FIRST INTERSTATE BANCSYSTEM INC quarterly report, Q3 FY2023

Business context and reporting period

First Interstate BancSystem, Inc. is a community banking holding company operating 305 banking offices across 14 states. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. Results include Great Western Bank, acquired in February 2022, so year-over-year comparisons reflect differing acquisition-related costs and purchase-accounting loan accretion.

Key financial metrics

• Profitability: Q3 net income declined $13.0 million year over year, primarily as higher deposit and borrowing costs reduced net interest income. Nine-month net income rose $79.6 million, chiefly reflecting $115.0 million of GWB acquisition expenses in the 2022 comparison period and lower credit-loss provision expense.
• Credit costs and asset quality: Q3 provision for credit losses was a $0.1 million reduction, versus $8.4 million expense in Q3 2022. Nine-month provision was $26.8 million, compared with $68.0 million. Net charge-offs were $1.1 million in Q3 (annualized 0.02% of average loans). Nonaccrual loans increased to $81.4 million from $59.2 million at year-end; total nonperforming assets rose to $96.2 million from $78.3 million. The allowance for loan losses was $226.7 million, or 1.24% of loans, versus $220.1 million, or 1.22%.
• Balance sheet and funding: Total assets were $30.54 billion, down 5.4% from year-end; loans held for investment were $18.21 billion, up 0.6%. Deposits were $23.68 billion, down 5.6%, although management said deposits increased during Q3. Noninterest-bearing deposits were 27.0% of deposits, down from 30.2% at year-end. Estimated uninsured deposits were $7.9 billion, or 33.2% of deposits.
• Liquidity and debt: Cash and cash equivalents were $593.1 million, versus $870.5 million at year-end. FHLB borrowings were $2.067 billion, down from $2.327 billion; long-term debt was $120.8 million and subordinated debentures were $163.1 million. At September 30, available capacity included approximately $4.76 billion at the FHLB, $2.5 billion through the Federal Reserve’s Bank Term Funding Program, $0.7 billion at the discount window, and $2.5 billion of additional liquidity from cash, unpledged collateral and federal funds markets.
• Cash flow and capital: For nine months, operating cash flow was $358.7 million, investing cash flow was $1.330 billion, and financing cash flow was negative $1.966 billion; cash declined $277.4 million. Consolidated CET1 capital was 11.02% and total risk-based capital was 13.19%; the Company and Bank exceeded applicable well-capitalized requirements.
• Securities and equity: Investment securities totaled $8.89 billion. Available-for-sale securities had $662.6 million of gross unrealized losses; held-to-maturity securities had estimated fair value of $2.80 billion versus $3.26 billion amortized cost. Accumulated other comprehensive loss was $521.7 million. The Company reported no intention or expected need to sell available-for-sale securities before recovery.

Material changes versus comparable periods

• Q3 net interest income declined $53.1 million year over year as the cost and volume of interest-bearing deposits and borrowings rose. Q3 cost of funds increased to 1.59% from 0.28% a year earlier; the FTE margin fell to 3.07% from 3.71%.
• For the first nine months, net interest income declined $13.2 million. Purchase-accounting accretion on acquired loans fell to $15.0 million from $42.0 million, while interest expense rose substantially. Excluding acquired-loan accretion, nine-month adjusted FTE margin was 3.11%, versus 3.06%.
• Q3 non-interest income increased mainly because the 2022 quarter included a $24.2 million net investment-securities loss. Nine-month non-interest income decreased, including lower mortgage banking revenues and swap fees; 2023 also included $23.5 million of securities losses from sales.
• Non-interest expense fell $12.1 million in Q3 and $99.9 million for nine months. The year-to-date comparison primarily reflects $115.0 million of acquisition-related expenses in 2022; 2023 included higher FDIC premiums and certain operating costs.

Outlook, management commentary and risks

The filing provides no specific earnings or financial guidance. Management described liquidity and capital as strong, noted proactive client outreach and collateral optimization following banking-sector volatility, and said it continued to evaluate acquisition and other strategic opportunities. It also cited continuing pressure from higher rates: asset yields have risen, but deposit and borrowing costs have increased and compressed the quarterly margin.

• Management’s rate simulation estimated that an immediate 100-basis-point upward parallel rate shock would reduce net interest income 3.28% over the following 12 months, while a 100-basis-point downward shock would increase it 5.22%; a gradual 2% rate reduction each quarter for four quarters would increase it 5.81%.
• Management identified potential economic slowdown, deposit withdrawals or lower deposit balances, and deterioration in borrowers’ repayment capacity as risks. Nonperforming loans increased, particularly in commercial real estate and construction; management also reported credit migration and agricultural-loan modifications.
• The FDIC had proposed a special assessment on uninsured deposits. The Company estimated a potential impact of approximately $9.8 million under the proposal, expected to be recognized upon final issuance; final terms and timing remained uncertain.
• Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
• The board declared a quarterly dividend of $0.47 per share, payable November 16, 2023.

Important facts for investors to verify

• Whether deposit balances stabilize and how uninsured-deposit levels and funding costs evolve.
• Whether margin pressure continues as deposits reprice and short-term borrowings mature or are replaced.
• Trends in nonaccrual and criticized loans, especially commercial real estate, construction and agricultural exposures, and adequacy of the allowance.
• The trajectory of unrealized securities losses, liquidity capacity and capital ratios under changing rates or deposit outflows.
• The final FDIC special-assessment rule and its actual expense and timing for the Company.