First Interstate BancSystem, Inc. (NASDAQ:FIBK):

SECOND QUARTER 2010 FINANCIAL HIGHLIGHTS:
  • Diluted earnings per common share of $0.14 for the quarter, as compared to $0.32 for first quarter 2010 and $0.39 for second quarter 2009.
  • Net income available to common stockholders of $5.8 million for the quarter, as compared to $10.3 million in first quarter 2010 and $12.5 million in second quarter 2009.
  • Net interest margin, on a tax equivalent basis, of 3.96% for the quarter, as compared to 4.00% for first quarter 2010 and 4.04% for second quarter 2009.
  • Provision for loan losses of $19.5 million for the quarter, as compared to $11.9 million in first quarter 2010 and $11.7 million in second quarter 2009.
  • Non-performing assets of $200 million, or 2.77% of total assets, as of June 30, 2010, as compared to $177 million, or 2.45% of total assets, as of March 31, 2010 and $167 million, or 2.47% of total assets, as of June 30, 2009.
  • Allowance for loan losses of $114 million, or 2.51% of total loans, as of June 30, 2010, as compared to $106 million, or 2.37% of total loans, as of March 31, 2010 and $98 million, or 2.11% of total loans, as of June 30, 2009.
  • Tier 1 risk-based capital ratio of 12.87% and total risk-based capital ratio of 14.81% as of June 30, 2010.
  • Book value per common share of $16.12 as of June 30, 2010, as compared to $15.96 as of March 31, 2010 and $16.10 as of June 30, 2009.
  • Tangible book value per common share of $11.61 as of June 30, 2010, as compared to $11.43 as of March 31, 2010 and $9.85 as of June 30, 2009.
  • Common stock dividends of $0.1125 per share for the quarter. Common stock dividends have remained at this quarterly rate since April 2009.
RESULTS SUMMARY                
(Unaudited; $ in thousands, except per share data) Three Months Ended Sequential Year
June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change % Change
Net income $ 6,659 $ 11,130 $ 13,336 -40.2% -50.1%
Net income available to common stockholders 5,806 10,286 12,483 -43.6% -53.5%
Diluted earnings per common share 0.14 0.32 0.39 -56.3% -64.1%
Dividends per common share 0.1125 0.1125 0.1125 0.0% 0.0%
Book value per common share 16.12 15.96 16.10 1.0% 0.1%
Tangible book value per common share* 11.61 11.43 9.85 1.6% 17.9%
Net tangible book value per common share* 13.02 12.84 11.78 1.4% 10.5%
Return on average common equity 3.42% 7.86% 10.01%
Return on average assets 0.37% 0.64% 0.80%
 
Six Months Ended Year
June 30, June 30, Over Year
  2010   2009   % Change
Net income $ 17,789 $ 30,024 -40.8%
Net income available to common stockholders 16,092 28,327 -43.2%
Diluted earnings per common share 0.43 0.89 -51.7%
Dividends per common share 0.2250 0.2750 -18.2%
Return on average common equity 5.35% 11.53%
Return on average assets 0.50% 0.91%
 

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

First Interstate BancSystem, Inc. (NASDAQ:FIBK), parent holding company of First Interstate Bank, reports second quarter 2010 net income available to common stockholders of $5.8 million, or $0.14 per diluted share, as compared to $10.3 million, or $0.32 per diluted share, for first quarter 2010 and $12.5 million, or $0.39 per diluted share, for second quarter 2009. Return on average common equity and return on average assets were 3.42% and 0.37%, respectively, for the second quarter of 2010 compared to 7.86% and 0.64%, respectively, in the first quarter of 2010 and 10.01% and 0.80%, respectively, in the second quarter of 2009.

“Today we reported the Company’s second quarter earnings which, although lower than the same quarter of 2009 and the prior quarter, continued to demonstrate First Interstate’s core earnings strength during a period of unsurpassed challenges and economic stress,” said Lyle R. Knight, President and Chief Executive Officer. “Credit costs, as expected, continued to have a negative impact on earnings. During second quarter, we recorded higher provisions for loan losses and as of June 30, 2010 our allowance for loan losses was 2.51% of total loans, as compared to 2.11% as of June 30, 2009. We expect quarterly provisions for loan losses to remain at high levels until we see evidence of a leveling-off or decline in non-performing assets.”

REVENUE     Three Months Ended   Sequential   Year
(Unaudited; $ in thousands) June 30,   March 31,   June 30, Quarter Over Year
  2010   2010   2009   % Change   % Change  
Interest income $ 79,867 $ 79,499 $ 81,148 0.5 % -1.6 %
Interest expense   16,691   17,830   21,958   -6.4 % -24.0 %
Net interest income 63,176 61,669 59,190 2.4 % 6.7 %
Provision for loan losses   19,500   11,900   11,700   63.9 % 66.7 %
Net interest income after provision for loan losses
$ 43,676 $ 49,769 $ 47,490   -12.2 % -8.0 %
Non-interest income:
Other service charges, commissions and fees $ 7,380 $ 6,872 $ 6,616 7.4 % 11.5 %
Service charges on deposit accounts 4,759 4,598 5,071 3.5 % -6.2 %
Income from the origination and sale of loans 4,186 3,300 10,359 26.8 % -59.6 %
Wealth management revenues 3,199 3,014 2,663 6.1 % 20.1 %
Investment securities gains, net 15 27 5 -44.4 % 200.0 %
Other income   1,498   1,697   2,553   -11.7 % -41.3 %
Total non-interest income $ 21,037 $ 19,508 $ 27,267   7.8 % -22.8 %
 
