BILLINGS, Mont.--(BUSINESS WIRE)--First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the third quarter of 2020. For the quarter, the Company reported net income of $48.3 million, or $0.76 per share, which compares to net income of $36.7 million, or $0.57 per share, for the second quarter of 2020, and $49.1 million, or $0.76 per share, for the third quarter of 2019.

The third quarter of 2019 included acquisition costs related to the acquisitions of Idaho Independent Bank (“IIBK”) and Community 1st Bank (“CMYF”), both of which were acquired on April 8, 2019. The acquisition costs negatively impacted earnings by $0.04 per share in the third quarter of 2019.

HIGHLIGHTS

• Tangible book value per common share increased to $20.19 as of September 30, 2020, compared to $20.02 as of June 30, 2020, and $19.42 as of September 30, 2019.
• The Company repurchased 1.4 million common shares at an average price of $32.05 per share during the third quarter of 2020 as part of its repurchase program. Additionally, the board of directors increased the number of shares authorized for repurchase under the repurchase program by 3.0 million common shares.
• The quarterly cash dividend increased 11.8% from $0.34 to $0.38 per common share, payable on November 16, 2020, to common stockholders of record as of November 6, 2020.
• Loans held for investment increased $119.7 million during the third quarter of 2020, or a 4.7% annualized growth rate.
• Non-performing assets decreased $4.0 million, or 6.2%, to $60.1 million for the third quarter of 2020, from $64.1 million during the second quarter of 2020 and decreased $14.8 million, or 19.8%, from $74.9 million during the third quarter of 2019.
• The Company had existing deferrals on approximately 350 loans totaling approximately $77.1 million as of October 16, 2020, or 0.76% of loans held for investment as of September 30, 2020. Additionally, as of October 16, 2020, the Company had forbearance requests granted on 24 residential mortgage loans totaling $6.1 million.
• Total deposits increased $542.0 million during the third quarter of 2020, or a 16.3% annualized growth rate.
• Non-interest income increased 12.6% to $44.7 million during the third quarter of 2020 from $39.7 million during the second quarter of 2020.

“We continue to see encouraging signs of economic strength throughout our markets, which helped us to deliver a strong quarter highlighted by quality balance sheet growth, significant contributions from many of our sources of non-interest income, and generally positive trends in asset quality,” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “Despite the impact of the COVID-19 pandemic, we are seeing many of our commercial clients performing exceptionally well in the current environment, resulting in consistent inflows of non-interest bearing deposits for the bank. We have also seen almost all of our deferred loans return to scheduled payments, with only a handful of borrowers requiring additional deferrals. The positive trends in asset quality and improving health of our borrowers resulted in only a modest provision for credit losses this quarter, following the significant increase in our level of reserves earlier in the year as the pandemic accelerated.”

“During the third quarter, we repurchased 1.4 million shares of our common stock, and our board of directors has approved an 11.8% increase in our quarterly dividend. We are very pleased that our consistent financial performance, high level of reserves, and strong asset quality have enabled us to increase the amount of capital that we return to shareholders while still being well positioned to manage through the duration of the pandemic,” continued Mr. Riley.

DIVIDEND DECLARATION

On October 26, 2020, the Company’s board of directors declared a dividend of $0.38 per common share, payable on November 16, 2020, to common stockholders of record as of November 6, 2020. The dividend equates to a 4.91% annualized yield based on the $30.98 per share average closing price of the Company’s common stock as reported on NASDAQ during the third quarter of 2020.

NET INTEREST INCOME

Net interest income increased by 0.4%, to $123.0 million, during the third quarter of 2020, compared to $122.5 million during the second quarter of 2020. During the third quarter of 2020, the Company recorded a total of $10.6 million of interest income from the Paycheck Protection Program, or (PPP), lending activity as compared to $8.6 million during the second quarter of 2020. Net interest income decreased $2.5 million, or 2.0% during the third quarter of 2020, compared to $125.5 million during the third quarter of 2019. The year-over-year decrease was primarily the result of lower levels of charged-off interest recoveries and interest accretion related to the fair valuation of previously acquired loans, and the impact of the decrease in the federal funds rate in March 2020.

