First Interstate BancSystem, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. This annual filing reports full-year results, not standalone fourth-quarter results.
Business context and reporting period
First Interstate is a community-banking holding company operating through First Interstate Bank, with one reportable segment. At year-end it had 307 banking offices in 14 states, $32.3 billion in assets, $25.1 billion in deposits, $18.1 billion in loans held for investment and $3.1 billion in stockholders’ equity.
Results include Great Western Bank (GWB) from its February 1, 2022 acquisition date. The $1.72 billion all-stock transaction added 174 offices and materially expanded the balance sheet; core systems were converted in May 2022. Accordingly, year-over-year comparisons are substantially affected by the acquisition.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $942.6 | $489.2 |
| Net interest margin, fully taxable-equivalent | 3.36% | 2.85% |
| Non-interest income | $163.2 | $149.5 |
| Provision for (reversal of) credit losses | $82.7 | ($14.6) |
| Non-interest expense | $766.0 | $405.5 |
| Net income | $202.2 | $192.1 |
| Diluted earnings per share | $1.96 | $3.11 |
| Return on average assets | 0.65% | 1.02% |
| Efficiency ratio | 67.83% | 61.94% |
| Operating cash flow | $534.4 | $282.3 |
Net interest income rose $453.4 million, driven by GWB’s acquired assets and higher market rates; acquired-loan interest accretion also contributed. The margin increased 51 basis points, or 38 basis points excluding acquired-loan accretion and recoveries. Net income increased 5.3%, but diluted EPS declined as shares outstanding rose substantially following the acquisition. Acquisition-related expense was $118.9 million, versus $11.6 million in 2021; management reported a $0.90 per-share after-tax impact in 2022.
Total assets increased 64.1% to $32.3 billion. Loans held for investment, net of deferred fees and costs, increased 94.0% to $18.1 billion, primarily from GWB. Deposits increased 54.1% year over year to $25.1 billion, including $11.7 billion acquired; after acquisition, deposits declined $2.9 billion, or 17.7%, from the 2021 year-end level. The company reported no brokered deposits at year-end.
Cash and cash equivalents fell to $870.5 million from $2.34 billion. Net cash provided by operating activities was $534.4 million; investing activities used $949.0 million and financing activities used $1.06 billion. The company had $2.327 billion in FHLB borrowings at year-end, compared with none a year earlier, and $1.053 billion in overnight repurchase agreements. Long-term debt was $120.8 million and subordinated debentures were $163.1 million. Management said capital exceeded regulatory requirements; the Bank was classified as well capitalized.
The allowance for credit losses on loans was $220.1 million, or 1.22% of loans, versus $122.3 million, or 1.31%, in 2021. Net charge-offs rose to $30.1 million from $7.3 million. Non-performing assets were $78.3 million, up from $29.7 million; year-end non-performing loans were $65.6 million. Accruing troubled debt restructurings not included in non-performing assets increased to $60.4 million from $2.3 million.
Available-for-sale securities had $629.7 million of gross unrealized losses at year-end, primarily attributed to interest-rate changes; accumulated other comprehensive loss was $477.1 million. Management reported no credit losses on available-for-sale securities and stated it had the intent and ability to hold the securities long enough to allow anticipated recovery. The company recorded a $24.4 million net investment securities loss, mainly from selling $500 million of Treasury notes and recognizing deferred swap gains.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management described ongoing uncertainty around inflation, interest rates and the possibility of an economic slowdown, downturn or recession. It noted that rising rates supported asset yields but could increase deposit costs, pressure funding and borrower repayment capacity, and affect loan demand.
- Integration and expenses: GWB’s core conversion was completed in May 2022. Integration, conversion and acquisition costs were significant; achieving expected cost savings and other benefits is not assured.
- Credit and concentration risks: Commercial loans, including $8.5 billion of commercial real estate loans, represented about 63% of loans held for investment. Management cited sensitivity to economic conditions, property values, commodity prices and borrower cash flows.
- Liquidity and funding: Deposit balances declined after the acquisition, and the company drew on short-term FHLB funding. Higher competition for deposits could increase funding costs. Management said it was not aware of events expected to materially impair liquidity, capital resources or operations.
- Interest-rate and securities exposure: Higher rates can affect margins, deposits, borrowers and the fair value of securities. The available-for-sale portfolio included $1.11 billion of collateralized loan obligations. Interest-rate sensitivity estimates are modeled scenarios, not forecasts.
- Capital returns: The company paid $182.1 million of common dividends and repurchased 5.0 million shares for $197.4 million in 2022. A $0.47-per-share quarterly dividend was declared in January 2023. The 2022 repurchase authorization was fully used.
- Other risks and contingencies: The filing highlights regulatory and compliance obligations, cybersecurity and third-party vendor risks, acquisition integration, LIBOR transition, goodwill impairment, climate and natural-disaster exposures, and competition. Management did not expect ongoing or anticipated legal matters to have a material adverse effect.
- Controls and audit: Management and the auditor reported effective internal control over financial reporting, with an unqualified audit opinion. However, the assessment and audit excluded GWB; its assets were approximately 40.4% of consolidated assets at acquisition.
Most important facts for investors to verify
- How deposit balances and mix evolved after year-end, and the company’s reliance and cost of FHLB and other wholesale funding.
- Whether loan delinquencies, non-performing assets, troubled restructurings and charge-offs continue to rise, particularly in commercial real estate and construction.
- How much of reported earnings and margin reflects acquired-loan accretion, rate changes and other non-recurring or acquisition-related items.
- The scale and duration of securities unrealized losses, liquidity available from unpledged securities, and sensitivity to further rate movements.
- Progress on GWB integration, recurring expense levels and realization of expected acquisition benefits; also note that GWB was excluded from the year-end internal-control assessment.
- Regulatory capital ratios, dividend capacity and any future share repurchase plans, given the acquisition-related share issuance and the completed 2022 repurchase authorization.