Exhibit 99.1

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

For Immediate Release

 

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

First Interstate BancSystem, Inc. reports second quarter 2011 net income available to common shareholders of $9.0 million, or $0.21 per diluted share, as compared to $8.7 million, or $0.20 per diluted share, for first quarter 2011 and $5.8 million, or $0.14 per diluted share, for second quarter 2010.

RESULTS SUMMARY

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

 

		Three Months Ended												Sequential				Year
		June 30, 2011				March 31, 2011				June 30, 2010				Quarter % Change				Over Year % Change
Net income		$	9,854			$	9,506			$	6,659				3.7	%			48.0	%
Net income available to common shareholders			9,001				8,662				5,806				3.9	%			55.0	%
Diluted earnings per common share			0.21				0.20				0.14				5.0	%			50.0	%
Dividends per common share			0.1125				0.1125				0.1125				0.0	%			0.0	%
Book value per common share			16.51				16.10				16.12				2.5	%			2.4	%
Tangible book value per common share*			12.05				11.63				11.61				3.6	%			3.8	%
Net tangible book value per common share*			13.45				13.04				13.02				3.1	%			3.3	%
Return on average common equity			5.23	%			5.11	%			3.42	%
Return on average assets			0.54	%			0.52	%			0.37	%
Weighted average common shares outstanding			42,781,894				42,689,390				42,620,563
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards			114,717				170,591				283,433
		Six Months Ended								Year
		June 30, 2011				June 30, 2010				Over Year % Change
Net income		$	19,360			$	17,789				8.8	%
Net income available to common stockholders			17,663				16,092				9.8	%
Diluted earnings per common share			0.41				0.43				-4.7	%
Dividends per common share			0.2250				0.2250				0.0	%
Return on average common equity			5.17	%			5.35	%
Return on average assets			0.53	%			0.50	%
Weighted average common shares outstanding			42,735,897				37,133,376
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards			138,031				269,087

 

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

 

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“Our second quarter results were in line with our expectations,” said Lyle R. Knight, President and Chief Executive Officer for First Interstate BancSystem, Inc. “We are pleased to deliver solid year-over-year earnings growth, particularly in light of the challenging economic and regulatory environments we face today. Although we do not expect to see overall loan growth during 2011, we are encouraged to see modest growth in the commercial and agricultural segments of our loan portfolio, which is offsetting the declines we are seeing in the construction portfolio.”

Non-performing assets increased to 4.05% of total assets as of June 30, 2011. “The credit cycle is progressing as we expected in our markets and we are steadily resolving problem assets, particularly in the Flathead, Gallatin Valley and Jackson market areas,” said Mr. Knight. “We believe non-performing assets are currently at or near their peak.”

 

REVENUE SUMMARY		Three Months Ended												Sequential				Year
(Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010				Quarter % Change				Over Year % Change
Interest income		$	73,551			$	73,843			$	79,867				-0.4	%			-7.9	%
Interest expense			11,024				12,045				16,691				-8.5	%			-34.0	%
Net interest income			62,527				61,798				63,176				1.2	%			-1.0	%
Non-interest income:
Other service charges, commissions and fees			7,768				7,380				7,380				5.3	%			5.3	%
Service charges on deposit accounts			4,385				4,110				4,759				6.7	%			-7.9	%
Income from the origination and sale of loans			4,109				3,445				4,186				19.3	%			-1.8	%
Wealth management revenues			3,483				3,295				3,199				5.7	%			8.9	%
Investment securities gains, net			16				2				15				700.0	%			6.7	%
Other income			1,830				1,927				1,498				-5.0	%			22.2	%
Total non-interest income			21,591				20,159				21,037				7.1	%			2.6	%
Total revenues		$	84,118			$	81,957			$	84,213				2.6	%			-0.1	%
Tax equivalent net interest margin ratio			3.84	%			3.73	%			3.96	%
		Six Months Ended								Year
		June 30, 2011				June 30, 2010				Over Year %  Change
Interest income		$	147,394			$	159,366				-7.5	%
Interest expense			23,069				34,521				-33.2	%
Net interest income			124,325				124,845				-0.4	%
Non-interest income:
Other service charges, commissions and fees			15,148				14,252				6.3	%
Service charges on deposit accounts			8,495				9,357				-9.2	%
Income from the origination and sale of loans			7,554				7,486				0.9	%
Wealth management revenues			6,778				6,213				9.1	%
Investment securities gains, net			18				42				-57.1	%
Other income			3,757				3,195				17.6	%
Total non-interest income			41,750				40,545				3.0	%
Total revenues		$	166,075			$	165,390				0.4	%
Tax equivalent net interest margin ratio			3.78	%			3.98	%