• There were no material recoveries of previously charged-off interest included in net interest income during the second or the third quarter of 2020, compared to previously charged-off interest recoveries of $0.4 million during the third quarter of 2019.
• Interest accretion attributable to the fair valuation of acquired loans contributed $3.2 million to net interest income during the third quarter of 2020, of which approximately $1.4 million was related to early payoffs. This compares to interest accretion of $3.0 million in net interest income during the second quarter of 2020, of which approximately $1.1 million was related to early payoffs, and interest accretion of $4.0 million in net interest income during the third quarter of 2019, of which approximately $1.2 million was related to early payoffs.

The net interest margin ratio was 3.29% for the third quarter of 2020 compared to 3.52% reported during the second quarter of 2020 and 3.93% during the third quarter of 2019. The decreases were the result of significant growth in earning assets, as a result of significant deposit growth resulting from client behavior during this phase of the coronavirus pandemic (COVID-19), which were invested at lower yields, along with increases in interest on long-term debt which was partially offset by lower deposit costs.

• Exclusive of the impact of the recovery of charged-off interest and interest accretion, the Company’s net interest margin ratio contracted 24 basis points to 3.20% during the third quarter of 2020, compared to 3.44% during the second quarter of 2020, primarily due to lower yields on the Company’s higher levels of earning assets and an increase in interest on long-term debt, partially offset by lower funding costs.
• Exclusive of the impact of the recovery of charged-off interest and interest accretion, the Company’s net interest margin ratio contracted 60 basis points to 3.20%, compared to 3.80% during the third quarter of 2019, primarily as a result of the impact of the reduction in March 2020 to the federal funds rate, significant PPP loan balances at low yields, higher cash balances, and an increase in interest on long-term debt, all of which were partially offset by lower deposit costs.

PROVISION FOR CREDIT LOSSES

The 2020 quarterly provision for credit losses reflects the adoption of the current expected credit loss (CECL) accounting standard. The provision includes an increase in expected losses over the life of the loan portfolios as a result of significant changes in the Company's internal economic forecast in response to COVID-19 and uncertainty regarding the benefits of government stimulus in response to COVID-19. During the third quarter of 2020, the Company recorded a provision for credit losses of $5.2 million, compared to $19.5 million during the second quarter of 2020, and $2.6 million during the third quarter of 2019. The provision includes the impact of net charge-offs of $4.6 million, or an annualized 0.18% of average loans outstanding, for the third quarter of 2020, compared to $2.3 million, or an annualized 0.09% of average loans outstanding, for the second quarter of 2020, and $1.8 million, or an annualized 0.08% of average loans outstanding for the third quarter of 2019.

The Company’s allowance for credit losses on loans as a percentage of period-end loans held for investment, including PPP loans, decreased to 1.43% at September 30, 2020, compared to 1.46% at June 30, 2020, and increased compared to 0.83% at September 30, 2019. The increase from September 30, 2019 is a result of the adoption of the CECL standard and the impact of COVID-19 on the Company’s economic outlook. Coverage of non-performing loans increased to 267.46% at September 30, 2020, compared to 253.65% at June 30, 2020, as a result of a higher allowance for credit losses and lower levels of non-performing loans, and compared to 131.35% at September 30, 2019. The increase from September 30, 2019 is primarily a result of the adoption of the CECL standard and the impact of COVID-19 on the Company’s economic outlook.

While the allowance for credit losses on loans of 1.43% includes the PPP loan balance, the allowance for credit losses does not include a reserve on the PPP loans which are 100% guaranteed by the Small Business Administration. The allowance for credit losses on loans as a percentage of period-end loans held for investment would have been 20 basis points higher had the PPP loan balances been excluded at September 30, 2020.

NON-INTEREST INCOME

Total non-interest income increased $5.0 million, or 12.6%, to $44.7 million during the third quarter of 2020, as compared to $39.7 million during the second quarter of 2020, as the Company observed revenues begin to normalize after the initial impact from COVID-19 in the second quarter. Total non-interest income increased $6.5 million, or 17.0%, from $38.2 million during the third quarter of 2019, which is primarily the result of higher mortgage banking revenues and other fee income associated with swap activities in the third quarter of 2020.

