First Interstate BancSystem, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The Montana-based regional bank holding company reported the three months ended March 31, 2020, compared with Q1 2019. It operated 152 banking offices across six states. Results include the Idaho Independent Bank and Community 1st Bank acquisitions completed in April 2019; Q1 2019 did not include their operations.
Financial results and condition
- Revenue and earnings: Interest and non-interest income totaled $175.9 million, versus $163.8 million in Q1 2019. Net income fell to $29.3 million from $41.6 million; diluted EPS was $0.45 versus $0.69.
- Net interest: Net interest income rose 6.1% to $123.1 million. Net interest margin on a fully taxable equivalent basis declined to 3.90% from 4.04%, reflecting lower asset yields, partly offset by lower funding costs.
- Credit costs: Provision for credit losses was $29.0 million, compared with $3.7 million. The loan allowance rose to $129.1 million, or 1.43% of period-end loans, from $73.0 million, or 0.81%, at year-end. The increase reflected CECL adoption and a weaker, more uncertain economic outlook.
- Non-interest items: Non-interest income rose 31.6% to $43.7 million, led by mortgage banking revenue of $13.6 million versus $4.1 million, amid increased refinancing. Non-interest expense increased 8.4% to $100.3 million, including $2.9 million of mortgage servicing rights impairment.
- Balance sheet and liquidity: Total assets were $14.4 billion, down 1.6% from December 31, 2019. Loans totaled $9.0 billion, approximately unchanged; deposits were $11.6 billion, down 0.8%. Cash and cash equivalents were $869.2 million, down from $1.08 billion. Operating cash flow was $41.3 million; cash declined $207.6 million during the quarter.
- Debt and capital: Long-term debt was $13.9 million and subordinated debentures were $86.9 million; repurchase agreements were $614.1 million. The company reported a 12.01% consolidated common equity tier 1 ratio and a 9.90% leverage ratio, and said it exceeded applicable capital requirements.
- Shareholder returns: The company paid $61.2 million in common dividends and repurchased 1.05 million Class A shares for $31.2 million. After quarter-end, it declared a $0.34-per-share dividend.
Material changes versus the prior comparable period
- Net income declined about 30%, as the sharp rise in credit-loss provision more than offset higher net interest income and fee revenue.
- CECL adoption on January 1, 2020 increased the loan allowance by $30.0 million and added a $2.3 million allowance for off-balance-sheet exposures, resulting in a $24.1 million after-tax reduction to opening retained earnings. Prior-year figures were not restated.
- Non-performing loans increased to $63.1 million from $48.6 million at year-end; non-performing assets were $71.3 million, compared with $57.1 million.
- Mortgage servicing rights impairment of $2.9 million was recorded in Q1 2020; there was none in Q1 2019. Mortgage banking revenues increased substantially with refinancing activity.
Outlook, commentary, and risks
- Management provided no numerical earnings or financial guidance. It said COVID-19’s effects were highly uncertain and could adversely affect revenues, borrowers, credit quality, profitability, capital, and liquidity.
- By April 27, the company had implemented modifications on approximately 3,950 loans totaling $1.1 billion and granted forbearance on about 133 residential mortgage loans totaling $46.6 million. It elected to apply CARES Act relief for qualifying modifications.
- Through the first phase of the Paycheck Protection Program, the company had approved more than 6,800 applications for approximately $1.0 billion.
- The company temporarily suspended share repurchases in response to the pandemic. It identified risks including recession and market volatility, energy-sector stress, rising credit losses, uncertainty in CECL estimates, lower interest rates, and possible goodwill impairment. Management reported a triggering event for goodwill testing but did not consider goodwill impaired at March 31.
- Management stated it was not aware of events reasonably likely to have a material adverse effect on liquidity, capital resources, or operations. The filing cautions that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How subsequent COVID-related payment deferrals, forbearances, borrower draws, and economic conditions affect delinquencies, non-performing assets, charge-offs, and the allowance for credit losses.
- Whether CECL assumptions and the one-year economic forecast remain appropriate as conditions change, and how much of future provision expense reflects the pandemic versus the accounting transition.
- Whether the large Q1 mortgage banking revenue increase and related servicing-rights impairment persist or reverse.
- How deposit trends, cash usage, repurchase agreements, and capital levels evolve, particularly while buybacks are suspended and dividends continue.
- Whether the disclosed PPP approvals represent funded balances and how forgiveness, servicing, and related credit or operational risks develop.