First Interstate BancSystem, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts are in U.S. dollars; financial figures are generally in millions unless stated otherwise. The February 1, 2022 Great Western Bancorp merger occurred after year-end and is not included in 2021 operating results.
Business context
First Interstate is a community banking holding company operating through First Interstate Bank, with one reportable segment. At year-end 2021, it had 147 banking offices in Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming, and provided lending, deposit, mortgage, wealth management, and related services. The company reported $19.7 billion of assets, $16.3 billion of deposits, $9.3 billion of loans held for investment, and $2.0 billion of stockholders’ equity.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net income | $192.1 | $161.2 | Up 19.2%; diluted EPS was $3.11 versus $2.53. |
| Net interest income | $488.2 | $497.0 | Down $8.8; fully taxable-equivalent net interest income was $490.4 versus $499.0. |
| Net interest margin (FTE) | 2.86% | 3.47% | Down 61 basis points. |
| Provision for credit losses | $(14.6) reversal | $56.9 expense | Reflects a provision release in 2021 versus a provision in 2020. |
| Non-interest income | $150.5 | $156.7 | Down 4.0%. |
| Non-interest expense | $405.5 | $387.5 | Up 4.6%; includes $11.6 of acquisition costs and a $1.0 legal settlement. |
| Efficiency ratio | 61.94% | 57.61% | Higher, indicating weaker operating efficiency under the company’s definition. |
| Return on average assets | 1.02% | 1.00% | Slightly higher. |
| Return on average common equity | 9.73% | 8.12% | Higher. |
Lower asset yields following 2020 rate cuts and a larger mix of lower-yielding securities and bank deposits weighed on net interest margin. Lower funding costs and PPP loan forgiveness income partly offset the pressure. Mortgage banking revenue fell to $40.8 from $47.3, while payment services revenue rose to $45.1 from $41.1 and wealth management revenue rose to $26.3 from $23.8. The effective federal tax rate was 17.4%, versus 17.5%.
Total assets rose 11.5% to $19.7 billion. Deposits increased 14.4% to $16.3 billion, including a 20.2% increase in non-interest-bearing demand deposits to $5.6 billion. The company reported no brokered deposits. Investment securities grew 60.3% to $6.5 billion, while loans held for investment, net of deferred fees and costs, declined 4.9% to $9.3 billion, largely as PPP balances ran off.
Net loans after allowance were $9.2 billion; the loan-loss allowance was $122.3, or 1.31% of loans, versus $144.3, or 1.47%, in 2020. Net charge-offs were $7.3, or 0.07% of average loans, compared with $14.2, or 0.14%. Non-performing assets fell to $29.7 from $50.5; non-performing loans were $27.7, or 0.30% of loans held for investment.
Cash and cash equivalents were $2.3 billion, and stockholders’ equity was $2.0 billion. Operating cash flow was $282.3; investing activities used $2.12 billion, principally reflecting securities purchases, while financing activities provided $1.91 billion, mainly from deposit growth. Year-end long-term debt was $112.4 and subordinated debentures held by subsidiary trusts were $87.0; securities sold under repurchase agreements were $1.05 billion. The company reported approximately $2.07 billion of available FHLB lines, subject to collateral availability, with no FHLB advances outstanding. The Bank was categorized as well capitalized; its CET1 ratio was 11.79%, total risk-based capital ratio 12.56%, and leverage ratio 7.24%.
Material changes, outlook, and risks
- Great Western merger: Completed February 1, 2022, in exchange for approximately 46.9 million First Interstate Class A shares valued at about $1.7 billion at closing. The combined company added 174 offices across additional states. The acquisition accounting and pro forma combined revenue and earnings were incomplete or unavailable when the 10-K was filed; branch and system conversion was expected in May 2022.
- Shareholder returns: The company paid $101.6 in common dividends during 2021. A quarterly dividend of $0.41 per share was declared in January 2022 and paid in February. The board may change future dividends. The company repurchased 72,700 shares under its program in 2021.
- Management outlook: No numerical earnings or revenue guidance is provided. Management said it was monitoring COVID-19, inflation, supply-chain disruptions, and economic conditions. Its model estimated net interest income would increase 7.68% under an immediate 100-basis-point rate increase, assuming a static balance sheet; management cautioned that such simulations are not forecasts.
- Key risks: Commercial real estate and commercial business loans represented about 59.1% of the loan portfolio; local economic weakness, borrower stress, commodity exposure, or falling collateral values could increase losses. Interest-rate changes may affect margins, asset values, funding costs, and credit quality. The company also identified deposit competition, cyber and third-party service risks, COVID-19 and inflation uncertainty, and the complexity, cost, employee retention, and benefit-realization risks of integrating Great Western.
- Other notable items: The company transferred $646.7 of securities from available-for-sale to held-to-maturity during 2021. Year-end accumulated other comprehensive loss was $11.0, including the impact of market-value changes in securities. The company held $899.4 of available-for-sale CLO securities. It ceased new USD LIBOR originations at year-end 2021 and said legacy contracts were being transitioned ahead of the scheduled June 2023 cessation for remaining U.S. dollar LIBOR settings.
- Contingencies and controls: Management did not expect pending or anticipated legal matters to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Review subsequent filings for Great Western’s acquisition-date fair values, goodwill and intangible assets, pro forma results, integration charges, realized cost savings, and actual conversion progress.
- Track post-merger deposit retention and funding costs, loan growth and credit quality, and any change in the combined company’s capital ratios.
- Assess whether net interest margin stabilizes or improves as rates change, and compare realized results with the company’s interest-rate simulation assumptions.
- Monitor credit-loss allowance adequacy and concentrations, especially commercial real estate, commercial business, agriculture, energy, and other locally exposed borrowers.
- Check the securities portfolio’s value sensitivity, liquidity availability, and CLO exposure, as well as the status of legacy LIBOR contract transitions.
- Confirm the sustainability of dividends and the effect of the merger’s share issuance on per-share earnings and shareholder dilution.