First Interstate in Montana buying Great Western for $2 billion

First Interstate BancSystem is acquiring Great Western Bancorp in Sioux Falls, South Dakota, in a $2 billion deal that would move the Billings, Montana-based company into eight new states and more than double the size of its branch network.

The combined company would have $32 billion of assets and more than 300 branches across 14 states that span the Pacific Northwest, the Mountain West and the Upper Midwest. Of the nine states that make up Great Western’s footprint, eight would be new markets for First Interstate.

First Interstate President and CEO Kevin Riley called it a “transformative” deal that would give the bank a foothold in faster-growing markets and the additional resources to increase its investments in technology.

“With the addition of Great Western we will significantly increase the geography diversification of our franchise and enter states to the east and south of our current footprint — most notably, Colorado, Arizona, Nebraska and Iowa, while considerably increasing our presence in South Dakota,” Riley said during a call Thursday to discuss the deal.

“These are attractive markets that will present good growth opportunities long into the future,” he continued. “Cities like Omaha [Nebraska], Des Moines [Iowa] and Sioux Falls are growing nicely and are very similar to our existing Boise, Idaho, and Spokane, Washington, markets where we’ve had a great deal of success over the past few years.”

Overall, Riley added, “the Great Western footprint represents larger, faster-growing markets with higher median household income, which we believe will create good opportunity for expansion of our retail offerings in addition to the growth of our wealth management business.”

The all-stock transaction, expected to close in the first quarter of 2022, is the seventh-largest bank acquisition announced in 2021. It’s also the first for the typically acquisitive First Interstate since before the pandemic. The company closed seven bank deals between 2014 and 2019, though Great Western is its largest to date.

Analysts had anticipated a return to dealmaking given the bank’s history and the strength of its stock. Its shares in September have traded above 200% of tangible book value.

First Interstate “has been on our list of likely buyers since February of this year,” when coronavirus vaccines rolled out and bank M&A started to pick up, said Wells Fargo analyst Jared Shaw.

Piper Sandler analyst Matthew Clark said that, for First Interstate to grow substantially in coming years, it needed to expand its reach. The Great Western acquisition, he said, would give First Interstate entrance to markets “that are larger and enhance its growth prospects relative to its legacy Mountain footprint, where it has dominant market share.”

The combined company would have $18.4 billion of loans, with Great Western contributing $8.5 billion of the total. The two banks’ loan books are similar — predominantly commercial real estate and commercial-and-industrial loans — though Great Western also has a sizable portfolio of agriculture credits.

The merged bank would have $27.1 billion of deposits, with Great Western adding $11.5 billion. With Great Western’s 174 branches, First Interstate would have 321 branches.

First Interstate estimates the deal will be 20% accretive to earnings per share by 2023, assuming fully phased-in cost savings that are expected to total 21% of the seller’s noninterest expense base.

The company said that, at closing, five directors from Great Western could join the First Interstate board. Mark Borrecco, Great Western’s president and CEO, is expected to become the combined company’s chief banking officer. Other Great Western executives have agreed to assume key positions as well.

Borrecco launched an initiative to de-risk the company’s balance sheet when he became CEO of Great Western in 2020. The process involved exiting higher-risk loans, including some in the agriculture book. He said on the call to discuss the deal that this put upward pressure on expense levels, making it difficult to invest in modernizing the bank’s technology platform.

“It became clear that combining with First Interstate would accelerate our internal efforts by two to four years and would immediately put the Great Western franchise in an offensive position, allowing us to focus on our core banking strengths and our clients,” Borrecco said. “While we will continue our work to de-risk the loan portfolio, we are in a much stronger position to do so in the combined organization.”

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