First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the second quarter of 2023. For the quarter, the Company reported net income of $67.0 million, or $0.65 per share, which compares to net income of $56.3 million, or $0.54 per share, for the first quarter of 2023, and net income of $64.1 million, or $0.59 per share, for the second quarter of 2022.
For the second quarter of 2022, earnings included pre-tax acquisition costs of $45.8 million, which were related to the acquisition of Great Western Bancorp, Inc. (“Great Western”), the parent company of Great Western Bank (“GWB”), which reduced earnings by $0.34 per share during that quarter. The first and second quarters of 2023 did not include comparable costs.
HIGHLIGHTS
- Net income of $67.0 million, or $0.65 per share, for the second quarter of 2023, was impacted by $1.9 million in severance expenses, or $0.01 per share, primarily a result of permanent staffing reductions related to efficiency gains in our mortgage fulfillment process.
- Overall total deposits decreased, as expected 2.2%, for the second quarter of 2023, with growth of 1.6% during the month of June 2023 offsetting seasonal declines occurring earlier in the quarter. The Company does not hold brokered deposits.
- Net interest margin, on a fully taxable equivalent (“FTE”) basis, decreased to 3.12% for the second quarter of 2023, a 24 basis point decrease from the first quarter of 2023. Excluding income related to purchase accounting accretion, the adjusted net interest margin1, on a FTE basis, decreased to 3.05% for the second quarter of 2023, a 24 basis point decrease from the first quarter of 2023.
- Loans held for investment increased $17.7 million, or an annualized 0.4% during the second quarter of 2023 compared to the first quarter of 2023. Commercial real estate loans increased $133.1 million, or an annualized 6.1%, primarily a result of construction loans transitioning to permanent financing. Loans held for investment to deposit ratio remained relatively stable at 77.5%, as of June 30, 2023, compared to 75.7% as of March 31, 2023.
- Changes in accumulated other comprehensive loss related to unrealized losses on available-for-sale securities partially offset by an increase in retained earnings resulted in book value per common share of $29.72 as of June 30, 2023, compared to $30.28 as of March 31, 2023, and $30.36 as of June 30, 2022. Tangible book value per common share1 was $18.12 as of June 30, 2023, compared to $18.57 as of March 31, 2023 and $18.92 as of June 30, 2022. As of June 30, 2023, the accumulated other comprehensive loss position is equal to $4.37 of tangible book value per common share.
“We continued to deliver solid financial performance in the second quarter in a difficult environment for banking and we are encouraged that we are beginning to see a reversion to historical trends in our deposit base,” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “Our markets are experiencing healthy economic conditions, most notably in the tourism and agriculture industries, where we are seeing significant increases in visitors to our national parks and have sufficient moisture levels in most parts of our footprint. We are focused on staying true to our community banking model by taking care of our clients and servicing our markets, which has allowed us to continue growing our client base. Over the first half of the year we have added a significant number of net new deposit accounts, as clients look to move their banking relationship to a strong financial institution with a reputation for service.”
“Over the rest of the year we are moving forward as planned with a number of strategic initiatives, which includes rolling out a new suite of consumer credit cards in August. In addition, recent changes within our Mortgage department are focused on using the strength of our branch network to originate mortgages within our communities in a more efficient manner and evidence our continued commitment to managing costs. We believe these initiatives will help us to continue growing our customer base and expanding our relationships with existing customers, particularly in our newer markets, which will enable us to continue generating long-term profitable growth and further enhancing the value of our franchise,” said Mr. Riley.
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1 Non-GAAP financial measure - see Non-GAAP Financial Measures included herein for a reconciliation to GAAP measures.
DIVIDEND DECLARATION
On July 25, 2023, the Company’s board of directors declared a dividend of $0.47 per common share, payable on August 17, 2023, to common stockholders of record as of August 7, 2023. The dividend equates to a 7.5% annualized yield based on the $25.21 per share average closing price of the Company’s common stock as reported on NASDAQ during the second quarter of 2023.
NET INTEREST INCOME
Net interest income decreased $20.5 million, or 8.6%, to $218.4 million, during the second quarter of 2023, compared to net interest income of $238.9 million during the first quarter of 2023 and decreased $20.6 million, or 8.6%, during the second quarter of 2023 from the second quarter of 2022, primarily due to an increase in interest expense as a result of a higher levels and costs of interest-bearing liabilities.
- Interest accretion attributable to the fair valuation of acquired loans from acquisitions contributed to net interest income during the second quarter of 2023, the first quarter of 2023, and the second quarter of 2022, in the amounts of $4.6 million, $5.2 million, and $16.7 million, respectively.
