First Interstate BancSystem, Inc. Reports Results for Third Quarter 2011

For Immediate Release

 

Contact:		Marcy Mutch		NASDAQ: FIBK
		Investor Relations Officer First Interstate BancSystem, Inc. (406) 255-5322 investor.relations@fib.com		www.FIBK.com

First Interstate BancSystem, Inc. reports third quarter 2011 net income available to common shareholders of $11.1 million, or $0.26 per diluted share, as compared to $9.0 million, or $0.21 per diluted share, for second quarter 2011 and $7.9 million, or $0.18 per diluted share, for third quarter 2010.

RESULTS SUMMARY

(Unaudited; $ in thousands, except per share data)

 

		Three Months Ended												Sequential				Year
		September 30,				June 30,				September 30,				Quarter				Over Year
		2011				2011				2010				% Change				% Change
Net income		$	11,921			$	9,854			$	8,729				21.0	%			36.6	%
Net income available to common shareholders			11,059				9,001				7,867				22.9	%			40.6	%
Diluted earnings per common share			0.26				0.21				0.18				23.8	%			44.4	%
Dividends per common share			0.1125				0.1125				0.1125				0.0	%			0.0	%
Book value per common share			16.70				16.51				16.23				1.2	%			2.9	%
Tangible book value per common share*			12.25				12.05				11.72				1.7	%			4.5	%
Net tangible book value per common share*			13.66				13.45				13.14				1.6	%			4.0	%
Return on average common equity			6.17	%			5.23	%			4.52	%
Return on average assets			0.65	%			0.54	%			0.48	%
Weighted average common shares outstanding			42,774,259				42,749,376				42,634,283
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards			67,404				114,717				150,587

 

		Nine Months Ended								Year
		September 30,				September 30,				Over Year
		2011				2010				% Change
Net income		$	31,281			$	26,518				18.0	%
Net income available to common stockholders			28,722				23,959				19.9	%
Diluted earnings per common share			0.67				0.61				9.8	%
Dividends per common share			0.3375				0.3375				0.0	%
Return on average common equity			5.51	%			5.05	%
Return on average assets			0.57	%			0.49	%
Weighted average common shares outstanding			42,737,986				38,986,458
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards			111,368				216,219

 

*	See Non-GAAP Financial Measures included herein for a discussion regarding tangible and net tangible book value per common share.

 

1

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“We were pleased to deliver a solid quarter that reflects stabilizing economic conditions in most of our markets and strong execution in all areas of the Bank,” said Lyle R. Knight, President and Chief Executive Officer for First Interstate BancSystem, Inc. “Compared to the second quarter of 2011, we generated higher revenue, improved operating efficiencies and higher returns on both equity and assets. Importantly, our loan portfolio is showing encouraging signs of improvement as we work down our level of problem loans, which is resulting in lower loan loss provision expense.”

REVENUE SUMMARY

(Unaudited; $ in thousands)

 

		Three Months Ended												Sequential				Year
		September 30,				June 30,				September 30,				Quarter				Over Year
		2011				2011				2010				% Change				% Change
Interest income		$	73,483			$	73,551			$	78,965				-0.1	%			-6.9	%
Interest expense			9,991				11,024				15,221				-9.4	%			-34.4	%
Net interest income			63,492				62,527				63,744				1.5	%			-0.4	%
Non-interest income:
Other service charges, commissions and fees			8,479				7,768				7,821				9.2	%			8.4	%
Service charges on deposit accounts			4,609				4,385				4,497				5.1	%			2.5	%
Income from the origination and sale of loans			5,512				4,109				7,355				34.1	%			-25.1	%
Wealth management revenues			3,202				3,483				3,091				-8.1	%			3.6	%
Investment securities gains, net			38				16				66				137.5	%			-42.4	%
Other income			1,285				1,830				2,025				-29.8	%			-36.5	%
Total non-interest income			23,125				21,591				24,855				7.1	%			-7.0	%
Total revenues		$	86,617			$	84,118			$	88,599				3.0	%			-2.2	%
Tax equivalent net interest margin ratio			3.84	%			3.84	%			3.89	%

 

		Nine Months Ended								Year
		September 30,				September 30,				Over Year
		2011				2010				% Change
Interest income		$	220,877			$	238,331				-7.3	%
Interest expense			33,060				49,742				-33.5	%
Net interest income			187,817				188,589				-0.4	%
Non-interest income:
Other service charges, commissions and fees			23,627				22,073				7.0	%
Service charges on deposit accounts			13,104				13,854				-5.4	%
Income from the origination and sale of loans			13,066				14,841				-12.0	%
Wealth management revenues			9,980				9,304				7.3	%
Investment securities gains, net			56				108				-48.1	%
Other income			5,042				5,220				-3.4	%
Total non-interest income			64,875				65,400				-0.8	%
Total revenues		$	252,692			$	253,989				-0.5	%
Tax equivalent net interest margin ratio			3.80	%			3.95	%

 

2

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Net Interest Income

Net interest income increased during third quarter 2011, as compared to second quarter 2011, primarily due to one additional accrual day. Further reductions in funding costs, along with a continued shift from higher-costing time deposits to lower-costing demand deposits, were offset by decreased loan and investment yields resulting in a stable net interest margin of 3.84% during third quarter 2011 compared to second quarter 2011. Compression in the net interest margin ratio during the nine months ended September 30, 2011, compared to the same period in 2010, was attributable to lower yields earned on the Company’s investment and loan portfolios and lower outstanding loan balances, the effects of which were partially offset by a 35 basis point reduction in funding costs.

