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 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 as well as consistent overall financial performance with a long track record of profitability dating back through the global financial crisis. First Interstate’s experienced and risk focused management team, augmented by additional talent in recent years, also remains a key credit strength. The company’s earnings power in recent quarters have been pressured by interest rate headwinds, which also impact the broader industry, though we view the 2023 ROA of 0.83% as solid considering the conservative balance sheet leverage and the challenging operating environment. Conversely, the strong liquidity profile and deposit base is supportive of the ratings as evidenced by its top quartile deposit beta of 25% for the current interest rate cycle and cost of deposits at 4Q23 of 1.35%. Management follows a conservative credit philosophy and underwriting standards that have served the company well during periods of economic stress. Though FIBK has experienced some negative credit migration in 2H23, primarily driven by idiosyncratic issues, the company benefits from the purchase accounting adjustments related to the Great Western Bancorp, Inc. ("GWB") portfolio and a 1.25% LLR to offset potential future losses. First Interstate’s capital position declined following the GWB acquisition in 1Q22, which the company has focused on rebuilding since with shrinking and de-risking the balance sheet, along with retained earnings, although FIBK’s payout ratio is currently over 50% due to 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 60 bp improvement through 2023. 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 brought on by a potential recession.

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. As the ratings incorporate a certain degree of resilience based upon KBRA’s stress testing, a rating downgrade in the near term is unlikely. Any 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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