The net interest margin ratio, on an FTE basis, was 3.12% for the second quarter of 2023, compared to 3.36% reported during the first quarter of 2023, and 3.25% during the second quarter of 2022. Excluding interest accretion from the fair value of acquired loans, on a quarter-over-quarter basis, the net interest margin ratio decreased 24 basis points, primarily driven by higher short-term borrowing costs, and higher interest-bearing deposit costs, which was partially offset by loan yield expansion and a modestly favorable earning asset mix. Excluding interest accretion from the fair value of acquired loans, on a year-over-year basis, the net interest margin ratio increased two basis points, primarily as a result of increased yields on earning assets and a shift in the mix of earning assets from investment securities and cash to loans, partially offset by higher short-term borrowings and higher costs of interest-bearing liabilities.
PROVISION FOR (REDUCTION OF) CREDIT LOSSES
During the second quarter of 2023, the Company recorded a provision for credit losses of $11.7 million, including a provision for unfunded commitments of $3.0 million and reduction of the provision for credit losses for investment securities of $1.2 million. This compares to a provision for credit losses of $15.2 million during the first quarter of 2023 and a reduction of the provision for credit losses of $1.7 million during the second quarter of 2022.
For the second quarter of 2023, the allowance for credit losses included net charge-offs of $11.4 million, or an annualized 0.25% of average loans outstanding, compared to net charge-offs of $6.2 million, or an annualized 0.14% of average loans outstanding, for the first quarter of 2023, and net charge-offs of $0.3 million, or an annualized 0.01% of average loans outstanding, for the second quarter of 2022. The net charge-offs for the second quarter of 2023 were largely comprised of one construction real estate credit in a metro market.
The Company’s allowance for credit losses as a percentage of period-end loans held for investment decreased to 1.23% at June 30, 2023 from 1.24% at March 31, 2023, and decreased from 1.28% at June 30, 2022. Coverage of non-performing loans decreased to 242.0% at June 30, 2023, compared to 265.1% at March 31, 2023 and increased from 200.5% at June 30, 2022. The allowance for credit losses on off-balance sheet credit exposures increased to $20.8 million at June 30, 2023, from $17.8 million at March 31, 2023.
NON-INTEREST INCOME | |||||||||||||||||||||||
For the Quarter Ended | Jun 30, 2023 | Mar 31, 2023 | $ Change | % Change | Jun 30, 2022 | $ Change | % Change | ||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||
Payment services revenues | $ | 20.1 | $ | 18.7 | $ | 1.4 | 7.5 | % | $ | 19.5 | $ | 0.6 | 3.1 | % | |||||||||
Mortgage banking revenues | 2.6 | 2.3 | 0.3 | 13.0 | 5.0 | (2.4 | ) | (48.0 | ) | ||||||||||||||
Wealth management revenues | 8.8 | 9.0 | (0.2 | ) | (2.2 | ) | 9.3 | (0.5 | ) | (5.4 | ) | ||||||||||||
Service charges on deposit accounts | 5.8 | 5.2 | 0.6 | 11.5 | 6.3 | (0.5 | ) | (7.9 | ) | ||||||||||||||
Other service charges, commissions, and fees | 2.4 | 2.4 | — | — | 3.6 | (1.2 | ) | (33.3 | ) | ||||||||||||||
Investment securities loss | (0.1 | ) | (23.4 | ) | 23.3 | (99.6 | ) | (0.1 | ) | — | — | ||||||||||||
Other income | 4.5 | 2.2 | 2.3 | 104.5 | 6.3 | (1.8 | ) | (28.6 | ) | ||||||||||||||
Total non-interest income | $ | 44.1 | $ | 16.4 | $ | 27.7 | 168.9 | % | $ | 49.9 | $ | (5.8 | ) | (11.6 | )% | ||||||||
Non-interest income was $44.1 million for the second quarter of 2023, increasing $27.7 million compared to the first quarter of 2023. The primary driver of the increase was the realized loss of $23.4 million on the disposition of available-for-sale investment securities and a reduction of $1.9 million related to the fair value of loans held for sale recognized through other income in the first quarter of 2023.
Compared to the second quarter of 2022, non-interest income decreased $5.8 million. The decrease was primarily due to decreases in mortgage banking revenues, lower overdraft fees related to the previously announced reduction to the Company’s non-sufficient funds and overdraft practices, and other income. The decrease in other income was related to gains on the sale of premises and equipment and a recovery in the credit valuation discount on derivatives acquired in the GWB acquisition during the second quarter of 2022.
