First Interstate BancSystem, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted, financial figures are in millions of dollars. The filing is unaudited.
Business context and reporting period
First Interstate is a community banking company operating across 14 states. On February 1, 2022, it completed its acquisition of Great Western Bancorp (GWB), expanding its footprint and substantially increasing its balance sheet. Q1 results include GWB operations from the acquisition date; the filing says a separate post-acquisition revenue and net income disclosure is impractical because of combined operations. GWB system conversion was expected in May 2022.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $227.2 | $158.8 in Q1 2021 |
| Net interest income | $178.0 | $120.7 in Q1 2021 |
| Net interest margin, fully taxable equivalent | 2.80% | 3.04% in Q1 2021 |
| Net income (loss) | $(33.4); diluted loss per share $(0.36) | $51.4; diluted EPS $0.83 in Q1 2021 |
| Provision for credit losses | $61.3 | $5.1 reversal in Q1 2021 |
| Non-interest income | $49.2 | $38.1 in Q1 2021 |
| Non-interest expense | $207.2, including $65.2 of acquisition-related expense | $98.4 in Q1 2021 |
| Operating cash flow | $64.9 | $70.5 in Q1 2021 |
| Total assets | $33,162.2 | $19,671.9 at December 31, 2021 |
| Loans held for investment, net of deferred fees and costs | $16,945.0 | $9,331.7 at December 31, 2021 |
| Total deposits | $28,088.3 | $16,269.6 at December 31, 2021 |
| Cash and cash equivalents | $3,811.3 | $2,344.8 at December 31, 2021 |
| Long-term debt / subordinated debentures | $120.4 / $163.1 | $112.4 / $87.0 at December 31, 2021 |
| Stockholders’ equity | $3,441.1 | $1,986.6 at December 31, 2021 |
The company reported regulatory capital ratios above applicable capital adequacy requirements. At March 31, 2022, consolidated total risk-based capital was 14.27%, CET1 was 11.91%, and the leverage ratio was 8.96%.
Material changes versus comparable periods
- Net income declined by $84.8 million year over year to a loss, primarily due to GWB acquisition expenses and the higher provision for credit losses.
- Net interest income rose 47.5%, principally reflecting the acquired business; this was partly offset by lower Paycheck Protection Program (PPP) loan income. The company reported $7.6 million of acquired-loan fair-value accretion, including $6.0 million related to GWB.
- Net interest margin fell 24 basis points year over year, which management attributed mainly to a shift toward lower-yielding securities and cash. Excluding acquired-loan accretion and PPP income, the margin was 2.65%, versus 2.81% a year earlier.
- Assets, loans, deposits, and equity expanded substantially with the acquisition. The company issued approximately 46.9 million shares valued at $1,723.3 million as consideration.
- Available-for-sale securities had $293.1 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $202.0 million, compared with $11.0 million at year-end 2021. Management said it intended and was able to hold the securities long enough to allow anticipated recovery.
Outlook, commentary, risks, and unusual items
- Acquisition and integration: The GWB purchase-price allocation and fair values remained provisional and subject to refinement. The acquisition generated $516.0 million of provisional goodwill, which is not tax deductible. System conversion was expected in May 2022.
- Credit quality: The $61.3 million provision included $68.3 million for acquired non-PCD loans, $2.1 million for acquired unfunded commitments, and $1.6 million for held-to-maturity securities, partly offset by a $10.7 million net reversal primarily related to the legacy portfolio. Net charge-offs were $16.7 million, including $15.4 million on acquired GWB loans associated with accelerated restructuring. Nonperforming assets were $139.1 million versus $29.7 million at year-end, largely reflecting acquired assets.
- Economic and rate risks: Management noted multidecade-high inflation, the Federal Reserve’s March rate increase, a 1.4% annualized decline in first-quarter U.S. GDP, and uncertainty over whether economic weakness would persist. It highlighted possible effects on customers, deposits, loan repayment, credit losses, expenses, and margins. Management said interest-rate movements generally have a greater effect on the company than inflation itself.
- Liquidity and funding: Management said it continuously monitors liquidity and was not aware of events reasonably likely to materially adversely affect liquidity, capital resources, or operations. Funding sources include deposits, operating cash flow, maturing assets, and potential borrowings. Deposit growth excluding acquired deposits was $136.1 million, or 0.84%, from year-end.
- Other items: The company declared a $0.41-per-share quarterly dividend on April 27, payable May 20, 2022. It reported no material changes in risk factors or market-risk disclosures, and management concluded disclosure controls were effective as of March 31, 2022. No formal financial guidance is provided in the filing.
Most important facts for investors to verify
- How much of the reported loss and expense burden is nonrecurring acquisition cost, and how quickly are expected integration benefits realized?
- Whether GWB’s provisional loan marks, goodwill, and other purchase-accounting estimates change as valuations are finalized.
- Credit performance of acquired loans, including criticized and nonaccrual exposures, and whether elevated charge-offs or provisions continue.
- Effects of interest-rate changes on net interest margin, securities values, deposit costs, and liquidity; monitor the substantial unrealized securities losses.
- Whether deposit growth, capital ratios, and liquidity remain resilient as the acquired business is integrated and economic conditions evolve.