BILLINGS, Mont.–(BUSINESS WIRE)–First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the second quarter of 2019. For the quarter, the Company reported net income of $37.9 million, or $0.59 per share, which compares to net income of $41.6 million, or $0.69 per share, for the first quarter of 2019, and $41.7 million, or $0.74 per share, for the second quarter of 2018.
First and second quarter 2019 earnings included acquisition costs related to the acquisitions of Northwest Bancorporation, Inc. (“Northwest”), the parent company of Inland Northwest Bank (“INB”), acquired on August 16, 2018, Idaho Independent Bank (“IIBK”), acquired on April 8, 2019, and Community First Bank (“CMYF”), acquired on April 8, 2019. The aforementioned acquisition costs negatively impacted earnings by $0.16 and $0.03 per common share for the second quarter of 2019 and the first quarter of 2019, respectively. There were no acquisition costs during the second quarter of 2018. Additionally, the second quarter of 2019 payment services revenues were reduced as a result of the Durbin Amendment when compared to the second quarter of 2018.
HIGHLIGHTS
- Net interest margin ratio, on a fully taxable equivalent basis, increased to 4.08%, for the second quarter of 2019, a four basis point increase from the prior quarter and a 21 basis point increase from the second quarter of 2018.
- Organic loan growth was 7.2% annualized for the second quarter of 2019.
- Non-performing assets as a percentage of total assets decreased to 0.51%, compared to 0.54% during the first quarter of 2019 and 0.74% during the second quarter of 2018.
- Criticized assets include $26.8 million related to the acquisitions of IIBK and CMYF. Excluding the increase related to the acquisitions, criticized assets declined $15.3 million, or 4.33% of average loans, as of the second quarter of 2019 compared to 4.75%, as of the first quarter of 2019.
- Net charge offs of $2.0 million, or 0.09% of average loans, as of the second quarter of 2019, compared to $4.3 million, or 0.21% of average loans, as of the first quarter of 2019.
- Mortgage banking revenues increased 55.6% to $8.4 million, for the second quarter of 2019, compared to $5.4 million for the first quarter of 2019, and increased 16.7%, from $7.2 million, compared to the second quarter of 2018.
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Successful close and system conversions of IIBK and CMFY during the second quarter of 2019.
“Our second quarter results were highlighted by the initial positive impact from our recent acquisitions of Idaho Independent Bank and Community 1st Bank, as well as a higher level of loan production across most of our markets,” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “We generated 7.2% annualized loan growth on an organic basis in the second quarter, driven by solid growth in our commercial, consumer and agricultural portfolios. We also had a very strong quarter in our mortgage banking business, as our larger market footprint helped us to capitalize on the pick-up in demand we saw due to the decline in mortgage rates. Our loan pipeline remains healthy and we expect to continue to see positive trends in revenue generation over the second half of the year. Combined with the cost savings we expect to get in the second half of the year from the integration of our recent acquisitions, we anticipate delivering a higher level of profitability going forward.”
DIVIDEND DECLARATION
On July 29, 2019, the Company’s board of directors declared a dividend of $0.31 per common share, payable on August 21, 2019, to common stockholders of record as of August 8, 2019. The dividend equates to a 3.11% annualized yield based on the $39.92 per share average closing price of the Company’s common stock as reported on NASDAQ during the second quarter of 2019.
ACQUISITIONS
On October 11, 2018, the Company entered into a definitive agreement to acquire all of the outstanding stock of IIBK, a community bank headquartered in Coeur d’ Alene, Idaho with 11 banking offices across Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems occurred on June 7, 2019. Consideration for the acquisition was $157.3 million, consisting of the issuance of 3.871 million shares of the Company’s Class A common stock valued at $40.64 per share, the closing price of the Company’s Class A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of IIBK common stock received 0.50 shares of First Interstate Class A common stock for each share of IIBK common stock.
On October 11, 2018, the Company also entered into a definitive agreement to acquire all of the outstanding stock of CMYF, a community bank headquartered in Post Falls, Idaho with three banking offices in North Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems occurred on June 7, 2019. Consideration for the acquisition was $18.8 million, consisting of the issuance of 0.463 million shares of the Company’s Class A common stock valued at $40.64 per share, the closing price of the Company’s Class A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of CMYF common stock received 0.3784 shares of First Interstate Class A common stock for each share of CMYF common stock.
