First Interstate BancSystem, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results. The Great Western Bancorp (GWB) acquisition closed February 1, 2022, so reported 2022 results include GWB from that date; comparisons with 2021 are not fully like-for-like.
Business context and material developments
First Interstate is a community banking company operating 308 banking offices across 14 states. It completed its acquisition of GWB for $1.723 billion in stock, issuing approximately 46.9 million shares. The acquired bank’s core systems converted on May 23, 2022. Purchase accounting and fair-value allocations remain provisional.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $237.9 million | $118.8 million | $415.9 million | $239.5 million |
| Net interest margin, FTE | 3.25% | 2.82% | 3.05% | 2.93% |
| Provision for (reversal of) credit losses | $(1.7) million | $0 | $59.6 million | $(5.1) million |
| Non-interest income | $51.0 million | $35.3 million | $100.2 million | $73.4 million |
| Non-interest expense | $210.3 million | $99.0 million | $417.5 million | $197.4 million |
| Net income | $64.1 million | $42.5 million | $30.7 million | $93.9 million |
| Diluted EPS | $0.59 | $0.69 | $0.30 | $1.52 |
- Q2 net income rose 50.8% year over year, primarily reflecting GWB; diluted EPS fell as the share count increased following the stock-funded acquisition. First-half net income declined 67.3%, chiefly due to acquisition-related expenses and purchase-accounting credit provision.
- Net interest income growth reflected the acquisition and higher earning-asset yields; acquired-loan fair-value accretion contributed $16.7 million in Q2 and $24.4 million year to date. Excluding acquired-loan accretion and PPP income, FTE margin was 3.01% in Q2 and 2.85% for the first half.
- Acquisition-related expense was $45.8 million in Q2 and $111.0 million for the first half. Mortgage banking revenue declined 47.9% in Q2, attributed mainly to reduced refinance activity; payment-services, wealth-management, and deposit-service revenues increased, substantially reflecting GWB.
- At June 30, assets were $32.1 billion, up 63.0% from year-end, and loans held for investment were $17.2 billion, up 83.9%. Total deposits were $26.9 billion, up 65.1%, including $11.7 billion acquired; excluding acquired deposits, deposits declined $1.1 billion, or 6.7%.
- Cash and cash equivalents were $1.06 billion, down from $2.34 billion at year-end. First-half operating cash flow was $269.2 million; investing cash use was $163.4 million and financing cash use was $1.39 billion. Financing cash flows included a $1.09 billion net deposit decrease, $157.9 million of debt repayments, $65.9 million of share repurchases, and $89.5 million of dividends.
- Long-term debt was $120.4 million and subordinated debentures were $163.1 million. Repurchase agreements totaled $1.23 billion. The filing states the company and bank exceeded applicable capital requirements; consolidated total risk-based capital was 13.60% and common equity tier 1 was 11.46%.
Credit, securities, and other notable items
- Loans’ allowance for credit losses was $220.4 million, or 1.28% of loans held for investment, versus $122.3 million, or 1.31%, at year-end. The first-half provision included $59.5 million related to acquired non-PCD loans and $2.1 million for acquired unfunded commitments; Q2 included a $1.7 million reversal.
- Nonperforming assets were $126.7 million, including $109.9 million of nonperforming loans, versus $29.7 million at year-end. Management attributed much of the increase to acquired GWB loans and OREO. The allowance was 205.98% of non-accrual loans.
- Available-for-sale securities had $456.2 million of gross unrealized losses at June 30, compared with $59.4 million at year-end, primarily reflecting interest-rate movements. Accumulated other comprehensive loss widened to $329.8 million from $11.0 million; the filing says the company intended and was able to hold the securities until anticipated recovery and did not expect forced sales.
- Management terminated a $500 million forward-starting interest-rate swap, recognizing a $23.3 million gain to be accreted into income through May 2026. The filing reports no material legal proceedings expected to adversely affect financial condition, results, or liquidity, and no material change in previously disclosed risk factors.
Outlook, risks, and contingencies
No specific earnings or financial guidance is provided. Management said higher rates were supporting net interest income through improved yields and asset mix, while noting uncertainty from inflation, economic slowdown or recession, deposit flows, and borrowers’ repayment capacity. The company’s model estimated net interest income would increase 2.78% under an immediate 100-basis-point parallel rate shock over 12 months, down from 7.68% at year-end 2021; under a gradual 2.0% rate increase over four quarters, the estimated increase was 2.42%, down from 7.07%. These are scenario estimates, not guidance. Management stated it was not aware of events likely to materially harm liquidity, capital resources, or operations. The board declared a $0.41-per-share quarterly dividend after quarter-end.
Important facts for investors to verify
- How much post-acquisition revenue, expense savings, and integration costs GWB contributes; standalone acquired-bank results were not practicable to disclose.
- Whether provisional acquisition valuations, including goodwill of $478.2 million and acquired-loan credit marks, change materially as purchase accounting is finalized.
- Whether deposit outflows excluding the acquisition persist, and how deposit pricing responds to further rate changes.
- Whether elevated nonperforming loans, troubled debt restructurings, and the allowance remain appropriate as economic conditions and credit quality evolve.
- The effect of unrealized securities losses, interest-rate sensitivity, and continued share repurchases and dividends on capital and liquidity.