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

THIRD QUARTER 2010 FINANCIAL HIGHLIGHTS:
  • Diluted earnings per common share of $0.18 for the quarter, as compared to $0.14 for second quarter 2010 and $0.36 for third quarter 2009.
  • Net income available to common stockholders of $7.9 million for the quarter, as compared to $5.8 million in second quarter 2010 and $11.5 million in third quarter 2009.
  • Net interest margin, on a tax equivalent basis, of 3.89% for the quarter, as compared to 3.96% for second quarter 2010 and 4.00% for third quarter 2009.
  • Provision for loan losses of $18.0 million for the quarter, as compared to $19.5 million in second quarter 2010 and $10.5 million in third quarter 2009.
  • Non-performing assets of $237 million, or 3.24% of total assets, as of September 30, 2010, as compared to $200 million, or 2.77% of total assets, as of June 30, 2010 and $157 million, or 2.27% of total assets, as of September 30, 2009.
  • Allowance for loan losses of $120 million, or 2.70% of total loans, as of September 30, 2010, as compared to $114 million, or 2.51% of total loans, as of June 30, 2010 and $102 million, or 2.21% of total loans, as of September 30, 2009.
  • Tier 1 risk-based capital ratio of 13.22% and total risk-based capital ratio of 15.18% as of September 30, 2010.
  • Book value per common share of $16.23 as of September 30, 2010, as compared to $16.12 as of June 30, 2010 and $16.56 as of September 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 Quarter

% Change
 

Year Over Year

% Change
September 30,   June 30,   September 30,
  2010     2010     2009  
Net income $ 8,729 $ 6,659 $ 12,318 31.1 % -29.1 %
Net income available to common stockholders 7,867 5,806 11,456 35.5 % -31.3 %
Diluted earnings per common share 0.18 0.14 0.36 28.6 % -50.0 %
Dividends per common share 0.1125 0.1125 0.1125 0.0 % 0.0 %
Book value per common share 16.23 16.12 16.56 0.7 % -2.0 %
Tangible book value per common share* 11.72 11.61 10.36 0.9 % 13.1 %
Net tangible book value per common share* 13.14 13.02 12.28 0.9 % 7.0 %
Return on average common equity 4.52 % 3.42 % 8.98 %
Return on average assets 0.48 % 0.37 % 0.71 %
 
Nine Months Ended Year Over Year % Change
September 30, September 30,
  2010     2009  
Net income $ 26,518 $ 42,342 -37.4 %
Net income available to common stockholders 23,959 39,783 -39.8 %
Diluted earnings per common share 0.61 1.25 -51.2 %
Dividends per common share 0.3375 0.3875 -12.9 %
Return on average common equity 5.05 % 10.66 %
Return on average assets 0.49 % 0.84 %
 

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

First Interstate BancSystem, Inc., parent holding company of First Interstate Bank, reports third quarter 2010 net income available to common stockholders of $7.9 million, or $0.18 per diluted share, as compared to $5.8 million, or $0.14 per diluted share, for second quarter 2010 and $11.5 million, or $0.36 per diluted share, for third quarter 2009. Return on average common equity and return on average assets were 4.52% and 0.48%, respectively, for the third quarter of 2010, compared to 3.42% and 0.37%, respectively, in the second quarter of 2010, and 8.98% and 0.71%, respectively, in the third quarter of 2009.

“I am pleased to report improvement in the Company’s performance during third quarter,” said Lyle R. Knight, President and Chief Executive Officer for First Interstate BancSystem, Inc. “The improvement from last quarter was largely due to decreased provisions for loan losses and increased income from the origination and sale of residential real estate mortgages. Our improved performance reflects the value of the diversity of our business mix. While our provisions for loan losses were lower compared to second quarter 2010, our allowance for loan losses as a percentage of total loans increased to 2.70%, a level we feel is sufficient to provide for estimated losses inherent in our loan portfolio as of September 30, 2010. In the next several quarters, we will continue to closely monitor credit quality, proactively identifying and addressing problem loans. We will also continue our focus on managing net interest margin and reducing the growth of non-interest expenses.”

