How First Interstate is responding to activist pressure

• Key insight: First Interstate BancSystem reaffirmed its strategic plan to pursue organic growth, not bank M&A, as it faces pressure from a high-profile activist investor.
• What’s at stake: The bank seemed to align itself with some of the activist group’s demands, but it did not outright commit to certain items, such as a Common Equity Tier 1 ratio of 10.3%.
• Forward look: The two sides are scheduled to meet to discuss a resolution.

First Interstate BancSystem, one of several regional banks currently in the crosshairs of a high-profile activist investor, appeared to meet some of the group’s demands Thursday, but left others hanging.

While First Interstate executives did not “publicly swear off any and all future acquisitions” or “publicly swear off any securities restructurings,” as HoldCo Asset Management requested in a report last week, they did say they’re not interested in doing mergers and acquisitions or in using excess capital to restructure the securities book. Rather, the Billings, Montana-based bank will use excess capital to continue buying back shares, the executives said.

“M&A is not something we’re focused on,” First Interstate President and CEO Jim Reuter, a veteran bank executive who came out of retirement last year to lead the $27.3 billion-asset bank, said during a call to discuss the bank’s third-quarter earnings results.

While the board has a fiduciary responsibility to evaluate proposed bids from potential buyers, the bank is “focused on executing on our strategic plan because we’re really confident in our future success,” he added.

Reuter’s comments were of high interest in light of HoldCo’s report. The investment firm, which has recently stepped up its criticism of several U.S. banks, chastised First Interstate’s board of directors for making “value-destructive decisions,” including the 2021 acquisition of Great Western Bancorp in Sioux Falls, South Dakota, a deal that predated Reuter’s arrival.

HoldCo made several demands of the bank, including publicly declaring a goal of reducing its common equity Tier 1 ratio target to 10.3%, which is much lower than the current CET1 ratio of 13.9%, and changing management’s compensation structures.

First Interstate made no such commitments Thursday. But regarding its CET1 ratio, Chief Financial Officer David Della Camera did say the bank will be “more in line with the peers in the near term” than where it is currently.

HoldCo owns about 3.8% of First Interstate’s common shares, according to its Oct. 24 report. In addition to First Interstate, the firm has recently issued reports on Dallas-based Comerica, Eastern Bankshares in Boston and Columbia Banking System in Tacoma, Washington. 

HoldCo called for both Comerica and Eastern to sell, and Comerica agreed to do so earlier this month. Eastern has said that it’s focused on organic growth and integration work tied to recent acquisitions. It is pressing Columbia, which it said has pursued “a high-risk acquisition strategy,” to commit to a five-year rebuilding plan that includes staying below $100 billion of assets.

Neither First Interstate nor the analysts on Thursday’s call mentioned the HoldCo report. After the call, both First Interstate and HoldCo declined to comment. According to HoldCo’s report, the firm is scheduled to meet with First Interstate’s management to talk about potential resolutions.

Reuter, who was the CEO of FirstBank Holding in Lakewood, Colorado, until March 2024, is leading First Interstate through a transition. The bank has homed in on relationship banking, exiting certain non-relationship-based businesses, including indirect auto lending.

The bank has been leaving “markets that do not make sense” for its current strategy and is instead investing “in areas where we have strong share and growth opportunities,” Reuter said on the call.

Part of the plan involves reconfiguring the branch network. Earlier this month, First Interstate sold 12 branches in Arizona and Kansas to Clayton, Missouri-based Enterprise Financial Services.

Two weeks ago, First Interstate said it would sell 11 Nebraska branches to Security First Bank in Rapid City, South Dakota. And on Thursday, it said it would close four branches in eastern Nebraska during the first quarter of 2026 and open a new branch in Billings next year.

In August, First Interstate’s board authorized a $150 million share repurchase plan. Through Oct. 28, it repurchased about $57.2 million, or approximately 1.8 million shares, it said Thursday. 

Andrew Terrell, an analyst at Stephens Research, asked on the call whether the bank would be likely to use some of its excess capital to restructure securities.

Della Camera said such actions are “not a priority right now.” 

Some of HoldCo’s demands for First Interstate don’t appear to be too far off from the change in strategy that Reuter has rolled out, Jared Shaw, an analyst at Barclays, told American Banker. 

According to Shaw, Reuter’s message from the start was: “We’re not doing deals. We’re focused on integrating and rightsizing what we have and drilling down to core operations.”

HoldCo’s activism is “holding management’s feet to the fire more,” both at First Interstate and at the other banks it’s targeting, Shaw said. But that doesn’t mean the group thinks a sale is the right move for First Interstate, he noted.

“I don’t think they’re out there trying to drive everyone to a sale,” he said. 

For the quarter, First Interstate reported net income of $71.4 million, up 28.6% year over year. Earnings per share were $0.69, topping the average consensus estimate of $0.62 per share. 

Of note was the decline in average loans, which totaled $16.4 billion through Sept. 30. Executives said the 12% year-over-year drop reflected the run-off of noncore relationships as well as the recent branch sales, which included deposits and loans. It was also a consequence of loan payoffs, lower demand for real estate loans and stiffer competition on pricing and terms, Reuter said.

The bank is forecasting average loans to total $15.5 billion at the end of the fourth quarter. 

First Interstate’s stock price fell 0.73% Thursday. So far this year, it’s down about 3%.