First Interstate BancSystem, Inc. (NASDAQ: FIBK) reports fourth quarter 2010 net income available to common stockholders of $10.0 million, or $0.23 per diluted share, as compared to $7.9 million, or $0.18 per diluted share, for third quarter 2010 and $10.7 million, or $0.34 per diluted share, for fourth quarter 2009. Return on average common equity and return on average assets were 5.68% and 0.58%, respectively, for the fourth quarter of 2010, compared to 4.52% and 0.48%, respectively, in the third quarter of 2010, and 8.07% and 0.65%, respectively, in the fourth quarter of 2009.
RESULTS SUMMARY                      
(Unaudited; $ in thousands, except per share data) Three Months Ended Sequential Year
December 31, September 30, December 31, Quarter Over Year
2010 2010 2009 % Change   % Change
Net income $ 10,838 $ 8,729 $ 11,521 24.2 % -5.9 %
Net income available to common stockholders 9,975 7,867 10,658 26.8 % -6.4 %
Diluted earnings per common share 0.23 0.18 0.34 27.8 % -32.4 %
Dividends per common share 0.1125 0.1125 0.1125 0.0 % 0.0 %
Book value per common share 16.05 16.23 16.73 -1.1 % -4.1 %
Tangible book value per common share* 11.55 11.72 10.53 -1.5 % 9.7 %
Net tangible book value per common share* 12.96 13.14 12.46 -1.4 % 4.0 %
Return on average common equity 5.68 % 4.52 % 8.07 %
Return on average assets 0.58 % 0.48 % 0.65 %
 
Twelve Months Ended Year
December 31, December 31, Over Year
2010 2009 % Change
Net income $ 37,356 $ 53,863 -30.6 %
Net income available to common stockholders 33,934 50,441 -32.7 %
Diluted earnings per common share 0.85 1.59 -46.5 %
Dividends per common share 0.4500 0.5000 -10.0 %
Return on average common equity 5.22 % 9.98 %
Return on average assets 0.52 % 0.79 %
 

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

“Overall, First Interstate BancSystem performed well in 2010 in the midst of a difficult economy,” said Lyle R. Knight, President and Chief Executive Officer for First Interstate BancSystem, Inc. "The current low interest rate environment combined with diminished loan demand challenged us in 2010 and we expect these trends to continue in upcoming quarters. Improvement in our results from last quarter was largely due to strong income from the origination and sale of residential real estate loans and the reversal of previously recorded mortgage servicing rights impairment. The performance of the loan portfolio in the fourth quarter was consistent with our expectations, with previously identified problem assets continuing to migrate through the credit continuum without any surprises in terms of the degree of deterioration. While our provision for loan losses was slightly lower during the fourth quarter 2010, as compared to third quarter 2010, our allowance for loan losses as a percentage of total loans increased to 2.76%, a level we feel is sufficient to provide for estimated losses inherent in our loan portfolio. With this strong reserve and the conservative position we have taken on our impaired loans, we believe credits costs will be manageable in 2011. In addition, we will continue to strategically manage our balance sheet in order to optimize our net interest margin and will work to identify and implement changes to our cost structures to reduce the growth of non-interest expenses.”
REVENUE SUMMARY       Three Months Ended     Sequential     Year
(Unaudited; $ in thousands) December 31,     September 30,     December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Interest income $ 76,215 $ 78,965 $ 82,678 -3.5 % -7.8 %
Interest expense   13,365     15,221     19,094   -12.2 % -30.0 %
Net interest income 62,850 63,744 63,584 -1.4 % -1.2 %
 
Non-interest income:
Other service charges, commissions and fees 7,421 7,821 7,124 -5.1 % 4.2 %
Income from the origination and sale of loans 8,027 7,355 5,246 9.1 % 53.0 %
Service charges on deposit accounts 4,327 4,497 5,038 -3.8 % -14.1 %
Wealth management revenues 3,083 3,091 2,894 -0.3 % 6.5 %
Investment securities gains, net 62 66 11 -6.1 % 463.6 %
Other income   2,591     2,025     1,897   28.0 % 36.6 %
Total non-interest income   25,511     24,855     22,210   2.6 % 14.9 %
Total revenues $ 88,361   $ 88,599   $ 85,794   -0.3 % 3.0 %
 
