First Interstate BancSystem, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results. The company is a community banking-focused financial holding company operating 304 banking offices across 14 states.
Financial results and condition
| Metric | Q1 2024 / March 31, 2024 | Comparison |
|---|---|---|
| Net income; diluted EPS | $58.4 million; $0.57 | Q1 2023: $56.3 million; $0.54 |
| Net interest income | $200.1 million | Down $38.8 million from $238.9 million |
| Net interest margin | 2.91%; FTE margin 2.93% | Q1 2023: 3.33%; FTE 3.36% |
| Provision for credit losses | $5.3 million | Q1 2023: $15.2 million |
| Non-interest income / expense | $42.1 million / $160.2 million | Q1 2023: $16.4 million / $165.8 million |
| Total assets | $30.1 billion | Down 1.7% from year-end 2023 |
| Loans held for investment, net of deferred fees | $18.2 billion | Down $76.8 million from year-end |
| Total deposits | $22.8 billion | Down $513.1 million, or 2.2%, from year-end |
| Cash and cash equivalents | $635.0 million | Year-end 2023: $578.0 million |
| Stockholders’ equity | $3.21 billion | Year-end 2023: $3.23 billion |
Q1 operating cash flow was $87.6 million, investing cash flow was $531.9 million, and financing cash flow was negative $562.5 million. Financing outflows included $513.1 million of net deposit reductions and $261.0 million of repayments of other borrowings; cash increased by $57.0 million during the quarter.
Consolidated regulatory capital ratios were 13.64% total risk-based capital, 11.37% Tier 1 and common equity Tier 1, and 8.28% leverage. The company reported that it exceeded applicable capital adequacy requirements. Long-term debt was $370.8 million, including a new $250 million FHLB borrowing; other borrowed funds were $2.34 billion. Remaining FHLB borrowing capacity was approximately $4.42 billion, subject to collateral availability.
Material changes and operating trends
- Net income rose $2.1 million year over year, but primarily because Q1 2023 included a $23.4 million loss on available-for-sale securities sales. Higher deposit and borrowing costs reduced net interest income and compressed the margin.
- Interest expense rose to $124.6 million from $77.0 million. Management cited higher funding costs and a less favorable funding mix, partly offset by higher loan yields and lower non-interest expense.
- Non-interest expense declined $5.6 million year over year. Lower employee benefits and other expenses were partly offset by increased professional fees, OREO expense, and FDIC premiums; the latter included a $1.5 million special assessment accrual.
- Nonperforming loans increased to $175.0 million from $111.3 million at December 31, 2023. Management attributed much of the increase in non-accrual loans to a single $54.4 million commercial and industrial relationship. Nonperforming assets totaled $189.4 million.
- The allowance for loan losses was $227.7 million, or 1.25% of loans held for investment, unchanged from year-end. Net charge-offs were $8.4 million, an annualized 0.18% of average loans.
- Available-for-sale securities had $495.3 million of gross unrealized losses at quarter-end; held-to-maturity securities had an estimated fair value of $2.50 billion versus a carrying amount of $2.85 billion. Management said it did not intend or expect to sell available-for-sale securities before recovery.
Outlook, risks, and other notable disclosures
- The filing provides no specific earnings or financial guidance. Management noted uncertainty around future interest-rate changes and economic conditions. It cited inflation, funding costs, deposit behavior, loan repayment capacity, and potential deterioration in credit quality as risks.
- Management reported that the deposit base is diversified and 66.0% of deposits were FDIC-insured, including accounts eligible for pass-through insurance. Estimated uninsured deposits were $7.9 billion, or 34.6% of total deposits.
- The company accessed $1.0 billion through the Federal Reserve Bank Term Funding Program in January 2024 and used it to repay FHLB advances; it also extended $1.0 billion of FHLB advances to longer terms. Management said this funding repositioning reduced overall borrowing costs.
- Interest-rate simulation estimated that a parallel +200-basis-point rate shift would reduce one-year net interest income 4.41%; a −100-basis-point shift would increase it 5.22%. The filing cautions that these scenarios are not forecasts and depend on assumptions, including deposit betas.
- Disclosure controls were reported effective, but internal control over financial reporting remained ineffective because of unremediated material weaknesses involving deposit and loan account controls, segregation of duties, and certain IT access and change-management controls. Management expected remediation during 2024, subject to testing and sustained effective operation.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect. The company declared a $0.47-per-share quarterly dividend after quarter-end, payable May 16, 2024.
Most important facts for investors to verify
- Whether net interest margin and funding costs stabilize, particularly as deposits reprice and the borrowing mix changes.
- Developments in the $54.4 million commercial and industrial relationship and the broader rise in nonperforming loans and collateral-dependent loans.
- Deposit trends, uninsured-deposit levels, and continued access to secured wholesale and Federal Reserve funding.
- Whether the securities portfolio’s unrealized losses, including losses on securities held for more than 12 months, affect liquidity or capital if circumstances require sales.
- Progress and independent testing of remediation for the disclosed material weaknesses in internal control over financial reporting.