First Interstate BancSystem, Inc. Reports First Quarter Earnings

BILLINGS, Mont.–(BUSINESS WIRE)–First Interstate BancSystem, Inc. (NASDAQ: FIBK) today reported financial results for the first quarter of 2022. For the quarter, the Company reported a net loss of $33.4 million, or $0.36 per share, which compares to net income of $51.1 million, or $0.83 per share, for the fourth quarter of 2021, and net income of $51.4 million, or $0.83 per share, for the first quarter of 2021.

The first quarter of 2022 and the fourth quarter of 2021 earnings include pre-tax acquisition costs of $65.2 million and $5.0 million, respectively, related to the acquisition of Great Western Bancorp, Inc. (“Great Western”), the parent company of Great Western Bank (“GWB”), which reduced earnings by $0.57 and $0.06 per common share for the first and fourth quarters, respectively. The first quarter of 2021 did not include comparable costs.

HIGHLIGHTS

• We successfully completed the acquisition of Great Western on February 1, 2022, for consideration of 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. Following the acquisition, the Company’s dual class share structure was eliminated on March 25, 2022.

• Total assets increased $13,490.3 million, or 68.6%, to $33,162.2 million as of March 31, 2022, from $19,671.9 million as of December 31, 2021, primarily as a result of assets acquired from GWB.

• Net interest margin ratio, on a fully taxable equivalent basis, increased to 2.80% for the first quarter of 2022, an 11 basis point increase from the fourth quarter of 2021. Excluding income related to the Payroll Protection Program (PPP) and interest accretion income, the net interest margin, on a fully taxable equivalent basis, increased to 2.65% for the first quarter of 2022, a 19 basis point increase from the fourth quarter of 2021.

• First quarter 2022 provision expense of $61.3 million includes $68.3 million attributable to non-purchase credit deteriorated loans acquired in the transaction, which reduced earnings $0.59 per share, for the first quarter of 2022.

• Total deposits increased $11,818.7 million, or 72.6%, to $28,088.3 million as of March 31, 2022 from $16,269.6 million as of December 31, 2021, resulting in a 294.43% annualized growth rate in deposits. Excluding deposits acquired as a result of the GWB acquisition (as of February 1, 2022), annualized deposit growth was 3.24% for the first quarter of 2022.

• All credit metrics for the legacy FIBK loan portfolio again showed sequential improvement at March 31, 2022 from December 31, 2021. At the same time, credit metrics for the acquired GWB loan portfolio showed meaningful improvement when compared with announced expectations at deal announcement. Purchased credit deteriorated loans for the GWB loans acquired were $722.4 million at February 1, 2022, down from $1,201.0 million as disclosed with the announcement of the transaction on September 16, 2021.

• Net charge-offs in the first quarter of 2022 were $16.7 million, or an annualized 0.47% of average loans outstanding, of which net charge-offs of $15.4 million was attributable to the loans acquired from GWB in order to facilitate accelerated restructuring of several credits. Exclusive of charge-offs related to the acquired loans, net charge-offs were $1.3 million, or a decrease of $1.4 million as of March 31, 2022, from $2.7 million, or an annualized 0.11% of average loans outstanding, as of December 31, 2021, and decreased $1.6 million, from $2.9 million, or an annualized 0.12% of average loans outstanding, as of March 31, 2021.

• Tangible book value per common share of $19.78 as of March 31, 2022, compared to $20.83 as of December 31, 2021 and $19.85 as of March 31, 2021. Quarter over quarter, tangible book value decreased $1.05 per share driven by the change in accumulated other comprehensive income of $191.0 million, or $1.74 per share.

“We are excited to capitalize on some of the most vibrant, fastest growing markets in the country. This quarter, we continued to deploy our excess liquidity into higher yielding earning assets and saw expansion in our net interest margin. Excluding the impact created by the purchase accounting provision and transaction costs, we had another quarter of strong earnings” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “The completion of our merger with Great Western Bancorp at the beginning of February has further increased our exposure to attractive markets, while adding a talented team of commercial bankers that will benefit from the greater resources and support they will have as part of First Interstate. The integration is proceeding smoothly and we remain on track to realize the cost savings projected for the transaction during the second half of the year.