 

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Net Interest Income

Net interest income increased during second quarter 2011, as compared to first quarter 2011, due to one additional accrual day. The Company’s net interest margin ratio increased to 3.84% during second quarter 2011, from 3.73% during first quarter 2011, primarily due to decreases in average savings and time deposits combined with an overall reduction in our cost of funds and a shift in the mix of average interest earning assets from deposits in banks to higher-yielding investment securities.

Although net interest income remained stable during the three and six months ended June 30, 2011, as compared to the same periods in 2010, the Company’s net interest margin ratio decreased. Compression in the net interest margin ratio during the six months ended June 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 43 basis point reduction in funding costs.

On July 15, 2011, the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation, or FDIC, issued separate final rules to implement the Dodd-Frank Act mandated repeal of the prohibition against paying interest on demand deposits that became effective on July 21, 2011. Management does not expect this change will have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

Non-interest Income

Other service charges, commissions and fees increased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010, primarily due to higher interchange income resulting from higher volumes of debit and credit card transactions. Recent regulation, which becomes effective on October 1, 2011, will reduce the maximum allowable debit card interchange fee per transaction for large issuers. Issuers with less than $10 billion in assets, like the Company, are exempt from limitations on debit card interchange fees, although payment card networks could make other fee adjustments for small issuers. The Company recorded debit card interchange fees of $2.9 million and $5.7 million during the three and six months ended June 30, 2011.

Income from the origination and sale of residential mortgage loans increased during second quarter 2011, as compared to first quarter 2011, primarily due to seasonal fluctuations in new home purchases. Purchased home loan originations accounted for approximately 61% of the Company’s residential real estate loan originations during second quarter 2011, as compared to 44% during first quarter 2011 and 61% during second quarter 2010.

Wealth management revenues increased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010. Wealth management revenues also increased during the six months ended June 30, 2011, as compared to the same period in 2010. These increases were primarily due to new business activity and increases in the market values of assets under trust management.

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

 

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NON-INTEREST EXPENSE		Three Months Ended												Sequential				Year
(Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010				Quarter % Change				Over Year %  Change
Non-interest expense:
Salaries, wages and employee benefits expense		$	27,889			$	27,702			$	27,379				0.7	%			1.9	%
Occupancy, net			4,013				4,215				3,963				-4.8	%			1.3	%
Furniture and equipment			3,129				3,220				3,356				-2.8	%			-6.8	%
Outsourced technology services			2,212				2,241				2,449				-1.3	%			-9.7	%
FDIC insurance premiums			1,629				2,466				2,667				-33.9	%			-38.9	%
Other real estate owned expense, net of income			2,042				1,711				2,980				19.3	%			-31.5	%
Mortgage servicing rights amortization			671				807				1,115				-16.9	%			-39.8	%
Mortgage servicing rights impairment (recovery)			27				(347	)			271				-107.8	%			-90.0	%
Core deposit intangibles amortization			361				362				440				-0.3	%			-18.0	%
Other expenses			12,219				10,581				10,806				15.5	%			13.1	%
Total non-interest expense		$	54,192			$	52,958			$	55,426				2.3	%			-2.2	%
		Six Months Ended								Year
		June 30, 2011				June 30, 2010				Over Year %  Change
Non-interest expense:
Salaries, wages and employee benefits		$	55,591			$	55,457				0.2	%
Occupancy, net			8,228				8,105				1.5	%
Furniture and equipment			6,349				6,697				-5.2	%
Outsourced technology services			4,453				4,698				-5.2	%
FDIC insurance premiums			4,095				5,123				-20.1	%
Other real estate owned expense, net of income			3,753				3,521				6.6	%
Mortgage servicing rights amortization			1,478				2,248				-34.3	%
Mortgage servicing rights impairment (recovery)			(320	)			221				-244.8	%
Core deposit intangibles amortization			723				879				-17.7	%
Other expenses			22,800				21,222				7.4	%
Total non-interest expense		$	107,150			$	108,171				-0.9	%

