8-K: First Interstate BancSystem Reports Mixed First Quarter Results Amidst Deposit Declines

First Interstate BancSystem reported a net income of $58.4 million for the first quarter of 2024, alongside a decrease in deposits and an increase in non-performing assets.

Summary

• First Interstate BancSystem, Inc. announced its financial results for the first quarter of 2024, reporting a net income of $58.4 million, or $0.57 per share.
• This compares to a net income of $61.5 million, or $0.59 per share, in the fourth quarter of 2023, and $56.3 million, or $0.54 per share, in the first quarter of 2023.
• The company experienced a decrease in loans held for investment by $76.8 million, primarily due to seasonal declines in agriculture loans.
• Total deposits decreased by $513.1 million, driven by seasonal declines in business deposits and the strategic run-off of two higher-cost municipal accounts totaling $185.0 million.
• Non-performing assets increased by $61.6 million, largely due to one non-accrual commercial and industrial loan relationship.
• The net interest margin decreased to 2.91%, an 8 basis point decrease from the previous quarter.
• Non-interest expense decreased by $5.8 million compared to the fourth quarter of 2023.
• The company declared a dividend of $0.47 per share, payable on May 16, 2024, representing a 6.9% annualized yield based on the average stock price during the first quarter.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company highlights some positives like expense control and a strong dividend, the decrease in net income, deposits, and net interest margin, along with an increase in non-performing assets, raises concerns.

Positives

• Criticized loans decreased by $58.3 million, indicating improved credit quality.
• Non-interest expense decreased by $5.8 million, showing effective cost management.
• The company maintains strong capital and liquidity levels.
• The company declared a healthy dividend for shareholders.
• The company's management believes the results position them well for the remainder of 2024.

Negatives

• Net income decreased compared to both the previous quarter and the same quarter last year.
• Non-performing assets increased by $61.6 million, indicating a deterioration in asset quality.
• Total deposits decreased by $513.1 million, reflecting a significant outflow.
• Net interest margin decreased to 2.91%, impacting profitability.
• Loans held for investment decreased by $76.8 million.

Risks

• The increase in non-performing assets, driven by a single large commercial loan, poses a risk to future earnings.
• The decrease in deposits could impact the company's funding costs and liquidity.
• The decline in net interest margin could reduce profitability if not addressed.
• Seasonal declines in agriculture loans could continue to impact loan balances.
• The company faces risks related to changes in interest rates, economic conditions, and regulatory requirements.

Future Outlook

The company anticipates ending deposits to increase 1-2% from March 31 levels through year-end 2024, with normal seasonality, and loans to be relatively flat from end-of-year 2023. Net interest income is expected to decline mid-single digits for 2024 compared to 2023 levels, while anticipating second quarter net interest margin to increase from the first quarter. Non-interest income is anticipated to increase low single digits for 2024 compared to 2023, excluding the $23.5mm losses on securities sales in 2023. Total reported expenses are expected to be flat to increase low-single-digits over reported 2023 levels in 2024, excluding the FDIC special assessment charges. The effective tax rate is anticipated to be 23.0%-23.5% for full-year 2024. Net charge-offs are anticipated to be between 15 and 20 basis points for the full year 2024.

Management Comments

• We executed well in the first quarter, with results generally in-line with our expectations, which we believe positions us well for the remainder of 2024, said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc.
• With our strong financial performance, we expect to continue to generate improvements in our capital ratios and maintain a healthy dividend for our shareholders.
• Given our strong levels of capital and liquidity, adequate allowance for credit loss levels, and continued expense control, we remain confident in our ability to generate solid returns, said Mr. Riley.

Industry Context

The results reflect a challenging environment for regional banks, with deposit outflows and margin compression being common themes. The increase in non-performing assets is a concern, but the company's strong capital position provides a buffer. The company's focus on expense control is a positive sign in the current environment.

Comparison to Industry Standards

• Compared to peers like Zions Bancorporation and KeyCorp, First Interstate's net interest margin of 2.91% is on the lower end, indicating potential challenges in profitability.
• The decrease in deposits is a common trend among regional banks, but the magnitude of $513.1 million is significant and warrants attention.
• The increase in non-performing assets to $189.4 million is a concern, as it is higher than some of its peers, such as Western Alliance Bancorporation, which has been actively managing its credit risk.
• The company's capital ratios, with a CET1 of 11.37% and total RBC of 13.64%, are generally in line with industry standards and provide a solid foundation.
• The dividend yield of 6.9% is attractive compared to the average yield of the financial sector, which is around 3-4%.

Stakeholder Impact

• Shareholders will receive a dividend of $0.47 per share, but may be concerned about the decrease in net income and the increase in non-performing assets.
• Employees may be affected by cost-cutting measures if the company continues to focus on expense control.
• Customers may experience changes in service offerings or pricing as the company adjusts to the current environment.
• Creditors may be concerned about the increase in non-performing assets and the potential impact on the company's financial stability.

Next Steps

• The company will host a conference call on April 25, 2024, to discuss the results.
• The company will continue to focus on managing expenses and maintaining strong capital ratios.
• The company will monitor credit quality and address the increase in non-performing assets.
• The company will work to stabilize and grow its deposit base.

Key Dates

Keywords

financial results, net income, deposits, loans, net interest margin, non-performing assets, dividends, credit quality, banking, capital ratios