“As a result of the strong progress that Great Western made in resolving its problem loans prior to the completion of the merger and the pro-active resolution efforts we have taken since the closing, we now expect the resolution of credit quality issues to be less of a headwind to total loan growth in our first year of combined operations than we initially anticipated. Our loan pipeline remains strong, which should lead to continued favorable shifts in our mix of earning assets and positive trends in our level of profitability,” said Mr. Riley.

DIVIDEND DECLARATION

On April 27, 2022, the Company’s board of directors declared a dividend of $0.41 per common share, payable on May 20, 2022, to common stockholders of record as of May 10, 2022. The dividend equates to a 4.2% annualized yield based on the $39.40 per share average closing price of the Company’s common stock as reported on NASDAQ during the first quarter of 2022.

RECENT ACQUISITION

On February 1, 2022, the Company completed its acquisition of Great Western, the parent company of 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. GWB was merged with our existing bank subsidiary, First Interstate Bank, contemporaneously with the closing of the parent company merger. The core system conversion is expected to occur over the weekend of May 21, 2022.

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 exchange on the acquisition date. As of the acquisition date, Great Western had total assets with fair values of $13,311.2 million, loans held for investment with fair values of $7,713.3 million and deposits with fair values of $11,682.6 million. The Company has recorded provisionally the fair values of the assets and liabilities acquired from GWB provisionally and will finalize the amounts during the year. In conjunction with the acquisition, the Company recorded provisional goodwill of $516.0 million, customer relationship intangible assets of $22.8 million, and core deposit intangible assets of $49.1 million.

NET INTEREST INCOME

Net interest income increased $56.2 million, or 46.1%, to $178.0 million, during the first quarter of 2022, compared to $121.8 million during the fourth quarter of 2021, primarily as a result of the impact of the GWB acquisition and an expansion in our net interest margin, which was partially offset by a decrease of $6.9 million in PPP loan income during the first quarter of 2022. Net interest income increased $57.3 million, or 47.5%, during the first quarter of 2022, from $120.7 million during the first quarter of 2021, primarily as a result of the impact of the GWB acquisition, which was partially offset by a decrease of $9.5 million in PPP loan income compared to the first quarter of 2021.

• Interest accretion attributable to the fair valuation of acquired loans from acquisitions contributed $7.6 million, $1.9 million, and $2.3 million to net interest income during the first quarter of 2022, the fourth quarter of 2021, and the first quarter of 2021, respectively. Interest accretion attributable to the GWB acquisition accounted for $6.0 million during the first quarter of 2022.

• The Company earned a total of $2.8 million of interest income, including loan fees, on PPP loans with average balances of $91.6 million during the first quarter of 2022 as compared to $9.7 million of interest income, including loan fees, on PPP loans with average balances of $200.1 million during the fourth quarter of 2021 and $12.3 million of interest income, including loan fees, on PPP loans with average balances of $764.0 million during the first quarter of 2021. The Company had $1.3 million of unearned deferred fees related to PPP loans accrued as of March 31, 2022.

The net interest margin ratio was 2.80% for the first quarter of 2022 compared to 2.69% reported during the fourth quarter of 2021 and 3.04% during the first quarter of 2021. Excluding interest accretion from the fair value of acquired loans and PPP income, on a quarter-over-quarter basis the net interest margin expanded 19 basis points primarily the result of a shift in the mix of earning assets toward loans, and an increase in the yield on investment securities and cash. On the same basis year-over-year, the decrease in net interest margin was the result of a reduction in yields on earning assets, due to a shift in the mix of earning assets toward investment securities, and lower yields on both loans and investment securities.