Tax equivalent net interest margin ratio   3.72 %   3.89 %   4.05 %
 
 
Twelve Months Ended Year
December 31, December 31, Over Year
2010 2009 % Change
Interest income $ 314,543 $ 328,034 -4.1 %
Interest expense   63,107     84,898     -25.7 %
Net interest income 251,436 243,136 3.4 %
 
Non-interest income:
Other service charges, commissions and fees 29,494 28,747 2.6 %
Income from the origination and sale of loans 22,868 30,928 -26.1 %
Service charges on deposit accounts 18,181 20,323 -10.5 %
Wealth management revenues 12,387 10,821 14.5 %
Investment securities gains, net 170 137 24.1 %
Other income   7,811     9,734     -19.8 %
Total non-interest income   90,911     100,690     -9.7 %
Total revenues $ 342,347   $ 343,826     -0.4 %
 
Tax equivalent net interest margin ratio   3.89 %   4.05 %
 

Net Interest Income

During fourth quarter 2010, continued low loan demand negatively impacted net interest income and contributed to a 17 basis point reduction in net interest margin ratio. Average loans decreased $103 million, or 2.3% during fourth quarter 2010, as compared to third quarter 2010, resulting in an approximate 9 basis point reduction in the Company's net interest margin ratio. The remaining compression in net interest margin ratio was attributable to lower yields earned on the Company's investment security and loan portfolios, partially offset by a 16 basis point reduction in funding costs during fourth quarter 2010.

Non-interest Income

Refinancing activity remained elevated during the fourth quarter of 2010 resulting in an increase in income from the origination and sale of loans, as compared to third quarter 2010 and fourth quarter 2009. Refinancing activity accounted for approximately 72% of the Company’s residential real estate loan originations during fourth quarter 2010, as compared to 69% during third quarter 2010, and 53% during fourth quarter 2009. Increases in refinancing activity were partially offset by fewer originations of loans to purchase homes, which decreased 5% during fourth quarter 2010, as compared to third quarter 2010, and 12% as compared to fourth quarter 2009. Income from the origination and sale of loans decreased during the twelve months ended December 31, 2010, as compared to the same period in the prior year, due to a substantial decline in refinancing activity from early 2009.

Other income increased during fourth quarter 2010, compared to third quarter 2010 and fourth quarter 2009, primarily due to increases in earnings of securities held under deferred compensation plans and life insurance proceeds. Other income decreased during the twelve months ended December 31, 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     Year
(Unaudited; $ in thousands) December 31,     September 30,     December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Non-interest expense:
Salaries, wages and employee benefits $ 29,216 $ 27,994 $ 27,980 4.4 % 4.4 %
Occupancy, net 4,207 3,939 4,242 6.8 % -0.8 %
Furniture and equipment 3,326 3,411 3,389 -2.5 % -1.9 %
FDIC insurance premiums 2,584 2,337 2,389 10.6 % 8.2 %
Outsourced technology services 2,377 2,402 2,279 -1.0 % 4.3 %
Other real estate owned expense, net of income 1,541 2,608 318 -40.9 % 384.6 %
Mortgage servicing rights amortization 1,146 1,221 1,224 -6.1 % -6.4 %
Mortgage servicing rights impairment (recovery) (2,999 ) 1,991 (255 ) -250.6 % 1076.1 %
Core deposit intangibles amortization 432 437 531 -1.1 % -18.6 %
Other expenses   12,993     11,670     13,055   11.3 % -0.5 %
Total non-interest expense $ 54,823   $ 58,010   $ 55,152   -5.5 % -0.6 %
 
 
Twelve Months Ended Year
December 31, December 31, Over Year
2010 2009 % Change
Non-interest expense:
Salaries, wages and employee benefits $ 112,667 $ 113,569 -0.8 %
Occupancy, net 16,251 15,898 2.2 %
Furniture and equipment 13,434 12,405 8.3 %
FDIC insurance premiums 10,044 12,130 -17.2 %
Outsourced technology services 9,477 10,567 -10.3 %
Other real estate owned expense, net of income 7,670 6,397 19.9 %
Mortgage servicing rights amortization 4,615 7,568 -39.0 %
Mortgage servicing rights impairment (recovery) (787 ) (7,224 ) -89.1 %
Core deposit intangibles amortization 1,748 2,131 -18.0 %
Other expenses   45,885     44,269     3.7 %
Total non-interest expense $ 221,004   $ 217,710     1.5 %
 

Salaries, wages and employees benefits expenses increased during fourth quarter 2010, as compared to third quarter 2010 and fourth quarter 2009. The increase is primarily due to higher group medical insurance costs.

