BILLINGS, Mont.–(BUSINESS WIRE)–First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the third quarter of 2019. For the quarter, the Company reported net income of $49.1 million, or $0.76 per share, which compares to net income of $37.9 million, or $0.59 per share, for the second quarter of 2019, and $41.4 million, or $0.71 per share, for the third quarter of 2018.
Second and third quarter 2019 earnings included acquisition costs related to the acquisitions of Idaho Independent Bank (“IIBK”) and Community First Bank (“CMYF”), both acquired on April 8, 2019. Third quarter 2018 earnings included acquisition costs related to the acquisition of Northwest Bancorporation, Inc. (“Northwest”), the parent company of Inland Northwest Bank (“INB”), acquired on August 16, 2018. The aforementioned acquisition costs negatively impacted earnings by $0.04, $0.16, and $0.04 per common share for the third quarter of 2019, the second quarter of 2019, and the third quarter of 2018, respectively.
HIGHLIGHTS
- Earnings per share increased to $0.76 per share from $0.59 per share, or $0.80 per share from $0.75 per share, exclusive of the above acquisition costs, for a 6.7% increase, on a linked quarter basis.
- Annualized organic loan growth of 1.8% and annualized organic deposit growth of 10.7% for the third quarter of 2019.
- Non-performing assets as a percentage of total assets remained stable at 0.51% on a linked quarter basis and decreased 12 basis points, compared to 0.63%, for the third quarter of 2018.
- Net charge offs of $1.8 million, or 0.08% of average loans, as of the third quarter of 2019, compared to $2.0 million, or 0.09% of average loans, as of the second quarter of 2019, and $2.5 million, or 0.12% of average loans, as of the third quarter of 2018.
- Mortgage banking revenues increased 25.0% to $10.5 million, for the third quarter of 2019, compared to $8.4 million for the second quarter of 2019, and increased 56.7%, from $6.7 million, compared to the third quarter of 2018.
- With the impact from the Durbin amendment fully absorbed, payment services revenues increased 2.9% on a linked quarter basis and 6.9% compared to the third quarter of 2018.
- Efficiency ratio declined to 57.9% during the third quarter of 2019, compared to 66.2% during the second quarter of 2019 and 60.7% during the third quarter of 2018.
“Our third quarter results demonstrate the strength of our deposit franchise, diverse sources of revenue, and improving efficiencies,” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “We had strong inflows of core deposits during the quarter, as our commitment to relationship banking and superior customer service is helping us to continue to attract new customers to First Interstate. The strong deposit growth resulted in excess liquidity that temporarily pressured our net interest margin. We expect to see the positive benefits of redeploying this liquidity into higher yielding assets in the fourth quarter. We continue to see strong revenue in our mortgage banking business, as we expand our loan production in newer markets and generate more origination opportunities from our new digital loan application process. We took a conservative approach to loan production in the third quarter, as the decline in interest rates resulted in unattractive loan pricing. With the subsequent increase in long-term interest rates, loan pricing has improved and we expect to see a higher level of production in the fourth quarter that should positively impact our profitability.”
NET INTEREST INCOME
Net interest income increased to $125.5 million during the third quarter of 2019, compared to $125.3 million during the second quarter of 2019 and $110.0 million during the third quarter of 2018. The year-over-year growth rate of 14.1% was primarily the result of increased yields in earning assets and the impact of the INB, IIBK, and CMYF acquisitions.
- Included in net interest income this quarter was the recovery of previously charged-off interest of $0.4 million, compared to previously charged-off interest of $1.5 million during the second quarter of 2019 and $0.7 million during the third quarter of 2018.
- Interest accretion attributable to the fair valuation of acquired loans contributed $4.0 million to net interest income during the third quarter of 2019, of which approximately $1.2 million was related to early payoffs. This compares to interest accretion of $5.2 million in net interest income during the second quarter of 2019, of which approximately $2.6 million was related to early payoffs, and interest accretion of $3.6 million in net interest income during the third quarter of 2018, of which approximately $1.5 million was related to early payoffs.
The net interest margin ratio was 3.93% for the third quarter of 2019 compared to 4.08% reported during the second quarter of 2019 and 3.88% during the third quarter of 2018.
