to any instances of non-compliance and to implement and update
appropriate procedures to prevent instances of non-compliance and other violations from occurring.
USA PATRIOT Act
The USA PATRIOT Act of 2001 amended the Bank Secrecy Act of 1970 and the Money Laundering Control Act of 1986
and adopted additional measures requiring insured depository institutions, broker-dealers, and certain other financial
institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing.
The laws and related regulations also provide for information sharing, subject to conditions, between federal law enforcement
agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking
regulators are required, when reviewing bank holding company acquisition or merger applications, to take into account the
effectiveness of the anti-money laundering activities of the applicants.
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Office of Foreign Asset Control
The United States Treasury Office of Foreign Asset Control enforces economic and trade sanctions imposed by the United
States on foreign persons and governments. Among other authorities, the Office of Foreign Asset Control may require United
States financial institutions to block or “freeze” assets of identified foreign persons or governments which come within the
control of the financial institution. Financial institutions are required to adopt procedures for identification of new and existing
deposit accounts and other relationships with persons or governments identified by the Office of Foreign Asset Control and
to timely report the accounts or relationships to the Office of Foreign Asset Control.
Incentive Compensation
In May 2016, the Federal Reserve Board, other federal banking agencies, and the SEC jointly published re-proposed rule-
making designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would
encourage inappropriate risk taking at a covered institution, which includes a bank or bank holding company with $1 billion
or more of assets, such as us. The proposed rule (i) prohibits incentive-based compensation arrangements that encourage
executive officers, employees, directors, or principal shareholders to expose the institution to inappropriate risks by providing
excessive compensation (based on the standards for excessive compensation adopted pursuant to the FDIA) and (ii) prohibits
incentive-based compensation arrangements for executive officers, employees, directors or principal shareholders that could
lead to a material financial loss for the institution. The proposed rule requires covered institutions to establish policies and
procedures for monitoring and evaluating their compensation practices. The comment period ended in July 2016. Although
final rules had not been adopted as of February 2020, if these or other regulations are adopted in a form similar to the proposed
rule-making, they could impose limitations on the manner in which we may structure compensation for our executives.
Cyber-security
In March 2015, federal regulators issued two related statements regarding cyber-security. One statement indicates that
financial institutions should design multiple layers of security controls to establish lines of defense and to ensure their risk
management processes also address the risk posed by compromised client credentials, including security measures to reliably
authenticate clients accessing internet-based services of the financial institution. The other statement indicates that a financial
institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery,
resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial
institution is also expected to develop appropriate processes to enable recovery of data and business operations and address
rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of
cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including
financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations
and to store sensitive data. We employ a variety of preventative and detective tools to monitor, block, and provide alerts
regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength
of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and
attackers respond rapidly to changes in defensive measures. While, to date, we have not experienced a significant compromise,
significant data loss, or any material financial losses related to cyber-security attacks, our systems and those of our clients
and third-party service providers are under constant threat and it is possible that we could experience a significant event in
the future. Risks and exposures related to cyber-security attacks are expected to remain high for the foreseeable future due to
the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile
banking, and other technology-based products and services by us and our clients. See Item “1A. Risk Factors,” for a further
discussion of risks related to cyber-security.
Website Access to SEC Filings
The Company’s electronic filings with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K, and Proxy Statements, as well as amendments to these reports and statements filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available at no cost through our website at
www.FIBK.com as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The
Company’s SEC filings are also available through the SEC’s website at www.sec.gov. Our website and the information
contained therein or connected thereto is not intended to be incorporated into this report and should not be considered a part
of this report.
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Item 1A. Risk Factors
Like other financial and bank holding companies, we are subject to a number of risks, many of which are outside of our
control. If any of the events or circumstances described below actually occur, our business, financial condition, results of
operations, and prospects could be harmed. These risks are not the only ones that we may face. Other risks of which we are
not aware, including those which relate to the banking and financial services industry in general and us in particular, or those
which we do not currently believe are material, may harm our future business, financial condition, results of operations, and
prospects. You should consider carefully the following important factors in evaluating us, our business, and an investment in
our securities.
Risks Relating to the Market and Our Business
A decline in economic conditions could reduce demand for our products and services, which could have an adverse
effect on our results of operations.
Our clients are located predominantly in Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming. Unlike larger
banks that are more geographically diversified, our profitability largely depends on the general economic conditions in these
areas.
Deterioration in economic conditions could result in the following consequences, any of which could have a material,
adverse effect on our business, financial condition, liquidity, and results of operations:
•
•
•
•
•
•
demand for our products and services may decline;
loan delinquencies, problem assets, and foreclosures may increase;
collateral for loans, especially real estate, may decline in value;
future borrowing power of our clients may be reduced;
the value of our securities portfolio may decline; and
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Additionally, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an
outbreak of hostilities or other international or domestic calamities, including wars or international conflicts with respect to
which the United States may or may not be directly involved in the Middle East or elsewhere in the world, unemployment,
or other economic and geopolitical factors beyond our control, could further impact these local economic conditions and
negatively affect our business and results of operations.
Deflationary pressures, while possibly lowering our operating costs, could also have a significant negative effect on our
borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively
affect our business, financial condition, and results of operations.
We are subject to lending risks.
We take on credit risk by virtue of making loans and extending loan commitments and letters of credit. Our credit standards,
procedures, and policies may not prevent us from incurring substantial credit losses, particularly in light of market
developments.
While our loan portfolio is diversified across business sectors, it is concentrated in commercial real estate and commercial
business loans. As of December 31, 2019, we had $4.9 billion of commercial loans, including $3.5 billion of commercial real
estate loans, representing approximately 54.4%of our total loan portfolio. These loans may involve greater risks than other
types of lending. Because payments on such loans are often dependent on the successful operation or development of the
property or business involved, repayment of such loans is more sensitive than other types of loans to adverse conditions in
the real estate market or the general economy. Commercial loans typically are made on the basis of the borrowers’ ability to
make repayment from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the
borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared
with other loans, as well as the collateral that is generally less readily-marketable, losses incurred on commercial loans could
have a material adverse impact on our business, financial condition, and results of operations.
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In addition, at December 31, 2019, we had $2.7 billion of agricultural, construction, residential, and other real estate loans,
representing approximately 29.9% of our total loan portfolio. Many of our borrowers operate in industries that are directly or
indirectly impacted by changes in commodity prices, such as agriculture, livestock, and energy businesses, as well as businesses
indirectly impacted by commodities prices such as businesses that transport commodities or manufacture equipment used in
production of commodities. Changes in commodity products prices depend on local, regional and global events or conditions
that affect supply and demand for the relevant commodity. Deterioration in economic conditions or in the real estate market
could result in increased delinquencies and foreclosures and could have an adverse effect on the collateral value for many of
these loans and on the repayment ability of many of our borrowers. Deterioration in economic conditions or in the real estate
market could also reduce the number of loans we make to businesses in the construction and real estate industry, which could
negatively impact our interest income and results of operations. Similarly, the occurrence of a natural or manmade disaster
in our market areas could impair the value of the collateral we hold for real estate secured loans. Any one or a combination
of the factors identified above could negatively impact our business, financial condition, results of operations, and prospects.
Changes in interest rates may have an adverse effect on demand for our products and services and on our profitability.
Our earnings and cash flows are largely dependent on net interest income, which is the difference between interest income
earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing
liabilities, such as deposits and borrowed funds. The level of net interest income is primarily a function of the average balance
of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on such assets
and the cost of such liabilities. The narrowing of interest rate spreads could adversely affect our earnings and financial condition.
We cannot control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive
pressures, and the policies of regulatory authorities, including monetary policies of the Federal Open Market Committee,
affect interest income and interest expense.
Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans
and securities and the amount of interest we pay on deposits and borrowings, but such changes could also adversely affect
(1) our ability to originate loans and obtain deposits, (2) the fair value of our financial assets and liabilities, including mortgage
servicing rights, (3) our ability to realize gains on the sale of assets, and (4) the average duration of our mortgage-backed
securities and collateralized mortgage obligations portfolios. For example, rising interest rates could adversely affect our
mortgage banking business because higher interest rates could cause clients to apply for fewer mortgages. Similarly, rising
interest rates would increase the required periodic payment for variable rate loans and may result in an increase in non-
performing loans. Additionally, rising interest rates may increase the cost of our deposits, which are a primary source of
funding. Any substantial, unexpected, or prolonged change in market interest rates could have a material, adverse effect on
our cash flows, financial condition, and results of operations.
Changes in interest rates can also affect the slope of the yield curve. A decline in the current yield curve or a flatter or
inverted yield curve could cause our net interest income and net interest margin to contract, which could have a material
adverse effect on our net income and cash flows, as well as the value of our assets. An inverted yield curve may also adversely
affect the yield on investment securities by increasing the prepayment risk of any securities purchased at a premium. A flattening
or inversion of the yield curve or a negative interest rate environment in the United States could create downward pressure
on our net interest margin.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers
to repay their current loan obligations or by reducing our margins and profitability. As of December 31, 2019, 51.4% of our
loans were advanced to our clients on a variable or adjustable-rate basis. As a result, an increase in interest rates could result
in increased loan defaults, foreclosures, and charge-offs and could necessitate further increases to the allowance for loan and
lease losses, any of which could have a material adverse effect on our business, financial condition, or results of operations.
In addition, a decrease in interest rates could negatively impact our margins and profitability.
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Changes to United States trade policies and other factors beyond the Company’s control, including the imposition of
tariffs and retaliatory tariffs, may adversely impact our business, financial condition, and results of operations.
Changes to United States trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting other
countries, including China, countries comprising the European Union or Middle East, Canada, and Mexico, and retaliatory
tariffs by such countries, could materially harm our business. Tariffs and retaliatory tariffs have been imposed, and additional
tariffs and retaliatory tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and
materials that our clients import or export, including, among others, agricultural and oil and gas products, could cause the
prices of our clients’ products to increase, which could reduce demand for such products, or reduce our clients’ margins, which
would adversely impact their revenues, financial results, and ability to service debt. This in turn could adversely affect our
financial condition and results of operations. In addition, to the extent changes in the political environment have a negative
impact on us or on the markets in which we operate, our business, results of operations, and financial condition could be
materially and adversely impacted.
On October 1, 2018, the United States, Canada, and Mexico agreed to a new trade deal to replace the North American Free
Trade Agreement ("NAFTA"), which is subject to congressional approval and ratification by Canada, which may or may not
be approved in 2020. In the event the agreement is not fully ratified in 2020, various components of the agreement may not
be effective until 2021. The full impact of this agreement on us, our clients, and on the economic conditions in our region is
currently unknown. A trade war or other governmental action related to tariffs or international trade agreements or policies
has the potential to negatively impact ours and/or our clients' costs, demand for our clients' products, and/or the United States
economy or certain sectors thereof and, thus, adversely impact our business, financial condition, and results of operations.
We grow our business in part by acquiring other financial services businesses from time-to-time. These acquisitions
present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration
of acquired businesses after closing.
We have in the past, and may in the future, seek to grow our business by acquiring other businesses. Acquisitions of other
companies or of financial assets and related deposits and other liabilities present risks and uncertainties to us in addition to
those presented by the nature of the business acquired.
Acquisitions may be substantially more expensive or take longer to complete than anticipated. This risk includes
unanticipated costs incurred in connection with the integration of the acquired business. Anticipated benefits (such as cost
savings from synergies or strategic gains from being able to offer product sets to a broader potential client base) may not be
fully realized. It can take longer or require greater resources to achieve these benefits. It also may prove impossible to achieve
them at all or in their entirety as a result of unexpected factors or events.
A number of specific factors could affect our ability to achieve anticipated results from acquisitions, some of which may
depend on the nature of the business acquired. For example, if an acquisition includes loan portfolios, the extent of credit
losses following completion of the acquisition could adversely affect our combined results of operations. Similarly, if an
acquisition includes deposits, the extent of deposit attrition post-closing could adversely affect our combined results of
operations. Acquisitions of banking companies typically include both loans and deposits, and the extent of any post-closing
credit losses and deposit attrition could be affected by a number of factors, including the state of the economy following the
acquisition and the quality of our pre-acquisition analysis of any acquired business. As another example, if an acquisition
involves entering into new geographic or other markets, our inexperience with respect thereto may negatively impact our
ability to take advantage of the opportunities anticipated to be presented in connection with any such expansion plans.
Our ability to analyze the risks presented by prospective acquisitions, as well as our ability to prepare in advance of closing
for integration, depends, in part, on the information we can gather with respect to the business we are acquiring, which can
be limited. By way of example, anticipating accurately the results of litigation or governmental investigations that may be
pending at the time of an acquisition, or may be filed or commenced thereafter, as a result of an acquisition or otherwise, is
a difficult exercise at best, and the impact thereof may be materially underestimated. Furthermore, the extent to which client
attrition from an acquired business actually is experienced by us may materially exceed our expectations. Our pre-acquisition
review of the business may also impact our ability to prepare for and execute on the integration of an acquired business.
As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively
impacted by regulatory issues, including delays in obtaining required approvals. Our ability to make large acquisitions in the
future may be negatively impacted as well by regulatory rules or future regulatory initiatives designed to limit systemic risk.
If we were to experience any of the foregoing adverse effects in connection with an acquisition, our business and financial
condition and results of operations could be materially harmed.
14
Difficulties in identifying suitable opportunities or combining the operations of acquired entities or assets with our own
operations or assessing the effectiveness of businesses in which we make strategic investments or with which we enter into
strategic contractual relationships may prevent us from achieving the expected benefits from these acquisitions, investments,
or relationships.
Inherent uncertainties exist when assessing, acquiring, or integrating the operations of another business or investment or
relationship opportunity. We may not be able to fully achieve the strategic objectives and planned operating efficiencies
relevant to an acquisition or strategic relationship. In addition, the markets and industries in which we and the potential
acquisition and investment targets operate are highly competitive. Acquisition or investment targets may lose clients or
otherwise perform poorly or unprofitably, or in the case of an acquired business or strategic relationship, cause us to lose
clients or perform poorly or unprofitably. Future acquisition and investment activities and efforts to monitor newly acquired
businesses or reap the benefits of a new strategic relationship may require us to devote substantial time and resources and
may cause these acquisitions, investments, and relationships to be unprofitable or cause us to be unable to pursue other business
opportunities.
After completing an acquisition, we may find that certain material information was not adequately disclosed during the
due diligence process or that certain items were not accounted for properly in accordance with financial accounting and
reporting standards. We may also not realize the expected benefits of the acquisition due to lower financial results pertaining
to the acquired entity or assets. For example, we may fail to correctly assess the quality of the assets being acquired and could
experience higher charge-offs than originally anticipated related to the acquired loan portfolio; the total cost and time required
to complete the integration successfully could be greater than estimated and result in higher acquisition costs than expected
or a loss of market opportunity due to any such delay; we may be unable to deploy profitably funds acquired in an acquisition;
or we may experience poor overall performance of the combined entity. Additionally, acquired companies or businesses may
increase our risk of regulatory action or restrictions related to the operations of the acquired business or the regulatory
requirements that apply to the combined business.
Acquisitions may also result in business disruptions that could cause clients to remove their accounts from us and move
their business to competing financial institutions. It is possible that the integration process related to acquisitions could result
in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could
adversely affect our ability to maintain relationships with clients and employees. The loss of key employees in connection
with an acquisition could adversely affect our ability to successfully conduct our business. Acquisition and integration efforts
could divert management attention and resources, which could have an adverse effect on our financial condition and results
of operations. Additionally, the operation of the acquired branches may adversely affect our existing profitability, and we may
not be able to achieve results in the future similar to those achieved by the existing banking business or manage growth
resulting from the acquisition effectively.
If we experience loan losses in excess of estimated amounts, our earnings could be adversely affected.
The risk of credit losses on loans varies with, among other things, general economic conditions, the composition of our
loan portfolio, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value
and marketability of the collateral for the loan. We maintain an allowance for loan losses based upon, among other things,
historical experience, delinquency trends, economic conditions, and regular reviews of loan portfolio quality. Based upon
such factors, management makes various assumptions and judgments about the ultimate collectability of our loan portfolio
and provides an allowance for loan losses. These assumptions and judgments are complex and difficult to determine given
the significant uncertainty surrounding future conditions in the general economy and banking industry. If management’s
assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate, or if banking authorities or
regulations require us to increase the allowance for loan losses, our net income may be adversely affected. As a result, an
increase in loan losses could have a material adverse effect on our earnings, financial condition, results of operations, and
prospects.
Loss of deposits or a change in mix could increase the Company’s funding costs.
Deposits are a low cost and stable source of funding. We depend on checking and savings, negotiable order of withdrawal,
and money market deposit account balances and other forms of client deposits as our primary source of funding. The availability
of internet banking products has increased the mobility of client deposits. We compete with banks and other financial institutions
for deposits. Funding costs may increase because the Company may lose deposits and replace them with more expensive
sources of funding. Clients may shift their deposits into higher-cost products or the Company may need to raise its interest
rates to remain competitive in the marketplace. Higher funding costs reduce the Company’s net interest income and net income.
15
Many of our loans and our obligations for borrowed money are priced based on variable interest rates tied to the London
Interbank Offered Rate (“LIBOR”). We are subject to risks that LIBOR may no longer be available, or may become
unreliable, as a result of the United Kingdom’s Financial Conduct Authority ceasing to require the submission of LIBOR
quotes as of December 31, 2021.
LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-
rate loans, asset-backed securities, and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority,
which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.
The announcement means the continuation of LIBOR cannot be guaranteed after 2021. The potential cessation of LIBOR
quotes or the future unavailability or unreliability of LIBOR creates substantial risks to the banking industry, including us.
Unless alternative rates can be negotiated, our variable-rate loans, funding and derivative obligations that specify the use of
a LIBOR index, would no longer be able to adjust as anticipated. This would adversely affect our asset/liability management
and could lead to more asset and liability mismatches and interest rate risk unless appropriate LIBOR alternatives are developed.
It could also disrupt the capital and credit markets as a result of confusion or uncertainty.
The Federal Reserve has sponsored the Alternative Reference Rates Committee (“ARRC”), which serves as a forum to
coordinate and track planning as market participants currently using LIBOR consider (a) transitioning to alternative reference
rates where it is deemed appropriate and (b) addressing risks in legacy contracts language given the possibility that LIBOR
might cease publication. On April 3, 2018, the Federal Reserve began publishing three new reference rates, including
the Secured Overnight Financing Rate (“SOFR”). ARRC has recommended SOFR as the alternative to LIBOR, and published
fallback interest rate consultations for public comment as well as a Paced Transition Plan to SOFR use. The Financial Stability
Board has taken an interest in LIBOR and possible replacement indices as a matter of risk management. The International
Organization of Securities Commissions, or IOSCO, has been active in this area and is expected to call on market participants
to have backup options if a reference rate, such as LIBOR, ceases publication. The International Swap Dealers Association
has published guidance on interest rate benchmarks and alternatives in July and August 2018. It cannot be predicted whether
SOFR or another index or indices will become a market standard that replaces LIBOR, and if so, the effects on our clients,
or our future results of operations or financial condition.
The market transition away from LIBOR to an alternative reference rate is complex. If LIBOR rates are no longer available,
and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements
with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation
with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates. The replacement
reference rates could also result in a reduction in our interest income. We may also receive inquiries and other actions from
regulators in respect to the Company's preparation and readiness for the replacement of LIBOR with alternative reference
rates.
We may be adversely affected by declining oil and gas prices, and declining demand for coal.
Oil and gas drilling and production in Wyoming and in the Bakken Formation in Montana and North Dakota have been
important contributors to our region’s economic growth. As of December 31, 2019, our direct exposure to the oil and gas
industry was approximately $64.7 million in loan commitments, including approximately $47.2 million advanced to oil and
gas service companies. As of December 31, 2019, we also had commitments to lend an additional $17.5 million to oil and gas
borrowers. These borrowers may be significantly affected by volatility in oil and gas prices and declines in the level of drilling
and production activity. A prolonged period of low oil and gas prices or other events that result in a decline in drilling activity
could have a negative impact on the economies of our market areas and on our clients. We carefully monitor the impact of
volatility in oil and gas prices on our loan portfolio. As of December 31, 2019, 30.6% of our outstanding oil and gas loans
were criticized.
Additionally, adverse developments in the demand for coal due to tightening environmental regulations, the suspension
of new coal leasing on federal lands, slower growth in electricity demand, and fuel competition from low natural gas prices
may impact the economies of the Powder River Basin in Montana and Wyoming.
Adverse developments in the energy sector could have spillover effects on the broader economies of our market areas,
including commercial and residential real estate values and the general level of economic activity. The State of Wyoming
derives a significant portion of its operating budget from energy extraction and related industries. As such, reductions in oil,
gas, and coal-related revenues may have additional negative economic implications for the State of Wyoming. There is no
assurance that our business, financial condition, results of operations, and cash flows will not be adversely impacted by
increases in non-performing oil and gas loans, or by the direct and indirect effects of current and future conditions in the
energy industry.
16
Reductions in interchange fees will reduce our associated income.
An interchange fee is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure
and payment facilitation, and which is paid to debit, credit and prepaid card issuers to compensate them for the costs associated
with card issuance and operation. In the case of credit cards, this includes the risk associated with lending money to clients.
We earn interchange fees on these debit and credit card transactions, included in the payment services line item of the
consolidated statements of income. The Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that
may be charged for debit and prepaid card transactions by us as we have over $10.0 billion in total assets. To the extent
interchange fees are reduced, our income from those fees will be reduced, which could have a material adverse effect on our
business and results of operations.
Our goodwill may become impaired, which may adversely impact our results of operations and financial condition.
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at
least annually and on an interim basis if an event or circumstance indicates it is likely an impairment has occurred. In
testing for impairment, the Company performs a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the fair value of the
reporting unit is in excess of the carrying value, the fair value of net assets is estimated based on analyses of our market
value, discounted cash flows, and peer values. Consequently, the determination of the fair value of goodwill is sensitive to
market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in
impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a
material adverse effect on our business, financial condition, and results of operations. As of December 31, 2019, we had
goodwill of $621.6 million, or 30.9% of our total stockholders’ equity.
Our reputation is very important to our ability to maintain, attract and retain client relationships.
Our clients expect us to deliver personalized financial services with the highest standards of performance, professionalism,
compliance, and ethics. Damage to our reputation could undermine retention of our current clients and our ability to attract
potential clients while also impairing the confidence of our counterparties and vendors, the result of which affects our ability
to effect transactions. Maintaining our reputation depends, in part, on our ability to identify and address issues that may arise
such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, cyber-security,
employee, client and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from
the failure or perceived failure of us to comply with legal and regulatory requirements. To maintain our reputation, we also
must prevent third parties from infringing on the “First Interstate Bank” brand and associated trademarks and our other
intellectual property. Our reputation or prospects could be significantly damaged by adverse publicity or negative information
regarding our Company, whether or not true, that may be posted on social media, reported in the news, or posted in other parts
of the internet. Defending of our reputation, trademarks and other intellectual property, including through litigation, could
result in costs that could have a material adverse effect on our business, financial condition, or results of operations.
Changes in accounting standards could materially impact our financial statements.
From time-to-time, the Financial Accounting Standards Board (“FASB”), and the SEC change the financial accounting
and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we
record and report our financial condition and results of operations. For example, the FASB issued amendments to its guidance
on the credit impairment of financial instruments. The amendments, which will be effective for our first fiscal year after
December 15, 2019, would introduce a new impairment model based on current expected credit losses (“CECL”), rather than
incurred losses. The CECL model would apply to most debt instruments, including loan receivables and loan commitments.
The amendment may require us to increase our allowance for loan losses, may cause volatility in our allowance for loan losses,
may negatively impact our capital ratios, and the costs of collecting, reviewing, and analyzing the additional data required
may have an adverse effect on our operational results. For additional information regarding changes in accounting standards,
see “Notes to Consolidated Financial Statements — Recent Authoritative Accounting Guidance” included in Part IV, Item 15
of this report.
17
We are dependent upon the services of our management team and directors.
Our future success and profitability is substantially dependent upon the management skills of our executive officers and
directors, many of whom have held officer and director positions with us for many years. We currently have employment
agreements or non-competition agreements with five of our key executives: Kevin P. Riley, our president and chief executive
officer; Marcy D. Mutch, our chief financial officer; Renee L. Newman, our chief strategy officer; Jodi Delahunt Hubbell,
our chief operating officer; and Philip G. Gaglia, our chief risk officer. We do not have employment agreements with the other
executives. The unanticipated loss or unavailability of key employees could harm our ability to operate our business or execute
our business strategy. We may not be successful in retaining key employees or finding and integrating suitable successors in
the event of key employee loss or unavailability.
We may not be able to attract and retain qualified employees to operate our business effectively.
As a result of low unemployment rates in our historical geographic footprint and the Northwest region of the United States,
there is substantial competition for qualified personnel in our markets. It may be difficult for us to attract and retain qualified
employees at all management and staffing levels. Failure to attract and retain employees and maintain adequate staffing of
qualified personnel could adversely impact our operations and our ability to execute our business strategy. Furthermore,
relatively low unemployment rates may lead to significant increases in salaries, wages, and employee benefits expenses as
we compete for qualified and skilled employees, which could negatively impact our results of operations and prospects.
Changes in new governmental regulation and/or changes in existing regulation could have a material, adverse effect
on the Company.
The Company is extensively regulated under federal and state banking laws and regulations that are intended primarily
for the protection of depositors, the DIF, and the banking system as a whole. Both the scope of the laws and regulations and
the intensity of the supervision to which our business is subject have increased in recent years, in response, we believe, to the
financial crisis as well as other factors, such as technological and market changes. Regulatory enforcement and fines have
also increased across the banking and financial services sector. Many of these changes have occurred as a result of the Dodd-
Frank Act and its implementing regulations, most of which are now in place. The Company expects its business will remain
subject to extensive regulation and supervision.
Regulations, along with the currently existing tax, accounting, securities, insurance, employment, monetary and other laws
and regulations, rules, standards, policies and interpretations control the methods by which we conduct business, implement
strategic initiatives and tax compliance and govern financial reporting and disclosures. In addition, the Company is subject
to changes in federal and state laws as well as changes in banking and credit regulations and governmental economic and
monetary policies. Congress may enact legislation from time-to-time that affects the regulation of the financial services
industry, and state legislatures may enact legislation from time-to-time affecting the regulation of financial institutions chartered
by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their
regulations or change the manner in which existing regulations are applied. The regulatory environment for financial institutions
entails significant potential increases in compliance requirements and associated costs, including those related to consumer
credit, such as mortgage lending. Any regulatory changes could adversely and materially affect the Company.
Any failure to comply with CRA, fair lending and other laws and regulations could lead to material penalties.
We must comply with the CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and
regulations that impose non-discriminatory lending and other requirements on financial institutions. A failure to comply with
these laws could result in a wide variety of sanctions, including the required payment of damages and civil money penalties,
injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. In addition to
actions by the U.S. Department of Justice and other federal agencies, including the FDIC and CFPB, who are responsible for
enforcing these laws, our compliance with fair lending laws could be challenged in private class action litigation. The costs
of defending any such challenge and any adverse outcome arising from such a challenge could damage our reputation or could
have a material adverse effect on our business, financial condition or results of operations.
18
We are subject to the USA PATRIOT ACT, OFAC, the BSA and related FinCEN and FFIEC Guidelines and regulations
and any failure to comply could result in material implications.
We are routinely examined by our regulators for compliance with the USA PATRIOT ACT, OFAC, the BSA and related
FinCEN and FFIEC Guidelines. Failure to maintain and implement adequate programs and to fully comply with all of the
relevant laws or regulations, could have serious legal, financial and reputational consequences for us, causing applicable bank
regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit
such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and significant
civil money penalties against institutions found to be violating these regulations. If any of the foregoing were to come to pass,
our business, financial condition or results of operations could be materially and adversely affected.
Our total assets exceed $10 billion, which subjects us to heightened regulatory requirements.
As of December 31, 2019, we had consolidated total assets of $14.6 billion. This means that the Company is subject to
various additional requirements on bank holding companies with $10 billion or more total assets, as imposed by the Dodd-
Frank Act and its implementing regulations, including compliance with portions of the Federal Reserve’s enhanced prudential
oversight requirements and a more frequent and enhanced regulatory examination regime. In addition, for compliance in
certain areas such as consumer financial protection laws and regulations, the Bank, with $10 billion or more in total assets,
is primarily examined by the CFPB, with the FDIC maintaining supervision over some consumer related regulations. The
Bank previously was examined by the FDIC for compliance with consumer protection laws. The CFPB is a relatively new
federal agency with evolving regulations and practices, causing some uncertainty as to how the CFPB’s examination and
regulatory authority might impact our business.
Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by
clients, including actual damages, restitution and attorney's fees. Federal bank regulators, state attorney generals and state and
local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other
remedies, including regulatory sanctions, client rescission rights and civil money penalties in the jurisdictions in which we
operate. Failure to comply with consumer protection requirements may also result in delays or restrictions on mergers and
acquisitions and expansionary activities we may wish to pursue, and could otherwise materially and adversely affect our
business, financial condition and results of operations.
We may be subject to more stringent capital requirements in the future.
Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These
supervisory actions may result in higher capital requirements, higher deposit insurance premiums, and limitations on the
Company’s activities that could have a material adverse effect on its business and profitability. For example, in July 2013, the
FDIC and the federal banking agencies approved a new rule that substantially amended the regulatory risk-based capital rules
applicable to us by adopting “Basel III” regulatory capital reforms and, other changes required by the Dodd-Frank Act.
That rule included minimum risk-based capital and leverage ratios, which became effective for us on January 1, 2015, and
refined the definition of what constitutes “capital” for calculating these ratios. The rule required unrealized gains and losses
on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-
time opt-out is exercised. In addition, the final rule established a “capital conservation buffer” that, once fully phased in and
combined with established minimum common equity, risk-based assets capital, and total capital ratios, will exceed the prompt
corrective action “well-capitalized” thresholds. (According to the FDIC Improvement Act of 1991, a depository institution is
“well-capitalized” if it has a total risk-based capital ratio of 10% or greater; a Tier 1 risk-based capital ratio of 8.0% or greater;
a Tier 1 leverage ratio of 5.0% or greater; a common equity Tier 1 capital ratio of 6.5% or greater; and is not subject to a
regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure.)
In January 2019, the phase-in of the new capital conservation buffer requirement was completed. An institution will be
subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level
falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be
utilized for such actions.
19
The table below compares minimum required capital ratios and the well-capitalized minimums to current actual ratios for
the Company and the Bank as of December 31, 2019. The well-capitalized standard for the Company is from Regulation Y
and the well-capitalized standard for the Bank is from Prompt Corrective Action, or PCA, regulations.
Minimum Regulatory
Capital Ratio
Minimum Ratio + Capital
Conservation Buffer
Well-Capitalized
Minimums
The
Company
The Bank
Actual
Common Equity Tier
1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Tier 1 Leverage Ratio
4.50%
6.00%
8.00%
4.00%
7.00%
8.50%
10.50%
N/A
6.50%
8.00%
10.00%
5.00%
12.62%
13.41%
14.10%
10.13%
11.81%
11.81%
12.50%
8.91%
Our Company faces cyber-security risks, including “denial-of-service attacks,” “hacking,” and “identity theft” that
could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant
legal and financial exposure.
Our computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks,
such as denial of service attacks, hacking, terrorist activities, or identity theft. Financial services institutions and companies
engaged in data processing have reported breaches in the security of their websites or other systems, some of which have
involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data,
disable or degrade service, or sabotage systems, often through the introduction of computer viruses, malware, cyber-attacks,
and other means. Denial-of-service attacks have been launched against a number of large financial services institutions,
primarily resulting in inconvenience. Future cyber-attacks could be more disruptive and damaging. Hacking and identity theft
risks, in particular, could cause serious reputational harm to the Company and the Bank.
In addition, we provide our clients with the ability to bank remotely, including online, through their mobile device and
over the telephone. The secure transmission of confidential information over the internet and other remote channels is a critical
element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes,
and other internal and external security breaches. We may be required to spend significant capital and other resources to protect
against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.
To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information,
security breaches and viruses could expose us to claims, regulatory scrutiny, litigation, and other possible liabilities.
Despite efforts to ensure the integrity of our systems, cyber threats are rapidly evolving and we may not be able to anticipate
or prevent all such attacks, nor may we be able to implement guaranteed preventive measures against such security breaches.
The techniques used by cyber criminals change frequently, may not be recognized until launched, and can originate from a
wide variety of sources, including outside groups such as external service providers. These risks may increase in the future
as we continue to increase our mobile payment and other internet-based product offerings and expand our internal usage of
web-based products and applications.
Further, targeted social engineering attacks may be sophisticated and difficult to prevent and our employees, clients, or
other users of our systems may be fraudulently induced to disclose sensitive information, allowing cyber criminals to gain
access to our data or data of our clients.
A successful penetration or circumvention of system security could cause us serious negative consequences, including
significant disruption of operations, misappropriation of confidential information, or damage to our computers or systems or
to those of our clients and counterparties. A successful security breach could result in violations of applicable privacy and
other laws, financial loss to us or to our clients, loss of confidence in our security measures, significant litigation exposure,
and harm to our reputation, all of which could have a material adverse effect on our business, financial condition, results of
operations, and prospects.
20
Privacy, information security and data protection rules regulations could affect or limit how we collect and use personal
information, increase our costs, and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including: (i) certain limitations on our
ability to share non-public personal information about our clients with non-affiliated third parties; (ii) requirements for certain
disclosures to clients about our information collection, sharing and security practices and afford clients the right to "opt out"
of any information sharing by us with non-affiliated third parties (with certain exceptions); and (iii) requirements that we
develop, implement and maintain a written information security program containing appropriate safeguards based on our size
and complexity, the nature and scope of our activities, and the sensitivity of client information we process, as well as plans
for responding to data security breaches. Compliance with current or future privacy, data protection and information security
laws (including those regarding security breach notification) affecting client or employee data could result in higher compliance
and technology costs and could restrict our ability to provide certain products and services, which could have a material
adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection
and information security laws could result in potentially significant regulatory or governmental investigations or actions,
litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial
condition, or results of operations.
We are subject to liquidity risks.
Liquidity is the ability to meet current and future cash flow needs on a timely basis at a reasonable cost. Our liquidity is
used to make loans and to repay deposit liabilities as they become due or are demanded by clients. Potential alternative sources
of liquidity include federal funds purchased and securities sold under repurchase agreements. We maintain a portfolio of
investment securities and hold overnight funds that may be used as a secondary source of liquidity to the extent the securities
are not pledged for collateral. Other potential sources of liquidity include the sale of loans, the utilization of available
government and regulatory assistance programs, the ability to acquire brokered deposits, the issuance of additional
collateralized borrowings such as Federal Home Loan Bank advances, the issuance of debt or equity securities, and borrowings
through the Federal Reserve’s discount window. Without sufficient liquidity from these potential sources, we may not be able
to meet the cash flow requirements of our depositors and borrowers.
Additionally, our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable
to us could be impaired by factors specific to us, the financial services industry, or the economy in general. Factors that could
reduce our access to liquidity sources include a downturn in our local or national economies, difficult or illiquid credit markets,
or adverse regulatory actions against us. A failure to maintain adequate liquidity could have a material, adverse effect on our
regulatory standing, business, financial condition, and results of operations.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we anticipate continuing to evaluate merger and acquisition opportunities
presented to us in our core and other markets. The number of financial institutions headquartered in our geographic market
continues to decline through merger and other activity. We expect that other banking and financial companies, many of which
have significantly greater resources, will compete with us to acquire financial services businesses. This competition, as the
number of acquisition targets decreases, could increase prices for potential acquisitions which could reduce our potential
returns, and reduce the attractiveness of these opportunities to us. Also, acquisitions are subject to various regulatory approvals.
If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe
may be in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory
compliance, including with respect to anti-money laundering obligations, consumer protection laws and CRA obligations,
and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition could be dilutive
to our earnings and shareholders’ equity per share of our common stock, and could adversely affect our financial condition
and results of operations.
Costs associated with repossessed properties, including environmental remediation, may adversely impact our results
of operations, cash flows, and financial condition.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may
foreclose on and take title to properties serving as collateral for certain loans. There are significant costs associated with our
ownership of these properties including, but not limited to, personnel costs, taxes and insurance, completion and repair costs,
and valuation adjustments. Additionally, we may experience unfavorable pricing in connection with our disposition of
foreclosed properties. These costs, along with unfavorable pricing upon disposition, may adversely affect our cash flows,
financial condition, and results of operations.
21
If hazardous or toxic substances are found on these properties, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially
reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more
stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental
liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material,
adverse effect on our cash flows, financial condition, and results of operations.
Our systems of internal operating controls may not be effective.
We establish and maintain systems of internal operational controls that provide us with critical information used to manage
our business. These systems are subject to various inherent limitations, including cost, judgments used in decision-making,
assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk
of fraud. Moreover, controls may become inadequate because of changes in conditions or processes and the risk that the degree
of compliance with policies or procedures may deteriorate over time. Because of these limitations, any system of internal
operating controls may not be successful in preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management. From time-to-time, control deficiencies and losses from operational
malfunctions or fraud have occurred and may occur in the future. Any future deficiencies, weaknesses, or losses related to
internal operating control systems could have an adverse effect on our business, financial condition, results of operations, and
prospects.
The Company may experience significant competition from new or existing competitors, which may reduce its client
base or cause it to lower prices for its products and services in order to maintain market share.
There is intense competition among banks in the Company’s market area. In addition, the Company competes with other
providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities
firms, insurance companies, commercial finance and leasing companies, factoring companies, the mutual funds industry, fin-
tech companies, full-service brokerage firms, and discount brokerage firms, some of which are subject to less extensive
regulations than us with respect to the products and services they provide. Our success depends, in part, on our ability to adapt
our products and services to evolving industry standards and client expectations. There is increasing pressure to provide
products and services at lower prices. Lower prices can reduce our net interest margin and revenues from our fee-based
products and services.
In addition, the adoption of new technologies by competitors, including Internet banking services, mobile applications,
and advanced ATM functionality, could require us to make substantial expenditures to modify or adapt our existing products
and services. Also, these and other capital investments in our business may not produce expected growth in earnings anticipated
at the time of the expenditure. The Company may not be successful in introducing new products and services, achieving market
acceptance of its products and services, anticipating or reacting to consumers’ changing technological preferences, or
developing and maintaining loyal clients. In addition, we could lose market share to the shadow banking system or other non-
traditional banking organizations.
Some of our larger competitors may have greater capital and resources than the Company, may have higher lending limits,
and may offer products and services not offered by us. Any potential adverse reactions to our financial condition or status in
the marketplace, as compared to its competitors, could limit our ability to attract and retain clients and to compete for new
business opportunities. The inability to attract and retain clients or to effectively compete for new business may have a material
and adverse effect on our financial condition and results of operations.
The Company also experiences competition from non-bank companies inside and outside of its market area and, in some
cases, from companies other than those traditionally considered financial sector participants. In particular, technology
companies have begun to focus on the financial sector and offer software and products primarily over the internet, with an
increasing focus on mobile device delivery. These companies generally are not subject to regulatory requirements comparable
to those to which financial institutions are subject, and may accordingly realize certain cost savings and offer products and
services at more favorable rates and with greater convenience to the client. For example, a number of companies offer bill
pay and funds transfer services that allow clients to avoid using a bank. Technology companies are generally positioned and
structured to quickly adapt to technological advances and directly focus resources on implementing those advances. This
competition could result in the loss of fee income and client deposits and related income. In addition, changes in consumer
spending and saving habits could adversely affect our operations, and the Company may be unable to develop competitive
and timely new products and services in response. As the pace of technology and change advance, continuous innovation is
expected to exert long-term pressure on the financial services industry.
22
The Company relies on other companies to provide certain key components of its business infrastructure.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day
operations and we outsource many of our major systems, such as certain data processing, loan servicing, and deposit processing
systems. While the Company has selected these external vendors and systems carefully and continues to manage and oversee
these vendors, it does not control their operations. Failure of certain external vendors or systems to perform or provide services
in accordance with contractual arrangements could be disruptive to our operations and limit our ability to provide certain
products and services demanded by our clients. Because our information technology and telecommunications systems interface
with and depend on third-party systems, we could experience disruptions if demand for such services exceeds capacity or
such third-party systems fail or experience interruptions. If significant, sustained, or repeated, a system failure or disruption
could compromise our ability to operate effectively, damage our reputation, result in a loss of client business, and/or subject
us to additional regulatory scrutiny and possible financial liability. Any of the failures or disruptions mentioned above could
negatively impact our financial condition, results of operations, cash flows, and prospects. Replacing these third-party vendors
could also entail significant delay and expense.
There are operational risks that are inherent in our business.
