BILLINGS, Mont., January 26, 2023--(BUSINESS WIRE)--First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the fourth quarter of 2022. For the quarter, the Company reported net income of $85.8 million, or $0.82 per diluted share, which compares to net income of $85.7 million, or $0.80 per share, for the third quarter of 2022, and net income of $51.1 million, or $0.83 per share, for the fourth quarter of 2021.

Earnings include pre-tax acquisition costs of $3.9 million, $4.0 million, and $5.0 million for the fourth quarter of 2022, the third quarter of 2022, and the fourth quarter of 2021, respectively, which were related to the acquisition of Great Western Bancorp, Inc. ("Great Western"), the parent company of Great Western Bank ("GWB"), which reduced earnings by $0.03, $0.03, and $0.06 per common share for the fourth quarter of 2022, the third quarter of 2022, and the fourth quarter of 2021, respectively.

For the year ending December 31, 2022, the Company reported net income of $202.2 million, or $1.96 per diluted share, compared to $192.1 million, or $3.11 per diluted share, in 2021. Results in the 2022 and 2021 periods include pre-tax acquisition costs related to the Great Western acquisition of $118.9 million and $11.6 million, respectively, which reduced earnings by $0.90 and $0.15 per common share for December 31, 2022 and 2021, respectively.

HIGHLIGHTS

• Net income of $85.8 million, or $0.82 per diluted share, for the fourth quarter of 2022, driven by loan growth and offset by a provision for credit losses of $14.7 million as well as a reduction in purchase accounting accretion of $9.3 million from the third quarter of 2022.

• Net interest margin, on a fully taxable equivalent basis, decreased to 3.61% for the fourth quarter of 2022, a 10 basis point decrease from the third quarter of 2022. Excluding income related to purchase accounting accretion, the adjusted net interest margin¹, on a fully taxable equivalent basis, increased to 3.49% for the fourth quarter of 2022, a two basis point increase from the third quarter of 2022.

• Efficiency ratio of 57.1% for the fourth quarter of 2022 compared to 58.4% for the third quarter of 2022. Adjusted efficiency ratio¹ was 54.6% for the fourth quarter of 2022 compared to an adjusted efficiency ratio of 52.4% for the third quarter of 2022.

• Return on average common stockholders’ equity of 11.2% for the fourth quarter of 2022. Adjusted return on average common stockholders’ equity¹ was 11.7% for the fourth quarter of 2022.

• Loans held for investment increased $495.7 million, or an annualized 11.1% during the fourth quarter of 2022.

• Non-performing loans decreased $20.4 million, to $65.6 million as of December 31, 2022, from $86.0 million as of September 30, 2022.

• Book value per common share of $29.43 as of December 31, 2022, compared to $28.77 as of September 30, 2022, and $31.94 as of December 31, 2021. Tangible book value per common share¹ of $17.69 as of December 31, 2022, compared to $17.01 as of September 30, 2022 and $20.83 as of December 31, 2021, driven by a change in accumulated other comprehensive loss related to unrealized losses on available-for-sale securities.

¹ Non-GAAP financial measure - see Non-GAAP Financial Measures included herein for a reconciliation.

"Our fourth quarter performance wrapped up a strong year for the Company as we executed well on the integration of our merger with Great Western, realizing the cost synergies projected for the transaction while generating solid organic loan growth throughout our footprint," said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. "We continued to see a significant volume of high quality lending opportunities in the fourth quarter, with our newer markets helping us generate our strongest organic loan growth of the year. We also saw positive trends in our adjusted net interest margin and asset quality, as non-performing assets declined by 23.5%.

"Entering 2023, with our strong levels of capital, ample liquidity, and an allowance for credit loss positioned for a more uncertain macro-economic environment, we believe we are well positioned to effectively manage through a wide range of economic scenarios. As we continue to gain more traction in our newer markets, we expect to continue generating solid loan growth in 2023, although likely at a lower level than last year given the possibility of weaker economic conditions. While we expect 2023 to present a more challenging operating environment, with the strength of the franchise we have built and the strong execution we are seeing throughout the organization, we believe that we are well positioned to continue creating long-term value for our shareholders," said Mr. Riley.