Variations in net OREO expense between periods were primarily due to fluctuations in write-downs of the estimated fair value of OREO properties. Fourth quarter 2010 net OREO expense included $367 thousand of operating expenses, $1.2 million of fair value write-downs and net losses of $13 thousand on the sale of OREO properties.

FDIC insurance premiums increased during fourth quarter 2010, as compared to third quarter 2010, due to the adjustment of third quarter assessment estimates to actual amounts. FDIC insurance premiums decreased in 2010, as compared to 2009, 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 in 2009.

Fluctuations in the fair value of mortgage servicing rights are primarily due to changes in assumptions regarding estimated prepayments of the underlying mortgage loans, which typically correspond with changes in market interest rates. Mortgage interest rates increased during fourth quarter 2010, resulting in a $3.0 million recovery of previously recorded impairment in the fair value of mortgage servicing rights.

On December 1, 2010, the Company sold mortgage servicing rights with a book value of $5 million. A loss of $1.5 million on the sale was included in other expense during fourth quarter 2010. In conjunction with the sale, the Company entered into an agreement with the purchaser whereby the Company continues to sub-service the loans underlying the sold mortgage servicing rights.
ASSET QUALITY       Three Months Ended
(Unaudited; $ in thousands) December 31,     September 30,     December 31,
2010 2010 2009
Allowance for loan losses - beginning of period $ 120,236 $ 114,328 $ 101,748
Charge-offs (18,045 ) (12,789 ) (12,793 )
Recoveries 789 697 575
Provision   17,500     18,000     13,500  
Allowance for loan losses - end of period $ 120,480   $ 120,236   $ 103,030  
 
December 31, September 30, December 31,
2010 2010 2009
Period end loans $ 4,367,909 $ 4,452,387 $ 4,528,004
Average loans 4,402,141 4,504,657 4,561,237
Non-performing loans:
Nonaccrual loans 195,342 174,249 115,030
Accruing loans past due 90 days or more 1,852 1,129 4,965
Restructured loans   13,490     26,630     4,683  
Total non-performing loans 210,684 202,008 124,678
Other real estate owned   33,632     35,296     38,400  
Total non-performing assets $ 244,316   $ 237,304   $ 163,078  
 
Net charge-offs to average loans (annualized) 1.56 % 1.06 % 1.06 %
Provision for loan losses to average loans (annualized) 1.58 % 1.59 % 1.17 %
Allowance for loan losses to period end loans 2.76 % 2.70 % 2.28 %
Allowance for loan losses to total non-performing loans 57.19 % 59.52 % 82.64 %
Non-performing loans to period end loans 4.82 % 4.54 % 2.75 %

Non-performing assets to period end loans and other real estate owned
5.55 % 5.29 % 3.57 %
Non-performing assets to total assets 3.33 % 3.24 % 2.28 %
 

The Company's loan portfolio continued to be adversely impacted by difficult economic conditions in certain of its market areas. The Flathead, Gallatin Valley and Jackson market areas, which are dependent upon resort and second home communities, accounted for approximately 68% of loans charged-off during fourth quarter 2010 and approximately 54% of the Company's non-performing assets as of December 31, 2010, versus only 21% of the Company's total loans as of the same date.

As of December 31, 2010, total non-performing loans included $170 million of real estate loans, of which $78 million were construction loans and $73 million were commercial real estate loans. Non-performing construction loans as of December 31, 2010 were comprised of land acquisition and development loans of $44 million, residential construction loans of $17 million and commercial construction loans of $17 million.

Nonaccrual loans increased during fourth quarter 2010, as compared to third quarter 2010, primarily due to the commercial and commercial real estate loans of three borrowers. Approximately 45% of the increase was attributable to one borrower in the Jackson market area. As of December 31, 2010, approximately 76% of the Company's nonaccrual loans were current with regard to principal payments.