NET INTEREST INCOME
The Company’s net interest income increased $9.3 million, or 8.0%, to $125.3 million during the second quarter of 2019, compared to $116.0 million during the first quarter of 2019, primarily as a result of organic growth and the impact of the IIBK and CMYF acquisitions. Net interest income increased $21.5 million, or 20.7%, from $103.8 million during the second quarter of 2018, primarily as a result of an expansion in our net interest margin and the impact of the INB, IIBK, and CMYF acquisitions.
Net interest income was positively impacted this quarter by the recovery of previously charged-off interest of $1.5 million compared to previously charged-off interest of $0.9 million during the first quarter of 2019 and $1.9 million during the second quarter of 2018.
Interest accretion attributable to the fair valuation of acquired loans contributed $5.2 million to net interest income during the second quarter of 2019, of which approximately $2.6 million was related to early payoffs. This compares to interest accretion of $3.9 million in net interest income during the first quarter of 2019, of which approximately $1.7 million was related to early payoffs, and interest accretion of $2.9 million in net interest income during the second quarter of 2018, of which approximately $1.1 million was related to early payoffs.
The Company’s net interest margin ratio was 4.08% for the second quarter of 2019, four basis point higher than the 4.04% during the first quarter of 2019. Compared to the second quarter of 2018, net interest margin expanded 21 basis points, from 3.87%, due primarily to the result of higher yields on higher levels of earning assets. Exclusive of the impact of the recovery of charged-off interest and the impact of interest accretion on acquired loans of an aggregate of $5.2 million, $3.9 million, and $2.9 million, respectively, the Company’s net interest margin ratio contracted one basis point to 3.86% during the second quarter of 2019, compared to 3.87% during the first quarter of 2019, and expanded 17 basis points compared to 3.69% during the second quarter of 2018.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $3.8 million during the second quarter of 2019, compared to $3.7 million during the first quarter of 2019, and $2.9 million during the second quarter of 2018. Net charge offs were $2.0 million, or 0.09% of average loans, for the second quarter of 2019, compared to $4.3 million, or 0.21% of average loans, for the first quarter of 2019. Higher levels of the provision during the second quarter of 2019 were attributable to organic loan growth and an increase in loans migrating from the acquired loan portfolio to the originated loan portfolio due to renewals, refinancing, and restructure.
The Company’s allowance for loan losses as a percentage of period-end loans was 0.82%, 0.85%, and 0.96% at June 30, 2019, March 31, 2019 and June 30, 2018, respectively. The decrease in the percentage from June 30, 2018 is primarily a result of higher loan balances increased by the INB, IIBK, and CMYF acquired loans, which were recorded at fair value for INB and provisionally recorded at fair value for IIBK and CMYF in accordance with generally accepted accounting principles (“GAAP”), with no corresponding allowance for loan losses in purchase accounting. Coverage of non-performing loans was 160.61%, 138.70%, 98.28% at June 30, 2019, March 31, 2019 and June 30, 2018, respectively.
NON-INTEREST INCOME
Total non-interest income increased $4.9 million, or 14.2%, to $39.4 million during the second quarter of 2019, as compared to total non-interest income of $34.5 million during the first quarter of 2019, primarily as a result of seasonal increases in payment services revenue, higher mortgage banking revenue, and other income. Total non-interest income increased $1.8 million, or 4.8%, from $37.6 million during the second quarter of 2018, primarily as a result of increased mortgage banking revenue and other income, net of the Durbin Amendment impact.
Payment services revenues increased $1.1 million, or 11.7%, to $10.5 million during the second quarter of 2019, as compared to the $9.4 million earned during the first quarter of 2019, as a result of seasonally higher transaction volumes. Payment services revenues decreased $2.4 million, or 18.6%, during the second quarter of 2019, when compared to the $12.9 million earned during the second quarter of 2018, primarily as a result of a $3.6 million decrease in revenues during the second quarter of 2019 attributable to the Durbin Amendment. This rule, which limits the amount of interchange fees banks of our size may charge, impacted our Company beginning July 1, 2018. This decrease was offset by increases in debit card and credit card volume during the second quarter of 2019 as compared to the second quarter of 2018.
Mortgage banking revenues increased $3.0 million, or 55.6%, to $8.4 million during the second quarter of 2019, as compared to $5.4 million during the first quarter of 2019 and increased $1.2 million, or 16.7%, during the second quarter of 2019 from $7.2 million during the second quarter of 2018. These increases are due primarily to an increase in mortgage loan production. During the second quarter of 2019, loans originated for home purchases accounted for approximately 81.4% of loan production, as compared to 79.1% during the first quarter of 2019 and 80.0% during the second quarter of 2018.