 
Six Months Ended   Year
June 30, June 30, Over Year
  2010   2009   % Change  
Interest income $ 159,366 $ 163,031 -2.2 %
Interest expense   34,521   44,778   -22.9 %
Net interest income 124,845 118,253 5.6 %
Provision for loan losses   31,400   21,300   47.4 %

Net interest income after provision for loan losses
$ 93,445 $ 96,953   -3.6 %
Non-interest income:
Other service charges, commissions and fees $ 14,252 $ 13,567 5.0 %
Service charges on deposit accounts 9,357 9,849 -5.0 %
Income from the origination and sale of loans 7,486 20,592 -63.6 %
Wealth management revenues 6,213 5,186 19.8 %
Investment securities gains, net 42 52 -19.2 %
Other income   3,195   4,234   -24.5 %
Total non-interest income $ 40,545 $ 53,480   -24.2 %
 

Net Interest Income

Deposit growth combined with corresponding increases in interest earning assets and stable market interest rates resulted in increases in net interest income during the three and six months ended June 30, 2010, as compared to the three months ended March 31, 2010 and the three and six months ended June 30, 2009.

The Company’s net interest margin ratio, on a fully taxable equivalent, or FTE basis, declined 4 basis points to 3.96% during second quarter 2010 from 4.00% during first quarter 2010. This decline reflected the investment of proceeds from the Company’s March 2010 initial public offering, or IPO, in interest bearing deposits, which yielded 25 basis points during second quarter. The Company’s FTE net interest margin decreased 8 basis points and 10 basis points during the three and six months ended June 30, 2010, respectively, from the same periods in 2009. This compression in FTE net interest margin ratio was primarily due to a shift in the mix of interest earning assets from higher-yielding loans to lower-yielding investments.

Non-interest Income

Non-interest income increased 7.8% to $21.0 million during second quarter 2010, as compared to $19.5 million during first quarter 2010 and decreased 22.8%, as compared to $27.3 million during second quarter 2009. Non-interest income of $40.5 million for the six months ended June 30, 2010, decreased 24.2% compared to $53.5 million during the same period in 2009. Decreases in non-interest income during the three and six months ended June 30, 2010, as compared to the same periods in 2009, were primarily due to lower income from the origination and sale of residential mortgage loans. As expected, the spike in refinancing activity that occurred early in 2009 has declined substantially and income from the origination and sale of loans is expected to continue to remain below levels reported in 2009. Income from the origination and sale of loans increased during second quarter 2010 as compared to first quarter 2010 primarily due to seasonal fluctuations in new home purchases combined with an increase in closings on purchased home loans due to Federal tax incentives for first time and other qualifying homebuyers. Purchased home loan originations during the second quarter of 2010 increased 76% over first quarter 2010 and 27% as compared to the second quarter of 2009.
NON-INTEREST EXPENSE   Three Months Ended   Sequential   Year
(Unaudited; $ in thousands) June 30,   March 31,   June 30, Quarter Over Year
  2010   2010     2009   % Change   % Change  
Non-interest expense:
Salaries, wages and employee benefits $ 27,379 $ 28,078 $ 29,543 -2.5 % -7.3 %
Occupancy, net 3,963 4,142 3,795 -4.3 % 4.4 %
Furniture and equipment 3,356 3,341 3,011 0.4 % 11.5 %
FDIC insurance premiums 2,667 2,456 5,528 8.6 % -51.8 %
Outsourced technology services 2,449 2,249 3,283 8.9 % -25.4 %
Mortgage servicing rights amortization 1,115 1,133 2,145 -1.6 % -48.0 %
Mortgage servicing rights impairment (recovery) 271 (50 ) (4,418 ) -642.0 % -106.1 %
Other real estate owned expense, net of income 2,980 541 649 450.8 % 359.2 %
Core deposit intangibles amortization 440 439 536 0.2 % -17.9 %
Other expenses   10,806   10,416     10,665   3.7 % 1.3 %
Total non-interest expense $ 55,426 $ 52,745   $ 54,737   5.1 % 1.3 %
 
 
Six Months Ended   Year
June 30, June 30, Over Year
  2010   2009     % Change  
Non-interest expense:
Salaries, wages and employee benefits $ 55,457 $ 57,554 -3.6 %
Occupancy, net 8,105 7,742 4.7 %
Furniture and equipment 6,697 6,023 11.2 %
FDIC insurance premiums 5,123 7,364 -30.4 %
Outsourced technology services 4,698 5,954 -21.1 %
Mortgage servicing rights amortization 2,248 5,067 -55.6 %
Mortgage servicing rights impairment (recovery) 221 (7,265 ) -103.0 %
Other real estate owned expense, net of income 3,521 919 283.1 %
Core deposit intangibles amortization 879 1,071 -17.9 %
Other expenses   21,222   20,753     2.3 %
Total non-interest expense $ 108,171 $ 105,182     2.8 %
 

Non-interest expense increased 5.1% to $55.4 million during second quarter 2010, as compared to $52.7 million during first quarter 2010 and 1.3%, as compared to $54.7 million during second quarter 2009. Non-interest expense of $108.2 million for the six months ended June 30, 2010, increased 2.8%, as compared to $105.2 million for the same period in 2009. Significant components of the changes in non-interest expense include:

Salaries, wages and employee benefits expense – salaries, wages and employee benefits expense decreased 2.5% to $27.4 million for the three months ended June 30, 2010, as compared to $28.1 million for the three months ended March 31, 2010 and decreased 7.3% and 3.6% during the three and six months ended June 30, 2010, respectively, as compared to the same periods in the prior year. Decreases in salaries, wages and employee benefits expense were primarily due to lower incentive bonus and profit sharing accruals reflective of the Company’s performance results during the three and six months ended June 30, 2010.