- Exclusive of the impact of the recovery of charged-off interest and interest accretion, the net interest margin ratio contracted six basis points to 3.80% during the third quarter of 2019, compared to 3.86% during the second quarter of 2019. This decrease is primarily the result of lower yields on earning assets which were partially offset by lower funding costs which together negatively impacted the net interest margin by three basis points, as well as increased liquidity due to deposit growth held in overnight funds that negatively impacted the net interest margin by an additional three basis points.
- Exclusive of the impact of the recovery of charged-off interest and interest accretion, the net interest margin ratio expanded seven basis points, compared to 3.73% during the third quarter of 2018, primarily as a result of higher yields on earning assets partially offset by higher funding costs.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $2.6 million during the third quarter of 2019, compared to $3.8 million during the second quarter of 2019, and $2.0 million during the third quarter of 2018. Net charge offs were $1.8 million, or 0.08% of average loans outstanding, for the third quarter of 2019, compared to $2.0 million, or 0.09% of average loans outstanding, for the second quarter of 2019.
The Company’s allowance for loan losses as a percentage of period-end loans was 0.82%, 0.82%, and 0.86% at September 30, 2019, June 30, 2019 and September 30, 2018, respectively. The decrease in the percentage from September 30, 2018 is primarily a result of increased loan balances from the IIBK and CMYF acquired loans, which were provisionally recorded at fair value in accordance with generally accepted accounting principles (“GAAP”), with no corresponding allowance for loan losses as prescribed by GAAP. Coverage of non-performing loans was 130.89%, 160.61%, 110.84% at September 30, 2019, June 30, 2019 and September 30, 2018, respectively.
NON-INTEREST INCOME
Total non-interest income increased $1.4 million, or 3.6%, to $40.8 million during the third quarter of 2019, as compared to $39.4 million during the second quarter of 2019, and increased $4.6 million, or 12.7%, from $36.2 million during the third quarter of 2018. The increases were primarily the result of increased mortgage banking revenues.
Mortgage banking revenues increased $2.1 million, or 25.0%, to $10.5 million during the third quarter of 2019, as compared to $8.4 million during the second quarter of 2019 and increased $3.8 million, or 56.7%, during the third quarter of 2019 from $6.7 million during the third quarter of 2018. These increases are due primarily to increased mortgage loan production as a result of higher levels of refinance activity and lower interest rates. During the third quarter of 2019, loans originated for home purchases accounted for approximately 66.0% of loan production, as compared to 81.4% during the second quarter of 2019 and 85.1% during the third quarter of 2018.
Other income decreased $1.1 million, or 21.6%, to $4.0 million during the third quarter of 2019, as compared to $5.1 million during the second quarter of 2019 and decreased $0.5 million, or 11.1%, during the third quarter of 2019 from $4.5 million during the third quarter of 2018. The decreases were primarily due to fluctuations in other income experienced throughout the year.
NON-INTEREST EXPENSE
Non-interest expense decreased $12.8 million, or 11.4%, to $99.3 million during the third quarter of 2019, as compared to $112.1 million during the second quarter of 2019, primarily due to a quarter-over-quarter decrease of $9.7 million in acquisition related expenses. Non-interest expense increased $8.6 million, or 9.5%, from $90.7 million during the third quarter of 2018, as a result of higher operating costs related to the INB, IIBK, and CMYF acquisitions during 2019.
The following table presents, for the periods indicated, acquisition related expenses.
|
|
Quarter Ended |
||||||||||||||
|
|
Sep 30, 2019 |
Jun 30, 2019 |
Mar 31, 2019 |
Dec 31, 2018 |
Sep 30, 2018 |
||||||||||
|
Legal and professional fees |
$ |
0.1 |
|
$ |
0.4 |
|
$ |
0.3 |
|
$ |
1.1 |
|
$ |
2.4 |
|
|
Employee expenses |
1.4 |
|
6.2 |
|
0.6 |
|
1.0 |
|
— |
|
|||||
|
Technology conversion and contract terminations |
1.5 |
|
6.4 |
|
0.8 |
|
4.6 |
|
0.5 |
|
|||||
|
Other |
0.8 |
|
0.5 |
|
0.6 |
|
0.3 |
|
0.2 |
|
|||||
|
Total acquisition related expenses |
$ |
3.8 |
|
$ |
13.5 |
|
$ |
2.3 |
|
$ |
7.0 |
|
$ |
3.1 |
|
|
|
|
|
|
|
|
||||||||||
|
After-tax impact on earnings per share |
$ |
0.04 |
|
$ |
0.16 |
|
$ |
0.03 |
|
$ |
0.09 |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
||||||||||
Exclusive of acquisition related expenses, non-interest expense decreased to $95.5 million during the third quarter of 2019, as compared to $98.6 million during the second quarter of 2019, and increased $7.9 million, compared to $87.6 million during the third quarter of 2018. The linked quarter decrease was the result of lower employee benefit costs. The year-over-year increase is the result of higher operating costs attributable to the INB, IIBK, and CMYF acquisitions.