FDIC insurance premiums decreased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010. 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. Second quarter 2011 net OREO expense included $340 thousand of net operating expenses, $2.0 million of fair value write-downs and net gains of $261 thousand on the sale of OREO properties. Approximately 96% of write-downs recorded during the three and six months ended June 30, 2011 related to properties in the Flathead market area.

Decreases in mortgage servicing rights amortization during second quarter 2011, as compared to first quarter 2011 and second quarter 2010, were primarily due to the sale of mortgage servicing rights during fourth quarter 2010 combined with changes in the estimated duration of the loans underlying the Company’s capitalized mortgage servicing rights.

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

Other expenses increased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010, primarily due to the timing of expenses, most significantly advertising and legal expenses. In addition, annual retention payments for directors aggregating $345 thousand were expensed during second quarter 2011. Other expenses increased during the six months ended June 30, 2011, as compared to the same period in 2010, primarily due higher legal expenses related to collection activities.

 

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ASSET QUALITY		Three Months Ended
(Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010
Allowance for loan losses - beginning of period		$	124,446			$	120,480			$	106,349
Charge-offs			(16,102	)			(12,339	)			(12,107	)
Recoveries			835				1,305				586
Provision			15,400				15,000				19,500
Allowance for loan losses - end of period		$	124,579			$	124,446			$	114,328
		June 30, 2011				March 31, 2011				June 30, 2010
Period end loans		$	4,281,260			$	4,263,764			$	4,562,288
Average loans			4,269,637				4,303,575				4,520,119
Non-performing loans:
Nonaccrual loans			229,662				212,394				139,975
Accruing loans past due 90 days or more			2,194				4,140				7,550
Restructured loans			31,611				33,344				10,588
Total non-performing loans			263,467				249,878				158,113
Other real estate owned			28,323				31,995				42,338
Total non-performing assets		$	291,790			$	281,873			$	200,451
Net charge-offs to average loans (annualized)			1.43	%			1.04	%			1.02	%
Provision for loan losses to average loans (annualized)			1.45	%			1.41	%			1.73	%
Allowance for loan losses to period end loans			2.91	%			2.92	%			2.51	%
Allowance for loan losses to total non-performing loans			47.28	%			49.80	%			72.31	%
Non-performing loans to period end loans			6.15	%			5.86	%			3.47	%
Non-performing assets to period end loans and other real estate owned			6.77	%			6.56	%			4.35	%
Non-performing assets to total assets			4.05	%			3.79	%			2.77	%

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 46% of the Company’s non-performing assets as of June 30, 2011, versus only 19% of the Company’s total loans as of the same date.

Net charged-off loans increased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010. Approximately 78% of the loans charged-off during second quarter 2011 were located in the Flathead, Gallatin Valley and Jackson market areas. Additionally, approximately 51% of the loans charged-off during second quarter 2011 were related to six borrowers, including one commercial real estate, two commercial construction and three land development borrowers. Management expects charge-offs to remain elevated in future quarters as previously identified problem loans continue to work through the credit cycle.

As of June 30, 2011, total non-performing loans included $224 million of real estate loans, of which $110 million were construction loans and $86 million were commercial real estate loans. Non-performing construction loans as of June 30, 2011 were comprised of land acquisition and development loans of $68 million, residential construction loans of $18 million and commercial construction loans of $24 million.

The most significant increases in non-performing loans during second quarter 2011, as compared to first quarter 2011, occurred in nonaccrual loans. Approximately $15 million of the increase in nonaccrual loans during second quarter 2011, as compared to first quarter 2011, was related to the loans of one land development borrower. Approximately 67% of the Company’s nonaccrual loans were current with regard to principal payments as of June 30, 2011, as compared to 71% as of March 31, 2011.