FDIC insurance premiums – FDIC insurance premiums for the three and six months ended June 30, 2010 decreased 51.8% and 30.4%, respectively, as compared to the same periods in 2009, due to a special FDIC insurance assessment levied during the second quarter of 2009. The special assessment, which was applicable to all insured depository institutions, resulted in additional FDIC insurance expense of $3.1 million during second quarter 2009. The Company expects FDIC insurance premiums to remain at high levels for the foreseeable future.

Mortgage servicing rights amortization - mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Changes in the estimated servicing period caused amortization expense to vary between periods. Mortgage servicing rights amortization was $1.1 million during second quarter 2010, as compared to $1.1 million during first quarter 2010 and $2.1 million during second quarter 2009. Mortgage servicing rights amortization decreased 55.6% to $2.2 million for the six months ended June 30, 2010, as compared to $5.1 million during the same period in 2009.

Mortgage servicing rights impairment (recovery) – mortgage servicing rights are evaluated quarterly for impairment based on the fair value of the mortgage servicing rights. Impairment adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for changes in impairment through a charge to current period earnings. Fluctuations in the fair value of mortgage servicing rights are primarily due to changes in assumptions regarding prepayments of the underlying mortgage loans, which typically correspond with changes in market interest rates. During second quarter 2010, the Company recorded impairment of $271 thousand, as compared to reversing previously recorded impairment of $50 thousand during first quarter 2010 and $4.4 million during second quarter 2009. During the six months ended June 30, 2010, the Company recorded impairment of $221 thousand, as compared to a reversal of previously recorded impairment of $7.3 million during the same period in 2009.

Other real estate expense, net of income - variations in net other real estate owned, or OREO, expense between periods is primarily due to write-downs of the estimated fair value of OREO properties. Net OREO expense was $3.0 million during second quarter 2010, as compared to $541 thousand during first quarter 2010 and $649 thousand during second quarter 2009. Net OREO expense for the six months ended June 30, 2010 was $3.5 million, as compared to $919 thousand during the same period in 2009. Increases in net OREO expense were primarily due to the second quarter 2010 write-downs of the estimated fair values of one residential property located in Jackson Hole, Wyoming and one land development property pending sale in the Flathead area around Kalispell, Montana.

ASSET QUALITY     Three Months Ended
(Unaudited; $ in thousands) June 30,     March 31,     June 30,
  2010     2010     2009  
Allowance for loan losses - beginning of period $ 106,349 $ 103,030 $ 92,223
Charge-offs (12,107 ) (9,398 ) (6,350 )
Recoveries 586 817 822
Provision   19,500     11,900     11,700  
Allowance for loan losses - end of period $ 114,328   $ 106,349   $ 98,395  
 
June 30, March 31, June 30,
  2010     2010     2009  
Period end loans $ 4,562,288 $ 4,481,019 $ 4,665,550
Average loans 4,520,119 4,502,713 4,693,750
Non-performing loans:
Nonaccrual loans 139,975 122,341 120,500
Accruing loans past due 90 days or more 7,550 3,041 13,954
Restructured loans   10,588     7,660     1,030  
Total non-performing loans 158,113 133,042 135,484
Other real estate owned   42,338     43,980     31,789  
Total non-performing assets $ 200,451   $ 177,022   $ 167,273  
 
Net charge-offs to average loans (annualized) 1.02 % 0.77 % 0.47 %
Provision for loan losses to average loans (annualized) 1.73 % 1.07 % 1.00 %
Allowance for loan losses to period end loans 2.51 % 2.37 % 2.11 %
Allowance for loan losses to total non-performing loans 72.31 % 79.94 % 72.62 %
Non-performing loans to period end loans 3.47 % 2.97 % 2.90 %

Non-performing assets to period end loans and other real estate owned
4.35 % 3.91 % 3.56 %
Non-performing assets to total assets 2.77 % 2.45 % 2.47 %
 

Non-performing assets were 4.35% of total loans and other real estate owned as of June 30, 2010 compared to 3.91% as of March 31, 2010 and 3.56% as of June 30, 2009. Difficult economic conditions continued to have a negative impact on businesses and consumers in the Company’s market areas during second quarter 2010, especially in three market areas with economies dependent upon resort and second home communities. These market areas include the Flathead area around Kalispell, Montana, the Gallatin Valley area around Bozeman, Montana and the Jackson Hole, Wyoming market area. Residential and second home subdivisions in these market areas were overbuilt and are now experiencing severely depressed real estate values and limited sales activity. These three markets accounted for approximately 56% of the Company’s non-performing assets as of June 30, 2010 versus 21% of the Company’s total loans as of the same date. The continuing significant impact of current economic conditions, particularly in the three market areas noted, is expected to further increase non-performing assets in future quarters.