Salary and wage expenses remained stable at $40.6 million during the third quarter of 2019, as compared to $40.4 million during the second quarter of 2019 and increased $3.8 million, or 10.3%, from $36.8 million in the third quarter of 2018. The increase reflects higher levels of salary and wages as a result of the recent acquisitions.
Employee benefit expenses decreased $2.1 million, or 15.0%, to $11.9 million during the third quarter of 2019, when compared to the $14.0 million incurred during the second quarter of 2019, primarily due to higher director compensation expense during the second quarter of 2019 when Company shares are issued to directors, lower payroll tax expenses as the year progresses, and lower health insurance costs. Employee benefit expenses were stable as compared to $11.9 million during the third quarter of 2018.
Core deposit intangible amortization expense was stable at $3.0 million during the second and the third quarter of 2019. Core deposit intangible amortization expense increased $1.0 million, or 50.0%, during the third quarter of 2019 from $2.0 million during the third quarter of 2018, attributable to the additional core deposit intangibles acquired as a result of the INB, IIBK, and CMYF acquisitions.
Other expenses remained stable at $30.4 million during the third quarter of 2019, as compared to $30.5 million during the second quarter of 2019. Other expenses increased $3.7 million, or 13.9%, during the third quarter of 2019 from $26.7 million during the third quarter of 2018, primarily as a result of the recent acquisitions.
BALANCE SHEET
Total assets increased $287.0 million, or 2.0%, to $14,701.6 million from the second quarter of 2019 primarily due to increased liquidity. Total assets increased $1,345.8 million from $13,355.8 million as of September 30, 2018 primarily as a result of the acquisitions of IIBK and CMYF and through organic growth.
Total loans increased $42.2 million, or 0.5%, to $9,101.5 million as of September 30, 2019, from $9,059.3 million as of June 30, 2019, primarily due to an increase in mortgage loans held for sale. Total loans increased $583.5 million, or 6.9%, to $9,101.5 million as of September 30, 2019, from $8,518.0 million as of September 30, 2018, of which $417.1 million was attributable to the IIBK and CMYF acquired loans and $166.4 million of organic loan growth.
Total real estate loans increased $36.9 million, or 0.6%, to $6,209.1 million as of September 30, 2019, from $6,172.2 million as of June 30, 2019, primarily driven by a 9.4% seasonal increase in commercial construction loans typical to the summer and fall months. Year-over-year, total real estate loans increased $412.3 million, or 7.1%, from September 30, 2018. Exclusive of IIBK and CMYF acquired loans of $328.0 million, total real estate loans increased organically $84.3 million, or 1.5%. Within the real estate portfolio, commercial loans increased organically $103.6 million, or 3.2%, construction loans increased organically $72.9 million, or 9.3%, agricultural loans increased organically $8.7 million, or 4.0%, and residential loans decreased $100.9 million, or 6.4%.
Total consumer loans decreased $9.1 million, or 0.8%, to $1,066.9 million as of September 30, 2019, from $1,076.0 million as of June 30, 2019. Within the consumer loan portfolio, indirect loans growth was seasonally stronger with an increase of $4.7 million, or 0.6%. Direct loans decreased $12.9 million, or 6.4%, and credit card loans decreased $0.9 million, or 1.1%, as of September 30, 2019 compared to June 30, 2019. Year-over-year, total consumer loans decreased $11.4 million, or 1.1%, from $1,078.3 million, as of September 30, 2018. Exclusive of IIBK and CMYF acquired loans of $14.6 million, consumer loans decreased $26.0 million, primarily attributable to the direct portfolio.