Payment services revenues increased $1.2 million, or 12.9%, to $10.5 million during the third quarter of 2020, when compared to the $9.3 million earned during the second quarter of 2020. This increase is the result of increases in debit card and credit card volume during the third quarter of 2020 as compared to the second quarter of 2020. Payment services revenues decreased $0.3 million, or 2.8%, during the third quarter of 2020, when compared to the $10.8 million earned during the third quarter of 2019.

Mortgage banking revenues increased $0.1 million, or 0.7%, to $14.3 million during the third quarter of 2020, as compared to $14.2 million during the second quarter of 2020. Mortgage banking revenues increased $3.9 million, or 37.5%, during the third quarter of 2020 from $10.4 million during the third quarter of 2019. These increases were primarily driven by higher levels of mortgage loan production as a result of increased levels of refinance activity due to the favorable interest rate environment. These increases were partially offset by mortgage servicing impairments of $1.4 million during the third quarter of 2020 and $5.5 million during the second quarter of 2020. During the third quarter of 2020, loans originated for home purchases accounted for approximately 48.6% of loan production, as compared to 29.0% during the second quarter of 2020 and 66.0% during the third quarter of 2019.

Other service charges, commissions and fees increased $2.1 million, or 72.4%, to $5.0 million during the third quarter of 2020, when compared to $2.9 million during the second quarter of 2020 and increased $3.3 million, or 194.1%, during the third quarter of 2020 from $1.7 million during the third quarter of 2019. The increases are primarily driven by an increase in swap fees of $1.9 million during the third quarter of 2020 as compared to the second quarter of 2020 and an increase in swap fees of $3.2 million during the third quarter of 2020 as compared to the third quarter of 2019.

NON-INTEREST EXPENSE

Non-interest expense increased $3.9 million, or 4.1%, to $99.5 million during the third quarter of 2020, as compared to $95.6 million during the second quarter of 2020 and increased $2.8 million, or 2.9%, as compared to $96.7 million during the third quarter of 2019, primarily due to higher salaries and wages partially offset by a decrease in acquisition related expenses.

There were no material acquisition related expenses for the second or third quarter of 2020 whereas the third quarter of 2019 included $3.8 million of such expenses. Exclusive of acquisition related expenses, non-interest expense increased $6.6 million, compared to $92.9 million during the third quarter of 2019.

Salaries and wages expense increased $1.8 million, or 4.1%, to $46.0 million during the third quarter of 2020, compared to $44.2 million during the second quarter of 2020, primarily as a result of one-time expenses of $2.2 million related to an amendment to an employment agreement and an adjustment to home loan commissions. Salaries and wages increased $5.9 million, or 14.7%, from $40.1 million in the third quarter of 2019, primarily as a result higher levels of home loan commissions, the one-time payments mentioned above, and higher incentive accruals during the third quarter of 2020.

Employee benefit expenses increased $1.4 million, or 13.5%, to $11.8 million during the third quarter of 2020, when compared to the $10.4 million incurred during the second quarter of 2020, primarily due to higher health insurance expenses. Employee benefit expenses decreased $0.1 million, or 0.8%, from $11.9 million during the third quarter of 2019.

BALANCE SHEET

Total assets increased $598.1 million, or 3.6%, to $17,069.5 million as of September 30, 2020, from $16,471.4 million as of June 30, 2020 and increased $2,367.9 million, or 16.1%, from $14,701.6 million as of September 30, 2019. The increases from the comparable periods are primarily due to an increase in loans held for investment and increases in cash and cash equivalents and investment securities, as a result of higher levels of deposits, partially offset by a decrease in loans held for sale.

Loans held for investment increased $119.7 million, or 1.2%, to $10,152.2 million as of September 30, 2020, from $10,032.5 million as of June 30, 2020, primarily due to an increase of $97.1 million in commercial real estate loans. Loans held for investment increased $1,159.6 million, or 12.9%, as of September 30, 2020, from $8,992.6 million as of September 30, 2019, primarily due to the PPP loans originated during the second quarter of 2020.