To successfully offer our clients the products and services they demand, we must be able to process a large volume of
transactions efficiently and accurately while complying with federal and state banking laws and regulations. Operational risk
and losses can result from a variety of things including internal and external fraud; errors by employees or third parties; failure
to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements
and conduct of business rules; equipment failures, including those caused by natural disasters or by electrical,
telecommunications, or other essential utility outages; business continuity and data security system failures, including those
caused by computer viruses, cyber-attacks or unforeseen problems encountered while implementing major new computer
systems or upgrades to existing systems; or the inadequacy or failure of systems and controls, including those of our suppliers
or counterparties. Although we have devoted substantial resources to developing efficient procedures, identifying and rectifying
weaknesses in existing procedures and training staff, it is not possible to be certain that the risk controls and loss mitigation
actions we have implemented have been or will be effective in controlling our operating risks. The occurrence of any of these
risks could result in a diminished ability for us to operate our business, additional costs to correct defects, potential liability
to clients, reputational damage, and regulatory intervention, any of which could adversely affect our business, financial
condition, and results of operations.
The resolution of litigation, if unfavorable, could have a material, adverse effect on our results of operations for a
particular period.
We face legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation
and regulatory proceedings against financial institutions remains high. Legal liability against us could have material, adverse
financial effects or cause harm to our reputation, which in turn could adversely impact our business prospects.
Additionally, some of the services we provide, such as trust and investment services, require us to act as fiduciaries for
our clients and others. From time-to-time, third parties may make claims and take legal action against us pertaining to the
performance of our fiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to us,
we may be exposed to significant financial liability and/or our reputation could be damaged. Either of these results may
adversely impact demand for our products and services or otherwise have a harmful effect on our business, financial condition,
and results of operations.
We may not effectively implement new technology-driven products and services or be successful in marketing these
products and services to our clients.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology enables financial institutions to better serve clients
and to perform more efficiently. Our future success depends, in part, upon our ability to use technology to provide products
and services that will satisfy clients’ demands for convenience, as well as to create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able
to effectively implement new technology-driven products and services or be successful in marketing these products and
services to our clients. Failure to successfully keep pace with technological change affecting the financial services industry
could have a material, adverse impact on our business and, in turn, on our financial condition, results of operations, and
prospects.
23
The soundness of other financial institutions could adversely affect the Company.
Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties. For example, we execute transactions with counterparties in the
financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients.
As a result, defaults by, or even rumors or questions about, one or more financial services companies or the financial services
industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.
Many of these transactions expose us to increased credit risk in the event of default of a counterparty or client.
Our business is subject to the risks of certain global conditions, earthquakes, tsunamis, floods, fires, and other natural
catastrophic events.
A major catastrophe, such as a pandemic, disease outbreak, or other natural disaster including extreme weather or other
events, such as an earthquake, tsunami, flood, fire, winter storms, or other type of natural disaster could adversely affect our
financial condition or result in a prolonged interruption of our business. We have operations and clients in the Northwest, a
geographical region that has been or may be affected by disease, earthquake, volcano, tsunami, and flooding activity, which
could be adversely impacted by these natural disasters or other severe weather in the region. Unpredictable natural and other
disasters could have an adverse effect on the Company in that such events could materially disrupt our operations or the ability
or willingness of our clients to access the financial services offered by the Company. These events could reduce our earnings
and cause volatility in its financial results for any fiscal quarter or year and have a material, adverse effect on our financial
condition and/or results of operations and prospects.
We may be adversely affected by a world-wide pandemic.
Certain of our borrowers may be affected by the recent outbreak of the coronavirus, which originated in Wuhan, Hubei
Province, China but has been reported in other countries. These effects could include disruptions or restrictions in our borrowers’
supply chains, closures of their facilities or decreases in demand for their products and services. If our borrowers are adversely
affected, or if the virus leads to a widespread health crisis that impacts economic growth, our financial condition and results
of operations could be adversely affected, despite having no direct operations in China.
Risks Relating to Our Common Stock
Volatility in the price and volume of our stock may be unfavorable.
The market price of our Class A common stock is volatile and could be subject to wide fluctuations in price in response
to various factors, some of which are beyond our control. These factors include:
•
•
•
•
•
•
•
•
•
•
prevailing market conditions;
our historical performance and capital structure;
estimates of our business potential and earnings prospects;
an overall assessment of our management;
conversion by our Class B shareholders of their shares into Class A common stock to liquidate their holdings;
our performance relative to our peers;
market demand for our shares;
perceptions of the banking industry in general;
political influences on investor sentiment; and
consumer confidence.
At times, the stock markets, including the NASDAQ Stock Market, on which our Class A common stock is listed, may
experience significant price and volume fluctuations. As a result, the market price of our Class A common stock is likely to
be similarly volatile and investors in our Class A common stock may experience a decrease in the value of their shares,
including decreases unrelated to our operating performance or prospects. Further, because our Class B common stock is
convertible on a share-for-share basis into Class A common stock and the share price of our Class B common stock is based
upon the share price of our Class A common stock, our Class B common stock price is similarly impacted by the factors
affecting our Class A common stock.
In addition, following periods of volatility in the overall market and the market price of a company’s securities, securities
class action litigation has often been instituted against companies. This litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s attention and resources.
24
Our dividend policy, or our ability to pay dividends, may change.
We are a legal entity separate and distinct from our subsidiary Bank. Since we are a holding company with no significant
assets other than the capital stock of our subsidiaries, we depend upon dividends from our Bank for a substantial part of our
revenue. Accordingly, our ability to pay dividends, cover operating expenses, and acquire other institutions depends primarily
upon the receipt of dividends or other capital distributions from the Bank. The ability of our Bank to pay dividends to us is
subject to, among other things, its earnings, financial condition, and need for funds, as well as federal and state governmental
policies and regulations applicable to us and the Bank, which limit the amount that may be paid as dividends without prior
approval.
Although we have historically paid dividends to our stockholders, we have no obligation to continue doing so and may
change our dividend policy at any time without notice to our stockholders. Holders of our common stock are only entitled to
receive such cash dividends as our board of directors may declare out of funds legally available for such payments. The amount
of any dividend declaration is subject to our evaluation of our strategic plans, growth initiatives, capital availability, projected
liquidity needs, and other factors.
An investment in our common stock is not an insured deposit.
Our Class A and Class B common stock is not a bank savings account or deposit and, therefore, is not insured against loss
by the FDIC, any other deposit insurance fund, or any other public or private entity. As a result, holders of our common stock
could lose some or all of their investment.
Holders of the Class B common stock have voting control of the Company and are able to determine virtually all matters
submitted to stockholders, including potential change in control transactions.
Members of the Scott family control a majority of the voting power of our outstanding common stock. Due to their holdings
of common stock, members of the Scott family are able to determine the outcome of virtually all matters submitted to
stockholders for approval, including the election of directors, amendment of our articles of incorporation (except when a class
vote is required by law or pursuant to our articles of incorporation), any merger or consolidation requiring common stockholder
approval, and the sale of all or substantially all of our assets. Accordingly, such holders have the ability to prevent change in
control transactions as long as they maintain voting control of the Company.
In addition, because these holders have the ability to elect all of our directors, they are able to control our policies and
operations, including the appointment of management, the payments of dividends on our common stock, and entering into
extraordinary transactions; their interests may not in all cases be aligned with the interests of all stockholders. The Scott family
members have entered into a stockholder agreement giving family members a right of first refusal to purchase shares of Class
B common stock that are intended to be sold or transferred, subject to certain exceptions, by other family members. This
agreement may have the effect of continuing ownership of the Class B common stock and control within the Scott family.
This concentrated control limits stockholders’ ability to influence corporate matters. As a result, the market price of our Class A
common stock could be adversely affected.
“Anti-takeover” provisions and the regulations to which we are subject may also make it more difficult for a third party
to acquire control of us, even if the change in control would be beneficial to stockholders.
We are a financial and bank holding company incorporated in the State of Montana. Anti-takeover provisions in Montana
law and our articles of incorporation and bylaws, as well as regulatory approvals that would be required under federal law,
could make it more difficult for a third party to acquire control of us and may prevent stockholders from receiving a premium
for their shares of our Class A common stock. These provisions could adversely affect the market price of our Class A common
stock and could reduce the amount that stockholders might receive if we are sold.
Our articles of incorporation provide that our Board may issue up to 100,000 shares of preferred stock, in one or more
series, without stockholder approval and with such terms, conditions, rights, privileges, and preferences as the Board may
deem appropriate. In addition, our articles of incorporation provide for staggered terms for our Board and limitations on
persons authorized to call a special meeting of stockholders. In addition, certain provisions of Montana law may have the
effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances
that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-
prevailing market price of such Class A common stock.
25
Further, the acquisition of specified amounts of our common stock (in some cases, the acquisition or control of more than
5% of our voting stock) may require certain regulatory approvals, including the approval of the Federal Reserve and one or
more of our state banking regulatory agencies. The filing of applications with these agencies and the accompanying review
process can take several months. Additionally, as discussed above, the holders of the Class B common stock will have voting
control of the Company. This and the other factors described above may hinder or even prevent a change in control of us,
even if a change in control would be beneficial to our stockholders.
We qualify as a “controlled company” under the NASDAQ Marketplace Rules and may rely on exemptions from certain
corporate governance requirements.
Due to the combined voting power of the members of the Scott family, we qualify as a “controlled company” under the
NASDAQ Marketplace Rules. As a “controlled company,” we are exempt from certain NASDAQ corporate governance
requirements, including the requirements that:
• a majority of the board of directors consist of independent directors;
•
the compensation of officers be determined, or recommended to the board of directors for determination, by a majority
of the independent directors or a compensation committee comprised solely of independent directors; and
• director nominees be selected, or recommended for the board of directors’ selection, by a majority of the independent
directors or a nominating committee comprised solely of independent directors with a written charter or board resolution
addressing the nomination process.
Our compensation and governance and nominating committees may not consist entirely of independent directors. As long
as we choose to rely on these exemptions from NASDAQ Marketplace Rules, stockholders and other interested parties should
be aware, therefore, that decisions concerning executive compensation and director nominations may not be determined solely
by the Board’s independent directors and may be adverse to your particular interests.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We may issue additional Class A common stock in the future pursuant to current or future employee equity compensation
plans or in connection with future acquisitions or financings. Should we choose to raise capital by selling shares of Class A
common stock for any reason, the issuance would have a dilutive effect on the holders of our Class A and Class B common
stock and could have a material negative effect on the market price of our Class A common stock. In addition, our Class B
common stock is convertible into Class A common stock at any time at the sole discretion of the holders of Class B shares or
automatically if, on the record date for any meeting of stockholders, the number of outstanding Class B shares constitutes less
than 20% of the aggregate number of common stock then outstanding.
The common stock is equity and is subordinate to our existing and future indebtedness.
Shares of our Class A and Class B common stock are equity interests and do not constitute indebtedness. As such, shares
of our Class A and Class B common stock rank junior to all our indebtedness, including any subordinated term loans,
subordinated debentures held by trusts that have issued trust-preferred securities, and other non-equity claims on us with
respect to assets available to satisfy claims on us. In the future, we may make additional offerings of debt or equity securities
or we may issue additional debt or equity securities as consideration for future mergers and acquisitions.
None.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal executive offices and one of our banking offices are anchor tenants in an 18-story commercial building
located in Billings, Montana. The building is owned by a joint venture limited liability company in which FIB owns a 50.0%
interest. We lease approximately 105,616 square feet of office space in the building. We also own a 65,226 square foot building
that houses our operations center in Billings, Montana. We provide banking services at 152 locations in Idaho, Montana,
Oregon, South Dakota, Washington, and Wyoming, of which 41 properties are leased from independent third parties and 111
properties are owned by us. We believe each of our facilities is suitable and adequate to meet our current operational needs.
26
Item 3. Legal Proceedings
In the normal course of business, we may be named or threatened to be named as a defendant in various lawsuits. We
record accruals for outstanding legal matters when it is believed to be probable that a loss will be incurred and the amount
can be reasonably estimated. 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.
Not applicable.
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
The Class A common stock is listed on the NASDAQ Stock Market under the symbol “FIBK.” As December 31, 2019,
we had 1,498 record shareholders, including the Wealth Management division of FIB as trustee for 566,804 shares of Class A
common stock held on behalf of 682 individual participants in the Savings and Profit Sharing Plan for Employees of First
Interstate BancSystem, Inc., or the Savings Plan. The Class B common stock is not and will not be listed on the NASDAQ
Stock Market or any other exchange. Therefore, no trading market is expected to develop in the Class B common stock.
Dividends
It is our policy to pay a quarterly dividend to all common shareholders. The Board recently announced an increase in its
quarterly cash dividend amount to $0.34 per share of common stock and a special dividend of $0.60 per share of common
stock. We currently intend to continue paying quarterly dividends; however, the Board may change or eliminate the payment
of future dividends.
Dividend Restrictions
For a description of restrictions on the payment of dividends, see Part I, Item 1, “Business — Regulation and Supervision
— Dividends and Restrictions on Transfers of Funds,” and Part II, Item7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Capital Resources and Liquidity Management” included herein.
Sales of Unregistered Securities
There were no sales of unregistered equity securities by us during the years ended December 31, 2019, 2018, or 2017 that
were not registered under the Securities Act of 1933.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to purchases made by or on behalf of us or any “affiliated
purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months
ended December 31, 2019.
Period
October 2019
November 2019
December 2019
Total
Total Number of
Shares Purchased (1)
3,457
—
—
3,457
$
$
Average Price
Paid Per Share
40.23
—
—
40.23
Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
—
—
—
—
Maximum Number
of Shares That May
Yet Be Purchased Under
the Plans or Programs
2,500,000
2,500,000
2,500,000
2,500,000
(1) Stock repurchases were redemptions of vested restricted shares tendered in lieu of cash for payment of income tax withholding
amounts by participants of the Company’s 2015 Equity Compensation Plan.
27
Performance Graph
The performance graph below compares the cumulative total shareholder return on our Class A common stock with the
cumulative total return on equity securities of companies included in the NASDAQ Composite Index and the SNL U.S. Bank
NASDAQ index, measured on the last trading day of each year shown. The SNL U.S. Bank NASDAQ index is a comparative
peer index comprised of financial companies, including banks, savings institutions, and related holding companies that perform
banking-related functions, listed on the NASDAQ Stock Market. The NASDAQ Composite Index is a comparative broad
market index comprised of all domestic and international common stocks listed on the NASDAQ Stock Market. This graph
assumes a $100 investment in our Class A common stock on December 31, 2014, and reinvestment of dividends on the date
of payment without commissions. The plot points on the graph were provided by SNL Financial LC, Charlottesville, VA. The
performance graph represents past performance, which may not be indicative of the future performance of our Class A common
stock.
Index
First Interstate BancSystem, Inc.
NASDAQ Composite
SNL U.S. Bank NASDAQ
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
$ 100.00
$ 107.62
$ 162.44
$ 156.76
$ 146.95
$ 173.71
100.00
100.00
106.96
107.95
116.45
149.68
150.96
157.58
146.67
132.82
200.49
166.75
28
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial position as of December 31,
2019 and 2018, and the results of our operations for the fiscal years ended December 31, 2019, 2018 and 2017, has been
derived from our audited consolidated financial statements included in Part IV, Item 15. This data should be read in conjunction
with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and such
consolidated financial statements, including the notes thereto. The selected consolidated financial data with respect to our
consolidated financial position as of December 31, 2017, 2016 and 2015, and the results of our operations for the fiscal years
ended December 31, 2016 and 2015, has been derived from our audited consolidated financial statements not included herein.
Five Year Summary
(Dollars in millions except share and per share data)
As of or for the year ended December 31,
2019
2018
2017
2016
2015
Selected Balance Sheet Data:
Net loans
Investment securities
Total assets
Deposits
Securities sold under repurchase agreements
Long-term debt
Subordinated debentures held by subsidiary trusts
Common stockholders’ equity
Selected Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common shareholders
Common Share Data:
Earnings per share:
Basic
Diluted
Dividends per share
Book value per share (1)
Tangible book value per share (2)
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
8,958.6
3,052.3
14,644.2
11,663.5
697.6
13.9
86.9
2,013.9
554.0
59.0
495.0
13.9
481.1
149.9
395.9
235.1
54.1
$
$
$
8,430.7
2,677.5
13,300.2
10,680.7
712.4
15.8
86.9
1,693.9
473.4
40.9
432.5
8.6
423.9
143.3
360.9
206.3
46.1
$
$
$
7,542.2
2,693.2
12,213.3
9,934.9
643.0
13.1
82.5
1,427.6
377.8
28.0
349.8
11.0
338.8
141.8
323.9
156.7
50.2
5,402.3
2,124.5
9,063.9
7,376.1
537.6
28.0
82.5
982.6
297.4
17.6
279.8
10.0
269.8
136.5
261.0
145.3
49.6
181.0
$
160.2
$
106.5
$
95.7
$
$
2.84
2.83
1.24
30.87
19.96
$
2.77
2.75
1.12
27.94
17.52
$
2.07
2.05
0.96
25.28
16.04
$
2.15
2.13
0.88
21.87
16.92
5,169.4
2,057.5
8,728.2
7,088.9
510.6
27.9
82.5
950.5
282.4
18.1
264.3
6.8
257.5
121.5
248.6
130.4
43.7
86.7
1.92
1.90
0.80
20.91
16.18
63,645,029
57,778,857
51,429,366
44,511,774
45,184,091
63,884,868
58,217,123
51,903,209
44,910,396
45,646,418
29
Five Year Summary (continued)
(Dollars in millions except share and per share data)
As of or for the year ended December 31,
Financial Ratios:
Return on average assets
Return on average common stockholders’ equity
Return on average tangible common equity (3)
Average stockholders’ equity to average assets
Yield on average earning assets
Cost of average interest bearing liabilities
Interest rate spread
Net interest margin (4)
Efficiency ratio (5)
Common stock dividend payout ratio (6)
Loan to deposit ratio
Asset Quality Ratios:
Non-performing loans to total loans (7)
Non-performing assets to total loans and other real estate
owned (OREO) (8)
Non-performing assets to total assets
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Net charge-offs to average loans
Capital Ratios:
Tangible common equity to tangible assets (9)
Common equity tier 1 capital ratio (10)
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
2019
2018
2017
2016
2015
1.28%
9.53
15.02
13.40
4.47
0.67
3.80
3.99
59.65
43.66
77.43
1.27%
10.50
16.70
12.10
4.24
0.51
3.73
3.88
61.31
40.43
79.62
0.98%
8.57
12.76
11.45
3.93
0.39
3.54
3.64
64.77
46.38
76.64
1.10%
9.93
12.81
11.04
3.80
0.30
3.50
3.57
61.88
40.93
74.27
1.02%
9.37
12.23
10.87
3.70
0.31
3.39
3.46
63.55
41.65
74.01
0.54%
0.68%
0.95%
1.40%
1.37%
0.63
0.39
0.81
150.21
0.16
9.35%
12.62
13.41
14.10
10.13
0.85
0.55
0.86
125.65
0.10
8.39%
11.40
12.26
12.99
9.47
1.08
0.68
0.95
99.40
0.23
7.75%
11.04
11.93
12.76
8.86
1.58
0.96
1.39
99.52
0.20
8.60%
12.65
13.89
15.13
10.11
1.49
0.90
1.46
106.71
0.08
8.64%
12.69
13.99
15.36
10.12
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
For purposes of computing book value per share, book value equals common stockholders’ equity.
Tangible book value per share is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes of computing
tangible book value per share, tangible book value equals total common stockholders’ equity less goodwill, and other intangible assets (excluding
mortgage servicing rights). Tangible book value per share is calculated as tangible common stockholders’ equity divided by common shares
outstanding, and its most directly comparable GAAP financial measure is book value per share. See below our reconciliation of non-GAAP
financial measures to their most directly comparable GAAP financial measures under the caption “—Non-GAAP Financial Measures” in this
Part II, Item 6.
Return on average tangible common equity is a non-GAAP financial measure. For purposes of computing return on average tangible common
equity, average tangible common stockholders’ equity equals average total stockholders’ equity less average goodwill and average other intangible
assets (excluding mortgage servicing rights). Return on average tangible common equity is calculated as net income available to common
shareholders divided by average tangible common stockholders’ equity, and its most directly comparable GAAP financial measure is return on
average common stockholders’ equity. See below our reconciliation of non-GAAP financial measures to their most directly comparable GAAP
financial measures under the caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
Net interest margin ratio is presented on a fully taxable equivalent, or FTE, basis.
Our efficiency ratio definition conforms with the FDIC definition for all periods presented as non-interest expense less amortization of intangible
assets divided by net interest income plus non-interest income.
Common stock dividend payout ratio represents dividends per common share divided by basic earnings per common share.
Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing interest.
Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest and OREO.
Tangible common equity to tangible assets is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes
of computing tangible common equity to tangible assets, tangible common equity is calculated as total common stockholders’ equity less goodwill
and other intangible assets (excluding mortgage servicing assets), and tangible assets is calculated as total assets less goodwill and other intangible
assets (excluding mortgage servicing rights). The most directly comparable GAAP financial measure to tangible common equity to tangible
assets is common equity to assets. See below our reconciliation of non-GAAP financial measures to their most directly comparable GAAP
financial measures under the caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
(10)
For purposes of computing tier 1 common capital to total risk-weighted assets, tier 1 common capital excludes preferred stock and trust preferred
securities.
30
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles (“GAAP”) in the United States
of America, this annual report contains the following non-GAAP financial measures that management uses to evaluate our
capital adequacy: return on average common tangible equity, tangible book value per common share, tangible common equity
to tangible assets, and net tangible common equity to tangible assets. Return on average common tangible equity is calculated
as net income available to common shareholders divided by average tangible common stockholders’ equity. Tangible book
value per common share is calculated as tangible common stockholders’ equity divided by common shares outstanding.
Tangible assets is calculated as total assets less goodwill and other intangible assets (excluding mortgage servicing assets).
Tangible common equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets.
Net tangible common equity to tangible assets is calculated as net tangible common stockholders’ equity divided by tangible
assets. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies
because other companies may not calculate these non-GAAP measures in the same manner. They also should not be considered
in isolation or as a substitute for measures prepared in accordance with GAAP.
The following table shows a reconciliation from ending total common stockholders’ equity (GAAP) to ending tangible
common stockholders’ equity (non-GAAP) and ending net tangible common stockholders’ equity (non-GAAP) and ending
total assets (GAAP) to ending tangible assets (non-GAAP), their most directly comparable GAAP financial measures, in each
instance as of the periods presented. It also shows a reconciliation from ending total common stockholders’ equity (GAAP)
to ending average tangible common stockholders’ equity (non-GAAP).
Non-GAAP Financial Measures - Five Year Summary
(Dollars in millions except share and per share data)
As of December 31,
2019
2018
2017
2016
2015
Total common stockholders’ equity (GAAP)
$
2,013.9
$
1,693.9
$
1,427.6
$
982.6
$
950.5
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
Tangible common stockholders’ equity
(Non-GAAP)
Total Assets (GAAP)
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
711.7
631.6
521.8
222.5
215.1
$
1,302.2
$
1,062.3
$
905.8
$ 14,644.2
$ 13,300.2
$ 12,213.3
$
$
760.1
9,063.9
$
$
735.4
8,728.2
711.7
631.6
521.8
222.5
215.1
Tangible assets (Non-GAAP)
$ 13,932.5
$ 12,668.6
$ 11,691.5
$
8,841.4
$
8,513.1
Average Balances:
Total common stockholders’ equity (GAAP)
$
1,899.0
$
1,525.8
$
1,243.7
$
963.5
$
926.1
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
Average tangible common stockholders’ equity (Non-
GAAP)
694.1
566.6
408.9
216.7
216.5
$
1,204.9
$
959.2
$
834.8
$
746.8
$
709.6
Common shares outstanding
65,246,339
60,623,247
56,465,559
44,926,176
45,458,255
Net income available to common shareholders
Book value per common share (GAAP)
Tangible book value per common share
(Non-GAAP)
Tangible common equity to tangible assets (Non-GAAP)
Return on average common tangible equity (Non-GAAP)
$
$
181.0
30.87
$
$
160.2
27.94
$
$
106.5
25.28
$
$
95.7
$
86.7
21.87
20.91
19.96
9.35%
15.02
17.52
8.39%
16.70
16.04
7.75%
12.76
16.92
8.60%
12.81
16.18
8.64%
12.22
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and
Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. Any statements about our plans, objectives,
expectations, strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are
identified by words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trends,” “objectives,” “continues” or
similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “may” or similar
expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other
important factors that could cause actual results to differ materially from any results, performance or events expressed or
implied by such forward-looking statements. The following factors, among others, may cause actual results to differ materially
from current expectations in the forward-looking statements, including those set forth in this report:
political, legal, regulatory, and general economic or business conditions, either nationally or regionally;
geopolitical uncertainties throughout the world that may impact our business and our clients’ businesses;
•
•
• weather-related, disease, and other adverse climate or other conditions that may impact our business and our clients’
business;
changes in the interest rate environment or interest rate changes made by the Federal Reserve;
credit performance of our loan portfolio;
adequacy of the allowance for loan losses and access to low-cost funding sources;
the unavailability of LIBOR:
impairment of goodwill;
dependence on the Company’s management team and ability to attract and retain qualified employees;
governmental regulation and changes in regulatory, tax and accounting rules and interpretations;
stringent capital requirements;
future FDIC insurance premium increases;
•
•
•
•
•
•
•
•
•
• CFPB restrictions on our ability to originate and sell mortgage loans;
•
•
•
•
•
•
•
cyber-security risks, including items such as “denial of service,” “hacking” and “identity theft”;
significant litigation and regulatory proceedings;
inability to meet liquidity requirements;
environmental remediation and other costs;
ineffective internal operational controls;
competitive pressures among depository and other financial institutions may increase significantly;
competitors may have greater financial resources or develop products that enable them to compete more successfully
and may be subject to different regulatory standards than us;
reliance on external vendors;
soundness of other financial institutions;
failure of technology and failure to effectively implement technology-driven products and services;
risks associated with introducing and implementing new lines of business, products or services;
failure to execute on strategic or operational plans, including the ability to complete mergers and acquisitions or fully
achieve expected cost savings or revenue growth associated with mergers and acquisitions;
deposit attrition, client loss and/or revenue loss following completed mergers/acquisitions;
anti-takeover provisions;
change in dividend policy and the inability of our bank subsidiary to pay dividends;
uninsured nature of any investment in Class A and Class B common stock;
decline in market price and volatility of Class A and Class B common stock;
voting control of Class B stockholders;
dilution as a result of future equity issuances;
controlled company status; and
subordination of Class A and Class B common stock to Company debt.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
These factors are not necessarily all of the factors that could cause our actual results, performance or achievements to
differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable
factors also could harm our results.
32
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth herein. Forward-looking statements speak only as of the date they are made and we do
not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information
or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent
required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will
make additional updates with respect to those or other forward-looking statements.
Executive Overview
We are a financial and bank holding company headquartered in Billings, Montana. As of December 31, 2019, we had
consolidated assets of $14.6 billion, deposits of $11.7 billion, total loans of $9.0 billion and total stockholders’ equity of $2.0
billion.
We currently operate 152 banking offices, including detached drive-up facilities, in communities across Idaho, Montana,
Oregon, South Dakota, Washington, and Wyoming in addition to Internet and mobile banking services. Through our bank
subsidiary, FIB, we deliver a comprehensive range of banking products and services to individuals, businesses, municipalities
and other entities throughout our market areas. Our clients participate in a wide variety of industries, including agriculture,
construction, education, energy, governmental services, healthcare, mining, professional services, retail, tourism, and
wholesale trade.
Our Business
Our principal business activity is lending to, accepting deposits from and conducting financial transactions, with and for
individuals, businesses, municipalities and other entities. We derive our income principally from interest charged on loans
and, to a lesser extent, from interest and dividends earned on investments. We also derive income from non-interest sources
such as fees received in connection with various lending and deposit services; trust, employee benefit, investment and insurance
services; mortgage loan originations, sales and servicing; merchant and electronic banking services; and from time to time,
gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings, operating expenses,
provisions for loan losses and income tax expense.
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed
and variable rate loans. Our real estate loans comprise commercial real estate, construction (including residential, commercial
and land development loans), residential, agricultural and other real estate loans. Fluctuations in the loan portfolio are directly
related to the economies of the communities we serve. While each loan originated must meet minimum underwriting standards
established in our credit policies, bankers are granted discretion within pre-approved limits in approving and pricing loans to
assure that the banking offices are responsive to competitive issues and community needs in each market area. We fund our
loan portfolio primarily with the core deposits from our clients, generally without utilizing brokered deposits and with minimal
reliance on wholesale funding sources. For additional information about our underwriting standards and loan approval process,
see “Business—Lending Activities,” included in Part I, Item 1 of this report.
Recent Trends and Developments
Acquisitions
On April 8, 2019, we completed the acquisition of IIBK, a community bank headquartered in Coeur d'Alene, Idaho with
11 banking offices across Idaho. Consideration for the acquisition totaled $157.3 million, consisting of the issuance of 3.871
million shares of the Company’s Class A common stock valued at $40.64 per share, the closing price of the Company’s Class
A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of IIBK common
stock received 0.50 shares of First Interstate Class A common stock for each share of IIBK common stock. Previously unvested
IIBK restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued
and outstanding at acquisition close and included in consideration. All IIBK stock options outstanding, vested and were settled
by IIBK prior to the close of the transaction.
33
On April 8, 2019, we also completed the acquisition of CMYF a community bank headquartered in Post Falls, Idaho with
three banking offices in North Idaho. Consideration for the acquisition totaled $18.8 million, consisting of the issuance of
0.463 million shares of the Company’s Class A common stock valued at $40.64 per share, the closing price of the Company’s
Class A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of CMYF
common stock received 0.3784 shares of First Interstate Class A common stock for each share of CMYF common stock.
Previously unvested CMYF restricted stock awards outstanding immediately prior to the close of the transaction vested and
were considered issued and outstanding at acquisition close and included in consideration. All CMYF stock options outstanding,
vested and were settled by CMYF prior to the close of the transaction.
For additional information regarding these acquisitions, see “Risk Factors” included in Part I, Item 1A and “Notes to
Consolidated Financial Statements — Acquisitions” included in Part IV, Item 15 of this report.
Regulation
On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised regulatory
capital framework for U.S. banks in accordance with the Basel III international accord. The revised regulatory capital
framework, or Basel III, became effective for the Company on January 1, 2015. Basel III includes a more stringent definition
of capital and introduces a new common equity tier 1, or CET1, capital requirement, sets forth a comprehensive methodology
for calculating risk-weighted assets, introduces a conservation buffer and sets out minimum capital ratios and overall capital
adequacy standards. Certain deductions and adjustments to regulatory capital phased in starting January 1, 2015 and were
fully implemented by January 1, 2018. The capital conservation buffer phased in beginning January 1, 2016 and was fully
implemented by January 1, 2019. As of December 31, 2019, we had capital levels that, in all cases, exceeded the well capitalized
guidelines. For additional information regarding our capital levels, see “Capital Resources and Liquidity Management”
included herein and “Notes to Consolidated Financial Statements—Regulatory Capital,” included in Part IV, Item 15 of this
report.
Primary Factors Used in Evaluating Our Business
As a banking institution, we manage and evaluate various aspects of both our financial condition and our results of
operations. We monitor our financial condition and performance and evaluate the levels and trends of the line items included
in our balance sheet and statements of income, as well as various financial ratios that are commonly used in our industry. We
analyze these ratios and financial trends against both our own historical levels and the financial condition and performance
of comparable banking institutions in our region and nationally.
Results of Operations
Principal tools we use in managing and evaluating our results of operations include tracking performance as measured by
certain metrics including return on average equity, net interest income, non-interest income, non-interest expense and net
income. Net interest income is affected by a number of factors such as the level of interest rates, changes in interest rates and
changes in the volume and composition of interest earning assets and interest bearing liabilities. Changes in interest rate spread,
which is the difference between interest earned on assets and interest paid on liabilities, has the most significant impact on
net interest income. Other factors like volume of loans, investment securities, and other interest earning assets, compared to
the volume of interest bearing deposits and indebtedness also cause changes in our net interest income between periods. Non-
interest bearing sources of funds, such as demand deposits and stockholders’ equity, help to support earning assets.
The impact of funding, including non-interest bearing deposit sources, is captured in the net interest margin, which is
calculated as net interest income divided by average earning assets. We evaluate our net interest income by assessing the yields
on our loans and other earning assets, the costs of our deposits and other funding sources, and the levels of our net interest
spread and net interest margin.
We seek to increase our non-interest income over time, and we evaluate our non-interest income relative to the trends of
the individual types of non-interest income in view of prevailing market conditions.
We manage our non-interest expenses in consideration of growth opportunities and our community banking model that
emphasizes client service and responsiveness. We evaluate our non-interest expense on factors that include our non-interest
expense relative to our average assets, our efficiency ratio and the trends of the individual categories of non-interest expense.
Finally, we seek to increase our net income and provide favorable shareholder returns over time, and we evaluate our net
income relative to the performance of similar bank holding companies on factors that include return on average assets, return
on average equity, total shareholder return, and growth in earnings.
34
Financial Condition
Managing and evaluating our financial condition, we focus on liquidity, the diversification and quality of our loans, the
adequacy of our allowance for loan losses, the diversification and terms of our deposits and other funding sources, the re-
pricing characteristics and maturities of our assets and liabilities, including potential interest rate exposure, and the adequacy
of our capital levels. We seek to maintain sufficient levels of cash and investment securities to meet potential payment and
funding obligations, and we evaluate our liquidity on factors that include the levels of cash and highly liquid assets relative
to our liabilities, the quality and maturities of our investment securities, the ratio of loans to deposits and any reliance on
brokered certificates of deposit or other wholesale funding sources.
We seek to maintain a diverse and high quality loan portfolio and evaluate our asset quality on factors that include the
allocation of our loans among loan types, credit exposure to any single borrower or industry type, non-performing assets as
a percentage of total loans and OREO, and loan charge-offs as a percentage of average loans. We seek to maintain our allowance
for loan losses at a level adequate to absorb probable losses inherent in our loan portfolio at each balance sheet date, and we
evaluate the level of our allowance for loan losses relative to our overall loan portfolio and the level of non-performing loans
and potential charge-offs.
We seek to fund our assets primarily using core client deposits spread among various deposit categories, and we evaluate
our deposit and funding mix on factors that include the allocation of our deposits among deposit types, the level of our non-
interest bearing deposits, the ratio of our core deposits (i.e. excluding time deposits above $100,000) to our total deposits, and
our reliance on brokered deposits or other wholesale funding sources, such as borrowings from other banks or agencies. We
seek to manage the mix, maturities and re-pricing characteristics of our assets and liabilities to maintain relative stability of
our net interest rate margin in a changing interest rate environment, and we evaluate our asset-liability management using
models to evaluate the changes to our net interest income under different interest rate scenarios.
Finally, we seek to maintain adequate capital levels to absorb unforeseen operating losses and to help support the growth
of our balance sheet. We evaluate our capital adequacy using the regulatory and financial capital ratios including leverage
capital ratio, tier 1 risk-based capital ratio, total risk-based capital ratio, tangible common equity to tangible assets, and tier
1 common capital to total risk-weighted assets.
Critical Accounting Estimates and Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the
banking industry. Application of these principles requires management to make estimates, assumptions and judgments that
affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant accounting
policies we follow are summarized in “Notes to Consolidated Financial Statements—Summary of Significant Accounting
Policies” included in Part IV, Item 15 of this report.
Our critical accounting estimates are summarized below. 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.
Allowance for Loan Losses
The provision for loan losses creates an allowance for loan losses known and inherent in the loan portfolio at each balance
sheet date. The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan
portfolio.
35
We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant
loan we have assessed to have weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain
the allowance for loan losses at appropriate levels. In determining the allowance for loan losses, we estimate losses on specific
loans, or groups of loans, where the probable loss can be identified and reasonably determined. Loans acquired in business
combinations are recorded at their estimated fair values on the date of acquisition. Accordingly, no allowance for loan losses
related to these loans is recorded at the date of transfer. An allowance for loan losses is recorded for credit deterioration
occurring subsequent to the transfer date. Determining the amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgment and the use of subjective measurements, including management’s
assessment of the internal risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio,
overall portfolio quality, industry concentrations, delinquency trends and the impact of current local, regional, and national
economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are possible and may have
a material impact on our allowance, and as a result, on our consolidated financial statements or results of operations. The
allowance for loan losses is maintained at an amount we believe is sufficient to provide for estimated losses inherent in our
loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses result from management’s assessment
of the adequacy of the allowance for loan losses. The loan loss rates for 2018 and 2019 incorporate the available loss history
data from Bank of the Cascades (“BOTC”) prior to the merger date to represent a consolidated institutional loss rate for both
originated and acquired portfolios. Management monitors qualitative and quantitative trends in the loan portfolio, including
changes in the levels of past due, internally classified and non-performing loans. See “Notes to Consolidated Financial
Statements—Summary of Significant Accounting Policies” for a description of the methodology used to determine the
allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included
herein under the heading “—Financial Condition—Allowance for Loan Losses.” See also Part I, Item 1A, “Risk Factors—
Risks Relating to the Market and Our Business.”
Goodwill
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at
least annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. Goodwill
impairment is determined by comparing the fair value of a reporting unit to its carrying amount. In any given year the Company
may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting
unit is in excess of its carrying value. If it is not more likely than not that the fair value of the reporting unit is in excess of
the carrying value, or if the Company elects to bypass the qualitative assessment, a quantitative impairment test is performed.
In performing a quantitative test for impairment, the fair value of net assets is estimated based on analyses of the Company’s
market value, discounted cash flows and peer values. The determination of goodwill impairment is sensitive to market-based
economics and other key assumptions used in determining or allocating fair value. Variability in the market and changes in
assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact
on our consolidated financial statements or results of operations.
Our annual goodwill impairment test is performed each year as of July 1st. The Company performed its annual goodwill
impairment qualitative assessment as of 2019 and determined the Company’s goodwill was not considered impaired. We will
continue to monitor our performance and evaluate our goodwill for impairment annually or more frequently as needed.
For additional information regarding goodwill, see “Notes to Consolidated Financial Statements—Summary of Significant
Accounting Policies,” included in Part IV, Item 15 of this report and “Risk Factors—Risks Relating to the Market and Our
Business,” included in Part I, Item 1A of this report.
Fair Values of Loans Acquired in Business Combinations
Loans acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for
credit losses. Credit risks are included in the determination of fair value. Determining the fair value of the loans involves
estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and
discounting those cash flows at an appropriate market rate of interest.
36
For loans with no significant evidence of credit deterioration since origination, the difference between the fair value and
the unpaid principal balance of the loan at the acquisition date is amortized into interest income using the effective interest
method over the remaining period to contractual maturity. Loans acquired with evidence of deterioration in credit quality
since origination are accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 310-30 “Loans and
Debt Securities Acquired with Deteriorated Credit Quality.” For loans that meet the criteria stipulated in ASC Topic 310-30,
the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired (“accretable yield”) is
amortized to interest income over the expected remaining contractual lives of the underlying loans using the effective interest
method. The credit component, or nonaccretable yield, is not accreted. The Company continues to evaluate the reasonableness
of expectations for the timing and amount of cash to be collected. Increases in expected cash flows subsequent to the initial
measurement are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in
expected cash flows are recognized as impairment.
For additional information regarding acquired loans, see “Notes to Consolidated Financial Statements—Summary of
Significant Accounting Policies,” “Notes to Consolidated Financial Statements—Acquisitions” and “Notes to Consolidated
Financial Statements—Loans,” included in Part IV, Item 15 of this report.
Results of Operations
The following discussion of our results of operations compares the years ended December 31, 2019 to December 31, 2018
and the years ended December 31, 2018 to December 31, 2017.
Net Interest Income
Net interest income, the largest source of our operating income, is derived from interest, dividends, and fees received on
interest earning assets, less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include
loans and investment securities. Interest bearing liabilities include deposits and various forms of indebtedness. Net interest
income is affected by the level of interest rates, changes in interest rates and changes in the composition of interest earning
assets and interest bearing liabilities.
Changes in interest rate spread, which is the difference between interest earned on assets and interest paid on liabilities,
has the most significant impact on net interest income. Other factors like volume of loans, investment securities, and other
interest earning assets compared to the volume of interest bearing deposits and indebtedness also cause changes in our net
interest income between periods. Non-interest bearing sources of funds, such as demand deposits and stockholders’ equity,
help to support earning assets.
37
The following table presents, for the periods indicated, condensed average balance sheet information, together with interest
income and yields earned on average interest earning assets and interest expense and rates paid on average interest bearing
liabilities.
