First Interstate BancSystem, Inc. (FIBK): Navigating Growth and Transformation in the Midwest

Published on March 11, 2025 | Ticker: FIBK

Business Overview

First Interstate BancSystem was incorporated in Montana in 1971 and has grown both organically and through strategic acquisitions over the past several decades. The company operates as a financial and bank holding company, primarily focused on community banking. Through its bank subsidiary, First Interstate Bank, the company provides a comprehensive range of banking products and services, including online and mobile banking, to individuals, businesses, government entities, and others throughout its market areas.

The company has expanded its market reach over the years, acquiring various banks and bank holding companies such as Mountain West Bank, United Bank, N.A., Flathead Bank of Bigfork, Bank of the Cascades, Inland Northwest Bank, Idaho Independent Bank, Community 1st Bank, and Great Western Bank. These acquisitions have allowed First Interstate to grow its footprint across the Rocky Mountain, Pacific Northwest, Midwest, and Southwest regions.

Over the years, First Interstate has faced various challenges common to the banking industry, such as navigating changes in regulations, adapting to technological advancements, and managing credit risks in its loan portfolio. For example, the company weathered the 2008 financial crisis and the more recent 2023 banking crisis, demonstrating its resilience and ability to navigate difficult operating environments. Additionally, the company has integrated multiple acquisitions, which required careful planning and execution to ensure a smooth transition and realization of expected synergies.

The company's strategic focus on community banking has been a key driver of its success over the years. First Interstate Bank is known for its personalized service approach, which empowers its local banking offices to remain responsive to their respective markets while adhering to companywide standards and established limits on authority and discretion. This balanced approach has allowed the company to maintain strong customer relationships and a deep understanding of the communities it serves, positioning it for continued growth and success.

Financial Performance

As of December 31, 2024, First Interstate BancSystem reported total assets of $29.14 billion, deposits of $23.00 billion, loans held for investment of $17.80 billion, and total stockholders' equity of $3.30 billion. The company's net income for the year ended December 31, 2024, was $226.0 million, or $2.19 per diluted share, compared to $257.5 million, or $2.48 per diluted share, for the year ended December 31, 2023.

The company's financial performance in 2024 was impacted by a number of factors, including higher provision for credit losses and lower net interest income due to increased funding costs, partially offset by higher non-interest income and lower non-interest expense. Specifically, the company recorded a provision for credit losses of $67.8 million in 2024, compared to $32.2 million in 2023, driven by higher net charge-offs and an increase in criticized assets. Net interest income declined by $57.2 million, or 6.5%, in 2024, primarily due to higher interest expense on deposits and declines in interest and dividends on investment securities. These factors were partially offset by a $31.1 million, or 21.2%, increase in non-interest income, driven by higher gains on the sale of investment securities and other income sources.

In terms of balance sheet trends, the company's total loans held for investment, net of deferred fees and costs, decreased by $434.7 million, or 2.4%, to $17.84 billion as of December 31, 2024, compared to $18.28 billion as of December 31, 2023. This decline was largely attributable to the company's decision to discontinue indirect lending originations, which represented approximately 4% of the loan portfolio. Deposits decreased by $307.5 million, or 1.3%, to $23.02 billion as of December 31, 2024, from $23.32 billion as of December 31, 2023.

For the fiscal year 2024, First Interstate BancSystem reported annual revenue of $999.70 million, annual net income of $226.00 million, annual operating cash flow of $355.00 million, and annual free cash flow of $332.00 million. In the most recent quarter (Q4 2024), the company reported revenue of $261.30 million and net income of $52.10 million. The company saw a 3.6% increase in revenue for Q4 2024 compared to Q4 2023.

Liquidity

The company's capital ratios remained strong, with a common equity Tier 1 capital ratio of 12.16% and a total risk-based capital ratio of 14.38% as of December 31, 2024. These ratios well exceeded the regulatory requirements for a "well-capitalized" institution.

As of December 31, 2024, First Interstate BancSystem had a debt-to-equity ratio of 0.04, indicating a low level of leverage. The company reported cash and cash equivalents of $896.60 million. First Interstate BancSystem has access to various credit facilities, including an unused federal funds line of credit with third parties amounting to $235.00 million, subject to funds availability. It also has an unused line of credit with the Federal Reserve Bank for borrowings up to $1.81 billion secured by government and agency backed securities and a blanket pledge of agricultural and commercial loans, as well as an unused $50.00 million revolving line of credit with another third party.

The company's current ratio and quick ratio both stood at 19.07 as of December 31, 2024, indicating strong short-term liquidity.