During fourth quarter 2010, the Company placed the restructured loans of two commercial real estate borrowers on nonaccrual. These loans, which aggregated $7 million, are included in the nonaccrual loans balance in the above table. The remaining decrease in restructured loans at December 31, 2010, as compared to September 30, 2010, was primarily due to payments received on the loans of one commercial and commercial real estate borrower. As of December 31, 2010, all of the Company's restructured loans were performing in accordance with their restructured terms.

During fourth quarter 2010, the Company recorded additions to OREO of $4 million, wrote down the fair value of OREO properties by $1 million and sold OREO with a book value of $5 million.

Provision for loan losses reflects management’s estimation of the effect of current economic conditions on the Company’s loan portfolio. Approximately 50% of the fourth quarter provision for loan losses was attributable to the Flathead, Gallatin Valley and Jackson market areas. Management expects quarterly provisions for loan losses to remain at elevated 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 Allowance Loans Potential
for Net for 30 - 89 Days Non-Performing Non-Performing Problem
Loan Losses Charge-offs Loan Losses   Past Due Loans Assets 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
Q4 2010 17,500 17,256 120,480 57,011 210,684 244,312 238,250
 

Potential problem loans consist of performing loans that have been internally risk classified due to uncertainties regarding the borrowers' ability to continue to comply with the contractual repayment terms of the loans. Potential problem loans decreased during fourth quarter 2010, as compared to third quarter 2010, primarily due to the movement of potential problem loans to the non-performing loan category.
ASSETS                   Sequential     Year
(Unaudited; $ in thousands) December 31, September 30, December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Cash and cash equivalents $ 685,618 $ 542,355 $ 623,482 26.4 % 10.0 %
Investment securities 1,933,403 1,829,424 1,446,280 5.7 % 33.7 %
Loans 4,367,909 4,452,387 4,528,004 -1.9 % -3.5 %
Less allowance for loan losses   120,480   120,236   103,030 0.2 % 16.9 %
Net loans   4,247,429   4,332,151   4,424,974 -2.0 % -4.0 %
Other assets   634,520   625,271   642,917 1.5 % -1.3 %
Total assets $ 7,500,970 $ 7,329,201 $ 7,137,653 2.3 % 5.1 %
 

The Company continued to invest excess liquidity into investment securities during fourth quarter 2010. The duration of the Company’s investment securities portfolio increased to an estimated 2.5 years as of December 31, 2010, from 1.7 years as of September 30, 2010. This increase in duration was primarily driven by higher market interest rates as of December 31, 2010 and the resulting extensions in the estimated lives of our mortgage-backed investment securities.
LOANS                   Sequential     Year
(Unaudited; $ in thousands) December 31, September 30, December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Real estate loans:
Commercial $ 1,565,665 $ 1,565,525 $ 1,556,273 0.0 % 0.6 %
Construction:
Land acquisition & development 329,720 360,890 403,866 -8.6 % -18.4 %
Residential 99,196 111,545 134,970 -11.1 % -26.5 %
Commercial   98,542   91,713   98,056 7.4 % 0.5 %
Total construction loans   527,458   564,148   636,892 -6.5 % -17.2 %
 
Residential 549,604 544,952 539,098 0.9 % 1.9 %
Agriculture 182,794 189,895 195,045 -3.7 % -6.3 %
Mortgage loans originated for sale   46,408   53,722   36,430 -13.6 % 27.4 %
Total real estate loans   2,871,929   2,918,242   2,963,738 -1.6 % -3.1 %
 
Consumer:
Indirect consumer loans 423,552 432,869 423,104 -2.2 % 0.1 %
Other consumer loans 162,137 165,725 195,331 -2.2 % -17.0 %
Credit card loans   60,891   59,222   59,113 2.8 % 3.0 %
Total consumer loans   646,580   657,816   677,548 -1.7 % -4.6 %
 
Commercial 730,471 739,151 750,647 -1.2 % -2.7 %
Agricultural 116,546 134,689 134,470 -13.5 % -13.3 %
Other loans, including overdrafts   2,383   2,489   1,601 -4.3 % 48.8 %
Total loans $ 4,367,909 $ 4,452,387 $ 4,528,004 -1.9 % -3.5 %
 