PROVISION FOR (REDUCTION OF) CREDIT LOSSES

During the first quarter of 2022, the Company recorded a provision for credit losses of $61.3 million, compared to a reduction of $9.5 million during the fourth quarter of 2021, and a reduction of $5.1 million during the first quarter of 2021. The provision during the first quarter of 2022 includes $70.4 million related to the day two GWB acquisition impact, of which $68.3 million is related to the acquired non-PCD funded loans and $2.1 million is related to the unfunded commitments.

The allowance for credit losses is updated quarterly based on the current loan portfolio, asset quality metrics, and the results of the current economic outlook. For the first quarter of 2022, the allowance for credit losses was impacted by net charge-offs of $16.7 million, or an annualized 0.47% of average loans outstanding, compared to net charge-offs of $2.7 million, or an annualized 0.11% of average loans outstanding, for the fourth quarter of 2021, and net charge-offs of $2.9 million, or an annualized 0.12% of average loans outstanding, for the first quarter of 2021.

The Company’s allowance for credit losses as a percentage of period-end loans was 1.46%, 1.31%, and 1.38% at March 31, 2022, December 31, 2021, and March 31, 2021, respectively. The increase in the percentage from December 31, 2021 is primarily a result of GWB acquired loans, which included a higher percentage of criticized assets than the Company’s legacy loans. Coverage of non-performing loans decreased to 203.3% at March 31, 2022, compared to 441.5% at December 31, 2021 and 330.0% at March 31, 2021, as a result of higher levels of non-performing loans related to the GWB acquisition.

NON-INTEREST INCOME

Non-interest income increased $11.8 million, or 31.6%, to $49.2 million during the first quarter of 2022, as compared to $37.4 million during the fourth quarter of 2021 and increased $11.1 million, or 29.1%, from $38.1 million during the first quarter of 2021, primarily as a result of the GWB acquisition.

Payment services revenues increased $3.5 million, or 31.0%, to $14.8 million during the first quarter of 2022, when compared to the $11.3 million during the fourth quarter of 2021. Payment services revenues increased $4.6 million, or 45.1%, during the first quarter of 2022, when compared to the $10.2 million during the first quarter of 2021. These increases are mainly the result of increased revenue from the GWB acquisition and higher business credit card volume during the first quarter of 2022 as compared to the fourth quarter of 2021 and the first quarter of 2021.

Mortgage banking revenues increased $0.4 million, or 5.0%, to $8.4 million during the first quarter of 2022, as compared to $8.0 million during the fourth quarter of 2021. Included in the first quarter of 2022 was a $3.4 million recovery of mortgage servicing rights impairment compared to a $1.0 million recovery of impairment during the fourth quarter of 2021. Excluding the impairment recovery from both quarters, the decrease in revenues was driven by lower net realized gain-on-sale margins and a decline in the volume of loans sold when compared to the fourth quarter of 2021. Mortgage banking revenues decreased $3.2 million, or 27.6%, during the first quarter of 2022 from $11.6 million during the first quarter of 2021. Included in the first quarter of 2022 was a $3.4 million recovery of mortgage servicing rights impairment compared to a $5.9 million recovery of impairment during the first quarter of 2021. Excluding the impairment recovery in both quarters, year-over-year revenues decreased $0.7 million as a result of lower refinance volumes. During the first quarter of 2022, loans originated for home purchases accounted for approximately 63.3% of loan production, as compared to 59.0% during the fourth quarter of 2021 and 44.4% during the first quarter of 2021.

Service charges on deposit accounts increased $3.3 million, or 75.0%, to $7.7 million during the first quarter of 2022, as compared to $4.4 million during the fourth quarter of 2021 and increased $3.9 million, or 102.6%, during the first quarter of 2022 from $3.8 million during the first quarter of 2021. These increases are primarily due to the GWB acquisition.

Other service charges, commissions, and fees increased $1.5 million, or 53.6%, to $4.3 million during the first quarter of 2022, when compared to $2.8 million during the fourth quarter of 2021 and increased $2.2 million, or 104.8%, during the first quarter of 2022 from $2.1 million during the first quarter of 2021. The increases were primarily due to the acquisition of GWB and increases in swap fee revenues.

