First Interstate BancSystem, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. First Interstate BancSystem is a community banking holding company operating 307 banking offices across 14 states. This unaudited report covers the quarter and six months ended June 30, 2023. Comparisons with 2022 are affected by the Great Western Bank acquisition, completed February 1, 2022.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $218.4 million | $239.0 million | $457.3 million | $417.4 million |
| Net income | $67.0 million | $64.1 million | $123.3 million | $30.7 million |
| Diluted EPS | $0.65 | $0.59 | $1.19 | $0.30 |
| Non-interest income | $44.1 million | $49.9 million | $60.5 million | $98.7 million |
| Non-interest expense | $163.9 million | $210.3 million | $329.7 million | $417.5 million |
- Margins and funding costs: Q2 net interest margin on a fully taxable-equivalent (FTE) basis was 3.12%, down from 3.25% a year earlier; excluding acquired-loan accretion, it was 3.05% versus 3.03%. The six-month FTE margin was 3.24%, up from 3.05%. Q2 cost of funds, including non-interest-bearing deposits, rose to 1.43% from 0.10% a year earlier, reflecting higher deposit rates and FHLB borrowing.
- Balance sheet at June 30: Assets were $30.98 billion, down 4.1% from year-end 2022. Loans held for investment, net of deferred fees and costs, were $18.26 billion, up 0.9% from year-end. Deposits were $23.58 billion, down 6.0%; non-interest-bearing deposits were $6.52 billion, or 27.6% of deposits.
- Liquidity and borrowings: Cash and cash equivalents were $680.5 million, versus $870.5 million at year-end. Other borrowed funds, principally FHLB borrowings, were $2.59 billion, up $262 million since year-end; the reported average FHLB borrowing rate was 5.31%. The Bank reported $4.52 billion of remaining FHLB capacity, $2.5 billion of BTFP capacity, $0.6 billion at the Federal Reserve discount window, and $2.6 billion of additional liquidity from cash, unpledged securities and the federal funds market.
- Cash flows, first six months: Operating activities provided $229.6 million; investing activities provided $1.03 billion; financing activities used $1.45 billion. Deposit outflows of $1.49 billion were a major funding use; securities maturities, calls, paydowns and sales provided $1.12 billion.
- Credit and capital: The loan allowance was $224.6 million, or 1.23% of loans. Nonperforming loans were $92.8 million, versus $65.6 million at December 31, 2022; Q2 net charge-offs were $11.4 million, an annualized 0.25% of average loans. Consolidated CET1 was 10.76%; the Bank’s was 11.17%. The Company reported capital above applicable well-capitalized requirements.
Material changes versus comparable periods
- Q2 net interest income fell $20.6 million year over year as sharply higher interest expense more than offset higher asset yields. Interest expense was $98.9 million versus $7.4 million, including $39.3 million on other borrowings.
- Six-month net income rose $92.6 million, primarily reflecting higher net interest income, $111.0 million less acquisition-related expense than in 2022, and lower provision expense. The year-ago period included Great Western acquisition costs and a substantial acquired-loan credit provision.
- Six-month non-interest income declined $38.2 million. It included $23.5 million of net investment securities losses from selling $853 million of securities in Q1 2023. Mortgage banking revenue also declined with lower production and tighter gain-on-sale spreads.
- Available-for-sale securities were $5.86 billion at fair value and held-to-maturity securities were $3.32 billion at amortized cost. Their estimated fair values were $5.86 billion and $2.92 billion, respectively. Accumulated other comprehensive loss was $459.0 million.
Outlook, commentary, risks and unusual items
- Management described liquidity and capital as strong amid banking-sector funding concerns and said it proactively contacted clients and optimized collateral to support access to funding. It stated it did not intend to sell or restructure securities at the reporting date.
- No specific earnings or financial guidance was provided. Management cautioned that operating results to date are not necessarily indicative of full-year results.
- Key risks discussed include deposit outflows and higher deposit costs, reliance on wholesale funding, further rate changes and their effects on margins and borrowers, economic slowdown and potential credit deterioration, and interest-rate-related securities valuation losses.
- Interest-rate simulation estimated that a sudden 100-basis-point increase would reduce net interest income by 2.32% over the following 12 months under a static balance sheet; a 100-basis-point decrease would increase it by 3.51%.
- The FDIC proposed a special assessment to recover costs related to protecting uninsured depositors. The Company estimated an approximately $9.8 million impact under the proposal, expected to be recognized if a final rule is issued; the final amount and timing remain uncertain.
- Management said ordinary-course litigation is not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors. The Company declared a quarterly dividend of $0.47 per share after quarter-end.
Important facts for investors to verify
- Track deposit levels and mix, deposit pricing, and the amount, cost and maturity profile of FHLB and other borrowings.
- Monitor net interest margin and earnings sensitivity as rates change, including the effects of acquired-loan accretion.
- Review trends in nonperforming and criticized loans, charge-offs, agricultural and commercial real estate exposures, and allowance adequacy.
- Assess available liquidity and collateral capacity against deposit outflows, and consider the size and potential realization of securities losses.
- Confirm the final FDIC special-assessment rule and its effect on expense; distinguish recurring performance from prior-year acquisition-related items and 2023 securities-sale losses.