 

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OREO decreased during second quarter 2011, as compared to first quarter 2011 and second quarter 2010. During second 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 $5 million. As of June 30, 2011, approximately 71% of total OREO was comprised of properties located in the Flathead, Gallatin Valley and Jackson market areas.

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

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

 

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ASSETS (Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Cash and cash equivalents		$	415,491			$	680,321			$	502,484				-38.9	%			-17.3	%
Investment securities			2,022,729				1,987,378				1,635,459				1.8	%			23.7	%
Loans			4,281,260				4,263,764				4,562,288				0.4	%			-6.2	%
Less allowance for loan losses			124,579				124,446				114,328				0.1	%			9.0	%
Net loans			4,156,681				4,139,318				4,447,960				0.4	%			-6.5	%
Other assets			607,890				622,109				639,473				-2.3	%			-4.9	%
Total assets		$	7,202,791			$	7,429,126			$	7,225,376				-3.0	%			-0.3	%

 

LOANS (Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Real estate loans:
Commercial		$	1,555,964			$	1,553,750			$	1,594,780				0.1	%			-2.4	%
Construction:
Land acquisition & development			312,690				319,573				371,191				-2.2	%			-15.8	%
Residential			63,364				78,572				122,452				-19.4	%			-48.3	%
Commercial			76,740				95,623				86,883				-19.7	%			-11.7	%
Total construction loans			452,794				493,768				580,526				-8.3	%			-22.0	%
Residential			578,739				561,420				540,255				3.1	%			7.1	%
Agriculture			177,728				181,513				193,764				-2.1	%			-8.3	%
Mortgage loans originated for sale			28,498				20,992				48,478				35.8	%			-41.2	%
Total real estate loans			2,793,723				2,811,443				2,957,803				-0.6	%			-5.5	%
Consumer:
Indirect consumer loans			413,825				411,908				428,738				0.5	%			-3.5	%
Other consumer loans			152,704				155,100				193,462				-1.5	%			-21.1	%
Credit card loans			59,655				58,075				58,574				2.7	%			1.8	%
Total consumer loans			626,184				625,083				680,774				0.2	%			-8.0	%
Commercial			724,158				703,837				777,918				2.9	%			-6.9	%
Agricultural			133,898				121,571				142,279				10.1	%			-5.9	%
Other loans, including overdrafts			3,297				1,830				3,514				80.2	%			-6.2	%
Total loans		$	4,281,260			$	4,263,764			$	4,562,288				0.4	%			-6.2	%

As of June 30, 2011, total loans increased, as compared to March 31, 2011, primarily due to seasonal fluctuations in the commercial and agricultural loan portfolios and the retention of select residential real estate loan production.

As of June 30, 2011, total loans decreased, as compared to June 30, 2010, with all major categories of loans showing decreases except residential real estate loans. Management attributes decreases in loans to a general decline in new home construction in our market areas, particularly in markets dependent upon resort and second home communities including the Flathead, Gallatin Valley and Jackson market areas, sluggish consumer growth amid economic uncertainty, and to a lesser extent, 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)		June 30, 2011				March 31, 2011				June 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Deposits		$	5,794,665			$	5,931,184			$	5,802,322				-2.3	%			-0.1	%
Securities sold under repurchase agreements			435,039				536,955				453,749				-19.0	%			-4.1	%
Accounts payable and accrued expenses			35,395				40,400				39,741				-12.4	%			-10.9	%
Accrued interest payable			11,712				12,162				20,442				-3.7	%			-42.7	%
Long-term debt			37,480				37,491				38,023				0.0	%			-1.4	%
Other borrowed funds			5,440				5,522				7,196				-1.5	%			-24.4	%
Subordinated debentures held by subsidiary trusts			123,715				123,715				123,715				0.0	%			0.0	%
Total liabilities		$	6,443,446			$	6,687,429			$	6,485,188				-3.6	%			-0.6	%

All outstanding repurchase agreements are with commercial and municipal depositors and are due in one day. Fluctuations in repurchase agreements are primarily the result of changes in liquidity of our customers.

