First Interstate BancSystem, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; financial statements are unaudited. Unless noted, amounts are in millions of dollars. Comparisons are affected by the February 1, 2022 acquisition of Great Western Bank (GWB), whose results are included from that date.
Business context
First Interstate is a community banking holding company operating 308 banking offices across 14 states. It provides lending, deposit, payment, mortgage and wealth-management services. GWB’s systems conversion was completed in May 2022.
Key financial results and condition
| Metric | Q3 2022 | Comparable period / balance |
|---|---|---|
| Net interest income | $266.8 | $127.1 in Q3 2021 |
| Net interest margin, fully taxable equivalent | 3.71% | 2.90% in Q3 2021 |
| Provision for credit losses | $8.4 | No provision or reversal in Q3 2021 |
| Non-interest income | $22.9 | $39.5 in Q3 2021 |
| Non-interest expense | $173.2 | $105.9 in Q3 2021 |
| Net income / diluted EPS | $85.7 / $0.80 | $47.1 / $0.76 in Q3 2021 |
- Nine months: Net interest income was $684.2 versus $366.6; net interest margin was 3.27% versus 2.91%. Net income fell to $116.4 from $141.0, and diluted EPS was $1.13 versus $2.28.
- Balance sheet at September 30: Assets were $31.3 billion; loans held for investment, net, $17.4 billion; investment securities, $10.3 billion; deposits, $25.9 billion; and stockholders’ equity, $3.0 billion.
- Credit: Allowance for loan losses was $213.0, or 1.21% of loans held for investment. Nine-month net charge-offs were $29.0, or 0.24% of average loans. Nonperforming loans were $86.0, and nonperforming assets were $102.4.
- Cash flow, nine months: Operating activities provided $438.6; investing activities used $313.0; financing activities used $1,878.5. Cash and cash equivalents declined $1,752.9 to $591.9.
- Funding and capital: Other borrowed funds were $625.0, long-term debt $120.7, and subordinated debentures $163.1. The company reported a 10.49% consolidated CET1 ratio and said it exceeded applicable capital requirements. FHLB borrowing capacity was $3,962.4.
Material changes and unusual items
- GWB added $13.4 billion of assets and $11.7 billion of deposits at acquisition. Total assets grew 59.3% from year-end 2021; loans held for investment grew 88.6% and deposits 59.1%. Excluding acquired deposits, deposits subsequently declined $2.1 billion, mainly reflecting run-off of higher-cost acquired balances.
- Q3 net income increased 82.0% year over year, primarily due to GWB, while nine-month net income decreased 17.4%, reflecting the securities-sale loss, acquisition costs and purchase-accounting provision expense.
- Q3 non-interest income included a net $24.2 loss on securities transactions: a $46.3 loss on sale of U.S. Treasury notes was partly offset by recognition of a deferred swap gain. Nine-month acquisition-related expenses were $115.0.
- Available-for-sale securities had $665.0 of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $507.7 net of tax. Management said it did not intend, and did not expect it would need, to sell those securities before recovery.
- The company repurchased the full 5.0 million shares authorized under its 2022 program for approximately $197.4. A quarterly dividend of $0.47 per share was declared after quarter-end.
Outlook, commentary and risks
Management said net interest income was rising with higher asset yields and a more favorable earning-asset mix, while noting that higher rates could pressure borrowers’ repayment capacity. Its September 30 interest-rate simulation estimated net interest income would increase 1.97% under an immediate 100-basis-point shock and 2.43% under a gradual 2.0% increase over four quarters; both estimates were below the corresponding year-end 2021 estimates. The filing provides no specific earnings or revenue guidance.
Management cited inflation, uncertain economic growth, possible recession, deposit outflows, interest-rate changes and potential deterioration in loan quality as risks. It noted that future credit provisions could rise if the economy or asset quality weakens. The allowance reflects management’s estimates and economic forecasts. Management reported no material change in risk factors from the 2021 Form 10-K, no expected material adverse effect from ordinary-course litigation, and effective disclosure controls.
Important facts for investors to verify
- How much reported earnings and net interest income depend on acquired GWB operations and acquired-loan purchase-accounting accretion.
- Whether deposit run-off continues, and how deposit pricing and funding costs respond to further rate changes.
- Trends in criticized, nonperforming and restructured loans, charge-offs, and the adequacy of the allowance—particularly for acquired and commercial construction exposures.
- The duration and recovery sensitivity of the securities portfolio, its unrealized losses, and any further sales or hedge-related gains or losses.
- Whether acquisition integration delivers expected benefits and how recurring expenses compare with reported acquisition and integration costs.
- Future liquidity, borrowing levels and capital ratios, including the effects of dividends, repurchases and asset growth.