Total real estate loans increased $166.4 million, or 2.7%, to $6,263.3 million as of September 30, 2020, from $6,096.9 million as of June 30, 2020, primarily driven by increases in commercial loans of $97.1 million, or 2.7%, commercial construction loans of $71.0 million, or 15.4%, residential loans of $23.6 million, or 1.8%, and agricultural loans of $3.5 million, or 1.6%. The increases were offset by decreases in residential construction loans of $18.3 million, or 7.4% and land acquisition and development construction loans of $10.5 million, or 3.7%.

Total real estate loans increased $352.2 million, or 6.0%, from September 30, 2019. Growth within the real estate loan portfolio is primarily attributable to increases in commercial loans of $221.0 million, or 6.4%, increases in commercial construction loans of $144.1 million, or 37.3%, and increases in residential loans of $54.6 million, or 4.3%. Growth was primarily offset by decreases in land acquisition and development construction loans of $34.8 million, or 11.2%, and decreases in residential construction loans of $33.9 million, or 12.9%.

Total consumer loans increased $3.0 million, or 0.3%, to $1,044.8 million as of September 30, 2020, from $1,041.8 million as of June 30, 2020. Within the consumer loan portfolio, indirect loans increased $10.9 million, or 1.4%, direct loans decreased $7.2 million, or 4.3%, and credit card loans decreased $0.7 million, or 1.0%. Total consumer loans decreased $22.1 million, or 2.1%, from $1,066.9 million, as of September 30, 2019, primarily attributable to deceases in the direct and credit card loan portfolios as compared to September 30, 2019.

Commercial loans decreased $49.0 million, or 1.9%, to $2,599.6 million as of September 30, 2020, from $2,648.6 million as of June 30, 2020 and increased $873.1 million, or 50.6%, from $1,726.5 million as of September 30, 2019. The increase from 2019 is primarily due to the PPP loans originated in the second quarter, partially offset by pay-downs within the portfolio.

Agricultural operating loans decreased $8.1 million, or 2.9%, to $274.7 million as of September 30, 2020, from $282.8 million as of June 30, 2020. Agricultural operating loans decreased $18.0 million, or 6.1%, from $292.7 million as of September 30, 2019.

Mortgage loans held for sale decreased $67.9 million, or 40.0%, to $102.0 million as of September 30, 2020, from $169.9 million as of June 30, 2020, primarily due to a decline in originations of mortgage loans held for sale, relative to historic highs at the end of the second quarter of 2020. The decline is the result of a decrease in the levels of refinance activity, which were significantly elevated in the first half of 2020, as a result of the low interest rate environment. Mortgage loans held for sale decreased $6.9 million, or 6.3%, as of September 30, 2020, from $108.9 million as of September 30, 2019.

Other assets decreased $9.0 million, or 3.4%, to $255.8 million as of September 30, 2020, from $264.8 million as of June 30, 2020, primarily due to decreases in accounts receivables of $7.3 million and interest rate swap contracts of $3.9 million which were partially offset by normal fluctuations in other assets. Other assets increased $36.2 million, or 16.5%, as of September 30, 2020, from $219.6 million as of September 30, 2019, primarily due to an increase in interest rate swap contracts of $35.5 million.

Total deposits increased $542.0 million, or 4.1%, to $13,882.4 million as of September 30, 2020, from $13,340.4 million as of June 30, 2020, primarily as a result of a $371.6 million increase in non-interest bearing business deposits and an increase in interest bearing demand and savings deposits. These increases were partially offset by decreases in interest-bearing time deposits. Total deposits increased $2,082.8 million, or 17.7%, from $11,799.6 million as of September 30, 2019, primarily related to an increase of $1,158.5 million in non-interest-bearing business deposits and an increase in interest-bearing demand and savings deposits. These increases were partially offset by decreases in interest-bearing time deposits.