REVENUE SUMMARY   Three Months Ended  

Sequential Quarter

% Change
 

Year Over Year

% Change
(Unaudited; $ in thousands) September 30,   June 30,   September 30,
  2010     2010     2009  
Interest income $ 78,965 $ 79,867 $ 82,325 -1.1 % -4.1 %
Interest expense   15,221     16,691     21,026   -8.8 % -27.6 %
Net interest income 63,744 63,176 61,299 0.9 % 4.0 %
 
Non-interest income:
Other service charges, commissions and fees 7,821 7,380 8,056 6.0 % -2.9 %
Service charges on deposit accounts 4,497 4,759 5,436 -5.5 % -17.3 %
Income from the origination and sale of loans 7,355 4,186 5,090 75.7 % 44.5 %
Wealth management revenues 3,091 3,199 2,741 -3.4 % 12.8 %
Investment securities gains, net 66 15 74 340.0 % -10.8 %
Other income   2,025     1,498     3,603   35.2 % -43.8 %
Total non-interest income   24,855     21,037     25,000   18.1 % -0.6 %
Total revenues $ 88,599   $ 84,213   $ 86,299   5.2 % 2.7 %
 
Tax equivalent net interest margin ratio   3.89 %   3.96 %   4.00 %
 
 
Nine Months Ended  

Year Over Year

% Change
September 30, September 30,
  2010     2009  
Interest income $ 238,331 $ 245,356 -2.9 %
Interest expense   49,742     65,804     -24.4 %
 
Net interest income 188,589 179,552 5.0 %
 
Non-interest income:
Other service charges, commissions and fees 22,073 21,623 2.1 %
Service charges on deposit accounts 13,854 15,285 -9.4 %
Income from the origination and sale of loans 14,841 25,682 -42.2 %
Wealth management revenues 9,304 7,927 17.4 %
Investment securities gains, net 108 126 -14.3 %
Other income   5,220     7,837     -33.4 %
 
Total non-interest income   65,400     78,480     -16.7 %
 
Total revenues $ 253,989   $ 258,032     -1.6 %
 
Tax equivalent net interest margin ratio   3.95 %   4.05 %

Net Interest Income

Deposit growth combined with corresponding increases in interest earning assets resulted in increases in net interest income during the three and nine months ended September 30, 2010, as compared to the three months ended June 30, 2010, and the three and nine months ended September 30, 2009. In addition, third quarter 2010 net interest income was positively impacted by one additional accrual day, as compared to second quarter 2010.

Despite growth in net interest income, the Company experienced lower interest rate spreads and compression of its net interest margin ratio. Higher levels of loans on nonaccrual status and the resulting charge-off of interest on nonaccrual loans accounted for 5 basis points of the reduction in net interest margin ratio during third quarter 2010, as compared to second quarter 2010. In addition, deposit growth coupled with low demand for loans resulted in a shift in the mix of interest earning assets from higher-yielding loans to lower-yielding investment securities, which further compressed the Company’s net interest margin ratio.

Non-interest Income

Refinancing activity surged during the third quarter of 2010 as mortgage interest rates declined, resulting in an increase in income from the origination and sale of loans during third quarter 2010, as compared to second quarter 2010 and third quarter 2009. Refinancing activity accounted for approximately 69% of the Company’s residential real estate loan originations during third quarter 2010, as compared to 39% during second quarter 2010, and 45% during third quarter 2009. Increases in refinancing activity were partially offset by fewer originations of loans to purchase homes, which decreased 26% during third quarter 2010, as compared to second quarter 2010, and 15% as compared to third quarter 2009, in part due to the expiration of the federal first-time home buyer credit. Income from the origination and sale of loans decreased during the nine months ended September 30, 2010, as compared to the same period in the prior year, due a substantial decline in refinancing activity from early 2009.

Other income increased during third quarter 2010, compared to second quarter 2010, primarily due to a $249 thousand one-time gain on the sale of student loans. Other income decreased during the three and nine months ended September 30, 2010, as compared to the same periods in 2009, primarily due to a $2.1 million one-time gain on the sale of Visa Class B common shares recorded during third quarter 2009.
         
NON-INTEREST EXPENSE Three Months Ended

Sequential Quarter

% Change

Year Over Year

% Change
(Unaudited; $ in thousands) September 30, June 30, September 30,
  2010   2010   2009  
Non-interest expense:
Salaries, wages and employee benefits $ 27,994 $ 27,379 $ 28,035 2.2 % -0.1 %
Occupancy, net 3,939 3,963 3,914 -0.6 % 0.6 %
Furniture and equipment 3,411 3,356 2,993 1.6 % 14.0 %
FDIC insurance premiums 2,337 2,667 2,377 -12.4 % -1.7 %
Outsourced technology services 2,402 2,449 2,334 -1.9 % 2.9 %
Other real estate owned expense, net of income 2,608 2,980 5,160 -12.5 % -49.5 %
Mortgage servicing rights amortization 1,221 1,115 1,277 9.5 % -4.4 %
Mortgage servicing rights impairment (recovery) 1,991 271 296 634.7 % 572.6 %
Core deposit intangibles amortization 437 440 530 -0.7 % -17.5 %
Other expenses   11,670   10,806   10,460   8.0 % 11.6 %
Total non-interest expense $ 58,010 $ 55,426 $ 57,376   4.7 % 1.1 %
 