Average Balance Sheets, Yields and Rates
(Dollars in millions)
2019
Interest
Average
Balance
Year Ended December 31,
2018
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
2017
Interest
Average
Rate
Interest earning assets:
Loans (1) (2)
Investment securities (2)
Interest bearing deposits in banks
Federal funds sold
$ 8,879.1 $ 472.2
65.0
18.8
—
2,723.8
843.6
0.8
5.32% $ 7,985.0 $ 405.9
58.4
2,639.4
2.39
11.3
573.6
2.23
—
11.1
—
5.08% $ 6,675.4 $ 327.4
47.6
2,417.5
2.21
7.1
634.2
1.97
—
0.7
—
4.90%
1.97
1.13
—
Total interest earnings assets
Non-earning assets
Total assets
Interest bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Repurchase agreements
Other borrowed funds
Long-term debt
Subordinated debentures held by
subsidiary trusts
Total interest bearing liabilities
Non-interest bearing deposits
Other non-interest bearing liabilities
Stockholders’ equity
Total liabilities and stockholders’
12,447.3
1,720.3
$ 14,167.6
$ 3,033.5 $
3,463.4
1,478.9
677.3
—
15.2
86.9
8,755.2
3,327.5
185.9
1,899.0
556.0
4.47
11,209.1
1,405.6
$ 12,614.7
475.6
4.24
9,727.8
1,133.7
$ 10,861.5
382.1
3.93
8.6
18.4
22.3
3.9
—
1.3
4.5
59.0
8.1
12.5
12.0
2.7
0.2
1.3
4.1
40.9
0.28% $ 2,882.8 $
0.53
1.51
0.58
—
8.55
3,166.7
1,199.5
642.8
1.7
17.6
5.18
0.67
84.1
7,995.2
2,984.3
109.4
1,525.8
0.28% $ 2,553.1 $
0.39
1.00
0.42
11.76
7.39
2,739.2
1,112.7
587.1
23.9
8.0
5.5
7.7
8.2
1.3
1.5
0.6
0.21%
0.28
0.73
0.21
6.42
7.48
3.1
27.9
3.85
0.39
4.88
0.51
82.5
7,106.5
2,430.9
80.4
1,243.7
equity
$ 14,167.6
$ 12,614.7
$ 10,861.5
Net FTE interest income
Less FTE adjustments (2)
Net interest income from
consolidated statements of
income
Interest rate spread
Net FTE interest margin (3)
Cost of funds, including non-interest
bearing demand deposits (4)
$ 497.0
(2.0)
$ 495.0
$ 434.7
(2.2)
$ 432.5
$ 354.2
(4.4)
$ 349.8
3.80%
3.99%
0.49%
3.73%
3.88%
0.37%
3.54%
3.64%
0.29%
(1) Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred
loan costs, which is not material.
(2) Interest income and average rates for tax exempt loans and securities are presented on a fully taxable equivalent, or FTE, basis. The
federal income tax rate of 21%, 21%, and 35% was utilized at December 31, 2019, 2018, and 2017, respectively.
(3) Net FTE interest margin during the period equals (i) the difference between interest income on interest earning assets and the interest
expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
(4) Cost of funds including non-interest bearing demand deposits is calculated by dividing total interest on interest bearing liabilities by
the sum of total interest bearing liabilities plus non-interest bearing deposits.
38
Net FTE interest income increased $62.3 million to $497.0 million during 2019, as compared to $434.7 million in 2018,
primarily due to higher outstanding loan balances as a result of the full year impact of the Inland Northwest Bank (“INB”)
acquisition, the IIBK and CMYF acquisitions, and organic loan growth, combined with increases in yields earned on interest
earning assets, which were partially offset by a higher cost of funds. Also contributing to the increase in net FTE interest
income during 2019, as compared to 2018, was interest accretion related to the fair value of acquired loans of $18.4 million
during 2019 as compared to $13.7 million in 2018, of which $8.0 million was the result of early loan payoffs during 2019 as
compared to $5.9 million in 2018. Net FTE interest income was also positively impacted by recoveries of previously charged-
off interest of $3.1 million in 2019, as compared to $4.0 million in 2018. The Company’s net interest margin ratio increased
11 basis points to 3.99% during 2019, as compared to 3.88% in 2018. Exclusive of interest accretion related to acquired loans
and the impact of recoveries of charged-off interest, our 2019 net interest margin ratio increased 10 basis points over our
similarly calculated net interest margin ratio in 2018.
Net FTE interest income increased $80.5 million to $434.7 million during 2018, as compared to $354.2 million in 2017,
primarily due to higher outstanding loan balances as a result of the full year impact of the BOTC acquisition, the INB acquisition,
and organic loan growth, combined with increases in yields earned on interest earning assets, which were partially offset by
a higher cost of funds, as a result of increasing our rates on client deposits in response to increases in the Federal Fund rate.
Also contributing to the increase in net FTE interest income during 2018, as compared to 2017, was interest accretion related
to the fair value of loans. Interest accretion related to the fair valuation of acquired loans was $13.7 million during 2018 as
compared to $10.7 million in 2017, of which $5.9 million was the result of early loan payoffs during 2018 as compared to $5.1
million in 2017. Net FTE interest income was also positively impacted by recoveries of previously charged-off interest of $4.0
million in 2018, as compared to $5.6 million in 2017. The Company’s net interest margin ratio increased 24 basis points
to 3.88% during 2018, as compared to 3.64% in 2017. Exclusive of interest accretion related to acquired loans and the impact
of recoveries of charged-off interest, our 2018 net interest margin ratio increased 25 basis points over our similarly calculated
net interest margin ratio in 2017.
The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense
resulting from estimated changes in average asset and liability balances (volume) and estimated changes in average interest
rates (rate). Changes which are not due solely to volume or rate have been allocated to these categories based on the respective
percent changes in average volume and average rate as they compare to each other.
Analysis of Interest Changes Due To Volume and Rates
(Dollars in millions)
Year Ended December 31, 2019
compared with
December 31, 2018
Rate
Volume
Net
Year Ended December 31, 2018
compared with
December 31, 2017
Rate
Volume
Net
Year Ended December 31, 2017
compared with
December 31, 2016
Rate
Volume
Net
Interest earning assets:
Loans (1)
Investment Securities (1)
$
45.4 $
1.9
20.9 $
4.7
Interest bearing deposits in
banks
Total change
Interest bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Repurchase agreements
Other borrowed funds
Long-term debt
Subordinated debentures held
by subsidiary trusts
Total change
Increase in FTE net interest
income (1)
5.3
52.6
0.4
1.2
2.8
0.1
(0.2)
(0.2)
0.1
4.2
2.2
27.8
0.1
4.7
7.5
1.1
—
0.2
0.3
13.9
66.3
6.6
7.5
80.4
0.5
5.9
10.3
1.2
(0.2)
—
0.4
18.1
$
64.2 $
4.4
14.3 $
6.4
(0.7)
67.9
0.7
1.2
0.6
0.1
(1.4)
0.7
0.1
2.0
4.9
25.6
1.9
3.6
3.2
1.3
0.1
—
0.9
11.0
78.5
10.8
4.2
93.5
2.6
4.8
3.8
1.4
(1.3)
0.7
1.0
13.0
$
63.1 $
5.8
2.6 $
4.1
0.8
69.7
0.4
0.9
0.1
0.1
—
(1.3)
—
0.2
3.7
10.4
2.9
4.1
0.2
0.7
1.5
0.1
0.4
9.9
65.7
9.9
4.5
80.1
3.3
5.0
0.3
0.8
1.5
(1.2)
0.4
10.1
$
48.4 $
13.9 $
62.3
$
65.9 $
14.6 $
80.5
$
69.5 $
0.5 $
70.0
(1) Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.
39
Provision for Loan Losses
During 2019, we recorded a provision for loan losses of $13.9 million, as compared to $8.6 million in 2018. The increase
in provision for loan losses recorded in 2019 was primarily a result of higher levels of net loan charge-offs offset by improvement
in credit quality. During 2018, we recorded a provision for loan losses of $8.6 million, as compared to $11.0 million in 2017.
The decrease in provision for loans losses recorded in 2018 was primarily a result of improvement in credit quality and lower
levels of net loan charge-offs. For information regarding our non-performing loans, see “Non-Performing Assets” included
herein. For information regarding our allowance for losses, see “Financial Condition—Allowance for Loan Losses” included
herein.
Non-interest Income
Our principal sources of non-interest income primarily include fee-based revenues such as payment services, mortgage
banking and wealth management revenues, service charges on deposit accounts and other service charges, commissions and
fees. The following table presents the composition of our non-interest income as of the dates indicated:
Non-interest income
(Dollars in millions)
Payment services revenues
Mortgage banking revenues
Wealth management revenues
Service charges on deposit accounts
Other service charges, commissions and fees
Loss on termination of interest rate swap
Investment securities gains (losses), net
Other income
Total non-interest income
Year Ended December 31,
% Change
2019
2018
2017
$
$
41.5
30.4
23.8
21.1
17.1
43.3
24.9
23.2
21.8
15.1
$
43.3
28.9
21.1
21.3
13.3
—
0.1
15.9
$ 149.9
—
(0.1)
15.1
$ 143.3
(1.1)
0.7
14.3
$ 141.8
2019 vs
2018
2018 vs
2017
(4.2)%
22.1
2.6
(3.2)
13.2
NM
NM
5.3
4.6 %
—%
(13.8)
10.0
2.3
13.5
NM
NM
5.6
1.1%
Non-interest income increased $6.6 million, or 4.6%, to $149.9 million in 2019, as compared to $143.3 million in 2018,
and $1.5 million, or 1.1%, to $143.3 million in 2018 as compared to $141.8 million in 2017. Significant components of these
fluctuations are discussed below.
Payment services revenues consist of interchange fees that merchants pay for processing electronic payment transactions
and ATM service fees. Payment services revenues decreased $1.8 million, or 4.2%, in 2019, as compared to $43.3 million for
the same period in 2018. Payment services revenues were stable in 2018, as compared to $43.3 million in 2017. Payment
services for 2019 and 2018 reflect decreases of $6.7 million and $6.5 million, respectively, attributable to the Durbin
Amendment rule (which limits the amount of interchange fees certain banks may charge) which impacted our Company
beginning July 1, 2018.
Mortgage banking revenues include origination and processing fees on residential real estate loans held for sale and gains
on residential real estate loans sold to third parties. Fluctuations in market interest rates have a significant impact on mortgage
banking revenues. Higher interest rates can reduce the demand for home loans and loans to refinance existing mortgages.
Conversely, lower interest rates generally stimulate refinancing and home loan origination. Mortgage banking revenues
increased $5.5 million, or 22.1%, to $30.4 million in 2019, as compared to $24.9 million in 2018. The increase is primarily
attributable to increased demand in the refinance market as a result of lower interest rates. Loans originated for home purchases
accounted for approximately 68.2% of 2019 loan production, as compared to approximately 79.3% in 2018.
Mortgage banking revenues decreased $4.0 million, or 13.8%, to $24.9 million in 2018, as compared to $28.9 million in
2017. The decrease is primarily attributable to a lack of demand in the refinance market and reduced gain on sale margins.
Loans originated for home purchases accounted for approximately 79.3% of 2018 loan production, as compared to
approximately 71.9% in 2017.
40
Wealth management revenues are principally comprised of fees earned for management of trust assets and investment
services. Wealth management revenues increased $0.6 million, or 2.6%, as compared to $23.2 million for the same period in
2018 and increased $2.1 million, or 10.0%, in 2018, as compared to $21.1 million in 2017. The 2018 increase was driven by
a concentrated effort on revenue growth through a consistent sales practice coupled with a change in our pricing exception
protocol.
Other service charges, commissions and fees primarily include mortgage servicing fees, fees earned on certain derivative
interest rate contracts and insurance commissions. Other service charges, commissions and fees increased $2.0 million, or
13.2%, as compared to the same period in 2018 and increased $1.8 million, or 13.5%, in 2018, as compared to $13.3 million
in 2017, primarily due to the IIBK and CMYF acquisitions in April 2019 and the INB acquisition in August 2018, respectively.
Additionally, mortgage loan servicing fee income increased year-over-year as a result of an increase in the number of loans
serviced and additional fees earned on derivative interest rate swap contracts offered to clients.
Non-interest Expense
The following table presents the composition of our non-interest expense as of the dates indicated:
Non-interest expense
(Dollars in millions)
Salaries and wages
Employee benefits
Outsourced technology services
Occupancy, net
Furniture and equipment
OREO expense, net of income
Professional fees*
FDIC insurance premiums
Mortgage servicing rights amortization
Mortgage servicing rights impairment (recovery)
Core deposit intangibles amortization
Other expenses*
Year Ended December 31,
% Change
2019
$ 155.3
51.5
32.3
28.3
13.2
(2.2)
11.6
3.5
4.3
0.4
11.2
66.2
2018
$ 146.4
47.9
28.7
25.4
12.7
0.3
10.5
5.6
3.1
—
7.9
60.0
2017
$ 122.7
37.6
25.1
22.4
11.5
0.4
10.4
4.7
3.0
(0.1)
5.5
53.5
2019 vs
2018
2018 vs
2017
6.1%
7.5
12.5
11.4
3.9
NM
10.5
(37.5)
38.7
NM
41.8
10.3
19.3%
27.4
14.3
13.4
10.4
(25.0)
1.0
19.1
3.3
NM
43.6
12.1
Acquisition related expenses
Total non-interest expense
* Certain reclassifications, none of which were material, have been made to conform 2018 and 2017 amounts to the 2019 presentation.
12.4
$ 360.9
27.2
$ 323.9
20.3
$ 395.9
63.7
9.7%
(54.4)
11.4%
Non-interest expense increased $35.0 million, or 9.7%, to $395.9 million in 2019, as compared to $360.9 million in 2018,
and increased $37.0 million, or 11.4%, to $360.9 million in 2018, as compared to $323.9 million in 2017. Significant components
of these increases are discussed in more detail below.
Salaries and wages expense increased $8.9 million, or 6.1%, to $155.3 million in 2019, as compared to $146.4 million in
2018. The increase was primarily due to inflationary wage increases and increased personnel costs associated with the IIBK
and CMYF acquisitions in April 2019 and the full-year impact of the INB acquisition in August 2018.
Salaries and wages expense increased $23.7 million, or 19.3%, to $146.4 million in 2018, as compared to $122.7 million
in 2017. The increase was primarily due to inflationary wage increases, one-time separation payments, higher incentive
compensation, and increased personnel costs associated with the INB acquisition in August 2018 and the full-year impact of
the BOTC acquisition in May 2017.
Employee benefits expense increased $3.6 million, or 7.5%, to $51.5 million in 2019, as compared to $47.9 million in
2018. The increase in employee benefits expense in 2019, as compared to 2018, was primarily due to additional benefit costs
resulting from the IIBK and CMYF acquisitions in April 2019 and the full-year impact of the INB acquisition in August 2018.
41
Employee benefits expense increased $10.3 million, or 27.4%, to $47.9 million in 2018, as compared to $37.6 million in
2017. The increase in employee benefits expense in 2018, as compared to 2017, was primarily due to higher profit sharing
contributions and additional benefit costs resulting from the INB acquisition in August 2018 and the full-year impact of the
BOTC acquisition in May 2017 and an increase in our group insurance costs.
Outsourced technology services expense increased $3.6 million or 12.5%, to $32.3 million in 2019, as compared to $28.7
million in 2018. The increase was primarily due to expenses resulting from the IIBK and CMYF acquisitions in April 2019
and the full-year impact of the INB acquisition in August 2018.
Outsourced technology services expense increased $3.6 million or 14.3%, to $28.7 million in 2018, as compared to $25.1
million in 2017. The increase was primarily due to expenses resulting from the INB acquisition in August 2018 and the full-
year impact of the BOTC acquisition in May 2017.
Occupancy, net expense increased $2.9 million or 11.4%, to $28.3 million in 2019, as compared to $25.4 million in 2018.
The increase was primarily due to expenses resulting from the IIBK and CMYF acquisitions in April 2019 and the full-year
impact of the INB acquisition in August 2018.
Occupancy, net expense increased $3.0 million or 13.4%, to $25.4 million in 2018, as compared to $22.4 million in 2017.
The increase was primarily due to expenses resulting from the INB acquisition in August 2018 and the full-year impact of the
BOTC acquisition in May 2017.
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed,
as a result of acquisitions, and are amortized based on the estimated useful lives of the related deposits. Core deposit intangibles
amortization expense increased $3.3 million or 41.8%, to $11.2 million in 2019, as compared to $7.9 million in 2018, and
increased $2.4 million or 43.6%, to $7.9 million in 2018, as compared to $5.5 million in 2017, due to additional amortization
of core deposit intangibles recorded in conjunction with recent acquisitions. We acquired core deposit intangibles of $16.6
million in conjunction with our acquisitions of IIBK and CMYF in April 2019, $15.7 million in conjunction with our acquisition
of INB in August 2018, and $48.0 million in conjunction with our acquisition of BOTC in May 2017. For additional information
regarding acquired core deposit intangibles, see “Notes to Consolidated Financial Statements—Acquisitions,” included in
Part IV, Item 15 of this report.
Other expenses primarily include advertising and public relations costs; office supply, postage, freight, telephone and
travel expenses; donations expense; debit and credit card expenses; board of director fees; legal expenses; and, other losses.
Other expenses increased $6.2 million, or 10.3%, to $66.2 million in 2019, as compared to $60.0 million in 2018. Increases
in other expenses are due to the additional operating expenses resulting from the IIBK and CMYF acquisitions in April 2019
and the INB acquisition in August 2018.
Other expenses increased $6.5 million, or 12.1%, to $60.0 million in 2018, as compared to $53.5 million in 2017. Increases
in other expenses are due to the additional operating expenses resulting from the INB acquisition in August 2018 and the
BOTC acquisition in May 2017, and higher new market tax credit amortization as a result of our participation in additional
new market tax credit projects.
During 2019, 2018, and 2017, we recorded acquisition related expenses of $20.3 million, $12.4 million, and $27.2 million,
respectively. Acquisition related expenses primarily include legal and professional fees; technology, conversion and contract
termination costs; employee retention payments; and travel expenses. For additional information regarding our acquisitions,
see “Recent Developments” included herein and “Notes to Consolidated Financial Statements—Acquisitions,” included in
Part IV, Item 15 of this report.
Income Tax Expense
Our effective federal tax rate was 18.8% for the year ended December 31, 2019, 17.1% for the year ended December 31,
2018 and 27.2% for the year ended December 31, 2017. Our federal tax rate was reduced as a result of the Tax Cuts and Jobs
Act enacted on December 22, 2017. The effective tax rate for 2017 was impacted by the adjustment of our deferred tax assets
and liabilities related to the tax rate change as a result of the Tax Cuts and Jobs Act. Fluctuations in effective federal income
tax rates are primarily due to the re-measurement of deferred tax assets and liabilities resulting from the enactment of federal
tax reform (2017 only), and the timing of federal tax credits resulting from our participation in the New Markets Tax Credits
Program, a program through the U.S. Department of Treasury, aimed at attracting private capital into low-income communities.
For additional information about our participation in the New Markets Tax Credits Program, see “Notes to Consolidated
Financial Statements—Summary of Significant Accounting Policies,” included in Part IV, Item 15 of this report.
42
State income tax applies primarily to pretax earnings generated within Idaho, Montana, Oregon and South Dakota. Our
effective state tax rate was 4.2% for the year ended December 31, 2019, 5.2% for the year ended December 31, 2018 and
4.8% for the year ended December 31, 2017.
Net Income
Net income was $181.0 million, or $2.83 per diluted share, in 2019, compared to $160.2 million, or $2.75 per diluted
share, in 2018 and $106.5 million, or $2.05 per diluted share, in 2017. The after-tax impact of acquisition related expenses
on earnings per share was $0.24, $0.17, and $0.34, respectively for the periods.
Summary of Quarterly Results
The following tables present the Company’s summarized quarterly financial information for the fiscal years ended
December 31, 2019 and 2018.
Quarterly Results (Unaudited)
(Dollars in millions except per share data)
Year Ended December 31, 2019 (1)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income*
Non-interest expense*
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
130.6 $
142.1 $
141.3 $
14.6
116.0
3.7
112.3
33.2
92.5
53.0
16.8
125.3
3.8
121.5
39.2
111.9
48.8
15.8
125.5
2.6
122.9
40.3
98.8
64.4
$
$
11.4
41.6 $
10.9
37.9 $
15.3
49.1 $
0.69 $
0.59 $
0.76 $
0.69
0.59
0.76
140.0
11.8
128.2
3.8
124.4
37.2
92.7
68.9
16.5
52.4
0.81
0.80
Dividends paid per common share
(1) Quarterly amounts may not add to annual amounts due to the effect of rounding on a quarterly basis.
* Certain reclassifications, none of which were material, have been made to conform certain first, second, and third quarter amounts
to the fourth quarter presentation.
0.31
0.31
0.31
0.31
43
Quarterly Results (Unaudited)
(Dollars in millions except per share data)
Year Ended December 31, 2018 (1)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
107.6 $
113.0 $
121.2 $
7.8
99.8
2.1
97.7
35.2
85.9
47.0
9.2
103.8
2.9
100.9
37.6
84.9
53.6
11.2
110.0
2.0
108.0
36.2
90.7
53.5
10.3
36.7 $
11.9
41.7 $
12.1
41.4 $
0.65 $
0.74 $
0.71 $
$
$
0.65
0.74
0.71
0.28
131.6
12.7
118.9
1.6
117.3
34.3
99.4
52.2
11.8
40.4
0.67
0.67
0.28
Dividends paid per common share
(1) Quarterly amounts may not add to annual amounts due to the effect of rounding on a quarterly basis.
0.28
0.28
Financial Condition
Total assets increased $1,344.0 million, or 10.1%, to $14,644.2 million as of December 31, 2019, from $13,300.2 million
as of December 31, 2018, with $862.3 million of the increase attributable to the IIBK and CMYF acquisitions. The remaining
increase was primarily due to the deployment of funds generated through organic deposit growth into interest earning assets.
Total assets increased $1,086.9 million, or 8.9%, to $13,300.2 million as of December 31, 2018, from $12,213.3 million
as of December 31, 2017, with $797.5 million of the increase attributable to the INB acquisition.
Loans
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed
and variable rate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities we serve.
While each loan originated generally must meet minimum underwriting standards established in our credit policies, bankers
are granted certain levels of authority in approving and pricing loans to assure that the banking offices are responsive to
competitive issues and community needs in each market area. For additional information regarding our underwriting standards
and loan approval policies, see “Community Banking—Lending Activities,” included in Part I, Item 1 of this report.
Total loans increased $527.9 million, or 6.2%, to $9,031.6 million as of December 31, 2019, from $8,503.7 million as of
December 31, 2018. Approximately $417.1 million of this increase was attributable to the acquisitions of IIBK and CMYF
in April 2019. Exclusive of the IIBK and CMYF acquisitions, total loans grew organically $110.8 million, or 1.3%, with the
growth occurring in commercial real estate, construction, agricultural real estate, agricultural, and loans held for sale. These
increases were partially offset by declines in residential real estate, consumer, and commercial loans.
Total loans increased $889.4 million, or 11.7%, to $8,503.7 million as of December 31, 2018, from $7,614.3 million as
of December 31, 2017. Approximately $713.1 million of this increase was attributable to the acquisition of INB in August
2018. Exclusive of the INB acquisition, total loans grew organically $176.3 million, or 2.3%, with all major categories of
loans held for investment showing growth.
44
The following table presents the composition of our loan portfolio as of the dates indicated:
Loans Outstanding
(Dollars in millions)
2019
Percent
2018
Percent
As of December 31,
Percent
2017
2016
Percent
2015
Percent
Loans
Real estate:
Commercial
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Other loans
Mortgage loans
held for sale
Total loans
Less allowance for
loan losses
Net loans
Ratio of allowance
to total loans
$ 3,484.7
977.7
1,546.1
226.6
1,045.2
1,371.3
279.1
—
38.7% $ 3,235.4
838.7
10.7
1,542.0
17.1
217.4
2.5
1,070.2
11.6
1,310.3
15.2
254.8
3.1
1.6
—
38.0% $ 2,822.9
708.3
1,487.4
158.2
1,034.4
1,215.4
136.2
4.9
9.9
18.1
2.6
12.6
15.4
3.0
—
37.1% $ 1,834.4
482.0
1,027.4
170.2
970.3
797.9
132.9
1.6
9.3
19.5
2.1
13.6
15.9
1.8
0.1
33.5% $ 1,793.3
430.7
1,032.9
156.2
844.4
792.4
142.2
1.3
8.8
18.8
3.1
17.7
14.6
2.4
—
34.2%
8.2
19.7
3.0
16.1
15.1
2.7
—
100.9
9,031.6
1.1
100.0%
33.3
8,503.7
0.4
100.0%
46.6
7,614.3
0.6
100.0%
61.8
5,478.5
1.1
100.0%
52.9
5,246.3
1.0
100.0%
73.0
$ 8,958.6
73.0
$ 8,430.7
72.1
$ 7,542.2
76.2
$ 5,402.3
76.8
$ 5,169.5
0.81%
0.86%
0.95%
1.39%
1.46%
Real Estate Loans. We provide interim construction and permanent financing for both single-family and multi-unit
properties, medium-term loans for commercial, agricultural and industrial property and/or buildings and equity lines of credit
secured by real estate.
Commercial real estate loans. Commercial real estate loans include loans for property and improvements used commercially
by the borrower or for lease to others for the production of goods or services. Approximately 47.7% and 49.2% of our
commercial real estate loans were owner occupied as of December 31, 2019 and 2018, respectively. Commercial real estate
loans increased $249.3 million, or 7.7%, to $3,484.7 million as of December 31, 2019, from $3,235.4 million as of December 31,
2018. Exclusive of $151.5 million of IIBK and CMYF acquired loans, commercial real estate loans increased organically
$97.8 million, or 3.0%. Organic growth primarily occurred in Idaho and Oregon.
Commercial real estate loans increased $412.5 million, or 14.6%, to $3,235.4 million as of December 31, 2018,
from $2,822.9 million as of December 31, 2017. Exclusive of $303.8 million of INB acquired loans, commercial real estate
loans increased organically $108.7 million, or 3.9%. Organic growth primarily occurred in Western Montana and Wyoming.
Construction loans. Construction loans are primarily to commercial builders for residential lot development and the
construction of single-family residences and commercial real estate properties. Construction loans are generally underwritten
pursuant to pre-approved permanent financing. As of December 31, 2019, our construction loan portfolio was divided among
the following categories: approximately $244.1 million, or 25.0%, residential construction; approximately $431.5 million, or
44.1%, commercial construction; and, approximately $302.1 million, or 31.0%, land acquisition and development. This
compares to approximately $242.8 million, or 28.9%, residential construction; approximately $274.3 million, or 32.7%,
commercial construction; and, approximately $321.6 million, or 38.4%, land acquisition and development as of December 31,
2018.
Construction loans increased $139.0 million, or 16.6%, to $977.7 million as of December 31, 2019, from $838.7 million
as of December 31, 2018. Exclusive of $100.5 million of IIBK and CMYF acquired loans, construction loans increased
organically $38.5 million, or 4.6%, due to increases in commercial construction loans, which were partially offset by decreases
in land acquisition and development and residential construction loans. Construction loans increased $130.4 million, or 18.4%,
to $838.7 million as of December 31, 2018, from $708.3 million as of December 31, 2017. Exclusive of $64.0 million of INB
acquired loans, construction loans increased organically $66.4 million, or 9.4%, due to increases in commercial construction
loans, which were partially offset by decreases in land acquisition and development and residential construction loans.
45
Residential real estate loans. Retained residential real estate loans are typically secured by first liens on the financed
property and generally mature in less than fifteen years. Included in residential real estate loans were home equity loans and
lines of credit of $423.5 million and $409.5 million as of December 31, 2019 and December 31, 2018, respectively. Residential
real estate loans increased $4.1 million, or 0.3%, to $1,546.1 million as of December 31, 2019, from $1,542.0 million as of
December 31, 2018. Exclusive of $76.0 million of IIBK and CMYF acquired loans, residential real estate loans decreased
$71.9 million, or 4.7%.
Residential real estate loans increased $54.6 million, or 3.7%, to $1,542.0 million as of December 31, 2018, from $1,487.4
million as of December 31, 2017. Exclusive of $83.0 million of INB acquired loans, residential real estate loans
decreased $28.4 million, or 1.9%.
During 2019 and 2018, we sold most of our residential real estate loan production to secondary investors.
Consumer Loans. Our consumer loans include direct personal loans; credit card loans and lines of credit; and, indirect
loans created when we purchase consumer loan contracts advanced for the purchase of automobiles, boats and other consumer
goods from the consumer product dealer network within the market areas we serve. Personal loans and indirect dealer loans
are generally secured by automobiles, recreational vehicles, boats and other types of personal property and are made on an
installment basis. Credit cards are offered to clients in our market areas. Lines of credit are generally floating rate loans that
are unsecured or secured by personal property. Approximately 75.1% and 73.6% of our consumer loans as of December 31,
2019 and 2018, respectively, were indirect consumer loans.
Consumer loans decreased $25.0 million, or 2.3%, to $1,045.2 million as of December 31, 2019, from $1,070.2 million
as of December 31, 2018. Exclusive of $14.6 million of IIBK and CMYF acquired loans, consumer loans decreased organically
$39.6 million, or 3.7%, across all consumer loan categories. Consumer loans increased $35.8 million, or 3.5%, to $1,070.2
million as of December 31, 2018, from $1,034.4 million as of December 31, 2017. Exclusive of $7.7 million of INB acquired
loans, consumer loans increased organically $28.1 million, or 2.7%, across all consumer loan categories.
Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small
and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansions.
Commercial loans generally include lines of credit, business credit cards and loans with maturities of five years or less and
outstanding balances tend to be cyclical in nature. The loans are generally made with business operations as the primary source
of repayment, and are typically collateralized by inventory, accounts receivable, equipment and/or personal guarantees.
Commercial loans increased $61.0 million, or 4.7%, to $1,371.3 million as of December 31, 2019, from $1,310.3 million
as of December 31, 2018. Exclusive of $61.4 million of IIBK and CMYF acquired loans, commercial loans decreased $0.4
million, or 0.0%. Commercial loans increased $94.9 million, or 7.8%, to $1,310.3 million as of December 31, 2018,
from $1,215.4 million as of December 31, 2017. Exclusive of $110.9 million of INB acquired loans, commercial loans
decreased $16.0 million, or 1.3%.
Agricultural Loans. Our agricultural loans generally consist of short and medium-term loans and lines of credit that are
primarily used for crops, livestock, equipment and general operations. Agricultural loans are ordinarily secured by assets such
as livestock or equipment and are repaid from the operations of the farm or ranch. Agricultural loans generally have maturities
of five years or less, with operating lines for one production season. Agricultural loans increased $24.3 million, or 9.5%, to
$279.1 million as of December 31, 2019, from $254.8 million as of December 31, 2018. Exclusive of $12.6 million of IIBK
and CMYF acquired loans, agricultural loans increased organically $11.7 million, or 4.6%. The increase is primarily attributable
to Oregon. Agricultural loans increased $118.6 million, or 87.1%, to $254.8 million as of December 31, 2018, from $136.2
million as of December 31, 2017. Exclusive of $101.7 million of INB acquired loans, agricultural loans increased
organically $16.9 million, or 12.4%. The increase is primarily attributable to Montana and South Dakota.
46
The following table presents the maturity distribution of our loan portfolio and the sensitivity of the loans to changes in
interest rates as of December 31, 2019:
Maturities and Interest Rate Sensitivities
(Dollars in millions)
Within
One Year
One Year to
Five Years
After
Five Years
Total
Real estate
Consumer
Commercial
Agricultural
Other
Mortgage loans held for sale
Total loans
Loans at fixed interest rates
Loans at variable interest rates
Non-accrual loans
Total loans
Non-Performing Assets
$
1,990.2 $
2,801.9 $
330.5
539.4
221.0
—
100.9
629.0
668.2
54.8
—
—
1,443.0 $
85.7
163.7
3.3
—
—
3,182.0 $
4,153.9 $
1,695.7 $
1,608.0 $
2,443.6 $
339.0 $
1,574.0
1,710.3
—
—
1,313.8
42.9
$
$
$
6,235.1
1,045.2
1,371.3
279.1
—
100.9
9,031.6
4,390.6
4,598.1
42.9
3,182.0 $
4,153.9 $
1,695.7 $
9,031.6
Non-performing assets include non-accrual loans, loans contractually past due by 90 days or more and still accruing
interest, and OREO. The following table sets forth information regarding non-performing assets as of the dates indicated:
Non-Performing Assets and Troubled Debt Restructurings
(Dollars in thousands)
As of December 31,
Non-performing loans:
Non-accrual loans
Accruing loans past due 90 days or more
Total non-performing loans
OREO
Total non-performing assets
Troubled debt restructurings not included above (1)
2019
2018
2017
2016
2015
$
42.9
$
54.3
$
69.4
$
72.8
$
5.7
48.6
8.5
57.1
5.5
$
$
3.8
58.1
14.4
72.5
5.6
$
$
3.1
72.5
10.1
82.6
12.6
$
$
3.8
76.6
10.0
86.6
22.3
$
$
$
$
66.3
5.6
71.9
6.3
78.2
15.4
Non-performing loans to total loans (2)
0.54%
0.68%
0.95%
1.40%
1.37%
Non-performing assets to total loans and OREO (3)
Non-performing assets to total assets (4)
0.63
0.39
0.85
0.55
Allowance for loan losses to non-performing loans (5)
150.21
125.65
1.08
0.68
99.40
1.58
0.96
99.52
1.49
0.90
106.71
(1) Accruing loans modified in troubled debt restructurings are not considered non-performing loans. While still considered impaired
under applicable accounting guidance, these loans are performing as agreed under their modified terms and management expects
performance to continue.
(2) Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing loans to total loans would be 0.60%,
0.75%, 1.12%, 1.81% and 1.67% as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(3) Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to total loans and OREO
would be 0.69%, 0.92%, 1.25%, 1.98% and 1.78% as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(4) Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to total assets would be
0.43%, 0.59%, 0.78%, 1.20% and 1.07% as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(5) Including accruing troubled debt restructurings described in footnote 1, the ratio of allowance for loan losses to non-performing loans
would be 134.91%, 114.55%, 84.72%, 77.04% and 87.89% as of December 31, 2019, 2018, 2017, 2016, and 2015, respectively.
47
Non-performing loans. Non-performing loans include non-accrual loans and loans contractually past due 90 days or more
and still accruing interest. Impaired loans include all loans risk rated doubtful, loans placed on non-accrual status and loans
renegotiated in troubled debt restructurings, with the exception of consumer loans. We monitor and evaluate collateral values
on impaired loans quarterly. Appraisals are required on all impaired loans every 18-24 months, or sooner as conditions
necessitate. We update valuations on collateral underlying oil and gas credits based on recent market-based oil price forecasts
provided by an independent third party. We also monitor real estate values by market for our larger market areas. Based on
trends in real estate values, adjustments may be made to the appraised value based on time elapsed between the appraisal date
and the impairment analysis or a new appraisal may be ordered. Appraised values in our smaller market areas may be adjusted
based on trends identified through discussions with local realtors and appraisers. Appraisals are also adjusted for selling costs.
The collateral valuation is compared to the loan balance and any resulting shortfall is recorded in the allowance for loan losses
as a specific valuation allowance. Provisions for loan losses are impacted by changes in the specific valuation allowances and
historical or general valuation elements of the allowance for loan losses.
Total non-performing loans decreased $9.5 million, or 16.4%, to $48.6 million as of December 31, 2019, from $58.1
million as of December 31, 2018. Non-accrual loans, the largest component of non-performing loans, decreased $11.4 million,
or 21.0%, to $42.9 million as of December 31, 2019, from $54.3 million as of December 31, 2018. This decrease was primarily
due to the movement of non-performing loans out of the portfolio through pay-downs, charge-offs and the resolution of
workout strategies in the commercial loan portfolio.
Total non-performing loans decreased $14.4 million, or 19.9%, to $58.1 million as of December 31, 2018, from $72.5
million as of December 31, 2017. Non-accrual loans, the largest component of non-performing loans, decreased $15.1 million,
or 21.8%, to $54.3 million as of December 31, 2018, from $69.4 million as of December 31, 2017. This decrease was primarily
due to the movement of non-performing loans out of the portfolio through pay-downs, charge-offs and the sale of $9.3 million
of construction and commercial real estate loans.
The following table sets forth the allocation of our non-performing loans among our different types of loans as of the dates
indicated.
Non-Performing Loans by Loan Type
(Dollars in millions)
Real estate:
Commercial
Construction:
Land acquisition and
development
Residential
Commercial
Total construction
Residential
Agricultural
Total real estate
Consumer
Commercial
Agricultural
Other
Total non-performing loans
2019
Percent
2018
Percent
2017
Percent
2016
Percent
2015
Percent
As of December 31,
$ 13.6
28.0% $ 10.0
17.2% $ 27.1
37.4% $ 26.5
34.6% $ 24.2
33.6%
1.7
—
0.5
2.2
5.7
5.2
26.7
3.5
16.0
2.4
—
$ 48.6
3.5
—
1.0
4.5
11.7
10.7
54.9
7.3
32.9
4.9
—
3.9
1.0
0.2
5.1
6.8
12.6
34.5
3.5
17.1
3.0
—
100.0% $ 58.1
6.7
1.7
0.3
8.7
11.8
21.7
59.4
6.0
29.4
5.2
—
3.3
1.7
3.8
8.8
8.6
3.6
48.1
3.3
20.3
0.8
—
100.0% $ 72.5
4.6
2.3
5.2
12.1
11.8
5.0
66.3
4.6
28.0
1.1
—
5.3
0.5
0.8
6.6
7.1
4.3
44.5
2.9
26.2
3.0
—
100.0% $ 76.6
6.9
0.6
1.0
8.5
9.3
5.7
58.1
3.8
34.2
3.9
—
7.9
0.3
1.0
9.2
7.3
5.3
46.0
1.9
23.0
0.7
0.3
100.0% $ 71.9
11.0
0.4
1.3
12.7
10.2
7.4
63.9
2.7
32.0
1.0
0.4
100.0%
Non-accrual loans. We generally place loans, excluding acquired credit impaired loans, on non-accrual when they become
90 days past due, unless they are well secured and in the process of collection. When a loan is placed on non-accrual status,
any interest previously accrued but not collected is reversed from income. If all loans on non-accrual status had been current
in accordance with their original terms, gross interest income of approximately $2.5 million, $3.0 million and $3.5 million
would have been accrued for the years ended December 31, 2019, 2018 and 2017, respectively.
48
Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and
when, in the opinion of management, the loans are estimated to be fully collectible as to both principal and interest. Loans
returned to accrual status are no longer considered impaired.
For additional information regarding non-performing loans, see “Notes to Consolidated Financial Statements—Loans”
included in financial statements included Part IV, Item 15 of this report.
OREO. OREO consists of real property acquired through foreclosure on the collateral underlying defaulted loans. We
initially record OREO at fair value less estimated selling costs. Any excess of loan carrying value over the fair value of the
real estate acquired is recorded as a charge against the allowance for loan losses. Estimated losses that result from the ongoing
periodic valuation of these properties are charged to earnings in the period in which they are identified. The fair values of
OREO properties are estimated using appraisals and management estimates of current market conditions. OREO properties
are appraised every 18-24 months unless deterioration in local market conditions indicates the need to obtain new appraisals
sooner. OREO properties are evaluated by management quarterly to determine if additional write-downs are appropriate or
necessary based on current market conditions. Quarterly evaluations include a review of the most recent appraisal of the
property and reviews of recent appraisals and comparable sales data for similar properties in the same or adjacent market
areas. Commercial and agricultural OREO properties are listed with unrelated third party professional real estate agents or
brokers local to the areas where the marketed properties are located. Residential properties are typically listed with local
realtors, after any redemption period has expired. We rely on these local real estate agents and/or brokers to list the properties
on the local multiple listing system, to provide marketing materials and advertisements for the properties and to conduct open
houses.
OREO decreased $5.9 million, or 41.0%, to $8.5 million as of December 31, 2019, from $14.4 million as of December 31,
2018. During 2019, we recorded additions to OREO of $14.1 million, acquired $2.4 million in conjunction with the IIBK
acquisition, wrote down the fair value of OREO properties by $0.9 million and sold OREO with a book value of $21.8 million.
As of December 31, 2019, 25.5% of our OREO balance related to land and land development properties, 46.8% to commercial
properties, 27.0% to residential real estate properties and 0.7% to construction properties.
OREO increased $4.3 million, or 42.6%, to $14.4 million as of December 31, 2018, from $10.1 million as of December 31,
2017. During 2018, we recorded additions to OREO of $12.1 million, acquired $0.6 million in conjunction with the INB
acquisition, wrote down the fair value of OREO properties by $0.1 million and sold OREO with a book value of $8.3 million.
As of December 31, 2018, 17.2% of our OREO balance related to land and land development properties, 68.5% to commercial
properties, 13.9% to residential real estate properties and 0.4% to construction properties.
Troubled Debt Restructurings. Modifications of performing loans are made in the ordinary course of business and are
completed on a case-by-case basis as negotiated with the borrower. Loan modifications typically include interest rate
concessions, interest-only periods, short-term payment deferrals and extension of amortization periods to provide payment
relief. A loan modification is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and
we, for economic or legal reasons, grant a concession to the borrower that we would not otherwise consider. Those modifications
deemed to be troubled debt restructurings are monitored centrally to ensure proper classification as a troubled debt restructuring
and if or when the loan may be placed on accrual status.
