Thanks, Bailey. Good morning. Thank you for joining us for our fourth quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed in those statements. I'd like to direct all listeners to the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release, as well as the risk factors identified in the annual report and our more recent periodic report filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any of the forward-looking statements made today.
A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. Joining us from management this morning are Kevin Riley, our Chief Executive Officer, and Marcy Mutch, our Chief Financial Officer, along with members of our management team. At this time, I'll turn the call over to Kevin Riley. Kevin?
Thanks, Lisa. Good morning, and thanks again to all of you for joining us on our call today. Again, this quarter, along with our earnings release, we have published an updated investor presentation that has some additional disclosures that we believe will be helpful. The presentation can be accessed on our investor website, and if you haven't downloaded a copy yet, I would encourage you to do so. I'm gonna start off today by providing an overview of the major highlights for the quarter, and then I'll turn the call over to Marcy to provide more details on our financials. We delivered another strong quarter as healthy economic conditions across our markets resulted in strong deposit inflows, a strong level of new loan production, and further improvement in asset quality.
Combined with our disciplined expense management, this produced a strong quarter of earnings, with net income coming in at $51.2 million or $0.83 per diluted share. Excluding $0.06 per share of merger related expenses, our earnings per share was $0.03 higher than the operating earnings per share in the prior quarter. While we're disappointed with our net loan growth in the quarter, the highlight was exceptional levels of loan production that we had. Although we are still seeing some impact from supply chain disruption and labor shortages causing projects and investments to be delayed, we had a strong level of new loan production, with all of our markets making strong contributions. We are particularly pleased with the positive trends we are seeing in the Mountain Division as Montana led all of the markets.
This is indicative of both increasing demand and our improved business development efforts. While we had extremely productive quarter of new business development, this was offset by an unusually high level of loan payoffs, which impacted our total loan growth. Some of the payoffs were a result of sales of companies prior to year-end, while others were related to both banks and non-banks offering low long-term fixed rate pricing, where we made a balance sheet management decision not to compete. As always, we balance growth with risk management. In this case, we are not going to take on unnecessary interest rate risk just to show loan growth, particularly ahead of potential a rise in interest rates.
This long-term approach has enabled us to grow the company while maintaining exceptional asset quality and our targeted level of interest rate sensitivity, producing results that have consistently created long-term value for our shareholders. As a result of the elevated payoffs and the continued strong deposit growth, our cash position grew by nearly $600 million on average during the quarter to $2.3 billion, or approximately 13% of earning assets. This leaves us a lot of room to optimize our balance sheet mix over time. As we announced earlier this month, we have received all regulatory and shareholder approvals for the merger with Great Western Bancorp, which is expected to be completed on or about February 1st. We are very pleased that we are on track to complete this merger just four and a half months after announcement.
This is a testament to our acquisition experience, efficiencies, and strong regulatory standings. Over that time, we have made great progress in our integration planning and continue to feel good about our ability to meet our announced financial targets for the merger. The system conversion is scheduled for the weekend of May 20th, with Great Western branches to open under the First Interstate brand on May 23rd. We expect full realization of our cost synergies shortly thereafter. As you may have seen, Great Western announced its fourth quarter results last night as well, showing tremendous progress working through its problem loan portfolio.
Non-performing assets declined 13%, while criticized loans declined by nearly $150 million, excluding the loans held for sale. On that point, the team did a great job reaching an agreement to sell $75 million of mostly criticized hotel loans at a 12% discount, which is below the mark we disclosed on hospitality loans designated as PCD in our initial due diligence. Great Western is consistently resolving problem loans inside of our original estimate for PCD loan marks, which may lead to a lower level of loan marks assumed in the transaction than initially projected. Great Western also had a good quarter of loan production, with total loans increasing over $100 million, adjusted for a $122 million impact on PPP loans and $36 million related to the disposition of non-performing loans.
