First Interstate BancSystem, Inc.

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

First Interstate BancSystem, Inc. is a regional financial holding company operating through its subsidiaries. The Company provides a range of banking and other financial services to commercial and retail clients in the Mountain and Pacific Northwest regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

First Interstate BancSystem (FIBK) operates in a very competitive industry, lacking significant moats. Its main source of income comes from net interest income (difference between income from loans and interest paid for deposits), which are subject to economic fluctuation and regulations. The company’s earnings are highly reliant on the strength of the overall economy and its ability to manage its credit portfolio.

Business Overview

First Interstate BancSystem (FIBK) operates primarily as a traditional commercial and retail bank, providing services such as: * Lending: Commercial loans, agricultural loans, real estate loans, and consumer loans * Deposits: Checking, savings, and money market accounts, as well as certificates of deposit (CDs). * Other financial services: Wealth management, insurance, and trust services. The company’s operations are concentrated in Montana, Idaho, Oregon, South Dakota, Wyoming, and Washington.

Historically, FIBK has expanded through acquisitions, creating a network of 207 branches and 314 ATMs across the Western U.S. While this has led to considerable size, its benefits in terms of moats are limited.

Financial Analysis

Here’s a breakdown of FIBK’s financials, emphasizing the latest reported results (Form 10-Q as of 09/30/2024 and 09/30/2023): * Revenue: The main income driver is Net Interest Income (NII), which was $255 million for the first three quarters of 2024, up from $221.6 million for the same period in 2023. This increase was primarily driven by higher average interest rates, whereas the recent quarter (September 2024) saw a decline compared to June 2024, signaling potential future pressure. Non-interest income is far less significant with 162 million in 2024 compared to 164 million in 2023.

  • FIBK reports revenue in two segments: net interest income (NII) and noninterest income (fee income). NII is more significant by far.

    • Profitability: The bank’s profitability is measured by several factors including ROA and ROE. Net income was 151.9m in 9 months ended Sept 2024 versus 158.1m in 9 months ended Sep 2023, a ~4% decrease. The third quarter was the worst in a few years. The company’s net interest margin(NIM), the difference between interest income and interest paid on deposits, was 3.19% in the first nine months of 2024, an increase from 2.77% in 2023, which reflects an increase in NII due to rising rates. The most recent quarter saw margin pressure.
    • Balance Sheet:
      • Total assets at the end of September 2024 were $18.1 billion, compared to $18.1 billion at year-end 2023, demonstrating modest growth. Total loans held for investment were at $12 billion.
      • Total deposits were $15.8 billion in Sept 2024 compared to $15.9 billion in 2023, indicating a recent decrease.
      • Capital ratios are well above the levels required by regulators (Tier 1, Common Equity Tier 1 and Total Capital), indicating sound capital levels.
    • Credit Quality: Non-performing assets are about 0.37% of total loans, showing a healthy credit portfolio. The allowance for credit losses represents roughly 1.3% of total loans, which covers a good portion of these non-performing assets. Net charge-offs to loans was -0.03% in the third quarter, reflecting loan quality.
    • Cash Flow:
      • The bank’s free cash flow varies over time with significant changes stemming from loan origination and sales of securities.

A key takeaway is that although there are clear signs of a robust business and management, FIBK suffers from a lack of revenue diversification. Interest income is clearly the most important driver. Thus, it is very dependent on prevailing interest rates and the overall economy.

Moat Assessment: 1 / 5

FIBK lacks a significant economic moat due to the following: * Commoditized Services: Banking services, such as deposit accounts and lending, are widely available, with minimal differentiation among competitors. This lack of uniqueness limits its ability to secure pricing power or customer captivity. Switching costs are low, and customers can easily move to other banks if they see better offers. * Lack of Scale Advantage: Though its size enables efficiencies, they are limited by competition from larger national and regional banks that can achieve a bigger cost-advantage than FIBK. The company’s market cap is 3.14B, whereas peers like US Bancorp and Wells Fargo have significantly larger valuation and market share. * Limited Economic Moats: It is tough to say FIBK has an “economic moat,” which is an advantage that gives the firm pricing power. Most of the things that they do can be easily replicated by other players. Thus there is really no differentiation. * Regulatory Barriers: While banking is heavily regulated, which makes it difficult for new players to enter, that protection applies equally to all the incumbents.

Overall, the bank is primarily a provider of financial services in a highly competitive market, where there is no pricing power, brand loyalty, or innovative advantages that can give it an edge.

Risks to the Moat and Business Resilience

Here are the most pertinent factors:

  • Interest Rate Risk: Changes in interest rates directly affect the bank’s profitability by reducing NII. Low rates can compress margins, whereas rising rates can potentially increase defaults. The bank has reported they are actively managing the liability side of their balance sheet and working to minimize the volatility. However, this remains a major risk factor.
  • Economic Cycle Risk: Economic downturns will affect the bank’s profitability as consumers and businesses may have difficulty repaying loans and new lending is limited. Moreover, low interest rates are typically paired with low levels of economic activity, leading to reduced revenues from the spread.
  • Credit Risk: Loan defaults could damage the bank’s bottom line if the economy slows down and people can’t pay their obligations. The company has stated they are seeing some softness in the commercial real estate sector, and continue to monitor the loan portfolio.
  • Intense Competition: The banking sector is highly competitive, and new and existing banks or fintech companies are constantly working to create innovative solutions to take away market share. The bank’s lack of differentiation may make it harder for them to compete and retain customers.
  • Regulation: Changes in regulatory rules can affect profitability, compliance costs, and the overall operations of the bank.

Given that, there are plenty of issues on the horizon for the company, and they need to proactively work in improving operations and strengthening their risk management. The volatility in their results shows the sensitivity that the bank has to market conditions.

Understandability: 2 / 5

While banking is a common business, the specifics of FIBK’s operations and the nuances of its financial statements make it a bit complicated to understand for the average investor. A lot of the drivers of revenues and costs (interest rates, loan mix) are not intuitive.

Balance Sheet Health: 4 / 5

The company has a healthy balance sheet that looks good right now with adequate capital ratios and good asset quality. The main concern is long-term impact on their financial health from changing regulations, economic downturn and increasing competition that might impact its solvency and profitability.

Conclusion

While First Interstate BancSystem has some regional relevance and has shown to be a well-run bank with some financial strength, it lacks any moat that can provide a sustainable and predictable long-term return. The bank’s revenue is heavily dependent on interest rates and its performance is closely tied to economic conditions and that makes the company’s profitability difficult to manage. Thus, based on these analysis, the company is not the best pick.