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Acquisitions | 9 Months Ended
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Sep. 30, 2018
Business Combinations [Abstract] |
Acquisitions | Acquisitions Idaho Independent Bank. On October 11, 2018, the Company entered into a definitive agreement to acquire all of the outstanding stock of Idaho Independent Bank ("IIBK"), a community bank headquartered in Coeur d' Alene, Idaho with 11 banking offices across Idaho, in an all-stock transaction valued at approximately $181.3 million in aggregate, or $22.73 per share of IIBK stock. The Company believes the transaction, if completed on the terms contemplated, will complement the Company's footprint and will provide the Company with an expanded presence in several high-growth markets, including Boise and Coeur d’Alene, Idaho. The transaction has been approved by the boards of directors of both companies and is expected to close and convert data processing systems in the second quarter of 2019, subject to customary conditions, including regulatory approval and IIBK shareholder approval. Community 1 st Bank. On October 11, 2018, the Company also entered into a definitive agreement to acquire all of the outstanding stock of Community 1st Bank ("CMYF"), a community bank headquartered in Post Falls, Idaho with three banking offices in North Idaho, in an all-stock transaction valued at approximately$21.5 million in aggregate, or $17.20 per share of CMYF stock. The Company believes the transaction, if completed on the terms contemplated, will complement the Company’s footprint and will provide the Company with an expanded presence in North Idaho's high-growth markets. The transaction has been approved by the boards of directors of both companies and is expected to close and convert data processing systems in the second quarter of 2019, subject to customary conditions, including regulatory approval and CMYF shareholder approval. Northwest Bancorporation, Inc. On April 25, 2018, the Company entered into a definitive agreement to acquire all of the outstanding stock of Northwest Bancorporation, Inc. (“Northwest”), the parent company of Inland Northwest Bank (“INB”), a Spokane, Washington based community bank with 20 banking offices across Idaho, Oregon and Washington. The acquisition was completed on August 16, 2018, and the Company will merge INB with its existing bank subsidiary, First Interstate Bank, on November 9, 2018. Consideration for the acquisition was $176.3 million, consisting of the issuance of 3.84 million shares of the Company's Class A common stock valued at $45.15 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock exchange on the acquisition date. The Company paid approximately $3.0 million in cash related to Northwest warrants, which were included in the consideration paid. Holders of each share of Northwest common stock received 0.516 shares of First Interstate Class A common stock for each share of Northwest common stock. Additionally, all Northwest stock purchase warrants outstanding immediately prior to the close of the transaction were canceled in exchange for the right to receive a cash payment as provided in the Agreement. Previously unvested Northwest restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued and outstanding at acquisition close. The assets and liabilities of Northwest were provisionally recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date and will be finalized in the coming months. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as provisional goodwill. The preliminary purchase price allocation resulted in provisional goodwill of $100.8 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Northwest and the Company. The following table summarizes the consideration paid, fair values of the Northwest assets acquired and liabilities assumed, and the resulting goodwill. Due to the recent closing of the transaction, all amounts reported are provisional pending the review of valuations obtained from third parties.