Commercial loans decreased $44.1 million, or 3.0%, to $1,422.6 million as of September 30, 2019, from $1,466.7 million as of June 30, 2019, primarily due to the pay-off of $20.1 million in the shared national credits portfolio and pay-downs in operating lines during the third quarter. Commercial loans increased $85.4 million, or 6.4%, from $1,337.2 million as of September 30, 2018. Exclusive of IIBK and CMYF acquired loans of $61.4 million, commercial loans increased organically $24.0 million, or 1.8%, as compared to September 30, 2018.
Agricultural loans increased $15.1 million, or 5.4%, to $292.7 million as of September 30, 2019, from $277.6 million as of June 30, 2019. Year-over-year, agricultural loans increased $27.9 million, or 10.5%, from $264.8 million as of September 30, 2018. Exclusive of IIBK and CMYF acquired loans of $12.6 million, agricultural loans increased organically $15.3 million, or 5.8%.
Mortgage loans held for sale increased $44.8 million, or 69.9%, to $108.9 million as of September 30, 2019, from $64.1 million as of June 30, 2019 and increased $71.2 million, or 188.9%, as of September 30, 2019, from $37.7 million as of September 30, 2018. The increases were due to an increase in originations of mortgage loans held for sale.
Goodwill and intangible assets, excluding mortgage servicing rights, decreased $3.8 million, to $715.6 million as of September 30, 2019, from $719.4 million as of June 30, 2019. The decrease is attributable to an adjustment to provisional goodwill and core deposit intangibles amortization expense. Year-over-year, goodwill and intangible assets, excluding mortgage servicing rights, increased $81.9 million, from $633.7 million as of September 30, 2018, attributable to provisional goodwill and core deposit intangibles acquired in the IIBK and CMYF acquisitions net of core deposit intangibles amortization expense.
Company owned life insurance increased $1.1 million, or 0.4%, to $292.8 million as of September 30, 2019, from $291.7 million as of June 30, 2019, and increased $19.1 million, or 7.0%, as of September 30, 2019, from $273.7 million as of September 30, 2018, primarily attributable to the IIBK acquisition.
Premises and equipment decreased $18.3 million, or 5.7%, to $302.8 million as of September 30, 2019, from $321.1 million as of June 30, 2019, primarily due to a $15.0 million adjustment in the right-of-use leased assets as a result of a reassessment of the lease terms which had no corresponding impact to the results of operations. Year-over-year, premises and equipment increased $58.6 million, or 24.0%, from $244.2 million as of September 30, 2018. The increase was a result of $26.7 million of premises and equipment acquired from IIBK and CMYF, with the remaining $31.9 million primarily related to the adoption of the updated leasing standard, ASU 2016-02, on January 1, 2019.
Other real estate owned decreased $9.8 million, or 35.5%, to $17.8 million as of September 30, 2019, from $27.6 million as of June 30, 2019, primarily attributable to the disposition of one agricultural real estate property during the third quarter of 2019. Other real estate owned increased $0.5 million, or 2.9%, as of September 30, 2019, from $17.3 million as of September 30, 2018.
Other assets increased $15.9 million, or 7.8%, to $219.6 million as of September 30, 2019, from $203.7 million as of June 30, 2019, primarily due to an increase of $2.2 million in Federal Reserve stock and an increase of $8.3 million related to our interest rate swap contracts. Year-over year, other assets increased $45.7 million, or 26.3%, as of September 30, 2019, from $173.9 million as of September 30, 2018. Exclusive of other assets of $8.7 million acquired from IIBK and CMYF, other assets increased $37.0 million, primarily due to an increase of $10.9 million in Federal Reserve stock and $20.5 million related to our interest rate swaps.
Total deposits increased $309.7 million, or 2.7%, to $11,799.6 million as of September 30, 2019, from $11,489.9 million as of June 30, 2019, as a result of increases in non-interest bearing business deposits and savings deposits. Year-over-year, total deposits increased $954.0 million, or 8.8%, from $10,845.6 million as of September 30, 2018. Exclusive of deposits of $706.7 million acquired from IIBK and CMYF, deposits grew organically $247.3 million, or 2.3%, compared to September 30, 2018, primarily related to an organic increase of $133.6 million in non-interest bearing deposits and $113.7 million in interest bearing deposits.
