First Interstate BancSystem, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. First Interstate is a community banking holding company operating 304 offices across 14 states, with one operating segment.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net income | $257.5 million | $202.2 million |
| Diluted earnings per share | $2.48 | $1.96 |
| Net interest income | $878.8 million | $942.6 million |
| Non-interest income | $147.0 million | $163.2 million |
| Provision for credit losses | $32.2 million | $82.7 million |
| Non-interest expense | $656.8 million | $766.0 million |
| Net interest margin (GAAP) | 3.12% | 3.33% |
| Efficiency ratio | 62.50% | 67.83% |
| Return on average assets | 0.83% | 0.65% |
- Net income increased 27.3%, largely because 2023 had no Great Western acquisition-related expense versus $118.9 million in 2022. Net interest income fell $63.8 million, reflecting higher funding costs and lower acquired-loan interest accretion.
- Interest expense rose to $401.3 million from $78.9 million as deposit and borrowing costs increased. The average cost of funds, including non-interest-bearing deposits, increased to 1.46% from 0.29%.
- At year-end, assets were $30.7 billion, down 5.0%; deposits were $23.3 billion, down $1.75 billion; loans held for investment were $18.3 billion, up 1.0%; and stockholders’ equity was $3.23 billion.
- Cash and cash equivalents were $578.0 million, down from $870.5 million. Operating cash flow was $428.0 million; cash decreased $292.5 million overall during the year.
- FHLB borrowings reached $2.60 billion, up from $2.33 billion, at a disclosed year-end average rate of 5.32%. Long-term debt was $120.8 million and subordinated debentures were $163.1 million.
- Capital ratios remained above regulatory requirements: consolidated CET1 was 11.08%, total risk-based capital 13.28%, and leverage capital 8.22%. The Bank was categorized as well-capitalized.
Material changes and notable items
- Interest income benefited from higher asset yields, but the funding mix shifted toward more costly interest-bearing deposits and borrowings. FTE net interest margin narrowed to 3.14% from 3.36%.
- Non-interest expense declined mainly because 2022 included GWB acquisition costs. Offsetting items included higher FDIC premiums, including a $10.5 million special assessment accrued in fourth-quarter 2023.
- Mortgage banking revenue fell to $8.4 million from $18.7 million, primarily due to lower home-loan production and tighter sale margins. Net investment securities losses were $23.5 million.
- Available-for-sale securities had $803.4 million of gross unrealized losses on positions held in a loss position for more than 12 months; management attributed losses primarily to interest rates and said it did not intend, and did not expect to be required, to sell before recovery. The securities portfolio had $9.05 billion carrying value; held-to-maturity securities’ estimated fair value was $334 million below amortized cost.
- Non-performing assets increased to $127.8 million from $78.3 million. Non-accrual loans rose to $106.4 million from $59.2 million; the allowance for loan losses was $227.7 million, or 1.25% of loans. Net charge-offs were $23.5 million, or 0.13% of average loans.
- Commercial real estate loans were $8.87 billion, approximately 48.4% of loans held for investment. Total commercial loans, including commercial real estate, were approximately 64.5% of the portfolio.
- Available liquidity included year-end unused FHLB capacity of approximately $3.62 billion and an unused Federal Reserve line of approximately $3.04 billion, subject to collateral and availability. In January 2024, the Company borrowed $1.0 billion through the Bank Term Funding Program at 4.76% to repay higher-rate FHLB advances and support cash.
Outlook, risks and controls
- The filing provides no specific earnings, revenue, margin, or credit-loss guidance. Management noted uncertainty around the economic outlook, deposit levels, interest rates, and loan performance; the Federal Reserve had indicated possible rate reductions in 2024.
- Key risks include deposit outflows and higher funding costs, interest-rate and securities-value exposure, commercial real estate and other credit concentrations, economic deterioration in the Company’s markets, cybersecurity and third-party service-provider risks, and increased regulation and FDIC assessments.
- Management identified a material weakness in internal control over financial reporting involving deposit-account controls, loan and deposit workflow segregation of duties, and IT general controls. Management and the auditor concluded ICFR was not effective as of year-end. The filing says the deficiencies did not cause a material misstatement in the reported financial statements; management aims to remediate the weakness during 2024, subject to testing. The financial-statement audit opinion was unqualified.
- Management reported no legal matter expected to have a material adverse effect. Goodwill of $1.10 billion was not impaired in the 2023 assessments.
Investor verification priorities
- Track deposit balances, mix, uninsured deposits, retention, and the cost and availability of replacement funding; verify post-year-end BTFP use and remaining borrowing capacity.
- Review commercial real estate exposure, criticized and non-performing loans, collateral values, loan modifications, charge-offs, and whether the allowance remains adequate.
- Assess the pace of deposit repricing and its effect on net interest margin, earnings, and interest-rate sensitivity.
- Monitor securities unrealized losses, liquidity needs, and any realized losses from portfolio sales.
- Confirm remediation and independent validation of the material weakness, and monitor FDIC special-assessment expense and any further assessment changes.
- Consider the sustainability of the $0.47 quarterly dividend in light of earnings, capital needs, funding costs, and regulatory limits.