| As Recorded | Fair Value |  | As Recorded
As of August 16, 2018 | by Northwest | Adjustments |  | by the Company
Assets acquired: |  |  |  |
Cash and cash equivalents | $ | 31.2 |  | $ | — |  |  | $ | 31.2 |
Investment securities | 3.1 |  | — |  |  | 3.1 |
Loans held for investment | 727.9 |  | (14.8 | ) | (1) | 713.1 |
Allowance for loan loss | (8.0 | ) | 8.0 |  | (2) | — |
Premises and equipment | 14.5 |  | (0.5 | ) | (3) | 14.0 |
Other real estate owned (“OREO”) | 0.3 |  | 0.3 |  |  | 0.6 |
Core deposit intangible assets | 2.4 |  | 13.3 |  | (4) | 15.7 |
Deferred tax assets, net | 1.2 |  | (1.6 | ) | (5) | (0.4 | )
Other assets | 29.3 |  | (9.7 | ) | (6) | 19.6 |
Total assets acquired | 801.9 |  | (5.0 | ) |  | 796.9 |
Liabilities assumed: |  |  |  |
Deposits | 696.1 |  | 0.2 |  | (7) | 696.3 |
Accounts payable and accrued expense | 8.1 |  | (0.4 | ) | (8) | 7.7 |
Long term debt | 13.0 |  | — |  |  | 13.0 |
Trust preferred securities | 5.2 |  | (0.8 | ) | (9) | 4.4 |
Total liabilities assumed | 722.4 |  | (1.0 | ) |  | 721.4 |
Net assets acquired | $ | 79.5 |  | $ | (4.0 | ) |  | $ | 75.5 |
Consideration paid: |  |  |  |
Cash |  |  |  | $ | 3.0 |
Class A common stock |  |  |  | 173.3 |
Total consideration paid |  |  |  | 176.3 |
Goodwill |  |  |  | $ | 100.8 |
Explanation of fair value adjustments and the removal of previously recorded fair value marks recorded by Northwest:
(1) | Write down of the book value of loans to their estimated fair values. The fair value of the loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company’s analysis of the fair value of each loan’s underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(2) | Adjustment to remove the Northwest allowance for loan losses at acquisition date, as the credit risk is included in the fair value adjustment for loans receivable described in (1) above.
(3) | Write down of the book value of premises and equipment to their estimated fair values on the date of acquisition based upon broker’s opinion of value.
(4) | Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an independent accounting and advisory firm.
(5) | Adjustment consists of the write-off of pre-existing deferred tax assets and purchase accounting adjustments as a result of the acquisition.
(6) | Adjustment consists of reductions to the fair value of other items, including the removal of Northwest previously recorded goodwill.
(7) | Increase in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition based upon valuation from an independent accounting and advisory firm.
(8) | Decrease due to the write-off of off balance sheet reserves.
(9) | Write down of the book value of debt to the estimated fair values on the date of acquisition based upon favorable interest rates in the market.
Core deposit intangible assets of $15.7 million are being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years. The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition, measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since origination for which it is probable, at acquisition, the Company will be unable to collect all contractual amounts owed. For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest amounts collected, and (iii) indices used to fair value variable rate loans. Information regarding Northwest loans acquired deemed credit-impaired as of the August 16, 2018 acquisition date are as follows:
Contractually required principal and interest payments | $ | 27.5 |
Contractual cash flows not expected to be collected (“non-accretable discount”) | 4.4 |
Cash flows expected to be collected | 23.1 |
Interest component of cash flows expected to be collected (“accretable discount”) | 3.2 |
Fair value of acquired credit-impaired loans | $ | 19.9 |
Information regarding Northwest acquired loans not deemed credit-impaired at the August 16, 2018 acquisition date are as follows:
Contractually required principal and interest payments | $ | 894.8 |
Contractual cash flows not expected to be collected | 26.1 |
Fair value at acquisition | $ | 693.2 |
Unaudited pro forma consolidated revenues and net income as if the Northwest acquisition had occurred as of January 1, 2018, are not presented because the effect of this acquisition was not considered significant. The accompanying consolidated statements of income for the three and nine months ended September 30, 2018, include the results of operations of the acquired entity from the August 16, 2018 acquisition date. For the period from August 16, 2018 to September 30, 2018, Northwest reported revenues of $5.9 million and net income of $2.1 million. The acquired entity will continued to operate as INB until November 9, 2018 at which point INB’s operations will be integrated with the Company’s operations, and INB will merge with FIB. Cascade Bancorp. On November 17, 2016, the Company entered into an agreement and plan of merger (the “Agreement”) to acquire all of the outstanding stock of Cascade Bancorp (“Cascade”), parent company of Bank of the Cascades, an Oregon-based community bank with 46 banking offices across Oregon, Idaho, and Washington. This transaction was strategic in allowing the Company to expand its community banking footprint in the Northwest corridor of the United States. The merger was completed on May 30, 2017. Holders of each share of Cascade common stock received 0.14864 shares of First Interstate Class A common stock and $1.91 in cash, without interest, for each share of Cascade common stock. In connection with the merger, the Company issued approximately 11.3 million shares of First Interstate Class A common stock, which was valued at $34.30 per share, which was the closing price of First Interstate Class A common stock on the acquisition date. Cash paid by First Interstate was approximately $155.0 million, which included the cash portion of the merger consideration and the cash in lieu of fractional shares that Cascade Bancorp shareholders would have otherwise been entitled to receive. Total consideration exchanged in connection with the merger amounted to $541.0 million. All “in-the-money” Cascade options and all Cascade restricted stock units outstanding immediately prior to the transaction close were canceled in exchange for the right to receive a cash payment as provided in the Agreement. The Company paid approximately $9.3 million in cash related to Cascade options and restricted stock units, which was included in the consideration paid. Unvested Cascade restricted stock awards outstanding immediately prior to the transaction close were canceled in exchange for the right to receive a cash payment and Company shares as provided in the Agreement. The Company paid a total of approximately $2.2 million in cash and issued approximately 168 thousand Company shares, valued at $34.30 per share, related to Cascade unvested restricted stock awards. Of the cash paid and shares issued related to Cascade unvested restricted stock awards, approximately $2.4 million was allocated to expense and excluded from consideration paid due to the acceleration of award vesting at the Company’s discretion. The remaining balance of approximately $5.5 million related to unvested Cascade restricted stock awards is included in the consideration paid. The assets and liabilities of Cascade were recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as goodwill. The purchase price allocation resulted in goodwill of $232.8 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Cascade and the Company. The following table summarizes the consideration paid, fair values of the Cascade assets acquired and liabilities assumed, and the resulting goodwill. All amounts were finalized in the first quarter of 2018.
| As Recorded | Fair Value |  | As Recorded
As of May 30, 2017 | by Cascade | Adjustments |  | by the Company
Assets acquired: |  |  |  |
Cash and cash equivalents | $ | 246.8 |  | $ | — |  |  | $ | 246.8 |
Investment securities | 476.7 |  | 4.9 |  | (1) | 481.6 |
Loans held for investment | 2,111.0 |  | (31.7 | ) | (2) | 2,079.3 |
Mortgage loans held for sale | 10.3 |  | — |  |  | 10.3 |
Allowance for loan loss | (24.0 | ) | 24.0 |  | (3) | — |
Premises and equipment | 46.6 |  | 0.1 |  | (4) | 46.7 |
Other real estate owned (“OREO”) | 1.2 |  | — |  |  | 1.2 |
Core deposit intangible assets | — |  | 48.0 |  | (5) | 48.0 |
Deferred tax assets, net | 47.6 |  | (20.9 | ) | (6) | 26.7 |
Other assets | 98.6 |  | 2.1 |  | (7) | 100.7 |
Total assets acquired | 3,014.8 |  | 26.5 |  |  | 3,041.3 |
Liabilities assumed: |  |  |  |
Deposits | 2,669.9 |  | (0.9 | ) | (8) | 2,669.0 |
Accounts Payable and Accrued Expense | 62.2 |  | 1.9 |  | (9) | 64.1 |
Total liabilities assumed | 2,732.1 |  | 1.0 |  |  | 2,733.1 |
Net assets acquired | $ | 282.7 |  | $ | 25.5 |  |  | $ | 308.2 |
Consideration paid: |  |  |  |
Cash |  |  |  | $ | 155.0 |
Class A common stock |  |  |  | 386.0 |
Total consideration paid |  |  |  | 541.0 |
Goodwill |  |  |  | $ | 232.8 |
Explanation of fair value adjustments:
(1) | Write up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2) | Write down of the book value of loans to their estimated fair values. Shared National Credits (SNC) were recorded at quoted sales prices where available. The fair value of the remaining loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company’s analysis of the fair value of each loan’s underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3) | Adjustment to remove the Cascade allowance for loan losses at acquisition date, as the credit risk is included in the fair value adjustment for loans receivable described in (2) above.
(4) | Write up of the book value of premises and equipment to their estimated fair values on the date of acquisition based upon appraisals obtained from an independent third party appraiser or broker’s opinion of value.
(5) | Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an independent accounting and advisory firm.