Non-interest Income

Other service charges, commissions and fees increased during third quarter 2011, as compared to second quarter 2011 and third quarter 2010, primarily due to higher service charge income from ATM transactions and higher interchange income from increased volumes of debit and credit card transactions.

Although regulations became effective on October 1, 2011, that reduced the maximum allowable debit card interchange fee per transaction for large issuers with over $10 billion in assets, the Company qualifies for the small-issuer exemption. Under this exemption the Company does not anticipate any immediate, significant impact to interchange revenues.

Income from the origination and sale of residential mortgage loans increased during third quarter 2011, as compared to second quarter 2011, primarily due to increased purchased home and refinancing activity brought on by a reduction in home mortgage rates. Purchased home loan originations accounted for approximately 47% of the Company’s residential real estate loan originations during third quarter 2011, as compared to 61% during second quarter 2011 and 31% during third quarter 2010.

Wealth management revenues decreased during third quarter 2011, as compared to second quarter 2011 due to declines in the market values of assets under trust management. Wealth management revenues increased during the nine months ended September 30, 2011, as compared to the same period in 2010 primarily due to new business activity and increases in the market values of assets under trust management.

Fluctuations in other income during third quarter 2011, as compared to second quarter 2011 and third quarter 2010, were primarily due to fluctuations of values of securities held under deferred compensation plans.

 

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NON-INTEREST EXPENSE

(Unaudited; $ in thousands)

 

		Three Months Ended												Sequential				Year
		September 30,				June 30,				September 30,				Quarter				Over Year
		2011				2011				2010				% Change				% Change
Non-interest expense:
Salaries, wages and employee benefits expense		$	26,888			$	27,889			$	27,994				-3.6	%			-4.0	%
Occupancy, net			4,180				4,013				3,939				4.2	%			6.1	%
Furniture and equipment			3,018				3,129				3,411				-3.5	%			-11.5	%
Outsourced technology services			2,235				2,212				2,402				1.0	%			-7.0	%
FDIC insurance premiums			1,631				1,629				2,337				0.1	%			-30.2	%
Other real estate owned expense, net of income			2,878				2,042				2,608				40.9	%			10.4	%
Mortgage servicing rights amortization			807				671				1,221				20.3	%			-33.9	%
Mortgage servicing rights impairment			1,168				27				1,991				4225.9	%			-41.3	%
Core deposit intangibles amortization			362				361				437				0.3	%			-17.2	%
Other expenses			11,874				12,219				11,670				-2.8	%			1.7	%
Total non-interest expense		$	55,041			$	54,192			$	58,010				1.6	%			-5.1	%

 

		Nine Months Ended								Year
		September 30,				September 30,				Over Year
		2011				2010				% Change
Non-interest expense:
Salaries, wages and employee benefits		$	82,479			$	83,451				-1.2	%
Occupancy, net			12,408				12,044				3.0	%
Furniture and equipment			9,367				10,108				-7.3	%
Outsourced technology services			6,688				7,100				-5.8	%
FDIC insurance premiums			5,726				7,460				-23.2	%
Other real estate owned expense, net of income			6,631				6,129				8.2	%
Mortgage servicing rights amortization			2,285				3,469				-34.1	%
Mortgage servicing rights impairment			848				2,212				-61.7	%
Core deposit intangibles amortization			1,085				1,316				-17.6	%
Other expenses			34,674				32,892				5.4	%
Total non-interest expense		$	162,191			$	166,181				-2.4	%

Salaries, wages and employee benefits decreased in third quarter 2011 from second quarter 2011 and from the same period a year ago largely due to reductions in FTE’s and fluctuations of values of securities held under deferred compensation plans.

In February 2011, the FDIC issued a final rule that, among other things, modified the definition of an institution’s deposit insurance assessment base and revised assessment rate schedules. These changes, which became effective April 1, 2011, resulted in a reduction in the Company’s FDIC insurance premiums.

Variations in net OREO expense between periods were primarily due to fluctuations in write-downs of the estimated fair value of OREO properties. Third quarter 2011 net OREO expense included $538 thousand of net operating expenses, $2.4 million of fair value write-downs and net gains of $113 thousand on the sale of OREO properties. Approximately 52% of write-downs recorded during the current quarter related to properties in our stressed markets, which include the Flathead, Gallatin Valley and Jackson market areas.

Fluctuations in the fair value of mortgage servicing rights were due to changes in assumptions regarding estimated prepayments of the underlying residential mortgage loans, which typically correspond with changes in market interest rates. Residential mortgage interest rates decreased during third quarter 2011, as compared to second quarter 2011, resulting in an impairment of mortgage servicing rights.