As of December 31, 2019, we had loans renegotiated in troubled debt restructurings of $24.9 million, of which $19.4
million were reported as non-accrual loans in the non-performing asset and troubled debt restructurings and non-performing
loan tables above. The remaining $5.5 million were on accrual status and are reported as troubled debt restructurings in the
non-performing asset and troubled debt restructurings table above.
As of December 31, 2018, we had loans renegotiated in troubled debt restructurings of $23.4 million, of which $17.8
million were reported as non-accrual loans in the non-performing asset and troubled debt restructurings and non-performing
loan tables above. The remaining $5.6 million were on accrual status and are reported as troubled debt restructurings in the
non-performing asset and troubled debt restructurings table above.
For additional information regarding loans modified in troubled debt restructurings, see “Notes to Consolidated Financial
Statements—Loans” included in financial statements included Part IV, Item 15 of this report.
49
Allowance for Loan Losses
The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with GAAP.
The methodology used to assess the adequacy is consistently applied to the Company’s loan portfolio. The allowance for loan
losses is established through a provision for loan losses based on our evaluation of known and inherent risk in our loan portfolio
at each balance sheet date. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of
loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is
based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio,
overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of
current economic conditions on certain historical loan loss rates. See the discussion under “Critical Accounting Estimates and
Significant Accounting Policies — Allowance for Loan Losses” above.
The allowance for loan losses is increased by provisions charged against earnings and net recoveries of charged-off loans
and is reduced by negative provisions credited to earnings and net loan charge-offs. Loans, or portions thereof, are charged-
off when management believes that the collectability of the principal is unlikely or, with respect to consumer installment and
credit card loans, according to established delinquency schedules. The allowance for loan losses consists of three elements:
(1) Specific valuation allowances associated with impaired loans. Specific valuation allowances are determined based
on assessment of the fair value of the collateral underlying the loans as determined through independent appraisals,
the present value of future cash flows, observable market prices and any relevant qualitative or environmental factors
impacting the loan. No specific valuation allowances are recorded for impaired loans that are adequately secured.
(2) Historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends.
Historical valuation allowances are determined by applying percentage loss factors to the credit exposures from
outstanding loans. For commercial, agricultural and real estate loans, loss factors are applied based on the internal
risk classifications of these loans. For consumer loans, loss factors are applied on a portfolio basis. For commercial,
agriculture and real estate loans, loss factor percentages are based on a migration analysis of our historical loss
experience, designed to account for credit deterioration. For consumer loans, loss factor percentages are based on a
three-year loss history.
(3) General valuation allowances determined based on changes in the nature of the loan portfolio, overall portfolio
quality, industry concentrations, delinquency trends, general economic conditions and other qualitative risk factors
both internal and external to us.
Based on the assessment of the adequacy of the allowance for loan losses, the Company records provisions for loan losses
to maintain the allowance for loan losses at appropriate levels.
Loans acquired in business combinations are recorded at fair value with no allowance for loan losses on the date of
acquisition. Subsequent to the acquisition date, an allowance for loan loss is recorded for the emergence of new probable and
estimable losses on loans acquired without evidence of credit impairment. Loans acquired with evidence of credit impairment
are regularly monitored and to the extent that the performance has deteriorated from the Company’s expectations at the date
of acquisition, an allowance for loan losses is established. As of December 31, 2019 and 2018, management determined that
an allowance of $1.0 million and $0.8 million, respectively, related to loans acquired in prior year acquisitions with evidence
of credit impairment was required under GAAP.
Loans, or portions thereof, are charged-off against the allowance for loan losses when management believes that the
collectability of the principal is unlikely, or, with respect to consumer installment loans, according to an established delinquency
schedule. Generally, loans are charged-off when (1) there has been no material principal reduction within the previous 90 days
and there is no pending sale of collateral or other assets, (2) there is no significant or pending event which will result in
principal reduction within the upcoming 90 days, (3) it is clear that we will not be able to collect all or a portion of the loan,
(4) payments on the loan are sporadic, will result in an excessive amortization or are not consistent with the collateral held or
(5) foreclosure or repossession actions are pending. Loan charge-offs do not directly correspond with the receipt of independent
appraisals or the use of observable market data if the collateral value is determined to be sufficient to repay the principal
balance of the loan.
50
If the impaired loan is adequately collateralized, a specific valuation allowance is not recorded. As such, significant changes
in impaired and non-performing loans do not necessarily correspond proportionally with changes in the specific valuation
component of the allowance for loan losses. Additionally, the Company expects the timing of charge-offs will vary between
quarters and will not necessarily correspond proportionally to changes in the allowance for loan losses or changes in non-
performing or impaired loans due to timing differences among the initial identification of an impaired loan, recording of a
specific valuation allowance for the impaired loan and any resulting charge-off of uncollectible principal.
During 2019, we recorded provisions for loan losses of $13.9 million, as compared to $8.6 million in 2018. The increase
in provisions for loan losses during 2019, as compared to 2018, is reflective of higher levels of net loan charge-offs offset by
improvement in credit quality.
During 2018, we recorded provisions for loan losses of $8.6 million, as compared to $11.0 million in 2017. The decrease
in provisions for loan losses during 2018, as compared to 2017, is reflective of improved credit quality and lower levels of
net loan charge-offs.
The following table sets forth information regarding our allowance for loan losses as of the dates and for the periods
indicated.
Allowance for Loan Losses
(Dollars in millions)
As of and for the year ended December 31,
Balance at the beginning of period
Charge-offs:
Real estate
Commercial
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Total charge-offs
Recoveries:
Real estate
Commercial
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Period end loans
Average loans
Net charge-offs to average loans
Allowance to period-end loans
2019
2018
2017
2016
2015
$
73.0
$
72.1
$
76.2
$
76.8
$
74.2
0.2
2.0
1.3
—
13.0
6.6
0.5
23.6
0.5
1.3
0.9
—
3.6
3.4
—
9.7
13.9
13.9
73.0
9,031.6
8,879.1
0.16%
0.81
$
$
1.9
0.7
1.1
—
11.3
4.7
—
19.7
1.9
0.9
0.9
—
4.5
3.6
0.2
12.0
7.7
8.6
73.0
8,503.7
7,985.0
0.10%
0.86
$
$
2.3
0.8
1.2
—
11.3
6.8
0.4
22.8
0.9
0.2
0.3
—
4.2
2.1
—
7.7
15.1
11.0
72.1
7,614.3
6,675.4
0.23%
0.95
$
$
3.5
0.7
1.0
—
8.6
5.8
0.2
19.8
0.5
1.8
0.3
0.6
2.8
3.2
—
9.2
10.6
10.0
76.2
5,478.5
5,378.3
0.20%
1.39
$
$
0.3
2.4
0.7
0.7
5.6
1.7
0.2
11.6
1.8
0.9
0.4
—
2.6
1.7
—
7.4
4.2
6.8
76.8
5,246.2
5,056.8
0.08%
1.46
$
$
The allowance for loan losses was $73.0 million, or 0.81% of period-end loans, at December 31, 2019, compared to $73.0
million, or 0.86% of period-end loans, at December 31, 2018, and $72.1 million, or 0.95% of period-end loans, at December 31,
2018. The decrease in the allowance for loan losses as a percentage of total loans as of December 31, 2019, compared to
December 31, 2018 and December 31, 2017, is primarily due to the addition of acquired loans which are initially recorded at
fair value with no carryover of the related allowance for loan losses.
51
As of December 31, 2019, our direct exposure to the energy sector was approximately $64.7 million in loan commitments,
including approximately $47.2 million outstanding loans related to drilling and extraction activity, of which, approximately
$27.9 million in loans are advanced to service companies. We also had commitments to lend an additional $17.5 million to
energy borrowers. Reserves allocated to energy loans as a percentage of total energy loans totaled 2.2% as of December 31,
2019, compared to 8.2% as of December 31, 2018. The decrease in reserves allocated to energy loans was primarily due to
the charge-off of specific reserves related to one borrower.
Although we have established our allowance for loan losses in accordance with GAAP in the United States and we believe
that the allowance for loan losses is adequate to provide for known and inherent losses in the portfolio at all times, future
provisions will be subject to on-going evaluations of the risks in the loan portfolio. If the economy declines or asset quality
deteriorates, material additional provisions could be required.
The allowance for loan losses is allocated to loan categories based on the relative risk characteristics, asset classifications
and actual loss experience of the loan portfolio. The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories as of the dates indicated. The allocations presented should not be interpreted as an
indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion
of the allowance allocated to each loan category represents the total amount available for future losses that may occur within
these categories. The unallocated portion of the allowance for loan losses and the total allowance are applicable to the entire
loan portfolio.
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
As of December 31,
2019
2018
2017
2016
2015
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
Allocated
Reserves
Real estate
Consumer
Commercial
Agricultural
Other loans
Mortgage loans
held for sale
Unallocated
$
28.9
9.9
32.6
1.6
—
—
—
69.0% $
11.6
15.2
3.1
—
1.1
N/A
31.0
8.7
31.3
2.0
—
—
—
68.6% $
12.6
15.4
3.0
—
0.4
N/A
31.7
8.7
30.5
1.2
—
—
—
68.0% $
13.6
16.0
1.8
—
0.6
N/A
28.6
7.7
38.1
1.8
—
—
—
64.2% $
17.7
14.6
2.4
—
1.1
N/A
52.3
5.1
18.8
0.6
—
—
—
65.1%
16.1
15.1
2.7
—
1.0
N/A
Totals
$
73.0
100.0% $
73.0
100.0% $
72.1
100.0% $
76.2
100.0% $
76.8
100.0%
The allowance for loan losses allocated to real estate loans decreased 6.8%, to $28.9 million, as of December 31, 2019,
from $31.0 million as of December 31, 2018, primarily due to lower loss rates offset by higher levels of specific reserves in
the real estate portfolio. The allowance for loan losses allocated to real estate loans decreased 2.2% to $31.0 million as
of December 31, 2018, from $31.7 million as of December 31, 2017, primarily due to lower levels of specific reserves and
lower loss rates in the real estate portfolio.
The allowance for loan losses allocated to commercial loans increased 4.2% to $32.6 million as of December 31, 2019,
from $31.3 million as of December 31, 2018, primarily due to higher loss rates offset by lower levels of specific reserves
within the commercial portfolio. The allowance for loan losses allocated to commercial loans increased 2.6% to $31.3
million as of December 31, 2018, from $30.5 million as of December 31, 2017, primarily due to higher levels of specific
reserves and higher loss rates within the commercial portfolio.
52
Investment Securities
We manage our investment portfolio to obtain the highest yield possible, while meeting our risk tolerance and liquidity
guidelines and satisfying the pledging requirements for deposits of state and political subdivisions and securities sold under
repurchase agreements. Our portfolio principally comprises U.S. government agency residential mortgage-backed securities
and collateralized mortgage obligations, U.S. government agency securities and tax exempt securities. Federal funds sold and
interest bearing deposits in bank are additional investments that are classified as cash equivalents rather than as investment
securities. Investment securities classified as available-for-sale are recorded at fair value, while investment securities classified
as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the deferred tax effect, on available-for-
sale securities are reported as increases or decreases in accumulated other comprehensive income or loss, a component of
stockholders’ equity.
Investment securities increased $374.8 million, or 14.0%, to $3,052.3 million as of December 31, 2019, from $2,677.5
million as of December 31, 2018. Approximately $78.7 million of this increase was attributable to the acquisitions of IIBK
and CMYF in April 2019 with the remaining increase due to the investment of funds generated through deposit growth.
Investment securities decreased $15.7 million, or 0.6%, to $2,677.5 million as of December 31, 2018, from $2,693.2
million as of December 31, 2017. The decrease is due to normal fluctuations in our investment portfolio.
53
The following table sets forth the carrying value, percentage of total investment securities and weighted average yields
on investment securities as of December 31, 2019. Weighted-average yields have been computed on a fully taxable-equivalent
basis using a tax rate of 21%.
Securities Maturities and Yield
(Dollars in millions)
Carrying
Value
% of Total
Investment
Securities
Weighted
Average
FTE Yield
U.S. Treasuries
Maturing within one year
Mark-to-market adjustments on securities available-for-sale
$
Total
U.S. Government agency securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Mark-to-market adjustments on securities available-for-sale
Total
Mortgage-backed securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Mark-to-market adjustments on securities available-for-sale
Total
Marketable CDs
Maturing within one year
Maturing in one to five years
Mark-to-market adjustments on securities available-for-sale
Total
Tax exempt securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Mark-to-market adjustments on securities available-for-sale
Total
Corporate securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Mark-to-market adjustments on securities available-for-sale
Total
Other securities
Maturing in one to five years
Mark-to-market adjustments on securities available-for-sale
Total
Total
9.0
—
9.0
120.4
130.7
136.2
(0.7)
386.6
543.5
1,246.2
116.8
445.9
13.2
2,365.6
2.9
0.3
—
3.2
13.9
60.4
52.3
10.8
0.8
138.2
26.2
78.2
44.0
1.2
149.6
0.29%
—
0.29
1.82%
NA
1.82
3.95
4.28
4.46
(0.02)
12.67
17.80
40.83
3.83
14.61
0.43
77.50
0.10
0.01
—
0.11
0.46
1.98
1.71
0.35
0.03
4.53
0.86
2.56
1.44
0.04
4.90
1.50
1.94
2.57
NA
2.03
2.88
1.72
2.74
2.59
NA
2.25
2.50
2.50
NA
2.50
2.77
3.24
3.86
3.85
NA
3.45
2.18
2.53
4.06
NA
2.90
0.1
—
0.1
3,052.3
$
—
—
—
100.00%
7.66
NA
7.66
2.39%
Maturities of securities noted above reflect $181.2 million of investment securities at their final maturities which have
call provisions within the next year. Based on current market interest rates, management expects approximately $4.7 million
of these securities will be called in 2020.
54
As of December 31, 2019, the estimated duration of our investment portfolio was 2.4 years, as compared to 2.5 years as
of December 31, 2018. The weighted average yield on investment securities increased 18 basis points to 2.39% in 2019, from
2.21% in 2018, and increased 24 basis points to 2.21% in 2018, from 1.97% in 2017.
As of December 31, 2019, investment securities with amortized costs and fair values of $2,132.0 million and $2,144.9
million, respectively, were pledged to secure public deposits and securities sold under repurchase agreements, as compared
to $1,943.1 million and $1,908.4 million, respectively, as of December 31, 2018. For additional information concerning
securities sold under repurchase agreements, see “—Securities Sold Under Repurchase Agreements” included herein.
Mortgage-backed securities, and to a limited extent other securities, have uncertain cash flow characteristics that present
additional interest rate risk in the form of prepayment or extension risk primarily caused by changes in market interest rates.
This additional risk is generally rewarded in the form of higher yields. Maturities of mortgage-backed securities presented
above have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. As of December 31,
2019, the carrying value of our investments in non-agency mortgage-backed securities totaled $47.6 million. All other
mortgage-backed securities included in the table above were issued by U.S. government agencies and corporations. As of
December 31, 2019, there were no significant concentrations of investments (greater than 10% of stockholders’ equity) in any
individual security issuer, except for U.S. government or agency-backed securities.
Approximately 80.1% and 76.5% of our tax-exempt securities were general obligation securities as of December 31, 2019
and 2018, respectively, of which 61.0% and 57.8%, respectively, were issued by political subdivisions or agencies within the
states of Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming.
We evaluate our investment portfolio quarterly for other-than-temporary declines in the market value of individual
investment securities. This evaluation includes monitoring credit ratings; market, industry and corporate news; volatility in
market prices; and, determining whether the market value of a security has been below its cost for an extended period of time.
As of December 31, 2019, we had investment securities with fair values aggregating $202.5 million that had been in a continuous
loss position more than twelve months. Gross unrealized losses on these securities totaled $1.8 million as of December 31,
2019, and were primarily attributable to changes in interest rates. No impairment losses were recorded during 2019, 2018 or
2017.
For additional information concerning investment securities, see “Notes to Consolidated Financial Statements —
Investment Securities” included in Part IV, Item 15.
Goodwill and Intangibles
Goodwill increased $74.9 million, or 13.70%, to $621.6 million as of December 31, 2019, from $546.7 million as of
December 31, 2018, attributable to the goodwill recorded in conjunction with the acquisitions of IIBK and CMYF and the
finalization of provisional amounts related to INB. Goodwill increased $102.0 million, or 22.9%, to $546.7 million as
of December 31, 2018, from $444.7 million as of December 31, 2017, attributable to the provisional goodwill recorded in
conjunction with the acquisition of INB and the finalization of provisional amounts related to prior acquisitions.
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed
and are amortized based on the estimated useful lives of the related deposits. Core deposit intangibles, net of accumulated
amortization, increased $5.2 million, or 9.1%, to $62.1 million as of December 31, 2019, from $56.9 million as of December 31,
2018, attributable to the core deposit intangibles recorded in conjunction with the acquisitions of IIBK and CMYF. Core
deposit intangibles, net of accumulated amortization increased $7.8 million, or 15.9%, to $56.9 million as of December 31,
2018, from $49.1 million as of December 31, 2017, attributable to the core deposit intangibles recorded in conjunction with
the acquisition of INB. We acquired core deposit intangibles of $16.6 million in conjunction with our acquisitions of IIBK
and CMYF in April 2019, $15.7 million in conjunction with our acquisition of INB in August 2018, $48.0 million in conjunction
with our acquisition of BOTC in May 2017.
55
Deposits
We emphasize developing relationships with our clients in order to increase our core deposit base, which is our primary
funding source. Our deposits consist of non-interest bearing and interest bearing demand, savings, individual retirement and
time deposit accounts.
The following table summarizes our deposits as of the dates indicated:
Deposits
(Dollars in millions)
As of December 31,
2019
Percent
2018
Percent
2017
Percent
2016
Percent
2015
Percent
Non-interest bearing
demand
Interest bearing:
$ 3,426.5
29.4% $ 3,158.3
29.6% $ 2,900.0
29.2% $ 1,906.3
25.8% $ 1,823.7
25.6%
Demand
Savings
Time, $100 or more
Time, other
3,195.4
3,591.6
651.1
798.9
27.4
30.8
5.6
6.8
2,957.5
3,247.9
547.6
769.4
27.7
30.4
5.1
7.2
2,787.5
3,095.4
432.0
720.0
28.1
31.2
4.3
7.2
2,276.5
2,141.8
461.4
590.1
30.9
29.0
6.3
8.0
2,178.4
1,955.2
487.4
644.2
30.8
27.6
6.9
9.1
Total interest bearing
8,237.0
70.6
7,522.4
70.4
7,034.9
70.8
5,469.8
74.2
5,265.2
74.4
Total deposits
$ 11,663.5
100.0% $ 10,680.7
100.0% $ 9,934.9
100.0% $ 7,376.1
100.0% $ 7,088.9
100.0%
Total deposits increased $982.8 million, or 9.20%, to $11,663.5 million as of December 31, 2019, from $10,680.7 million
as of December 31, 2018, with approximately $706.7 million of the increase attributable to the IIBK and CMYF acquisitions
in April 2019. Total deposits increased $745.8 million, or 7.5%, to $10,680.7 million as of December 31, 2018, from $9,934.9
million as of December 31, 2017, with approximately $696.3 million of the increase attributable to the INB acquisition in
August 2018. During 2019, the mix of deposits shifted slightly from lower-costing savings and demand deposits to higher-
costing time deposits.
Non-interest bearing demand deposits. Non-interest bearing demand deposits increased $268.2 million, or 8.5%, to $3,426.5
million as of December 31, 2019, from $3,158.3 million as of December 31, 2018. Approximately $244.9 million of this
increase was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions,
non-interest bearing demand deposits decreased organically $23.3 million, or 0.7%. Non-interest bearing demand deposits
increased $258.3 million, or 8.9%, to $3,158.3 million as of December 31, 2018, from $2,900.0 million as of December 31,
2017. Approximately $231.8 million of this increase was attributable to the acquisition of INB in August 2018. Exclusive of
the INB acquisition, non-interest bearing demand deposits increased organically $26.5 million, or 0.9%.
Interest bearing demand deposits. Interest bearing demand deposits increased $237.9 million, or 8.0%, to $3,195.4 million
as of December 31, 2019, from $2,957.5 million as of December 31, 2018. Approximately $171.8 million of this increase was
attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, interest
bearing demand deposits decreased organically $66.1 million, or 2.2%. Interest bearing demand deposits increased $170.0
million, or 6.1%, to $2,957.5 million as of December 31, 2018, from $2,787.5 million as of December 31, 2017.
Approximately $158.2 million of this increase was attributable to the acquisition of INB in August 2018. Exclusive of the
INB acquisition, interest bearing demand deposits increased organically $11.8 million, or 0.4%.
Savings deposits. Savings deposits increased $343.7 million, or 10.6%, to $3,591.6 million as of December 31, 2019,
from $3,247.9 million as of December 31, 2018. Approximately $254.7 million of this increase was attributable to the
acquisitions of IIBK and CMFY in April 2019. Exclusive of the IIBK and CMYF acquisitions, savings deposits decreased
$89.0 million, or 2.7%. Savings deposits increased $152.5 million, or 4.9%, to $3,247.9 million as of December 31, 2018,
from $3,095.4 million as of December 31, 2017. Approximately $204.6 million of this increase was attributable to the
acquisition of INB in August 2018. Exclusive of the INB acquisition, savings deposits decreased $52.1 million, or 1.7%.
Time deposits of $100,000 or more. Time deposits of $100,000 or more increased $103.5 million, or 18.9%, to $651.1
million as of December 31, 2019, from $547.6 million as of December 31, 2018. Approximately $26.4 million of this increase
was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, time
deposits of $100,000 or more increased organically $77.1 million, or 14.1%. Time deposits of $100,000 or more
increased $115.6 million, or 26.8%, to $547.6 million as of December 31, 2018, from $432.0 million as of December 31,
2017. Approximately $28.7 million of this increase was attributable to the acquisition of INB in August 2018. Exclusive of
the INB acquisition, time deposits of $100,000 or more increased organically $86.9 million, or 20.1%.
56
Other time deposits. Other time deposits increased $29.5 million, or 3.8%, to $798.9 million as of December 31, 2019,
from $769.4 million as of December 31, 2018. Approximately $8.9 million of this increase was attributable to the acquisitions
of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, other time deposits decreased $20.6 million,
or 2.7%. Other time deposits increased $49.4 million, or 6.9%, to $769.4 million as of December 31, 2018, from $720.0
million as of December 31, 2017. Approximately $73.0 million of this increase was attributable to the acquisition of INB in
August 2018. Exclusive of the INB acquisition, other time deposits decreased $23.6 million, or 3.3%.
As of December 31, 2019 and 2018, we had Certificate of Deposit Account Registry Service, or CDARS, deposits of
$117.7 million and $87.1 million, respectively. As of December 31, 2019 and 2018, we had brokered deposits of $2.9 million
and $24.1 million, respectively. Our brokered deposits were acquired through acquisitions.
For additional information concerning client deposits, including the use of repurchase agreements, see “Business—
Community Banking—Deposit Products,” included in Part I, Item 1 and “Notes to Consolidated Financial Statements—
Deposits,” included in Part IV, Item 15 of this report.
Securities Sold Under Repurchase Agreements
Under repurchase agreements with commercial and municipal depositors, client deposit balances are invested in short-
term U.S. government agency securities overnight and are then repurchased the following day. All outstanding repurchase
agreements are due in one day and balances fluctuate in the normal course of business. Repurchase agreement balances
decreased $14.8 million, or 2.1%, to $697.6 million as of December 31, 2019, from $712.4 million as of December 31, 2018,
and increased $69.4 million, or 10.8%, as of December 31, 2018 from $643.0 million as of December 31, 2017.
The following table sets forth certain information regarding securities sold under repurchase agreements as of the dates
indicated:
Securities Sold Under Repurchase Agreements
(Dollars in millions)
As of and for the year ended December 31,
Securities sold under repurchase agreements:
Balance at period end
Average balance
Maximum amount outstanding at any month-end
Average interest rate:
During the year
At period end
Long-Term Debt
2019
2018
2017
$
$
697.6
677.3
713.0
$
712.4
642.8
712.4
643.0
587.1
704.4
0.58%
0.20
0.42%
0.59
0.21%
0.26
Long-term debt decreased $1.9 million, or 12.0%, to $13.9 million as of December 31, 2019, from $15.8 million as of
December 31, 2018, primarily due to the redemption of one note payable maturing September 2032.
Long-term debt increased $2.7 million, or 20.6%, to $15.8 million as of December 31, 2018, from $13.1 million as
of December 31, 2017, primarily due to $2.6 million related to two note payables related to a New Market Tax Credit
(“NMTC”). On March 21, 2018, the Company borrowed $2.0 million on a note payable maturing on March 31, 2038, with
interest only at a 1.30% fixed rate, payable monthly, until March 31, 2025 and then principal and interest payable at
a 3.25% fixed rate until maturity. The note is collateralized by the Company’s equity interest in FC Sub CDE, LLC, a community
development entity, or CDE, owned 99.9% by the Company. On March 29, 2018, the Company borrowed $0.6 million on
a 1.30% fixed rate note payable maturing on June 1, 2034, with interest only, payable monthly, until March 31, 2025 and then
principal and interest payable until maturity. The note is collateralized by the Company’s equity interest in BH Sub CDE,
LLC, a CDE owned 99.9% by the Company. For additional information regarding the long-term debt, see “Notes to
Consolidated Financial Statements—Long-Term Debt,” included in Part IV, Item 15 of this report.
57
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased $35.5 million, or 37.7%, to $129.6 million as of December 31, 2019,
from $94.1 million as of December 31, 2018. This increase was primarily attributable to the Company recognizing $39.6
million in liabilities related to leases, as a result of the adoption of ASU 2016-02 discussed in “Notes to Consolidated Financial
Statements – Recent Authoritative Accounting Guidance” included in Part IV, Item 15 of this report, in addition to fluctuations
in the normal course of business. Accounts payable and accrued expenses increased $7.5 million, or 8.7%, to $94.1 million
as of December 31, 2018, from $86.6 million as of December 31, 2017. This increase was attributable to accruals as a result
of the acquisition of INB in August 2018 and fluctuations in the normal course of business.
Deferred Tax Liability/Asset
The net deferred tax liability increased $18.1 million, or 210.5%, to $26.7 million as of December 31, 2019, from $8.6
million as of December 31, 2018, primarily due to decreases in deferred tax assets as a result of the utilization of NOL
carryforwards, reduction of deferred compensation liabilities, and an increase in unrealized gains in our investment portfolio,
the decreases were offset by increases in deferred tax liabilities related to amortization of intangible assets and an increase in
mortgage servicing rights retained.
As of December 31, 2018, we had a net deferred tax liability of $8.6 million, as compared to a net deferred tax asset of
$4.0 million as of December 31, 2017. The shift in deferred taxes from a net asset to a net liability was primarily due to
decreases in deferred tax assets as a result of the utilization of NOL carryforwards and federal tax credit carryforwards offset
by increases in deferred tax liabilities related to amortization of intangible assets and depreciation of fixed assets.
Contractual Obligations
Contractual obligations as of December 31, 2019 are summarized in the following table.
Contractual Obligations
(Dollars in millions)
Within
One Year
One Year to
Three Years
Payments Due
Three Years
to Five Years
After
Five Years
Deposits without a stated maturity
Time deposits
Securities sold under repurchase agreements
Long-term debt obligations (1)
Financing lease obligations
Operating lease obligations
Purchase obligations (2)
Subordinated debentures held by subsidiary trusts (3)
$
10,213.5 $
1,140.9
697.6
—
0.1
6.4
2.1
—
Total contractual obligations
$
12,060.6 $
— $
284.4
—
5.0
0.2
11.7
—
—
301.3 $
— $
24.7
—
—
0.2
10.3
—
—
35.2 $
— $
—
—
7.6
0.8
22.1
—
86.9
117.4 $
Total
10,213.5
1,450.0
697.6
12.6
1.3
50.5
2.1
86.9
12,514.5
(1) Long-term debt obligations consists of fixed rate note payables with various interest rates from 1.00% to 6.24% and maturities from
July 29, 2022 through December 31, 2041. For additional information concerning long-term debt, see “Notes to Consolidated Financial
Statements — Long Term Debt and Other Borrowed Funds” included in Part IV, Item 15.
(2) Purchase obligations relate to obligations under construction contracts to build or renovate banking offices.
(3) The subordinated debentures are unsecured, with various interest rates and maturities from June 30, 2035 through April 1, 2038. Interest
distributions are payable quarterly; however, we may defer interest payments at any time for a period not exceeding 20 consecutive
quarters. For additional information concerning the subordinated debentures, see “Notes to Consolidated Financial Statements —
Subordinated Debentures Held by Subsidiary Trusts” included in Part IV, Item 15.
We also have obligations under a post-retirement healthcare benefit plan. These obligations represent actuarially determined
future benefit payments to eligible plan participants. See “Notes to Consolidated Financial Statements — Employee Benefit
Plans” included in Part IV, Item 15.
Off-Balance Sheet Arrangements
We have entered into various arrangements not reflected on the consolidated balance sheet that have or are reasonably
likely to have a current or future effect on our financial condition, results of operations or liquidity. These include guarantees,
commitments to extend credit and standby letters of credit.
58
We guarantee the distributions and payments for redemption or liquidation of capital trust preferred securities issued by
our wholly-owned subsidiary business trusts to the extent of funds held by the trusts. Although the guarantees are not separately
recorded, the obligations underlying the guarantees are fully reflected on our consolidated balance sheets as subordinated
debentures held by subsidiary trusts. The subordinated debentures currently qualify as tier 1 capital under the Federal Reserve
capital adequacy guidelines. For additional information regarding the subordinated debentures, see “Notes to Consolidated
Financial Statements — Subordinated Debentures Held by Subsidiary Trusts” included in Part IV, Item 15.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of our clients. These financial instruments include commitments to extend credit and standby letters of credit. For
additional information regarding our off-balance sheet arrangements, see “Notes to Consolidated Financial Statements —
Financial Instruments with Off-Balance Sheet Risk” included in Part IV, Item 15.
Capital Resources and Liquidity Management
Capital Resources
Stockholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and changes
in the unrealized holding gains or losses, net of taxes, on available-for-sale investment securities. Stockholders’ equity increased
$320.0 million, or 18.9%, to $2,013.9 million as of December 31, 2019 from $1,693.9 million as of December 31, 2018, due
primarily to the retention of earnings, other comprehensive income, proceeds from stock option exercises, and issuance of
additional Class A common stock as consideration for the acquisitions of IIBK and CMYF. This increase was offset by stock
repurchases of vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by participants
and aggregate cash dividends of $79.2 million to common shareholders during 2019.
Stockholders’ equity increased $266.3 million, or 18.7%, to $1,693.9 million as of December 31, 2018 from $1,427.6
million as of December 31, 2017, due primarily to the retention of earnings, proceeds from stock option exercises, and issuance
of additional Class A common stock as partial consideration for the acquisition of Northwest Bancorporation, Inc.
(“Northwest”), the parent company of INB. This increase was offset by other comprehensive losses, stock repurchases of
vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by participants, and aggregate
cash dividends of $64.1 million to common shareholders during 2018.
On February 19, 2020, we declared a special dividend to common stockholders of $0.60 per share, which is payable on
March 12, 2020 to shareholders of record as of March 2, 2020.
On January 28, 2020, we declared a quarterly dividend to common stockholders of $0.34 per share, which was paid on
February 20, 2020 to shareholders of record as of February 10, 2020.
On June 11, 2019, the company’s board of directors adopted a new stock repurchase program to replace the program that
had been in place since 2015 and which had only 24,123 shares of Class A common stock remaining to be purchased thereunder.
Under the new stock repurchase program, the Company may repurchase up to 2.5 million of its outstanding shares of Class
A common stock. To date the Company has not repurchased any shares under the current authorization.
For additional information regarding the repurchases, see “Notes to Consolidated Financial Statements — Capital Stock
and Dividend Restrictions” included in Part IV, Item 15 of this report.
On April 8, 2019, the Company issued 3,871,422 and 463,134 shares of its Class A common stock with an aggregate value
of $157.3 million and $18.8 million as consideration for the acquisitions of IIBK and CMYF, respectively.
In addition, during 2019, the Company issued 22,417 shares of its Class A common stock to directors for their annual
service on the Company’s board of directors. The aggregate value of the shares issued to directors of $0.8 million is included
in stock-based compensation expense in the accompanying consolidated statements of changes in stockholders’ equity.
On June 8, 2018, we filed a registration statement on Form S-4, as amended on July 2, 2018, to register 3,982,842 shares
of Class A common stock to be issued as partial consideration for our acquisition of Northwest.
On August 16, 2018, the Company issued 3,837,540 shares of its Class A common stock with an aggregate value of $173.3
million as partial consideration for the acquisition of Northwest.
On November 28, 2018, we filed a registration statement on Form S-4, as amended on January 16, 2019, to register
4,045,302 shares of Class A common stock to be issued as partial consideration for our acquisition of IIBK.
59
On November 28, 2018, we filed a registration statement on Form S-4, as amended on January 16, 2019, to register 492,069
shares of Class A common stock to be issued as partial consideration for our acquisition of CMYF.
For additional information regarding the acquisition, see “—Executive Overview—Recent Trends and Developments”
included above “Notes to Consolidated Financial Statements—Acquisitions,” included in Part IV, Item 15 of this report.
On July 2, 2013, the Board of Governors of the Federal Reserve Bank, or the Federal Reserve Board, issued a final rule
implementing a revised regulatory capital framework for United States banks in accordance with the Basel III international
accord and satisfying related mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The revised
regulatory capital framework (the “Basel III Capital Rules”) substantially revised the risk-based capital requirements applicable
to bank holding companies and depository institutions by defining the components of capital and addressing other issues
affecting the numerator in banking institutions’ regulatory capital ratios, addressing risk weights and other issues affecting
the denominator in banking institutions’ regulatory capital ratios and replacing the existing risk-weighting approach with a
more risk-sensitive approach. The Basel III Capital Rules became effective for the Company on January 1, 2015, subject to
a phase-in period for certain provisions. The capital conservation buffer required under Basel III began to phase in starting
January 1, 2016 and became fully implemented on January 1, 2019.
As of December 31, 2019 and 2018, we had capital levels that, in all cases, exceeded the well capitalized guidelines.
Additionally, our calculations indicate that as of December 31, 2019, we would meet all fully phased-in Basel III capital
adequacy requirements. For additional information regarding the impact of this final rule, see “Regulation and Supervision
— Capital Standards and Prompt Corrective Action” included in Part I, Item 1 of this report. For additional information
regarding our capital levels, see “Notes to Consolidated Financial Statements—Regulatory Capital,” included in Part IV,
Item 15 of this report.
Liquidity
Liquidity measures our ability to meet current and future cash flow needs on a timely basis and at a reasonable cost. We
manage our liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between
assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by
management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest
bearing deposits in banks, federal funds sold, available-for-sale investment securities and maturing or prepaying balances in
our held-to-maturity investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities
sold under repurchase agreements and borrowings. Other sources of liquidity include the sale of loans, the ability to acquire
additional national market funds through non-core deposits, the issuance of additional collateralized borrowings such as FHLB
advances, the issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the
issuance of preferred or common securities.
Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of
interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity
requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our
loan and investment portfolios, debt financing and increases in client deposits. For additional information regarding our
operating, investing and financing cash flows, see “Consolidated Financial Statements—Consolidated Statements of Cash
Flows,” included in Part IV, Item 15 of this report.
As a holding company, we are a corporation separate and apart from our subsidiary Bank and, therefore, we provide for
our own liquidity. Our main sources of funding include management fees and dividends declared and paid by our subsidiaries
and access to capital markets. There are statutory, regulatory and debt covenant limitations that affect the ability of our Bank
to pay dividends to us. Management believes that such limitations will not impact our ability to meet our ongoing short-term
cash obligations. For additional information regarding dividend restrictions, see “—Financial Condition—Capital Resources
and Liquidity Management” above and “Business—Regulation and Supervision—Restrictions on Transfers of Funds to Us
and the Bank” and “Risk Factors—Risks Relating to the Market and Our Business.
Management continuously monitors our liquidity position and adjustments are made to the balance between sources and
uses of funds as deemed appropriate. Our management is not aware of any events that are reasonably likely to have a material
adverse effect on our liquidity, capital resources or operations. In addition, our management is not aware of any regulatory
recommendations regarding liquidity, which if implemented, would have a material adverse effect on us.
60
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk. Our business and the composition of our balance sheet consists of
investments in interest earning assets (principally loans and investment securities) which are primarily funded by interest
bearing liabilities (deposits and indebtedness). Such financial instruments have varying levels of sensitivity to changes in
market interest rates. Interest rate risk results when, due to different maturity dates and repricing intervals, interest rate indices
for interest earning assets fluctuate adversely relative to interest bearing liabilities, thereby creating a risk of decreased net
earnings and cash flow.
Although we characterize some of our interest-sensitive assets as securities available-for-sale, such securities are not
purchased with the intent to sell in the near term. Rather, such securities may be sold in response to or in anticipation of
changes in interest rates and resulting prepayment risk. See “Notes to Consolidated Financial Statements—Summary of
Significant Accounting Policies” included in Part IV, Item 15 of this report.
Asset Liability Management
The goal of asset liability management is the prudent control of market risk, liquidity and capital. Asset liability management
is governed by policies, goals and objectives adopted and reviewed by the Bank’s board of directors. Development of asset
liability management strategies is the responsibility of the Asset Liability Committee, or ALCO, which is composed of members
of senior management.
Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or long-term value due to changes in interest rates. Our primary
source of earnings is net interest income, which is affected by changes in interest rates, the relationship between rates on
interest bearing assets and liabilities, the impact of interest rate fluctuations on asset prepayments and the mix of interest
bearing assets and liabilities.
The ability to optimize net interest income is largely dependent upon the achievement of an interest rate spread that can
be managed during periods of fluctuating interest rates. Interest sensitivity is a measure of the extent to which net interest
income will be affected by market interest rates over a period of time. Interest rate sensitivity is related to the difference
between amounts of interest earning assets and interest bearing liabilities which either reprice or mature within a given period
of time. The difference is known as interest rate sensitivity gap.
61
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio for different intervals as of
December 31, 2019. The information presented in the table is based on our mix of interest earning assets and interest bearing
liabilities and historical experience regarding their interest rate sensitivity.
Interest Rate Sensitivity Gaps
(Dollars in millions)
Interest earning assets:
Loans (1)
Investment securities (2)
Interest bearing deposits in banks
Federal funds sold
Total interest earning assets
Interest bearing liabilities:
Interest bearing demand accounts (3)
Savings deposits (3)
Time deposits, $100 or more
Other time deposits
Securities sold under repurchase agreements
Long-term debt
Subordinated debentures held by subsidiary trusts
Total interest bearing liabilities
Rate gap
Cumulative rate gap
Three
Months
or Less
Projected Maturity or Repricing
One
Year to
Five Years
Three
Months to
One Year
After
Five Years
Total
$
3,043.4
$
1,659.0
$
3,920.0
$
366.3
$
8,988.7
428.0
796.0
0.1
428.9
30.9
—
4,267.5
$
2,118.8
897.6
$
2,025.9
356.7
92.5
697.6
—
86.9
720.0
849.8
436.6
255.1
—
0.1
—
4,157.2
110.3
110.3
$
$
2,261.6
(142.8)
(32.5)
$
$
$
$
1,398.3
8.2
—
5,326.5
1,578.0
715.9
170.7
137.4
—
5.4
—
2,607.4
2,719.1
2,686.6
$
$
$
$
797.1
0.1
—
3,052.3
835.2
0.1
1,163.5
$ 12,876.3
— $
3,195.6
3,591.6
964.9
485.1
697.6
13.9
86.9
$
$
9,035.6
3,840.7
—
0.9
0.1
—
8.4
—
9.4
1,154.1
3,840.7
$
$
$
$
Cumulative rate gap as a percentage of total interest earning
assets
0.86%
(0.25)%
20.86%
29.83%
29.83%
(1) Does not include non-accrual loans of $42.9 million. Variable rate loans are included in the three months or less category in the above
table although certain of these loans have reached interest rate floors and may not immediately reprice.
(2) Adjusted to reflect: (a) expected shorter maturities based upon our historical experience of early prepayments of principal, and (b) the
redemption of callable securities on their next call date.
(3) Interest bearing demand and savings deposits, while technically subject to immediate withdrawal, actually display sensitivity
characteristics that generally fall within one to five years. Their allocation is presented based on those sensitivity characteristics. If
these deposits were included in the three month or less category, the above table would reflect a negative three month gap of $3.8 million,
a negative cumulative one year gap of $2.3 million and a positive cumulative one to five year gap of $2.7 million.
Net Interest Income Sensitivity
We believe net interest income sensitivity provides the best perspective of how day-to-day decisions affect our interest
rate risk profile. We monitor net interest income sensitivity by utilizing an income simulation model to subject twelve month
net interest income to various rate movements. Simulations modeled quarterly include scenarios where market rates change
instantaneously up or down in a parallel manner and scenarios where market rates gradually increase 200 basis points. Estimates
produced by our income simulation model are based on numerous assumptions including, but not limited to: (1) the timing
of changes in interest rates, (2) shifts or rotations in the yield curve, (3) repricing characteristics for market rate sensitive
instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan
prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in our assets, such as caps and
floors, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent
in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a
change in market interest rates on our results, but rather to provide insight into our current interest rate exposure and execute
appropriate asset/liability management strategies accordingly.