 
Nine Months Ended

Year Over Year

% Change
September 30, September 30,
  2010   2009
Non-interest expense:
Salaries, wages and employee benefits $ 83,451 $ 85,589 -2.5 %
Occupancy, net 12,044 11,656 3.3 %
Furniture and equipment 10,108 9,016 12.1 %
FDIC insurance premiums 7,460 9,741 -23.4 %
Outsourced technology services 7,100 8,288 -14.3 %
Other real estate owned expense, net of income 6,129 6,079 0.8 %
Mortgage servicing rights amortization 3,469 6,344 -45.3 %
Mortgage servicing rights impairment (recovery) 2,212 (6,969) -131.7 %
Core deposit intangibles amortization 1,316 1,600 -17.8 %
Other expenses   32,892   31,214   5.4 %
 

Total non-interest expense
$ 166,181 $ 162,558   2.2 %

Other real estate expense, net of income - Variations in net OREO expense between periods were primarily due to fluctuations in write-downs of the estimated fair value of OREO properties. Third quarter 2010 net OREO expense included $356 thousand of operating expenses and $2.4 million of fair value write-downs, which were partially offset by net gains of $179 thousand on the sale of OREO properties.

FDIC insurance premiums – Effective July 1, 2010, the Company opted out of participation in the Transaction Account Guarantee, or TAG, component of the Temporary Liquidity Guaranty Program, which provided full FDIC insurance coverage for certain transaction deposit accounts. Management does not expect deposits will be adversely affected by discontinuation of the TAG program. FDIC insurance premiums decreased during the nine months ended September 30, 2010, as compared to the same period in the prior year, due to a special FDIC insurance assessment levied during second quarter 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.

Mortgage servicing rights impairment (recovery) – 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. Mortgage interest rates declined during third quarter 2010, resulting in a significant increase in refinancing activity. Accordingly, during third quarter 2010, the Company recorded an impairment adjustment to the fair value of its capitalized mortgage servicing rights of $2.0 million.
ASSET QUALITY   Three Months Ended
(Unaudited; $ in thousands) September 30,   June 30,   September 30,
  2010     2010     2009  
Allowance for loan losses - beginning of period $ 114,328 $ 106,349 $ 98,395
Charge-offs (12,789 ) (12,107 ) (7,641 )
Recoveries 697 586 494
Provision   18,000     19,500     10,500  
Allowance for loan losses - end of period $ 120,236   $ 114,328   $ 101,748  
 
September 30, June 30, September 30,
  2010     2010     2009  
Period end loans $ 4,452,387 $ 4,562,288 $ 4,606,454
Average loans 4,504,657 4,520,119 4,623,749
Non-performing loans:
Nonaccrual loans 174,249 139,975 120,026
Accruing loans past due 90 days or more 1,129 7,550 4,069
Restructured loans   26,630     10,588     988  
Total non-performing loans 202,008 158,113 125,083
Other real estate owned   35,296     42,338     31,875  
Total non-performing assets $ 237,304   $ 200,451   $ 156,958  
 
Net charge-offs to average loans (annualized) 1.06 % 1.02 % 0.61 %
Provision for loan losses to average loans (annualized) 1.59 % 1.73 % 0.90 %
Allowance for loan losses to period end loans 2.70 % 2.51 % 2.21 %
Allowance for loan losses to total non-performing loans 59.52 % 72.31 % 81.34 %
Non-performing loans to period end loans 4.54 % 3.47 % 2.72 %

Non-performing assets to period end loans and other real estate owned
5.29 % 4.35 % 3.38 %
Non-performing assets to total assets 3.24 % 2.77 % 2.27 %

Difficult economic conditions continued to negatively impact businesses and consumers in the Company’s market areas during third 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, Wyoming market area. These three markets accounted for approximately 55% of the Company’s non-performing assets as of September 30, 2010, versus only 21% of the Company’s total loans as of the same date. The continuing impact of current economic conditions is expected to result in further increases in non-performing assets in future quarters.

