First Interstate BancSystem, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a Montana-based regional bank holding company operating 152 banking offices across six states. Figures are unaudited; dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $125.5 | $110.0 | $366.8 | $313.6 |
| Provision for loan losses | $2.6 | $2.0 | $10.1 | $7.0 |
| Non-interest income | $40.8 | $36.2 | $114.7 | $109.0 |
| Non-interest expense | $99.3 | $90.7 | $305.2 | $261.5 |
| Net income | $49.1 | $41.4 | $128.6 | $119.8 |
| Diluted EPS | $0.76 | $0.71 | $2.03 | $2.09 |
| Net interest margin, fully taxable equivalent | 3.93% | 3.88% | 4.01% | 3.84% |
Q3 net income increased about 19% year over year, while nine-month net income rose about 7%. Nine-month diluted EPS declined as weighted-average diluted shares increased to 63.5 million from 57.3 million, reflecting acquisition-related share issuance. Nine-month non-interest expense rose 16.7%, including $19.6 million of acquisition-related costs. Mortgage banking revenue improved with increased refinancing activity and lower rates; nine-month payment services revenue declined, partly due to the Durbin Amendment.
Financial position, liquidity, and capital
- At September 30, total assets were $14.70 billion, up 10.5% from December 31, 2018. Loans were $9.10 billion, up 7.0%; deposits were $11.80 billion, up 10.5%.
- Cash and cash equivalents were $1.27 billion, compared with $822.0 million at year-end. Nine-month operating cash flow was $56.7 million, versus $171.9 million in 2018; ending cash increased by $447.6 million.
- Non-interest-bearing deposits were $3.64 billion, or 30.8% of deposits. Brokered deposits were $2.9 million. Repurchase agreements were $636.9 million and generally mature overnight.
- Long-term debt was $13.9 million and subordinated debentures were $86.9 million. The filing also reports $636.9 million of repurchase agreements as a funding liability.
- Stockholders’ equity was $1.98 billion. Consolidated total risk-based capital was 13.71%, common equity tier 1 was 12.19%, and leverage capital was 9.96%; the company said it exceeded applicable capital requirements.
- The allowance for loan losses was $75.0 million, or 0.82% of period-end loans, versus $73.0 million, or 0.86%, at year-end. Non-performing assets were $74.9 million, or 0.51% of assets; non-performing loans were 0.63% of loans.
Material changes and notable items
- Acquisitions of Idaho Independent Bank and Community 1st Bank closed on April 8, 2019, with systems conversion on June 7. They contributed $706.7 million of deposits and $417.1 million of loans, and were funded with approximately $176.1 million of newly issued Class A shares. Acquisition accounting values remained provisional.
- Management attributed higher net interest income primarily to growth in earning assets, higher asset yields, and the acquisitions; higher funding costs partly offset these gains. Acquired-loan interest accretion contributed $13.2 million to nine-month net interest income.
- Non-accrual loans were $50.1 million, down from $54.3 million at year-end, while loans past due 90 days or more and still accruing were $7.0 million, up from $3.8 million. Total criticized loans were $416.1 million, compared with $401.3 million at year-end.
- Available-for-sale securities had $12.9 million of net unrealized gains at quarter-end, compared with a $25.5 million net unrealized loss at year-end. The filing reported no securities impairment losses.
- The company adopted lease accounting in 2019, initially recognizing $54.6 million of right-of-use assets and lease liabilities. A third-quarter reassessment reduced each to $39.6 million, with no earnings impact.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management said it continues to evaluate acquisitions and other strategic opportunities and reported no known events expected to materially adversely affect liquidity, capital, or operations. It cautioned that results depend on economic and regional conditions, interest rates, credit performance, funding access, regulation, technology and cybersecurity, competition, and successful integration of acquisitions. Management noted that an economic downturn or deteriorating asset quality could require materially higher loan-loss provisions.
The company was preparing for adoption of the current expected credit loss standard (CECL) on January 1, 2020, but could not reasonably estimate its impact and said adoption could increase the allowance. Management considered other claims and litigation unlikely to have a material adverse effect. Off-balance-sheet commitments included $2.84 billion of credit commitments and $52.2 million of standby letters of credit; these amounts do not necessarily represent expected cash outflows. Mortgage loan sale recourse provisions applied to $1.0 million of loans.
Key facts for investors to verify
- Whether the acquired banks’ provisional fair values, goodwill, and expected integration benefits are finalized and achieved.
- Whether loan quality, criticized assets, charge-offs, and the 0.82% allowance remain adequate as the loan book grows.
- How CECL adoption affects the allowance, retained earnings, and capital beginning in 2020.
- Whether deposit costs and funding mix pressure net interest margin, particularly if rates change.
- Whether earnings growth translates into per-share growth given acquisition-related dilution and elevated expenses.
- Whether cash-flow variability and off-balance-sheet commitments remain manageable alongside dividends and potential share repurchases.