62
We target a mix of interest earning assets and interest bearing liabilities such that no more than 4.0% of the net interest
income will be at risk over a one-year period, should interest rates immediately shift up or down 100 basis points, or gradually
shift up 200 basis points over a 12 month period. As of December 31, 2019, our income simulation model predicted net interest
income would increase 0.76% on an immediate 100 basis point shock, assuming a static balance sheet. Assuming a 0.5%
gradual increase in interest rates during each of the next four consecutive quarters, net interest income would increase $8.1
million or 1.63%. Conversely, if interest rates declined 100 basis points, the model indicates that net interest income would
decline 6.93% under a static balance sheet scenario.
We did not simulate the gradual 200 basis points decrease in interest rates due to the low rate environment as
of December 31, 2019. Prime rate has historically been set at a rate of 300 basis points over the targeted federal funds rate,
which is currently set between 150 and 175 basis points. Our income simulation model has an assumption that prime will
continue to be set at a rate of 300 basis points over the targeted federal funds rate. Additionally, rates that are currently below
2.0% are modeled not to fall below 0% with an overall decrease of 2.0% in interest rates. Although we did not simulate a
decrease in interest rates due to the low rate environment as of December 31, 2019, a further decline in interest rates would
result in compression of our net interest income.
Each scenario predicts that our interest bearing assets reprice faster than our interest bearing liabilities. We are not currently
engaged in significant derivative or balance sheet hedging activities to manage our interest rate risk. The preceding interest
rate sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating
results.
Recent Accounting Pronouncements
The expected impact of accounting standards recently issued but not yet adopted are discussed in “Notes to Consolidated
Financial Statements—Authoritative Accounting Guidance” included in Part IV, Item 15 of this report.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries are contained in
Part IV, Item 15 of this report and are incorporated herein by reference.
Report of RSM US LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2019 and 2018
Consolidated Statements of Income — Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income — Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows — Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on accounting and financial disclosure.
Disclosure Controls and Procedures
Item 9A. Controls and Procedures
We have established and maintain disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. As of December 31, 2019, our management evaluated, under the supervision and with the participation
of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures, as of December 31, 2019, were effective in ensuring that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported
within the time periods required by the SEC’s rules and forms and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
63
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting
includes controls and procedures designed to provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of our published financial statements in accordance with U.S. generally accepted
accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even systems that are
deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As permitted by guidance provided by the staff of the U.S. Securities and Exchange Commission, the scope of management’s
assessment of internal control over financial reporting as of December 31, 2019 has excluded the Company’s wholly owned
subsidiaries, Idaho Independent Bank and Community 1st Bank, which were acquired on April 8, 2019, but did not merge
with and into First Interstate Bank until June 7, 2019.
Our management, including the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of our
system of internal control over financial reporting as of December 31, 2019 based on the guidelines established in the Internal
Control--Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment, we believe that, as of December 31, 2019, our system of internal control over financial
reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation
of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
RSM US LLP, the independent registered public accounting firm that audited our consolidated financial statements included
in this Annual Report on Form 10-K, has issued a report on the effectiveness of our internal control over financial reporting
as of December 31, 2019. The report, which expresses an unqualified opinion on the effectiveness of our internal control over
financial reporting as of December 31, 2019, is included below.
64
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Interstate BancSystem, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited First Interstate BancSystem, Inc. and its subsidiaries' (the Company) internal control over financial reporting
as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,
and the related notes to the consolidated financial statements of the Company and our report dated February 26, 2020 expressed
an unqualified opinion.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Community 1st
Bank and Idaho Independent Bank from its assessment of internal control over financial reporting as of December 31, 2019, because
they were acquired by the Company in a purchase business combination in the second quarter of 2019. We have also excluded
Community 1st Bank and Idaho Independent Bank from our audit of internal control over financial reporting. Community 1st Bank
and Idaho Independent Bank operated as wholly owned subsidiaries of the Company from April 8, 2019 (the date of acquisition)
until they were merged into First Interstate Bank on June 7, 2019. Community 1st Bank’s and Idaho Independent Bank’s combined
total assets represented approximately 6 percent of the Company’s related consolidated assets as of the date of the merger.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Des Moines, Iowa
February 26, 2020
65
There were no items required to be disclosed in a report on Form 8-K during the fourth quarter of 2019 that were not
reported.
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning directors, executive officers and corporate governance is set forth under the heading, “Directors
and Executive Officers” and “Corporate Governance” in our Proxy Statement relating to our 2020 annual meeting of
shareholders and is herein incorporated by reference.
Information concerning our compliance with section 16(a) of the Securities Exchange Act of 1934 is set forth under the
heading “Delinquent Section 16(a) Reports” in our Proxy Statement relating to our 2020 annual meeting of shareholders and
is herein incorporated by reference.
Item 11. Executive Compensation
Information concerning executive compensation is set forth under the headings “Compensation Discussion and Analysis”
and “Compensation of Executive Officers and Directors” in our Proxy Statement relating to our 2020 annual meeting of
shareholders and is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and management as well as related stockholder
matters is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plans” in our Proxy Statement relating to our 2020 annual meeting of shareholders and is herein incorporated
by reference.
The following table provides information, as of December 31, 2019, regarding our equity compensation plans.
Number of Securities to be
Weighted Average
Number of Securities
Issued Upon Exercise of
Exercise Price of
Remaining Available
Outstanding Options,
Outstanding Options,
For Future Issuance Under
Plan Category
Warrants and Rights
Warrants and Rights
Equity Compensation Plans(1)
Equity compensation plans
approved by shareholders(2)
221,197
Equity compensation plans not
approved by shareholders
NA
$15.33
NA
1,492,762
NA
(1) Excludes number of securities to be issued upon exercise of outstanding options, warrants and rights.
(2) Represents stock options issued pursuant to the 2015 Equity Compensation Plan, as amended and restated. For additional information,
see “Notes to Consolidated Financial Statements—Stock Based Compensation” included in financial statements included Part IV,
Item 15 of this report.
66
Item 13. Certain Relationships and Related Transactions and Director Independence
Information concerning relationships and related party transactions of certain of our executive officers, directors, and
greater than 5% shareholders as well as the independence of our directors is set forth under the headings “Directors and
Executive Officers” and “Certain Relationships and Related Transactions” in our Proxy Statement relating to our 2020 annual
meeting of shareholders and is herein incorporated by reference. In addition, see “Notes to Consolidated Financial Statements
—Related Party Transactions” included in Part IV, Item 15.
Item 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is set forth under the heading “Directors and Executive
Officers — Principal Accounting Fees and Services” in our Proxy Statement relating to our 2020 annual meeting of shareholders
and is herein incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Our audited consolidated financial statements follow.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of First Interstate BancSystem, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc. and its subsidiaries
(the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes
to the consolidated financial statements (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and our report dated February 26, 2020 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures
that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
The Company’s loan portfolio totaled $9,031.6 million as of December 31, 2019 and the associated allowance for loan
losses was $73.0 million. As described in Notes 1 and 6 to the consolidated financial statements, the allowance for loan losses
is established to absorb known and inherent losses in the Company’s loan portfolio. The Company’s allowance for loan losses
consists of three elements: (1) specific valuation allowances based on probable losses on impaired loans; (2) historical valuation
allowances based on loan loss experience for similar loans with similar characteristics and trends; and (3) general valuation
allowances based on changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency
trends, general economic conditions and other qualitative risk factors both internal and external to the Company. The evaluation
of the qualitative risk factors that comprise the general valuation allowances requires a significant amount of judgement by
management and involves a high degree of estimation.
We identified the general valuation allowance component of the allowance for loan losses as a critical audit matter, because
auditing this element of the allowance for loan losses required significant auditor judgement related to estimates determined
by management which are highly subjective and have significant uncertainty.
68
Our audit procedures related to the Company’s general valuation allowance component of the allowance for loan losses
included the following, among others:
• We obtained an understanding of the relevant controls related to the allowance for loan losses and tested such controls
for design and operating effectiveness, including controls relating to management’s review and approval of the
allowance calculation and management’s assessment and review of the qualitative factor changes and conclusions.
• We tested management’s key metric inputs by (1) agreeing them to internal and external source data and verifying
the magnitude and directional consistency between changes, or lack thereof, in the underlying data and management’s
qualitative factors; (2) evaluating whether management’s conclusions were consistent with Company provided
internal data and external independently sourced data; and (3) agreeing management’s qualitative factor adjustments
to the allowance for loan losses calculation.
/s/ RSM US LLP
We have served as the Company’s auditor since 2004.
Des Moines, Iowa
February 26, 2020
69
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31,
Assets
Cash and due from banks
Interest bearing deposits in banks
Federal funds sold
Total cash and cash equivalents
Investment securities:
Available-for-sale
Held-to-maturity (estimated fair values of $94.5 and $400.7 at December 31, 2019 and
2018, respectively)
Total investment securities
Loans held for investment
Mortgage loans held for sale
Total loans
Less allowance for loan losses
Net loans
Goodwill
Company-owned life insurance
Premises and equipment, net of accumulated depreciation
Core deposit intangibles, net of accumulated amortization
Accrued interest receivable
Mortgage servicing rights, net of accumulated amortization and impairment reserve
Other real estate owned (“OREO”)
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Securities sold under repurchase agreements
Accounts payable and accrued expenses
Accrued interest payable
Deferred tax liability, net
Long-term debt
Subordinated debentures held by subsidiary trusts
Total liabilities
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no
shares issued or outstanding as of December 31, 2019 and 2018
Common stock
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
70
2019
2018
$
$
241.5
835.2
0.1
1,076.8
244.1
577.8
0.1
822.0
2,960.0
2,270.7
92.3
3,052.3
8,930.7
100.9
9,031.6
73.0
8,958.6
621.6
293.8
306.0
62.1
46.7
30.2
8.5
187.6
14,644.2
3,426.5
8,237.0
11,663.5
697.6
129.6
12.1
26.7
13.9
86.9
12,630.3
—
1,049.3
953.6
11.0
2,013.9
14,644.2
$
$
$
406.8
2,677.5
8,470.4
33.3
8,503.7
73.0
8,430.7
546.7
275.1
245.2
56.9
44.9
27.7
14.4
159.1
13,300.2
3,158.3
7,522.4
10,680.7
712.4
94.1
7.8
8.6
15.8
86.9
11,606.3
—
866.7
851.8
(24.6)
1,693.9
13,300.2
$
$
$
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Year Ended December 31,
Interest income:
Interest and fees on loans
Interest and dividends on investment securities:
Taxable
Exempt from federal taxes
Interest on deposits in banks
Total interest income
Interest expense:
Interest on deposits
Interest on securities sold under repurchase agreements
Interest on other borrowed funds
Interest on long-term debt
Interest on subordinated debentures held by subsidiary trusts
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Payment services revenues
Mortgage banking revenues
Wealth management revenues
Service charges on deposit accounts
Other service charges, commissions and fees
Loss on termination of interest rate swap
Investment securities gains (losses), net
Other income
Total non-interest income
Non-interest expense:
Salaries and wages
Employee benefits
Outsourced technology services
Occupancy, net
Furniture and equipment
Professional fees
FDIC insurance premiums
Mortgage servicing rights amortization
Mortgage servicing rights impairment (recovery)
OREO expense, net of income
Core deposit intangibles amortization
Other expenses
Acquisition related expenses
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
See accompanying notes to consolidated financial statements.
71
2019
2018
2017
$
470.9
$
404.3
$
324.7
62.3
2.0
18.8
554.0
49.3
3.9
—
1.3
4.5
59.0
495.0
13.9
481.1
41.5
30.4
23.8
21.1
17.1
—
0.1
15.9
149.9
155.3
51.5
32.3
28.3
13.2
11.6
3.5
4.3
0.4
(2.2)
11.2
66.2
20.3
395.9
235.1
54.1
181.0
2.84
2.83
$
$
55.4
2.4
11.3
473.4
32.6
2.7
0.2
1.3
4.1
40.9
432.5
8.6
423.9
43.3
24.9
23.2
21.8
15.1
—
(0.1)
15.1
143.3
146.4
47.9
28.7
25.4
12.7
10.5
5.6
3.1
—
0.3
7.9
60.0
12.4
360.9
206.3
46.1
160.2
2.77
2.75
$
$
42.8
3.2
7.1
377.8
21.4
1.3
0.5
1.7
3.1
28.0
349.8
11.0
338.8
43.3
28.9
21.1
21.3
13.3
(1.1)
0.7
14.3
141.8
122.7
37.6
25.1
22.4
11.5
10.4
4.7
3.0
(0.1)
0.4
5.5
53.5
27.2
323.9
156.7
50.2
106.5
2.07
2.05
$
$
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Year ended December 31,
Net income
Other comprehensive income (loss) before tax:
Investment securities available-for-sale:
2019
2018
2017
$
181.0
$
160.2
$
106.5
Change in net unrealized gains (losses) during the period
Reclassification adjustment for net (gains) losses included in income
Reclassification adjustment for securities transferred from held-to-maturity to
available-for-sale
Change in unamortized loss on available-for-sale investment securities
transferred into held-to-maturity
Change in net unrealized loss on derivatives
Reclassification adjustment for derivative net loss included in income
Defined benefit post-retirement benefit plans:
Change in net actuarial loss
Other comprehensive income (loss), before tax
Deferred tax benefit (expense) related to other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying notes to consolidated financial statements.
54.9
(0.1)
(6.0)
—
—
—
(0.8)
48.0
(12.4)
35.6
(13.9)
0.1
—
1.6
—
—
(0.6)
(12.8)
3.3
(9.5)
(6.5)
(0.7)
—
1.9
(1.1)
1.1
(1.3)
(6.6)
2.8
(3.8)
$
216.6
$
150.7
$
102.7
72
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share and per share data)
Balance at December 31, 2016
Net income
Other comprehensive loss, net of tax expense
Common stock transactions:
33,063 common shares purchased and retired
11,267,676 common shares issued
140,246 non-vested common shares issued
53,571 non-vested common shares forfeited or canceled
218,095 stock options exercised, net of 67,792 shares tendered
in payment of option price and income tax withholding
amounts
Stock-based compensation expense
Common cash dividends declared ($0.96 per share)
Balance at December 31, 2017
Net income
Reclassification of the income tax effects of the Tax Cut and
Jobs Act from AOCI
Other comprehensive loss, net of tax expense
Common stock transactions:
24,271 common shares purchased and retired
3,848,929 common shares issued
214,892 non-vested common shares issued
43,079 non-vested common shares forfeited or canceled
161,217 stock options exercised, net of 38,450 shares tendered
in payment of option price and income tax withholding
amounts
Stock-based compensation expense
Common cash dividends declared ($1.12 per share)
Balance at December 31, 2018
Net income
Other comprehensive income, net of tax expense
Common stock transactions:
43,560 common shares purchased and retired
4,356,973 common shares issued
212,587 non-vested common shares issued
46,198 non-vested common shares forfeited or canceled
143,222 stock options exercised, net of 47,971 shares tendered in
payment of option price and income tax withholding amounts
Stock-based compensation expense
Common cash dividends declared ($1.24 per share)
Balance at December 31, 2019
See accompanying notes to consolidated financial statements.
Common
Stock
$
$
$
296.1
—
—
(1.3)
386.0
—
—
2.4
3.8
—
687.0
—
—
—
(1.0)
173.3
—
—
1.8
5.6
—
866.7
—
—
(2.5)
176.1
—
—
1.0
8.0
—
$ 1,049.3
73
Retained
Earnings
694.7
$
106.5
—
—
—
—
—
—
—
(48.6)
752.6
160.2
$
3.1
—
—
—
—
—
—
—
(64.1)
851.8
181.0
—
$
—
—
—
—
—
—
(79.2)
953.6
$
$
$
$
Accumulated
Other
Comprehensive
Income (Loss)
$
Total
Stockholders’
Equity
(8.2) $
—
(3.8)
—
—
—
—
—
—
—
(12.0) $
—
(3.1)
(9.5)
—
—
—
—
—
—
—
(24.6) $
—
35.6
—
—
—
—
—
—
—
11.0
$
982.6
106.5
(3.8)
(1.3)
386.0
—
—
2.4
3.8
(48.6)
1,427.6
160.2
—
(9.5)
(1.0)
173.3
—
—
1.8
5.6
(64.1)
1,693.9
181.0
35.6
(2.5)
176.1
—
—
1.0
8.0
(79.2)
2,013.9
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
Cash flows from operating activities:
Net income
2019
2018
2017
$
181.0
$
160.2
$
106.5
Adjustments to reconcile net income from operations to net cash provided by
operating activities:
Provision for loan losses
Net (gain) loss on disposal of property and equipment
Depreciation and amortization
Net premium amortization on investment securities
Net (gain) loss on investment securities transactions
Realized and unrealized net gains on mortgage banking activities
Net loss (gain) on sale of OREO
Write-downs of OREO and other assets pending disposal
Net (gain) on sale of health savings accounts
Mortgage servicing rights impairment (recovery)
Deferred income tax expense
Net increase in cash surrender value of company-owned life insurance
policies
Stock-based compensation expense
Originations of mortgage loans held for sale
Proceeds from sales of mortgage loans held for sale
Changes in operating assets and liabilities:
Decrease (increase) in interest receivable
Increase in other assets
(Decrease) increase in interest payable
Decrease in accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity
Available-for-sale
Proceeds from maturities, pay-downs, calls and sales of investment
securities:
Held-to-maturity
Available-for-sale
Proceeds from bank-owned life insurance settlements
Extensions of credit to clients, net of repayments
Recoveries of loans charged-off
Proceeds from sales of OREO
Acquisition of intangible assets
Proceeds from the sale of health savings accounts
Acquisition of banks and bank holding companies, net of cash and cash
equivalents acquired
Capital expenditures, net of proceeds from sales
Net cash used in investing activities
$
13.9
(1.5)
38.7
8.9
(0.1)
(30.5)
(3.6)
0.9
—
0.4
5.4
(6.7)
8.0
(1,015.6)
971.2
0.3
(22.1)
(13.5)
(7.8)
127.3
—
(1,270.0)
35.6
978.6
3.2
(81.4)
9.7
25.4
—
0.3
298.4
(16.6)
(16.8)
$
8.6
(1.2)
27.6
10.0
0.1
(23.0)
(0.8)
0.1
—
—
15.8
(5.0)
5.6
(768.1)
798.4
(3.3)
(8.0)
2.2
(0.2)
219.0
(2.0)
(541.0)
79.3
460.0
—
(221.7)
12.0
9.1
—
—
28.1
(4.9)
(181.1)
$
11.0
0.2
18.4
11.6
(0.7)
(25.2)
0.1
0.4
(3.1)
(0.1)
20.9
(5.4)
3.9
(815.0)
860.1
(0.6)
(6.1)
0.2
(22.5)
154.6
(12.8)
(614.3)
97.4
426.2
—
(99.7)
7.8
5.9
(28.0)
6.1
91.8
(11.0)
(130.6)
74
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
Year Ended December 31,
Cash flows from financing activities:
Net increase (decrease) in deposits
Net increase (decrease) in securities sold under repurchase agreements
Net increase (decrease) in other borrowed funds
Repayments of long-term debt
Advances on long-term debt
Proceeds from issuance of common stock
Purchase and retirement of common stock
Dividends paid to common stockholders
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes
Cash paid during the period for interest expense
Supplemental disclosures of noncash investing and financing activities:
Amortization of unrealized gains and losses on transfers of securities
Transfer of securities from held-to-maturity to available-for-sale
Right-of-use assets obtained in exchange for operating lease liabilities
Transfer from long-term debt to other borrowed funds
Transfer of loans to other real estate owned
Capitalization of internally originated mortgage servicing rights
Supplemental schedule of noncash investing activities from acquisitions:
Investment securities available for sale
Investment securities held to maturity
Loans held for sale
Loans
Premises and equipment
Goodwill
Core deposit intangible
Mortgage servicing rights
Company-owned life insurance
Deferred tax assets
Interest receivable
Other real estate owned
Other assets
Total noncash assets acquired
Liabilities assumed:
Deposits
Securities sold under repurchase agreements
Accounts payable and accrued expenses
Long-term debt
Other borrowed funds
Trust preferred securities
Deferred tax liability
Total liabilities assumed
See accompanying notes to consolidated financial statements.
75
2019
2018
2017
$
$
$
$
$
$
$
$
276.2
(45.2)
(4.1)
(2.0)
0.1
1.0
(2.5)
(79.2)
144.3
254.8
822.0
1,076.8
51.2
54.7
$
$
$
— $
281.1
39.6
—
14.1
7.3
78.7
—
0.5
416.6
24.6
75.3
16.6
—
15.2
—
2.2
2.4
6.5
638.6
706.7
30.4
19.9
4.1
—
—
0.1
761.2
$
$
$
$
49.5
69.4
(26.1)
(7.1)
2.8
1.8
(1.0)
(64.1)
25.2
63.1
758.9
822.0
25.3
38.7
1.6
—
—
—
12.1
6.1
3.1
—
—
713.1
14.0
101.1
15.7
—
9.5
—
3.6
0.6
6.2
866.9
696.3
—
7.7
7.0
6.1
4.4
0.3
721.8
$
$
$
$
$
$
$
$
(110.2)
105.4
0.1
0.1
5.0
2.4
(1.3)
(48.6)
(47.1)
(23.1)
782.0
758.9
28.8
27.8
3.0
—
—
20.0
5.4
5.6
424.3
57.3
10.3
2,079.3
47.7
231.9
48.0
3.5
57.0
28.6
7.6
1.2
31.6
3,028.3
2,669.0
—
64.2
—
—
—
—
2,733.2
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. First Interstate BancSystem, Inc. (the “Parent Company” and collectively with its subsidiaries, the
“Company”) is a financial and bank holding company that, through the branch offices of its bank subsidiary, provides
a comprehensive range of banking products and services to individuals, businesses, municipalities and other entities
throughout Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming. In addition to its primary emphasis
on commercial and consumer banking services, the Company also offers trust, employee benefit, investment and
insurance services through its bank subsidiary. The Company is subject to competition from other financial institutions
and nonbank financial companies, and is also subject to the regulations of various government agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Presentation. The Company’s consolidated financial statements include the accounts of the Parent Company
and its operating subsidiaries. As of December 31, 2019, the Company had one significant subsidiary, First Interstate
Bank (“FIB”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain
reclassifications, none of which were material, have been made in the consolidated financial statements for 2018 and
2017 to conform to the 2019 presentation. These reclassifications did not change previously reported net income or
stockholders’ equity.
Business Combinations. The Company accounts for all business combinations using the acquisition method of
accounting. Under this method of accounting, acquired assets and assumed liabilities are included with the acquirer's
accounts as of the date of acquisition, with any excess of purchase price over the fair value of the net assets acquired
recognized as either finite lived intangibles or capitalized as goodwill. In addition, acquisition related costs and
restructuring costs are recognized as period expenses as incurred. Fair values are subject to refinement over the
measurement period, not to exceed one year after the closing date.
Equity Method Investments. The Company has investments in real estate joint ventures that are not consolidated
because the Company does not own a majority voting interest, control the operations or receive a majority of the losses
or earnings of the joint venture. These joint ventures are accounted for using the equity method of accounting whereby
the Company initially records its investment at cost (or fair value at the date of acquisition) and then subsequently
adjusts the carrying value for the Company’s proportionate share of distributions and earnings or losses of the joint
ventures.
Variable Interest Entities. The Company’s wholly-owned business trusts, FI Statutory Trust I (“Trust I”), FI Capital
Trust II (“Trust II”), FI Statutory Trust III (“Trust III”), FI Capital Trust IV (“Trust IV”), FI Statutory Trust V (“Trust
V”), FI Statutory Trust VI (“Trust VI”), and Northwest Bancorporation Capital Trust I (“Trust VII”) are variable interest
entities for which the Company is not a primary beneficiary. Accordingly, the accounts of Trust I, Trust II, Trust III,
Trust IV, Trust V, Trust VI, and Trust VII are not included in the accompanying consolidated financial statements, and
are instead accounted for using the equity method of accounting.
The Company has equity investments in variable interest Certified Development Entities (“CDEs”) which have received
allocations under the New Markets Tax Credits Program. The underlying activities of the CDEs are community
development projects designed primarily to promote community welfare, such as economic rehabilitation and
development of low-income areas by providing housing, services, or jobs for residents. The maximum exposure to loss
in the CDEs is the amount of equity invested and credit extended by the Company. The Company has credit protection
in the form of indemnification agreements, guarantees, and collateral arrangements. As the primary beneficiary of these
variable interest entities, the Company’s consolidated financial statements include the assets, liabilities, and results of
operations of the CDEs. The primary activities of the CDEs are recognized in interest and fees on loans, other non-
interest income and long-term debt interest expense on the Company’s statements of operations. Related cash flows
are recognized in loans originated, principal collected on loans and advances or repayments of long-term debt.
Assets Held in Fiduciary or Agency Capacity. The Company holds certain trust assets in a fiduciary or agency
capacity. The Company also purchases and sells federal funds as an agent. These and other assets held in an agency or
fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated
financial statements.
76
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and income and expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance
for loan losses, the valuation of goodwill, fair valuations of investment securities and other financial instruments and
the status of loss contingencies.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents include cash on hand,
amounts due from banks, federal funds sold for one day periods and interest bearing deposits in banks with original
maturities of less than three months. As of December 31, 2019 and 2018, the Company had cash of $769.3 million and
$574.4 million, respectively, on deposit with the Federal Reserve Bank. In addition, the Company maintained
compensating balances with the Federal Reserve Bank of approximately $46.3 million and $28.1 million as of
December 31, 2019 and 2018, respectively, to reduce service charges for check clearing services.
Investment Securities. Investments in debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and carried at amortized cost. Investments in debt securities that may be
sold in response to or in anticipation of changes in interest rates and resulting prepayment risk, or other factors. The
unrealized gains and losses on these securities are reported, net of applicable income taxes, as a separate component
of stockholders’ equity and comprehensive income. Management determines the appropriate classification of securities
at the time of purchase and at each reporting date management reassesses the appropriateness of the classification.
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for accretion of
discounts to maturity and amortization of premiums over the estimated average life of the security, or in the case of
callable securities, through the first call date, using the effective yield method. Such amortization and accretion is
included in interest income. Realized gains and losses are included in investment securities gains. Declines in the fair
value of securities below their cost that are judged to be other-than-temporary are included in other expenses if the
decline is related to credit losses. Other-than-temporary impairment losses related to other factors are recognized in
other comprehensive income, net of income taxes. In estimating other-than-temporary impairment losses, the Company
considers, among other things, the length of time and the extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuer and the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities
sold is based on the specific identification method.
Loans. Loans are reported at the principal amount outstanding. Interest income on loans is calculated using the simple
interest method on the daily balance of the principal amount outstanding. Loan origination fees and certain direct
origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using a level
yield method over the expected lives of the related loans.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payment obligations as they become due or when a loan becomes contractually past due ninety days or more with
respect to interest or principal, unless such past due loan is well secured and in the process of collection. When interest
accrual is discontinued, all unpaid accrued interest is reversed against current period interest income. Interest income
is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned
to accrual status when all principal and interest amounts contractually due are brought current and when, in the opinion
of management, the loans are estimated to be fully collectible as to both principal and interest.
A loan is considered impaired when, based upon current information and events, it is probable that the Company will
be unable to collect, on a timely basis, all amounts due according to the contractual terms of the loan’s original agreement.
The amount of the impairment is measured using cash flows discounted at the loan’s effective interest rate, except
when it is determined that the primary source of repayment for the loan is the operation or liquidation of the underlying
collateral. In such cases, the current fair value of the collateral, reduced by anticipated selling costs, is used to measure
impairment.
77
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The Company considers impaired loans to include all loans, except consumer loans, that are risk rated as doubtful or
on which interest accrual has been discontinued or that have been renegotiated in a troubled debt restructuring. Interest
payments received on impaired loans are applied based on whether they are on accrual or non-accrual status. Interest
income recognized by the Company on impaired loans primarily relates to loans modified in troubled debt restructurings
that remain on accrual status. Interest payments received on non-accrual impaired loans are applied to principal. Interest
income is subsequently recognized only to the extent cash payments are received in excess of principal due.
Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the
acquisition date, with no carryover of the related allowance for credit losses. Credit risks are included in the determination
of fair value. For loans with no significant evidence of credit deterioration since origination, the difference between
the fair value and the unpaid principal balance of the loan at the acquisition date is amortized into interest income using
the effective interest method over the remaining period to contractual maturity. The accounting for loans acquired with
evidence of a deterioration of credit quality is described below.
Loans acquired through the completion of a transfer, including loans acquired in business combinations, that have
evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company
will be unable to collect all contractually required payments receivable are initially recorded at fair value (as determined
by the present value of expected future cash flows) with no valuation allowance. The difference between the
undiscounted cash flows expected at acquisition and the recorded fair value of the loan, or the “accretable yield,” is
recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for
interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,”
are not recognized as a yield adjustment, a loss accrual or a valuation allowance. Increases in expected cash flows
subsequent to the initial measurement are recognized prospectively through adjustment of the yield on the loan over
its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these
impaired loans reflect only losses incurred after the acquisition.
A loan is considered a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to
a restructuring of the loan and the Company grants concessions to the borrower in the restructuring that it would not
otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date
and other actions to minimize potential losses. Certain troubled debt restructurings are on non-accrual status at the time
of restructuring and are returned to accrual status only after considering the borrower’s sustained repayment performance
in accordance with the restructuring agreement for a reasonable period of at least six months and management is
reasonably assured of future performance. If the troubled debt restructuring meets these performance criteria and the
interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at
the time of the restructuring for a new loan with comparable risk, then the loan will no longer be disclosed as a troubled
debt restructuring although they continue to be individually evaluated for impairment and disclosed as impaired loans.
Loans held for sale include residential mortgage loans originated for immediate sale. The Company has elected to
account for loans held for sale using the fair value option. Under the fair value option, net loan origination fees are
recognized in non-interest income at the time of origination. Subsequent changes in the estimated fair values of loans
held for sale are recorded as unrealized gains and losses in non-interest income. Estimated fair values of loans held for
sale are determined based upon current secondary market prices for loans with similar coupons, maturities and credit
quality, or in the case of committed loans, on current delivery prices. Gains and losses on loans held for sale are
recognized based on the difference between the net sales proceeds, including the estimated value associated with
servicing assets or liabilities, and the net carrying value of the loans sold. Adjustments to reflect unrealized gains and
losses resulting from changes in fair value of loans held for sale, as well as realized gains and losses on the sale of
loans, are included in non-interest income - mortgage banking revenues on the accompanying consolidated statements
of income. Loans held for sale were $100.9 million and $33.3 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company had $1.4 million recorded investments in consumer mortgage loans secured
by residential real estate for which formal foreclosure proceedings were in process.
78
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses which is
charged to expense. Loans, or portions thereof, are charged against the allowance for loan losses when management
believes that the collectability of the principal is unlikely or, with respect to consumer installment and credit card loans,
according to established delinquency schedules. The allowance balance is an amount that management believes will
be adequate to absorb known and inherent losses in the loan portfolio based upon quarterly analysis of the current risk
characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, industry
concentrations and current economic factors and the estimated impact of current economic and environmental conditions
on historical loss rates.
Loans acquired in business combinations are recorded at their estimated fair values on the date of acquisition.
Accordingly, no allowance for loan losses related to these loans is recorded at the date of transfer. An allowance for
loan losses is recorded for credit deterioration occurring subsequent to the transfer date.
Goodwill. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for
impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely impairment
has occurred. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount.
In any given year the Company may elect to perform a qualitative assessment to determine whether it is more likely
than not that the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the
fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the qualitative
assessment, a quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value
of net assets is estimated based on analyses of the Company’s market value, discounted cash flows and peer values.
The determination of goodwill impairment is sensitive to market-based economics and other key assumptions used in
determining or allocating fair value. Variability in the market and changes in assumptions or subjective measurements
used to allocate fair value are reasonably possible and may have a material impact on our consolidated financial
statements or results of operations.
Core Deposit Intangibles. Core deposit intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed, as a result of acquisitions, and are amortized using an accelerated method based on
the estimated weighted average useful lives of the related deposits, which is generally ten years.
Mortgage Servicing Rights. The Company recognizes the rights to service mortgage loans for others, whether acquired
or internally originated. Mortgage servicing rights are initially recorded at fair value based on comparable market data
and are amortized in proportion to and over the period of estimated net servicing income. Mortgage servicing rights
are evaluated quarterly for impairment by discounting the expected future cash flows, taking into consideration the
estimated level of prepayments based on current industry expectations and the predominant risk characteristics of the
underlying loans including loan type, note rate and loan term. Impairment adjustments, if any, are recorded through a
valuation allowance.
Premises and Equipment. Buildings, furniture and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed using straight-line methods over estimated useful lives of 5 to 45 years for buildings
and improvements and 4 to 15 years for furniture and equipment. Leasehold improvements and assets acquired under
a financing lease are amortized over the shorter of their estimated useful lives or the terms of the related leases. Land
is recorded at cost. Costs incurred for maintenance and repairs are expensed as incurred.
We have leased branches and office space and have entered into various other agreements in conducting our business.
Operating lease right-of-use assets are included within the Premises and Equipment line item and our operating lease
liability is included within the Other Liabilities line item. Operating lease expense is recognized on a straight-line basis
over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such
as property taxes are expensed as incurred. Lease and non-lease components are accounted for separately as the amounts
are readily determinable under our lease contracts. Leases with an initial term of 12 months or less are not recorded
on the balance sheet.
Upon adoption of ASU 2016-02, the Company elected to apply certain practical expedients whereby we did not reassess
(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing
leases, and (iii) initial direct costs for any existing leases. We elected the hindsight practical expedient to determine the
lease term for existing leases.
79
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
In recognizing lease right-of use assets and related lease liabilities, we determine whether an agreement represents a
lease and at commencement of the lease we evaluate each agreement to determine whether the lease is an operating or
financing lease. Some of our lease agreements have contained renewal options, tenant improvement allowances, rent
holidays, and rent escalation clauses. We hold one financing lease with the remaining leases classified as operating
leases. Right-of-use lease assets represent our right to use the underlying asset for the lease term and the lease obligation
represents our commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations
are recognized at the commencement date based on the present value of remaining lease payments over the lease term.
For the Company’s leases that do not provide an implicit rate, we use an estimated incremental borrowing rate based
on the information available at the commencement date in determining the present value of lease payments. The right-
of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The
estimated lease term may include options to extend or terminate the lease when it is reasonably certain that we will
exercise that option.
Company-Owned Life Insurance. Key executive and group life insurance policies are recorded at their cash surrender
value. Separate account group life insurance policies are subject to a stable value contract that offsets the impact of
interest rate fluctuations on the market value of the policies and are recorded at the stabilized investment value. Increases
in the cash surrender or stabilized investment value of insurance policies, as well as insurance proceeds received, are
recorded as other non-interest income, and are not subject to income taxes.
Deferred Compensation Plan. The Company has a deferred compensation plan for the benefit of certain highly
compensated officers and directors of the Company. The plan allows for discretionary employer contributions in excess
of tax limits applicable to the Company’s 401(k) and profit sharing plans and the deferral of salary, short-term incentives
or director fees subject to certain limitations. Deferred compensation plan assets and liabilities are included in the
Company’s consolidated balance sheets at fair value.
As of December 31, 2019 and 2018, deferred compensation plan assets were $18.2 million and $12.1 million,
respectively. Corresponding deferred compensation plan liabilities were $18.2 million and $12.1 million as of
December 31, 2019 and 2018, respectively.
Impairment of Long-Lived Assets. Long-lived assets, including premises and equipment and certain identifiable
intangibles, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. The amount of the impairment loss, if any, is based on the asset’s fair value. No
impairment losses were recognized in 2019, 2018, or 2017.
Other Real Estate Owned. Real estate acquired in satisfaction of loans is initially carried at current fair value less
estimated selling costs. Any excess of loan carrying value over the fair value of the real estate acquired is recorded as
a charge to the allowance for loan losses. Subsequent declines in fair value less estimated selling costs are included
in OREO expense. Subsequent increases in fair value less estimated selling costs are recorded as a reduction in OREO
expense to the extent of recognized losses. Operating expenses, net of related income, and gains or losses on sales are
included in OREO expense. Write-downs of $0.9 million, $0.1 million and $0.4 million were recorded in 2019, 2018
and 2017, respectively. The carrying value of foreclosed residential real estate properties included in other real estate
owned was $2.3 million as of December 31, 2019, and $2.0 million as of December 31, 2018.
Restricted Equity Securities. The Company, as a member of the Federal Reserve Bank and the Federal Home Loan
Bank (“FHLB”), is required to maintain investments in each of the organization’s capital stock. As of December 31,
2019, restricted equity securities of the Federal Reserve Bank and the FHLB of $42.8 million and $10.7 million,
respectively, were included in other assets at cost. As of December 31, 2018, restricted equity securities of the Federal
Reserve Bank and the FHLB were $37.5 million and $10.7 million, respectively. No ready market exists for these
restricted equity securities, and they have no quoted market values. Restricted equity securities are periodically reviewed
for impairment based on ultimate recovery of par value. The determination of whether a decline affects the ultimate
recovery of par value is influenced by the significance of the decline compared to the cost basis of the restricted equity
securities, the length of time a decline has persisted, the impact of legislative and regulatory changes on the issuing
organizations and the liquidity positions of the issuing organizations. Based on management’s assessment, no
impairment losses were recorded on restricted equity securities during 2019, 2018 or 2017.
80
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Derivatives and Hedging Activities. For asset and liability management purposes, the Company enters into interest
rate swap contracts to hedge against changes in forecasted cash flows due to interest rate exposures. Interest rate swaps
are contracts in which a series of interest payments are exchanged over a prescribed period. The notional amount upon
which the interest payments are based is not exchanged. The swap agreements are derivative instruments and convert
a portion of the Company’s forecasted variable rate debt to a fixed rate (i.e., cash flow hedge) over the payment term
of the interest rate swap. The effective portion of the gain or loss on cash flow hedging instruments is initially reported
as a component of other comprehensive income and subsequently reclassified into earnings in the same period during
which the transaction affects earnings. The ineffective portion of the gain or loss on derivative instruments, if any, is
recognized in earnings. The Company does not enter into interest rate swap agreements for trading or speculative
purposes. As of December 31, 2019, the Company does not have an existing agreement.
The Company also enters into certain interest rate swap contracts that are not designated as hedging instruments. These
derivative contracts relate to transactions in which the Company enters into an interest rate swap with a client while at
the same time entering into an offsetting interest rate swap with a third party financial institution. Because the Company
acts as an intermediary for the client, changes in the fair value of the underlying derivative contracts for the most part
offset each other and do not significantly impact the Company’s results of operations.
In the normal course of business, the Company enters into interest rate lock commitments to finance residential mortgage
loans that are not designated as accounting hedges. These commitments, which contain fixed expiration dates, offer
the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe
established by the Company. Interest rate risk arises on these commitments and subsequently closed loans if interest
rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments
related to residential mortgage loans intended to be sold are considered derivatives and are marked to market through
earnings. In addition to the effects of the change in market interest rate, the fair value measurement of the derivative
also contemplates the expected cash flows to be received from the counterparty from the future sale of the loan.
The Company sells residential mortgage loans on either a best efforts or mandatory delivery basis. The Company
mitigates the effect of the interest rate risk inherent in providing interest rate lock commitments by entering into forward
loan sales contracts. During the interest rate lock commitment period, these forward loan sales contracts are marked
to market through earnings and are not designated as accounting hedges. Exclusive of the fair value component associated
with the projected cash flows from the loan delivery to the investor, the changes in fair value related to movements in
market rates of the interest rate lock commitments and the forward loan sales contracts generally move in opposite
directions, and the net impact of changes in these valuations on net income during the loan commitment period is
generally inconsequential. When the loan is funded to the borrower, the interest rate lock commitment derivative expires
and the Company records a loan held for sale. The forward loan sales contract acts as a hedge against the variability
in cash to be received from the loan sale.
The changes in measurement of the estimated fair values of the interest rate lock commitments and forward loan sales
contracts are included in mortgage banking revenues in the accompanying consolidated statements of income.
Earnings Per Common Share. Basic and diluted earnings per common share are calculated using a two-class method.
Under the two-class method, basic earnings per common share is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during the period, excluding outstanding
participating securities. Participating securities include non-vested performance restricted stock awards granted and
all non-vested time restricted stock awards. Diluted earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of common shares outstanding determined for the
basic earnings per share calculation plus the dilutive effect of stock compensation using the treasury stock method.
Income Taxes. The Parent Company and its subsidiaries have elected to be included in a consolidated federal income
tax return. For state income tax purposes, the combined taxable income of the Parent Company and its subsidiaries is
apportioned among the states in which operations take place. Federal and state income taxes attributable to the
subsidiaries, computed on a separate return basis, are paid to or received from the Parent Company.