As of September 30, 2010, total non-performing loans included $173 million of real estate loans, of which $80 million were construction loans and $75 million were commercial real estate loans. Non-performing construction loans as of September 30, 2010 were comprised of land acquisition and development loans of $48 million, residential construction loans of $17 million and commercial construction loans of $15 million. Non-performing loans increased during third quarter 2010 primarily due to higher levels of nonaccrual loans, with all loan categories except agricultural loans showing increases. The largest increases in nonaccrual loans during third quarter 2010, as compared to second quarter 2010, occurred in commercial real estate and construction loans. In addition, approximately 61% of loans with balances exceeding $1 million that were placed on nonaccrual during third quarter 2010 were located in the Flathead, Gallatin Valley and Jackson market areas. As of September 30, 2010, 84% of the Company’s nonaccrual loans were current.

Restructured loans increased as of September 30, 2010, as compared to June 30, 2010, primarily due to the additions of one commercial and three commercial real estate borrowing relationships. As of September 30, 2010, 87% of the Company’s restructured loans were performing in accordance with their modified terms.

During third quarter 2010, the Company recorded additions to OREO of $3 million, sold OREO with a book value of $8 million and wrote down the fair value of OREO properties by $2 million. Approximately 68% of sold OREO properties were located in the Gallatin Valley, Flathead and Jackson market areas.

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 60% of the third quarter 2010 provision. Management expects quarterly provisions for loan losses to remain at high levels until a leveling-off or decline in non-performing assets occurs.

Following is a summary of the Company’s credit quality trends since the start of 2008.

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

Potential

Problem

Loans
 
Q1 2008 $ 2,363 $ 766 $ 68,415 $ 55,532 $ 58,047 $ 58,921 $ 74,348
Q2 2008 5,321 1,086 72,650 81,571 92,403 95,108 94,371
Q3 2008 5,636 1,192 77,094 58,085 89,800 92,971 87,176
Q4 2008 20,036 9,814 87,316 92,180 90,922 96,947 138,850
Q1 2009 9,600 4,693 92,223 98,980 103,653 122,300 181,263
Q2 2009 11,700 5,528 98,395 88,632 135,484 167,273 166,673
Q3 2009 10,500 7,147 101,748 91,956 125,083 156,958 207,961
Q4 2009 13,500 12,218 103,030 63,878 124,678 163,078 220,976
Q1 2010 11,900 8,581 106,349 62,675 133,042 177,022 254,314
Q2 2010 19,500 11,521 114,328 99,334 158,113 200,451 286,483
Q3 2010 18,000 12,092 120,236 47,966 202,008 237,304 279,128

The second quarter 2010 increase in loans 30-89 days past was comprised principally of ten loans in the Flathead, Gallatin Valley and Jackson market areas. Two of these loans, aggregating 18% of the total second quarter 2010 increase, were placed on non-accrual during third quarter 2010 and the remaining eight loans are now current.
ASSETS(Unaudited; $ in thousands)  

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 

Sequential Quarter

% Change
 

Year Over Year

% Change
Cash and cash equivalents $ 542,355 $ 502,484 $ 512,442 7.9 % 5.8 %
Investment securities 1,829,424 1,635,459 1,297,845 11.9 % 41.0 %
Loans 4,452,387 4,562,288 4,606,454 -2.4 % -3.3 %
Less allowance for loan losses   120,236   114,328   101,748 5.2 % 18.2 %
 
Net loans   4,332,151   4,447,960   4,504,706 -2.6 % -3.8 %
Other assets   625,271   639,473   608,225 -2.2 % 2.8 %
 
Total assets $ 7,329,201 $ 7,225,376 $ 6,923,218 1.4 % 5.9 %

The Company continued to invest excess liquidity into investment securities during third quarter 2010. 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 September 30, 2010, from 2.2 years as of September 30, 2009.
LOANS(Unaudited; $ in thousands)  

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 

Sequential Quarter

% Change
 

Year Over Year

% Change
Real estate loans:
Commercial $ 1,565,525 $ 1,594,780 $ 1,559,161 -1.8 % 0.4 %
Construction:
Land acquisition & development 360,890 371,191 417,030 -2.8 % -13.5 %
Residential 111,545 122,452 151,149 -8.9 % -26.2 %
Commercial   91,713   86,883   109,377 5.6 % -16.1 %
Total construction loans   564,148   580,526   677,556 -2.8 % -16.7 %
 
Residential 544,952 540,255 544,453 0.9 % 0.1 %
Agriculture 189,895 193,764 199,530 -2.0 % -4.8 %
Mortgage loans originated for sale   53,722   48,478   42,343 10.8 % 26.9 %
Total real estate loans   2,918,242   2,957,803   3,023,043 -1.3 % -3.5 %
 