 

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ASSET QUALITY

(Unaudited; $ in thousands)

 

			$0,000,000,0				$0,000,000,0				$0,000,000,0
		Three Months Ended
		September 30,				June 30,				September 30,
		2011				2011				2010
Allowance for loan losses – beginning of period		$	124,579			$	124,446			$	114,328
Charge-offs			(20,405	)			(16,102	)			(12,789	)
Recoveries			2,129				835				697
Provision			14,000				15,400				18,000
Allowance for loan losses – end of period		$	120,303			$	124,579			$	120,236

 

			$0,000,000,00				$0,000,000,00				$0,000,000,00
		September 30,				June 30,				September 30,
		2011				2011				2010
Period end loans		$	4,275,717			$	4,281,260			$	4,452,387
Average loans			4,291,632				4,269,637				4,504,657
Non-performing loans:
Non-accrual loans			223,961				229,662				174,249
Accruing loans past due 90 days or more			3,001				2,194				1,129
Troubled debt restructurings			35,616				31,611				26,630
Total non-performing loans			262,578				263,467				202,008
Other real estate owned			25,080				28,323				35,296
Total non-performing assets		$	287,658			$	291,790			$	237,304
Net charge-offs to average loans (annualized)			1.69	%			1.43	%			1.06	%
Provision for loan losses to average loans (annualized)			1.29	%			1.45	%			1.59	%
Allowance for loan losses to period end loans			2.81	%			2.91	%			2.70	%
Allowance for loan losses to total non-performing loans			45.82	%			47.28	%			59.52	%
Non-performing loans to period end loans			6.14	%			6.15	%			4.54	%
Non-performing assets to period end loans and other real estate owned			6.69	%			6.77	%			5.29	%
Non-performing assets to total assets			3.94	%			4.05	%			3.24	%

The Company’s loan portfolio continued to be adversely impacted by difficult economic conditions in certain of its market areas. The Flathead, Gallatin Valley and Jackson market areas, which are dependent upon resort and second home communities, accounted for approximately 43% of the Company’s non-performing assets versus only 18% of the Company’s total loans as of September 30, 2011.

Net charged-off loans increased during third quarter 2011, as compared to second quarter 2011 and third quarter 2010. Approximately 48% of the net charged-off loans during third quarter 2011 were located in the Flathead, Gallatin Valley and Jackson market areas. Additionally, approximately 73% of the loans charged-off during third quarter 2011 were related to three borrowers, including one commercial real estate and two land development borrowers.

As of September 30, 2011, total non-performing loans included $225 million of real estate loans, of which $101 million were construction loans and $91 million were commercial real estate loans. Non-performing construction loans as of September 30, 2011 were comprised of land acquisition and development loans of $65 million, commercial construction loans of $21 million and residential construction loans of $15 million.

Non-accrual loans decreased $6 million during third quarter 2011, as compared to second quarter 2011. Decreases to non-accrual loans due to charge-off, pay-off or foreclosure were largely offset by increases from two commercial and four real estate borrowers.

OREO decreased during third quarter 2011, as compared to second quarter 2011 and third quarter 2010. During third quarter 2011, the Company recorded additions to OREO of $3 million, wrote down the fair value of OREO properties by $2 million and sold OREO with a net book value of $4 million. As of September 30, 2011, approximately 68% of total OREO was comprised of properties located in the Flathead, Gallatin Valley and Jackson market areas.

 

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Fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the Company’s allowance for loan losses. Management expects quarterly provisions for loan losses to decline as credit quality improves.

Following is a summary of the Company’s credit quality trends since the start of 2009.

CREDIT QUALITY TRENDS

(Unaudited; $ in thousands)

 

		Provisions for Loan Losses				Net Charge-offs				Allowance for Loan Losses				Loans 30 - 89 Days Past Due				Non-Performing Loans				Non-Performing Assets
Q1 2009		$	9,600			$	4,693			$	92,223			$	98,980			$	103,653			$	122,300
Q2 2009			11,700				5,528				98,395				88,632				135,484				167,273
Q3 2009			10,500				7,147				101,748				91,956				125,083				156,958
Q4 2009			13,500				12,218				103,030				63,878				124,678				163,078
Q1 2010			11,900				8,581				106,349				62,675				133,042				177,022
Q2 2010			19,500				11,521				114,328				99,334				158,113				200,451
Q3 2010			18,000				12,092				120,236				47,966				202,008				237,304
Q4 2010			17,500				17,256				120,480				57,011				210,684				244,312
Q1 2011			15,000				11,034				124,446				68,021				249,878				281,873
Q2 2011			15,400				15,267				124,579				70,145				263,467				291,790
Q3 2011			14,000				18,276				120,303				62,165				262,578				287,658

Following is a summary of the Company’s criticized loans since the start of 2009.

CRITICIZED LOANS

(Unaudited; $ in thousands)

 

		Other Assets Especially Mentioned				Substandard				Doubtful				Total
Q1 2009		$	163,402			$	231,861			$	40,356			$	435,619
Q2 2009			230,833				242,751				48,326				521,910
Q3 2009			239,320				271,487				60,725				571,532
Q4 2009			279,294				271,324				69,603				620,221
Q1 2010			312,441				311,866				64,113				688,420
Q2 2010			319,130				337,758				92,249				749,137
Q3 2010			340,075				340,973				116,003				797,051
Q4 2010			305,925				303,653				133,353				742,931
Q1 2011			293,899				299,072				135,862				728,833
Q2 2011			268,450				309,029				149,964				727,443
Q3 2011			261,501				305,145				134,367				701,013

“We’re pleased to see the continued downward trend in our criticized loans. While we don’t anticipate this level of charge-offs in future quarters, we do expect they will continue to be elevated for the foreseeable future and we’ll see volatility in this number as we continue to work through our problem loans,” said Lyle R. Knight, President and Chief Executive Officer for First Interstate BancSystem, Inc.