With the strong progress Great Western has made on working through its problem loans, the front line has been able to shift its focus back to business development and capitalizing on the strong growth in many of its markets, which is a trend we expect to continue. Lastly, we hope you saw that earlier this week we announced significant changes in our consumer overdraft practices, including the elimination of NSF fees and a significant reduction in overdraft fees. We are also introducing a checkless account that has no ability to be overdrawn and includes debit and online banking access that will allow us to expand our product set and better serve the underbanked in our community. As a regional bank, it is important for us to be setting the example in our market on this front.
It is the right thing to do, and we hope other local market participants will follow our lead. With an effective date of April 1st, we estimate this change will reduce First Interstate's NSF and OD fees by around $5 million in 2022. Helping your neighbor and being a good corporate citizen, those are the core values that First Interstate was founded on. They will not change as we grow. They will only get stronger. With that, I'll turn the call over to Marcy so she can provide some additional details on our fourth quarter results. Go ahead, Marcy.
Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the third quarter of 2021, and I'll begin with our income statement. On a GAAP basis, our net interest income decreased by $5.1 million, which was primarily due to $4.5 million decrease in PPP loan income. Accretion income was also $400,000 lower on a linked quarter basis. Excluding the impact of PPP and accretion income, our net interest income was relatively flat compared with the prior quarter. Our net interest margin declined 22 basis points from the prior quarter to 2.69%, partially attributable to the lower level of PPP income.
Excluding PPP from both periods, our net interest margin decreased by 15 basis points, primarily due to a shift in the mix of our earning assets toward investment securities and cash, along with modestly lower loan yields. This offset a 1 basis point decline in our cost of funds. Yields on new loan production were about 20 basis points lower than the prior quarter, but still in the very high 3% range. This decline is attributable to an intentional shift in the mix of new production toward variable rate loans, which were about 54% of the total production in the quarter. Our non-interest income decreased $2.3 million quarter-over-quarter to $37.4 million, primarily due to lower mortgage banking revenues, which was partially offset by higher wealth management and swap revenues.
Moving to total non-interest expense, we recorded $5 million in acquisition-related expense in the quarter. Excluding acquisition-related expense in both periods and the litigation accrual last quarter, we were pleased with our expense management in the quarter, with non-interest expense declining by $900,000. Moving to the balance sheet, our loans held for investment decreased $291 million from the end of the prior quarter, which included a net decline in PPP loans of approximately $190 million. Excluding PPP loans and deferred fees, total loans held for investment declined by approximately $107 million from the end of the prior quarter, primarily due to declines in the construction and consumer loan portfolios. This was partially offset by an increase in our commercial real estate portfolio.
The commercial portfolio was essentially unchanged from the prior quarter, excluding the PPP loan impact. As of December 31st, we had approximately $96 million of PPP loans on our balance sheet, net of $3.8 million of remaining associated deferred loan fees. On the liability side, our deposits continued to increase and were up $262 million from the end of the prior quarter, with most of the growth coming in interest-bearing demand deposits. Moving to asset quality. Our portfolio continued to perform exceptionally well. Non-performing assets declined by 16% in the quarter and criticized loans declined by another 14% due to upgrades and pay downs.
Our credit losses continued to be low, with $2.7 million of net charge-offs, which on an annualized basis represented only 11 basis points of average loans in the quarter. Given the improvement in asset quality and a strong macroeconomic backdrop, we had a negative provision for credit losses of $9.5 million. This reduced our allowance as a percentage of loans held for investment to 1.31% at December 31st, while our coverage of non-accrual loans increased to 491%. Excluding the $96 million of remaining PPP loans, our allowance represented 1.32% of loans held for investment at the end of the quarter. I'll wrap up with a few comments about our outlook for 2022, which at this point are for First Interstate on a standalone basis.
