First Interstate BancSystem, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a community banking holding company operating 147 banking offices across six states. Dollar amounts are in millions unless noted.
Financial results and condition
- Q2 earnings: Net income was $42.5, up 15.8% from $36.7 a year earlier; diluted EPS was $0.69 versus $0.57. For the first six months, net income was $93.9 versus $66.0 and diluted EPS was $1.52 versus $1.02.
- Interest income and margin: Q2 net interest income was $118.8, down 3.0% year over year; net interest margin on a fully taxable equivalent basis was 2.82%, down 70 basis points. Six-month net interest income was $239.5, down 2.5%, and margin was 2.93%, down 77 basis points. Lower loan and securities yields and a shift toward lower-yielding securities and cash weighed on margin; lower deposit costs partly offset the pressure.
- Other income and expenses: Q2 non-interest income was $35.3, down 11.1%, while non-interest expense was $99.0, up 3.6%. Mortgage banking revenue declined, partly reflecting lower refinance activity and more mortgage production retained in the loan portfolio. Higher employee-benefit costs also contributed to expense growth.
- Credit costs and asset quality: Q2 provision for credit losses was zero, versus $19.5 in Q2 2020. The six-month provision was a reversal of $5.1, compared with expense of $48.5 in 2020. The allowance for loan losses was $135.5, or 1.38% of loans, at June 30. Non-performing assets were $37.6, down from $50.5 at year-end 2020; non-performing loans were $35.6.
- Balance sheet and funding: Total assets were $18,940.5, up 7.3% from year-end; deposits were $15,565.7, up 9.5%. Net loans held for investment were $9,699.2, broadly stable, while investment securities increased to $5,643.3. Cash and cash equivalents were $1,948.4, down from $2,276.8 at year-end as deposit growth was deployed largely into securities.
- Cash flow and debt: For the six months, operating cash flow was $106.1, investing cash flow was negative $1,674.7, and financing cash flow was positive $1,240.2; cash decreased $328.4. Long-term debt was $112.4 and subordinated debentures were $87.0. Repurchase-agreement funding was $1,038.7.
- Capital and shareholder returns: Consolidated regulatory capital ratios included a 13.89% total risk-based capital ratio, 11.45% common equity tier 1 ratio, and 7.84% leverage ratio. The company reported capital above applicable requirements. It declared $0.82 per share in dividends for the first half and declared a further $0.41 quarterly dividend after quarter-end.
Material changes and unusual items
- Earnings benefited substantially from the lower credit-loss provision compared with the pandemic-related provision in the prior-year periods; net interest income and non-interest income declined year over year.
- In June, the company transferred securities with $646.7 amortized cost and $672.2 fair value from available-for-sale to held-to-maturity, citing intent and ability to hold them to maturity. The transfer shifted $24.8 of pre-tax unrealized gains into accumulated other comprehensive income for subsequent accretion; management expected no future net-income impact from that accretion.
- Deposit growth was attributed primarily to government stimulus and stronger client cash balances. PPP loans outstanding were $571.9 at June 30; $648.1 were forgiven and $480.4 originated during the first half.
Outlook, commentary, and risks
- The filing provides no specific earnings, revenue, or margin guidance. Management said it continued to evaluate acquisition and other strategic opportunities.
- Management described branches as operating normally and expected most remaining back-office staff working remotely to return by the end of Q3, subject to conditions. It was monitoring renewed COVID-19 spread and variants, with the pandemic’s duration and economic effects still uncertain.
- Disclosed risks include COVID-19 effects on borrowers and the economy, potential deterioration in credit quality and collateral values, interest-rate changes and pressure on asset yields or net interest income, inflation uncertainty, and possible operational disruption or rising costs. Management noted no known event likely to materially adversely affect liquidity, capital resources, or operations.
- Management, after consultation with legal counsel, did not expect pending claims and litigation to have a material adverse effect on financial condition, results, or liquidity. The filing reports no material changes in legal proceedings.
Important facts for investors to verify
- Whether credit quality and the allowance remain adequate as economic conditions and borrower performance evolve, particularly given the zero Q2 provision and the six-month reversal.
- Whether loan yields and net interest margin stabilize as excess deposits are invested and interest rates change.
- How securities portfolio duration, unrealized values, and the held-to-maturity classification affect flexibility and reported equity; estimated portfolio duration rose to 4.0 years from 3.3 years at year-end.
- Whether deposit growth persists and how the company balances liquidity, securities investment, lending, dividends, and repurchases.
- The extent to which mortgage banking revenue, employee-benefit costs, and other operating expenses affect results in subsequent quarters.