(6) | Adjustment consists of the write-off of pre-existing deferred tax assets and purchase accounting adjustments as a result of the acquisition.
(7) | Adjustment consists of various other assets recorded as a result of the acquisition, including mortgage servicing rights, SBA servicing rights, and favorable leases offset by reductions to the fair value of other items.
(8) | Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition based upon valuation from an independent accounting and advisory firm.
(9) | Increase in fair value due to credit card incentive program, unfavorable leases, write-off of balance sheet reserve, and swap liability offset.
Core deposit intangible assets of $48.0 million are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 years. The Company acquired certain loans that are subject to ASC Topic 310-30. For loans that meet the criteria stipulated in Topic 310-30, the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired (“accretable yield”) is amortized to interest income over the expected remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest amounts collected, and (iii) indices used to fair value variable rate loans. Information regarding Cascade loans acquired deemed credit-impaired as of the May 30, 2017 acquisition date is as follows:
Contractually required principal and interest payments | $ | 49.7 |
Contractual cash flows not expected to be collected (“non-accretable discount”) | 24.7 |
Cash flows expected to be collected | 25.0 |
Interest component of cash flows expected to be collected (“accretable discount”) | 1.9 |
Fair value of acquired credit-impaired loans | $ | 23.1 |
Information regarding Cascade acquired loans not deemed credit-impaired at the May 30, 2017 acquisition date is as follows:
Contractually required principal and interest payments | $ | 2,098.1 |
Contractual cash flows not expected to be collected | 23.3 |
Fair value at acquisition | $ | 2,066.5 |
The accompanying consolidated statements of income for the three and nine months ended September 30, 2018 and 2017, include the results of operations of the acquired entity from the May 30, 2017 acquisition date. The acquired entities continued to operate as Bank of the Cascades until August 11, 2017 at which point Cascade’s operations were integrated with the Company’s operations, and Bank of the Cascades was merged with FIB. Standalone amounts for the Bank of the Cascades were no longer available after that date. The following table presents unaudited pro forma consolidated revenues and net income as if the Cascade acquisition had occurred as of January 1, 2016.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2018 | 2017 |  | 2018 | 2017
Interest income | $ | 121.2 |  | $ | 108.7 |  |  | $ | 341.8 |  | $ | 312.1 |
Non-interest income | 36.2 |  | 38.3 |  |  | 109.0 |  | 116.2 |
Total revenues | $ | 157.4 |  | $ | 147.0 |  |  | $ | 450.8 |  | $ | 428.3 |
Net income | $ | 41.4 |  | $ | 34.9 |  |  | $ | 119.8 |  | $ | 94.0 |
EPS - basic | $ | 0.71 |  | $ | 0.52 |  |  | $ | 2.10 |  | $ | 1.55 |
EPS - diluted | 0.71 |  | 0.51 |  |  | 2.09 |  | 1.53 |
The unaudited pro forma net income presented in the table above for 2017 was adjusted to exclude acquisition-related costs, including change in control expenses related to employee benefit plans and legal and professional expenses of $19.7 million, net of tax. The unaudited pro forma net income presented in the table above for 2018 and 2017 includes adjustments for scheduled amortization of core deposit intangible assets acquired in the acquisition. The unaudited supplemental pro forma net income presented in the table above for 2017 does not capture operating cost savings and other business synergies expected as a result of the acquisition. The Company recorded $3.1 million of Northwest related pre-tax acquisition related expenses for the three months ended September 30, 2018 and $5.4 million of Northwest and Cascade related pre-tax acquisition related expenses for the nine months ended September 30, 2018. These costs are incorporated in non-interest expenses in the Company’s consolidated statements of income.
|  | Three Months Ended September 30, 2018 |  | Nine Months Ended September 30, 2018
Legal and Professional Fees |  | $ | 2.4 |  |  | $ | 3.0 |
Employee Expenses |  | — |  |  | 0.1 |
Technology Conversion and Contract Termination |  | 0.5 |  |  | 2.0 |
Other |  | 0.2 |  |  | 0.3 |
Total Acquisition Related Expenses |  | $ | 3.1 |  |  | $ | 5.4 |

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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