 

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ASSETS

(Unaudited; $ in thousands)

 

		September 30, 2011				June 30, 2011				September 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Cash and cash equivalents		$	504,227			$	415,491			$	542,355				21.4	%			-7.0	%
Investment securities			2,045,796				2,022,729				1,829,424				1.1	%			11.8	%
Loans			4,275,717				4,281,260				4,452,387				-0.1	%			-4.0	%
Less allowance for loan losses			120,303				124,579				120,236				-3.4	%			0.1	%
Net loans			4,155,414				4,156,681				4,332,151				0.0	%			-4.1	%
Other assets			601,717				607,890				625,271				-1.0	%			-3.8	%
Total assets		$	7,307,154			$	7,202,791			$	7,329,201				1.4	%			-0.3	%

LOANS

(Unaudited; $ in thousands)

 

		September 30, 2011				June 30, 2011				September 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Real estate loans:
Commercial		$	1,561,788			$	1,555,964			$	1,565,525				0.4	%			-0.2	%
Construction:
Land acquisition & development			296,407				312,690				360,890				-5.2	%			-17.9	%
Commercial			67,261				76,740				91,713				-12.4	%			-26.7	%
Residential			64,098				63,364				111,545				1.2	%			-42.5	%
Total construction loans			427,766				452,794				564,148				-5.5	%			-24.2	%
Residential			586,425				578,739				544,952				1.3	%			7.6	%
Agriculture			177,121				177,728				189,895				-0.3	%			-6.7	%
Total real estate loans			2,753,100				2,765,225				2,864,520				-0.4	%			-3.9	%
Consumer:
Indirect consumer loans			415,245				413,825				432,869				0.3	%			-4.1	%
Other consumer loans			151,611				152,704				165,725				-0.7	%			-8.5	%
Credit card loans			60,283				59,655				59,222				1.1	%			1.8	%
Total consumer loans			627,139				626,184				657,816				0.2	%			-4.7	%
Commercial			703,010				724,158				739,151				-2.9	%			-4.9	%
Agricultural			136,728				133,898				134,689				2.1	%			1.5	%
Other loans, including overdrafts			3,252				3,297				2,489				-1.4	%			30.7	%
Total loans held for investment			4,223,229				4,252,762				4,398,665				-0.7	%			-4.0	%
Mortgage loans held for sale			52,488				28,498				53,722				84.2	%			-2.3	%
Total loans		$	4,275,717			$	4,281,260			$	4,452,387				-0.1	%			-4.0	%

As of September 30, 2011, total loans decreased, as compared to June 30, 2011 and September 30, 2010, primarily due to sluggish commercial and consumer growth amid economic uncertainty as well as the movement of lower quality loans out of the loan portfolio through charge-off, pay-off or foreclosure.

 

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LIABILITIES

(Unaudited; $ in thousands)

 

		September 30, 2011				June 30, 2011				September 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Deposits		$	5,851,319			$	5,794,665			$	5,902,181				1.0	%			-0.9	%
Securities sold under repurchase agreements			475,522				435,039				455,861				9.3	%			4.3	%
Accounts payable and accrued expenses			37,266				35,395				44,313				5.3	%			-15.9	%
Accrued interest payable			8,786				11,712				15,241				-25.0	%			-42.4	%
Long-term debt			37,469				37,480				37,513				0.0	%			-0.1	%
Other borrowed funds			5,122				5,440				5,674				-5.8	%			-9.7	%
Subordinated debentures held by subsidiary trusts			123,715				123,715				123,715				0.0	%			0.0	%
Total liabilities		$	6,539,199			$	6,443,446			$	6,584,498				1.5	%			-0.7	%

DEPOSITS

(Unaudited; $ in thousands)

 

		September 30, 2011				June 30, 2011				September 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Non-interest bearing demand		$	1,243,703			$	1,109,905			$	1,098,375				12.1	%			13.2	%
Interest bearing:
Demand			1,308,122				1,233,039				1,144,415				6.1	%			14.3	%
Savings			1,662,602				1,703,548				1,599,774				-2.4	%			3.9	%
Time, $100 and over			704,518				772,567				981,941				-8.8	%			-28.3	%
Time, other			932,374				975,606				1,077,676				-4.4	%			-13.5	%
Total interest bearing			4,607,616				4,684,760				4,803,806				-1.6	%			-4.1	%
Total deposits		$	5,851,319			$	5,794,665			$	5,902,181				1.0	%			-0.9	%

Deposits increased slightly as of September 30, 2011, as compared to June 30, 2011 and decreased slightly compared to September 30, 2010. During third quarter 2011, the Company continued to experience a shift in the mix of deposits away from higher-costing time deposits to lower-costing demand deposits.

 

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STOCKHOLDERS’ EQUITY

(Unaudited, $ in thousands, except per share data)

 

		September 30, 2011				June 30, 2011				September 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Preferred stockholders’ equity		$	50,000			$	50,000			$	50,000				0.0	%			0.0	%
Common stockholders’ equity			693,873				686,948				671,755				1.0	%			3.3	%
Accumulated other comprehensive income, net			24,082				22,397				22,948				7.5	%			4.9	%
Total stockholders’ equity		$	767,955			$	759,345			$	744,703				1.1	%			3.1	%
Book value per common share		$	16.70			$	16.51			$	16.23				1.2	%			2.9	%
Tangible book value per common share*		$	12.25			$	12.05			$	11.72				1.7	%			4.5	%
Net tangible book value per common share *		$	13.66			$	13.45			$	13.14				1.6	%			4.0	%

 

*	See Non-GAAP Financial Measures included herein for a discussion of tangible and net tangible book value per common share.