Other income increased $0.8 million, or 18.6%, to $5.1 million during the second quarter of 2019, as compared to $4.3 million during the first quarter of 2019 and increased $2.5 million, or 96.2%, during the second quarter of 2019 from $2.6 million during the second quarter of 2018. The increases were primarily due to life insurance proceeds, net gains on the sale of fixed assets, and normal fluctuations in other income during the second quarter of 2019.
NON-INTEREST EXPENSE
Non-interest expense increased $18.3 million, or 19.5%, to $112.1 million during the second quarter of 2019, as compared to $93.8 million during the first quarter of 2019, primarily due to a quarter-over-quarter increase of $11.2 million in acquisition related expenses, in addition to higher operating costs related to the IIBK and CMYF acquisitions. Non-interest expense increased $27.2 million, or 32.0%, from $84.9 million during the second quarter of 2018, as a result of $13.5 million in acquisition related costs and higher operating costs related to the INB, IIBK, and CMYF acquisitions during 2019.
Acquisition related expenses for the second quarter of 2019 and the first quarter of 2019 were $13.5 million and $2.3 million, respectively. The after-tax impact of acquisition related expenses on earnings per share was $0.16 and $0.03 per share, respectively, for each of the quarterly periods. There were no acquisition costs during the second quarter of 2018.
The following table presents, for the periods indicated, acquisition related expenses.
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Quarter Ended |
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Jun 30, 2019 |
Mar 31, 2019 |
Dec 31, 2018 |
Sep 30, 2018 |
Jun 30, 2018 |
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|
Legal and professional fees |
$ |
|
0.4 |
|
$ |
|
0.3 |
|
$ |
|
1.1 |
|
$ |
|
2.4 |
|
$ |
|
— |
|
|
Employee expenses |
|
6.2 |
|
|
0.6 |
|
|
1.0 |
|
— |
|
— |
|
|||||||
|
Technology conversion and contract terminations |
|
6.4 |
|
|
0.8 |
|
|
4.6 |
|
|
0.5 |
|
— |
|
||||||
|
Other |
|
0.5 |
|
|
0.6 |
|
|
0.3 |
|
|
0.2 |
|
— |
|
||||||
|
Total acquisition related expenses |
$ |
|
13.5 |
|
$ |
|
2.3 |
|
$ |
|
7.0 |
|
$ |
|
3.1 |
|
$ |
|
— |
|
|
|
|
|
|
|
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Exclusive of acquisition related expenses, non-interest expense was $98.6 million during the second quarter of 2019, as compared to $91.5 million during the first quarter of 2019, primarily attributable to increases in salaries and wages, amortization of core deposit intangibles, and other expenses. Exclusive of acquisition related expenses, non-interest expense during the second quarter of 2019 increased $13.7 million, compared to $84.9 million during the second quarter of 2018, with the increase primarily attributable to higher operating costs as a result of the INB, IIBK, and CMYF acquisitions.
Salary and wage expenses increased $4.3 million, or 11.9%, to $40.4 million during the second quarter of 2019, as compared to $36.1 million during the first quarter of 2019. This increase reflects an increase of $2.6 million in salaries related to the IIBK and CMYF acquisitions and the annual merit wage increase effective for the second quarter of 2019. Salaries and wage expenses increased $6.1 million, or 17.8%, from $34.3 million in the second quarter of 2018. The increase reflects higher levels of salary and wages as a result of the recent acquisitions.
Employee benefit expenses were stable at $14.0 million during the second quarter of 2019, when compared to the $14.4 million incurred during the first quarter of 2019, as higher costs related to the IIBK and CMYF acquisitions were offset by lower health insurance and payroll tax expenses. Employee benefit expenses increased $1.7 million, or 13.8%, from $12.3 million during the second quarter of 2018, primarily as a result of the recent acquisitions.
Occupancy and equipment expenses were $10.5 million during both the first and the second quarter of 2019, as higher costs related to the IIBK and CMYF acquisitions were offset by lower repair and maintenance costs. Occupancy and equipment expense increased $1.6 million, or 18.0%, during the second quarter of 2019 from $8.9 million during the second quarter of 2018. The increase in occupancy and equipment expense is primarily due to increases related to the recent acquisitions.