Other income increased $3.2 million, or 114.3%, to $6.0 million during the first quarter of 2022, as compared to $2.8 million during the fourth quarter of 2021, primarily due to a $1.4 million gain on the disposition of the GWB acquired subordinated debt and an increase in the cash surrender value of life insurance during the first quarter of 2022. Other income increased $1.9 million, or 46.3%, during the first quarter of 2022 from $4.1 million during the first quarter of 2021, primarily due to a $1.4 million gain on the disposition of the GWB acquired subordinated debt.

NON-INTEREST EXPENSE

Non-interest expense increased $105.0 million, or 102.7%, to $207.2 million during the first quarter of 2022, as compared to $102.2 million during the fourth quarter of 2021, primarily due to an increase of $60.2 million in acquisition related costs and operating expenses of GWB. Exclusive of acquisition related expenses, non-interest expense increased $44.8 million during the first quarter of 2022, compared to the fourth quarter of 2021, primarily as a result of the operating expenses of GWB. Non-interest expense increased $108.8 million, or 110.6%, from $98.4 million during the first quarter of 2021, primarily due to $65.2 million in acquisition related costs and the operating expenses of GWB. Exclusive of acquisition related expenses, non-interest expense increased $43.6 million during the first quarter of 2022, compared to the first quarter of 2021, primarily as a result of the operating expenses of GWB.

Salaries and wages expenses increased $17.7 million, or 41.8%, to $60.0 million during the first quarter of 2022, compared to $42.3 million during the fourth quarter of 2021, primarily as a result of the additional employee-related expenses as a result of the acquisition of GWB, partially offset by lower commission expenses. Salaries and wages expenses increased $21.0 million, or 53.8%, from $39.0 million in the first quarter of 2021, primarily as a result of the additional employee-related expenses as a result of the acquisition of GWB, which were partially offset by lower commission expenses.

Employee benefit expenses increased $9.1 million, or 75.2%, to $21.2 million during the first quarter of 2022, as compared to $12.1 million during the fourth quarter of 2021, primarily due to an increase in expense related to the GWB acquisition and seasonal first quarter reset of payroll taxes. Employee benefit expenses increased $5.1 million, or 31.7%, from $16.1 million during the first quarter of 2021, primarily due to an increase in expense related to the GWB acquisition.

Occupancy and equipment expenses increased $3.8 million, or 32.8%, to $15.4 million during the first quarter of 2022, compared to $11.6 million during the fourth quarter of 2021 and increased $3.7 million, or 31.6%, from $11.7 million during the first quarter of 2021, due to the expansion of our branch network related to the GWB acquisition.

Other intangible amortization expense increased $1.1 million, or 44.0%, to $3.6 million during the first quarter of 2022, as compared to $2.5 million during the fourth quarter of 2021 and increased $1.1 million, or 44.0%, during the first quarter of 2022 from $2.5 million during the first quarter of 2021. These increases are attributable to the amortization of the $49.1 million of core deposit intangibles and $22.8 million customer relationship intangibles acquired in the GWB acquisition.

Other expenses increased $12.9 million, or 44.8%, to $41.7 million during the first quarter of 2022, as compared to $28.8 million during the fourth quarter of 2021 and increased $12.5 million, or 42.8%, during the first quarter of 2022 from $29.2 million during the first quarter of 2021. The increases are primarily due to increases in technology services, debit and credit card processing fees, FDIC insurance premiums, loan expenses, credit card rewards, professional fees, and other normal increases as a result of the GWB acquisition during the first quarter of 2022.

BALANCE SHEET

Total assets increased $13,490.3 million, or 68.6%, to $33,162.2 million as of March 31, 2022, from $19,671.9 million as of December 31, 2021, primarily due to $13,311.2 million of assets acquired in the acquisition of GWB.

