FIBK - First Interstate BancSystem: Not Bad But Not Great Either

2023-07-14 07:07:07 ET

Summary

• The author has identified First Interstate BancSystem as a mediocre investment opportunity, even as its shares have not fully recovered from a recent banking crisis.
• The company has seen impressive growth in its loan portfolio, largely due to the acquisition of Great Western, but concerns persist.
• Despite respectable financial performance, the author rates the company as a 'hold', citing better opportunities in the banking sector and a lack of strong position compared to other firms.

Earlier this year, a banking crisis caused the failure of multiple significant institutions. But just like with any crisis, there were companies that experienced significant downside that did not warrant it. At the same time, some did not deserve to fail but did deserve downside and experienced it. In the months since then, I have been on the lookout for some attractive prospects. I have found some that I believe offer strong upside potential. And I have found others that are mediocre. One of the banks that fits in this second category, in my opinion, is First Interstate BancSystem (FIBK). Shares of the company have not recovered all that much from their low point. Some investors may view this as a great opportunity to dive in. It is possible that some money could be made by buying up the stock. But when looking at the data available, I do think that there are better opportunities in the space right now.

Checking out First Interstate BancSystem

According to the management team at First Interstate BancSystem, the enterprise operates as a financial and bank holding company that's focused on providing community banking services. As of the end of its 2022 fiscal year, the firm operated 307 banking offices across 14 different states. Through these locations, the business engages in a variety of traditional banking activities. For instance, it offers basic deposit and loan services to commercial and consumer customers. Some of the loans that it offers are dedicated toward real estate, commercial activities, agriculture, and more. The company even offers wealth management services for a variety of clients, with those services including the establishment of investment accounts for individuals, employee benefit plans, charitable foundations, and more.

Between 2020 and 2022 , the company saw the value of its loans that are held to maturity grow from $9.81 billion to $18.10 billion. This is rather impressive growth and, according to management, much of the increase was driven by the firm's acquisition of Great Western at a price of $1.72 billion. Even in spite of recent market turbulence, the value of loans continued to grow into the first quarter of 2023. By that time, the total amount outstanding was $18.25 billion. By value, 47% of these loans were in the form of commercial real estate. I understand that many investors are worried at this time about exposure to office properties. But at this moment, only about $800.1 million, or 4.4%, of all loans fall under this category. 17% of the company's loans are commercial in nature. This is followed up by 12% for residential real estate and 10% involving construction real estate. The company also has no exposure to the major metropolitan areas that many fear. In fact, Montana is the state that the company has the greatest loan exposure to. That's about 15% in all. This is followed up by Iowa at 10% and South Dakota at 10%.

More important at this time is the deposit situation. This is because concerns over uninsured deposits ultimately drove the bank runs that caused institutions to collapse earlier this year. On this front, I do have some data that is slightly concerning. But first, let's start with the good news. Deposits for the company expanded from $14.22 billion in 2020 to $25.07 billion by 2022. At the end of the first quarter of this year, however, they had declined by almost $967 million to $24.11 billion in all. Considering that the run on financial institutions began March 10th, a decline of this magnitude is not exactly great news. But at the same time, it's far from catastrophic. At the end of the most recent quarter though, 34% of the company's deposits, about $8.2 billion in all, were uninsured. This number drops to about $6.2 billion if we give the business credit for deposits that are collateralized.

To cover this, First Interstate BancSystem does have about $10.9 billion worth of liquidity. But it also saw its borrowings grow to about $2.99 billion by the end of the first quarter of this year compared to the $2.61 billion that the company had at the end of 2022. One positive from this is that it is trading below its book value per share. The stock is currently at $24.34. Its overall book value per share is $30.28. However, the tangible book value per share is considerably lower at $18.57. That does not offer a tremendous amount of protection compared to how shares are priced today.

We should also pay attention, of course, to the income statement side of things and how that has changed in recent times. In 2020, the company generated net interest income of $440.9 million. It also saw non-interest income total $155.9 million. By 2022, these numbers had grown to $859.9 million and $163.2 million, respectively. Overall net income for the business grew from $161.2 million to $202.2 million. When it comes to the current fiscal year, we have seen continued growth. Net interest income of $223.7 million dwarfs the $117.1 million reported during the first quarter of 2022. The firm did see non-interest income plunge from $48.8 million to only $16.4 million. But in spite of that, net income for the business went from negative $33.4 million to positive $56.3 million.

These are perfectly respectable numbers. We don't know yet what the rest of 2023 will look like. But if we use data from 2022, the firm is trading at a price to earnings multiple of 12.3. Generally speaking in the industry, a multiple of about 16 is realistic. However, during these difficult times, I have seen many companies with multiples of 10 or lower. And some of these have uninsured deposit exposure that is lower than what First Interstate BancSystem enjoys.

Takeaway

After reviewing all the data currently provided, I would say that I am on the fence when it comes to First Interstate BancSystem. The company is not in bad shape. But it's also not in the best position compared to other firms that I have seen. This is true not only from a balance sheet perspective, but also from a valuation perspective. When you add all the data together, this leads me to feel rather neutral about the enterprise. And as such, I have decided to rate it a 'hold' for now.

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