DIVIDEND DECLARATION

On January 25, 2023, the Company’s board of directors declared a dividend of $0.47 per common share, payable on February 17, 2023, to common stockholders of record as of February 7, 2023. The dividend equates to a 4.4% annualized yield based on the $42.30 per share average closing price of the Company’s common stock as reported on NASDAQ during the fourth quarter of 2022.

GWB ACQUISITION

On February 1, 2022, the Company completed its acquisition of Great Western and GWB, a Sioux Falls, South Dakota based community bank with 174 banking offices across Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. Consideration for the acquisition totaled approximately $1.7 billion consisting of the issuance of 46.9 million shares of the Company’s Class A common stock valued at $36.76 per share, the opening price of the Company’s Class A common stock as quoted on the NASDAQ stock market on the acquisition date. GWB was merged with our existing bank subsidiary, First Interstate Bank, contemporaneously with the closing of the parent company merger. The core system conversion was completed on May 23, 2022.

As of the acquisition date, Great Western had total assets with fair values of $13,351.8 million, loans held for investment with fair values of $7,705.0 million and deposits with fair values of $11,688.0 million. As of December 31, 2022, the Company recorded provisional goodwill of $479.3 million, customer relationship intangible assets of $22.8 million, and core deposit intangible assets of $50.1 million.

NET INTEREST INCOME

Net interest income decreased $8.4 million, or 3.1%, to $258.4 million, during the fourth quarter of 2022, compared to net interest income of $266.8 million during the third quarter of 2022, resulting from a $9.3 million decrease in purchase accounting accretion. Excluding purchase accounting accretion, net interest income increased by $0.9 million compared with the prior quarter. Net interest income increased $136.3 million, or 111.6%, during the fourth quarter of 2022, from $122.1 million during the fourth quarter of 2021, primarily as a result of the impact of the GWB acquisition, which was partially offset by a decrease of $9.7 million in Payroll Protection Program ("PPP") loan income compared to the fourth quarter of 2021.

• Interest accretion attributable to the fair valuation of acquired loans from acquisitions contributed to net interest income during the fourth quarter of 2022, the third quarter of 2022, and the fourth quarter of 2021, in the amounts of $8.4 million, $17.7 million, and $1.9 million respectively.

The net interest margin ratio was 3.61% for the fourth quarter of 2022 compared to 3.71% reported during the third quarter of 2022 and 2.69% during the fourth quarter of 2021. Excluding interest accretion from the fair value of acquired loans, on a quarter-over-quarter basis the net interest margin increased two basis points, as the expansion of loan yields and a favorable result from a shift in the mix of earning assets that more than offset the increased cost of funds. On the same basis year-over-year, the increase in net interest margin was the result of increased yields on earning assets and a shift in the mix of earning assets toward investment securities and loans.

PROVISION FOR (REDUCTION OF) CREDIT LOSSES

During the fourth quarter of 2022, the Company recorded a provision for credit losses of $14.7 million, including a provision for unfunded commitments of $6.5 million. The increase to the provision for credit losses was a result of loan growth and qualitative adjustments to account for changes to macro-economic conditions that have been forecasted to impact the Company’s clients. This compares to a provision for credit losses of $8.4 million during the third quarter of 2022 and a $9.5 million reduction of credit losses during the fourth quarter of 2021.

For the fourth quarter of 2022, the allowance for credit losses included measurements for net charge-offs of $1.1 million, or an annualized 0.02% of average loans outstanding, compared to net charge-offs of $12.0 million, or an annualized 0.27% of average loans outstanding, for the third quarter of 2022, and net charge-offs of $2.7 million, or an annualized 0.11% of average loans outstanding, for the fourth quarter of 2021.