Total loans declined during fourth quarter 2010, as compared to third quarter 2010, with the most significant decreases occurring in land acquisition and development and residential construction loans. Management attributes these decreases to a general decline in new home construction, particularly in markets that are dependent upon resort and second home communities including the Flathead, Gallatin Valley and Jackson market areas, and the movement of loans out of the loan portfolio through charge-off, pay-off or foreclosure.
LIABILITIES                   Sequential     Year
(Unaudited; $ in thousands) December 31, September 30, December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Deposits $ 5,925,713 $ 5,902,181 $ 5,824,056 0.4 % 1.7 %
Securities sold under repurchase agreements 620,154 455,861 474,141 36.0 % 30.8 %
Other borrowed funds 4,991 5,674 5,423 -12.0 % -8.0 %
Long-term debt 37,502 37,513 73,353 0.0 % -48.9 %

Subordinated debentures held by subsidiary trusts
123,715 123,715 123,715 0.0 % 0.0 %
Other liabilities   52,093   59,554   62,531 -12.5 % -16.7 %
Total liabilities $ 6,764,168 $ 6,584,498 $ 6,563,219 2.7 % 3.1 %
 

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

Long-term debt decreased during the year 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) December 31, September 30, December 31, Quarter Over Year
2010 2010 2009 % Change % Change
Non-interest bearing demand $ 1,063,869 $ 1,098,375 $ 1,026,584 -3.1 % 3.6 %
Interest bearing:
Demand 1,218,078 1,144,415 1,197,254 6.4 % 1.7 %
Savings 1,718,521 1,599,774 1,362,410 7.4 % 26.1 %
Time, $100 and over 908,044 981,941 996,839 -7.5 % -8.9 %
Time, other   1,017,201   1,077,676   1,240,969 -5.6 % -18.0 %
Total interest bearing   4,861,844   4,803,806   4,797,472 1.2 % 1.3 %
Total deposits $ 5,925,713 $ 5,902,181 $ 5,824,056 0.4 % 1.7 %
 

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                   Sequential     Year

(Unaudited, $ in thousands, except per share data)
December 31, September 30, December 31, Quarter Over Year

 
2010 2010 2009 % Change % Change
Preferred stockholders' equity $ 50,000 $ 50,000 $ 50,000 0.0 % 0.0 %
Common stockholders' equity 677,427 671,755 509,359 0.8 % 33.0 %

Accumulated other comprehensive income, net
  9,375   22,948   15,075 -59.1 % -37.8 %
Total stockholders' equity $ 736,802 $ 744,703 $ 574,434 -1.1 % 28.3 %
 
Book value per common share $ 16.05 $ 16.23 $ 16.73 -1.1 % -4.1 %
Tangible book value per common share* $ 11.55 $ 11.72 $ 10.53 -1.5 % 9.7 %

Net tangible book value per common share*
$ 12.96 $ 13.14 $ 12.46 -1.4 % 4.0 %
 
*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.

Decreases in book value per common share, tangible book value per common share and net tangible book value per common share during fourth quarter, as compared to third quarter 2010 and fourth quarter 2009, are due to fluctuations in the mark-to-market adjustment on available-for-sale securities.

On December 7, 2010, the Company declared a quarterly dividend to common stockholders of $0.1125 per share. This dividend was paid on January 17, 2011 to shareholders of record as of January 3, 2011.
CAPITAL RATIOS       December 31,     September 30,     December 31,
(Unaudited) 2010 2010 2009
Tangible common stockholders' equity to tangible assets* 6.76% 7.03% 4.76%
Net tangible common stockholders' equity to tangible assets* 7.59% 7.88% 5.63%
Tier 1 common capital to total risk weighted assets 10.12% 9.85% 6.43%
Leverage ratio 9.27%** 9.38% 7.30%
Tier 1 risk-based capital 13.53%** 13.22% 9.74%
Total risk-based capital 15.50%** 15.18% 11.68%
 

*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 December 31, 2010, as compared to December 31, 2009, reflect the impact of additional capital raised from the Company’s IPO in March 2010.