Fluctuations in accounts payable and accrued expenses are primarily due to the timing of corporate income tax payments.

 

DEPOSITS (Unaudited; $ in thousands)		June 30, 2011				March 31, 2011				June 30, 2010				Sequential Quarter % Change				Year Over Year % Change
Non-interest bearing demand		$	1,109,905			$	1,110,940			$	1,040,072				-0.1	%			6.7	%
Interest bearing:
Demand			1,233,039				1,259,105				1,090,162				-2.1	%			13.1	%
Savings			1,703,548				1,742,958				1,487,746				-2.3	%			14.5	%
Time, $100 and over			772,567				825,585				996,478				-6.4	%			-22.5	%
Time, other			975,606				992,596				1,187,864				-1.7	%			-17.9	%
Total interest bearing			4,684,760				4,820,244				4,762,250				-2.8	%			-1.6	%
Total deposits		$	5,794,665			$	5,931,184			$	5,802,322				-2.3	%			-0.1	%

Deposits decreased slightly as of June 30, 2011, as compared to March 31, 2011 and June 30, 2010. During second quarter 2011, the Company continued to experience a shift in the mix of deposits away from higher-costing time deposits to lower-costing savings, interest bearing demand and non-interest bearing demand deposits.

 

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STOCKHOLDERS’ EQUITY (Unaudited, $ in thousands, except per share data)		June 30, 2011				March 31, 2011				June 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			686,948				682,049				668,302				0.7	%			2.8	%
Accumulated other comprehensive income, net			22,397				9,648				21,886				132.1	%			2.3	%
Total stockholders’ equity		$	759,345			$	741,697			$	740,188				2.4	%			2.6	%
Book value per common share		$	16.51			$	16.10			$	16.12				2.5	%			2.4	%
Tangible book value per common share*		$	12.05			$	11.63			$	11.61				3.6	%			3.8	%
Net tangible book value per common share *		$	13.45			$	13.04			$	13.02				3.1	%			3.3	%

 

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

On June 13, 2011, the Company declared a quarterly dividend to common shareholders of $0.1125 per share. This dividend was paid on July 15, 2011 to shareholders of record as of July 1, 2011.

 

CAPITAL RATIOS (Unaudited)		June 30, 2011				March 31, 2011				June 30, 2010
Tangible common stockholders’ equity to tangible assets*			7.38	%			6.90	%			7.06	%
Net tangible common stockholders’ equity to tangible assets*			8.24	%			7.74	%			7.93	%
Tier 1 common capital to total risk weighted assets			10.56	%			10.40	%			9.56	%
Leverage ratio			9.69	%**			9.34	%			9.43	%
Tier 1 risk-based capital			14.03	%**			13.85	%			12.87	%
Total risk-based capital			16.01	%**			15.83	%			14.81	%

 

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

Second Quarter 2011 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss second quarter 2011 results at 11:00 a.m. Eastern Time (9:00 a.m. MDT) on Tuesday, July 26, 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 July 26, 2011 through August 27, 2011 by dialing 1-877-344-7529 (using conference ID 10001664). 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)

 

		June 30, 2011				March 31, 2011				June 30, 2010
Assets
Cash and due from banks		$	130,413			$	120,814			$	169,461
Federal funds sold			1,764				3,108				5,164
Interest bearing deposits in banks			283,314				556,399				327,859
Total cash and cash equivalents			415,491				680,321				502,484
Investment securities:
Available-for-sale			1,873,864				1,841,281				1,500,659
Held-to-maturity (estimated fair values of $153,448, $147,401 and $136,782 as of June 30, 2011, March 31, 2011 and June 30, 2010, respectively)			148,865				146,097				134,800
Total investment securities			2,022,729				1,987,378				1,635,459
Loans			4,281,260				4,263,764				4,562,288
Less allowance for loan losses			124,579				124,446				114,328
Net loans			4,156,681				4,139,318				4,447,960
Premises and equipment, net of accumulated depreciation			186,529				185,702				193,551
Goodwill			183,673				183,673				183,673
Company-owned life insurance			74,080				73,545				72,395
Accrued interest receivable			33,588				32,380				38,429
Other real estate owned, net of write-downs			28,323				31,995				42,338
Mortgage servicing rights, net of accumulated amortization and impairment reserve			13,218				13,284				16,232
Deferred tax asset			10,466				19,112				—
Core deposit intangibles, net of accumulated amortization			8,080				8,441				9,672
Other assets			69,933				73,977				83,183
Total assets		$	7,202,791			$	7,429,126			$	7,225,376
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing		$	1,109,905			$	1,110,940			$	1,040,072
Interest bearing			4,684,760				4,820,244				4,762,250
Total deposits			5,794,665				5,931,184				5,802,322
Securities sold under repurchase agreements			435,039				536,955				453,749
Accounts payable and accrued expenses			35,395				40,400				39,741
Accrued interest payable			11,712				12,162				20,442
Long-term debt			37,480				37,491				38,023
Other borrowed funds			5,440				5,522				7,196
Subordinated debentures held by subsidiary trusts			123,715				123,715				123,715
Total liabilities			6,443,446				6,687,429				6,485,188
Stockholders’ equity:
Preferred stock			50,000				50,000				50,000
Common stock			265,639				264,932				263,317
Retained earnings			421,309				417,117				404,985
Accumulated other comprehensive income, net			22,397				9,648				21,886
Total stockholders’ equity			759,345				741,697				740,188
Total liabilities and stockholders’ equity		$	7,202,791			$	7,429,126			$	7,225,376

 

12

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CONSOLIDATED STATEMENTS OF INCOME

 

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

 

		Three Months ended
		June 30, 2011				March 31, 2011				June 30, 2010
Interest income:
Interest and fees on loans		$	61,475			$	62,391			$	67,501
Interest and dividends on investment securities:
Taxable			10,649				9,911				10,931
Exempt from federal taxes			1,194				1,171				1,173
Interest on deposits in banks			227				367				257
Interest on federal funds sold			6				3				5
Total interest income			73,551				73,843				79,867
Interest expense:
Interest on deposits			8,903				9,871				14,496
Interest on securities sold under repurchase agreements			171				237				229
Interest on other borrowed funds			—				—				1
Interest on long-term debt			495				489				509
Interest on subordinated debentures held by subsidiary trusts			1,455				1,448				1,456
Total interest expense			11,024				12,045				16,691
Net interest income			62,527				61,798				63,176
Provision for loan losses			15,400				15,000				19,500
Net interest income after provision for loan losses			47,127				46,798				43,676
Non-interest income:
Other service charges, commissions and fees			7,768				7,380				7,380
Service charges on deposit accounts			4,385				4,110				4,759
Income from the origination and sale of loans			4,109				3,445				4,186
Wealth management revenues			3,483				3,295				3,199
Investment securities gains, net			16				2				15
Other income			1,830				1,927				1,498
Total non-interest income			21,591				20,159				21,037
Non-interest expense:
Salaries, wages and employee benefits			27,889				27,702				27,379
Occupancy, net			4,013				4,215				3,963
Furniture and equipment			3,129				3,220				3,356
Outsourced technology services			2,212				2,241				2,449
FDIC insurance premiums			1,629				2,466				2,667
Other real estate owned expense, net of income			2,042				1,711				2,980
Mortgage servicing rights amortization			671				807				1,115
Mortgage servicing rights impairment (recovery)			27				(347	)			271
Core deposit intangibles amortization			361				362				440
Other expenses			12,219				10,581				10,806
Total non-interest expense			54,192				52,958				55,426
Income before income tax expense			14,526				13,999				9,287
Income tax expense			4,672				4,493				2,628
Net income			9,854				9,506				6,659
Preferred stock dividends			853				844				853
Net income available to common shareholders		$	9,001			$	8,662			$	5,806
Basic earnings per common share		$	0.21			$	0.20			$	0.14
Diluted earnings per common share		$	0.21			$	0.20			$	0.14

 

13

---

CONSOLIDATED STATEMENTS OF INCOME

 

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

 

		Six Months ended
		June 30, 2011				June 30, 2010
Interest income:
Interest and fees on loans		$	123,866			$	134,395
Interest and dividends on investment securities:
Taxable			20,560				22,133
Exempt from federal taxes			2,365				2,339
Interest on deposits in banks			594				481
Interest on federal funds sold			9				18
Total interest income			147,394				159,366
Interest expense:
Interest on deposits			18,774				29,774
Interest on securities sold under repurchase agreements			408				423
Interest on other borrowed funds			—				2
Interest on long-term debt			984				1,428
Interest on subordinated debentures held by subsidiary trusts			2,903				2,894
Total interest expense			23,069				34,521
Net interest income			124,325				124,845
Provision for loan losses			30,400				31,400
Net interest income after provision for loan losses			93,925				93,445
Non-interest income:
Other service charges, commissions and fees			15,148				14,252
Service charges on deposit accounts			8,495				9,357
Income from the origination and sale of loans			7,554				7,486
Wealth management revenues			6,778				6,213
Investment securities gains, net			18				42
Other income			3,757				3,195
Total non-interest income			41,750				40,545
Non-interest expense:
Salaries, wages and employee benefits			55,591				55,457
Occupancy, net			8,228				8,105
Furniture and equipment			6,349				6,697
Outsourced technology services			4,453				4,698
FDIC insurance premiums			4,095				5,123
Other real estate owned expense, net of income			3,753				3,521
Mortgage servicing rights amortization			1,478				2,248
Mortgage servicing rights impairment (recovery)			(320	)			221
Core deposit intangibles amortization			723				879
Other expenses			22,800				21,222
Total non-interest expense			107,150				108,171
Income before income tax expense			28,525				25,819
Income tax expense			9,165				8,030
Net income			19,360				17,789
Preferred stock dividends			1,697				1,697
Net income available to common shareholders		$	17,663			$	16,092
Basic earnings per common share		$	0.41			$	0.43
Diluted earnings per common share		$	0.41			$	0.43

 

14

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AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 

		For the three months ended
		June 30, 2011												March 31, 2011												June 30, 2010
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Interest earning assets:
Loans (1)(2)		$	4,269,637			$	61,926				5.82	%		$	4,303,575			$	62,836				5.92	%		$	4,520,119			$	67,964				6.03	%
Investment securities (2)			2,019,187				12,533				2.49				1,948,422				11,758				2.45				1,586,080				12,780				3.23
Interest bearing deposits in banks			359,446				227				0.25				587,804				367				0.25				407,656				257				0.25
Federal funds sold			3,871				6				0.62				2,242				3				0.54				4,408				5				0.45
Total interest earnings assets			6,652,141				74,692				4.50				6,842,043				74,964				4.44				6,518,263				81,006				4.98
Non-earning assets			617,221												622,539												679,514
Total assets		$	7,269,362											$	7,464,582											$	7,197,777
Interest bearing liabilities:
Demand deposits		$	1,263,466			$	847				0.27			$	1,249,283			$	834				0.27			$	1,116,216			$	870				0.31
Savings deposits			1,711,210				1,753				0.41				1,744,747				2,000				0.46				1,465,527				2,327				0.64
Time deposits			1,780,542				6,303				1.42				1,874,515				7,037				1.52				2,209,155				11,299				2.05
Repurchase agreements			469,459				171				0.15				569,881				237				0.17				465,573				229				0.20
Other borrowed funds			5,459				—				—				5,695				—				—				5,562				1				0.07
Long-term debt			37,485				495				5.30				37,496				489				5.29				38,170				509				5.35
Subordinated debentures held by by subsidiary trusts			123,715				1,455				4.72				123,715				1,448				4.75				123,715				1,456				4.72
Total interest bearing liabilities			5,391,336				11,024				0.82				5,605,332				12,045				0.87				5,423,918				16,691				1.23
Non-interest bearing deposits			1,089,909												1,070,744												982,053
Other non-interest bearing liabilities			47,791												51,013												60,457
Stockholders’ equity			740,326												737,493												731,349
Total liabilities and stockholders’ equity		$	7,269,362											$	7,464,582											$	7,197,777
Net FTE interest income						$	63,668											$	62,919											$	64,315
Less FTE adjustments (2)							(1,141	)											(1,121	)											(1,139	)
Net interest income from consolidated statements of income						$	62,527											$	61,798											$	63,176
Interest rate spread											3.68	%											3.57	%											3.75	%
Net FTE interest margin (3)											3.84	%											3.73	%											3.96	%
Cost of funds, including non-interest bearing demand deposits (4)											0.68	%											0.73	%											1.05	%

 

(1)	Average loan balances include nonaccrual 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 six months ended June 30,
		2011												2010
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Interest earning assets:
Loans (1)(2)		$	4,286,512			$	124,762				5.87	%		$	4,511,518			$	135,324				6.05	%
Investment securities (2)			1,984,000				24,291				2.47				1,539,216				25,822				3.38
Interest bearing deposits in banks			472,994				594				0.25				381,312				481				0.25
Federal funds sold			3,061				9				0.59				10,796				18				0.34
Total interest earnings assets			6,746,567				149,656				4.47				6,442,842				161,645				5.06
Non-earning assets			619,837												683,664
Total assets		$	7,366,404											$	7,126,506
Interest bearing liabilities:
Demand deposits			1,256,414				1,681				0.27	%			1,114,857				1,709				0.31	%
Savings deposits			1,727,886				3,753				0.44				1,443,953				4,643				0.65
Time deposits			1,827,269				13,340				1.47				2,233,631				23,422				2.11
Repurchase agreements			519,392				408				0.16				460,125				423				0.19
Othered borrowed funds			5,577				—				—				6,016				2				0.07
Long-term debt			37,490				984				5.29				54,606				1,428				5.27
Subordinated debentures held by by subsidiary trusts			123,715				2,903				4.73				123,715				2,894				4.72
Total interest bearing liabilities			5,497,743				23,069				0.85				5,436,903				34,521				1.28
Non-interest bearing deposits			1,080,379												970,966
Other non-interest bearing liabilities			49,395												61,964
Stockholders’ equity			738,887												656,673
Total liabilities and stockholders’ equity		$	7,366,404											$	7,126,506
Net FTE interest income						$	126,587											$	127,124
Less FTE adjustments (2)							(2,262	)											(2,279	)
Net interest income from consolidated statements of income						$	124,325											$	124,845
Interest rate spread											3.62	%											3.78	%
Net FTE interest margin (3)											3.78	%											3.98	%
Cost of funds, including non-interest bearing demand deposits (4)											0.71	%											1.09	%

 

(1)	Average loan balances include nonaccrual 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 June 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)		June 30, 2011				March 31, 2011				June 30, 2010
Total stockholders’ equity (GAAP)		$	759,345			$	741,697			$	740,188
Less goodwill and other intangible assets (excluding mortgage servicing rights)			191,792				192,155				193,391
Less preferred stock			50,000				50,000				50,000
Tangible common stockholders’ equity (Non-GAAP)		$	517,553			$	499,542			$	496,797
Add deferred tax liability for deductible goodwill			60,499				60,499				60,499
Net tangible common stockholders’ equity (Non-GAAP)		$	578,052			$	560,041			$	557,296
Common shares outstanding			42,964,921				42,961,253				42,803,349
Book value per common share		$	16.51			$	16.10			$	16.12
Tangible book value per common share		$	12.05			$	11.63			$	11.61
Net tangible book value per common share		$	13.45			$	13.04			$	13.02
Total assets (GAAP)		$	7,202,791			$	7,429,126			$	7,225,376
Less goodwill and other intangible assets (excluding mortgage servicing rights)			191,792				192,155				193,391
Tangible assets (Non-GAAP)		$	7,010,999			$	7,236,971			$	7,031,985
Tangible common stockholders’ equity to tangible assets (Non-GAAP)			7.38	%			6.90	%			7.06	%
Net tangible common stockholders’ equity to tangible assets (Non-GAAP)			8.24	%			7.74	%			7.93	%

First Interstate BancSystem, Inc.

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

www.FIBK.com

 

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