Investment securities increased $2,994.4 million, or 46.0%, to $9,502.5 million as of March 31, 2022, from $6,508.1 million as of December 31, 2021. The increase was primarily due to $2,698.9 million of securities acquired in the GWB acquisition.

Loans held for sale increased $148.0 million, or 491.7%, to $178.1 million as of March 31, 2022, from $30.1 million as of December 31, 2021, primarily due to $181.9 million of loans held for sale acquired from GWB, which were offset by a decrease in originations of mortgage loans held for sale.

The following table presents the composition and comparison of loans held for investment, including the February 1, 2022 loans acquired from GWB:

Loans held for investment, net of deferred loan fees and costs increased $7,613.3 million, or 81.6%, to $16,945.0 million as of March 31, 2022, from $9,331.7 million as of December 31, 2021, primarily due to $7,713.3 million of loans acquired held for investment in the GWB acquisition. Loans held for investment included PPP loans, net of deferred fees, of $56.7 million and $96.3 million as of March 31, 2022 and December 31, 2021, respectively. Excluding the impact of GWB acquired loans and PPP loans, loans held for investment as of March 31, 2022, decreased from December 31, 2021, primarily due to charge-offs and pay downs of GWB acquired loans.

The loans held for investment to deposit ratio increased to 60.3%, as of March 31, 2022, compared to 57.4% as of December 31, 2021.

As of March 31, 2021, goodwill and intangible assets, excluding mortgage servicing rights, company owned life insurance, premises and equipment, other real estate owned, and other assets, increased from December 31, 2021 primarily attributable to provisional balances acquired in the GWB acquisition.

Total deposits increased $11,818.7 million, or 72.6%, to $28,088.3 million as of March 31, 2022, from $16,269.6 million as of December 31, 2021, primarily due to $11,682.6 million in deposits acquired as a result of the GWB acquisition and organic increases in interest-bearing demand and non-interest bearing business deposits. These increases were partially offset by decreases in savings deposits and interest-bearing time deposits.

Securities sold under repurchase agreements increased $19.9 million, or 1.9%, to $1,071.0 million as of March 31, 2022, from $1,051.1 million as of December 31, 2021. Exclusive of $74.0 million in such securities acquired from GWB, securities sold under repurchase agreements decreased $54.1 million, or 5.1% from December 31, 2021. Fluctuations in repurchase agreement balances correspond with fluctuations in the liquidity of the Company’s clients.

Subordinated debentures held by subsidiary trusts increased $76.1 million, or 87.5%, to $163.1 million as of March 31, 2022, from $87.0 million as of December 31, 2021, due to $76.1 million of subordinated debentures held by subsidiary trusts acquired from Great Western.

The Company is considered to be “well-capitalized” as of March 31, 2022, having exceeded all regulatory capital adequacy requirements. During the first quarter of 2022, the Company paid regular common stock dividends of approximately $44.7 million, or $0.41 per share, and did not make any share repurchases of common stock pursuant to its previously announced stock repurchase program.

CREDIT QUALITY

As of March 31, 2022, non-performing assets increased $109.4 million, or 368.4%, to $139.1 million, compared to $29.7 million as of December 31, 2021, primarily driven by loans acquired from GWB. This resulted in an increase in non-accrual loans of $94.0 million, or 377.5%, an increase in other real estate owned of $15.5 million, or 775.0% as a result of the GWB acquisition, and a decrease in loans past due 90 days or more of $0.1 million. Non-accrual loans acquired from GWB totaled $100.7 million as of March 31, 2022.

Criticized loans increased $636.4 million, or 293.7%, to $853.1 million as of March 31, 2022, from $216.7 million as of December 31, 2021, driven by loans acquired from GWB and the down grade of a commercial real estate loan.

Contacts

John R. Stewart, CFA

Deputy Chief Financial Officer

First Interstate BancSystem, Inc.

(406) 255-5311

john.stewart@fib.com

NASDAQ: FIBK

www.FIBK.com

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