- key insights: First Interstate Bank System is sticking to its plan for organic growth instead of pursuing bank mergers and acquisitions, responding to pressure from an activist investor.
- what is the issue: While the bank seemed to align with some of the activist demands, it stopped short of fully committing to specifics, such as achieving a common equity Tier 1 ratio of 10.3%.
- Future outlook: The involved parties intend to meet to explore potential solutions.
First Interstate Bank System finds itself under scrutiny from a significant activist investor. Recently, it appeared to address certain demands from this group, though some requests are still unanswered.
First Interstate’s leadership did not “publicly commit to future acquisitions” or any restructuring of its securities, despite calls from Holdco Asset Management, which made claims in a recent report. Instead, executives emphasized the bank’s plans to use its excess capital for buying back shares. They made it clear: mergers and acquisitions aren’t on their agenda.
“M&A is not our focus,” stated Jim Reuter, the President and CEO of First Interstate, who returned to lead the $27.3 billion-asset bank last year during a call discussing third-quarter results.
He mentioned that while the board is obligated to assess any bid proposals, the bank remains focused on its strategic plan and is confident in its prospects.
These remarks from Reuter were interesting, especially considering the context of the Holdco report. The investment firm has recently intensified its critiques of several U.S. banks, accusing First Interstate’s board of making decisions that undermine value, including its acquisition of Great Western Bancorp in 2021.
Holdco has made several demands, like publicly announcing a goal to reduce its Common Equity Tier 1 ratio to 10.3%, which is notably lower than the current ratio of 13.9%, as well as changes to executive compensation.
However, First Interstate did not make any such commitments. On the topic of the CET1 ratio, Chief Financial Officer David Della Camera suggested that the bank would align more closely with its peers in the near term.
According to an October 24 filing, Holdco owns around 3.8% of First Interstate’s common stock. The firm has also released reports on other banks, including Comerica, Eastern Bancshares, and Columbia Banking System.
Holdco has urged both Comerica and Eastern to consider selling, with Comerica agreeing to take action earlier this month. Eastern has focused on organic growth strategies tied to its recent acquisitions and is pushing Columbia, which is accused of pursuing a “high-risk acquisition strategy,” to adopt a five-year restructuring plan limiting its assets to below $100 billion.
Neither First Interstate executives nor their analysts mentioned Holdco’s report during the recent call. Both declined to comment afterward, but the report indicates a meeting between Holdco and First Interstate’s management is planned to discuss potential solutions.
Mr. Reuter is also set to serve as CEO of FirstBank Holding in Lakewood, Colorado, until March 2024, where he’s guiding First Interstate’s transition. The bank focuses on relationship banking and has exited some non-core areas, such as indirect auto financing.
During the call, Reuter emphasized a shift away from “markets that don’t make sense,” instead directing investment towards regions with higher market share and growth potential.
As part of this plan, the branch network will be restructured. Earlier this month, First Interstate sold 12 branches located in Arizona and Kansas to a financial entity based in Clayton, Missouri. Additionally, two weeks ago, they announced the sale of 11 branches in Nebraska. They also stated plans to close four branches in eastern Nebraska by the first quarter of 2026, while preparing to open a new branch in Billings next year.
Just a few weeks ago, the bank’s board approved a $150 million stock repurchase initiative, and they revealed that around $57.2 million, or roughly 1.8 million shares, had been bought back by October 28.
During the call, analyst Andrew Terrell from Stevens Research inquired whether the bank might consider using some excess capital for restructured securities.
Della Camera responded that this kind of restructuring is “not a priority at the moment.”
Barclays analyst Jared Shaw mentioned that some of Holdco’s requests seem to overlap with the strategic adjustments proposed by Reuter. He pointed out that Reuter’s primary message has been, “We’re not trading. We’re focused on consolidating and fixing what we have and digging into our core business.”
Shaw suggested that Holdco’s assertive approach is making management more cautious at First Interstate and other targeted banks. Nonetheless, this doesn’t imply that Holdco believes a sale is appropriate for First Interstate at this time.
“I don’t think they’re trying to push everyone towards a sale,” he noted.
In its recent quarter, First Interstate reported a net income of $71.4 million, reflecting a 28.6% increase from the previous year, with earnings per share of $0.69, surpassing analyst expectations of $0.62.
Interestingly, average loan sizes decreased to $16.4 billion as of September 30. Executives explained that a 12% drop year-over-year stemmed from divesting non-core relationships and recent branch sales, impacting both deposits and loans. According to reports, this is also linked to loan repayments and reduced demand for real estate loans amidst heightened competition.
The bank anticipates average loans will amount to $15.5 billion by the end of the fourth quarter.
On Thursday, First Interstate’s stock fell by 0.73%, bringing its year-to-date decline to approximately 3%.