81
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and
liabilities are determined based on enacted income tax rates which will be in effect when the differences between the
financial statement carrying values and tax bases of existing assets and liabilities are expected to be reported in taxable
income.
Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination.
Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position
will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured
as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax
authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in
some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized
beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the
Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within
income tax expense in the consolidated statements of income. With few exceptions, the Company is no longer subject
to U.S. federal and state examinations by tax authorities for years before 2016. The Company had no material penalties
as of December 31, 2019, 2018 or 2017.
Revenue Recognition. The Company recognizes revenue as it is earned based on contractual terms, as transactions
occur, or as services are provided and collectability is reasonably assured. The principal source of revenue is interest
income from loans and investments. The Company also earns non-interest income from various banking and financial
services offered to its clients. Certain specific policies related to non-interest income include the following:
Wealth management and trust fee income
Wealth management and trust fee income represents monthly fees due from wealth management clients as consideration
for managing the clients’ assets. Wealth management and trust services include custody of assets, investment
management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance
obligation is completed. The Company does not earn performance-based incentives. Optional services such as
settlement, court, and regulatory fees are also available to existing trust and asset management clients. The Company’s
performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at
a point in time.
Service charges on deposit accounts
Service charges on deposit accounts represent general service fees for account maintenance and activity- or transaction-
based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some
other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed for
account maintenance services or when a transaction has been completed (such as a wire transfer or check orders).
Payment for such performance obligations are generally received at a point in time when the performance obligations
are satisfied.
Interchange and other fees
Interchange and other fees primarily represent debit and credit card income comprised of interchange fees earned
whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard.
ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder
uses a Company ATM. Merchant services income primarily represents fees charged to merchants to process their debit
and credit card transactions, in addition to account management fees. Swap fee income primarily represents income
associated with the execution of dealer bank swap agreements. Other service charges include revenue from processing
wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for
interchange and other service charges are largely satisfied, and related revenue recognized, when completion of the
services are rendered at a point in time.
82
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Annuity and insurance commissions
Annuity and insurance commissions primarily represent commissions received on annuity product sales. The Company
acts as an intermediary between the Company’s client and the insurance carrier. The Company’s performance obligation
is generally satisfied upon the issuance of the annuity policy, the carrier then remits the commission payment to the
Company, and the Company recognizes the revenue at a point in time.
Comprehensive Income. Comprehensive income includes net income, as well as other changes in stockholders’ equity
that result from transactions and economic events other than those with shareholders. In addition to net income, the
Company’s comprehensive income includes the after tax effect of changes in unrealized gains and losses on available-
for-sale investment securities and derivatives designated as cash flow hedges, changes in the unamortized gain or loss
on available-for-sale investment securities transferred to held-to-maturity and changes in net actuarial gains and losses
on defined benefit post-retirement benefits plans.
Segment Reporting. An operating segment is defined as a component of a business for which separate financial
information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and evaluate performance. The "Segment Reporting" topic of the FASB ASC requires that public companies
report certain information about operating segments. It also requires that public companies report certain information
about their products and services, the geographic areas in which they operate, and their major clients. The Company
is a holding company for a regional community bank, which offers a wide array of products and services to its clients.
The Company has one reporting unit and one operating segment, community banking, which encompasses commercial
and consumer banking services offered to individuals, businesses, municipalities and other entities.
For additional information concerning community banking, see “Business—Community Banking,” included in Part I,
Item 1 of this report.
Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was $4.2 million, $3.2 million,
and $3.5 million in 2019, 2018 and 2017, respectively.
Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from
the Company; the transferee obtains the right, free of conditions that constrain it from taking advantage of that right,
to pledge or exchange the transferred assets; and, the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
Stock-Based Compensation. Compensation cost for all stock-based awards is measured at fair value on the date of
grant and is recognized over the requisite service period for awards expected to vest. The impact of forfeitures of stock-
based payment awards on compensation expense is recognized as forfeitures occur. Stock-based compensation expense
of $8.0 million, $5.6 million and $3.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, is
included in benefits expense in the Company’s consolidated statements of income. Related income tax benefits
recognized for the years ended December 31, 2019, 2018 and 2017 were $1.2 million, $1.1 million and $2.6 million,
respectively, is included in income tax expense in the Company’s consolidated statements of income.
Fair Value Measurements. In general, fair value measurements are based upon quoted market prices, where available.
If quoted market prices are not available, fair value measurements are estimated using relevant market information and
other assumptions. Fair value estimates involve uncertainties and require some degree of judgment regarding interest
rates, credit risk, prepayments and other factors. The use of different assumptions or estimation techniques may have
a significant effect on the fair value amounts reported.
(2) ACQUISITIONS
Community 1st Bank. On October 11, 2018, the Company entered into a definitive agreement to acquire all of the
outstanding stock of CMYF, a community bank headquartered in Post Falls, Idaho with three banking offices in North
Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems occurred
on June 7, 2019.
83
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Consideration for the acquisition was $18.8 million, consisting of the issuance of 463,134 shares of the Company's
Class A common stock valued at $40.64 per share, the closing price of the Company's Class A common stock as quoted
on the NASDAQ stock market on the acquisition date. Holders of each share of CMYF common stock received 0.3784
shares of First Interstate Class A common stock for each share of CMYF common stock. Previously unvested CMYF
restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued
and outstanding at acquisition close and included in consideration. All CMYF stock options outstanding, vested and
were settled by CMYF prior to the close of the transaction.
The assets and liabilities of CMYF were recorded in the Company’s consolidated financial statements at their estimated
fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired
and liabilities assumed is recorded as goodwill. The purchase price allocation resulted in goodwill of $2.3 million,
which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s
one operating segment, community banking, and consists largely of the synergies and economies of scale expected
from combining the operations of CMYF and the Company.
The Company recorded net assets acquired of approximately $16.5 million consisting of approximately $129.1 million
in assets, inclusive of $78.8 million of loans, of which $0.7 million were classified as credit impaired, and assumed
approximately $112.6 million of liabilities, inclusive of $110.1 million of deposits. Adjustments to the fair value marks
for deferred taxes and accounts payable and accrued expenses were made since the prior quarter, none of which were
material. The adjustments had no impact on 2019 earnings and resulted in a net increase to goodwill of $0.1 million
from the third quarter reported balances. All amounts reported were finalized in the fourth quarter of 2019.
Core deposit intangible assets of $3.0 million are being amortized using an accelerated method over the estimated
useful lives of the related deposits of 10 years.
Unaudited pro forma consolidated revenues and net income as if the CMYF acquisition had occurred as of January 1,
2019, are not presented because the effect of this acquisition was not considered significant.
The accompanying consolidated statements of income include the results of operations of the acquired entity from the
April 8, 2019 acquisition date. Although CMYF legally merged with FIB, the acquired entity continued to do business
as CMYF until June 7, 2019, at which point CMYF’s operations were integrated with the Company’s operations.
Idaho Independent Bank. On October 11, 2018, the Company also entered into a definitive agreement to acquire all
of the outstanding stock of IIBK, a community bank headquartered in Coeur d'Alene, Idaho with 11 banking offices
across Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems occurred
on June 7, 2019.
Consideration for the acquisition was $157.3 million, consisting of the issuance of 3,871,422 shares of the Company's
Class A common stock valued at $40.64 per share, the closing price of the Company's Class A common stock as quoted
on the NASDAQ stock market on the acquisition date. Holders of each share of IIBK common stock received 0.50
shares of First Interstate Class A common stock for each share of IIBK common stock. Previously unvested IIBK
restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued
and outstanding at acquisition close and included in consideration. All IIBK stock options outstanding, vested and were
settled by IIBK prior to the close of the transaction.
The assets and liabilities of IIBK were recorded in the Company’s consolidated financial statements at their estimated
fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired
and liabilities assumed is recorded as goodwill. The purchase price allocation resulted in goodwill of $73.0 million,
which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s
one operating segment, community banking, and consists largely of the synergies and economies of scale expected
from combining the operations of IIBK and the Company.
84
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The following table summarizes the consideration paid, fair values of the IIBK assets acquired and liabilities assumed,
and the resulting goodwill. All amounts reported were finalized in the fourth quarter of 2019.
As of April 8, 2019
Assets acquired:
Cash and cash equivalents
Investment securities
Loans held for investment
Mortgage loans held for sale
Allowance for loan losses
Premises and equipment
Other real estate owned (“OREO”)
Company owned life insurance
Core deposit intangible assets
Deferred tax assets, net
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Accounts payable and accrued expense
Other borrowed funds
Securities sold under repurchase agreements
Total liabilities assumed
Net assets acquired
Consideration paid:
Class A common stock
Total consideration paid
Goodwill
As Recorded
by IIBK
Fair Value
Adjustments
As Recorded
by the Company
$
270.7 $
62.7
347.6
0.5
(6.3)
16.5
0.4
15.2
—
3.2
8.6
719.1
596.5
15.2
4.0
30.4
646.1
—
0.5
(9.8)
—
6.3
4.8
2.0
—
13.6
(2.6)
(0.7)
14.1
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
0.1
(9)
2.6 (10)
0.1 (11)
—
2.8
$
73.0 $
11.3
$
$
$
$
270.7
63.2
337.8
0.5
—
21.3
2.4
15.2
13.6
0.6
7.9
733.2
596.6
17.8
4.1
30.4
648.9
84.3
157.3
157.3
73.0
Explanation of fair value adjustments and the removal of previously recorded fair value marks recorded by IIBK. Adjustments
to the fair value marks for deferred tax assets and accounts payable and accrued expenses were made since the prior quarter,
none of which were material. The adjustments had no impact on 2019 earnings and a net decrease to goodwill of $1.1 million
from the third quarter reported balances.
(1) Write up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes
obtained from an independent third party pricing service.
(2) Write down of the book value of loans to their estimated fair values. The fair value of the loans was estimated using
cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses
and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of
collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company’s analysis of
the fair value of each loan’s underlying collateral, discounted using market-derived rates of return with consideration
given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3) Adjustment to remove the IIBK allowance for loan losses at acquisition date, as the credit risk is included in the fair
value adjustment for loans receivable described in (2) above.
(4) Write up of the book value of premises and equipment to their estimated fair values on the date of acquisition based
upon broker’s opinion of value and to record the fair value of right-of-use asset leases.
(5) Adjustment to the book value of other real estate owned to their estimated fair values on the date of acquisition based
on appraisal value.
(6) Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an
independent accounting and advisory firm.
85
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(7) Adjustment consists of the write-off of pre-existing deferred tax assets and purchase accounting adjustments as a result
of the acquisition.
(8) Adjustment consists of reductions to the fair value of other items.
(9)
Increase in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits
with similar terms on the date of acquisition based upon valuation from an independent accounting and advisory firm.
(10) Adjustment to the liability for the nonqualified retirement plan and to record the lease liability.
(11) Adjustment of the book value of debt to the estimated fair values on the date of acquisition based upon interest rates in
the market.
Core deposit intangible assets of $13.6 million are being amortized using an accelerated method over the estimated
useful lives of the related deposits of 10 years.
The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30
"Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition,
measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since
origination for which it is probable, at acquisition, the Company will be unable to collect all contractual amounts owed.
For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition
over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected
remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to
changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest
amounts collected, and (iii) indices used to fair value variable rate loans.
Information regarding IIBK loans acquired deemed credit-impaired as of the April 8, 2019 acquisition date are as
follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected (“non-accretable discount”)
Cash flows expected to be collected
Interest component of cash flows expected to be collected (“accretable discount”)
Fair value of acquired credit-impaired loans
$
$
24.1
3.9
20.2
3.4
16.8
Information regarding IIBK acquired loans not deemed credit-impaired at the April 8, 2019 acquisition date are as
follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected
Fair value at acquisition
$
$
398.7
15.2
321.5
Unaudited pro forma consolidated revenues and net income as if the IIBK acquisition had occurred as of January 1,
2019, are not presented because the effect of this acquisition was not considered significant.
The accompanying consolidated statements of income include the results of operations of the acquired entity from the
April 8, 2019 acquisition date. Although IIBK legally merged with FIB, the acquired entity continued to do business
as IIBK until June 7, 2019, at which point IIBK’s operations were integrated with the Company’s operations.
86
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Northwest Bancorporation, Inc. On April 25, 2018, the Company entered into a definitive agreement to acquire all
of the outstanding stock of Northwest Bancorporation, Inc. (“Northwest”), the parent company of Inland Northwest
Bank (“INB”), a Spokane, Washington based community bank with 20 banking offices across Idaho, Oregon and
Washington. The acquisition was completed on August 16, 2018, and the Company merged INB with its existing bank
subsidiary, First Interstate Bank, on November 9, 2018.
Consideration for the acquisition was $176.3 million, consisting of the issuance of 3.84 million shares of the Company's
Class A common stock valued at $45.15 per share, the closing price of the Company's Class A common stock as quoted
on the NASDAQ stock market on the acquisition date. The Company paid approximately $3.0 million in cash related
to Northwest warrants, which were included in the consideration paid. Holders of each share of Northwest common
stock received 0.516 shares of First Interstate Class A common stock for each share of Northwest common stock.
Additionally, all Northwest stock purchase warrants outstanding immediately prior to the close of the transaction were
canceled in exchange for the right to receive a cash payment as provided in the Agreement. Previously unvested
Northwest restricted stock awards outstanding immediately prior to the close of the transaction vested and were
considered issued and outstanding at acquisition close.
The assets and liabilities of Northwest were recorded in the Company’s consolidated financial statements at their
estimated fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets
acquired and liabilities assumed is recorded as goodwill. The purchase price allocation resulted in goodwill of $100.7
million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the
Company’s one operating segment, community banking, and consists largely of the synergies and economies of scale
expected from combining the operations of Northwest and the Company.
The following table summarizes the consideration paid, fair values of the Northwest assets acquired and liabilities
assumed, and the resulting goodwill. All amounts reported were finalized in the second quarter of 2019.
As of August 16, 2018
Assets acquired:
Cash and cash equivalents
Investment securities
Loans held for investment
Allowance for loan loss
Premises and equipment
Other real estate owned (“OREO”)
Core deposit intangible assets
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Accounts payable and accrued expense
Long term debt
Trust preferred securities
Deferred tax liability, net
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash
Class A common stock
Total consideration paid
Goodwill
As Recorded
by Northwest
Fair Value
Adjustments
As Recorded
by the Company
$
31.2 $
3.1
727.9
(8.0)
14.5
0.3
2.4
29.3
800.7
696.1
8.1
13.0
5.2
(1.2)
721.2
$
79.5 $
87
—
—
(14.8) (1)
8.0 (2)
—
0.3
13.3 (3)
(10.0) (4)
(3.2)
0.2 (5)
(0.4) (6)
0.1
(0.8) (7)
1.6 (8)
0.7
(3.9)
$
$
$
$
31.2
3.1
713.1
—
14.5
0.6
15.7
19.3
797.5
696.3
7.7
13.1
4.4
0.4
721.9
75.6
3.0
173.3
176.3
100.7
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Explanation of fair value adjustments and the removal of previously recorded fair value marks recorded by Northwest.
(1) Write down of the book value of loans to their estimated fair values. The fair value of the loans was estimated
using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future
credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans.
The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the
Company’s analysis of the fair value of each loan’s underlying collateral, discounted using market-derived rates
of return with consideration given to the period of time and costs associated with foreclosure and disposition of
the collateral.
(2) Adjustment to remove the Northwest allowance for loan losses at acquisition date, as the credit risk is included
in the fair value adjustment for loans receivable described in (1) above.
(3) Write down of the book value of premises and equipment to their estimated fair values on the date of acquisition
based upon broker’s opinion of value.
(4) Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from
an independent accounting and advisory firm.
(5) Adjustment consists of reductions to the fair value of other items, including the removal of Northwest previously
recorded goodwill.
(6)
Increase in book value of time deposits to their estimated fair values based upon interest rates of similar time
deposits with similar terms on the date of acquisition based upon valuation from an independent accounting and
advisory firm.
(7) Decrease due to the write-off of off-balance sheet reserves.
(8) Write down of the book value of debt to the estimated fair values on the date of acquisition based upon favorable
interest rates in the market.
(9) Adjustment consists of the write-off of pre-existing deferred tax assets and purchase accounting adjustments as
a result of the acquisition.
Core deposit intangible assets of $15.7 million are being amortized using an accelerated method over the estimated
useful lives of the related deposits of 10 years.
The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30
"Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition,
measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since
origination for which it is probable, at acquisition, the Company will be unable to collect all contractual amounts owed.
For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition
over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected
remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to
changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest
amounts collected, and (iii) indices used to fair value variable rate loans.
Information regarding Northwest loans acquired deemed credit-impaired as of the August 16, 2018 acquisition date
are as follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected (“non-accretable discount”)
Cash flows expected to be collected
Interest component of cash flows expected to be collected (“accretable discount”)
Fair value of acquired credit-impaired loans
$
$
27.5
4.4
23.1
3.2
19.9
Information regarding Northwest acquired loans not deemed credit-impaired at the August 16, 2018 acquisition date
are as follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected
Fair value at acquisition
$
$
894.8
26.1
693.2
88
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Unaudited pro forma consolidated revenues and net income as if the Northwest acquisition had occurred as of January
1, 2017, are not presented because the effect of this acquisition was not considered significant.
The accompanying consolidated statements of income include the results of operations of the acquired entity from the
August 16, 2018 acquisition date. The acquired entity continued to operate as INB until November 9, 2018 at which
point INB’s operations were integrated with the Company’s operations, and INB merged with FIB. Standalone amounts
for INB were no longer available after that date.
Acquisition related expenses
The Company recorded third party acquisition related costs of $20.3 million, $12.4 million and $27.2 million in 2019,
2018 and 2017, respectively. These costs are incorporated in non-interest expense in the Company’s consolidated
statements of income and are summarized below.
Legal and professional fees
Employee expenses
Technology conversion and contract termination
Other
Total acquisition related expenses
Dec 31, 2019
Dec 31, 2018
Dec 31, 2017
$
$
1.0 $
4.0 $
8.2
9.1
2.0
1.1
6.6
0.7
20.3 $
12.4 $
9.6
5.1
10.2
2.3
27.2
(3) GOODWILL AND CORE DEPOSIT INTANGIBLES
Goodwill
Net carrying value at beginning of period
Acquisitions and measurement period adjustments
Net carrying value at end of period
Year Ended December 31,
2018
2019
$
$
546.7
74.9
621.6
$
$
444.7
102.0
546.7
The Company performed its annual goodwill impairment qualitative assessment as of July 1, 2019, 2018, and 2017
and determined the Company’s goodwill was not considered impaired. In addition, there were no events or
circumstances that occurred during the second half of 2019 that would more-likely-than-not reduce the fair value of a
reporting unit below its carrying value, the Company did not perform interim testing as of December 31, 2019.
Core deposit intangibles (“CDI”)
The following table sets forth activity for identifiable core deposit intangibles subject to amortization:
Gross CDI, beginning of period
Established through acquisitions
Reductions due to sale of accounts
Accumulated amortization
Net CDI, end of period
Year Ended December 31,
2018
2019
$
$
89.7
16.6
(0.3)
(43.9)
62.1
$
$
74.0
15.7
—
(32.8)
56.9
Amortization expense of CDI assets was $11.2 million, $7.9 million and $5.5 million for the fiscal years
ended December 31, 2019, 2018 and 2017, respectively.
CDI are evaluated for impairment if events and circumstances indicate a possible impairment. The CDI are amortized
using an accelerated method based on the estimated weighted average useful lives of the related deposits, which
is generally ten years.
89
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The following table provides estimated future CDI amortization expense:
Years ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
(4)
INVESTMENT SECURITIES
$
$
10.9
9.9
9.0
8.2
7.3
16.8
62.1
The amortized cost and approximate fair values of investment securities are summarized as follows:
December 31, 2019
Available-for-Sale
U.S. Treasury notes
State, county and municipal securities
Obligations of U.S. government agencies
U.S. agency residential mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Corporate Securities
Other investments
Total
December 31, 2019
Held-to Maturity
State, county and municipal securities
Obligations of U.S. government agencies
U.S agency residential mortgage-backed securities &
collateralized mortgage obligations
Corporate securities
Other investments
Total
December 31, 2018
Available-for-Sale
U.S. Treasury notes
Obligations of U.S. government agencies
U.S. agency residential mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Corporate Securities
Other investments
Total
90
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
9.0 $
80.1
367.5
2,303.6
47.6
134.5
3.2
2,945.5 $
— $
0.8
0.1
19.6
—
1.2
—
21.7 $
— $
—
(0.8)
(6.0)
(0.4)
—
—
(7.2) $
9.0
80.9
366.8
2,317.2
47.2
135.7
3.2
2,960.0
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
57.3 $
19.8
1.2
13.9
0.1
92.3 $
2.1 $
—
—
0.1
—
2.2 $
— $
—
—
—
—
— $
59.4
19.8
1.2
14.0
0.1
94.5
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
2.6 $
569.3
1,566.4
72.0
92.9
2.0
2,305.2 $
— $
0.1
2.5
—
—
—
2.6 $
— $
(10.2)
(24.1)
(1.8)
(1.0)
—
(37.1) $
2.6
559.2
1,544.8
70.2
91.9
2.0
2,270.7
$
$
$
$
$
$
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
December 31, 2018
Held-to Maturity
State, county and municipal securities
Obligations of U.S. government agencies
U.S. agency residential mortgage-backed securities &
collateralized mortgage obligations
Corporate securities
Other investments
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
150.9 $
19.8
189.7
46.3
0.1
406.8 $
1.8 $
—
0.3
0.1
—
2.2 $
(0.9) $
(0.3)
(6.5)
(0.6)
—
(8.3) $
151.8
19.5
183.5
45.8
0.1
400.7
At December 31, 2018, we had $406.8 million of investment securities classified as held to maturity. As a result of the
adoption of ASU 2017-12 discussed in “Note 27 – Recent Authoritative Accounting Guidance”, the Company
transferred investment securities classified as held-to-maturity to investment securities available-for-sale. At the time
of transfer, the amortized cost and fair value of these securities totaled $281.1 million and $275.1 million, respectively.
In addition, the unrealized loss of $6.0 million was recorded in the consolidated statement of comprehensive income.
There were no material gross gains and no material gross losses realized on the disposition of available-for-sale securities
in 2019 and 2018. There were $1.1 million of gross gains realized and $0.4 million of gross losses realized on the
disposition of available-for-sale securities in 2017.
As of December 31, 2019, the Company had general obligation securities with amortized costs of $45.9 million included
in state, county and municipal securities, of which $28.0 million were issued by political subdivisions or agencies
within the states of Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming.
The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment
category, and the length of time individual investment securities have been in a continuous unrealized loss position,
as of December 31, 2019 and 2018. There were no held-to-maturity securities in a continuous unrealized loss position
as of December 31, 2019.
December 31, 2019
Available-for-Sale
Less than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
Obligations of U.S. government agencies
$
185.3 $
(0.8) $
— $
— $
185.3 $
(0.8)
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Private mortgage-backed securities
Total
$
740.1
—
925.4 $
(4.6)
—
(5.4) $
155.9
46.6
202.5 $
(1.4)
(0.4)
(1.8) $
896.0
46.6
1,127.9 $
(6.0)
(0.4)
(7.2)
91
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
December 31, 2018
Available-for-Sale
Less than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
Obligations of U.S. government agencies
$
363.1 $
(7.9) $
154.5 $
(2.3) $
517.6 $
(10.2)
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Private mortgage-backed securities
Corporate securities
Total
December 31, 2018
Held-to-Maturity
735.2
—
24.9
(14.5)
—
(0.2)
503.7
69.4
51.4
(9.6)
(1.8)
(0.8)
1,238.9
69.4
76.3
(24.1)
(1.8)
(1.0)
$
1,123.2 $
(22.6) $
779.0 $
(14.5) $
1,902.2 $
(37.1)
Less than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
State, county and municipal securities
$
25.9 $
(0.3) $
57.1 $
(0.6) $
83.0 $
(0.9)
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Corporate securities
Obligations of U.S. government agencies
45.0
—
19.5
(2.2)
—
(0.3)
120.2
39.6
—
(4.3)
(0.6)
—
165.2
39.6
19.5
Total
$
90.4 $
(2.8) $
216.9 $
(5.5) $
307.3 $
(6.5)
(0.6)
(0.3)
(8.3)
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual
investment security. Consideration is given to the length of time and the extent to which the fair value has been less
than cost; the financial condition and near term prospects of the issuer; and, the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The
Company had 338 and 760 individual investment securities that were in an unrealized loss position as of December 31,
2019 and 2018, respectively. Unrealized losses as of December 31, 2019 and 2018 related primarily to fluctuations in
the current interest rates. The fair value of these investment securities is expected to recover as the securities approach
their maturity or repricing date or if market yields for such investments decline. As of December 31, 2019, the Company
had the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated
recovery. Furthermore, the Company does not have the intent to sell any of the available-for-sale securities in the above
table and it is more likely than not that the Company will not have to sell any securities before a recovery in cost. No
impairment losses were recorded during 2019, 2018 or 2017.
Maturities of investment securities at December 31, 2019 are shown below. Maturities of mortgage-backed securities
have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment
securities maturities are shown at contractual maturity dates.
December 31, 2019
Within one year
After one year but within five years
After five years but within ten years
After ten years
Total
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
677.3 $
661.4
$
38.6 $
1,486.2
1,470.9
328.0
454.0
428.2
399.5
29.7
21.3
2.7
$
2,945.5 $
2,960.0
$
92.3 $
38.6
30.1
23.1
2.7
94.5
92
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
At December 31, 2019, the Company had investment securities callable within one year with amortized costs and
estimated fair values of $181.2 million and $181.1 million, respectively. These investment securities are primarily
classified as available-for-sale and included in the after five years but within ten years category in the table above. At
December 31, 2019, the Company had no callable structured notes.
Maturities of securities do not reflect rate repricing opportunities present in adjustable rate mortgage-backed securities.
At December 31, 2019 and 2018, the Company had variable rate mortgage-backed securities with amortized costs of
$298.1 million and $219.5 million, respectively, classified as available-for-sale in the table above.
There are no significant concentrations of investments at December 31, 2019, (greater than 10 percent of stockholders’
equity) in any individual security issuer, except for U.S. government or agency-backed securities.
Investment securities with amortized cost of $2,132.0 million and $1,943.1 million at December 31, 2019 and 2018,
respectively, were pledged to secure public deposits and securities sold under repurchase agreements. The approximate
fair value of securities pledged at December 31, 2019 and 2018 was $2,144.9 million and $1,908.4 million, respectively.
All securities sold under repurchase agreements are with clients and mature on the next banking day. The Company
retains possession of the underlying securities sold under repurchase agreements.
(5) LOANS
The following table presents loans by class as of the dates indicated:
December 31,
Real estate loans:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans held for sale
Total loans
2019
2018
$
3,484.7
$
3,235.4
302.1
244.1
431.5
977.7
1,546.1
226.6
6,235.1
784.6
179.0
81.6
1,045.2
1,371.3
279.1
—
8,930.7
100.9
321.6
242.8
274.3
838.7
1,542.0
217.4
5,833.5
787.8
200.6
81.8
1,070.2
1,310.3
254.8
1.6
8,470.4
33.3
$
9,031.6
$
8,503.7
The Company has lending policies and procedures in place that are designed to maximize loan income within an
acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting
system supplements the review process by providing management with frequent reports related to loan production,
loan quality, concentrations of credit, loan delinquencies and internally risk-classified loans.
93
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Real estate loans include construction and permanent financing for both single-family and multi-unit properties, term
loans for commercial, agricultural and industrial property and/or buildings and home equity loans and lines of credit
secured by real estate. Longer-term residential real estate loans are generally sold in the secondary market. Those
residential real estate loans not sold are typically secured by first liens on the financed property and generally mature
in less than fifteen years. Home equity loans and lines of credit are typically secured by first or second liens on residential
real estate and generally do not exceed a loan to value ratio of 80%. The Company had home equity loans and lines of
credit of $423.5 million and $409.5 million as of December 31, 2019 and 2018, respectively, included in residential
real estate loans. Commercial and agricultural real estate loans are generally secured by first liens on income-producing
real estate and generally mature in less than 5 years.
Construction loans are primarily to commercial builders for residential lot development and the construction of single-
family residences and commercial real estate properties. Construction loans are generally underwritten pursuant to pre-
approved permanent financing. During the construction phase the borrower pays interest only.
Consumer loans include direct personal loans, credit card loans, lines of credit and indirect dealer loans for the purchase
of automobiles, recreational vehicles, boats and other consumer goods. Personal loans and indirect dealer loans are
generally secured by automobiles, boats and other types of personal property and are made on an installment basis.
Credit cards are offered to individuals in our market areas. Lines of credit are generally floating rate loans that are
unsecured or secured by personal property.
Commercial loans include a mix of variable and fixed rate loans made to small and medium-sized manufacturing,
wholesale, retail and service businesses for working capital needs and business expansions. Commercial loans generally
include lines of credit, business credit cards and loans with maturities of five years or less. The loans are generally
made with business operations as the primary source of repayment, but also include collateralization by inventory,
accounts receivable, equipment and/or personal guarantees.
Agricultural loans generally consist of short and medium-term loans and lines of credit that are primarily used for crops,
livestock, equipment and general operations. Agricultural loans are ordinarily secured by assets such as livestock or
equipment and are repaid from the operations of the farm or ranch. Agricultural loans generally have maturities of five
years or less, with operating lines for one production season.
Included in the loan table above, are loans acquired in business combinations including certain loans that had evidence
of deterioration in credit quality since origination and for which it was probable, at acquisition, that all contractually
required payments would not be collected. The following table displays the outstanding unpaid principal balance and
accrual status of loans acquired with credit impairment as of December 31, 2019 and 2018.
December 31,
Outstanding principal
Carrying value:
Loans on accrual status
Total carrying value
2019
2018
$
$
49.8
36.8
36.8
$
$
43.4
30.2
30.2
The following table summarizes changes in the accretable yield for loans acquired credit impaired for the years
ended December 31, 2019, 2018, and 2017:
Year Ended December 31,
Beginning balance
Acquisitions
Additions
Accretion income
Reductions due to exit events
Reclassifications from nonaccretable differences
2019
2018
2017
$
$
8.9
3.4
—
(3.4)
(1.4)
2.5
7.3
3.2
0.6
(3.1)
(1.1)
2.0
8.9
$
$
6.8
1.9
0.1
(2.9)
(1.5)
2.9
7.3
Ending balance
$
10.0
$
94
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Loans are considered past due if the required principal and interest payments have not been received as of the date such
payments were due. The following tables present the contractual aging of the Company’s recorded investment in past
due loans by class as of the period indicated:
As of December 31, 2019
Real estate
Commercial
Construction:
Land acquisition &
development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans originated for sale
30 - 59
Days
Past Due
60 - 89
Days
Past Due
> 90
Days
Past Due
Total Loans
30 or More
Days
Past Due
Current
Loans
Non-accrual
Loans
Total
Loans
$
5.5 $
1.1 $
0.6 $
7.2 $
3,464.5 $
13.0 $
3,484.7
0.7
1.5
—
2.2
3.8
0.8
12.3
7.6
1.2
0.8
9.6
4.8
0.9
—
27.6
—
0.8
0.8
—
1.6
1.4
0.5
4.6
1.9
0.5
0.5
2.9
2.6
0.1
—
10.2
—
0.3
—
—
0.3
1.1
—
2.0
0.5
0.1
0.8
1.4
2.3
—
—
5.7
—
1.8
2.3
—
4.1
6.3
1.3
18.9
10.0
1.8
2.1
13.9
9.7
1.0
—
43.5
—
298.9
241.8
431.0
971.7
1,535.2
220.1
6,191.5
773.0
176.7
79.5
1,029.2
1,347.9
275.7
—
8,844.3
100.9
1.4
—
0.5
1.9
4.6
5.2
24.7
1.6
0.5
—
2.1
13.7
2.4
—
42.9
—
302.1
244.1
431.5
977.7
1,546.1
226.6
6,235.1
784.6
179.0
81.6
1,045.2
1,371.3
279.1
—
8,930.7
100.9
Total loans
$
27.6 $
10.2 $
5.7 $
43.5 $
8,945.2 $
42.9 $
9,031.6
95
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
As of December 31, 2018
Real estate
Commercial
Construction:
Land acquisition &
development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans originated for sale
30 - 59
Days
Past Due
60 - 89
Days
Past Due
> 90
Days
Past Due
Total Loans
30 or More
Days
Past Due
Current
Loans
Non-accrual
Loans
Total
Loans
$
10.4 $
1.0 $
0.8 $
12.2 $
3,214.0 $
9.2 $
3,235.4
1.6
1.0
0.4
3.0
8.8
2.2
24.4
6.8
1.4
0.9
9.1
8.3
2.1
—
43.9
—
0.1
0.4
—
0.5
1.1
—
2.6
2.1
0.5
0.4
3.0
1.2
0.3
—
7.1
—
0.2
—
—
0.2
0.2
—
1.2
0.4
0.1
0.8
1.3
1.3
—
—
3.8
—
1.9
1.4
0.4
3.7
10.1
2.2
28.2
9.3
2.0
2.1
13.4
10.8
2.4
—
54.8
—
316.0
240.4
273.7
830.1
1,525.3
202.6
5,772.0
776.8
198.1
79.7
1,054.6
1,283.7
249.4
1.6
8,361.3
33.3
3.7
1.0
0.2
4.9
6.6
12.6
33.3
1.7
0.5
—
2.2
15.8
3.0
—
54.3
—
321.6
242.8
274.3
838.7
1,542.0
217.4
5,833.5
787.8
200.6
81.8
1,070.2
1,310.3
254.8
1.6
8,470.4
33.3
Total loans
$
43.9 $
7.1 $
3.8 $
54.8 $
8,394.6 $
54.3 $
8,503.7
Acquired loans that meet the criteria for non-accrual of interest prior to the acquisition were considered performing
upon acquisition. If interest on non-accrual loans had been accrued, such income would have approximated $2.5 million,
$3.0 million and $3.5 million during the years ended December 31, 2019, 2018, and 2017, respectively.
96
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The Company considers impaired loans to include all originated loans, except consumer loans, that are risk rated as
doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings, and all loans acquired
with evidence of deterioration in credit quality and for which it was probable, at the acquisition, that the Company
would be unable to collect all contractual amounts owed. The following tables present information on the Company’s
recorded investment in impaired loans as of dates indicated:
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
December 31, 2019
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
29.2 $
12.9 $
10.8 $
23.7 $
9.2
0.1
1.0
10.3
6.9
8.6
55.0
25.5
6.9
0.4
—
0.5
0.9
3.9
5.2
22.9
12.0
2.3
2.6
—
—
2.6
1.8
3.0
18.2
5.3
4.0
3.0
—
0.5
3.5
5.7
8.2
41.1
17.3
6.3
$
87.4 $
37.2 $
27.5 $
64.7 $
0.7
0.5
—
0.1
0.6
0.2
0.2
1.7
1.7
0.2
3.6
December 31, 2018
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
22.2 $
8.6 $
7.7 $
16.3 $
10.0
1.1
0.7
11.8
8.8
12.9
55.7
24.1
3.2
0.4
0.6
0.2
1.2
5.7
12.5
28.0
5.5
2.5
3.5
0.4
—
3.9
2.0
0.2
13.8
14.4
0.6
3.9
1.0
0.2
5.1
7.7
12.7
41.8
19.9
3.1
$
83.0 $
36.0 $
28.8 $
64.8 $
0.7
0.2
0.1
—
0.3
0.3
—
1.3
5.2
0.3
6.8
97
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
December 31, 2017
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
45.6 $
20.9 $
14.1 $
35.0 $
10.0
1.8
4.7
16.5
11.5
3.7
77.3
—
29.5
1.1
3.4
1.7
0.4
5.5
8.2
3.6
38.2
—
12.4
0.8
0.5
—
3.5
4.0
2.0
—
20.1
—
11.4
0.3
3.9
1.7
3.9
9.5
10.2
3.6
58.3
—
23.8
1.1
3.9
—
—
2.2
2.2
0.1
—
6.2
—
4.4
0.2
$
107.9 $
51.4 $
31.8 $
83.2 $
10.8
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer
Commercial
Agricultural
Total
The following tables present the average recorded investment in and income recognized on impaired loans for the
periods indicated:
Year Ended December 31,
2019
2018
2017
Average
Recorded
Investment
Income
Recognized
Average
Recorded
Investment
Income
Recognized
Average
Recorded
Investment
Income
Recognized
$
$
41.4 $
18.7
4.6
64.7 $
0.1
0.2
—
0.3
$
$
50.0 $
21.9
2.1
74.0 $
0.1
0.2
—
0.3
$
$
63.5 $
28.1
2.4
94.0 $
0.3
0.2
—
0.5
Real estate
Commercial
Agricultural
Total
The amount of interest income recognized by the Company within the period that the loans were impaired was primarily
related to loans modified in troubled debt restructurings that remained on accrual status. Interest payments received on
non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due. If interest on impaired loans had been accrued, interest income on
impaired loans during 2019, 2018, and 2017 would have been approximately $2.5 million, $3.0 million and $3.5 million,
respectively.
Collateral dependent impaired loans are recorded at the fair value less selling costs of the underlying collateral
determined using discounted cash flows, independent appraisals and management estimates based upon current market
conditions. For loans measured under the present value of cash flows method, the change in present value attributable
to the passage of time, if applicable, is recognized in the provision for loan losses and thus no interest income is
recognized.
98
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Modifications of performing loans are made in the ordinary course of business and are completed on a case-by-case
basis as negotiated with the borrower. Loan modifications typically include interest rate changes, interest only periods
of less than twelve months, short-term payment deferrals and extension of amortization periods to provide payment
relief. A loan modification is considered a troubled debt restructuring if the borrower is experiencing financial difficulties
and the Company, for economic or legal reasons, grants a concession to the borrower that it would not otherwise
consider. Certain troubled debt restructurings are on non-accrual status at the time of restructuring and may be returned
to accrual status after considering the borrower’s sustained repayment performance in accordance with the restructuring
agreement for a period of at least six months and management is reasonably assured of future performance. If the
troubled debt restructuring meets these performance criteria and the interest rate granted at the modification is equal
to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with
comparable risk, then the loan will return to performing status and the accrual of interest will resume, although they
continue to be individually evaluated for impairment and disclosed as impaired loans.
The Company had loans renegotiated in troubled debt restructurings of $24.9 million as of December 31, 2019, of
which $19.4 million were included in non-accrual loans and $5.5 million were on accrual status. The Company had
loans renegotiated in troubled debt restructurings of $23.4 million as of December 31, 2018, of which $17.8 million
were included in non-accrual loans and $5.6 million were on accrual status.
The following table presents information on the Company’s troubled debt restructurings that occurred during the periods
indicated:
Year Ended December 31, 2019
Commercial real estate
Commercial
Agriculture
Total loans restructured
Year Ended December 31, 2018
Commercial real estate
Agriculture real estate
Consumer
Total loans restructured
Year Ended December 31, 2017
Commercial
Agriculture
Total loans restructured
Number
of
Notes
4
1
6
11
Number
of
Notes
3
1
1
5
Number
of
Notes
17
1
24
Type of Concession
Interest
rate
adjustment
Extension
of terms or
maturity
Principal
Balance at
Restructure
Date
Other
0.2 $
—
—
0.2 $
— $
—
—
— $
2.9 $
5.0
2.1
10.0 $
3.3
5.0
2.1
10.4
Type of Concession
Extension
of terms or
maturity
Interest
rate
adjustment
Principal
Balance at
Restructure
Date
Other
— $
—
—
— $
— $
—
—
— $
— $
0.2
0.3
0.5 $
3.6
0.2
0.3
4.1
Interest
only period
$
0.2 $
—
—
0.2 $
3.6 $
—
—
3.6 $
$
$
Interest
only period
$
Interest
only period
$
Type of Concession
Extension
of terms or
maturity
Interest
rate
adjustment
Principal
Balance at
Restructure
Date
Other
1.2 $
—
2.7 $
2.0 $
0.1
3.3 $
— $
—
— $
6.0 $
—
6.9 $
9.2
0.1
12.9
$
99
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Other concessions include payment reductions or deferrals for a specified period of time or the extension of amortization
schedules. A specific reserve may have been previously recorded for loans modified in troubled debt restructurings that
were on non-accrual status or otherwise deemed impaired before the modification. In periods subsequent to modification,
the Company continues to evaluate all loans modified in troubled debt restructurings for possible impairment, which
is recognized through the allowance for loan losses. Financial effects of modifications may include principal loan
forgiveness or other charge-offs directly related to the restructuring. The Company had no charge-offs directly related
to loans modified in troubled debt restructurings taken at the time of restructuring during 2019, 2018, and 2017.