On September 23, 2011, the Company declared a quarterly dividend to common shareholders of $0.1125 per share. This dividend was paid on October 17, 2011 to shareholders of record as of October 3, 2011.

CAPITAL RATIOS

(Unaudited)

 

		September 30, 2011				June 30, 2011				September 30, 2010
Tangible common stockholders' equity to tangible assets*			7.40	%			7.38	%			7.03	%
Net tangible common stockholders' equity to tangible assets*			8.25	%			8.24	%			7.88	%
Tier 1 common capital to total risk weighted assets			10.78	%			10.56	%			9.85	%
Leverage ratio			9.77	%**			9.69	%			9.38	%
Tier 1 risk-based capital			14.28	%**			14.03	%			13.22	%
Total risk-based capital			16.26	%**			16.01	%			15.18	%

 

*	See Non-GAAP Financial Measures included herein for a discussion of tangible and net tangible common stockholders' equity to tangible assets.

**	Preliminary estimate – may be subject to change.

As of September 30, 2011, the Company had capital levels that, in all cases, exceeded the “well capitalized” requirements under all regulatory capital guidelines.

Third Quarter 2011 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss third quarter 2011 results at 11:00 a.m. Eastern Time (9:00 a.m. MDT) on Tuesday, October 25, 2011. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-877-317-6789 or by logging on to www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. MDT) on October 25, 2011 through November 28, 2011 by dialing 1-877-344-7529 (using conference ID 10004691). The call will also be archived on our website, www.FIBK.com, for one year.

About First Interstate BancSystem, Inc.

First Interstate BancSystem, Inc. is a financial and bank holding company incorporated in 1971 and headquartered in Billings, Montana. The Company operates 71 banking offices in 42 communities in Montana, Wyoming and western South Dakota. Through First Interstate Bank, the Company delivers a comprehensive range of banking products and services to individuals, businesses, municipalities and other entities throughout the Company’s market areas.

 

9

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Cautionary Statement

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are covered by the safe harbor provisions of such sections. These statements include statements about decreased levels of criticized loans, stabilization of the loan portfolio, the Company’s level of allowance for loan losses, manageability of credit costs and levels of profitability. Therefore, the Company’s actual results, performance or achievements may differ materially from those expressed in or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions.

The following factors, among others, may cause actual results to differ materially from current expectations in the forward-looking statements, including those set forth in this release:

The following factors, among others, may cause actual results to differ materially from current expectations in the forward-looking statements, including those set forth in this release:

 

•

credit losses;

 

•

concentrations of real estate loans;

 

•

economic and market developments, including inflation;

 

•

commercial loan risk;

 

•

adequacy of the allowance for loan losses;

 

•

impairment of goodwill;

 

•

changes in interest rates;

 

•

access to low-cost funding sources;

 

•

increases in deposit insurance premiums;

 

•

inability to grow business;

 

•

adverse economic conditions affecting Montana, Wyoming and western South Dakota;

 

•

governmental regulation and changes in regulatory, tax and accounting rules and interpretations;

 

•

sweeping changes in regulation of financial institutions due to passage of the Dodd-Frank Act;

 

•

changes in or noncompliance with governmental regulations;

 

•

effects of recent legislative and regulatory efforts to stabilize financial markets;

 

•

dependence on the Company’s management team;

 

•

ability to attract and retain qualified employees;

 

•

failure of technology;

 

•

reliance on external vendors;

 

•

disruption of vital infrastructure and other business interruptions;

 

•

illiquidity in the credit markets;

 

•

inability to meet liquidity requirements;

 

•

lack of acquisition candidates;

 

•

failure to manage growth;

 

•

competition;

 

•

inability to manage risks in turbulent and dynamic market conditions;

 

•

ineffective internal operational controls;

 

•

environmental remediation and other costs;

 

•

failure to effectively implement technology-driven products and services;

 

•

litigation pertaining to fiduciary responsibilities;

 

•

capital required to support the Company’s bank subsidiary;

 

•

soundness of other financial institutions;

 

•

impact of Basel III capital standards and forthcoming new capital rules proposed for U.S. banks;

 

•

inability of our bank subsidiary to pay dividends;

 

•

change in dividend policy;

 

•

lack of public market for our Class A common stock;

 

•

volatility of Class A common stock;

 

•

voting control of Class B stockholders;

 

•

decline in market price of Class A common stock;

 

•

dilution as a result of future equity issuances;

 

•

uninsured nature of any investment in Class A common stock;

 

10

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•

anti-takeover provisions;

 

•

controlled company status; and

 

•

subordination of common stock to Company debt.

A more detailed discussion of each of the foregoing risks is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed February 28, 2011. These factors and the other risk factors described in the Company’s periodic and current reports filed with the Securities and Exchange Commission from time to time, however, are not necessarily all of the important factors that could cause the Company’s actual results, performance or achievements to differ materially from those expressed in or implied by any of the Company’s forward-looking statements. Other unknown or unpredictable factors also could harm the Company’s results. Investors and others are encouraged to read the more detailed discussion of the Company’s risks contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made and the Company does not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.