Core deposit intangible amortization expense increased $0.7 million, or 30.4%, to $3.0 million during the second quarter of 2019, as compared to $2.3 million during the first quarter of 2019. Core deposit intangible amortization expense increased $1.3 million, or 76.5%, during the second quarter of 2019 from $1.7 million during the second quarter of 2018. These increases are attributable to an additional $32.2 million of core deposit intangibles as a result of the INB, IIBK, and CMYF acquisitions.
Other expenses increased $2.4 million, or 8.5%, to $30.5 million during the second quarter of 2019, as compared to $28.1 million during the first quarter of 2019, primarily due to the acquisitions of IIBK and CMYF, as well as other normal fluctuations in operating expenses. Other expenses increased $2.7 million, or 9.7%, during the second quarter of 2019 from $27.8 million during the second quarter of 2018, primarily as a result of the recent acquisitions.
BALANCE SHEET
Total assets increased $916.4 million, or 6.8%, to $14,414.6 million from the first quarter of 2019 and $2,178.9 million from $12,235.7 million as of June 30, 2018 primarily as a result of the acquisitions of INB, IIBK, and CMYF and through organic growth.
Total loans increased $566.1 million, or 6.7%, to $9,059.3 million as of June 30, 2019, from $8,493.2 million as of March 31, 2019, due to $417.1 million attributable to the IIBK and CMYF acquisitions. Organic growth of $149.0 million was primarily in commercial, commercial real estate, agricultural, consumer, and agricultural real estate loans.
Total loans increased $1,300.6 million, or 16.8%, to $9,059.3 million as of June 30, 2019, from $7,758.7 million as of June 30, 2018, due to $1,130.2 million attributable to the INB, IIBK, and CMYF acquisitions.
Total real estate loans increased $338.6 million, or 5.8%, to $6,172.2 million as of June 30, 2019 compared to $5,833.6 million as of March 31, 2019. Exclusive of IIBK and CMYF acquired loans of $328.0 million, total real estate loans increased $10.6 million, or 0.2%. Within the real estate portfolio, commercial loans increased organically $58.5 million, or 1.8%, construction loans decreased organically $16.6 million, or 2.0%, residential loans decreased organically $46.4 million, or 3.0%, and agricultural loans increased organically $15.1 million, or 7.2%, as of June 30, 2019 compared to March 31, 2019.
Total real estate loans increased $939.3 million, or 17.9%, to $6,172.2 million as of June 30, 2019 compared to $5,232.9 million as of June 30, 2018 primarily due to INB, IIBK, and CMYF acquired loans of $820.0 million as well as organic growth of $119.3 million. Within the real estate portfolio, commercial loans increased organically $157.2 million, or 5.5%, construction loans increased organically $39.6 million, or 5.5%, residential loans decreased organically $86.1 million, or 5.8%, and agricultural loans increased organically $8.6 million, or 4.9%, as of June 30, 2019 compared to June 30, 2018.
Total consumer loans increased $29.0 million, or 2.8%, to $1,076.0 million as of June 30, 2019, from $1,047.0 million as of March 31, 2019. Exclusive of IIBK and CMYF acquired loans of $14.6 million, total consumer loans increased organically $14.4 million, or 1.4%. Within the consumer portfolio, indirect loans increased $17.4 million, or 2.2%, direct loans decreased $4.2 million, or 2.2%, and credit card loans increased $1.2 million, or 1.6%, as of June 30, 2019 compared to March 31, 2019.
Total consumer loans increased $20.8 million, or 2.0%, from $1,055.2 million, as of June 30, 2018. Exclusive of INB, IIBK, and CMYF acquired loans of $22.3 million, consumer loans decreased $1.5 million attributable to the direct portfolio.
Commercial loans increased $124.6 million, or 9.3%, to $1,466.7 million as of June 30, 2019, from $1,342.1 million as of March 31, 2019. Exclusive of IIBK and CMYF acquired loans of $61.4 million, commercial loans increased organically $63.2 million, or 4.7%.
Commercial loans increased $200.7 million, or 15.9%, from $1,266.0 million as of June 30, 2018. Exclusive of INB, IIBK, and CMYF acquired loans of $172.3 million, commercial loans increased organically $28.4 million, or 2.2%.
