Mountain West And Midwest Focus Will Fuel Digital Banking Expansion

Key Takeaways

• Focus on high-growth markets, digital expansion, and operational efficiency is expected to strengthen long-term profitability and competitive positioning.
  
• Strong capital and liquidity levels provide flexibility for value creation and support for shareholder returns through multiple strategic options.
  
• Declining loan balances, rising asset quality concerns, and overreliance on slow-growth core markets threaten revenue growth, diversification, and long-term competitiveness.

Catalysts

Operates as the bank holding company for First Interstate Bank that provides a range of banking products and services in the United States.

• With over 70% of its deposits located in markets growing faster than the national average and a large, low-cost granular deposit base, First Interstate is poised to benefit from ongoing economic and population expansion in the Mountain West and Midwest, supporting long-term organic loan and deposit growth, which should positively impact future revenues and earnings.
  
• The company is actively optimizing its branch footprint by divesting lower-growth markets and focusing capital investment and resources on high-growth areas, while maintaining disciplined cost management-this should drive improved operational efficiency and support higher net margins over time.
  
• Strategic efforts to enhance digital capabilities-including outsourcing consumer credit card operations, investing in production-driven areas, and maintaining expense discipline-position First Interstate to expand its mobile/digital banking reach and improve operational leverage, which is expected to gradually boost net margins and long-term profitability.
  
• Proactive repricing of maturing fixed and adjustable-rate loans, combined with disciplined credit and asset-liability management, is anticipated to drive continued improvement in net interest margins and a high single-digit increase in net interest income in 2026, even assuming flat loan balances.
  
• Strong capital and liquidity levels, further enhanced by the Arizona and Kansas branch transaction, give the company multiple options for value creation (e.g., share repurchases, organic investment, or future M&A), increasing flexibility to support shareholder returns and earnings growth through 2026 and beyond.

First Interstate BancSystem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Interstate BancSystem's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.5% today to 60.3% in 3 years time.
• Analysts expect earnings to reach $686.4 million (and earnings per share of $2.94) by about August 2028, up from $229.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $288.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Banks industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

First Interstate BancSystem Future Earnings Per Share Growth

Risks

• Persistent declines in loan balances-due to intentional exits from indirect and credit card lending, payoffs of large loans, and runoff in certain segments like multifamily construction-raise concerns about the bank's ability to generate organic loan growth, posing a risk to future revenue and net interest income.
  
• Elevated increases in criticized loans (up 17.2% quarter-over-quarter), particularly from multifamily projects experiencing slower lease-up, signal underlying asset quality pressures that may translate into higher credit costs or charge-offs, potentially impairing earnings and capital.
  
• Strategic focus on core markets with high existing market share could lead to overexposure to slow-growing or economically concentrated regions, limiting revenue diversification and increasing vulnerability to local downturns, negatively impacting earnings stability.
  
• Outsourcing of the consumer credit card portfolio and related loan sales, while neutral to short-term net income, reduce potential sources of noninterest income and future revenue stream diversification, increasing reliance on traditional lending margins.
  
• Ongoing cost-cutting and branch optimization actions suggest pressure to protect profitability, but sustained underinvestment in technology, talent, or front-line capabilities could erode competitive positioning against fintechs and larger banks, constraining long-term earnings growth and net margins.

Valuation

• The analysts have a consensus price target of $32.25 for First Interstate BancSystem based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $686.4 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $29.17, the analyst price target of $32.25 is 9.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.