First Interstate BancSystem, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; comparisons are with Q1 2018 unless otherwise noted. The company is a regional bank holding company headquartered in Montana.
Financial performance and condition
- Net income: $41.6 million, up 13.4% from $36.7 million. Diluted EPS was $0.69 versus $0.65.
- Net interest income: $116.0 million, up 16.2%. Fully taxable equivalent net interest margin increased to 4.04% from 3.75%; excluding acquired-loan accretion and recoveries of charged-off interest, it was 3.87% versus 3.61%.
- Revenue and costs: Non-interest income was $34.5 million, down 2.0%; non-interest expense was $93.8 million, up 9.2%. Provision for loan losses rose to $3.7 million from $2.1 million. Effective tax rate declined to 21.5% from 22.1%.
- Balance sheet at March 31: Assets were $13.50 billion, deposits $10.81 billion, total loans $8.49 billion, and stockholders’ equity $1.74 billion. Versus December 31, 2018, assets rose 1.5%, deposits rose 1.3%, loans were nearly unchanged, and equity rose 2.5%.
- Funding and debt: Non-interest-bearing deposits were $3.16 billion, or 29.2% of deposits. Repurchase agreements were $672.6 million; long-term debt was $15.8 million and trust-held subordinated debentures were $86.9 million. Brokered deposits were $11.8 million.
- Liquidity and cash flow: Cash and cash equivalents increased to $955.2 million from $822.0 million at year-end. Operating cash flow was $47.6 million, investing cash flow was $12.1 million, and financing cash flow was $73.5 million. The company reported regulatory capital ratios above applicable well-capitalized thresholds; consolidated total risk-based capital was 13.23% and common equity Tier 1 was 11.65%.
- Credit quality: Non-performing loans were $52.2 million, down from $58.1 million at year-end; non-performing assets were $73.3 million, slightly above $72.5 million. The allowance was $72.4 million, or 0.85% of period-end loans, versus $73.0 million, or 0.86%, at year-end. Q1 net charge-offs were $4.3 million versus $0.7 million a year earlier.
Material changes and notable items
- Higher average earning assets and improved asset yields contributed to the increase in net interest income and margin. Funding costs also increased: the average cost of interest-bearing liabilities rose to 0.71% from 0.41%.
- Payment-services revenue fell 10.5%; management attributed the pressure in part to the Durbin Amendment, partly offset by higher card transaction volumes.
- Non-interest expense growth reflected, among other items, higher employee benefits and costs associated with the 2018 INB acquisition. Acquisition-related expense was $2.3 million in both comparative quarters.
- Other real estate owned increased to $21.1 million from $14.4 million at year-end, primarily after $8.4 million of foreclosures, including one agricultural real estate asset.
- Operating lease accounting adopted January 1, 2019 added $54.6 million of right-of-use assets and an equal amount of lease liabilities, with immaterial reported impact on operations and liquidity. The company also reclassified $281.1 million of securities from held-to-maturity to available-for-sale under new hedging guidance; the transfer included a $6.0 million unrealized loss recorded in comprehensive income.
- After quarter-end, on April 8, 2019, the company completed acquisitions of Idaho Independent Bank and Community 1st Bank for stock consideration of $157.3 million and $18.8 million, respectively. Data-processing conversion was scheduled for June 2019. These transactions were not included in the March 31 balance sheet.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management says results for the quarter are not necessarily indicative of full-year results and reports no known event reasonably likely to materially impair liquidity, capital resources, or operations. It identifies risks including economic and regional conditions, interest-rate changes, credit performance and allowance adequacy, funding access, regulation, cyber and technology risks, litigation, and successful execution and integration of acquisitions. The company expects adoption of the current expected credit loss standard (CECL) on January 1, 2020; it could increase credit-loss allowances, but the impact was not yet reasonably estimable.
Management stated that other claims and litigation were not expected to materially adversely affect financial condition, results, or liquidity. At March 31, commitments to extend credit were approximately $2.64 billion and standby letters of credit were $47.6 million; these are off-balance-sheet exposures, not amounts necessarily expected to be funded. The board declared a $0.31-per-share dividend on May 3, payable May 23, 2019.
Investor verification priorities
- Assess whether margin gains can persist as deposit and other funding costs rise, and distinguish recurring earnings from acquired-loan accretion and interest recoveries.
- Review allowance adequacy, net charge-offs, criticized loans, past-due loans, and the increase in OREO, particularly the agricultural exposure.
- Verify the acquired banks’ integration, share issuance and dilution, conversion costs, and contribution to future results.
- Track deposit composition and funding concentration, liquidity against credit commitments, and capital ratios following the acquisitions.
- Monitor the implementation and estimated balance-sheet effect of CECL, which the company had not quantified.