Other liabilities decreased $5.0 million, or 2.7%, to $181.7 million as of September 30, 2019, from $186.7 million as of June 30, 2019, primarily due to a $15.0 million adjustment in the right-of-use lease liability as a result of a reassessment of the lease terms which had no corresponding impact to the results of operations. The decrease was offset by normal fluctuations in other liabilities. Year-over-year, other liabilities increased $71.1 million, or 64.3%, as of September 30, 2019, from $110.6 million as of September 30, 2018. Exclusive of IIBK and CMYF acquired other liabilities of $22.7 million, other liabilities increased $48.4 million as compared to September 30, 2018, primarily related to the adoption of the updated leasing standard, ASU 2016-02, on January 1, 2019 and the subsequent reassessment of the lease terms during the third quarter of 2019.
As a result of higher levels of liquidity, the loan to deposit ratio was 77.1%, as of September 30, 2019, compared to 78.8% and 78.5% as of June 30, 2019 and September 30, 2018, respectively.
The Company is considered to be “well-capitalized” as of September 30, 2019, having exceeded all regulatory capital adequacy requirements. During the third quarter of 2019, the Company paid common stock dividends of approximately $20.1 million, or $0.31 per share.
CREDIT QUALITY
As of September 30, 2019, non-performing assets increased $1.3 million, or 1.8%, to $75.1 million, compared to $73.8 million as of June 30, 2019, primarily due to an increase in non-accrual loans of $9.2 million. Non-accrual loans increased to $50.2 million as of September 30, 2019, as compared to $41.0 million during the second quarter of 2019, primarily related to the addition of two commercial loans. This increase was offset by the disposition of one other real estate owned property.
Criticized loans remained stable at $416.1 million, or 4.6% of total loans, as of September 30, 2019, compared to $414.0 million as of June 30, 2019. Criticized loans decreased $8.8 million from $424.9 million, or 5.0% of total loans, as of September 30, 2018.
Net loan charge-offs decreased $0.2 million, or 10.0%, to $1.8 million during the third quarter of 2019, as compared to $2.0 million during the second quarter of 2019. The net loan charge-offs in the third quarter of 2019 were composed of charge-offs of $4.7 million and recoveries of $2.9 million. Net loan charge-offs during the third quarter of 2018 were $2.5 million.
NON-GAAP FINANCIAL MEASURES
In addition to results presented in accordance with GAAP in the United States of America, this release contains the following non-GAAP financial measures that management uses to evaluate our capital adequacy: (i) tangible book value per common share; (ii) tangible common stockholders’ equity to tangible assets; (iii) tangible assets; (iv) tangible common stockholders’ equity; and (v) return on average tangible common stockholders’ equity. Tangible book value per common share is calculated as tangible common stockholders’ equity divided by common shares outstanding. Tangible common stockholders’ equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets. Tangible assets is calculated as total assets less goodwill and other intangible assets (excluding mortgage servicing assets). Tangible common stockholders’ equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets. Return on average tangible common stockholders’ equity is calculated as net income available to common shareholders divided by average tangible common stockholders’ equity. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. They also should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.
The Company adjusts the foregoing capital adequacy measures to exclude intangible assets except mortgage servicing rights, adjusts its non-interest expense to exclude acquisition related expenses, and adjusts its net interest margin ratio to exclude the impact of the recovery of charged-off interest and the impact of interest accretion on acquired loans. Management believes these non-GAAP financial measures, which are intended to complement the capital ratios defined by banking regulators and to present on a consistent basis our and our acquired companies’ organic continuing operations without regard to the acquisition costs and adjustments that we consider to be unpredictable and dependent on a significant number of factors that are outside our control, are useful to investors in evaluating the Company’s performance because, as a general matter, they either do not represent an actual cash expense and are inconsistent in amount and frequency depending upon the timing and size of our acquisitions (including the size, complexity and/or volume of past acquisitions, which may drive the magnitude of acquisition related costs, but may not be indicative of the size, complexity and/or volume of future acquisitions or related costs), or they cannot be anticipated or estimated in a particular period (in particular as it relates to unexpected recovery amounts).
Contacts
Marcy Mutch
Chief Financial Officer
First Interstate BancSystem, Inc.
(406) 255-5312
[email protected]
