First Interstate BancSystem, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is a community banking holding company operating through First Interstate Bank across 14 states. Figures are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Interest income | $315.9 | $184.4 |
| Net interest income | $238.9 | $178.4 |
| Provision for credit losses | $15.2 | $61.3 |
| Non-interest income | $16.4 | $48.8 |
| Non-interest expense | $165.8 | $207.2 |
| Net income (loss) | $56.3 | $(33.4) |
| Diluted earnings (loss) per share | $0.54 | $(0.36) |
| Net interest margin, FTE | 3.36% | 2.80% |
Net interest income rose 33.9%, reflecting higher asset yields and a full quarter of Great Western Bank operations following its 2022 acquisition; higher interest expense partly offset the increase. Adjusted FTE net interest margin, excluding purchase-accounting accretion and PPP income, was 3.29%, up from 2.65%. Net cash provided by operating activities was $57.7; investing activities provided $868.3 and financing activities used $715.8.
Balance sheet, liquidity, and capital
- At March 31, 2023, total assets were $31,637.7, down 2.0% from December 31, 2022. Net loans held for investment were $18,019.6; total deposits were $24,107.0.
- Deposits fell $966.6, or 3.9%, during the quarter, including lower business non-interest-bearing balances and demand and savings deposits. Cash and cash equivalents were $1,080.7, up from $870.5 at year-end.
- Other borrowed funds increased $383.0 to $2,710.0, primarily FHLB borrowings. Management reported approximately $3,678.7 of remaining FHLB credit capacity at March 31, subject to collateral availability. It also reported $4.3 billion of FHLB capacity and $2.4 billion of Federal Reserve borrowing capacity as of April 28.
- Stockholders’ equity was $3,160.3. Consolidated total risk-based capital was 12.63%, common equity tier 1 was 10.52%, and the leverage ratio was 7.72%; the company said it exceeded applicable capital requirements.
- The company declared a quarterly dividend of $0.47 per share, payable May 18, 2023.
Material changes and notable items
- Q1 2023 earnings improved from the prior-year loss, but the comparison is affected by $65.2 of Great Western acquisition-related expenses in Q1 2022. Q1 2023 also included a $23.4 realized loss on available-for-sale securities.
- The company sold $853.0 carrying value of available-for-sale securities during the quarter. Management said proceeds were primarily intended to reduce short-term borrowings early in Q2. Available-for-sale securities had $533.1 of gross unrealized losses at March 31, compared with $629.7 at year-end; held-to-maturity securities had an estimated fair value of $3,025.8 versus $3,376.2 amortized cost.
- Non-performing assets were $98.7, up from $78.3 at year-end. Non-accrual loans increased to $80.8 from $59.2, primarily due to commercial construction and commercial real estate loans. The allowance for loan losses was $226.1, or 1.24% of loans, versus $220.1, or 1.22%, at year-end.
- Net charge-offs were $6.2, an annualized 0.14% of average loans, versus $16.7 and 0.47% in Q1 2022. Management attributed the allowance increase to loan growth and credit migration and cautioned that economic deterioration or weaker asset quality could require additional provisions.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management described the company’s liquidity and balance sheet as strong and said it took proactive steps to contact clients and optimize funding after banking-industry failures and liquidity concerns. It cited deposit declines, higher funding costs, interest-rate movements, economic uncertainty, and potential deterioration in borrowers’ repayment capacity as risks. A 100-basis-point immediate rate increase was estimated to reduce modeled net interest income by 0.37% over the next 12 months; a 100-basis-point decrease was estimated to increase it by 1.76%. The company reported no material expected adverse effect from ordinary-course litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit trends stabilize and the company reduces reliance on higher-cost FHLB funding.
- How securities sales, unrealized losses, and securities pledged for funding affect liquidity and future earnings.
- Whether rising non-accrual loans and commercial real estate/construction exposures lead to higher credit losses or provisions.
- Whether net interest margin holds up as deposit costs and other funding costs change.
- How much of the earnings improvement reflects recurring operations versus the prior-year acquisition-cost comparison and the current-quarter securities loss.