First Interstate BancSystem, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial amounts are in millions, except per-share data and ratios. The company is a regional bank holding company operating across six western states; reported results include acquisitions completed in 2018 and April 2019.
Business context and material developments
First Interstate completed its acquisitions of Idaho Independent Bank (IIBK) and Community 1st Bank (CMYF) on April 8, 2019; data systems were converted on June 7. The company issued about 4.33 million Class A shares as consideration. The acquired operations are included in results from the acquisition date. Acquisition purchase-price allocations remain provisional. The 2018 Northwest Bancorporation acquisition also affects comparisons.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total interest and non-interest income | $181.5 | $150.6 | $346.6 | $293.4 |
| Net interest income | $125.3 | $103.8 | $241.3 | $203.6 |
| Provision for loan losses | $3.8 | $2.9 | $7.5 | $5.0 |
| Non-interest expense | $112.1 | $84.9 | $205.9 | $170.8 |
| Net income | $37.9 | $41.7 | $79.5 | $78.4 |
| Diluted EPS | $0.59 | $0.74 | $1.27 | $1.38 |
- Margins and revenue mix: Net interest margin on a fully taxable-equivalent basis was 4.08% in Q2 and 4.06% for the first half, compared with 3.87% and 3.81%, respectively, in 2018. Reported net interest income benefited from higher earning assets, acquisitions, organic growth, and margin expansion; acquired-loan accretion contributed $5.2 in Q2 and $9.2 for the first half.
- Profitability: Q2 net income declined despite higher income, chiefly as non-interest expense rose 32.0%, including $13.5 in acquisition-related costs. First-half net income increased slightly, while diluted EPS declined as the weighted-average share count rose after acquisition-related share issuance. Payment-services revenue fell 18.6% in Q2, largely due to the Durbin Amendment; mortgage banking revenue rose 16.7%.
- Balance sheet and liquidity: At June 30, total assets were $14,414.6, loans $9,059.3, deposits $11,489.9, and stockholders’ equity $1,948.6. Cash and cash equivalents were $1,128.9, up from $822.0 at year-end 2018. Six-month operating cash flow was $48.1, versus $97.7 in 2018; investing cash flow was positive $257.1, including $298.4 of net cash received in the acquisitions. Deposits increased $809.2, including $706.7 acquired and $102.5 organic growth.
- Funding and debt: Long-term debt was $15.8 and subordinated debentures were $86.9, both unchanged from year-end. Repurchase-agreement funding was $686.7, down from $712.4. Non-interest-bearing deposits were 29.4% of deposits; brokered deposits were $8.8.
- Credit: Allowance for loan losses was $74.2, or 0.82% of period-end loans, versus $73.0, or 0.86%, at year-end. Non-performing assets were $73.8, or 0.51% of total assets; non-performing loans were $46.2, down from $58.1 at year-end. OREO rose to $27.6 from $14.4, driven mainly by foreclosures and acquired property.
- Capital: The company reported a 13.43% total risk-based capital ratio, 11.94% common equity Tier 1 ratio, and 9.94% leverage ratio at June 30. The filing states the company and bank exceeded applicable capital requirements.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings or financial guidance. Management said it will continue evaluating bank acquisitions and other strategic opportunities and reported no known event reasonably likely to materially adversely affect liquidity, capital resources, or operations.
- Management cited risks including economic and interest-rate changes, loan-credit performance and allowance adequacy, funding access and deposit attrition, acquisition integration and realization of expected benefits, technology and cybersecurity, regulation, competition, and litigation. It cautioned that actual results may differ from forward-looking statements.
- The company is implementing the expected-credit-loss standard (CECL), effective January 1, 2020. Management could not yet reasonably estimate the effect and said adoption could increase the allowance for credit losses.
- Other items: adoption of lease accounting recognized $54.6 of right-of-use assets and matching lease liabilities, with an immaterial stated effect on results and liquidity. The board authorized repurchases of up to 2.5 million Class A shares; none had been repurchased under the new program by June 30. A $0.31-per-share dividend was declared after quarter-end. Management said other litigation was not expected to materially affect the company.
Important facts for investors to verify
- Whether provisional acquisition valuations, goodwill, acquired-loan marks, and integration costs change as purchase accounting is finalized—and whether expected integration benefits materialize.
- Whether margin expansion persists as deposit costs rise; assess the contribution of acquired-loan accretion and early payoffs to reported net interest income.
- Whether asset quality and OREO trends improve, and whether the allowance remains adequate as acquired loans season and CECL implementation approaches.
- How acquisition-driven share issuance, the repurchase authorization, and dividends affect per-share earnings and capital.
- Whether the unusually large increase in cash and the investing cash-flow contribution from acquisitions represent durable liquidity after integration and normal business funding needs.