Consumer:
Indirect consumer loans 432,869 428,738 434,154 1.0 % -0.3 %
Other consumer loans 165,725 193,462 192,621 -14.3 % -14.0 %
Credit card loans   59,222   58,574   58,598 1.1 % 1.1 %
Total consumer loans   657,816   680,774   685,373 -3.4 % -4.0 %
 
Commercial 739,151 777,918 746,302 -5.0 % -1.0 %
Agricultural 134,689 142,279 143,549 -5.3 % -6.2 %
Other loans, including overdrafts   2,489   3,514   8,187 -29.2 % -69.6 %
Total loans $ 4,452,387 $ 4,562,288 $ 4,606,454 -2.4 % -3.3 %

Other consumer loans decreased during third quarter 2010 primarily due the sale of student loans totaling $25 million.
LIABILITIES(Unaudited; $ in thousands)  

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 

Sequential Quarter

% Change
 

Year Over Year

% Change
Deposits $ 5,902,181 $ 5,802,322 $ 5,683,130 1.7 % 3.9 %
Securities sold under repurchase agreements 455,861 453,749 391,336 0.5 % 16.5 %
Other borrowed funds 5,674 7,196 5,766 -21.2 % -1.6 %
Long-term debt 37,513 38,023 77,491 -1.3 % -51.6 %

Subordinated debentures held by subsidiary trusts
123,715 123,715 123,715 0.0 % 0.0 %
Other liabilities   59,554   60,183   71,096 -1.0 % -16.2 %
Total liabilities $ 6,584,498 $ 6,485,188 $ 6,352,534 1.5 % 3.7 %

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

(Unaudited; $ in thousands)
 

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 

Sequential

Quarter

% Change
 

Year Over Year

% Change
Non-interest bearing demand $ 1,098,375 $ 1,040,072 $ 1,051,721 5.6 % 4.4 %
Interest bearing:
Demand 1,144,415 1,090,162 1,076,239 5.0 % 6.3 %
Savings 1,599,774 1,487,746 1,372,030 7.5 % 16.6 %
Time, $100 and over 981,941 996,478 926,429 -1.5 % 6.0 %
Time, other   1,077,676   1,187,864   1,256,711 -9.3 % -14.2 %
Total interest bearing   4,803,806   4,762,250   4,631,409 0.9 % 3.7 %
Total deposits $ 5,902,181 $ 5,802,322 $ 5,683,130 1.7 % 3.9 %

Increases in deposits were solely the result of organic growth. During 2010, the Company has experienced a slight 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.

STOCKHOLDERS' EQUITY

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

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 

Sequential Quarter

% Change
 

Year Over Year

% Change
Preferred stockholders' equity $ 50,000 $ 50,000 $ 50,000 0.0 % 0.0 %
Common stockholders' equity 671,755 668,302 503,408 0.5 % 33.4 %

Accumulated other comprehensive income, net
  22,948   21,886   17,276 4.9 % 32.8 %
Total stockholders' equity $ 744,703 $ 740,188 $ 570,684 0.6 % 30.5 %
 
Book value per common share $ 16.23 $ 16.12 $ 16.56 0.7 % -2.0 %
Tangible book value per common share* $ 11.72 $ 11.61 $ 10.36 0.9 % 13.1 %
Net tangible book value per common share * $ 13.14 $ 13.02 $ 12.28 0.9 % 7.0 %
 
*See Non-GAAP Financial Measures included herein for a discussion of tangible and net tangible book value per common share.

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.

On September 24, 2010, the Company declared a quarterly dividend to common stockholders of $0.1125 per share. This dividend was paid on October 15, 2010 to shareholders of record as of October 4, 2010.

CAPITAL RATIOS(Unaudited)  

September 30,

2010
 

June 30,

2010
 

September 30,

2009
 
Tangible common stockholders' equity to tangible assets* 7.03 % 7.06 % 4.84 %
Net tangible common stockholders' equity to tangible assets* 7.88 % 7.93 % 5.74 %
Tier 1 common capital to total risk weighted assets 9.85 % 9.56 % 6.26 %
Leverage ratio

9.38

%**
9.43 % 7.33 %
Tier 1 risk-based capital

13.22

%**
12.87 % 9.57 %
Total risk-based capital

15.18

%**
14.81 % 11.51 %
 

*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.

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

Third Quarter 2010 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss third quarter 2010 results at 11:00 a.m. Eastern Time (9:00 a.m. MDT) on Tuesday, October 26, 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 www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. MDT) on October 26 through the end of the fourth quarter by dialing 1-877-344-7529 (using conference ID 445153). 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 monitoring credit quality, identifying and addressing problem loans, the Company's level of allowance for loan losses, managing net interest margin, reducing growth of non-interest expenses, the effect of discontinuation of the TAG program on deposits, quarterly provisions for loan losses 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.

