First Interstate BancSystem, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a community-banking holding company operating 147 banking offices across Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming. Financial amounts are in millions unless noted.
Financial performance and condition
- Q3 earnings: Net income was $47.1, down from $48.3 a year earlier; diluted EPS was $0.76, unchanged. Net interest income rose 3.2% to $126.9, while non-interest income fell 11.2% to $39.7 and non-interest expense increased 6.4% to $105.9.
- Nine-month earnings: Net income increased 23.4% to $141.0 from $114.3; diluted EPS rose to $2.28 from $1.78. Net interest income declined 0.6% to $366.4; non-interest income declined 7.9% to $113.1; non-interest expense increased 4.6% to $303.3.
- Margins: Net interest margin on a fully taxable-equivalent basis was 2.91% for Q3 versus 3.29% a year earlier, and 2.92% for the nine months versus 3.55%. Management cited asset mix, elevated cash balances, and lower loan yields, partly offset by lower deposit costs. PPP loan interest and fees contributed $14.2 in Q3 and $34.3 year to date.
- Balance sheet: Assets were $19,372.2, up 9.8% from year-end 2020. Deposits rose 12.6% to $16,007.3, including non-interest-bearing deposits of $5,617.9. Loans held for investment, net of deferred fees and costs, declined 1.9% to $9,622.5; investment securities increased 48.3% to $6,021.7.
- Credit quality: The allowance for loan losses was $135.1, or 1.40% of loans, versus $144.3 and 1.47% at year-end. Nonperforming loans declined to $35.1 from $48.0, and nonperforming assets to $37.4 from $50.5. Q3 net charge-offs were $0.6, an annualized 0.02% of average loans.
- Cash flow and liquidity: Operating cash flow was $205.4 for nine months; investing cash flow was negative $1,873.9, reflecting substantial securities purchases; financing cash flow was positive $1,625.2, primarily from deposit growth. Cash and cash equivalents ended at $2,233.5. Management said it knew of no events reasonably likely to materially adversely affect liquidity or capital resources.
- Debt and capital: Long-term debt was $112.4 and subordinated debentures were $87.0, both unchanged from year-end. The company reported a 14.00% total risk-based capital ratio and 11.59% common equity tier 1 ratio; it said the company and bank exceeded applicable capital requirements.
- Shareholder returns: The company declared a $0.41-per-share quarterly dividend after quarter-end, payable November 18, 2021. It repurchased 72,700 shares under its buyback program during the first nine months for $2.9.
Material changes and unusual items
- On September 15, 2021, First Interstate agreed to acquire Great Western Bancorp in an all-stock transaction valued at approximately $2.0 billion, with each Great Western share converting into 0.8425 First Interstate Class A shares. Closing was expected in Q1 2022, subject to regulatory and shareholder approvals; systems conversion was expected in Q2 2022.
- Q3 included $6.6 of acquisition-related expense. Other expenses included a $1.2 litigation accrual. The filing says ordinary-course legal matters are not expected to have a material adverse effect, while cautioning ultimate outcomes could exceed recorded accruals.
- Available-for-sale securities generated a $42.3 after-tax other comprehensive loss for the first nine months, largely reflecting unrealized market-value changes; accumulated other comprehensive income fell to $14.3 from $56.6 at year-end.
- The allowance for credit losses included a $5.1 reversal for the first nine months, compared with a $53.7 provision in the prior-year period, reflecting improved credit metrics and economic outlook assumptions.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management said COVID-19 had limited direct operational impact, but continued to monitor the Delta variant and uncertainty around the economy and borrowers. It noted supply-chain and staffing disruptions affecting some borrowers and the indirect consumer portfolio.
Merger risks include failure or delay to obtain approvals, potential termination fee of $105, integration expense and execution challenges, employee or customer attrition, and possible disruption to operations. The company also cited interest-rate sensitivity, credit and economic risks, and uncertainty from the pandemic. Management reported disclosure controls were effective as of September 30, 2021, with no material quarter-end changes to internal control over financial reporting.
Investor verification priorities
- Track Great Western merger approvals, closing conditions, integration costs, and the potential $105 termination fee.
- Assess whether deposit growth can be deployed profitably as cash and securities yields pressure net interest margin.
- Monitor loan growth excluding PPP balances, PPP forgiveness and remaining unearned fees, and changes in borrower credit quality and charge-offs.
- Review the recurring versus acquisition-related and litigation-related components of expense, as well as trends in mortgage banking and other fee income.
- Verify capital, liquidity, and securities valuation trends, including the effect of interest-rate changes on accumulated other comprehensive income.