First Interstate BancSystem, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. First Interstate is a regional community bank operating across Idaho, Montana, Oregon, South Dakota, Washington and Wyoming. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net interest income | $103.8 | $79.3 | $203.6 | $148.2 |
| Net interest margin, FTE | 3.87% | 3.60% | 3.81% | 3.55% |
| Non-interest income | $37.6 | $37.2 | $72.8 | $66.3 |
| Non-interest expense | $84.9 | $80.4 | $170.8 | $144.1 |
| Provision for loan losses | $2.9 | $2.4 | $5.0 | $4.1 |
| Net income | $41.7 | $21.8 | $78.4 | $45.0 |
| Diluted EPS | $0.74 | $0.45 | $1.38 | $0.96 |
- Q2 total interest and non-interest income was $150.6, versus $123.1 a year earlier. Q2 efficiency ratio was 58.8%, improving from 68.1% a year ago.
- Management attributed stronger net interest income and margin to higher loan balances, organic growth, higher earning-asset yields and the BOTC acquisition; rising funding costs partially offset those benefits. Q2 included $2.9 of acquired-loan interest accretion.
- Q2 non-interest expense included no acquisition costs, compared with $10.1 in Q2 2017. Excluding that prior-year item, expenses increased, mainly reflecting the larger branch network and staffing following the BOTC acquisition.
- The effective tax rate was 22.2% in Q2 2018 versus 35.2% in Q2 2017, primarily reflecting the Tax Cuts and Jobs Act.
Financial position, cash flow and asset quality
- At June 30, 2018, total assets were $12,235.7, loans $7,758.7, deposits $9,945.5 and stockholders’ equity $1,458.3. Since December 31, 2017, loans grew 1.9%, deposits 0.1% and assets 0.2%.
- Cash and cash equivalents were $712.0, down from $758.9 at year-end. H1 operating cash flow was $97.7; investing cash use was $105.9 and financing cash use was $38.7. Cash declined $46.9 during the half.
- Funding included $641.8 of repurchase agreements, $15.7 of long-term debt and $82.5 of subordinated debentures. Other borrowed funds fell from $20.0 at year-end to zero, following repayment of a subordinated term loan. Management reported no known event likely to materially impair liquidity.
- The allowance for loan losses was $74.1, or 0.96% of loans, versus $72.1 and 0.95% at year-end. H1 net charge-offs were $3.0. Management cautioned that economic deterioration or weaker asset quality could require additional provisions.
- Non-performing assets were $90.3, up from $77.8 at March 31, but below $97.4 a year earlier. Non-performing loans were $75.4, or 0.97% of total loans. Criticized loans were $382.2, down from $400.5 at year-end.
- Regulatory capital ratios exceeded well-capitalized thresholds: consolidated total risk-based capital was 12.97%, common equity tier 1 was 11.25%, and leverage was 9.28%. Accumulated other comprehensive loss widened to $35.0 from $12.0 at year-end, largely reflecting unrealized securities losses amid interest-rate changes.
Material changes, outlook and risks
- Year-over-year comparisons are affected by the May 2017 Cascade Bancorp (BOTC) acquisition and its subsequent integration. The filing attributes higher lending balances and operating costs in part to the expanded business; the 2017 comparison also included acquisition expenses and a $3.0 gain on the sale of HSA custodial rights.
- On April 25, 2018, the company agreed to acquire Northwest Bancorporation, parent of Inland Northwest Bank, in an all-stock transaction valued at approximately $159.7. The transaction had board approval and was expected to close in Q3 2018, with integration in Q4, subject to regulatory and shareholder approvals. No transaction completion is reported in this filing.
- The board declared a $0.28-per-share quarterly dividend on August 1, payable August 21, 2018. The company provided no specific earnings or financial guidance.
- Key disclosed risks include regional economic weakness, credit and collateral deterioration, interest-rate and funding-cost changes, integration and acquisition execution, regulatory requirements associated with assets above $10 billion, competition, cybersecurity and dependence on vendors. The filing reports no material changes to previously disclosed risk factors, no material litigation developments and no material changes in market-risk disclosures.
- Commitments included $2,190.2 in credit commitments and $47.6 in standby letters of credit; the filing notes that commitments may expire unused. Sold residential mortgage loans with recourse provisions were $0.6. Management stated that other claims and litigation were not expected to materially adversely affect the company.
Investor verification priorities
- Confirm closing conditions, final terms, share issuance and integration costs for the proposed Inland Northwest Bank acquisition.
- Assess whether loan growth, deposit stability and net interest margin can persist as funding costs rise; distinguish recurring earnings from acquired-loan accretion and acquisition-related effects.
- Track non-performing assets, criticized loans, OREO additions and the allowance relative to loan growth and credit losses, particularly the sequential rise in non-performing assets.
- Review liquidity and funding concentration, including cash trends, repurchase-agreement balances and the ability to fund the stated credit commitments.
- Monitor unrealized securities losses, the effects of interest rates on capital and earnings, and the upcoming phase-in of the Basel III capital conservation buffer.