The Company considers a payment default to occur on loans modified in troubled debt restructurings when the loan
is 90 days or more past due or was placed on non-accrual status after the modification. The Company’s loans modified
in troubled debt restructurings within the previous 12 months for which there was a payment default during the period
were not significant as of December 31, 2019 and December 31, 2018. As of December 31, 2017, the Company had
one $1.3 million commercial loan modified in troubled debt restructurings within the previous 12 months for which
there was a payment default during the period. As of December 31, 2019, 2018, and 2017 all of the loans modified in
troubled debt restructurings with payment defaults during the previous twelve months were on non-accrual status.
At December 31, 2019, there were no material commitments to lend additional funds to borrowers whose existing
loans have been renegotiated or are classified as non-accrual.
As part of the on-going and continuous monitoring of the credit quality of the Company’s loan portfolio, management
tracks internally assigned risk classifications of loans. The Company adheres to a Uniform Classification System
developed jointly by the various bank regulatory agencies to internally risk rate loans. The Uniform Classification
System defines three broad categories of criticized assets, which the Company uses as credit quality indicators:
Other Assets Especially Mentioned — includes loans that exhibit weaknesses in financial condition, loan structure
or documentation, which if not promptly corrected, may lead to the development of abnormal risk elements.
Substandard — includes loans that are inadequately protected by the current sound worth and paying capacity of
the borrower. Although the primary source of repayment for a Substandard is not currently sufficient, collateral or
other sources of repayment are sufficient to satisfy the debt. Continuance of a Substandard loan is not warranted
unless positive steps are taken to improve the worthiness of the credit.
Doubtful — includes loans that exhibit pronounced weaknesses to a point where collection or liquidation in full,
on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Doubtful loans
are required to be placed on non-accrual status and are assigned specific loss exposure.
100
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The following tables present the Company’s recorded investment in criticized loans by class and credit quality indicator
based on the most recent analysis performed as of the dates indicated:
As of December 31, 2019
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Direct consumer
Total consumer loans
Commercial
Agricultural
Total
As of December 31, 2018
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Consumer:
Indirect consumer
Direct consumer
Total consumer loans
Commercial
Agricultural
Total
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
$
84.7 $
97.3 $
0.8 $
182.8
3.8
0.9
1.7
6.4
2.6
14.3
108.0
0.2
0.4
0.6
40.4
8.5
1.9
2.2
1.5
5.6
7.8
26.6
137.3
2.9
0.8
3.7
60.3
22.7
1.0
—
—
1.0
0.3
—
2.1
—
0.1
0.1
3.6
0.1
$
157.5 $
224.0 $
5.9 $
6.7
3.1
3.2
13.0
10.7
40.9
247.4
3.1
1.3
4.4
104.3
31.3
387.4
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
$
102.5 $
87.4 $
2.9 $
192.8
5.0
2.8
1.7
9.5
3.0
9.0
7.0
2.0
3.9
12.9
10.8
24.0
0.7
0.3
1.0
39.4
14.4
2.1
0.8
2.9
45.8
17.8
3.3
0.4
—
3.7
0.7
0.1
7.4
0.1
0.1
0.2
11.8
1.5
15.3
5.2
5.6
26.1
14.5
33.1
266.5
2.9
1.2
4.1
97.0
33.7
401.3
$
178.8 $
201.6 $
20.9 $
Total real estate loans
124.0
135.1
The Company maintains a credit review function, which is independent of the credit approval process, to assess assigned
internal risk classifications and monitor compliance with internal lending policies and procedures. Written action plans
with firm target dates for resolution of identified problems are maintained and reviewed on a quarterly basis for all
categories of criticized loans.
101
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(6) ALLOWANCE FOR LOAN LOSSES
The following tables present a summary of changes in the allowance for loan losses by portfolio segment:
Year Ended December 31, 2019
Real Estate Consumer Commercial Agriculture
Other
Total
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously
charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans held for investment
$
31.0 $
8.7 $
31.3 $
2.0 $
— $
73.0
(1.3)
(3.5)
10.6
(13.0)
2.7
3.6
4.5
(6.6)
3.4
0.1
(0.5)
—
—
—
—
28.9 $
9.9 $
32.6 $
1.6 $
— $
1.7 $
— $
1.7 $
0.2 $
— $
27.2
9.9
30.9
1.4
—
28.9 $
9.9 $
32.6 $
1.6 $
— $
13.9
(23.6)
9.7
73.0
3.6
69.4
73.0
41.1 $
— $
17.3 $
6.3 $
— $
64.7
6,194.0
1,045.2
1,354.0
272.8
—
8,866.0
6,235.1 $ 1,045.2 $
1,371.3 $
279.1 $
— $
8,930.7
$
$
$
$
$
Year Ended December 31, 2018
Real Estate Consumer Commercial Agriculture
Other
Total
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously
charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans held for investment
$
31.7 $
8.7 $
30.5 $
1.2 $
— $
72.1
(0.7)
(3.7)
6.8
(11.3)
3.7
4.5
1.9
(4.7)
3.6
0.6
—
0.2
—
—
—
31.0 $
8.7 $
31.3 $
2.0 $
— $
1.3 $
— $
5.2 $
0.3 $
— $
29.7
8.7
26.1
1.7
—
31.0 $
8.7 $
31.3 $
2.0 $
— $
8.6
(19.7)
12.0
73.0
6.8
66.2
73.0
41.8 $
— $
19.9 $
3.1 $
— $
64.8
5,791.7
1,070.2
1,290.4
251.7
1.6
8,405.6
5,833.5 $ 1,070.2 $
1,310.3 $
254.8 $
1.6 $
8,470.4
$
$
$
$
$
102
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Year Ended December 31, 2017
Real Estate Consumer Commercial Agriculture
Other
Total
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously
charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans held for investment
$
28.6 $
7.7 $
38.1 $
1.8 $
— $
76.2
6.0
(4.3)
8.1
(11.3)
1.4
4.2
(2.9)
(6.8)
2.1
(0.2)
(0.4)
—
—
—
—
31.7 $
8.7 $
30.5 $
1.2 $
— $
6.2 $
— $
4.4 $
0.2 $
— $
25.5
8.7
26.1
1.0
—
31.7 $
8.7 $
30.5 $
1.2 $
— $
11.0
(22.8)
7.7
72.1
10.8
61.3
72.1
58.3 $
— $
23.8 $
1.1 $
— $
83.2
5,118.5
1,034.4
1,191.6
135.1
4.9
7,484.5
5,176.8 $ 1,034.4 $
1,215.4 $
136.2 $
4.9 $
7,567.7
$
$
$
$
$
The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with
GAAP. The methodology used to assess the adequacy is consistently applied to the Company’s loan portfolio and
consists of three elements: (1) specific valuation allowances based on probable losses on impaired loans; (2) historical
valuation allowances based on loan loss experience for similar loans with similar characteristics and trends; and
(3) general valuation allowances determined based on changes in the nature of the loan portfolio, overall portfolio
quality, industry concentrations, delinquency trends, general economic conditions and other qualitative risk factors
both internal and external to the Company.
Specific allowances are established for loans where management has determined that probability of a loss exists by
analyzing the borrower’s ability to repay amounts owed, collateral deficiencies and any relevant qualitative or economic
factors impacting the loan. Historical valuation allowances are determined by applying percentage loss factors to the
credit exposures from outstanding loans. For commercial, agricultural and real estate loans, loss factors are applied
based on the internal risk classifications of these loans. For consumer loans, loss factors are applied on a portfolio
basis. For commercial, agriculture and real estate loans, loss factor percentages are based on a migration analysis of
our historical loss experience, designed to account for credit deterioration. For consumer loans, the loss factor
percentages are based on a three-year loss history for the 2018 and 2019 periods and on a one-year loss history for the
2017 comparable periods. The loan loss rates for 2018 and 2019 also incorporate the available loss history data from
BOTC prior to the merger date to represent a consolidated institutional loss rate for both originated and acquired
portfolios. General valuation allowances are determined by evaluating, on a quarterly basis, changes in the nature and
volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic and regulatory
conditions and the estimated impact of these factors on historical loss rates.
An allowance for loan losses is established for loans acquired deemed credit impaired and for which the Company
projects a decrease in the expected cash flows in periods subsequent to the acquisition of such loans. As of December 31,
2019 and 2018, the Company’s allowance for loan losses included $1.0 million and $0.8 million, respectively, related
to loans acquired credit impaired.
103
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(7)
PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
December 31,
Land
Buildings and improvements
Furniture and equipment
Total premises and equipment
Less accumulated depreciation
Premises and equipment, net
2019
2018
$
50.8
$
330.1
94.2
475.1
(169.1)
$
306.0
$
49.9
268.1
104.0
422.0
(176.8)
245.2
Depreciation expense was $23.3 million, $16.2 million, and $14.8 million for the years ended December 31, 2019,
2018, and 2017, respectively.
The Parent Company and a FIB branch office lease premises from an affiliated entity. See Note 18—Commitments
and Contingencies.
(8) COMPANY-OWNED LIFE INSURANCE
Company-owned life insurance consists of the following:
December 31,
Key executive, principal shareholder
Key executive split dollar
Group life
Total
2019
2018
$
$
4.4
7.0
282.4
293.8
$
$
4.7
9.4
261.0
275.1
The Company maintains key executive life insurance policies on certain principal shareholders. Under these policies,
the Company receives benefits payable upon the death of the insured. The net cash surrender value of key executive,
principal shareholder insurance policies was $4.4 million and $4.7 million at December 31, 2019 and 2018, respectively.
The Company also has life insurance policies covering selected other key officers. The net cash surrender value of
these policies was $7.0 million and $9.4 million at December 31, 2019 and 2018, respectively. Under these policies,
the Company receives benefits payable upon death of the insured. An endorsement split dollar agreement has been
executed with the selected key officers whereby a portion of the policy death benefit is payable to their designated
beneficiaries. The endorsement split dollar agreement will provide post-retirement coverage for those selected key
officers meeting specified retirement qualifications. The Company expenses the earned portion of the post-employment
benefit through the vesting period.
The Company has group life insurance policies covering selected officers of FIB. The net cash surrender value of these
policies was $282.4 million and $261.0 million at December 31, 2019 and 2018, respectively. Under these policies,
the Company receives benefits payable upon death of the insured. The Company has entered into either an endorsement
split dollar agreement or a survivor income benefit agreement with each insured officer. Under the endorsement split
dollar agreements, a portion of the policy death benefit is payable to the insured’s designated beneficiary if the insured
is employed by the Company at the time of death. Under the survivor income benefit agreements, the Company makes
a lump-sum payment to the insured’s designated beneficiary if the insured is employed by the Company at the time of
death.
104
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(9) OTHER REAL ESTATE OWNED
Information with respect to the Company’s other real estate owned follows:
Year Ended December 31,
Balance at beginning of year
Acquisitions
Additions
Capitalized improvements
Valuation adjustments
Dispositions
Balance at end of year
2019
2018
2017
$
10.0
$
$
14.4
2.4
14.1
0.3
(0.9)
(21.8)
10.1
0.6
12.1
—
(0.1)
(8.3)
$
8.5
$
14.4
$
1.2
5.4
—
(0.4)
(6.1)
10.1
Write-downs of $0.9 million, $0.1 million, and $0.4 million during 2019, 2018, and 2017, respectively, were adjustments
based on internal evaluations and other sources, including management estimates of the current fair value of properties,
and adjustments directly related to receipt of updated appraisals.
(10) DERIVATIVES AND HEDGING ACTIVITIES
The notional amounts and estimated fair values of the Company’s derivatives are presented in the following table. Fair
value estimates are obtained from third parties and are based on pricing models.
December 31, 2019
December 31, 2018
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
Derivative Assets (included in other assets on the consolidated balance sheets)
Non-hedging interest rate derivatives:
Interest rate swap contracts
Interest rate lock commitments
Total derivative assets
$
$
503.2 $
67.8
571.0 $
21.9
1.3
23.2
$
$
403.3 $
51.0
454.3 $
Derivative Liabilities (included in accounts payable and accrued expenses on the consolidated balance sheets)
Non-hedging interest rate derivatives:
Interest rate swap contracts
Forward loan sales contracts
Total derivative liabilities
$
$
503.2 $
128.0
631.2 $
21.9
0.3
22.2
$
$
403.3 $
64.6
467.9 $
8.8
1.3
10.1
8.8
0.6
9.4
The Company did not hold derivatives designated as hedging instruments at December 31, 2019 and 2018.
Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects
of master netting arrangements. Master netting arrangements allow the Company to settle all contracts held with a
single counterparty on a net basis and to offset net contract position with related collateral where applicable.
105
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The following table illustrates the potential effect of the Company’s master netting arrangements, by type of financial
instrument, on the Company’s consolidated balance sheets as of December 31, 2019 and December 31, 2018:
December 31, 2019
Gross
Amounts
Recognized
Gross
Amounts
Offset in the
Balance
Sheet
Net Amounts
in the
Balance
Sheet
Financial
Instruments
Fair Value of
Financial
Collateral in
the Balance
Sheet
Net Amount
Financial Assets
Interest rate swap contracts
$
21.9
$
— $
21.9
$
Mortgage related derivatives
Total derivatives
Total assets
$
1.3
23.2
23.2
—
—
$
— $
1.3
23.2
23.2
$
Financial Liabilities
Interest rate swap contracts
$
21.9
$
— $
21.9
$
Mortgage related derivatives
Total derivatives
Repurchase agreements
0.3
22.2
697.6
—
—
—
0.3
22.2
697.6
Total liabilities
$
719.8
$
— $
719.8
$
0.1
—
0.1
0.1
0.1
—
0.1
—
0.1
$
$
$
$
18.0
$
—
18.0
18.0
$
— $
—
—
697.6
697.6
$
3.8
1.3
5.1
5.1
21.8
0.3
22.1
—
22.1
December 31, 2018
Gross
Amounts
Recognized
Gross
Amounts
Offset in the
Balance
Sheet
Net Amounts
in the
Balance
Sheet
Financial
Instruments
Fair Value of
Financial
Collateral in
the Balance
Sheet
Net Amount
Financial Assets
Interest rate swap contracts
$
Mortgage related derivatives
Total derivatives
Total assets
$
Financial Liabilities
Interest rate swap contracts
$
Mortgage related derivatives
Total derivatives
Repurchase agreements
$
$
$
8.8
1.3
10.1
10.1
8.8
0.6
9.4
712.4
— $
—
—
— $
— $
—
—
—
$
$
$
8.8
1.3
10.1
10.1
8.8
0.6
9.4
712.4
Total liabilities
$
721.8
$
— $
721.8
$
2.7
—
2.7
2.7
2.7
—
2.7
—
2.7
$
$
$
$
$
$
$
2.4
—
2.4
2.4
4.1
—
4.1
712.4
716.5
$
3.7
1.3
5.0
5.0
2.0
0.6
2.6
—
2.6
106
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The following table presents the pre-tax gains or losses related to derivative contracts that were recorded in
accumulated other comprehensive income and other non-interest income in the Company’s statements of income:
As of or For The Year Ended December 31,
Derivatives designated as hedges:
2019
2018
2017
Amount of loss recognized in other comprehensive income (effective portion)
$
— $
— $
(1.1)
Reclassification adjustment for derivative net (gains) losses included in
income
Non-hedging interest rate derivatives:
Amount of gain recognized in other non-interest income
Amount of net fee income recognized in other non-interest income
Amount of net gains (losses) recognized in mortgage banking revenues
$
—
—
2.5
0.3
—
0.3
1.3
1.1
—
0.8
$
(0.5) $
(1.7)
(11) MORTGAGE SERVICING RIGHTS
Information with respect to the Company’s mortgage servicing rights follows:
Year Ended December 31,
Balance at beginning of year
Acquisitions of mortgage servicing rights
Originations of mortgage servicing rights
Amortization expense
Balance at end of year
Less valuation reserve
Balance at end of year, net of valuation reserve
Principal balance of serviced loans underlying mortgage servicing rights
Mortgage servicing rights as a percentage of serviced loans
2019
2018
2017
$
27.7
$
24.8
$
—
7.3
(4.4)
30.6
(0.4)
30.2
3,710.1
0.81%
$
$
—
6.0
(3.1)
27.7
—
27.7
3,698.2
0.75%
$
$
$
$
18.7
3.5
5.6
(3.0)
24.8
—
24.8
3,636.7
0.68%
At December 31, 2019, the estimated fair value and weighted average remaining life of the Company’s mortgage
servicing rights were $34.8 million and 6.0 years, respectively. The fair value of mortgage servicing rights was
determined using discount rates ranging from 9.3% to 11.0% and monthly prepayment speeds ranging from 0.6% to
1.5% depending upon the risk characteristics of the underlying loans. At December 31, 2018, the estimated fair value
and weighted average remaining life of the Company’s mortgage servicing rights were $42.4 million and 8.0 years,
respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 10.4% to
12.1% and monthly prepayment speeds ranging from 0.4% to 1.5% depending upon the risk characteristics of the
underlying loans. There were no material impairments reversed in 2019, 2018 and 2017, respectively. No permanent
impairment was recorded in 2019, 2018, or 2017.
107
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(12) DEPOSITS
Deposits are summarized as follows:
December 31,
Non-interest bearing demand
Interest bearing:
Demand
Savings
Time, $100 and over
Time, other
Total interest bearing
Total deposits
2019
2018
$
3,426.5
$
3,158.3
3,195.4
3,591.6
651.1
798.9
8,237.0
2,957.5
3,247.9
547.6
769.4
7,522.4
$
11,663.5
$
10,680.7
Other time deposits include $2.9 million and $24.1 million brokered deposits as of December 31, 2019 and 2018,
respectively, and deposits obtained through the Company’s participation in the Certificate of Deposit Account Registry
Service (“CDARS”). CDARS deposits totaled $117.7 million and $87.1 million as of December 31, 2019 and 2018,
respectively.
As of December 31, 2019 and 2018, the Company had time deposits of $278.4 million and $221.0 million, respectively,
that met or exceeded the FDIC insurance limit of $250,000.
Maturities of time deposits at December 31, 2019 are as follows:
Due within 3 months or less
Due after 3 months and within 6 months
Due after 6 months and within 12 months
Due within 2021
Due within 2022
Due within 2023
Due within 2024 and thereafter
Total
Time, $100
and Over
Total Time
$
$
101.6
140.8
273.7
104.0
23.6
3.5
3.9
323.6
301.4
515.9
220.4
64.0
13.9
10.8
$
651.1
$
1,450.0
Interest expense on time deposits of $100 and over was $11.5 million, $5.0 million, and $3.5 million for the years
ended December 31, 2019, 2018, and 2017, respectively.
108
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(13) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
December 31,
Subsidiaries:
2019
2018
8.00% capital lease obligation with term ending October 25, 2029
$
1.2
$
6.24% note payable maturing September 6, 2032, principal due at maturity, interest payable
monthly
2.28% note payable maturing July 29, 2022, principal due at maturity, interest payable
monthly
1.00% note payable maturing December 31, 2041, interest only payable quarterly until
December 31, 2025 and then principal and interest until maturity
Note payable maturing March 31, 2038, interest only payable at 1.30% monthly until March
31, 2025 and then principal and interest at 3.25% until maturity
1.30% note payable maturing June 1, 2034, interest only payable monthly until March 31,
2025 and then principal and interest until maturity
Total long-term debt
$
—
5.0
5.1
2.0
0.6
13.9
Maturities of long-term debt at December 31, 2019 are as follows:
2020
2021
2022
2023
2024
Thereafter
Total
$
$
1.3
1.8
5.0
5.1
2.0
0.6
15.8
0.1
0.1
5.1
0.1
0.1
8.4
$
13.9
The Company has available lines of credit with the FHLB of approximately $1,616.0 million, subject to collateral
availability. As of December 31, 2019 and 2018, there were no long or short-term advances outstanding with the FHLB.
The Company has a financing lease obligation on a banking office. Assets acquired under the financing lease, consist
solely of a building and leasehold improvements, and are included in premises and equipment subject to depreciation.
The Company borrowed or assumed through acquisitions $12.6 million and $14.4 million as of December 31, 2019
and 2018, respectively, related to New Market Tax Credits. During the third quarter of 2019, the Company redeemed
the note payable maturing September 2032. The long-term debt obligations consists of fixed rate note payables with
various interest rates from 1.00% to 6.24% and maturities from July 29, 2022 through December 31, 2041, collateralized
by the Company’s equity interest in various CDEs, which are 99.9% owned by the Company.
As of December 31, 2019 and 2018, the Company had no material other borrowed funds.
The Company has federal funds lines of credit with third parties amounting to $205.0 million, subject to funds
availability. These lines are subject to cancellation without notice. The Company also has a line of credit with the
Federal Reserve Bank for borrowings up to $455.6 million secured by a blanket pledge of indirect consumer loans,
and has an unused $50.0 million revolving line of credit with U.S. Bank National Association.
109
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(14) SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS
The Company sponsors seven wholly-owned business trusts, Trust I, Trust II, Trust III, Trust IV, Trust V, Trust VI, and
Trust VII (collectively, the “Trusts”). The Trusts were formed for the exclusive purpose of issuing an aggregate of
$84.3 million of 30-year floating rate mandatorily redeemable capital trust preferred securities (“Trust Preferred
Securities”) to third-party investors. The Trusts also issued, in aggregate, $2.6 million of common equity securities to
the Parent Company. Proceeds from the issuance of the Trust Preferred Securities and common equity securities were
invested in 30-year junior subordinated deferrable interest debentures (“Subordinated Debentures”) issued by the Parent
Company.
A summary of Subordinated Debenture issuances follows:
Issuance
October 2007
November 2007
December 2007
December 2007
January 2008
January 2008
June 2005
Maturity Date
January 1, 2038
December 15, 2037
December 15, 2037
April 1, 2038
April 1, 2038
April 1, 2038
June 30, 2035
Total subordinated debentures held by subsidiary trusts
Principal Amount Outstanding
as of December 31,
2019
2018
$
$
10.3
15.5
20.6
15.5
10.3
10.3
4.4
86.9
$
$
10.3
15.5
20.6
15.5
10.3
10.3
4.4
86.9
In October 2007, the Company issued $10.3 million of Subordinated Debentures to Trust II. The Subordinated
Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.25% per annum. As of December 31, 2019,
the interest rate on the Subordinated Debentures was 4.35%.
In November 2007, the Company issued $15.5 million of Subordinated Debentures to Trust I. The Subordinated
Debentures bore interest at a fixed rate of 7.50% for five years after issuance until December 16, 2012, and thereafter
at a variable rate equal to LIBOR plus 2.75% per annum. As of December 31, 2019, the interest rate on the Subordinated
Debentures was 4.64%.
In December 2007, the Company issued $20.6 million of Subordinated Debentures to Trust III. The Subordinated
Debentures bore interest at a fixed rate of 6.88% for five years after issuance until December 15, 2012, and thereafter
at a variable rate equal to LIBOR plus 2.40% per annum. As of December 31, 2019, the interest rate on the Subordinated
Debentures was 4.29%.
In December 2007, the Company issued $15.5 million of Subordinated Debentures to Trust IV. The Subordinated
Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.70% per annum. As of December 31, 2019
the interest rate on the Subordinated Debentures was 4.80%.
In January 2008, the Company issued $10.3 million of Subordinated Debentures to Trust V. The Subordinated
Debentures bore interest at a fixed rate of 6.78% for five years after issuance until April 1, 2013, and thereafter at a
variable rate equal to LIBOR plus 2.75% per annum. As of December 31, 2019 the interest rate on the Subordinated
Debentures was 4.85%.
In January 2008, the Company issued $10.3 million of Subordinated Debentures to Trust VI. The Subordinated
Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.75% per annum. As of December 31, 2019,
the interest rate on the Subordinated Debentures was 4.85%.
110
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
In conjunction with the acquisition of Northwest in August 2018, the Company acquired Northwest Bancorporation
Capital Trust I (“Trust VII”). The Northwest Trust was formed for the exclusive purpose of issuing an aggregate of $5.0
million of 30-year floating rate mandatorily redeemable capital trust preferred securities (“Northwest Trust Preferred
Securities”) to third-party investors. The Trusts also issued, in aggregate, $0.2 million of common equity securities to
Northwest. Proceeds from the issuance of the Trust Preferred Securities and common equity securities were invested
in 30-year junior subordinated deferrable interest debentures (“Northwest Subordinated Debentures”) issued by
Northwest. The Subordinated Debentures bore interest at a fixed rate of 5.95% for five years after issuance until June
30, 2010, and thereafter at a variable rate equal to LIBOR plus 1.70% per annum. As of December 31, 2019 the interest
rate on the Subordinated Debentures was 3.66%.
The Subordinated Debentures are unsecured with interest distributions payable quarterly. The Company may defer the
payment of interest at any time provided that the deferral period does not extend past the stated maturity. During any
such deferral period, distributions on the Trust Preferred Securities will also be deferred and the Company’s ability to
pay dividends on its common and preferred shares is restricted. The Subordinated Debentures may be redeemed, subject
to approval by the Federal Reserve Bank, at the Company’s option on or after five years from the date of issue, or at
any time in the event of unfavorable changes in laws or regulations. Debt issuance costs consisting primarily of
underwriting discounts and professional fees were capitalized and are being amortized through maturity to interest
expense using the straight-line method, which approximates level yield.
The terms of the Trust Preferred Securities are identical to those of the Subordinated Debentures. The Trust Preferred
Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity
dates or earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions
to the date of redemption. The Company guarantees the payment of distributions and payments for redemption or
liquidation of the Trust Preferred Securities to the extent of funds held by the Trusts.
Subject to certain limitations, the Trust Preferred Securities qualify as tier 1 capital of the Parent Company under the
Federal Reserve Board’s capital adequacy guidelines. Proceeds from the issuance of the Trust Preferred Securities were
used to fund acquisitions.
(15) CAPITAL STOCK AND DIVIDEND RESTRICTIONS
The Company’s authorized common stock consists of 200,000,000 shares, of which, 100,000,000 shares are designated
as Class A common stock and 100,000,000 are designated as Class B common stock. The Class A common stock has
one vote per share. The Class B common stock has five votes per share and is convertible to Class A common stock
on a share-for-share basis at any time.
The Company had 43,129,085 shares of Class A common stock and 22,117,254 shares of Class B common stock
outstanding as of December 31, 2019. The Company had 38,169,575 shares of Class A common stock and 22,453,672
shares of Class B common stock outstanding as of December 31, 2018.
During 2019, the Company issued 22,417 shares of its Class A common stock with an aggregate value of $0.8 million
to directors for their service on the Company’s board of directors during 2019. During 2018, the Company issued
11,389 shares of its Class A common stock with an aggregate value of $0.5 million to directors for their service on the
Company’s board of directors during 2018. The aggregate value of the shares issued to directors of is included in stock-
based compensation expense in the accompanying consolidated statements of changes in stockholders’ equity.
During 2019 and 2018, the Company did not repurchase any shares of its Class A common stock other than stock
repurchases which were redemptions of vested restricted shares tendered in lieu of cash for payment of income tax
withholding amounts by participants in the Company’s equity compensation plans.
On June 11, 2019, the company’s board of directors adopted a new stock repurchase program to replace the program
that had been in place since 2015 and which had only 24,123 shares of Class A common stock remaining to be purchased
thereunder. Under the new stock repurchase program, the Company may repurchase up to 2.5 million of its outstanding
shares of Class A common stock. To date the Company has not repurchased any shares under the current authorization.
111
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
On April 8, 2019, the Company issued 3,871,422 and 463,134 shares of its Class A common stock with an aggregate
value of $157.3 million and $18.8 million as consideration for the acquisitions of IIBK and CMYF, respectively.
On September 25, 2017, the Company filed a shelf registration statement on Form S-3, which was subsequently declared
effective by the SEC. The registration statement permits us to offer and sell up to $250.0 million of our Class A common
shares in one or more future public offerings. At the present time, we have no specific plans to offer any of the securities
covered by the registration statement.
The payment of dividends by subsidiary banks is subject to various federal and state regulatory limitations. In general,
a bank is limited, without the prior consent of its regulators, to paying dividends that do not exceed current year net
profits together with retained earnings from the two preceding calendar years. The Company’s debt instruments also
include limitations on the payment of dividends.
(16) EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income by the weighted average number of common
shares outstanding during the period presented, excluding unvested restricted stock. Diluted earnings per share is
calculated by dividing net income by the weighted average number of common shares determined for the basic earnings
per share computation plus the dilutive effects of stock-based compensation using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per common share:
Year Ended December 31,
Net income, basic and diluted
Weighted average common shares outstanding for basic earnings per share
computation
Dilutive effects of stock-based compensation
Weighted average common shares outstanding for diluted earnings per
common share computation
Basic earnings per common share
Diluted earnings per common share
2019
2018
2017
$
181.0
$
160.2
$
106.5
63,645,029
239,839
57,778,857
438,266
51,429,366
473,843
63,884,868
58,217,123
51,903,209
$
$
2.84
2.83
$
2.77
2.75
2.07
2.05
The Company had 150, 448, and 83,635 unvested time restricted stock outstanding as of December 31, 2019, 2018,
and 2017 respectively, that were not included in the computation of diluted earnings per common share because their
effect would be anti-dilutive. The Company had 138,298, 83,475, and 113,874 shares of unvested restricted stock as
of December 31, 2019, 2018, and 2017, respectively, that were not included in the computation of diluted earnings per
common share because performance conditions for vesting had not been met.
(17) REGULATORY CAPITAL
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking
regulators and the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative
measures of the Company’s and Bank’s assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Parent Company, like all bank holding companies, is not subject to the prompt
corrective action provisions. The Company’s and the Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum
amounts and ratios of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, as defined
in the regulations. As of December 31, 2019, the Company exceeded all capital adequacy requirements to which it is
subject.
112
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
As of December 31, 2019, the most recent notification from the regulatory agencies categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the
institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since the most recent notification that management believes have
changed the Bank's categories.
As an approved mortgage seller, the Bank is required to maintain a minimum level of capital specified by the United
States Department of Housing and Urban Development. At December 31, 2019 and 2018, the Bank met these
requirements.
On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised
regulatory capital framework for U.S. banks in accordance with the Basel III international accord and satisfying related
mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The revised regulatory capital
framework (the “Basel III Capital Rules”) substantially revised the risk-based capital requirements applicable to bank
holding companies and depository institutions by defining the components of capital and addressing other issues
affecting the numerator in banking institutions’ regulatory capital ratios, addressing risk weights and other issues
affecting the denominator in banking institutions’ regulatory capital ratios and replacing the existing risk-weighting
approach with a more risk-sensitive approach. The Basel III Capital Rules became effective for the Company on January
1, 2015, subject to a phase-in period for certain provisions. The capital conservation buffer required under Basel III
began to phase in starting January 1, 2016 and became fully implemented on January 1, 2019.
The Company’s actual capital amounts and ratios and selected minimum regulatory thresholds and prompt corrective
action provisions as of December 31, 2019 and 2018 are presented in the following tables:
Actual
Amount
Ratio
Minimum Required
for Capital
Adequacy Purposes
Ratio
Amount
For Capital
Adequacy Purposes
Plus Capital
Conservation Buffer
Amount
Ratio
Minimum to Be Well
Capitalized Under
Prompt Corrective
Action Requirements (1)
Amount
Ratio
December 31, 2019
Total risk-based capital:
Consolidated
FIB
$ 1,495.3
1,321.4
14.10% $
12.50
848.5
845.8
8.00% $ 1,113.6
1,110.1
8.00
10.50% $
10.50
1,060.6
1,057.2
10.00%
10.00
Tier 1 risk-based capital:
Consolidated
FIB
Common equity tier 1 risk-
based capital:
Consolidated
FIB
Leverage capital ratio:
Consolidated
FIB
1,422.3
1,248.4
13.41
11.81
1,338.2
1,248.4
1,422.3
1,248.4
12.62
11.81
10.13
8.91
636.3
634.3
477.3
475.7
561.6
560.4
6.00
6.00
4.50
4.50
4.00
4.00
901.5
898.6
742.4
740.0
561.6
560.4
8.50
8.50
7.00
7.00
4.00
4.00
848.5
845.8
689.4
687.2
702.0
700.4
8.00
8.00
6.50
6.50
5.00
5.00
113
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Minimum Required
for Capital
Adequacy Purposes
For Capital
Adequacy Purposes
Plus Capital
Conservation Buffer
Minimum to Be Well
Capitalized Under
Prompt Corrective
Action Requirements (1)
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2018
Total risk-based capital:
Consolidated
FIB
$ 1,285.0
1,184.5
12.99% $
12.01
791.2
788.8
8.00% $
8.00
976.6
973.7
9.88% $
9.88
Tier 1 risk-based capital:
Consolidated
FIB
1,212.0
1,111.6
12.26
11.27
Common equity tier 1 risk-
based capital:
Consolidated
FIB
Leverage capital ratio:
Consolidated
FIB
1,127.8
1,111.6
11.40
11.27
1,212.0
1,111.6
9.47
8.97
593.4
591.6
445.0
443.7
511.9
495.9
6.00
6.00
4.50
4.50
4.00
4.00
778.8
776.5
630.5
628.6
511.9
495.9
7.88
7.88
6.38
6.38
4.00
4.00
989.0
986.0
791.2
788.8
642.8
640.9
639.9
619.8
10.00%
10.00
8.00
8.00
6.50
6.50
5.00
5.00
(1) The ratios for the well capitalized requirement are only applicable to FIB. However, the Company manages its capital position
as if the requirement applies to the consolidated entity and has presented the ratios as if they also applied on a consolidated
basis.
(18) COMMITMENTS AND CONTINGENCIES
The Company had commitments under construction contracts of $2.1 million as of December 31, 2019.
The Parent Company and the Billings office of FIB are the anchor tenants in a building owned by an entity in which
FIB has a 50.0% ownership interest.
The Company leases certain premises and equipment from third parties under operating leases. Total rental expense to
third parties was $4.8 million, $3.2 million, and $2.5 million, in 2019, 2018 and 2017, respectively.
The total future minimum rental commitments, exclusive of maintenance and operating costs, required under operating
leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2019, are as
follows:
For the year ending December 31:
2020
2021
2022
2023
2024
Thereafter
Total
Third
Parties
Related
Entity
Total
$
$
5.0
4.7
4.4
4.2
4.1
20.5
42.9
$
$
1.4
1.4
1.2
1.0
1.0
1.6
7.6
$
$
6.4
6.1
5.6
5.2
5.1
22.1
50.5
114
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions.
Essentially all of the loan sales agreements require the repurchase of a mortgage loan by the seller in situations such
as breach of representation, warranty or covenant; untimely document delivery; false or misleading statements; failure
to obtain certain certificates or insurance; unmarketability; etc. Certain loan sales agreements contain repurchase
requirements based on payment-related defects that are defined in terms of the number of days or months since the
purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the
specific terms stated in the agreements, the Company had $0.9 million and $1.5 million of sold residential mortgage
loans with recourse provisions still in effect as of December 31, 2019 and 2018, respectively. The Company did not
repurchase any significant amount of loans from secondary market investors under the terms of loan sales agreements
during the years ended December 31, 2019, 2018 and 2017. In the opinion of management, the risk of recourse and the
subsequent requirement of loan repurchase to the Company is not significant, and accordingly no liabilities have been
established related to such. In addition, the Company made various representations and warranties associated with the
sale of loans. The Company has not incurred significant losses resulting from these provisions.
A substantial portion of the Company’s clients’ ability to honor their contracts is dependent on the economy in Idaho,
Montana, Oregon, South Dakota, Washington, and Wyoming. The Company’s loan portfolio is diversified and assigned
to risk classifications by industry concentrations and the current economic conditions. These industry concentrations
of credit are taken into consideration by management in determining the allowance for loan and lease losses.
In the normal course of business, the Company is involved in various other claims and litigation. In the opinion of
management, following consultation with legal counsel, the ultimate liability or disposition thereof is not expected to
have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.
(19) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts
recorded in the consolidated balance sheets. The Company evaluates each client’s creditworthiness on a case-by-case
basis. The amount of collateral obtained is based on management’s credit evaluation of the client. Collateral held varies
but may include accounts receivable, inventory, premises and equipment, and income-producing commercial properties.
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition
established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Generally, commitments to extend credit are subject to annual renewal. Since many
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Commitments to extend credit to borrowers approximated $2,807.8 million at
December 31, 2019, which included $764.1 million on unused credit card lines and $1,212.7 million with commitment
maturities beyond one year. Commitments to extend credit to borrowers approximated $2,620.4 million at December 31,
2018, which included $726.7 million on unused credit card lines and $1,058.5 million with commitment maturities
beyond one year.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client
to a third party. Most commitments extend for no more than two years and are generally subject to annual renewal.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities
to clients. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as
that involved in making commitments to extend credit. At December 31, 2019 and 2018, the Company had outstanding
stand-by letters of credit of $42.7 million and $46.7 million, respectively. The estimated fair value of the obligation
undertaken by the Company in issuing standby letters of credit is included in accounts payable and accrued expenses
in the Company’s consolidated balance sheets.
115
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(20)
INCOME TAXES
Income tax expense consists of the following:
Year ended December 31,
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
2019
2018
2017
$
$
40.5
8.2
48.7
3.7
1.7
5.4
54.1
$
$
23.1
7.2
30.3
12.3
3.5
15.8
46.1
$
$
24.3
5.0
29.3
18.4
2.5
20.9
50.2
Total income tax provision differs from the amount of income tax determined by applying the statutory federal income
tax rate of 21% for 2019 and 2018 and 35% for 2017, respectively, to income before income taxes due to the following:
Year ended December 31,
Tax expense at the statutory tax rate
Increase (decrease) in tax resulting from:
Tax-exempt income
State income tax, net of federal income tax benefit
Benefit of stock-based compensation plans
Federal tax credits
Benefit due to enactment of federal tax reform
Other, net
2019
2018
2017
$
49.4
$
43.3
$
54.9
(2.8)
9.9
(1.2)
(2.0)
—
0.8
54.1
$
(2.8)
8.5
(1.1)
(2.6)
—
0.8
46.1
$
(4.5)
4.9
(2.6)
(2.5)
(2.2)
2.2
50.2
Tax expense at effective tax rate
$
116
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and
liabilities that give rise to significant portions of the net deferred tax asset (liability) relate to the following:
December 31,
Deferred tax assets:
Loans, principally due to allowance for loan losses
Loan discount
Investment securities, unrealized losses
Deferred compensation
Non-performing loan interest
Other real estate owned write-downs and carrying costs
Tax credit carryforwards (1)
Net operating loss carryforwards (2)
Lease liabilities
Other
Deferred tax assets
Deferred tax liabilities:
Fixed assets, principally differences in bases and depreciation
Deferred loan costs
Investment securities, unrealized gains
Investment in joint venture partnership, principally due to differences in depreciation of
partnership assets
Right of use assets
Prepaid amounts
Government agency stock dividends
Goodwill and core deposit intangibles
Mortgage servicing rights
Other
Deferred tax liabilities
Net deferred tax assets (liabilities)
2019
2018
$
$
18.1
7.2
—
18.1
1.0
0.1
0.2
2.6
9.9
0.9
58.1
(8.8)
(2.8)
(3.9)
(0.7)
(9.7)
(0.5)
(1.2)
(49.2)
(7.2)
(0.8)
(84.8)
(26.7)
$
$
18.4
8.3
8.9
17.0
1.2
0.3
0.1
3.9
—
0.1
58.2
(6.9)
(2.6)
—
(0.8)
—
(0.6)
(1.5)
(44.2)
(6.4)
(3.8)
(66.8)
(8.6)
(1) Based on filed tax returns and amounts expected to be reported in current year tax returns (December 31, 2019), we had remaining
federal tax credit carryforwards of $0.1 million from acquired companies. The remaining federal tax credits were primarily generated
from AMT tax credit carryforwards, and their use is subject to annual limitations.
(2) As of December 31, 2019, we had remaining federal net operating loss carryforwards of $3.8 million from acquired companies,
which is available to offset federal taxable income and state net operating loss carryforwards in amounts which vary by state. The
federal net operating losses will expire beginning in 2029 and ending in 2037 and the state net operating losses will expire beginning
in 2020 and ending in 2034. The use of these carryforwards is subject to annual limitations.
The Company had current net income tax receivables of $6.1 million and $2.0 million at December 31, 2019 and 2018,
respectively.
117
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(21) STOCK-BASED COMPENSATION
The Company has equity awards outstanding under two stock-based compensation plans; the 2015 Equity Incentive
Plan (the “2015 Plan”) and the 2006 Equity Compensation Plan, as amended and restated (the “2006 Plan”). These
plans were primarily established to enhance the Company’s ability to attract, retain and motivate employees. The
Company’s Board of Directors or, upon delegation, the Compensation Committee of the Board of Directors
(“Compensation Committee”) has exclusive authority to select employees, advisors and others, including directors, to
receive awards and to establish the terms and conditions of each award made pursuant to the Company’s stock-based
compensation plans.
The 2015 Plan, approved by the Company’s shareholders in May 2015, was established to provide the Company with
flexibility to select from various equity-based performance compensation methods, and to be able to address changing
accounting and tax rules and corporate governance practices by optimally utilizing performance based compensation.
The 2015 Plan did not increase the number of shares of common stock available for awards under the 2006 Plan.
