First Interstate BancSystem, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Dollar amounts are in millions unless noted. The company is a community banking holding company operating in six states.
Financial performance and position
- Earnings: Net income was $51.4, up 75% from $29.3 a year earlier. Diluted EPS was $0.83 versus $0.45.
- Revenue and margin: Net interest income was $120.7, down 1.9% year over year; non-interest income was $38.1, down 0.8%. Net interest margin on a fully taxable-equivalent basis fell to 3.04% from 3.90%. Lower asset yields pressured results, partly offset by deposit growth, lower deposit costs, and $12.3 of PPP loan interest income.
- Credit costs: The company recorded a $5.1 reversal of credit-loss provision, compared with a $29.0 provision in Q1 2020. Net charge-offs were $2.9, or an annualized 0.12% of average loans. The loan allowance was $136.6, equal to 1.38% of loans held for investment.
- Expenses and taxes: Non-interest expense rose 3.6% to $98.4. The effective tax rate was 21.5%, compared with 21.9%.
- Cash flow: Operating cash flow was $70.5, versus $41.3 in Q1 2020. Investing activities used $959.2, largely reflecting investment-security purchases; financing activities provided $807.9, principally from $877.0 of deposit growth. Cash and cash equivalents were $2,196.0 at quarter-end, down from $2,276.8 at year-end.
- Balance sheet and funding: Assets were $18,443.4, up 4.5% from year-end. Deposits increased 6.2% to $15,094.0. Loans held for investment, net of deferred fees and costs, were $9,863.2, up 0.6%. Investment securities grew 20.3% to $4,886.4; held-to-maturity securities rose to $866.3 from $51.6. Long-term debt was $112.4 and subordinated debentures were $87.0; repurchase agreements were $1,052.6.
- Liquidity and capital: Management said it was not aware of events likely to materially harm liquidity or capital. Regulatory capital ratios exceeded applicable well-capitalized thresholds; consolidated total risk-based capital was 14.04% and the leverage ratio was 8.12%.
Material changes and notable items
- Compared with Q1 2020, net income improved substantially, primarily because credit-loss expense shifted to a reversal. Net interest income and margin declined amid lower market rates and a change in earning-asset mix.
- Non-performing assets declined to $43.6 from $50.5 at December 31, 2020; non-performing loans were $41.4. Non-accrual loans were $37.0, down from $39.5.
- PPP loans were $804.4 at quarter-end. During Q1, $371.9 was forgiven and the company originated $436.6 of additional PPP loans. PPP balances carry a 100% SBA guarantee and are excluded from the loan-loss allowance reserve.
- Unrealized losses on available-for-sale securities increased as interest rates and market conditions changed; the portfolio’s estimated duration rose to 4.3 years from 3.3 years. The company reported a $49.9 after-tax other comprehensive loss, largely from securities valuation changes, reducing accumulated other comprehensive income to $6.7.
- Quarterly dividends declared were $0.41 per share. The company repurchased 72,700 shares under its repurchase program for $2.9; 1.9 million authorized shares remained at quarter-end.
Outlook, risks and contingencies
- The filing gives no numerical earnings or financial guidance. Management described the economic recovery as progressing but uncertain, citing COVID-19 variants, the pandemic’s duration and severity, and effects on borrowers and supply chains.
- Key sensitivities include interest rates and asset yields, deposit growth and mix, loan demand and credit quality, and the economic assumptions used in the CECL allowance estimate. A sustained low-rate environment may continue to pressure margins; higher rates may affect securities values.
- COVID-related loan modifications and borrower performance remain relevant credit considerations. The company reported $12.2 of troubled debt restructurings at quarter-end, including $9.1 on non-accrual status; it reported no material new troubled debt restructurings during the quarter.
- Off-balance-sheet commitments included $2,302.1 to extend credit, $684.2 of unused credit-card lines, and $61.9 of standby letters of credit. Management said ordinary-course litigation was not expected to have a material adverse effect; $0.6 of residential mortgage loans remained subject to recourse provisions.
Important facts for investors to verify
- Whether the $5.1 provision reversal reflects durable credit improvement or changing economic forecasts, and how allowance coverage develops.
- PPP forgiveness and origination trends, and the effect of PPP balances and fees on future loan growth and interest income.
- Net interest margin sensitivity to rates, deposit mix and costs, and the enlarged securities portfolio’s duration and valuation exposure.
- Whether deposit growth remains stable and how cash and securities are redeployed while maintaining liquidity and capital.
- Future non-performing loans, modifications and charge-offs, especially as pandemic support measures change.