NON-INTEREST EXPENSE | ||||||||||||||||||||
For the Quarter Ended | Jun 30, 2023 | Mar 31, 2023 | $ Change | % Change | Jun 30, 2022 | $ Change | % Change | |||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Salaries and wages | $ | 68.1 | $ | 65.6 | $ | 2.5 | 3.8 | % | $ | 74.8 | $ | (6.7 | ) | (9.0 | )% | |||||
Employee benefits | 19.3 | 22.8 | (3.5 | ) | (15.4 | ) | 19.4 | (0.1 | ) | (0.5 | ) | |||||||||
Occupancy and equipment | 17.3 | 18.4 | (1.1 | ) | (6.0 | ) | 17.0 | 0.3 | 1.8 | |||||||||||
Other intangible amortization | 3.9 | 4.0 | (0.1 | ) | (2.5 | ) | 4.1 | (0.2 | ) | (4.9 | ) | |||||||||
Other expenses | 54.7 | 54.8 | (0.1 | ) | (0.2 | ) | 49.2 | 5.5 | 11.2 | |||||||||||
Other real estate owned expense | 0.6 | 0.2 | 0.4 | 200.0 | — | 0.6 | 100.0 | |||||||||||||
Acquisition related expenses | — | — | — | — | 45.8 | (45.8 | ) | (100.0 | ) | |||||||||||
Total non-interest expense | $ | 163.9 | $ | 165.8 | $ | (1.9 | ) | (1.1 | )% | $ | 210.3 | $ | (46.4 | ) | (22.1 | )% | ||||
The Company’s non-interest expense was $163.9 million for the second quarter of 2023, a decrease of $1.9 million from the first quarter of 2023. The quarter-over-quarter decrease was primarily due to a decrease in payroll taxes included within employee benefits which were partially offset by $1.9 million in severance costs primarily related to permanent staffing reductions within the mortgage group included within salaries and wages during the second quarter of 2023.
Compared to the second quarter of 2022, non-interest expense decreased by $46.4 million. The decrease is largely due to the acquisition expenses incurred during the second quarter of 2022 related to the acquisition of GWB in addition to lower incentive accruals included within salaries and wages during the second quarter of 2023. These decreases were partially offset by an increase in other expenses related to technology services, FDIC insurance premiums, and credit card rewards.
BALANCE SHEET
Total assets decreased $661.4 million, or 2.1%, to $30,976.3 million as of June 30, 2023, from $31,637.7 million as of March 31, 2023, primarily due to a decrease in investment securities and cash and cash equivalents as a result of a decline in deposits and the paydown of other borrowed funds. Total assets decreased $1,085.5 million, or 3.4%, from $32,061.8 million as of June 30, 2022, primarily due to declines in deposits and securities sold under repurchase agreements, partially offset by an increase in short-term borrowings.
Investment securities decreased $249.9 million, or 2.7%, to $9,175.6 million as of June 30, 2023, from $9,425.5 million as of March 31, 2023, and decreased $1,695.5 million, or 15.6%, from $10,871.1 million as of June 30, 2022. The decrease from June 30, 2022 was the result of the disposition of $853.0 million of investment securities during the first quarter of 2023 and normal cash flow activity and declines in fair market values during the period.
The following table presents the composition and comparison of loans held for investment as of the quarters-ended:
June 30,
| March 31, 2023 | $ Change | % Change |
June 30,
| $ Change | % Change | |||||||||||||
Real Estate: | |||||||||||||||||||
Commercial | $ | 8,813.9 | $ | 8,680.8 | $ | 133.1 | 1.5 | % | $ | 7,857.7 | $ | 956.2 | 12.2 | % | |||||
Construction | 1,836.5 | 1,893.0 | (56.5 | ) | (3.0 | ) | 1,759.5 | 77.0 | 4.4 | ||||||||||
Residential | 2,198.3 | 2,191.1 | 7.2 | 0.3 | 2,060.4 | 137.9 | 6.7 | ||||||||||||
Agricultural | 755.7 | 769.7 | (14.0 | ) | (1.8 | ) | 821.5 | (65.8 | ) | (8.0 | ) | ||||||||
Total real estate | 13,604.4 | 13,534.6 | 69.8 | 0.5 | 12,499.1 | 1,105.3 | 8.8 | ||||||||||||
Consumer: | |||||||||||||||||||