As of June 30, 2010, total non-performing loans included $135 million of real estate loans, of which $70 million were construction loans and $54 million were commercial real estate loans. Non-performing construction loans as of June 30, 2010 were comprised of land acquisition and development loans of $44 million, residential construction loans of $15 million and commercial construction loans of $11 million. Approximately 85% of loans with balances exceeding $1 million that were placed on nonaccrual during second quarter 2010 were located in the three market areas described above.

Based on management’s assessment of the adequacy of our allowance for loan losses, the Company recorded provisions for loan losses of $19.5 million during second quarter 2010, as compared to $11.9 million during first quarter 2010 and $11.7 million during second quarter 2009. Provisions for loan losses were $31.4 million for the six months ended June 30, 2010, as compared to $21.3 million for the same period in 2009. Increased provisions for loan losses reflect management’s estimation of the effect of current economic conditions on the Company’s loan portfolio. Specific loan loss reserves accounted for 75% of the second quarter 2010 provision for loan losses, while 25% was due to increases in general reserve requirements. As of June 30, 2010, the Company’s allowance for loan losses was 2.51% of total loans, as compared to 2.37% as of March 31, 2010 and 2.11% as of June 30, 2009.

Following is a summary of the Company’s credit quality trends since the start of 2008.
CREDIT QUALITY TRENDS
(Unaudited; $ in thousands)
                             
Allowance Loans
Provision for Net for 30 - 89 Days Non-Performing Non-Performing
Loan Losses Charge-offs Loan Losses Past Due Loans Assets
Q1 2008 $ 2,363 $ 766 $ 68,415 $ 55,532 $ 58,047 $ 58,921
Q2 2008 5,321 1,086 72,650 81,571 92,403 95,108
Q3 2008 5,636 1,192 77,094 58,085 89,800 92,971
Q4 2008 20,036 9,814 87,316 92,180 90,922 96,947
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
 
ASSETS                 Sequential     Year
(Unaudited; $ in thousands) June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change   % Change  
Cash and cash equivalents $ 502,484 $ 674,620 $ 551,907 -25.5 % -9.0 %
Investment securities 1,635,459 1,523,454 1,055,592 7.4 % 54.9 %
Loans 4,562,288 4,481,019 4,665,550 1.8 % -2.2 %
Less allowance for loan losses   114,328   106,349   98,395 7.5 % 16.2 %
Net loans   4,447,960   4,374,670   4,567,155 1.7 % -2.6 %
Other assets   639,473   642,896   602,264 -0.5 % 6.2 %
Total assets $ 7,225,376 $ 7,215,640 $ 6,776,918 0.1 % 6.6 %
 

Total assets of $7.2 billion as of June 30, 2010 increased less than 1.0% from March 31, 2010 and 6.6% from June 30, 2009, due to organic growth. Significant changes are discussed below:

Investment securities were $1.6 billion, or 22.6% of total assets, as of June 30, 2010, compared to $1.5 billion, or 21.1% of total assets, as of March 31, 2010 and $1.1 billion, or 15.6% of total assets, as of June 30, 2009. During the third quarter of 2009, the Company began investing excess liquidity into investment securities classified as available-for-sale. With lower market interest rates and the purchase of relatively short-term securities, the estimated duration of the Company’s investment securities portfolio decreased to 1.7 years as of June 30, 2010, from 2.5 years as of June 30, 2009.

LOANS                 Sequential     Year
(Unaudited; $ in thousands) June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change   % Change  
Real estate loans:
Commercial $ 1,594,780 $ 1,590,515 $ 1,543,640 0.3 % 3.3 %
Construction:
Land acquisition & development 371,191 383,737 380,937 -3.3 % -2.6 %
Residential 122,452 124,552 149,999 -1.7 % -18.4 %
Commercial   86,883   87,386   184,636 -0.6 % -52.9 %
Total construction loans   580,526   595,675   715,572 -2.5 % -18.9 %
Residential 540,255 537,474 557,196 0.5 % -3.0 %
Agriculture 193,764 193,001 199,583 0.4 % -2.9 %
Mortgage loans originated for sale   48,478   28,367   46,370 70.9 % 4.5 %
Total real estate loans   2,957,803   2,945,032   3,062,361 0.4 % -3.4 %
Consumer:
Indirect consumer loans 428,738 418,039 429,300 2.6 % -0.1 %
Other consumer loans 193,462 201,236 179,341 -3.9 % 7.9 %
Credit card loans   58,574   55,839   55,366 4.9 % 5.8 %
Total consumer loans   680,774   675,114   664,007 0.8 % 2.5 %
Commercial 777,918 729,309 785,478 6.7 % -1.0 %
Agricultural 142,279 127,639 149,658 11.5 % -4.9 %
Other loans, including overdrafts   3,514   3,925   4,046 -10.5 % -13.1 %
Total loans $ 4,562,288 $ 4,481,019 $ 4,665,550 1.8 % -2.2 %
 

Total loans increased 1.8% to $4.6 billion as of June 30, 2010 from $4.5 billion as of March 31, 2010, with the most significant growth occurring in commercial loans. Commercial loans of $778 million as of June 30, 2010 increased $49 million, or 6.7%, from $729 million as of March 31, 2010 primarily due to advances to both existing and new borrowers.

Total loans decreased 2.2% to $4.6 billion as of June 30, 2010, from $4.7 billion as of June 30, 2009. Management attributes this decrease to the impact of the broad recession on borrowers in the Company’s market areas, and to a lesser extent, the movement of lower quality loans out of the loan portfolio through loan charge-off or foreclosure.

LIABILITIES                 Sequential     Year
(Unaudited; $ in thousands) June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change   % Change  
Deposits $ 5,802,322 $ 5,788,382 $ 5,525,315 0.2 % 5.0 %
Securities sold under repurchase agreements 453,749 461,559 368,442 -1.7 % 23.2 %
Other borrowed funds 7,196 5,845 58,383 23.1 % -87.7 %
Long-term debt 38,023 39,034 79,644 -2.6 % -52.3 %

Subordinated debentures held by subsidiary trusts
123,715 123,715 123,715 0.0 % 0.0 %
Other liabilities   60,183   64,538   67,551 -6.7 % -10.9 %
Total liabilities $ 6,485,188 $ 6,483,073 $ 6,223,050 0.0 % 4.2 %
 

Total liabilities were $6.5 billion as of June 30, 2010, as compared to $6.5 billion as of March 31, 2010 and $6.2 billion as of June 30, 2009. Significant changes are discussed below:

Other borrowed funds were $7 million as of June 30, 2010 compared to $6 million as of March 31, 2010 and $58 million as of June 30, 2009. The increase from March 31, 2010 was due to timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal government. Year-over-year decreases in other borrowed funds were due to the scheduled repayments and maturities of short-term Federal Home Loan Bank borrowings.

Long-term debt was $38 million as of June 30, 2010, as compared to $39 million as of March 31, 2010 and $80 million as of June 30, 2009. Sequential quarter decreases in long-term debt were due to scheduled repayments of long-term borrowings. Year-over-year decreases in long-term debt were primarily due to the early extinguishment of variable rate term notes in March 2010 and, to a lesser extent, scheduled repayments of long-term Federal Home Loan Bank borrowings.
DEPOSITS                 Sequential     Year
(Unaudited; $ in thousands) June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change   % Change  
Non-interest bearing demand $ 1,040,072 $ 999,827 $ 986,830 4.0 % 5.4 %
Interest bearing:
Demand 1,090,162 1,098,196 1,072,445 -0.7 % 1.7 %
Savings 1,487,746 1,439,886 1,334,962 3.3 % 11.4 %
Time, $100 and over 996,478 1,005,645 880,104 -0.9 % 13.2 %
Time, other   1,187,864   1,244,828   1,250,974 -4.6 % -5.0 %
Total interest bearing   4,762,250   4,788,555   4,538,485 -0.5 % 4.9 %
Total deposits $ 5,802,322 $ 5,788,382 $ 5,525,315 0.2 % 5.0 %
 

Total deposits were $5.8 billion as of June 30, 2010, as compared to $5.8 billion as of March 31, 2010 and $5.5 billion as of June 30, 2009. Increases in deposits were solely the result of organic growth. In addition, the Company has experienced a slight shift in the mix of deposits away from higher costing time deposits to lower costing savings and non-interest bearing demand deposits.
STOCKHOLDERS' EQUITY                 Sequential     Year

(Unaudited, $ in thousands, except per share data)
June 30, March 31, June 30, Quarter Over Year
  2010   2010   2009 % Change   % Change  
Preferred stockholders' equity $ 50,000 $ 50,000 $ 50,000 0.0 % 0.0 %
Common stockholders' equity 668,302 666,357 493,303 0.3 % 35.5 %

Accumulated other comprehensive income, net
21,886 16,210 10,565 35.0 % 107.2 %
Total stockholders' equity $ 740,188 $ 732,567 $ 553,868 1.0 % 33.6 %
Book value per common share $ 16.12 $ 15.96 $ 16.10 1.0 % 0.1 %
Tangible book value per common share* $ 11.61 $ 11.43 $ 9.85 1.6 % 17.9 %

Net tangible book value per common share*
$ 13.02 $ 12.84 $ 11.78 1.4 % 10.5 %
 
*See Non-GAAP Financial Measures included herein for discussion of tangible and net tangible book value per common share.
 

Total stockholders’ equity was $740 million as of June 30, 2010, as compared to $733 million as of March 31, 2010 and $554 million as of June 30, 2009.

On March 29, 2010, the Company completed an IPO of 11,500,000 shares of Class A common stock. The Company received net proceeds of $153 million from the offering, after deducting underwriting discounts, commissions and other offering costs.

Remaining increases in stockholders’ equity during the three months ended June 30, 2010 as compared to first quarter 2010 and during the three and six months ended June 30, 2010, as compared to the same periods in 2009, were primarily due to increases in other comprehensive income, primarily unrealized gains on available-for-sale investment securities.

On May 27, 2010, the Company declared a quarterly dividend to common stockholders of $0.1125 per share. This dividend was paid on July 12, 2010 to shareholders of record as of July 1, 2010.
CAPITAL RATIOS     June 30,   March 31,   June 30,
(Unaudited) 2010 2010 2009
Tangible common stockholders' equity to tangible assets* 7.06% 6.96% 4.68%
Net tangible common stockholders' equity to tangible assets* 7.93% 7.82% 5.60%
Tier 1 common capital to total risk weighted assets 9.56% 9.67%

5.93%
Leverage ratio** 9.43% 9.58%

7.39%
Tier 1 risk-based capital** 12.87% 13.04%

9.19%
Total risk-based capital** 14.81% 15.00%

11.12%
 

*See Non-GAAP Financial Measures included herein for discussion of tangible and net tangible common stockholders' equity to tangible assets.
 
**Preliminary estimate - may be subject to change.
 

The Company exceeds “well capitalized” requirements under all regulatory capital guidelines. Significant increases in capital ratios at June 30, 2010, as compared to June 30, 2009, reflect the impact of additional capital raised from the Company’s IPO in March 2010.

CONSOLIDATED BALANCE SHEETS
             

(Unaudited, $ in thousands)
       
June 30, March 31, June 30,
  2010   2010   2009
Assets
Cash and due from banks $ 169,461 $ 142,775 $ 223,192
Federal funds sold 5,164 5,354 235,025
Interest bearing deposits in banks   327,859   526,491   93,690
Total cash and cash equivalents   502,484   674,620   551,907
Investment securities:
Available-for-sale 1,500,659 1,393,664 953,977

Held-to-maturity (estimated fair values of $136,782, $131,613 and $110,987 as of June 30, 2010, March 31, 2010 and March 31, 2009, respectively)
134,800 129,790 101,615
Total investment securities   1,635,459   1,523,454   1,055,592
Loans 4,562,288 4,481,019 4,665,550
Less allowance for loan losses   114,328   106,349   98,395
Net loans   4,447,960   4,374,670   4,567,155
Premises and equipment, net 193,551 196,596 189,349
Goodwill 183,673 183,673 183,673
Company-owned life insurance 72,395 71,874 70,223
Other real estate owned 42,338 43,980 31,789
Accrued interest receivable 38,429 36,480 38,272

Mortgage servicing rights, net of accumulated amortization and impairment reserve
16,232 16,836 20,565
Core deposit intangibles, net of accumulated amortization 9,672 10,112 11,611
Net deferred tax asset - - 4,146
Other assets   83,183   83,345   52,636
Total assets $ 7,225,376 $ 7,215,640 $ 6,776,918
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 1,040,072 $ 999,827 $ 986,830
Interest bearing   4,762,250   4,788,555   4,538,485
Total deposits   5,802,322   5,788,382   5,525,315
Securities sold under repurchase agreements 453,749 461,559 368,442
Accounts payable and accrued expenses 39,741 45,768 44,857
Accrued interest payable 20,442 18,770 22,694
Other borrowed funds 7,196 5,845 58,383
Long-term debt 38,023 39,034 79,644
Subordinated debentures held by subsidiary trusts   123,715   123,715   123,715
Total liabilities   6,485,188   6,483,073   6,223,050
Stockholders' equity:
Preferred stock 50,000 50,000 50,000
Common stock 263,317 262,366 111,150
Retained earnings 404,985 403,991 382,153
Accumulated other comprehensive income, net   21,886   16,210   10,565
Total stockholders' equity   740,188   732,567   553,868
Total liabilities and stockholders' equity $ 7,225,376 $ 7,215,640 $ 6,776,918
 

CONSOLIDATED STATEMENTS OF INCOME
           

(Unaudited, $ in thousands, except per share data)
     
Three Months ended
June 30,     March 31, June 30,
  2010   2010     2009  
Interest income:
Interest and fees on loans $ 67,501 $ 66,894 $ 69,655
Interest and dividends on investment securities:
Taxable 10,931 11,202 9,952
Exempt from federal taxes 1,173 1,166 1,374
Interest on deposits in banks 257 224 88
Interest on federal funds sold   5   13     79  
Total interest income   79,867   79,499     81,148  
Interest expense:
Interest on deposits 14,496 15,278 18,929
Interest on securities sold under repurchase agreements 229 194 175
Interest on other borrowed funds 1 1 418
Interest on long-term debt 509 919 798
Interest on subordinated debentures held by subsidiary trusts   1,456   1,438     1,638  
Total interest expense   16,691   17,830     21,958  
Net interest income 63,176 61,669 59,190
Provision for loan losses   19,500   11,900     11,700  
Net interest income after provision for loan losses   43,676   49,769     47,490  
Non-interest income:
Other service charges, commissions and fees 7,380 6,872 6,616
Service charges on deposit accounts 4,759 4,598 5,071
Income from the origination and sale of loans 4,186 3,300 10,359
Wealth management revenues 3,199 3,014 2,663
Investment securities gains, net 15 27 5
Other income   1,498   1,697     2,553  
Total non-interest income   21,037   19,508     27,267  
Non-interest expense:
Salaries, wages and employee benefits 27,379 28,078 29,543
Occupancy, net 3,963 4,142 3,795
Furniture and equipment 3,356 3,341 3,011
FDIC insurance premiums 2,667 2,456 5,528
Outsourced technology services 2,449 2,249 3,283
Mortgage servicing rights amortization 1,115 1,133 2,145
Mortgage servicing rights impairment (recovery) 271 (50 ) (4,418 )
Other real estate owned expense, net of income 2,980 541 649
Core deposit intangibles amortization 440 439 536
Other expenses   10,806   10,416     10,665  
Total non-interest expense   55,426   52,745     54,737  
Income before income tax expense 9,287 16,532 20,020
Income tax expense   2,628   5,402     6,684  
Net income 6,659 11,130 13,336
Preferred stock dividends   853   844     853  
Net income available to common shareholders $ 5,806 $ 10,286   $ 12,483  
Basic earnings per common share $ 0.14 $ 0.33 $ 0.40
Diluted earnings per common share $ 0.14 $ 0.32   $ 0.39  
 