Fourth Quarter 2010 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss fourth quarter 2010 results at 11:00 a.m. Eastern Time (9:00 a.m. MST) on Friday, February 4, 2011. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-877-317-6789 or by logging on to www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. MST) on February 4, 2011 through the end of the first quarter by dialing 1-877-344-7529 (using conference ID 447070). 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;
  • changes in loan demand;
  • 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 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)
           
 
December 31, September 30, December 31,
2010 2010 2009
 
Assets
Cash and due from banks $ 107,035 $ 124,933 $ 213,029
Federal funds sold 2,114 774 11,474
Interest bearing deposits in banks   576,469   416,648   398,979
Total cash and cash equivalents   685,618   542,355   623,482
 
Investment securities:
Available-for-sale 1,786,335 1,692,426 1,316,429

Held-to-maturity (estimated fair values of $146,508, $141,543 and $130,855 as of December 31, 2010, September 30, 2010 and December 31, 2009, respectively)
  147,068   136,998   129,851
Total investment securities   1,933,403   1,829,424   1,446,280
Loans 4,367,909 4,452,387 4,528,004
Less allowance for loan losses   120,480   120,236   103,030
Net loans   4,247,429   4,332,151   4,424,974
Premises and equipment, net 188,138 192,021 196,307
Goodwill 183,673 183,673 183,673
Company-owned life insurance 73,056 72,867 71,374
Other real estate owned 33,632 35,296 38,400
Accrued interest receivable 33,628 37,251 37,123
Deferred tax asset 18,472 - -

Mortgage servicing rights, net of accumulated amortization and impairment reserve
13,191 14,505 17,325
Core deposit intangibles, net of accumulated amortization 8,803 9,235 10,551
Other assets   81,927   80,423   88,164
Total assets $ 7,500,970 $ 7,329,201 $ 7,137,653
 
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 1,063,869 $ 1,098,375 $ 1,026,584
Interest bearing   4,861,844   4,803,806   4,797,472
Total deposits   5,925,713   5,902,181   5,824,056
Securities sold under repurchase agreements 620,154 455,861 474,141
Accounts payable and accrued expenses 38,915 44,313 44,946
Accrued interest payable 13,178 15,241 17,585
Other borrowed funds 4,991 5,674 5,423
Long-term debt 37,502 37,513 73,353
Subordinated debentures held by subsidiary trusts   123,715   123,715   123,715
Total liabilities   6,764,168   6,584,498   6,563,219
 
Stockholders' equity:
Preferred stock 50,000 50,000 50,000
Common stock 264,174 263,719 112,135
Retained earnings 413,253 408,036 397,224
Accumulated other comprehensive income, net   9,375   22,948   15,075
Total stockholders' equity   736,802   744,703   574,434
Total liabilities and stockholders' equity $ 7,500,970 $ 7,329,201 $ 7,137,653
 
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, $ in thousands, except per share data)
     
Three Months ended
December 31,     September 30,     December 31,
2010 2010 2009
Interest income:
Interest and fees on loans $ 65,044 $ 67,033 $ 69,877
Interest and dividends on investment securities:
Taxable 9,665 10,540 11,327
Exempt from federal taxes 1,145 1,137 1,213
Interest on deposits in banks 360 252 228
Interest on federal funds sold   1     3   33  
Total interest income   76,215     78,965   82,678  
 
Interest expense:
Interest on deposits 11,202 12,973 16,587
Interest on securities sold under repurchase agreements 247 209 179
Interest on other borrowed funds - 1 2
Interest on long-term debt 493 512 850
Interest on subordinated debentures held by subsidiary trusts   1,423     1,526   1,476  
Total interest expense   13,365     15,221   19,094  
Net interest income 62,850 63,744 63,584
Provision for loan losses   17,500     18,000   13,500  
Net interest income after provision for loan losses   45,350     45,744   50,084  
 
Non-interest income:
Other service charges, commissions and fees 7,421 7,821 7,124
Income from the origination and sale of loans 8,027 7,355 5,246
Service charges on deposit accounts 4,327 4,497 5,038
Wealth management revenues 3,083 3,091 2,894
Investment securities gains, net 62 66 11
Other income   2,591     2,025   1,897  
Total non-interest income   25,511     24,855   22,210  
 
Non-interest expense:
Salaries, wages and employee benefits 29,216 27,994 27,980
Occupancy, net 4,207 3,939 4,242
Furniture and equipment 3,326 3,411 3,389
FDIC insurance premiums 2,584 2,337 2,389
Outsourced technology services 2,377 2,402 2,279
Other real estate owned expense, net of income 1,541 2,608 318
Mortgage servicing rights amortization 1,146 1,221 1,224
Mortgage servicing rights impairment (recovery) (2,999 ) 1,991 (255 )
Core deposit intangibles amortization 432 437 531
Other expenses   12,993     11,670   13,055  
Total non-interest expense   54,823     58,010   55,152  
Income before income tax expense 16,038 12,589 17,142
Income tax expense   5,200     3,860   5,621  
Net income 10,838 8,729 11,521
Preferred stock dividends   863     862   863  
Net income available to common shareholders $ 9,975   $ 7,867 $ 10,658  
 