We will provide additional color on the combined company once we have a clear understanding of the purchase accounting impact at the end of the first quarter. Our outlook assumes three 25 basis point Fed hikes at the beginning of April, August, and November. Excluding PPP, we expect mid-single-digit loan growth and for deposit balances to be relatively flat for the year. Excluding PPP income, we expect mid-single-digit net interest income growth. We would expect the net interest margin to be relatively flat in the first quarter, again, excluding PPP, and for the first quarter to be the low point of the year.
Excluding the MSR impairment recoveries and securities gains we saw in 2021, we expect total fee income to be down mid-single digits, which includes a conservative outlook for our mortgage banking revenue and fully considers the roughly $5 million impact we discussed earlier related to consumer, NSF, and overdraft fees. This also assumes no MSR impact in 2022. Excluding the merger charges and litigation accruals that were incurred in 2021, we expect our operating non-interest expense growth to be in the low single digits. This is a great result considering the inflationary pressures in the market today and is a result of the scale of efficiencies we have worked so hard to put in place over the last few years.
Of course, we know we won't be operating on a standalone basis, but we thought it was important to provide a sense for the positive trends we expect in our historical business. In regard to the acquisition, there's still a lot of moving pieces, but at this point, we feel good about our ability to deliver the earnings and performance metrics we projected at the time of deal announcement. With that, I'll turn it back to Kevin. Kevin?
Nice job, Marcy. At the top of our priority list this year is executing a smooth and efficient integration of Great Western's operation. After the system conversion is completed in May, we should realize most of the cost savings projected for the transaction starting in the third quarter. As our franchise grows to more than $32 billion in assets with more than 300 branches across 14 states, we believe it is important that we continue to maintain the culture that has led to a long track record of success. That culture includes a strong commitment to making our communities that we live and work positive. We are excited to support the effort of the $20 million contribution to the First Interstate Foundation that we announced with the deal.
These funds will allow us to continue to make impact in our legacy communities and immediately provide support across our expanded footprint. As I mentioned earlier, we're already seeing Great Western's commercial banking team shift its focus back toward business development, which we expect to continue after the merger. With the progress that Great Western has made working down its problem loans prior to the closing, we should have fewer headwinds to our total loan growth than we expected at the time we announced the deal. Combined with strong levels of loan production that we are currently seeing at both First Interstate and Great Western, we believe our original pro forma growth expectations may prove conservative. As we look ahead to the year, we're excited by a number of catalysts that we have in place to deliver strong performance. Economic conditions in our markets are fundamentally healthy.
We are seeing increasing loan demand, and we'll increase our exposure to faster-growing markets following the closure of the merger. Both First Interstate and Great Western have good momentum in business development that should only accelerate as we leverage the combined strength of each organization. We'll start seeing the accretive benefits of the transaction in a more meaningful way during the second half of the year following the system conversion. Our balance sheet is very well positioned to benefit from rising interest rates, and we have the technology and the products to stay relevant in this highly competitive marketplace. With that, I'll open the call up for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that is star followed by one. Okay, our first question comes from Jared Shaw of Wells Fargo. Jared, please go ahead.
Hey, good morning, guys.
Good morning, Jared.
Good morning, Jared.
I guess maybe starting with loan growth, you know, your tone sounds optimistic, but, you know, then when we look at the original deal announcement guide of 3%-4%, that seems pretty light compared to the optimism that we've seen from peers with growth. I guess with Great Western being able to dispose of more of those troubled loans earlier, why aren't you more aggressive in looking at your loan growth or setting your loan growth targets for the year? It still seems pretty low.
Well, as Jared Shaw, as you know, in the past, we are always concerned with our estimates of what we could do. We feel good about it, but we don't want to get out over our skis with regards to projecting more than what we have already projected.
I think we do feel optimistic about Great Western, but they're resolving their problem loans at a pretty good pace. We just still look at that at this point at a net zero.
Okay. I guess, you know, if we did see growth come in better than expected, what would be driving that? Would that be, you know, lower pay downs, higher utilization, new customer acquisition? I guess, where do you see the most optimism, to potentially-
I see the most optimism if the marketplace hopefully gets some rational thought process in what they're doing with regards to loans. I mean, I think in the fourth quarter, people believed that interest rates were gonna be zero for a long extended period of time, and they were doing things that I would say that are pretty risky to put on their balance sheet. People put a lot of loan growth on at rates that I'm sure they probably have a little bit of indigestion on right now.
Can you just give us an update, or a reminder of what happens with the B shares and how much of that is automatic versus something needing to happen? You know, so when do you think those could be gone and the stock potentially able to be included in some indexes?
Right now, my belief is that they will be, they go away at the end of March.
Well, it says a record date of the annual shareholder meeting.
Which will be-
It's automatic.
It's automatically-
It's automatic.
At the end of March.
Okay. There's no vote required, no procedural, it's just-
No. No.
Okay.
That's all done.
Nope.
I guess just finally from me, you know, at announcement, it sounded like Mark was gonna be staying on as as part of the management. And he's not on this list. I guess, any update on what is going on there and any other thoughts on who from Great Western could be involved going forward?
Well, we have two people from Great Western that we announced that are moving forward as the CIO, Scott and their Chief Risk Officer, Karlyn, will be moving on with us to take over those positions at the combined institution. Mark has decided to move on and pursue other interests.
Okay. Thanks for taking the questions.
Thank you, Jared. The next question comes from Matthew Clark of Piper Sandler. Matthew, please go ahead.
Hey, good morning.
Good morning, Matt.
Good morning, Matt.
Maybe getting back to the payoff activity. You know, it sounds like it's a function of a number of things, but do you have a sense for, you know, how much of that might have been unusual or outsized? Were there any lumpy payoffs? I'm trying to get a sense for your payoff expectations going forward and whether or not you need that, you know, because that phenomenon may not necessarily change in the near term and kind of what your embedded assumptions are for the growth that drives that mid-single digit NII growth.
Yeah. I you know, you can't just totally predict the market. I'll give you my own opinion on what's gonna happen. You know, what we're seeing right now is that, you know, people were forcing growth in their balance sheet in the fourth quarter, and they were doing stuff. I think people are not in the mood of forcing that activity as much. I think pay downs we're seeing might subside a little bit due to the fact that the aggressiveness of people trying to book low rate deals is slowing.
Okay. Then on the core NIM outlook being relatively stable here in the first quarter, that's encouraging, but also a little surprising to me, given that you had deposits up and loans down this quarter and what that you know can do to your average earning assets in the upcoming quarter. I guess what other you know what's also helping to kind of stabilize your view there?
You know, again, I think the first quarter will be the low point for next year. That said, we are seeing some better yields on the investment portfolio than we've seen in the past. That's gonna help drive that to be a little bit better than you might expect.
Okay. Just on the excess cash, I mean, it continues to build, and I know, you know, you guys are keeping your powder dry with rates expected to go up. You know, how quickly might we see you know, redeploy that excess cash here this year?
Well, we're gonna be diligent on that. We're gonna continue to deploy it. I would make a projection that we will not have this much cash on the balance sheet as we go from quarter to quarter. It will continue to move down as we go out throughout the year, as we invest either in securities portfolio or into loans.
Okay. Then just the timing of the $5 million coming out of revenue from the overdraft, when does that start? And is it-
It starts April 1st.
Yeah. Okay. Thank you.
Thank you, Matthew. The next question comes from Jeff Rulis at D.A. Davidson. Jeff, please go ahead.
Thank you. Good morning.
Good morning, Jeff.
This is actually Jeff's associate on for Jeff this morning.
Can you speak up? We can't hear you.
Yeah, this is Andrew Gorczyca on for Jeff Rulis at D.A. Davidson. First question, does the fact that Great Western had net loan growth in Q4 change your outlook for consolidated growth in 2022? I believe you guys did not expect any net growth out of Great Western through 2023.