CONSOLIDATED BALANCE SHEETS

(Unaudited, $ in thousands)
  September 30,   June 30, September 30,
  2010   2010   2009
 
Assets
Cash and due from banks $ 124,933 $ 169,461 $ 216,532
Federal funds sold 774 5,164 41,503
Interest bearing deposits in banks   416,648   327,859   254,407
 
Total cash and cash equivalents   542,355   502,484   512,442
 
Investment securities:
Available-for-sale 1,692,426 1,500,659 1,165,315

Held-to-maturity (estimated fair values of $141,543, $136,782 and $136,291 as of September 30, June 30, 2010 and September 30, 2009, respectively)
136,998 134,800 132,530
Total investment securities   1,829,424   1,635,459   1,297,845
Loans 4,452,387 4,562,288 4,606,454
Less allowance for loan losses   120,236   114,328   101,748
Net loans   4,332,151   4,447,960   4,504,706
Premises and equipment, net 192,021 193,551 197,261
Goodwill 183,673 183,673 183,673
Company-owned life insurance 72,867 72,395 70,748
Other real estate owned 35,296 42,338 31,875
Accrued interest receivable 37,251 38,429 38,742

Mortgage servicing rights, net of accumulated amortization and impairment reserve
14,505 16,232 20,224
Core deposit intangibles, net of accumulated amortization 9,235 9,672 11,082
Other assets   80,423   83,183   54,620
Total assets $ 7,329,201 $ 7,225,376 $ 6,923,218
 
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 1,098,375 $ 1,040,072 $ 1,051,721
Interest bearing   4,803,806   4,762,250   4,631,409
Total deposits   5,902,181   5,802,322   5,683,130
Securities sold under repurchase agreements 455,861 453,749 391,336
Accounts payable and accrued expenses 44,313 39,741 51,951
Accrued interest payable 15,241 20,442 19,145
Other borrowed funds 5,674 7,196 5,766
Long-term debt 37,513 38,023 77,491
Subordinated debentures held by subsidiary trusts   123,715   123,715   123,715
Total liabilities   6,584,498   6,485,188   6,352,534
 
Stockholders' equity:
Preferred stock 50,000 50,000 50,000
Common stock 263,719 263,317 113,313
Retained earnings 408,036 404,985 390,095
Accumulated other comprehensive income, net   22,948   21,886   17,276
Total stockholders' equity   744,703   740,188   570,684
Total liabilities and stockholders' equity $ 7,329,201 $ 7,225,376 $ 6,923,218
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, $ in thousands, except per share data)
  Three Months ended
September 30,   June 30,   September 30,
  2010   2010   2009
Interest income:
Interest and fees on loans $ 67,033 $ 67,501 $ 70,335
Interest and dividends on investment securities:
Taxable 10,540 10,931 10,430
Exempt from federal taxes 1,137 1,173 1,304
Interest on deposits in banks 252 257 200
Interest on federal funds sold   3   5   56
Total interest income   78,965   79,867   82,325
 
Interest expense:
Interest on deposits 12,973 14,496 18,206
Interest on federal funds purchased - - 10
Interest on securities sold under repurchase agreements 209 229 179
Interest on other borrowed funds 1 1 369
Interest on long-term debt 512 509 760
Interest on subordinated debentures held by subsidiary trusts   1,526   1,456   1,502
Total interest expense   15,221   16,691   21,026
Net interest income 63,744 63,176 61,299
Provision for loan losses   18,000   19,500   10,500
Net interest income after provision for loan losses   45,744   43,676   50,799
 
Non-interest income:
Other service charges, commissions and fees 7,821 7,380 8,056
Service charges on deposit accounts 4,497 4,759 5,436
Income from the origination and sale of loans 7,355 4,186 5,090
Wealth management revenues 3,091 3,199 2,741
Investment securities gains, net 66 15 74
Other income   2,025   1,498   3,603
Total non-interest income   24,855   21,037   25,000
 
