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Acquisitions | 9 Months Ended
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Sep. 30, 2022
Business Combinations [Abstract] |
Acquisitions | Acquisition Great Western Bank. On September 15, 2021, the Company entered into a definitive agreement (“Agreement”) to acquire 100% of the outstanding stock of Great Western Bancorp, Inc. (“Great Western”), the parent company of Great Western Bank (“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. The acquisition of GWB expanded the Company’s geographical footprint with an enhanced platform for future growth. Consideration for the acquisition was $1,723.3 million, consisting of the issuance of 46.9 million shares of the Company’s Class A common stock valued at $36.76 per share, which was the opening price of the Company’s Class A common stock as quoted on the NASDAQ stock market on the acquisition date. The acquisition was completed on February 1, 2022. The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, and market conditions at the time of the acquisition, as well as other future events that are highly subjective in nature. This determination is subject to refinement for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The following table provides the provisional purchase price allocation as of the acquisition date and the Great Western assets acquired and liabilities assumed at their estimated fair value as of the acquisition date as amended for measurement period adjustments as of September 30, 2022. We recorded the estimate of fair value based on initial valuations available at the acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The purchase price allocation resulted in provisional goodwill of $478.4 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Great Western and the Company. Due to the recent closing of the transaction, all amounts reported are provisional pending the review of valuations obtained from third parties and other necessary information in support of related fair value accounting.
As of February 1, 2022 |  |  |  |
Assets acquired: |  |  |  |
Cash and cash equivalents |  |  |  | $ | 2,006.9 |
Investment securities |  |  |  | 2,699.0 |
Securities purchased under agreement to resell |  |  |  | 101.1 |
Loans held for sale |  |  |  | 217.0 |
Loans held for investment |  |  |  | 7,705.0 |
Allowance for credit losses |  |  |  | (59.5) |
Premises and equipment, including right of use lease assets |  |  |  | 144.7 |
Other real estate owned (“OREO”) |  |  |  | 15.8 |
Company owned life insurance |  |  |  | 186.6 |
Core deposit intangibles |  |  |  | 50.1 |
Customer relationship intangible |  |  |  | 22.8 |
Mortgage servicing rights |  |  |  | 1.3 |
Deferred tax assets, net |  |  |  | 63.6 |
Other assets |  |  |  | 198.9 |
Total assets acquired |  |  |  | 13,353.3 |
Liabilities assumed: |  |  |  |
Deposits |  |  |  | 11,688.0 |
Securities sold under repurchase agreements |  |  |  | 74.0 |
Accrued expenses and other liabilities |  |  |  | 111.0 |
FHLB advances |  |  |  | 122.9 |
Subordinated debt |  |  |  | 36.4 |
Subordinated debentures held by subsidiary trusts |  |  |  | 76.1 |
Total liabilities assumed |  |  |  | 12,108.4 |
Net assets acquired |  |  |  | $ | 1,244.9 |
Consideration paid: |  |  |  |
Class A common stock |  |  |  | 1,723.3 |
Total consideration paid (1) |  |  |  | $ | 1,723.3 |
Goodwill |  |  |  | $ | 478.4 |
(1) Includes $13 thousand of cash paid in lieu of fractional shares. As of September 30, 2022, the Company recorded measurement period adjustments to the fair value marks. These adjustments included increases of $0.9 million in other assets and $0.9 million in accrued expenses and a decrease of $0.2 million in premises and equipment, which resulted in a net increase to goodwill of $0.2 million from the June 30, 2022 reported balances. The related impact to net income that would have been recognized in previous periods if the adjustments were recognized as of the acquisition date was not material to the consolidated financial statements. The Company determined the fair value of loans, core deposit and customer relationship intangible assets, investment securities, premises and equipment, leases, mortgage servicing rights, deposits, FHLB advances, subordinated debt, and subordinated debentures held by subsidiary trusts with the assistance of third-party valuation specialists. The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above. Cash and cash equivalents The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets. Investment Securities Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies. Loans held for sale The loans held for sale portfolio was recorded at fair value based on quotes or bids from third party investors. Loans held for investment A valuation of the loans held for investment portfolio was performed by a third party as of the acquisition date in accordance with ASC 820 to assess the fair value of the loan portfolio, considering adjustments for interest rate risk, required equity return, servicing, credit, and liquidity risk. The loans held for investment portfolio was segmented into two groups including purchase credit deteriorated (PCD) loans and non-PCD loans. The non-PCD loans were pooled based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The PCD loans were valued at the loan level with similar characteristics noted above. The fair value was calculated using a discounted cash flow analysis. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards. The Company is required to record PCD assets, defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized in subsequent periods as credit loss expense (or reversal of credit loss expense) arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration is allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis is allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, is accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date. Information regarding loans acquired at the acquisition date as amended for measurement period adjustments as of September 30, 2022 were as follows:
(In millions) |
PCD loans: |
Unpaid principal balance | $ | 979.2 |
Principal amounts previously written off by GWB | (238.7) |
Interest applied to principal by GWB | (18.1) |
Adjusted unpaid principal balance | 722.4 |
Credit discount | (69.2) |
Discount attributable to other factors | (29.9) |
Fair value | 623.3 |
Allowance for credit losses | 59.5 |
Amortized cost basis | 682.8 |
Non-PCD loans: |
Unpaid principal balance | 7,107.9 |
Credit discount (1) | (76.5) |
Non-credit discount | (9.2) |
Fair value | 7,022.2 |
Amortized cost basis | $ | 7,705.0 |
(1) Represents the best estimate of the contractual cash flows not expected to be collected as of the acquisition date.
Core deposit intangible Core deposit intangible assets of $50.1 million on non-maturing deposits were determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, and costs of alternative funding using the discounted cash flow approach. The core deposit intangibles represent the costs saved by the Company between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base. These costs are amortized using an accelerated method over the estimated useful life of 10 years for the related deposits. Premises and equipment The fair values of premises are based on a market approach, using third-party appraisals and other analysis of value for land and premises. Deposits The fair values used for the demand and savings deposits equal the amounts payable on demand at the acquisition date. In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates. Customer relationship intangible Customer relationship intangible assets of $22.8 million were determined using an excess earnings model associated with the expected fee income related to the underlying client relationships and is being amortized using the straight-line method over the estimated useful life of 12 years. FHLB advances The fair value of fixed rate Federal Home Loan Bank of Des Moines (“FHLB”) advances was determined using a discounted cash flow approach. The cash flows of the advances were projected based on scheduled payments of the fixed rate advances, which factored in prepayment fees. The cash flows were then discounted to present value using the FHLB rates as of February 1, 2022. Subordinated debt and subordinated debentures held by subsidiary trusts The fair value of subordinated debt and subordinated debentures held by subsidiary trusts was determined by using a discounted cash flow method using a market participant discount rate for similar instruments over the remaining terms. Acquisition related expenses related to the GWB acquisition of $4.0 million and $115.0 million for the three and the nine month periods ended September 30, 2022, respectively, were included as a component of non-interest expense in the consolidated statements of income, of which none and approximately $26.8 million for the three and the nine month periods ended September 30, 2022, respectively, are acquisition related costs as defined by ASC 805. During the nine months ended September 30, 2022, the Company contributed $21.5 million to the First Interstate Foundation and reimbursed an aggregate of $8.2 million of the Scott family control group’s acquisition expenses pursuant to the Agreement. The accompanying consolidated statements of income for the three and the nine months ended September 30, 2022, include the results of operations of the acquired entity from the February 1, 2022 acquisition date. The disclosure of GWB post-acquisition revenue and net income is not practical due to the combining of certain GWB operations with and into FIB as of 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. The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and the nine month periods ended September 30, 2022 and 2021 as if GWB had been acquired on January 1, 2021. This unaudited pro forma information combines the historical results of GWB with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred at the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2022 | 2021 |  | 2022 | 2021
Total revenues | $ | 314.0 |  | $ | 295.8 |  |  | $ | 883.5 |  | $ | 909.1 |
Net income | $ | 90.3 |  | $ | 110.9 |  |  | $ | 267.8 |  | $ | 177.0 |
Earnings per common share (Basic) | $ | 0.85 |  | $ | 1.02 |  |  | $ | 2.60 |  | $ | 1.63 |
Earnings per common share (Diluted) | $ | 0.85 |  | $ | 1.02 |  |  | $ | 2.60 |  | $ | 1.63 |

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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