The Company’s allowance for credit losses as a percentage of period-end loans held for investment was 1.22%, 1.21%, and 1.31% at December 31, 2022, September 30, 2022, and December 31, 2021, respectively. Coverage of non-performing loans increased to 335.5% at December 31, 2022, compared to 247.7% at September 30, 2022 and decreased from 441.5% at December 31, 2021. The increase from September 30, 2022 is a result of lower levels of non-performing loans. The year-over-year decrease is a result of higher levels of non-performing loans related to the GWB acquisition.

NON-INTEREST INCOME

Non-interest income during the fourth quarter of 2022 compared to the third quarter of 2022 increased $18.7 million. The primary driver of the increase was the net loss of $24.2 million incurred on the sale of $500 million in U.S. treasury notes that had been previously swapped in the third quarter of 2022. Excluding the net loss, the decrease in non-interest income resulted from decreased payment services revenues, lower service charges on deposit accounts resulting from higher earnings credits and a decrease in other service charges, commissions, and fees as a result of lower swap fee revenue. Other income decreased in part related to a valuation write down on loans held for sale.

Compared to the fourth quarter of 2021, non-interest income increased by $4.5 million. The increase was primarily due to payment services revenues, partially offset by a decrease in mortgage banking revenues, reflecting a decrease in home loan production volume.

NON-INTEREST EXPENSE

The Company’s non-interest expense was $175.3 million for the fourth quarter of 2022, an increase of $2.1 million from the third quarter of 2022. The increase was driven by a $4.2 million incentive compensation adjustment based on the achievement of certain asset quality metrics as of December 31, 2022 in addition to the write down of property classified as other real estate owned and higher expenses related to the GWB acquisition. Included in other expenses was a $1.3 million accrual related to the settlement of an outstanding litigation. These increases were partially offset by a decrease in employee benefits as a result of unmet defined goals of long-term incentives.

Compared to the fourth quarter of 2021, non-interest expense increased by $73.1 million. The increase is largely due to the acquisition expenses related to the acquisition of GWB including employee-related costs and operations extending into a larger footprint.

BALANCE SHEET

Total assets increased $943.1 million, or 3.0%, to $32,287.8 million as of December 31, 2022, from $31,344.7 million as of September 30, 2022, primarily due to increases in loans held for investment, cash and cash equivalents, and investment securities. Total assets increased $12,615.9 million, or 64.1%, from $19,671.9 million as of December 31, 2021, primarily due to $13,351.8 million of assets acquired in the acquisition of GWB, which was partially offset by a decrease in cash and cash equivalents.

Investment securities increased $128.8 million, or 1.3%, to $10,397.9 million as of December 31, 2022, from $10,269.1 million as of September 30, 2022, and increased $3,889.8 million, or 59.8%, from $6,508.1 million as of December 31, 2021. The increase in the current quarter was driven by the purchase of U.S. Treasury securities. The year-over-year increase was primarily due to the redeployment of cash and cash equivalents into the securities portfolio and $2,699.0 million of securities acquired as a result of the GWB acquisition.

Investment in Federal Home Loan and Federal Reserve Bank stock increased $66.7 million, or 50.6%, to $198.6 million as of December 31, 2022, from $131.9 million as of September 30, 2022 and increased $144.8 million, or 269.1%, from $53.8 million as of December 31, 2021, primarily due to investment requirements in each of the organization’s capital stock that are applicable to the Company.

Loans held for sale decreased $13.7 million, or 14.6%, to $79.9 million as of December 31, 2022, from $93.6 million as of September 30, 2022, primarily due to a decrease in production of residential mortgage loans held for sale. Loans held for sale increased $49.8 million, or 165.4%, from $30.1 million as of December 31, 2021, primarily due to acquired agricultural loans transferred to held for sale.

The following table presents the composition and comparison of loans held for investment: