First Interstate BancSystem, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts are in millions unless otherwise noted. The company is a regional bank holding company operating 152 banking offices across six western states.
Financial results and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $122.5 | $125.3 | $245.6 | $241.3 |
| Provision for credit losses | $19.5 | $3.8 | $48.5 | $7.5 |
| Non-interest income | $39.7 | $37.6 | $78.1 | $69.3 |
| Non-interest expense | $95.6 | $110.3 | $190.6 | $201.3 |
| Net income | $36.7 | $37.9 | $66.0 | $79.5 |
| Diluted EPS | $0.57 | $0.59 | $1.02 | $1.27 |
| FTE net interest margin | 3.52% | 4.08% | 3.69% | 4.06% |
At June 30, 2020, total assets were $16.47 billion, loans held for investment before allowance were $10.03 billion, deposits were $13.34 billion, and stockholders’ equity was $2.00 billion. Cash and cash equivalents were $1.43 billion. The allowance for loan losses was $146.1 million, or 1.46% of loans, excluding a reserve on fully SBA-guaranteed PPP loans; management said the ratio would be 20 basis points higher excluding PPP loans. Long-term debt was $112.3 million, including $100 million of subordinated notes issued in May.
For the first half, operating cash flow was $9.2 million versus $48.1 million a year earlier; investing cash outflow was $1.38 billion, primarily reflecting loan growth and securities purchases; financing cash inflow was $1.72 billion, mainly from deposit growth. Cash and equivalents increased $348.2 million.
Changes versus comparable periods
- Q2 net income fell 3.2% year over year; first-half net income fell 17.0%. Higher credit-loss provision and lower net interest income weighed on results.
- Net interest margin contracted 56 basis points in Q2 and 37 basis points for the first half. Management attributed the decline to lower asset yields after rate cuts, low-yield PPP loans, higher cash balances and new debt costs, partly offset by lower deposit costs.
- Q2 non-interest income rose 5.6%; mortgage banking revenue increased 57.8% to $14.2 million on refinancing activity. Deposit service charges fell 33.3%, partly reflecting waived overdraft fees for clients receiving stimulus payments.
- Non-interest expense declined 13.3% in Q2, largely because acquisition-related costs were $13.5 million lower than in Q2 2019. Salaries increased with mortgage commissions and incentive accruals.
- Loans grew 12.3% from year-end, primarily from approximately $1.2 billion of PPP originations. Deposits rose 14.4%, supported by PPP-related inflows and higher client cash balances.
Outlook, risks and unusual items
- Management provided no specific earnings or financial guidance. It said COVID-19’s duration and economic effects remain uncertain and that the impact on results cannot yet be predicted; first-half operations had not, to date, experienced a significant operational impact.
- As of July 17, the company had approved more than 11,400 PPP applications totaling approximately $1.2 billion. As of July 31, it reported modifications on approximately 1,300 loans totaling $409.1 million; some borrowers had entered a second 90-day deferral period. It anticipated further short-term modifications.
- Provision expense reflected CECL adoption and a more adverse, uncertain economic forecast. CECL adoption on January 1 increased the loan allowance by $30.0 million and off-balance-sheet allowance by $2.3 million, reducing retained earnings by $24.1 million after tax.
- Nonperforming assets were $64.1 million, or 0.39% of assets, versus $57.1 million at year-end 2019. Nonperforming loans were $57.6 million, or 0.57% of loans.
- All reported regulatory capital ratios exceeded applicable minimums. Consolidated total risk-based capital was 14.76%, common equity tier 1 was 12.07%, and leverage capital was 9.22%. The company elected a five-year transition for CECL’s regulatory-capital effects.
- The company reported no material liquidity concerns and no material adverse effect expected from other claims or litigation. It identified COVID-19, potential credit deterioration, funding access, interest rates and collateral values among key risks; it has no pandemic business-interruption insurance. A COVID-related goodwill impairment trigger was identified, but management did not consider goodwill impaired at June 30.
- Q2 dividend declared was $0.34 per share. A further $0.34 quarterly dividend was declared July 24, payable August 17, 2020. The company repurchased no program shares in Q2 and said it had temporarily suspended repurchases in response to COVID-19; first-half repurchases totaled $31.2 million.
Key facts for investors to verify
- How PPP loan forgiveness, borrower payment performance and subsequent modification outcomes affect loan balances, interest income and credit risk.
- Whether the CECL allowance and economic assumptions remain adequate as unemployment, business conditions and collateral values evolve.
- Trends in nonperforming loans, criticized commercial exposures, charge-offs and the sizable provision relative to prior-year periods.
- Whether deposit inflows persist and how low rates, excess cash, PPP balances and the subordinated notes affect net interest margin and funding costs.
- Whether refinancing-driven mortgage revenue is sustainable and how servicing-rights impairment affects future results.
- Capital and shareholder distributions, including the CECL transition, the suspended repurchase program and the declared dividend.