CONSOLIDATED STATEMENTS OF INCOME
       

(Unaudited, $ in thousands, except per share data)
     
Six Months ended
June 30,     June 30,
  2010   2009  
Interest income:
Interest and fees on loans $ 134,395 $ 139,773
Interest and dividends on investment securities:
Taxable 22,133 20,221
Exempt from federal taxes 2,339 2,781
Interest on deposits in banks 481 92
Interest on federal funds sold   18   164  
Total interest income   159,366   163,031  
Interest expense:
Interest on deposits 29,774 38,433
Interest on federal funds purchased - 10
Interest on securities sold under repurchase agreements 423 418
Interest on other borrowed funds 2 976
Interest on long-term debt 1,428 1,639
Interest on subordinated debentures held by subsidiary trusts   2,894   3,302  
Total interest expense   34,521   44,778  
Net interest income 124,845 118,253
Provision for loan losses   31,400   21,300  
Net interest income after provision for loan losses   93,445   96,953  
Non-interest income:
Other service charges, commissions and fees 14,252 13,567
Service charges on deposit accounts 9,357 9,849
Income from the origination and sale of loans 7,486 20,592
Wealth management revenues 6,213 5,186
Investment securities gains, net 42 52
Other income   3,195   4,234  
Total non-interest income   40,545   53,480  
Non-interest expense:
Salaries, wages and employee benefits 55,457 57,554
Occupancy, net 8,105 7,742
Furniture and equipment 6,697 6,023
FDIC insurance premiums 5,123 7,364
Outsourced technology services 4,698 5,954
Mortgage servicing rights amortization 2,248 5,067
Mortgage servicing rights impairment (recovery) 221 (7,265 )
Other real estate owned expense, net of income 3,521 919
Core deposit intangibles amortization 879 1,071
Other expenses   21,222   20,753  
Total non-interest expense   108,171   105,182  
Income before income tax expense 25,819 45,251
Income tax expense   8,030   15,227  
Net income 17,789 30,024
Preferred stock dividends   1,697   1,697  
Net income available to common shareholders $ 16,092 $ 28,327  
Basic earnings per common share $ 0.43 $ 0.90
Diluted earnings per common share $ 0.43 $ 0.89  
 

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)
    For the three months ended
June 30, 2010     March 31, 2010     June 30, 2009
Average     Average Average     Average Average     Average
Balance   Interest   Rate Balance   Interest   Rate Balance   Interest   Rate
Interest earning assets:
Loans (1)(2) $ 4,520,119 $ 67,964 6.03 % $ 4,502,713 $ 67,360 6.07 % $ 4,693,750 $ 70,116 5.99 %
Investment securities (2) 1,586,080 12,780 3.23 1,492,276 13,042 3.54 1,030,885 12,119 4.72
Interest bearing deposits in banks 407,656 257 0.25 354,096 224 0.26 126,041 88 0.28
Federal funds sold   4,408     5     0.45     16,851     13     0.31     145,360     79     0.22  
Total interest earnings assets 6,518,263 81,006 4.98 6,365,936 80,639 5.14 5,996,036 82,402 5.51
Non-earning assets   679,514           687,663           689,942        
Total assets $ 7,197,777         $ 7,053,599         $ 6,685,978        
Interest bearing liabilities:
Demand deposits 1,116,216 870 0.31 % 1,112,950 839 0.31 % 1,087,671 1,072 0.40 %
Savings deposits 1,465,527 2,327 0.64 1,421,981 2,316 0.66 1,283,953 2,495 0.78
Time deposits 2,209,155 11,299 2.05 2,258,579 12,123 2.18 2,109,479 15,362 2.92
Repurchase agreements 465,573 229 0.20 454,687 194 0.17 389,034 175 0.18
Borrowings (3) 5,562 1 0.07 6,469 1 0.06 55,893 418 3.00
Long-term debt 38,170 509 5.35 71,285 919 5.23 81,575 798 3.92

Subordinated debentures held by subsidiary trusts
  123,715     1,456     4.72     123,715     1,438     4.71     123,715     1,638     5.31  
Total interest bearing liabilities 5,423,918 16,691 1.23 5,449,666 17,830 1.33 5,131,320 21,958 1.72
Non-interest bearing deposits 982,053 959,369 938,467
Other non-interest bearing liabilities 60,457 63,528 66,042
Stockholders' equity   731,349           581,036           550,149        

Total liabilities and stockholders' equity
$ 7,197,777         $ 7,053,599         $ 6,685,978        
Net FTE interest income $ 64,315 $ 62,809 $ 60,444
Less FTE adjustments (2)       (1,139 )           (1,140 )           (1,254 )    

Net interest income from consolidated statements of income
    $ 63,176           $ 61,669           $ 59,190      
Interest rate spread         3.75 %         3.81 %         3.79 %
Net FTE interest margin (4)         3.96 %         4.00 %         4.04 %
 
(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) Includes interest on federal funds purchased and other borrowed funds. Excludes long-term debt.
 