 

11

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CONSOLIDATED BALANCE SHEETS

(Unaudited, $ in thousands)

 

		September 30,				June 30,				September 30,
		2011				2011				2010
Assets
Cash and due from banks		$	135,229			$	130,413			$	124,933
Federal funds sold			2,119				1,764				774
Interest bearing deposits in banks			366,879				283,314				416,648
Total cash and cash equivalents			504,227				415,491				542,355
Investment securities:
Available-for-sale			1,896,385				1,873,864				1,692,426
Held-to-maturity (estimated fair values of $157,639, $153,448 and $141,543 as of September 30, 2011, June 30, 2011 and September 30, 2010, respectively)			149,411				148,865				136,998
Total investment securities			2,045,796				2,022,729				1,829,424
Loans held for investment			4,223,229				4,252,762				4,398,665
Mortgage loans held for sale			52,488				28,498				53,722
Total loans			4,275,717				4,281,260				4,452,387
Less allowance for loan losses			120,303				124,579				120,236
Net loans			4,155,414				4,156,681				4,332,151
Premises and equipment, net of accumulated depreciation			185,742				186,529				192,021
Goodwill			183,673				183,673				183,673
Company-owned life insurance			74,362				74,080				72,867
Accrued interest receivable			34,994				33,588				35,296
Other real estate owned, net of write-downs			25,080				28,323				37,251
Mortgage servicing rights, net of accumulated amortization and impairment reserve			11,909				13,218				14,505
Deferred tax asset			8,393				10,466				—
Core deposit intangibles, net of accumulated amortization			7,719				8,080				9,235
Other assets			69,845				69,933				80,423
Total assets		$	7,307,154			$	7,202,791			$	7,329,201
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing		$	1,243,703			$	1,109,905			$	1,098,375
Interest bearing			4,607,616				4,684,760				4,803,806
Total deposits			5,851,319				5,794,665				5,902,181
Securities sold under repurchase agreements			475,522				435,039				455,861
Accounts payable and accrued expenses			37,266				35,395				44,313
Accrued interest payable			8,786				11,712				15,241
Long-term debt			37,469				37,480				37,513
Other borrowed funds			5,122				5,440				5,674
Subordinated debentures held by subsidiary trusts			123,715				123,715				123,715
Total liabilities			6,539,199				6,443,446				6,584,498
Stockholders’ equity:
Preferred stock			50,000				50,000				50,000
Common stock			266,317				265,639				263,719
Retained earnings			427,556				421,309				408,036
Accumulated other comprehensive income, net			24,082				22,397				22,948
Total stockholders’ equity			767,955				759,345				744,703
Total liabilities and stockholders’ equity		$	7,307,154			$	7,202,791			$	7,329,201

 

12

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CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, $ in thousands, except per share data)

 

		Three Months ended
		September 30,				June 30,				September 30,
		2011				2011				2010
Interest income:
Interest and fees on loans		$	61,372			$	61,475			$	67,033
Interest and dividends on investment securities:
Taxable			10,721				10,649				10,540
Exempt from federal taxes			1,188				1,194				1,137
Interest on deposits in banks			200				227				252
Interest on federal funds sold			2				6				3
Total interest income			73,483				73,551				78,965
Interest expense:
Interest on deposits			7,905				8,903				12,973
Interest on securities sold under repurchase agreements			137				171				209
Interest on other borrowed funds			—				—				1
Interest on long-term debt			498				495				512
Interest on subordinated debentures held by subsidiary trusts			1,451				1,455				1,526
Total interest expense			9,991				11,024				15,221
Net interest income			63,492				62,527				63,744
Provision for loan losses			14,000				15,400				18,000
Net interest income after provision for loan losses			49,492				47,127				45,744
Non-interest income:
Other service charges, commissions and fees			8,479				7,768				7,821
Service charges on deposit accounts			4,609				4,385				4,497
Income from the origination and sale of loans			5,512				4,109				7,355
Wealth management revenues			3,202				3,483				3,091
Investment securities gains, net			38				16				66
Other income			1,285				1,830				2,025
Total non-interest income			23,125				21,591				24,855
Non-interest expense:
Salaries, wages and employee benefits			26,888				27,889				27,994
Occupancy, net			4,180				4,013				3,939
Furniture and equipment			3,018				3,129				3,411
Outsourced technology services			2,235				2,212				2,402
FDIC insurance premiums			1,631				1,629				2,337
Other real estate owned expense, net of income			2,878				2,042				2,608
Mortgage servicing rights amortization			807				671				1,221
Mortgage servicing rights impairment			1,168				27				1,991
Core deposit intangibles amortization			362				361				437
Other expenses			11,874				12,219				11,670
Total non-interest expense			55,041				54,192				58,010
Income before income tax expense			17,576				14,526				12,589
Income tax expense			5,655				4,672				3,860
Net income			11,921				9,854				8,729
Preferred stock dividends			862				853				862
Net income available to common shareholders		$	11,059			$	9,001			$	7,867
Basic earnings per common share		$	0.26			$	0.21			$	0.18
Diluted earnings per common share		$	0.26			$	0.21			$	0.18

 

13

---

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, $ in thousands, except per share data)

 