Non-interest expense:
Salaries, wages and employee benefits 27,994 27,379 28,035
Occupancy, net 3,939 3,963 3,914
Furniture and equipment 3,411 3,356 2,993
FDIC insurance premiums 2,337 2,667 2,377
Outsourced technology services 2,402 2,449 2,334
Other real estate owned expense, net of income 2,608 2,980 5,160
Mortgage servicing rights amortization 1,221 1,115 1,277
Mortgage servicing rights impairment (recovery) 1,991 271 296
Core deposit intangibles amortization 437 440 530
Other expenses   11,670   10,806   10,460
Total non-interest expense   58,010   55,426   57,376
Income before income tax expense 12,589 9,287 18,423
Income tax expense   3,860   2,628   6,105
Net income 8,729 6,659 12,318
Preferred stock dividends   862   853   862
Net income available to common shareholders $ 7,867 $ 5,806 $ 11,456
 
Basic earnings per common share $ 0.18 $ 0.14 $ 0.37
Diluted earnings per common share $ 0.18 $ 0.14 $ 0.36
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, $ in thousands, except per share data)
  Nine Months ended
September 30,   September 30,
  2010   2009  
Interest income:
Interest and fees on loans $ 201,428 $ 210,108
Interest and dividends on investment securities:
Taxable 32,673 30,651
Exempt from federal taxes 3,476 4,085
Interest on deposits in banks 733 292
Interest on federal funds sold   21   220  
Total interest income   238,331   245,356  
 
Interest expense:
Interest on deposits 42,747 56,639
Interest on federal funds purchased - 20
Interest on securities sold under repurchase agreements 632 597
Interest on other borrowed funds 3 1,345
Interest on long-term debt 1,940 2,399
Interest on subordinated debentures held by subsidiary trusts   4,420   4,804  
Total interest expense   49,742   65,804  
Net interest income 188,589 179,552
Provision for loan losses   49,400   31,800  
Net interest income after provision for loan losses   139,189   147,752  
 
Non-interest income:
Other service charges, commissions and fees 22,073 21,623
Service charges on deposit accounts 13,854 15,285
Income from the origination and sale of loans 14,841 25,682
Wealth management revenues 9,304 7,927
Investment securities gains, net 108 126
Other income   5,220   7,837  
Total non-interest income   65,400   78,480  
 
Non-interest expense:
Salaries, wages and employee benefits 83,451 85,589
Occupancy, net 12,044 11,656
Furniture and equipment 10,108 9,016
FDIC insurance premiums 7,460 9,741
Outsourced technology services 7,100 8,288
Other real estate owned expense, net of income 6,129 6,079
Mortgage servicing rights amortization 3,469 6,344
Mortgage servicing rights impairment (recovery) 2,212 (6,969 )
Core deposit intangibles amortization 1,316 1,600
Other expenses   32,892   31,214  
Total non-interest expense   166,181   162,558  
Income before income tax expense 38,408 63,674
Income tax expense   11,890   21,332  
Net income 26,518 42,342
Preferred stock dividends   2,559   2,559  
Net income available to common shareholders $ 23,959 $ 39,783  
 
Basic earnings per common share $ 0.61 $ 1.27
Diluted earnings per common share $ 0.61 $ 1.25  
AVERAGE BALANCE SHEETS
(Unaudited, $ in thousands)
  For the three months ended
September 30, 2010   June 30, 2010   September 30, 2009

Average Balance
  Interest  

Average Rate

Average Balance
  Interest  

Average Rate

Average Balance
  Interest  

Average Rate
Interest earning assets:            
Loans (1)(2) $ 4,504,657 $ 67,473 5.94 % $ 4,520,119 $ 67,964 6.03 % $ 4,623,749 $ 70,787 6.07 %
Investment securities (2) 1,720,925 12,333 2.84 1,586,080 12,780 3.23 1,171,740 12,487 4.23
Interest bearing deposits in banks 392,149 252 0.25 407,656 257 0.25 311,853 200 0.25
Federal funds sold   2,299     3     0.52     4,408     5     0.45     89,688     56     0.25  
Total interest earnings assets 6,620,030 80,061 4.80 6,518,263 81,006 4.98 6,197,030 83,530 5.35
Non-earning assets   658,680           679,514           696,814        
Total assets $ 7,278,710         $ 7,197,777         $ 6,893,844        
 
Interest bearing liabilities:
Demand deposits 1,127,006 842 0.30 % 1,116,216 870 0.31 % 1,076,513 971 0.36 %
Savings deposits 1,555,510 2,199 0.56 1,465,527 2,327 0.64 1,359,909 2,508 0.73
Time deposits 2,119,083 9,931 1.86 2,209,155 11,299 2.05 2,174,301 14,727 2.69
Repurchase agreements 464,655 209 0.18 465,573 229 0.20 401,998 179 0.18
Borrowings (3) 5,256 1 0.08 5,562 1 0.07 72,863 379 2.06
Long-term debt 37,658 512 5.39 38,170 509 5.35 79,383 760 3.80

