Kalkine has a fully transformed New Avatar.

US Equities Report

First Interstate BancSystem, Inc.

Feb 10, 2022

FIBK
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)

 

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 - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.