Agricultural loans increased $42.9 million, or 18.3%, to $277.6 million as of June 30, 2019, from $234.7 million as of March 31, 2019. Exclusive of IIBK and CMYF acquired loans of $12.6 million, agricultural loans increased organically $30.3 million, or 12.9%, mainly as a result of seasonal advances on operating lines. Agricultural loans increased $126.4 million, or 83.6% as of June 30, 2019, from $151.2 million as of June 30, 2018. Exclusive of INB, IIBK, and CMYF acquired loans of $114.3 million, agricultural loans increased organically $12.1 million, or 8.0%.
Mortgage loans held for sale increased $30.1 million, or 88.5%, to $64.1 million as of June 30, 2019, from $34.0 million as of March 31, 2019 and increased $13.8 million, or 27.4%, as of June 30, 2019, from $50.3 million as of June 30, 2018. The increases were primarily due to an increase in originations of mortgage loans held for sale.
Goodwill and intangible assets, excluding mortgage servicing rights, increased $90.5 million, to $719.4 million as of June 30, 2019, from $628.9 million as of March 31, 2019. The increase is attributable to provisional goodwill and core deposit intangibles acquired in the IIBK and CMYF acquisitions. Goodwill and intangible assets, excluding mortgage servicing rights, increased $200.2 million, from $519.2 million as of June 30, 2018, attributable to provisional goodwill and core deposit intangibles acquired in the INB, IIBK, and CMYF acquisitions offset by core deposit intangibles amortization expense.
Company owned life insurance increased $15.9 million, or 5.8%, to $291.7 million as of June 30, 2019, from $275.8 million as of March 31, 2019, attributable to the IIBK acquisition, and increased $29.0 million, or 11.0%, as of June 30, 2019, from $262.7 million as of June 30, 2018, attributable to the INB and IIBK acquisitions.
Premises and equipment increased $22.9 million, or 7.7%, to $321.1 million as of June 30, 2019, from $298.2 million as of March 31, 2019, attributable to the IIBK and CMYF acquisitions, and increased $87.4 million, or 37.4%, as of June 30, 2019, from $233.7 million as of June 30, 2018. The year-over-year increase was a result of $36.9 million of premises and equipment acquired from INB, IIBK, and CMYF, with the remaining $50.5 million, primarily related to the adoption of the updated leasing standard, ASU 2016-02, on January 1, 2019 offset by depreciation expense.
Other real estate owned increased $6.5 million, or 30.8%, to $27.6 million as of June 30, 2019, from $21.1 million as of March 31, 2019, primarily attributable to the addition of two legacy properties and one IIBK acquired property of $2.4 million during the 2019 period. Other real estate owned increased $12.7 million, or 85.2%, as of June 30, 2019, from $14.9 million as of June 30, 2018, primarily attributable to the addition of four legacy properties and INB and IIBK acquired other real estate owned of $3.0 million during the period which was offset by dispositions.
Other assets increased $22.4 million, or 12.4%, to $203.7 million as of June 30, 2019, from $181.3 million as of March 31, 2019. Exclusive of other assets of $8.5 million acquired from IIBK and CMYF, other assets increased $13.9 million, primarily due to an increase of $3.1 million in federal reserve stock and an increase of $9.3 million related to our interest rate swap contracts. Other assets increased $40.0 million, or 24.4%, as of June 30, 2019, from $163.7 million as of June 30, 2018. Exclusive of other assets of $27.9 million acquired from INB, IIBK, and CMYF, other assets increased $12.1 million, primarily due to an increase of $11.9 million related to our interest rate swap contracts.
Total deposits increased $675.2 million, or 6.2%, to $11,489.9 million as of June 30, 2019, from $10,814.7 million as of March 31, 2019. Exclusive of deposits of $706.7 million, acquired from IIBK and CMYF deposits decreased $31.5 million, or 0.3%, which is in-line with seasonal historical trends. Total deposits increased $1,544.4 million, from $9,945.5 million as of June 30, 2018. Exclusive of deposits of $1,403.0 million acquired from INB, IIBK, and CMYF, deposits grew organically $141.4 million, or 1.4%, compared to June 30, 2018.
Securities sold under repurchase agreements increased $14.1 million, or 2.1%, to $686.7 million as of June 30, 2019, from $672.6 million as of March 31, 2019. Exclusive of $30.4 million of securities sold under repurchase agreements acquired from IIBK, securities sold under repurchase agreements decreased $16.3 million. Securities sold under repurchase agreements increased $44.9 million, or 7.
Contacts
Marcy Mutch
Chief Financial Officer
First Interstate BancSystem, Inc.
(406) 255-5312
[email protected]