Strategic Initiatives and Outlook

In 2024, First Interstate BancSystem welcomed a new Chief Executive Officer, Jim Reuter, who joined the company after a successful tenure at another regional bank. Reuter's arrival has ushered in a renewed focus on organic growth, relationship banking, and operational efficiency, as the company seeks to unlock the full potential of its franchise and deliver enhanced value to its shareholders.

One of Reuter's first strategic actions was the decision to discontinue the company's indirect lending business, which had been a significant portion of its loan portfolio but was deemed to be dilutive to the company's overall return targets and not aligned with its relationship banking approach. The company estimates that the indirect lending portfolio, which represented approximately 4% of total loans, will amortize by 30% to 40% over the next 12 months, freeing up resources to be redeployed towards more profitable and relationship-driven lending opportunities.

Looking ahead, First Interstate BancSystem is focused on accelerating its organic growth initiatives, with a particular emphasis on expanding its deposit franchise and cross-selling a broader suite of banking products and services to its existing customer base. The company has also indicated that it will be taking a more measured approach to mergers and acquisitions, as it prioritizes the integration and optimization of its existing operations.

In terms of financial guidance for 2025, First Interstate BancSystem expects:

Deposits to increase in the low-single-digits, with normal seasonality

Modest loan growth, excluding the amortization of the 4% indirect lending portfolio
Net interest income to increase 5% to 7% compared to 2024
Continued net interest margin expansion throughout 2025
A modest increase in non-interest income, excluding property sales
Non-interest expenses to increase 3% to 5% over 2024
Total net charge-offs of 20 to 30 basis points

These projections indicate that First Interstate BancSystem anticipates returning to modest organic growth in 2025, with a focus on expanding the net interest margin and managing expenses and credit quality.

Risks and Challenges

While First Interstate BancSystem's strategic transformation holds promise, the company is not without its risks and challenges. The highly competitive nature of the banking industry, particularly in the company's markets, could pressure its ability to attract and retain customers, as well as maintain its net interest margin. Additionally, the company's heavy concentration in commercial real estate and commercial and industrial lending exposures it to potential credit quality issues, should economic conditions deteriorate.

Furthermore, the company's reliance on technology and digital banking platforms exposes it to cybersecurity risks, which could result in data breaches, service disruptions, and reputational damage. Regulatory changes, such as those related to capital requirements and consumer protection, also pose ongoing risks that the company must navigate effectively.

Community Banking Segment

First Interstate BancSystem operates a single reportable segment - community banking. Through its bank subsidiary, First Interstate Bank, the company delivers a comprehensive range of banking products and services to individuals, businesses, government entities, and others throughout its market areas.

The community banking segment encompasses commercial, governmental, and consumer banking services. This includes the acceptance of deposits, the extension of credit, mortgage loan origination and servicing, and wealth management services such as trust, employee benefit, investment management, insurance, and custodial services.

As of December 31, 2024, First Interstate BancSystem's loan portfolio consisted of a diverse mix of real estate, consumer, commercial, agricultural, and other loans. Real estate loans comprised 75.1% of the total loan portfolio, including commercial real estate (51.9%), construction (7.0%), residential (12.3%), and agricultural real estate (3.9%) loans. Commercial loans accounted for 15.9% of the portfolio, while consumer loans made up 5.1%, and agricultural loans were 3.9%.

The company's deposit base is also diverse, including noninterest-bearing demand deposits (25.2%), interest-bearing demand deposits (28.2%), savings deposits (34.0%), and time deposits (12.6%) as of December 31, 2024. First Interstate BancSystem has not relied on brokered deposits as a significant funding source.

In addition to its lending and deposit-taking activities, the community banking segment provides wealth management services, including trust, employee benefit, investment management, insurance, agency, and custodial services. As of December 31, 2024, the company had $8.1 billion in assets under management.

First Interstate BancSystem's community banking model emphasizes a local focus through personalized service while also strengthening the communities in its market areas through community involvement, service activities, and philanthropy. The company's strategy is to continue advancing its business in a disciplined and prudent manner, funded by organic growth in existing markets and selective expansion through acquisitions when appropriate opportunities arise.

Geographic Presence

First Interstate BancSystem primarily operates in the Western and Midwestern United States, with a focus on Arizona, Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, Oregon, South Dakota, Washington, and Wyoming. The company does not have a significant international presence.

Conclusion

First Interstate BancSystem's long history of community banking, strong market presence, and experienced management team position the company well for continued success. However, the company's recent leadership transition and strategic pivot towards organic growth and relationship banking will require careful execution and ongoing adaptation to the evolving banking landscape. By leveraging its strengths, addressing its risks, and delivering on its transformation initiatives, First Interstate BancSystem can enhance its competitive position and drive value for its shareholders in the years to come.

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