Subordinated debentures held by subsidiary trusts
  123,715     1,526     4.89     123,715     1,456     4.72     123,715     1,502     4.82  
 
Total interest bearing liabilities 5,432,883 15,220 1.11 5,423,918 16,691 1.23 5,288,682 21,026 1.58
 
Non-interest bearing deposits 1,046,112 982,053 982,301
Other non-interest bearing liabilities 59,515 60,457 66,877
Stockholders' equity   740,200           731,349           555,984        
 

Total liabilities and stockholders' equity
$ 7,278,710         $ 7,197,777         $ 6,893,844        
 
Net FTE interest income $ 64,841 $ 64,315 $ 62,504
Less FTE adjustments (2)       (1,097 )           (1,139 )           (1,205 )    
 

Net interest income from consolidated statements of income
    $ 63,744           $ 63,176           $ 61,299      
 
Interest rate spread         3.69 %         3.75 %         3.77 %
 
Net FTE interest margin (4)         3.89 %         3.96 %         4.00 %
 

(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 nine months ended September 30,
2010   2009

Average Balance
  Interest  

Average Rate

Average Balance
  Interest  

Average Rate
Interest earning assets:        
Loans (1)(2) $ 4,509,206 $ 202,797 6.01 % $ 4,693,173 $ 211,472 6.02 %
Investment securities 1,600,451 38,155 3.19 1,078,694 37,095 4.60
Interest bearing deposits in banks 384,964 733 0.25 146,430 292 0.27
Federal funds sold   7,933     21     0.35     126,276     220     0.23  
Total interest earnings assets 6,502,554 241,706 4.97 6,044,573 249,079 5.51
Non-earning assets   675,244           683,472        
Total assets $ 7,177,798         $ 6,728,045        
 
Interest bearing liabilities:
Demand deposits 1,118,951 2,551 0.30 % 1,076,374 3,313 0.41 %
Savings deposits 1,481,547 6,842 0.62 1,295,387 7,646 0.79
Time deposits 2,195,029 33,353 2.03 2,098,180 45,680 2.91
Repurchase agreements 461,652 632 0.18 410,608 597 0.19
Borrowings (3) 5,760 3 0.07 74,001 1,365 2.47
Long-term debt 48,895 1,940 5.30 81,037 2,399 3.96

Subordinated debentures held by subsidiary trusts
  123,715     4,420     4.78     123,715     4,804     5.19  
 
Total interest bearing liabilities 5,435,549 49,741 1.22 5,159,302 65,804 1.71
 
Non-interest bearing deposits 996,290 952,238
Other non-interest bearing liabilities 61,138 67,480
Stockholders' equity   684,821           549,025        
 

Total liabilities and stockholders' equity
$ 7,177,798         $ 6,728,045        
 
Net FTE interest income $ 191,965 $ 183,275
Less FTE adjustments (2)       (3,376 )           (3,723 )    
 

Net interest income from consolidated statements of income
    $ 188,589           $ 179,552      
 
Interest rate spread         3.75 %         3.80 %
 
Net FTE interest margin (4)         3.95 %         4.05 %
 

(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) 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 September 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

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

September 30,

2010
 

June 30,

2010
 

September 30,

2009
Total stockholders' equity (GAAP) $ 744,703 $ 740,188 $ 570,684

Less goodwill and other intangible assets (excluding mortgage servicing rights)
192,952 193,391 195,035
Less preferred stock   50,000     50,000     50,000  
Tangible common stockholders' equity (Non-GAAP) $ 501,751 $ 496,797 $ 325,649
 
Add deferred tax liability for deductible goodwill   60,499     60,499     60,499  
Net tangible common stockholders' equity (Non-GAAP) $ 562,250   $ 557,296   $ 386,148  
 
Common shares outstanding 42,798,040 42,803,349 31,436,992
 
Book value per common share $ 16.23 $ 16.12 $ 16.56
Tangible book value per common share $ 11.72 $ 11.61 $ 10.36
Net tangible book value per common share $ 13.14 $ 13.02 $ 12.28
 
Total assets (GAAP) $ 7,329,201 $ 7,225,376 $ 6,923,218

Less goodwill and other intangible assets (excluding mortgage servicing rights)
192,952 193,391 195,035
Tangible assets (Non-GAAP) $ 7,136,249   $ 7,031,985  

 
$ 6,728,183  
 
Tangible common stockholders' equity to tangible assets 7.03 % 7.06 % 4.84 %
Net tangible common stockholders' equity to tangible assets 7.88 % 7.93 % 5.74 %

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