		Nine Months ended
		September 30,				September 30,
		2011				2010
Interest income:
Interest and fees on loans		$	185,238			$	201,428
Interest and dividends on investment securities:
Taxable			31,281				32,673
Exempt from federal taxes			3,553				3,476
Interest on deposits in banks			794				733
Interest on federal funds sold			11				21
Total interest income			220,877				238,331
Interest expense:
Interest on deposits			26,679				42,747
Interest on securities sold under repurchase agreements			545				632
Interest on other borrowed funds			—				3
Interest on long-term debt			1,482				1,940
Interest on subordinated debentures held by subsidiary trusts			4,354				4,420
Total interest expense			33,060				49,742
Net interest income			187,817				188,589
Provision for loan losses			44,400				49,400
Net interest income after provision for loan losses			143,417				139,189
Non-interest income:
Other service charges, commissions and fees			23,627				22,073
Service charges on deposit accounts			13,104				13,854
Income from the origination and sale of loans			13,066				14,841
Wealth management revenues			9,980				9,304
Investment securities gains, net			56				108
Other income			5,042				5,220
Total non-interest income			64,875				65,400
Non-interest expense:
Salaries, wages and employee benefits			82,479				83,451
Occupancy, net			12,408				12,044
Furniture and equipment			9,367				10,108
Outsourced technology services			6,688				7,100
FDIC insurance premiums			5,726				7,460
Other real estate owned expense, net of income			6,631				6,129
Mortgage servicing rights amortization			2,285				3,469
Mortgage servicing rights impairment			848				2,212
Core deposit intangibles amortization			1,085				1,316
Other expenses			34,674				32,892
Total non-interest expense			162,191				166,181
Income before income tax expense			46,101				38,408
Income tax expense			14,820				11,890
Net income			31,281				26,518
Preferred stock dividends			2,559				2,559
Net income available to common shareholders		$	28,722			$	23,959
Basic earnings per common share		$	0.67			$	0.61
Diluted earnings per common share		$	0.67			$	0.61

 

14

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AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 

		For the three months ended
		September 30, 2011												June 30, 2011												September 30, 2010
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Interest earning assets:
Loans (1) (2)		$	4,291,632			$	61,801				5.71	%		$	4,269,637			$	61,926				5.82	%		$	4,504,657			$	67,473				5.94	%
Investment securities (2)			2,064,019				12,594				2.42				2,019,187				12,533				2.49				1,720,925				12,333				2.84
Interest bearing deposits in banks			311,768				200				0.25				359,446				227				0.25				392,149				252				0.25
Federal funds sold			1,858				2				0.43				3,871				6				0.62				2,299				3				0.52
Total interest earnings assets			6,669,277				74,597				4.44				6,652,141				74,692				4.50				6,620,030				80,061				4.80
Non-earning assets			615,472												617,221												658,680
Total assets		$	7,284,749											$	7,269,362											$	7,278,710
Interest bearing liabilities:
Demand deposits		$	1,265,339			$	775				0.24			$	1,263,466			$	847				0.27			$	1,127,006			$	842				0.30
Savings deposits			1,712,739				1,478				0.34				1,711,210				1,753				0.41				1,555,510				2,199				0.56
Time deposits			1,699,633				5,652				1.32				1,780,542				6,303				1.42				2,119,083				9,931				1.86
Repurchase agreements			477,612				137				0.11				469,459				171				0.15				464,655				209				0.18
Other borrowed funds			5,584				—				—				5,459				—				—				5,256				1				0.08
Long-term debt			37,473				498				5.27				37,485				495				5.30				37,658				512				5.39
Subordinated debentures held by subsidiary trusts			123,715				1,451				4.65				123,715				1,455				4.72				123,715				1,526				4.89
Total interest bearing liabilities			5,322,095				9,991				0.74				5,391,336				11,024				0.82				5,432,883				15,220				1.11
Non-interest bearing deposits			1,153,800												1,089,909												1,046,112
Other non-interest bearing liabilities			47,412												47,791												59,515
Stockholders’ equity			761,442												740,326												740,200
Total liabilities and stockholders’ equity		$	7,284,749											$	7,269,362											$	7,278,710
Net FTE interest income						$	64,606											$	63,668											$	64,841
Less FTE adjustments (2)							(1,114	)											(1,141	)											(1,097	)
Net interest income from consolidated statements of income						$	63,492											$	62,527											$	63,744
Interest rate spread											3.70	%											3.68	%											3.69	%
Net FTE interest margin (3)											3.84	%											3.84	%											3.89	%
Cost of funds, including non-interest bearing demand deposits (4)											0.61	%											0.68	%											0.93	%

 

(1)	Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs, which is not material.

(2)	Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.

(3)	Net FTE interest margin during the period equals the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by average interest earning assets for the period.

(4)	Calculated by dividing total interest on total interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.

 

15

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AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 