The 2006 Plan, approved by the Company’s shareholders in May 2006 and May 2014, was established to consolidate
into one plan the benefits available under all other than existing share-based award plans. The 2006 Plan continues
with respect to awards made prior to June 2015. All shares of common stock available for future grant under the 2006
Plan were transferred into the 2015 Plan. At December 31, 2019, there were 1,492,762 common shares available for
future grant under the 2015 Plan.
Stock Options. All options granted have an exercise price equal to fair market value, which is currently defined as the
closing sales price for the stock as quoted on the NASDAQ Stock Market for the last market trading day preceding the
date that the Company’s Board of Directors awards the benefit. Options may be subject to vesting as determined by
the Company’s Board of Directors or Compensation Committee, and can be exercised for periods of up to ten years
from the date of grant.
No stock option awards were granted in 2019 or 2018. All outstanding stock option awards were fully vested as of
December 31, 2016. As such, there was no compensation expense or related income tax benefits recognized related to
stock option awards in 2019 or 2018. Compensation expense related to stock option awards and the related income tax
benefits for the year ended December 31, 2016 were not considered material.
The following table summarizes Class A and Class B stock option activity under the Company’s active stock option
plans:
Year Ended December 31, 2019
Outstanding options, beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding options, end of year
Outstanding options exercisable, end of year
Number of
Shares
Weighted-Average
Exercise Price
428,176
$
15.61
Weighted-Average
Remaining
Contract Life
—
(191,193)
(15,786)
—
221,197
221,197
$
$
—
15.76
17.05
—
15.33
15.33
1.03
1.03
118
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The total intrinsic value of fully-vested stock options outstanding as of December 31, 2019 was $5.8 million. The total
intrinsic value of options exercised was $4.9 million, $4.9 million and $6.3 million during the years ended December 31,
2019, 2018 and 2017, respectively. The actual tax benefit realized for the tax deduction from option exercises totaled
$0.9 million, $0.9 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. The
Company received cash of $1.0 million, $1.8 million and $2.4 million from stock option exercises during the years
ended December 31, 2019, 2018 and 2017, respectively. The Company redeemed common stock with aggregate values
of $2.0 million, $1.6 million and $2.8 million tendered in payment for stock option exercises during the years ended
December 31, 2019, 2018 and 2017, respectively.
Restricted Stock Awards. Common stock issued under the Company’s restricted stock plan may not be sold or otherwise
transferred until restrictions have lapsed or performance objectives have been obtained. During the vesting periods,
participants have voting rights and receive dividends on all time restricted shares and vesting performance restricted
shares. Upon termination of employment, common shares upon which restrictions have not lapsed must be returned
to the Company.
All restricted share awards are classified as equity awards. The fair value of equity-classified restricted stock awards
is amortized as compensation expense on a straight-line basis over the period restrictions lapse or performance goals
are met. Compensation expense related to restricted stock awards of $8.0 million, $5.6 million and $3.3 million was
included in benefits on the Company’s consolidated statements of income for the years ended December 31, 2019,
2018 and 2017, respectively. Related income tax benefits recognized for the years ended December 31, 2019, 2018
and 2017 were $0.4 million, $0.2 million and $0.6 million, respectively.
The following table presents information regarding the Company’s restricted stock:
As of December 31, 2019
Restricted stock, beginning of year
Granted
Vested
Forfeited
Canceled
Restricted stock, end of year
Number of
Shares
Weighted-Average
Measurement Date
Fair Value
380,584
$
230,922
(202,286)
(46,198)
—
363,022
$
37.46
41.29
33.24
41.18
—
41.47
During 2019, the Company issued 230,922 restricted common shares. The 2019 restricted share awards included
18,335 additional shares related to the 2016 performance restricted stock grants and 72,926 performance restricted
shares, of which 36,463 vest in varying percentages upon achievement of defined return on equity performance goals,
and 36,463 vest in varying percentages upon achievement of defined total return to shareholder goals. Vesting of the
2019 performance restricted shares is also contingent on employment as of December 31, 2021. Additionally, 139,661
time-restricted shares were issued during 2019 that vest one-third on each annual anniversary of the grant date through
February 15, 2022, contingent on continued employment through the vesting date.
As of December 31, 2019, there was $8.1 million of unrecognized compensation cost related to non-vested, restricted
stock awards expected to be recognized over a period of 1.10 years.
119
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(22) EMPLOYEE BENEFIT PLANS
Profit Sharing Plan. The Company has a noncontributory profit sharing plan. All employees, other than temporary
employees, working 20 hours or more per week are eligible to participate in the profit sharing plan. The Company’s
Board of Directors authorizes all contributions to the profit sharing plan. Participants become 100% vested upon the
completion of two years of vesting service. Accrued contribution expense for this plan of $2.1 million, $2.4 million
and $1.6 million in 2019, 2018 and 2017, respectively, is included in employee benefits expense in the Company’s
consolidated statements of income.
Savings Plan. In addition, the Company has a contributory employee savings plan. All employees are eligible to
participate in the plan. Employee participation in the plan is at the option of the employee. The Company contributes
100% of the first 5% of the participating employee’s eligible compensation. Contribution expense for this plan of $7.0
million, $6.3 million and $5.5 million in 2019, 2018 and 2017, respectively, is included in employee benefits expense
in the Company’s consolidated statements of income.
Post-Retirement Healthcare Plan. The Company sponsors a contributory defined benefit healthcare plan (the “Plan”)
for active employees and employees and directors retiring from the Company at the age of at least 55 years and with
at least 15 years of continuous service. Retired Plan participants contribute the full cost of benefits based on the average
per capita cost of benefit coverage for both active employees and retired Plan participants.
In 2016, the Company amended the Plan to discontinue offering healthcare benefits to future retirees beginning July
1, 2016, with current retirees as of July 1, 2016 continuing in the Plan. The Company recorded a $2.8 million gain in
conjunction with the Plan amendment, which was recorded in other comprehensive income and is being amortized as
a reduction in net periodic benefit cost over the weighted average remaining service period of active employees expected
to receive post-retirement healthcare benefits under the Plan of approximately four years. The Plan amendment triggered
a curtailment, which immediately reduced the Company’s accumulated post-retirement benefit obligation and net
periodic benefit cost by $2.8 million and $0.3 million, respectively.
The Plan’s unfunded benefit obligation of $0.4 million and $0.5 million as of December 31, 2019 and 2018, respectively,
is included in accounts payable and accrued expenses in the Company’s consolidated balance sheets. Net periodic
benefit costs of $0.7 million, $0.8 million and $0.4 million for the years ended December 31, 2019, 2018 and 2017,
respectively, are included in employee benefits expense in the Company’s consolidated statements of income.
Weighted average actuarial assumptions used to determine the post-retirement benefit obligation at December 31, 2019,
and the net periodic benefit costs for the year then ended, included a discount rate of 3.6% and a 5.5% annual increase
in the per capita cost of covered healthcare benefits. Weighted average actuarial assumptions used to determine the
post-retirement benefit obligation at December 31, 2018, and the net periodic benefit costs for the year then ended,
included a discount rate of 3.6% and a 6.0% annual increase in the per capita cost of covered healthcare benefits. The
estimated effect of a one percent increase or a one percent decrease in the assumed healthcare cost trend rate would
not significantly impact the service and interest cost components of the net periodic benefit cost or the accumulated
post-retirement benefit obligation. Future benefit payments are expected to be $0.12 million, $0.09 million, $0.06
million, $0.05 million, $0.04 million and $0.08 million for 2020, 2021, 2022, 2023, 2024, and 2028 through 2029,
respectively.
At December 31, 2019, the Company had accumulated other comprehensive gain related to the plan of $0.5 million,
or $0.4 million net of related income tax benefit, comprised primarily of an unamortized transition asset of $0.7 million.
120
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(23) OTHER COMPREHENSIVE INCOME
The gross amounts of each component of other comprehensive income and the related tax effects for the periods
indicated are as follows:
Year Ended December 31, 2019
Investment securities available-for sale:
Change in net unrealized gain during period
Reclassification adjustment for net gain included in net income
Reclassification adjustment for securities transferred from held-to-
maturity to available-for-sale
Defined benefits post-retirement benefit plan:
Change in net actuarial gains
Total other comprehensive income
Year Ended December 31, 2018
Investment securities available-for sale:
Change in net unrealized loss during period
Reclassification adjustment for net loss included in net income
Change in unamortized loss on available-for-sale securities transferred
into held-to-maturity
Defined benefits post-retirement benefit plan:
Change in net actuarial gains
Total other comprehensive loss
Year Ended December 31, 2017
Investment securities available-for sale:
Change in net unrealized loss during period
Reclassification adjustment for net gain included in net income
Change in unamortized loss on available-for-sale securities transferred
into held-to-maturity
Change in net unrealized loss on derivatives
Reclassification adjustment for derivative net loss included in income
Defined benefits post-retirement benefit plan:
Change in net actuarial loss
Total other comprehensive loss
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
54.9 $
(0.1)
(6.0)
(0.8)
48.0 $
14.1 $
—
(1.6)
(0.1)
12.4 $
40.8
(0.1)
(4.4)
(0.7)
35.6
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
(13.9) $
(3.6) $
(10.3)
0.1
1.6
—
0.4
(0.6)
(12.8) $
(0.1)
(3.3) $
0.1
1.2
(0.5)
(9.5)
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
(6.5) $
(0.7)
1.9
(1.1)
1.1
(1.3)
(6.6) $
(2.7) $
(0.3)
0.7
(0.4)
0.4
(0.5)
(2.8) $
(3.8)
(0.4)
1.2
(0.7)
0.7
(0.8)
(3.8)
$
$
$
$
$
$
The components of accumulated other comprehensive income (loss), net of income taxes, are as follows:
Year ended December 31,
Net unrealized gain (loss) on investment securities available-for-sale
Net actuarial gain on defined benefit post-retirement benefit plans
Net accumulated other comprehensive income (loss)
2019
2018
$
$
10.6
0.4
11.0
$
$
(25.5)
0.9
(24.6)
121
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(24) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate BancSystem, Inc.
December 31,
Condensed balance sheets:
Cash and cash equivalents
Investment in bank subsidiary
Advances to subsidiaries, net
Other assets
Total assets
Other liabilities
Subordinated debentures held by subsidiary trusts
Total liabilities
Stockholders’ equity
2019
2018
$
147.1
$
72.9
1,899.3
1,648.9
$
$
$
$
48.9
61.7
2,157.0
56.2
86.9
143.1
2,013.9
46.0
59.0
1,826.8
46.0
86.9
132.9
1,693.9
Total liabilities and stockholders’ equity
$
2,157.0
$
1,826.8
Years Ended December 31,
Condensed statements of income:
Dividends from subsidiaries
Other interest income
Other income, primarily management fees from subsidiaries
Total income
Salaries and benefits
Interest expense
Acquisition expenses
Other operating expenses, net
Total expenses
Earnings before income tax benefit
Income tax benefit
Income before undistributed earnings of subsidiaries
Undistributed earnings of subsidiaries
2019
2018
2017
$
178.0
$
148.5
$
150.0
0.3
25.9
204.2
34.2
4.7
17.0
14.8
70.7
133.5
(11.9)
145.4
35.6
0.1
17.0
165.6
25.3
4.5
8.1
14.5
52.4
113.2
(9.3)
122.5
37.7
0.1
18.0
168.1
21.8
4.7
25.3
13.0
64.8
103.3
(14.2)
117.5
(11.0)
106.5
Net income
$
181.0
$
160.2
$
122
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Years Ended December 31,
Condensed statements of cash flows:
Cash flows from operating activities:
Net income
2019
2018
2017
$
181.0
$
160.2
$
106.5
Adjustments to reconcile net income to cash provided by operating
activities:
Undistributed earnings of subsidiaries
Stock-based compensation expense
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital distributions from nonbank subsidiaries
Acquisition of intangible assets
Acquisition of bank holding company, net of cash and cash
equivalents received
Investment in subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in advances from subsidiaries
Repayment of long-term debt
Proceeds from issuance of common stock, net of stock issuance
costs
Purchase and retirement of common stock
Dividends paid to common stockholders
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
(35.6)
8.0
8.1
161.5
—
—
—
—
—
(6.6)
—
1.0
(2.5)
(79.2)
(87.3)
74.2
72.9
Cash and cash equivalents, end of year
$
147.1
$
(37.7)
5.6
16.4
144.5
—
—
(14.7)
—
(14.7)
(9.9)
(26.0)
1.8
(1.0)
(64.1)
(99.2)
30.6
42.3
72.9
$
11.0
3.9
14.7
136.1
18.0
(28.0)
(128.3)
(18.0)
(156.3)
(28.4)
—
2.4
(1.3)
(48.6)
(75.9)
(96.1)
138.4
42.3
There was $176.1 million, $173.3 million, and $386.0 million in 2019, 2018, and 2017, respectively, of noncash
financing activities for the issuance of common stock were related to the CMYF and IIBK acquisitions in 2019, INB
acquisition in 2018, and BOTC acquisition in 2017.
123
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
(25) FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. There is a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value.
The three levels of inputs that may be used to measure fair value are as follows:
• Level 1 - Quoted prices in active markets for identical assets or liabilities
• Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities
• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of assets or liabilities
The methodologies used by the Company in determining the fair values of each class of financial instruments are based
primarily on the use of independent, market-based data to reflect a value that would be reasonably expected in an
orderly transaction between market participants at the measurement date, and therefore are classified within Level 2
of the valuation hierarchy. There have been no significant changes in the valuation techniques during the periods ended
December 31, 2019 and 2018.
The Company’s policy is to recognize transfers between levels as of the end of the reporting period. Transfers in and
out of Level 1, Level 2 and Level 3 are recognized on the actual transfer date. There were no transfers between fair
value hierarchy levels during the years ended December 31, 2019 and 2018.
Further details on the methods used to estimate the fair value of each class of financial instruments above are discussed
below:
Investment Debt Securities Available-for-Sale. The Company obtains fair value measurements for investment securities
from an independent pricing service. The fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the investment’s terms and conditions, among other things.
Vendors chosen by the Company are widely recognized vendors whose evaluations support the pricing functions of
financial institutions, investment and mutual funds, and portfolio managers. If needed, a broker may be utilized to
determine the reported fair value of investment securities. The Company has documented and evaluated the pricing
methodologies used by the vendors and maintains internal processes that regularly test valuations. These internal
processes include obtaining and reviewing available reports on internal controls, evaluating the prices for
reasonableness given market changes, obtaining and evaluating the inputs used in the model for a sample of securities,
investigating anomalies and confirming determinations through discussions with the vendor.
Loans Held for Sale. Fair value measurements for loans held for sale are obtained from an independent pricing service.
The fair value measurements consider observable data that may include binding contracts or quotes or bids from third
party investors as well as loan level pricing adjustments.
Interest Rate Swap Contracts. Fair values for derivative interest rate swap contracts are based upon the estimated
amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that
are observable or that can be corroborated by observable market data. The inputs used to determine fair value include
the 3 month LIBOR forward curve to estimate variable rate cash inflows and the federal funds effective swap rate to
estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such
difference is discounted to a present value to estimate the fair value of the interest rate swaps. The change in the value
of derivative assets attributable to basis risk, or the risk that offsetting investments in a hedging strategy will not
124
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
experience price changes in entirely opposite directions from each other, was not significant in the reported periods.
The Company also obtains and compares the reasonableness of the pricing from an independent third party.
For purposes of potential valuation adjustments to our derivative positions, we evaluate the credit risk of our
counterparties as well as ours. Accordingly, we have considered factors such as the likelihood of our default and the
default of our counterparties, our net exposures and remaining contractual life, among other things, in determining if
any fair value adjustments related to credit risk are required. The change in value of derivative assets and derivative
liabilities attributable to credit risk was not significant during the reported periods.
Interest Rate Lock Commitments. Fair value measurements for interest rate lock commitments are obtained from an
independent pricing service. The fair value measurements consider observable data that may include prices available
from secondary market investors taking into consideration various characteristics of the loan, including the loan amount,
interest rate, value of the servicing and loan to value ratio, among other things. Observable data is then adjusted to
reflect changes in interest rates, the Company’s estimated pull-through rate and estimated direct costs necessary to
complete the commitment into a closed loan net of origination and processing fees collected from the borrower.
Forward Loan Sales Contracts. The fair value measurements for forward loan sales contracts are obtained from an
independent pricing service. The fair value measurements consider observable data that includes sales of similar loans.
Deferred Compensation Plan Assets and Liabilities. The fair values of deferred compensation plan assets and liabilities
are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected
in an orderly transaction between market participants at the measurement date. These investments are in the same funds
and purchased in the same amounts as the participants’ selected investments, which represent the underlying liabilities
to plan participants. Deferred compensation plan liabilities are recorded at amounts due to participants, based on the
fair value of participants’ selected investments.
125
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:
As of December 31, 2019
Balance
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Investment debt securities available-for-sale:
U.S. Treasury Notes
State, county and municipal securities
Obligations of U.S. government agencies
U.S. agency mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Corporate securities
Other investments
Loans held for sale
Derivative assets:
Interest rate swap contracts
Interest rate lock commitments
Derivative liabilities:
Interest rate swap contracts
Forward loan sales contracts
Deferred compensation plan assets
Deferred compensation plan liabilities
$
$
9.0
80.9
366.8
2,317.2
47.2
135.7
3.2
100.9
21.9
1.3
21.9
0.3
18.2
18.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
9.0
80.9
366.8
2,317.2
47.2
135.7
3.2
100.9
21.9
1.3
21.9
0.3
18.2
18.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
126
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
As of December 31, 2018
Balance
Investment debt securities available-for-sale:
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
U.S. Treasury Notes
$
2.6
$
Obligations of U.S. government agencies
U.S. agency mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Corporate securities
Other investments
Loans held for sale
Derivative assets:
Interest rate swap contracts
Interest rate lock commitments
Derivative liabilities:
Interest rate swap contracts
Forward loan sales contracts
Deferred compensation plan assets
Deferred compensation plan liabilities
559.2
1,544.8
70.2
91.9
2.0
33.3
8.8
1.3
8.8
0.6
12.1
12.1
—
—
—
—
—
—
—
—
—
—
—
—
—
$
2.6
$
559.2
1,544.8
70.2
91.9
2.0
33.3
8.8
1.3
8.8
0.6
12.1
12.1
—
—
—
—
—
—
—
—
—
—
—
—
—
Additionally, from time to time, certain assets are measured at fair value on a non-recurring basis. Adjustments to fair
value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets
due to impairment. The following table presents information about the Company’s assets and liabilities measured at
fair value on a non-recurring basis:
As of December 31, 2019
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
As of December 31, 2018
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Gains
(Losses)
Total
$
27.6 $ —
$ —
$
27.6 $
2.2
6.2
—
—
—
—
2.2
6.2
(13.7)
(1.2)
(0.2)
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Gains
(Losses)
Total
$
24.1 $
0.6
4.9
—
—
—
$ —
$
24.1 $
—
—
0.6
4.9
(12.2)
(0.6)
(0.5)
127
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Impaired Loans. Collateralized impaired loans are reported at the fair value of the underlying collateral if repayment
is expected solely from collateral. The impaired loans are reported at fair value through specific valuation allowance
allocations. In addition, when it is determined that the fair value of an impaired loan is less than the recorded investment
in the loan, the carrying value of the loan is adjusted to fair value through a charge to the allowance for loan losses.
Collateral values are estimated using independent appraisals and management estimates of current market conditions.
As of December 31, 2019, certain impaired loans with a carrying value of $41.3 million were reduced by specific
valuation allowance allocations of $3.6 million and partial loan charge-offs of $10.1 million resulting in a reported fair
value of $27.6 million. As of December 31, 2018, certain impaired loans with a carrying value of $36.3 million were
reduced by specific valuation allowance allocations of $6.8 million and partial loan charge-offs of $5.4 million resulting
in a reported fair value of $24.1 million.
OREO. The fair values of OREO are estimated using independent appraisals and management estimates of current
market conditions. Upon initial recognition, write-downs based on the foreclosed asset’s fair value at foreclosure are
reported through charges to the allowance for loan losses. Periodically, the fair value of foreclosed assets is remeasured
with any subsequent write-downs charged to OREO expense in the period in which they are identified.
Long-lived Assets to be Disposed of by Sale. Long-lived assets to be disposed of by sale are carried at the lower of
carrying value or fair value less estimated costs to sell. The fair values of long-lived assets to be disposed of by sale
are based upon observable market data and management estimates of current market conditions. As of December 31,
2019, the Company had long-lived assets to be disposed of by sale with carrying values aggregating $6.4 million, which
was reduced by write-downs of $0.2 million charged to other expense, resulting in a reported fair value of $6.2 million.
As of December 31, 2018, the Company had long-lived assets to be disposed of by sale with carrying values of $5.4
million, had $0.5 million write-downs, resulting in a reported fair value of $4.9 million.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring
basis and for which the Company has utilized Level 3 inputs to determine fair values:
As of December 31, 2019
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted Average)
$
27.6 Appraisal
Appraisal adjustment
0% -
56% (22%)
2.2 Appraisal
6.2 Appraisal
Appraisal adjustment
8% -
65% (27%)
Appraisal adjustment
0% -
37%
(3%)
As of December 31, 2018
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted Average)
$
24.1 Appraisal
Appraisal adjustment
0% -
26% (13%)
0.6 Appraisal
4.9 Appraisal
Appraisal adjustment
8% -
96% (39%)
Appraisal adjustment
0% -
43% (10%)
The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair
value. The methodologies for estimating the fair value of financial instruments that are measured at fair value on a
recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial
instruments are discussed below. For financial instruments bearing a variable interest rate where no credit risk exists,
it is presumed that recorded book values are reasonable estimates of fair value.
128
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
Financial Assets. Carrying values of cash, cash equivalents and accrued interest receivable approximate fair values due
to the liquid and/or short-term nature of these instruments. Fair values for investment securities held-to-maturity are
obtained from an independent pricing service, which considers observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the investment’s terms and conditions, among other things. Fair values of fixed rate
loans and variable rate loans that reprice on an infrequent basis are estimated using an exit price by discounting future
cash flows using current interest rates at which similar loans with similar terms would be made to borrowers of similar
credit quality. Carrying values of variable rate loans that reprice frequently, and with no change in credit risk, approximate
the fair values of these instruments.
Financial Liabilities. The fair values of demand deposits, savings accounts, securities sold under repurchase agreements
and accrued interest payable are the amounts payable on demand at the reporting date. The fair values of fixed-maturity
certificates of deposit are estimated using external market rates currently offered for deposits with similar remaining
maturities. The fair values of derivative liabilities are obtained from an independent pricing service, which considers
observable data that may include the three-month LIBOR forward curve, the federal funds effective swap rate and cash
flows, among other things. The carrying values of the interest bearing demand notes to the United States Treasury are
deemed an approximation of fair values due to the frequent repayment and repricing at market rates. The fixed and
floating rate subordinated debentures, floating rate subordinated term loan, notes payable to the FHLB, fixed rate
subordinated term debt, and capital lease obligation are estimated by discounting future cash flows using current rates
for advances with similar characteristics.
Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and
standby letters of credit, based on fees currently charged to enter into similar agreements, is not significant.
129
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The estimated fair values of financial instruments that are reported in the Company’s consolidated balance sheets,
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, are as
follows:
`
Fair Value Measurements at Reporting Date
Using
Quoted Prices
in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
As of December 31, 2019
Financial assets:
Cash and cash equivalents
$
1,076.8 $
1,076.8 $
1,076.8 $
— $
Investment debt securities available-for-sale
2,960.0
2,960.0
Investment debt securities held-to-maturity
Accrued interest receivable
Mortgage servicing rights, net
Loans held for sale
Net loans held for investment
Derivative assets
Deferred compensation plan assets
92.3
46.7
30.2
94.5
46.7
34.8
100.9
100.9
8,857.7
8,930.7
23.2
18.2
23.2
18.2
—
—
—
—
—
—
—
—
2,960.0
94.5
46.7
34.8
100.9
8,906.7
23.2
18.2
Total financial assets
$ 13,206.0 $ 13,285.8 $
1,076.8 $
12,185.0 $
Financial liabilities:
Total deposits, excluding time deposits
$ 10,213.5 $ 10,213.5 $
10,213.5 $
— $
Time deposits
1,450.0
1,446.6
Securities sold under repurchase agreements
Accrued interest payable
Long-term debt
Subordinated debentures held by subsidiary
trusts
Derivative liabilities
Deferred compensation plan liabilities
697.6
12.1
13.9
86.9
22.2
18.2
697.6
12.1
10.4
81.3
22.2
18.2
—
—
—
—
—
—
—
1,446.6
697.6
12.1
10.4
81.3
22.2
18.2
Total financial liabilities
$ 12,514.4 $ 12,501.9 $
10,213.5 $
2,288.4 $
—
—
—
—
—
—
24.0
—
—
24.0
—
—
—
—
—
—
—
—
—
130
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
As of December 31, 2018
Financial assets:
Carrying
Amount
Estimated
Fair Value
Fair Value Measurements at Reporting Date
Using
Quoted Prices
in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
822.0 $
822.0 $
822.0 $
— $
Investment debt securities available-for-sale
2,270.7
2,270.7
Investment debt securities held-to-maturity
406.8
400.7
Accrued interest receivable
Mortgage servicing rights, net
Loans held for sale
Net loans held for investment
Derivative assets
Deferred compensation plan assets
Total financial assets
Financial liabilities:
44.9
27.7
33.3
44.9
42.4
33.3
8,397.4
8,439.7
10.1
12.1
10.1
12.1
—
—
—
—
—
—
—
—
2,270.7
400.7
44.9
42.4
33.3
8,415.6
10.1
12.1
$ 12,025.0 $ 12,075.9 $
822.0 $
11,229.8 $
Total deposits, excluding time deposits
$
9,363.7 $
9,363.7 $
9,363.7 $
— $
Time deposits
1,317.0
1,299.0
Securities sold under repurchase agreements
712.4
712.4
Other borrowed funds
Accrued interest payable
Long-term debt
Subordinated debentures held by subsidiary
trusts
Derivative liabilities
Deferred compensation plan liabilities
—
7.8
15.8
86.9
9.4
12.1
—
7.8
13.0
84.9
9.4
12.1
—
—
—
—
—
—
—
—
1,299.0
712.4
—
7.8
13.0
84.9
9.4
12.1
Total financial liabilities
$ 11,525.1 $ 11,502.3 $
9,363.7 $
2,138.6 $
—
—
—
—
—
—
24.1
—
—
24.1
—
—
—
—
—
—
—
—
—
—
(26) 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. These parties
were deposit clients of the Bank and incurred indebtedness in the form of loans, as clients, of $40.3 million and $43.2
million at December 31, 2019 and 2018, respectively. During 2019, new loans and advances on existing loans of $16.5
million were funded and loan repayments totaled $18.3 million. In addition, $1.1 million of loans were removed due
to changes in related parties during the year. All deposit and loan transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons
not related to the Company and do not involve more than a normal risk of collectability or present other unfavorable
features.
131
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
The Company leases an aircraft from an entity wholly-owned by the chairman of the Board of Directors of the Company.
Under the terms of the lease, we pay a fee for each flight hour plus certain third party operating expenses related to
the aircraft. During 2019, 2018 and 2017, the Company paid total fees and operating expenses of $22 thousand, $53
thousand and $45 thousand respectively, for its use of the aircraft. In addition, we lease a portion or our hanger and
provide pilot services to the related entity. During 2019, 2018 and 2017, the Company received payments from the
related entity of $30 thousand, $25 thousand and $17 thousand, respectively, for hangar use, pilot fees, and
reimbursement of certain third party operating expenses related to the chairman’s personal use of the aircraft.
The Company purchases services from an entity which includes certain members of the Company’s control group.
Services provided for the Company’s benefit include shareholder education and communication, strategic enterprise
planning and corporate governance consultation. During 2019, 2018 and 2017, the Company paid $85 thousand, $80
thousand and $73 thousand, respectively, for these services.
(27) RECENT AUTHORITATIVE ACCOUNTING GUIDANCE
ASU 2016-02, “Leases (Topic 842).” In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under
the new guidance, lessees will be required to recognize a lease liability and a right of use asset for all leases (with the
exception of short-term leases) at the commencement date of the lease and disclose key information about leasing
arrangements. Accounting by lessors is largely unchanged. In July 2018, the FASB issued ASU 2018-11 to provide
entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition
method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. Additionally, in December 2018, the
FASB issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for
certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption
of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, the Company recognized right-of-use assets
and related lease liabilities totaling $39.6 million and $39.6 million, respectively, with an immaterial impact on its
consolidated results of operations and liquidity. The Company elected to apply certain practical expedients provided
under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts are or contain leases,
(ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. The
Company elected the hindsight practical expedient to determine the lease term for existing leases. We also did not apply
the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance).
Lease and non-lease components are accounted for separately as the amounts are readily determinable under our lease
contracts.
132
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments.” The amendments in ASU 2016-13 require a financial asset or group of financial assets measured at
amortized cost basis to be presented on a company’s financial statements at the net amount expected to be collected
based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 requires a
company’s income statement to reflect the measurement of credit losses for newly recognized financial assets as well
as the expected increases or decreases of expected credit losses that have taken place during the period. The amendments
in ASU 2016-13 require that the allowance for credit losses for purchased financial assets with a more-than-insignificant
amount of credit deterioration since origination be measured at amortized cost basis with the initial allowance for credit
losses added to the purchase price rather than being reported as a credit loss expense. ASU 2016-13 also requires that
credit losses relating to available-for-sale debt securities be recorded through an allowance for credit losses. The
amendments in ASU 2016-13 are effective for the Company for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The amendments will be applied through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period. A prospective transition approach is
required for debt securities for which other-than-temporary impairment was recognized before the effective date.
Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to
improvement in cash flows expected to be collected will continue to be accreted into income over the remaining life
of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of
adoption will be recorded in earnings when received. We are currently evaluating the potential impact of ASU 2016-13
on our financial statements, which will be effective on January 1, 2020. We have formed a cross-functional working
group comprised of individuals from various functional areas including credit, risk management, finance, and
information technology, among others. We are currently working through our implementation plan which includes
assessment and documentation of processes, internal controls and data sources; model development and documentation;
and system configuration, among other things. We are in the process of implementing a third-party vendor solution.
The adoption of ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from
an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio,
to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the
portfolio. The adoption will also necessitate that we establish an allowance for expected credit losses for certain debt
securities and other financial assets. The impact of the adoption of ASU 2016-13 is influenced by the composition,
characteristics, and quality of our loan and securities portfolios as well as the prevailing economic conditions and
forecasts as of the adoption date and is currently expected to result in a 30 to 45 percent increase in our allowance for
loan losses, however, this range is subject to change as we complete our related implementation and validation efforts.
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization
on Purchased Callable Debt Securities.” The amendments in ASU 2017-08 shorten the amortization period for the
premium on certain purchased callable debt securities to the earliest call date. The new guidance does not change the
accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity.
ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018. As the
Company amortized premiums on callable debt securities to the earliest call date, the amendments in ASU 2017-08
became effective for the Company on January 1, 2019, and did not have a significant impact on the Company’s
consolidated financial statements, results of operations, or liquidity.
ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities.” In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to
Accounting for Hedging Activities (ASU 2017-12). The purpose of this updated guidance is to better align a company’s
financial reporting for hedging activities with the economic objectives of those activities. In addition, this ASU makes
certain targeted improvements to simplify the application of the hedge accounting, including to derivative instruments
as well as allow a one-time election to reclassify fixed-rate, prepayable debt securities from a held-to-maturity
classification to an available-for-sale classification. ASU 2017-12 is effective for public business entities for fiscal
years beginning after December 15, 2018. Guidance related to existing cash flow hedges and, if elected, fair value
hedges is to be applied under a modified retrospective approach and guidance related to amended presentation and
disclosures is to be applied under a prospective approach. Upon adoption of ASU 2017-12 on January 1, 2019, the
guidance did not have an impact on the Company's derivatives and, thus, no adjustments were made related to
derivatives. In conjunction with the adoption of ASU 2017-12, the Company made the transition election to reclassify
$281.1 million in book value of securities, that qualified, from held-to-maturity to available-for-sale.
133
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement.” In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU
2018-13). The amendments in this Update removes, modifies, and adds to the disclosure requirements on fair value
measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the
consideration of costs and benefits. The amendments in this Update are effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized
gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the
most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be
applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is
permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the
additional disclosures until their effective date. While the Company continues to assess all potential impacts of the
standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements
disclosures.
ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20):
Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” In August 2018,
the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General: Disclosure
Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). The amendments in
this Update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of
disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are
considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial
statements by applying concepts in the Concepts Statement. The amendments in this Update are effective for fiscal
years ending after December 15, 2020, for public business entities. Early adoption is permitted. While the Company
continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact
on our consolidated financial statements disclosures.
ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract.” In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software
(Subtopic 350-40). The amendments in this Update clarifies certain aspects of ASU 2015-05, “Customer’s Accounting
for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. ASU 2018-15 aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with
the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). The accounting for the service element of a hosting
arrangement that is a service contract is not affected by the Update. The amendments in this Update are effective for
fiscal years beginning after December 15, 2019, for public business entities. Early adoption is permitted. While the
Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial
impact on our consolidated financial statements disclosures.
ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR)
Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” In October
2018, the FASB issued ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index
Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit
use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815
in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the
Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap
Rate. The amendments in ASU 2018-16 became effective for the Company in conjunction with the adoption of ASU
2017-12 on January 1, 2019, and did not have a significant impact on the Company’s consolidated financial statements,
results of operations or liquidity.
134
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share and per share data)
ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments” In April 2019, the FASB issued ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging,
and Topic 825, Financial Instruments, that clarifies and improves areas of guidance related to the recently issued
standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial
instruments (ASU 2016-01). The amendments generally have the same effective dates as their related standards. If
already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after
December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of the Company’s next
annual reporting period; early adoption is permitted. The Company previously adopted both ASU 2017-12 and ASU
2016-01 and does not expect the amendments of ASU 2019-04 to have a material impact on the Company’s consolidated
financial statements, results of operations or liquidity.
(28) SUBSEQUENT EVENTS
Subsequent events have been evaluated for potential recognition and disclosure through the date financial statements
were filed with the Securities and Exchange Commission.
On February 19, 2020, we declared a special dividend to common stockholders of $0.60 per share, which is payable
on March 12, 2020 to shareholders of record as of March 2, 2020.
On January 28, 2020, the Company declared a quarterly dividend to common shareholders of $0.34 per share, which
was paid on February 20, 2020 to shareholders of record as of February 10, 2020.
No other events requiring recognition or disclosure were identified.
135
(a) 2. Financial statement schedules
All other schedules to the consolidated financial statements of the Registrant are omitted since the required
information is either not applicable, deemed immaterial, or is shown in the respective financial statements or in
notes thereto.
(a) 3. Exhibits
Exhibit
Number
3.1
3.2
4.1*
10.1*
10.2†
10.3†
10.4†
10.5†
10.6†
10.8*†
10.9*†
10.10*†
10.11*†
10.12*†
10.13*†
Description
Second Amended and Restated Articles of Incorporation dated May 30, 2017 (incorporated herein
by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, File No. 001-34653,
filed for the quarter ended June 30, 2017)
Third Amended and Restated Bylaws dated May 24, 2017 (incorporated herein by reference to
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, File No. 001-34653, filed for the
quarter ended June 30, 2017)
Description of securities registered under Section 12 of the Securities Exchange Act
Lease Agreement between Billings 401 Joint Venture and First Interstate Bank Montana dated
September 20, 1985 and addendum thereto (incorporated herein by reference to Exhibit 10.1 to the
Company’s Annual Report on Form 10-K, File No. 001-34653, filed for the year ended December
31, 2017)
First Interstate BancSystem’s Deferred Compensation Plan dated December 1, 2006 (incorporated
herein by reference to Exhibit 10.9 to the Company’s Pre-Effective Amendment No. 3 to
Registration Statement on Form S-1, File No. 333-164380, filed on March 23, 2010)
First Amendment to the First Interstate BancSystem’s Deferred Compensation Plan dated
October 24, 2008 (incorporated herein by reference to Exhibit 10.10 to the Company’s Pre-Effective
Amendment No. 3 to Registration Statement on Form S-1, No. 333-164380, filed on March 23,
2010)
2001 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 4.12 to the
Company’s Registration Statement on Form S-8, No. 333-106495, filed on June 25, 2003)
Second Amendment to 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.6 to
the Company’s Quarterly Report on Form 10-Q, File No. 001-34653, filed for the quarter ended
September 30, 2010)
First Interstate BancSystem, Inc. 2006 Equity Compensation Plan, amended and restated as of
November 21, 2013 (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration
Statement on Form S-8, No. 333-193543, filed on January 24, 2014)
First Interstate BancSystem, Inc. 2015 Equity and Incentive Plan , amended and restated as of
January 1, 2019 (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report
on Form 10-K, File No. 001-34653, filed on February 27, 2019)
First Interstate BancSystem, Inc. 2015 Equity and Incentive Plan Performance Restricted Stock
Grant Agreement
First Interstate BancSystem, Inc. 2015 Equity and Incentive Plan Performance Time Vested
Restricted Stock Grant Agreement (incorporated herein by reference to Exhibit 10.10 to the
Company’s Annual Report on Form 10-K, File No. 001-34653, filed on February 27, 2019)
First Interstate BancSystem, Inc. Director Compensation
Executive Employment Agreement between First Interstate BancSystem, Inc. and Kevin P. Riley
dated April 3, 2018 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K, File No. 001-34653, filed on April 5, 2018)
Executive Employment Agreement between First Interstate BancSystem, Inc. and Marcy D. Mutch
dated April 3, 2018 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K, File No. 001-34653, filed on April 5, 2018)
136
10.14*†
10.15*†
10.16*†
14.1
21.1*
23.1*
31.1*
31.2*
32**
101*
104*
Executive Employment Agreement between First Interstate BancSystem, Inc. and Renee L.
Newman dated April 3, 2018 (incorporated herein by reference to Exhibit 10.14 to the Company’s
Annual Report on Form 10-K, File No. 001-34653, filed on February 27, 2019)
Executive Employment Agreement between First Interstate BancSystem, Inc. and Jodi Delahunt
Hubbell dated April 3, 2018 (incorporated herein by reference to Exhibit 10.15 to the Company’s
Annual Report on Form 10-K, File No. 001-34653, filed on February 27, 2019)
Executive Employment Agreement between First Interstate BancSystem, Inc. and Philip G. Gaglia
dated April 3, 2018 (incorporated herein by reference to Exhibit 10.16 to the Company’s Annual
Report on Form 10-K, File No. 001-34653, filed on February 27, 2019)
Code of Ethics for Chief Executive Officer and Senior Financial Officers (incorporated herein by
reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K, File No. 001-34653, filed
for the fiscal year ended December 31, 2010)
Subsidiaries of First Interstate BancSystem, Inc.
Consent of RSM US LLP Independent Registered Public Accounting Firm
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the
Securities Exchange Act of 1934, as amended.
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the
Securities Exchange Act of 1934, as amended.
18 U.S.C. Section 1350 Certifications.
Interactive Data File - The instance document does not appear in the interactive data file because its
XBRL tags are embedded within the inline XBRL document.
Cover Page Interactive Data File - The cover page XBRL tags are embedded within the inline
XBRL document (included in Exhibit 101)
† Management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished (not filed) herewith.
(b) Exhibits
See Item 15(a)3 above.
(c) Financial Statements Schedules
See Item 15(a)2 above.
137
None.
Item 16. Form 10-K Summary
138
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
First Interstate BancSystem, Inc.
By:
/s/ KEVIN P. RILEY
Kevin P. Riley
President and Chief Executive Officer
February 26, 2020
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ JAMES R. SCOTT
James R. Scott, Chair of the Board
/s/ DAVID L. JAHNKE
David L. Jahnke, Vice Chair of the Board
/s/ STEVEN. J. CORNING
Steven J. Corning, Director
/s/ DANA L. CRANDALL
Dana L. Crandall, Director
/s/ CHARLES E. HART, M.D., M.S.
Charles E. Hart, M.D., M.S., Director
/s/ JOHN M. HEYNEMAN, JR.
John M. Heyneman, Jr., Director
/s/ DENNIS L. JOHNSON
Dennis L. Johnson, Director
/s/ ROSS E. LECKIE
Ross E. Leckie, Director
/s/ PATRICIA L. MOSS
Patricia L. Moss, Director
/s/ JAMES R. SCOTT, JR.
James R. Scott, Jr., Director
/s/ JONATHAN R. SCOTT
Jonathan R. Scott, Director
/s/ PETER I. WOLD
Peter I. Wold, Director
/s/ KEVIN P. RILEY
Kevin P. Riley
President, Chief Executive Officer and Director
(Principal executive officer)
/s/ MARCY D. MUTCH
Marcy D. Mutch
Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer)
139
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
February 26, 2020
Date
Member FDIC. Equal Housing Lender. _house_
© 2020 FIRST INTERSTATE BANCSYSTEM, INC. ALL RIGHTS RESERVED.
firstinterstate.com
00760.RP.20.03