Well, as I would say, one quarter doesn't make a trend. Do we feel better about the future? Absolutely. We're hoping that continues, so it could change our outlook, but I don't wanna have one quarter change, you know, the whole view of what might happen. It makes us feel that we were conservative at this juncture, and we hope to see better results moving forward.
Okay. Thank you very much. That is it from me. I will step away.
Thank you, Jeff. Our final question comes from Andrew Terrell from Stephens. Andrew, please go ahead.
Hey, good morning.
Good morning, Andrew.
Hey, maybe just to start, Marcy, I was a little bit surprised to hear the guidance for, I think it was, relatively flat deposit growth in 2022 on an organic basis. I was hoping you could just provide some more context there. Is there any kind of intentional runoff you're anticipating to kind of improve deposit mix or just can you maybe just talk to the drivers behind that?
You know, I just think, you know, with the PPP loan impact gone, the stimulus impact gone, and just what the markets are seeing just with this, you know, muni, you know, it could be some fluctuations in muni deposits and things like that. We just don't expect. It'll be flat year-over-year is what the expectation is following our normal seasonal trends. Again, down in the first quarter and then building back up as we go through the year, but relatively flat year-over-year.
Andrew, as we move through the year, if we don't have the normal rundown of deposits that we normally see in the first quarter, over the history of this company outside of the PPP process, you know, we could have positive loan growth. I mean, positive deposit growth. The question is when does it stop? It's you know, a lot of our customers have higher than average balances of deposits. When do they start utilizing that? You know, do we see a rundown? If we don't see a normal seasonal rundown in the first quarter, our deposits normally grow starting in the second quarter through the third quarter and then kind of slow down in the fourth. We don't know when they're gonna start utilizing those deposits.
Maybe it's a new, you know, place in banking where people keep higher balances. We just don't wanna over forecast deposits continuing to grow when, you know, we're kinda charting new territory here with regards to how consumers are behaving.
So far, the indications are that we follow historical trends.
Okay.
I mean, deposits.
Go ahead.
We'll know more at the end of the first quarter because our deposits will grow in the second and third because we are, as you know, we're a tourist industry, kinda, you know, we have a big tourist industry here, and that brings a lot of extra money into our markets, which causes our deposits to grow.
Yeah. Okay. That's really helpful color. I appreciate it. I heard your point on kind of full realization of cost synergies after kind of the May conversion process. I was curious. I appreciate your guidance on low single-digit expense growth. Just thinking about kind of the $56 million in cost savings coming from Great Western. Any reason to think this number might have potentially changed just given any of potential wage inflation pressures at Great Western? Or should we still kind of view the $56 million as a good kind of net cost savings number?
I think you should feel good about that.
Yeah.
You know, we already have the plans in place, so we feel good about it, so you should feel good about it.
Okay. Just last one for me. I think we've generally seen a dividend increase in the first quarter. I think it's the same here at $0.41 per share. Is it more just related to kind of pending merger? Anything changed with dividend strategy? Can you just remind us how you're thinking about potential for a buyback at these levels?
Well, I would tell you buybacks are probably not gonna happen at this level. You know, the dividend payout ratio might be a little higher this year just due to the purchase accounting and stuff like that, but we're gonna maintain, you know, what we can with regards to the dividend. As next year, hopefully pans out the way we think it's gonna be with the success of Great Western integration, dividend should increase from there out.
Okay. Thanks for taking my questions.
Thanks, Andrew.
Thank you, Andrew. There are currently no further questions registered, so as a reminder, it is star followed by one on your telephone keypad. There are no additional questions waiting at this time, so I'll pass the conference over to the managing team for closing remarks.
Thank you all for your questions. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning in today and goodbye.
That concludes the First Interstate BancSystem Incorporated fourth quarter earnings conference call. Thank you for your participation. You may now disconnect your line.