Bill Simpson wrote an analysis of First Interstate BancSystem (NASDAQ:FIBK) to TradingIPOs subscribers on March 20. In its debut Wednesday, March 24, the company sold 10 million shares for $14.50 each, raising $145 million. It had expected to sell 8.7 million shares for $14 to $16 apiece.
The text of Mr. Simpson's original writeup follows:
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First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.
FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.
Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.
From the prospectus:
'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'
As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.
The company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.
Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.
Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate (Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below the national 10% average. The economy in FIBK's area is driven by agriculture and energy.
FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.
Community model - Each of FIBK's local bank presidents has discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.
Future expansion to be funded via organic growth and potential acquisitions, including FDIC-assisted acquisitions.
Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.
FIBK has not leveraged it deposits; on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK, it is far below many community banks elsewhere in the US.
Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.
65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.
**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.
As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million, well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.
2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.
**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.
Glacier Bancorp (GBCI) is probably the closest public comparable. FIBK and GBCI are both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging its deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.
Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash hoard to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line. Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5% (since 2005). The reason is a 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.