(4) 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.
 

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)
  For the six months ended June 30,
  2010       2009
Average     Average Average     Average
    Balance   Interest   Rate     Balance   Interest   Rate
Interest earning assets:
Loans (1)(2) $ 4,511,518 $

135,324
6.05 % $ 4,727,885 $ 140,685 6.00 %
Investment securities 1,539,216 25,822 3.38 1,032,171 24,608 4.81
Interest bearing deposits in banks 381,312 481 0.25 63,718 92 0.29
Federal funds sold     10,796     18     0.34         144,569     164     0.23  
Total interest earnings assets 6,442,842

161,645
5.06 5,968,343 165,549 5.59
Non-earning assets     683,664               676,803        
Total assets   $ 7,126,506             $ 6,645,146        
Interest bearing liabilities:
Demand deposits 1,114,857 1,709 0.31 % 1,076,304 2,341 0.44 %
Savings deposits 1,443,953 4,643 0.65 1,263,128 5,138 0.82
Time deposits 2,233,631 23,422 2.11 2,060,118 30,954 3.03
Repurchase agreements 460,125 423 0.19 414,912 418 0.20
Borrowings (3) 6,016 2 0.07 74,570 986 2.67
Long-term debt 54,606 1,428 5.27 81,864 1,639 4.04

Subordinated debentures held by subsidiary trusts
    123,715     2,894     4.72         123,715     3,302     5.38  
Total interest bearing liabilities 5,436,903 34,521 1.28 5,094,611 44,778 1.77
Non-interest bearing deposits 970,966 937,209
Other non-interest bearing liabilities 61,964 67,781
Stockholders' equity     656,673               545,545        
Total liabilities and stockholders' equity
  $ 7,126,506             $ 6,645,146        
Net FTE interest income $

127,124
$ 120,771
Less FTE adjustments (2)        

(2,279
)               (2,518 )    

Net interest income from consolidated statements of income
      $ 124,845               $ 118,253      
Interest rate spread           3.78 %             3.82 %
Net FTE interest margin (4)           3.98 %             4.08 %
 
(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) Includes interest on federal funds purchased and other borrowed funds. Excludes long-term debt.
 
(4) 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.
 

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 and (iv) net tangible common stockholders’ equity to 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, 2010 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.

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       June 30,     March 31,     June 30,
(Unaudited; $ in thousands except share and per share data)   2010     2010     2009  
Total stockholders' equity (GAAP) $ 740,188 $ 732,567 $ 553,868

Less goodwill and other intangible assets (excluding mortgage servicing rights)
193,391 193,832 195,576
Less preferred stock   50,000     50,000     50,000  
Tangible common stockholders' equity (Non-GAAP) $ 496,797 $ 488,735 $ 308,292
Add deferred tax liability for deductible goodwill   60,499     60,499     60,499  
Net tangible common stockholders' equity (Non-GAAP) $ 557,296   $ 549,234   $ 368,791  
 
Common shares outstanding 42,803,349 42,776,940 31,299,568
 
Book value per common share $ 16.12 $ 15.96 $ 16.10
Tangible book value per common share $ 11.61 $ 11.43 $ 9.85
Net tangible book value per common share $ 13.02 $ 12.84 $ 11.78
 
 
Total assets (GAAP) $ 7,225,376 $ 7,215,640 $ 6,776,918

Less goodwill and other intangible assets (excluding mortgage servicing rights)
193,391 193,832 195,576
Tangible assets (Non-GAAP) $ 7,031,985   $ 7,021,808  

 
$ 6,581,342  
 
Tangible common stockholders' equity to tangible assets 7.06 % 6.96 % 4.68 %
Net tangible common stockholders' equity to tangible assets 7.93 % 7.82 % 5.60 %
 

Second Quarter 2010 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss second quarter 2010 results at 1:00 p.m. Eastern Time (11:00 a.m. MDT) on Friday, July 23, 2010. 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 http://www.talkpoint.com/viewer/starthere.asp?Pres=131580. The call will be recorded and made available for replay after 4:00 p.m. Eastern Time (2:00 p.m. MDT) on July 23 through 9:00 a.m. Eastern Time (7:00 a.m. MDT) on August 9, 2010 by dialing 1-877-344-7529 (using conference ID 442252). 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 72 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.

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 quarterly provisions for loan losses, income from the origination and sale of loans, FDIC insurance premiums and non-performing assets. Forward-looking statements involve known and unknown risks and uncertainties that are difficult to predict. 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:

• 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;

• 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;

• 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 II capital standards;

• inability of our bank subsidiary to pay dividends;

• change in dividend policy;

• lack of public market for our common stock;

• volatility of Class A common stock;

• voting control;

• decline in market price of Class A common stock;

• dilution as a result of future equity issuances;

• use of net proceeds;

• uninsured nature of any investment in Class A common stock;

• anti-takeover provisions;

• intent to qualify as a controlled company; and

• subordination of common stock to company debt.

A more detailed discussion of each of the foregoing risks is included in the Company’s periodic and current reports filed with the Securities and Exchange Commission and is contained in our most recently filed prospectus dated March 23, 2010, filed March 24, 2010. 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 most recently filed prospectus, which discussion in incorporated herein by reference.

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.

Copyright Business Wire 2010