8-K: First Interstate BancSystem Reports Mixed Fourth Quarter Results Amidst Economic Headwinds

First Interstate BancSystem reported a decrease in net income for the fourth quarter of 2023 compared to the previous quarter and the same period last year, while also seeing growth in loans and book value per share.

Summary

• First Interstate BancSystem reported a net income of $61.5 million, or $0.59 per share, for the fourth quarter of 2023, which is down from $72.7 million, or $0.70 per share, in the third quarter of 2023, and $85.8 million, or $0.82 per share, in the fourth quarter of 2022.
• The full year 2023 net income was $257.5 million, or $2.48 per share, compared to $202.2 million, or $1.96 per share, in 2022.
• Loans held for investment increased by $66.3 million during the quarter and $180.4 million year-over-year.
• Non-performing assets increased by $31.6 million during the quarter and $49.5 million year-over-year.
• The net interest margin decreased to 2.99% for the fourth quarter of 2023, a 6 basis point decrease from the third quarter of 2023.
• The company completed the purchase of 1.0 million of its common shares at $32.14 per share during the fourth quarter of 2023.
• Book value per common share increased to $31.05 as of December 31, 2023, compared to $29.38 as of September 30, 2023.
• Tangible book value per common share was $19.41 as of December 31, 2023, compared to $17.82 as of September 30, 2023.
• A dividend of $0.47 per share was declared, payable on February 19, 2024, to shareholders of record as of February 9, 2024.
• Net interest income decreased by $5.9 million, or 2.8%, to $207.8 million, during the fourth quarter of 2023, compared to the third quarter of 2023.
• The company recorded a provision for credit losses of $5.4 million during the fourth quarter of 2023.
• Non-interest income was $44.5 million for the fourth quarter of 2023, increasing $2.5 million compared to the third quarter of 2023.
• Non-interest expense was $166.0 million for the fourth quarter of 2023, an increase of $4.9 million from the third quarter of 2023.
• Total assets increased by $130.4 million to $30,671.2 million as of December 31, 2023, from $30,540.8 million as of September 30, 2023.
• Total deposits decreased by $356.4 million to $23,323.1 million as of December 31, 2023, from $23,679.5 million as of September 30, 2023.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company highlights some positives like share repurchases and strong capital ratios, the decrease in net income, net interest margin, and deposits, along with an increase in non-performing assets, raises concerns. The forward guidance also indicates a challenging year ahead.

Positives

• The company's book value per share and tangible book value per share increased during the quarter.
• The company repurchased 1 million shares of its stock, indicating confidence in its value.
• The company maintained a healthy dividend, providing value for shareholders.
• The company is considered well-capitalized, exceeding all regulatory capital adequacy requirements.
• The company saw attractive lending opportunities which generated a modest level of loan growth.
• The company's capital ratios improved during the quarter.
• The company's balance sheet maintains a strong liquidity position.
• The company's total assets increased during the quarter.
• The company's allowance for credit losses as a percentage of period-end loans held for investment increased modestly.

Negatives

• Net income decreased compared to both the previous quarter and the same quarter last year.
• Net interest margin decreased, indicating lower profitability from lending activities.
• Non-performing assets increased, suggesting a potential increase in loan defaults.
• Net interest income decreased, primarily due to increased interest expenses.
• Total deposits decreased, indicating a potential outflow of funds.
• Non-interest expenses increased, impacting overall profitability.
• The company recorded a $10.5 million accrual for the FDIC special assessment.
• The company saw an increase in severance costs of $3.6 million.
• The company saw an increase in credit card rewards accrual of $2.1 million.
• The company's coverage of non-performing loans decreased.

Risks

• The company faces risks related to changes in governmental regulations and increased regulatory scrutiny.
• There are risks associated with lending and loan sector concentrations.
• A decline in economic conditions could reduce demand for the company's products and services.
• The company is exposed to risks related to cyber-security and data protection.
• The company faces competition from other financial institutions and non-banks.
• Changes in interest rates could negatively impact the company's financial performance.
• The company is exposed to the risk of loan credit losses exceeding estimates.
• The company is exposed to the risk of a loss of deposits or a change in product mix that increases the company's funding costs.
• The company is exposed to the risk of an inability to access funding or to monetize liquid assets.
• The company is exposed to the risk of the potential impairment of goodwill and other intangible assets.

Future Outlook

The company anticipates deposits to be relatively flat for the full year 2024, with loans to be flat to increasing low single digits. Net interest income is expected to decline mid-single digits for 2024 compared to 2023 levels. Non-interest income is anticipated to increase low single digits for 2024 compared to 2023, excluding the $23.5 million losses on securities sales in 2023. Total reported expenses are expected to increase low-single-digits over reported 2023 levels in 2024, excluding the $10.5 million FDIC special assessment charge in 2023. The effective tax rate is anticipated to be approximately 23.5% for full-year 2024. Net charge-offs are anticipated to be between 15 and 20 basis points for the full year.

Management Comments

• We executed well in the fourth quarter, completing a share repurchase and accomplishing the cost savings initiative we mentioned last quarter, said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc.
• Even in this challenging environment, we saw attractive lending opportunities which generated a modest level of loan growth.
• With our strong financial performance, we had increases in our capital ratios and were able to maintain a healthy dividend, providing value for our shareholders.
• Given our high level of capital, liquidity, adequate allowance for credit losses, and the work we are doing to control expenses, we believe we are well positioned coming into 2024.
• Should a more favorable, stable economic environment create higher loan demand, we have the ability and willingness to meet those needs.
• Given the breadth of products and services, and superior level of service that we offer, our focus will continue to be on growing our client base in 2024 and delivering another year of solid financial performance for our shareholders.

Industry Context

The results reflect a challenging environment for regional banks, with increased interest expenses impacting net interest income and a need to manage credit quality carefully. The company's focus on cost control and capital management is consistent with industry trends as banks navigate economic uncertainty and regulatory changes.

Comparison to Industry Standards

• The company's net interest margin of 2.99% is below the average for many regional banks, which have seen margins compress due to rising deposit costs.
• The increase in non-performing assets is a concern, as it indicates potential credit quality issues, which is a trend being watched across the industry.
• The company's capital ratios, with a CET1 of 11.08% and total RBC of 13.28%, are generally strong compared to regulatory requirements and peers.
• The company's efficiency ratio of 64.2% is higher than some of the more efficient regional banks, indicating room for improvement in cost management.
• The company's loan growth of $66.3 million is modest, reflecting a cautious approach to lending in the current environment, which is similar to many other regional banks.
• The company's deposit decrease of $356.4 million is a concern, as it indicates a potential outflow of funds, which is a trend being seen across the industry as customers seek higher yields.

Stakeholder Impact

• Shareholders will be impacted by the decrease in net income and the potential for lower returns.
• Employees may be impacted by cost-cutting measures and potential changes in compensation.
• Customers may be impacted by changes in interest rates and loan availability.
• Creditors may be impacted by the company's financial performance and credit quality.

Next Steps

• The company will host a conference call on January 31, 2024, to discuss the results.
• The company will continue to focus on growing its client base in 2024.
• The company will continue to manage expenses and maintain a strong capital position.

Key Dates

Keywords

banking, financial results, net income, loans, deposits, net interest margin, asset quality, capital ratios, dividends, non-performing assets, credit losses, FDIC assessment, share repurchase