First Interstate BancSystem(FIBK) - 2021 Q4 - Annual Report

Part I Business First Interstate BancSystem, Inc. is a community-focused financial and bank holding company that significantly expanded its operations and asset base through the Great Western Bancorp acquisition Our Company First Interstate, a financial holding company, expanded its community banking operations through organic growth and the strategic acquisition of Great Western Bancorp, Inc - On February 1, 2022, the company acquired Great Western Bancorp, Inc. ("Great Western"), adding 174 banking offices in eight new states and expanding its presence in South Dakota[21] Financial Snapshot as of December 31, 2021 | Metric | Value (Billions) | | :--- | :--- | | Consolidated Assets | $19.7 | | Deposits | $16.3 | | Loans Held for Investment | $9.3 | | Total Stockholders' Equity | $2.0 | - The company's business model is focused on four key pillars: Our People, Our Priority; Relentless Client Focus; Future Ready, Today; and Financial Vitality[23][25] Community Banking The company operates a single community banking segment, offering comprehensive commercial, consumer, mortgage, and wealth management services with centralized operational oversight - The company has one operating segment: community banking, encompassing commercial and consumer banking, mortgage services, and wealth management[26] - Lending is guided by company-wide credit policies establishing minimum underwriting standards, including limitations on credit concentrations and requirements for collateral and repayment sources[27][28] - Key operational activities like marketing, credit review, loan servicing, and compliance are centralized to ensure consistent service and regulatory adherence[33] Market Area and Competition The company holds significant deposit market share in key states and faces intense competition from diverse financial service providers Deposit Market Share and Branch Locations by State (as of June 30, 2021) | State | % of Market Deposits | Deposit Market Share Rank | Number of Branches (as of Dec 31, 2021) | | :--- | :--- | :--- | :--- | | Idaho | 4.3% | 8 | 23 | | Montana | 17.5% | 2 | 44 | | Oregon | 2.3% | 11 | 33 | | South Dakota | 0.2% | 12 | 14 | | Washington | 0.4% | 31 | 18 | | Wyoming | 14.5% | 1 | 15 | | Total | | | 147 | - The company competes with a diverse group of financial service providers, including commercial banks, savings and loan associations, credit unions, fintech companies, and internet banks[36] Government Regulation and Supervision The company is extensively regulated by federal and state authorities, covering capital, dividends, consumer protection, and anti-money laundering, with specific rules for its asset size - The company is a financial holding company subject to regulation and examination by the Federal Reserve, with its subsidiary bank also regulated by the Montana Division of Banking and Financial Institutions and the CFPB[42][43] - The company is subject to Basel III capital requirements, including a minimum common equity Tier 1 ratio of 4.5%, Tier 1 capital ratio of 6.0%, total capital ratio of 8.0%, and a Tier 1 leverage ratio of 4.0%[57] - Dividend payments from the subsidiary bank, a primary source of funds for the holding company, are restricted by federal and state regulations, generally limited to net profits of the current and preceding two years without prior regulatory consent[52] - Due to its asset size exceeding $10 billion, the company is subject to the Durbin Amendment, which caps debit card interchange fees[79] Human Capital The company prioritizes its 2,358 employees, focusing on DEI, competitive compensation, community involvement, and professional development Employee Demographics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Full-Time Equivalent Employees | 2,358 | | Female Workforce | 70.7% | | Male Workforce | 29.3% | | Average Tenure | 8.0 years | - The company donates 2% of its net income before tax for charitable purposes and encourages employee volunteerism, including a company-wide Volunteer Day[103][104] - A Diversity, Equity, and Inclusion (DEI) Committee was formed to integrate DEI principles into all business practices[113] Risk Factors The company faces diverse risks including regulatory, credit, liquidity, market, operational (cybersecurity, third-party reliance), and strategic challenges, alongside stock volatility and pandemic impacts - The company's loan portfolio is concentrated in commercial real estate and commercial business loans, constituting 59.1% of the total loan portfolio as of December 31, 2021, making them sensitive to adverse market conditions[128] - The company faces significant operational risk from cybersecurity threats, including hacking and identity theft, and relies on third-party vendors for key business infrastructure components like data processing[157][165] - Strategic risks include potential difficulties in integrating the recently acquired Great Western, which could be more costly or time-consuming than expected, delaying anticipated benefits and cost savings[179] - The transition away from LIBOR presents a market risk, with the company ceasing new USD LIBOR origination as of December 31, 2021, and preparing legacy contracts for transition before the June 30, 2023 cessation date[152][153] - The ongoing COVID-19 pandemic continues to pose a general