Securities sold under repurchase agreements increased $64.2 million, or 8.5%, to $820.3 million as of September 30, 2020, from $756.1 million as of June 30, 2020, and increased $183.4 million, or 28.8%, as of September 30, 2020, from $636.9 million as of September 30, 2019. Fluctuations in repurchase agreement balances correspond with fluctuations in the liquidity of the Company’s clients.

The loans held for investment to deposit ratio was 73.1%, as of September 30, 2020, compared to 75.2% and 76.2% as of June 30, 2020 and September 30, 2019, respectively.

The Company is considered to be “well-capitalized” as of September 30, 2020, having exceeded all regulatory capital adequacy requirements. During the third quarter of 2020, the Company paid regular common stock dividends of approximately $21.9 million, or $0.34 per share, and repurchased 1,445,300 shares of common stock for approximately $46.3 million at an average price of $32.05 per share pursuant to its previously announced stock repurchase program.

CREDIT QUALITY

As of September 30, 2020, non-performing assets decreased $4.0 million, or 6.2%, to $60.1 million, compared to $64.1 million as of June 30, 2020, primarily due to decreases in non-accrual loans of $5.1 million, or 10.2% and other real estate owned of $0.8 million, or 12.3%, offset by an increase in loans 90 days past due of $1.9 million, or 24.7%.

Criticized loans increased $13.2 million, or 3.6%, to $379.3 million as of September 30, 2020, from $366.1 million as of June 30, 2020, driven primarily by several downgrades, including $12.7 million in hospitality, which were partially offset by one loan pay-down and one loan pay-off. Criticized loans decreased $36.8 million from $416.1 million as of September 30, 2019.

Net loan charge-offs increased $2.3 million, or 100.0%, to $4.6 million during the third quarter of 2020 as compared to $2.3 million during the second quarter of 2020. The net loan charge-offs in the third quarter of 2020 were composed of charge-offs of $6.4 million and recoveries of $1.8 million. The third quarter 2020 charge-offs primarily included a $1.7 million charge-off of a loan in the agricultural industry, for which was specifically reserved, and a $1.5 million charge-off of a loan in the aviation industry. Net loan charge-offs during the third quarter of 2019 were $1.8 million.

NON-GAAP FINANCIAL MEASURES

In addition to results presented in accordance with GAAP in the United States of America, this release contains the following non-GAAP financial measures that management uses to evaluate our capital adequacy: (i) tangible book value per common share; (ii) tangible common stockholders’ equity to tangible assets; (iii) tangible assets; (iv) tangible common stockholders’ equity; and (v) return on average tangible common stockholders’ equity. Tangible book value per common share is calculated as tangible common stockholders’ equity divided by common shares outstanding. Tangible common stockholders’ equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets. Tangible assets are calculated as total assets less goodwill and other intangible assets (excluding mortgage servicing assets). Tangible common stockholders’ equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets. Return on average tangible common stockholders’ equity is calculated as net income available to common shareholders divided by average tangible common stockholders’ equity. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. They also should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.

The Company adjusts the foregoing capital adequacy measures to exclude intangible assets except mortgage servicing rights, adjusts its non-interest expense to exclude acquisition related expenses, and adjusts its net interest margin ratio to exclude the impact of the recovery of charged-off interest and the impact of interest accretion on acquired loans. Management believes these non-GAAP financial measures, which are intended to complement the capital ratios defined by banking regulators and to present on a consistent basis our and our acquired companies’ organic continuing operations without regard to the acquisition costs and adjustments that we consider to be unpredictable and dependent on a significant number of factors that are outside our control, are useful to investors in evaluating the Company’s performance because, as a general matter, they either do not represent an actual cash expense and are inconsistent in amount and frequency depending upon the timing and size of our acquisitions (including the size, complexity and/or volume of past acquisitions, which may drive the magnitude of acquisition related costs, but may not be indicative of the size, complexity and/or volume of future acquisitions or related costs), or they cannot be anticipated or estimated in a particular period (in particular as it relates to unexpected recovery amounts).

Marcy Mutch
Chief Financial Officer
First Interstate BancSystem, Inc.
(406) 255-5312
marcy.mutch@fib.com
www.FIBK.com