		For the nine months ended September 30,
		2011												2010
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Interest earning assets:
Loans (1) (2)		$	4,288,237			$	186,564				5.82	%		$	4,509,206			$	202,797				6.01	%
Investment securities (2)			2,010,966				36,885				2.45				1,600,451				38,155				3.19
Interest bearing deposits in banks			418,661				794				0.25				384,964				733				0.25
Federal funds sold			2,656				11				0.55				7,933				21				0.35
Total interest earnings assets			6,720,520				224,254				4.46				6,502,554				241,706				4.97
Non-earning assets			618,367												675,244
Total assets		$	7,338,887											$	7,177,798
Interest bearing liabilities:
Demand deposits			1,259,421				2,456				0.26	%			1,118,951				2,551				0.30	%
Savings deposits			1,722,782				5,231				0.41				1,481,547				6,842				0.62
Time deposits			1,784,256				18,992				1.42				2,195,029				33,353				2.03
Repurchase agreements			505,313				545				0.14				461,652				632				0.18
Othered borrowed funds			5,579				—				—				5,760				3				0.07
Long-term debt			37,485				1,482				5.29				48,895				1,940				5.30
Subordinated debentures held by subsidiary trusts			123,715				4,354				4.71				123,715				4,420				4.78
Total interest bearing liabilities			5,438,551				33,060				0.81				5,435,549				49,741				1.22
Non-interest bearing deposits			1,105,122												996,290
Other non-interest bearing liabilities			48,726												61,138
Stockholders’ equity			746,488												684,821
Total liabilities andstockholders’ equity		$	7,338,887											$	7,177,798
Net FTE interest income						$	191,194											$	191,965
Less FTE adjustments (2)							(3,377	)											(3,376	)
Net interest income from consoli-dated statements of income						$	187,817											$	188,589
Interest rate spread											3.65	%											3.75	%
Net FTE interest margin (3)											3.80	%											3.95	%
Cost of funds, including non-interest bearing demand deposits (4)											0.68	%											1.03	%

 

(1)	Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs, which is not material.

(2)	Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.

(3)	Net FTE interest margin during the period equals the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by average interest earning assets for the period.

(4)	Calculated by dividing total interest on total interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.

 

16

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Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principals in the United States of America, or GAAP, this release contains the following non-GAAP financial measures that management uses to evaluate capital adequacy: (i) tangible book value per common share; (ii) net tangible book value per common share; (iii) tangible common stockholders’ equity to tangible assets; (iv) net tangible common stockholders’ equity to tangible assets; and (v) tangible assets.

For purposes of computing tangible book value per common share, tangible book value equals common stockholders’ equity less goodwill and other intangible assets (except mortgage servicing rights). Tangible book value per common share is calculated as tangible common stockholders’ equity divided by shares of common stock outstanding.

For purposes of computing net tangible book value per common share, net tangible book value equals common stockholders’ equity less goodwill (adjusted for associated deferred tax liability) and other intangible assets (except mortgage servicing rights). Net tangible book value per common share is calculated as net tangible common stockholders’ equity divided by shares of common stock outstanding. The Company’s goodwill as of September 30, 2011 was $184 million, of which approximately $159 million is deductible for income tax purposes over an original period of 15 years. The calculation of net tangible book value takes into account the full amount of tax benefit of approximately $60 million associated with deductible goodwill assuming the Company will continue to have income sufficient to allow it to recognize this benefit in future periods.

For purposes of computing tangible common stockholders’ equity to tangible assets, tangible assets equals total assets less goodwill and other intangible assets (except mortgage servicing rights). Tangible common stockholders’ equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets.

For purposes of computing net tangible common stockholders’ equity to tangible assets, net tangible common stockholders’ equity equals common stockholders’ equity less goodwill (adjusted for associated deferred tax liability) and other intangible assets (except mortgage servicing rights). Net tangible common stockholders’ equity to tangible assets is calculated as net tangible common stockholders’ equity divided by tangible assets.

Management believes that these non-GAAP financial measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from stockholders’ equity and retain the effect of unrealized losses on securities and other components of accumulated other comprehensive income (loss) in stockholders’ equity. Management also believes that such financial measures, which are intended to complement the capital ratios defined by banking regulators, are useful to investors in evaluating the Company’s performance due to the importance that analysts place on these ratios and also allow investors to compare certain aspects of our capitalization to other companies. These non-GAAP financial measures, however, may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. As a result, the usefulness of these measures to investors may be limited, and they should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.

 

17

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The following table reconciles the above described non-GAAP financial measures to their most directly comparable GAAP financial measures as of the dates indicated.

NON-GAAP FINANCIAL MEASURES

(Unaudited; $ in thousands except share and per share data)

 

		September 30,				June 30,				September 30,
		2011				2011				2010
Total stockholders’ equity (GAAP)		$	767,955			$	759,345			$	744,703
Less goodwill and other intangible assets (excluding mortgage servicing rights)			191,428				191,792				192,952
Less preferred stock			50,000				50,000				50,000
Tangible common stockholders’ equity (Non-GAAP)		$	526,527			$	517,553			$	501,751
Add deferred tax liability for deductible goodwill			60,499				60,499				60,499
Net tangible common stockholders’ equity (Non-GAAP)		$	587,026			$	578,052			$	562,250
Common shares outstanding			42,979,732				42,964,921				42,798,040
Book value per common share		$	16.70			$	16.51			$	16.23
Tangible book value per common share		$	12.25			$	12.05			$	11.72
Net tangible book value per common share		$	13.66			$	13.45			$	13.14
Total assets (GAAP)		$	7,307,154			$	7,202,791			$	7,329,201
Less goodwill and other intangible assets (excluding mortgage servicing rights)			191,428				191,792				192,952
Tangible assets (Non-GAAP)		$	7,115,726			$	7,010,999			$	7,136,249
Tangible common stockholders’ equity to tangible assets (Non-GAAP)			7.40	%			7.38	%			7.03	%
Net tangible common stockholders’ equity to tangible assets (Non-GAAP)			8.25	%			8.24	%			7.88	%

First Interstate BancSystem, Inc.

P.O. Box 30918     Billings, Montana 59116     (406) 255-5390

www.FIBK.com

 

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