KBRA Affirms Ratings for First Interstate BancSystem, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Billings, Montana-based First Interstate BancSystem, Inc. (NASDAQ: FIBK) (“First Interstate" or "the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the bank subsidiary, First Interstate Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

FIBK’s ratings are supported by its conservative balance sheet management with a risk weighted density that averages in the low 70% range and a loan-to-deposit ratio of 78% at 4Q24; both metrics are well below peer averages. The company operates across 14 states in dynamic markets, underpinned by a diversified, low-cost deposit base. This is reflected in a total cost of deposits that is over 80 basis points below peer averages and a solid funding mix, with core deposits accounting for 86% of total funding as of 3Q24. While the company’s earnings power has been pressured since the Federal Reserve began its aggressive interest rate hikes in 2022—consistent with trends impacting the broader industry—the 2024 return on assets (ROA) of 0.75% is viewed as adequate. This performance is impacted by the conservative balance sheet composition with ~30% of earning assets held in investment securities that yield just 100 basis points above the cost of funds. Management follows a conservative credit philosophy and underwriting standards that have served the company well during periods of economic stress. However, following the acquisition of Great Western Bancorp, Inc. (GWB) in 2022, FIBK has encountered some negative credit migration which has been largely attributed to idiosyncratic issues arising from the acquired loan portfolio. KBRA views the cushion to absorb these headwinds as adequate considering the purchase accounting adjustments and the loan loss reserve (LLR) of 1.14% as of 4Q24. Although First Interstate’s capital position declined following the GWB acquisition in 1Q22, the company has since rebuilt core capital (CET1 of >12% as of 4Q24) with the de-risking of the balance sheet, along with retained earnings, although FIBK’s payout ratio has averaged 83% over the last 3 years due to higher share count and the reduced earnings performance. Nonetheless, KBRA views overall capital levels to be appropriately aligned with the risk profile of the company and acknowledges that core capital is currently closer to peer averages following the 130 bp improvement since the GWB acquisition. As noted above, KBRA views the loss absorption capacity between the reserve coverage and capital to be sound, which should be sufficient in the event of weakened credit markets.

Rating Sensitivities

Overall financial performance more consistent with the higher rated category that also includes strong asset quality metrics and conservative capital management, in tandem with further expansion of durable, non-spread related revenue, could encourage positive rating momentum over time. Any material, unforeseen losses or outsized asset quality problems could have negative rating implications. Additionally, a significantly more aggressive risk appetite, liquidity profile, or capital management may pressure the ratings.

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