risk, with potential impacts on client demand, credit quality, and operational expenses due to economic disruptions and health measures[197][199] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[208] Properties The company's main offices are in Billings, Montana, and it operates 147 banking locations, mostly owned, which are deemed adequate - The company's main offices are in Billings, Montana, where it leases approximately 100,060 square feet and owns a 50% interest in the building's ownership LLC[211] - As of year-end 2021, the company operated from 147 locations across six states, with 111 properties owned and 36 leased from third parties[211] Legal Proceedings The company is involved in routine legal proceedings, with management expecting no material adverse impact on financial condition or operations - Management does not anticipate that ongoing or anticipated legal matters will have a material adverse effect on the company's business, financial condition, or operating results[213] Mine Safety Disclosures This item is not applicable to the company - Not applicable[214] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FIBK Class A common stock trades on NASDAQ, pays a quarterly dividend, and its five-year performance lagged key market indices - The Board approved a quarterly cash dividend of $0.41 per share of common stock[219] - During Q4 2021, the company repurchased 133 shares at an average price of $42.71, with 1,889,158 shares remaining available for repurchase as of December 31, 2021[223] Cumulative Total Shareholder Return (2016-2021) | Index | 12/31/16 | 12/31/21 | % Change | | :--- | :--- | :--- | :--- | | First Interstate BancSystem, Inc. | $100.00 | $114.31 | +14.3% | | NASDAQ Composite | $100.00 | $304.85 | +204.9% | | KBW NASDAQ Bank Index | $100.00 | $164.80 | +64.8% | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased in 2021 due to a credit loss provision reversal, while net interest income and non-interest income declined, and expenses rose due to acquisition costs Executive Overview and Recent Trends The company concluded its Great Western merger in early 2022, significantly expanding its asset base and branch network, while monitoring ongoing economic uncertainties - The merger with Great Western was completed on February 1, 2022, with stockholders receiving 0.8425 shares of FIBK Class A common stock per share, totaling approximately 46.9 million shares valued at about $1.7 billion[237] - Management continues to monitor the impact of COVID-19, noting economic recovery alongside challenges from inflation and supply chain disruptions, with branches functioning at normal hours[239] Critical Accounting Estimates Key accounting estimates include the Allowance for Credit Losses, Goodwill, and Fair Value of Acquired Loans, all requiring significant judgment and economic forecasting - The Allowance for Credit Losses is a critical estimate based on historical experience, current conditions, and a one-year economic forecast, where changes in assumptions could materially impact the allowance[254][255] - Goodwill totaled $621.6 million as of December 31, 2021, representing 31.3% of total stockholders' equity, with no impairment indicated by the annual test on July 1, 2021[163][259] - Loans acquired in business combinations are recorded at fair value, with an allowance for credit losses established at the acquisition date based on expected credit losses[262][263] Results of Operations Net income increased in 2021 due to a credit loss provision reversal, despite declines in net interest income and non-interest income, and a rise in expenses Key Performance Ratios | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Return on average assets | 1.02% | 1.00% | | Return on average common stockholders' equity | 9.73% | 8.12% | | Efficiency ratio | 61.94% | 57.61% | Net Interest Income and Margin Analysis | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Interest Income (FTE) | $490.4M | $499.0M | | Net Interest Margin (FTE) | 2.86% | 3.47% | | Interest Rate Spread | 2.81% | 3.38% | - The company recorded a reversal of provision for credit losses of $14.6 million in 2021, contrasting with a $56.9 million provision in 2020, attributed to an improved economic outlook post-CECL adoption and COVID-19 impact[278] - Non-interest income decreased by $6.2 million (4.0%), primarily due to a $6.5 million (13.7%) decline in mortgage banking revenues from lower origination volumes compared to 2020[280][282] - Non-interest expense increased by $18.0 million (4.6%), driven by $11.6 million in acquisition-related expenses for the GWB merger and a $1.0 million legal settlement[288] Financial Condition Total assets and deposits grew significantly in 2021, funding investment securities expansion, while the loan portfolio decreased due to PPP forgiveness and asset quality improved Loan Portfolio Composition (in millions) | Loan Category | Dec 31, 2021 | Dec 31, 2020 | % Change | | :--- | :--- | :--- | :--- | | Real estate | $6,731.4 | $6,399.5 | +5.2% | | Consumer | $931.7 | $1,025.9 | -9.2% | | Commercial | $1,475.5 | $2,153.9 | -31.5% | | Agricultural | $203.9 | $247.6 | -17.6% | | Total Loans Held for Investment | $9,344.0 | $9,828.5 | -4.9% | - The decrease in commercial loans was primarily due to the forgiveness of Paycheck Protection Program (PPP) loans, with outstanding PPP loans at $100.0 million at year-end 2021, down from $739.8 million at year-end 2020[309] Non-Performing Assets (in millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | % Change | | :--- | :--- | :--- | :--- | | Non-performing loans | $27.7 | $48.0 | -42.3% | | OREO | $2.0 | $2.5 | -20.0% | | Total non-performing assets | $29.7 | $50.5 | -41.2% | | NPA to loans and OREO | 0.32% | 0.51% | -37.3% | - Total deposits increased by $2.05 billion (14.4%), driven by growth in non-interest-bearing demand deposits (+$934.8 million) and interest-bearing demand/savings deposits, while time deposits decreased[356] - Investment securities increased by $2.45 billion (60.3%) to $6.51 billion, funded by strong deposit growth, with $646.7 million of securities transferred from available-for-sale to held-to-maturity during Q2 2021[340][343] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with models indicating an asset-sensitive position where net interest income benefits from rising rates - The company's primary market risk exposure is interest rate risk, which affects net interest income[388][393] Net Interest Income Sensitivity Analysis (as of Dec 31, 2021) | Interest Rate Scenario | Estimated % Change in NII (12 months) | | :--- | :--- | | Immediate +100 bps Shock | +7.68% | | Gradual +200 bps Ramp (over 4 quarters) | +7.07% | - The company's interest rate sensitivity gap analysis shows a cumulative one-year positive gap of $3,464.1 million, representing 19.25% of total interest-earning assets, indicating an asset-sensitive position[396] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2019-2021, including balance sheets, income statements, and cash flows, along with the independent auditor's report Report of Independent Registered Public Accounting Firm RSM US LLP issued unqualified opinions on the financial statements and internal controls, identifying the Allowance for Credit Losses as a Critical Audit Matter - The auditor, RSM US LLP, issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[435][436] - The Critical Audit Matter identified was the 'Allowance for Credit Losses - Loans Held for Investment,' specifically adjustments to historical loss information for current and forecasted economic scenarios, involving highly subjective and sensitive management estimates[441][442] Consolidated Financial Statements Consolidated financial statements show asset and deposit growth, increased net income, and cash flow dynamics driven by operating, investing, and financing activities Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total cash and cash equivalents | $2,344.8 | $2,276.8 | | Total investment securities | $6,508.1 | $4,060.3 | | Net loans held for investment | $9,209.4 | $9,663.2 | | Goodwill | $621.6 | $621.6 | | Total Assets | $19,671.9 | $17,648.7 | | Liabilities & Equity | | | | Total deposits | $16,269.6 | $14,217.0 | | Total liabilities | $17,685.3 | $15,688.9 | | Total stockholders' equity | $1,986.6 | $1,959.8 | | Total Liabilities & Equity | $19,671.9 | $17,648.7 | Consolidated Statement of Income Highlights (in millions) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net interest income | $488.2 | $497.0 | $495.0 | | (Reversal of) provision for credit losses | $(14.6) | $56.9 | $13.9 | | Total non-interest income | $150.5 | $156.7 | $142.6 | | Total non-interest expense | $405.5 | $387.5 | $388.6 | | Net income | $192.1 | $161.2 | $181.0 | | Diluted earnings per common share | $3.11 | $2.53 | $2.83 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, practices, or financial disclosure - There have been no disagreements with accountants on accounting and financial disclosure[405] Controls and Procedures Management and independent auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021[408] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2021[411] - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[412] Other Information The company reported no unreported Form 8-K items during the fourth quarter of 2021 - No items that should have been reported on a Form 8-K during Q4 2021 were unreported[420] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[420] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - This information is incorporated by reference from the 2022 Proxy Statement[423] Executive Compensation Information on executive compensation is incorporated by reference from the 2022 Proxy Statement - This information is incorporated by reference from the 2022 Proxy Statement[426] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the 2022 Proxy Statement - This information is incorporated by reference from the 2022 Proxy Statement[427] Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 23,252 | 880,798 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - This information is incorporated by reference from the 2022 Proxy Statement[429] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - This information is incorporated by reference from the 2022 Proxy Statement[431] Part IV Exhibits, Financial Statement Schedules This section includes audited consolidated financial statements, the independent auditor's report, and a comprehensive list of all exhibits filed with the Form 10-K - This section contains the audited consolidated financial statements and the list of exhibits filed with the report[433] Form 10-K Summary This item is not applicable - Not applicable[810]