First Interstate BancSystem, Inc.

Company Overview: First Interstate BancSystem, Inc. (NASDAQ: FIBK) is a community banking-focused financial and bank holding company that offers a variety of banking products and services, including online and mobile banking, through its banking subsidiary, First Interstate Bank, to individuals, businesses, municipalities, and others across its market areas. It provides trust, employee benefit, investment management, insurance, agency, and custodial services, including estate and personal trust administration, management of individual investment accounts, employee benefit plans and charity foundations, and insurance planning. FIBK banking offices, including detached drive-up facilities in Idaho, Montana, Oregon, South Dakota, and Washington.

FIBK Details

Key Takeaways from FY21 (ended December 31, 2021)

• Slight Decline in Net Interest Income: The company reported a decline of 1.77% in net interest income to USD 488.2 million in FY21 (ended December 31, 2021) compared to USD 497.0 million in FY20. Interest income from loans, which constituted 84.93% of the total interest-earning assets in FY21, reduced by 5.17% YoY. The decline in the interest income can be accredited to a decrease of USD 292.90 million in average loan balances, which stood at USD 9.51 billion as of December 31, 2021, complemented by unfavourable average rates.
• Decline in NPAs: As of December 31, 2021, the company’s Nonperforming Assets (NPA) reduced to USD 29.7 million from USD 50.5 million on December 31, 2020.
• Growth in Net Income: In FY21, FIBK reported a net profit of USD 192.1 million, increased from USD 161.2 million in FY20, representing a YoY growth of 19.17% with a diluted EPS of USD 3.11.
• Dividend Declaration: On January 26, 2022, the company declared a dividend of USD 0.41 per common share, payable on February 21, 2022, to shareholders of record on February 10, 2022.

Net Interest Income & Net Income Key Highlights; Analysis by Kalkine Group

Other Key Findings:

• Decline in Loan Portfolio: Total loans held for investment were reduced by USD 475.80 million to USD 9.33 billion as of December 31, 2021, compared to USD 9.81 billion as of December 31, 2020. The decline in loans can be attributable to the reduction in Total consumer and Commercial loans partially offset by Total real estate loans.
• Growth in Deposits: Total deposits held by the bank increased by USD 2.05 billion to USD 16.27 billion as of December 31, 2021, from USD 14.22 billion as of December 31, 2020, driven by significant growth non-interest-bearing, demand, and savings deposits.

• Improvement in Credit Quality: Allowance for credit losses annualized as a percentage of average loans reduced to 0.11% as of December 31, 2021, from 0.16% as of December 31, 2020.

Recent Developments

• On February 1, 2022, FIBK completed the previously announced merger with Great Western Bancorp, Inc. (GWB), the parent company of Great Western Bank. The merged entity company will operate under the First Interstate name and brand with its headquarters in Billings, Montana. GWB shareholders received.8425 shares of FIBK Class A common stock for each GWB share they owned. The total transaction value is estimated to be around USD 2.0 billion, based on closing prices on September 15, 2021. This merger is expected to make FIBK the leading community banking franchise in the western US.
• On January 26, 2022, FIBK announced significant improvements to its customer overdraft procedures, including lower fees and more flexible alternatives to fulfil clients' personal financial needs. The measures also include eliminating non-sufficient money fees and reducing overdraft fees.

Key Metrics: In FY21, FIBK's net interest margin was 2.86% lower than the industry median of 3.20%. Efficiency ratio improved to 63.5% in FY21 vs. 68% in FY20. Tier 1 Risk-Adjusted Capital Ratio increased to 12.49% in FY21 from 12.33% in FY20.

Profitability Metrics; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together hold around 23.32% of the total shareholding shares, while the top 4 constitute the maximum holding. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum stake in the company at 4.13% and 4.08%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Loans Concentration Risk: As of December 31, 2021, Real Estate loans accounted for 72.13% of the FIBK’s total loan portfolio. These loans possess a higher risk of non-payment than other types of lending. If these loans get impaired due to any reason, it may severely impact the company's financials.
• Geographical Concentration Risk: FIBK primary customers are concentrated in Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming.  As a result, any downturn in the real estate value in these key market areas or any unfavourable change in the economic environment could impair the company's financials.
• Voting Concentration Risk: Members of the Scott family hold a majority of the voting power in FIBK's outstanding common stock. Thus, gaining substantial control over its operations. This constrains the ability of other shareholders to influence corporate decisions.

Outlook

• Looking forward, FIBK believes that its combination of organic and acquisitive expansion will generate significant extra value for shareholders in FY22.
• It also stated that in FY22, it would be focused on efficiently integrating GWB’s operations and will begin realizing synergies from the merger, generating continued organic balance sheet growth through increased exposure to faster-growing markets, and capitalizing on asset-sensitive balance sheet to drive growth in net interest income and expansion in net interest margin as interest rates rise.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: FIBK's share price has corrected 17.71% over the past six months. The stock is currently leaning towards the lower band of its 52-week range of USD 36.01 to USD 51.24. We have valued the stock using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering its industry below net interest margin and negative loan growth in FY21 and loan and geographical concentration risk. We have taken peers like First Financial Bancorp. (NASDAQ: FFBC) and Eastern Bankshares, Inc. (NASDAQ: EBC). Considering the solid bottom-line performance, recent merger with GWB, improvement in overdraft procedures, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 37.73, down 0.45% as of February 09, 2022, 10:08 AM ET.

FIBK Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Disclaimer

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