Basic earnings per common share $ 0.23 $ 0.18 $ 0.34
Diluted earnings per common share $ 0.23   $ 0.18 $ 0.34  
 
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, $ in thousands, except per share data)
 
      Twelve Months ended
December 31,     December 31,
2010 2009
Interest income:
Interest and fees on loans $ 266,472 $ 279,985
Interest and dividends on investment securities:
Taxable 42,338 41,978
Exempt from federal taxes 4,621 5,298
Interest on deposits in banks 1,093 520
Interest on federal funds sold   22     253  
Total interest income   314,546     328,034  
 
Interest expense:
Interest on deposits 53,949 73,226
Interest on federal funds purchased - 20
Interest on securities sold under repurchase agreements 879 776
Interest on other borrowed funds 3 1,347
Interest on long-term debt 2,433 3,249
Interest on subordinated debentures held by subsidiary trusts   5,843     6,280  
Total interest expense   63,107     84,898  
Net interest income 251,439 243,136
Provision for loan losses   66,900     45,300  
Net interest income after provision for loan losses   184,539     197,836  
 
Non-interest income:
Other service charges, commissions and fees 29,494 28,747
Income from the origination and sale of loans 22,868 30,928
Service charges on deposit accounts 18,181 20,323
Wealth management revenues 12,387 10,821
Investment securities gains, net 170 137
Other income   7,811     9,734  
Total non-interest income   90,911     100,690  
 
Non-interest expense:
Salaries, wages and employee benefits 112,667 113,569
Occupancy, net 16,251 15,898
Furniture and equipment 13,434 12,405
FDIC insurance premiums 10,044 12,130
Outsourced technology services 9,477 10,567
Other real estate owned expense, net of income 7,670 6,397
Mortgage servicing rights amortization 4,615 7,568
Mortgage servicing rights impairment (recovery) (787 ) (7,224 )
Core deposit intangibles amortization 1,748 2,131
Other expenses   45,885     44,269  
Total non-interest expense   221,004     217,710  
Income before income tax expense 54,446 80,816
Income tax expense   17,090     26,953  
Net income 37,356 53,863
Preferred stock dividends   3,422     3,422  
Net income available to common shareholders $ 33,934   $ 50,441  
 
Basic earnings per common share $ 0.85 $ 1.61
Diluted earnings per common share $ 0.85   $ 1.59  
 
AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)
      For the three months ended
December 31, 2010     September 30, 2010     December 31, 2009
Average         Average Average         Average Average         Average
Balance     Interest     Rate Balance     Interest     Rate Balance     Interest     Rate
 
Interest earning assets:
Loans (1)(2) $ 4,402,141 $ 65,482 5.90 % $ 4,504,657 $ 67,473 5.94 % $ 4,561,237 $ 70,325 6.12 %
Investment securities (2) 1,849,445 11,471 2.46 1,720,925 12,333 2.84 1,374,162 13,241 3.82
Interest bearing deposits in banks 562,277 360 0.25 392,149 252 0.25 357,974 228 0.25
Federal funds sold   1,208       1       0.33     2,299       3       0.52     42,866       33       0.31  
Total interest earnings assets 6,815,071 77,314 4.50 6,620,030 80,061 4.80 6,336,239 83,827 5.25
Non-earning assets   636,062               658,680               698,022            
Total assets $ 7,451,133             $ 7,278,710             $ 7,034,261            
 
Interest bearing liabilities:
Demand deposits 1,183,446 878 0.29 % 1,127,006 842 0.30 % 1,103,095 755 0.27 %
Savings deposits 1,677,125 2,092 0.49 1,555,510 2,199 0.56 1,400,337 2,387 0.68
Time deposits 1,992,179 8,232 1.64 2,119,083 9,931 1.86 2,222,716 13,445 2.40
Repurchase agreements 535,543 247 0.18 464,655 209 0.18 459,029 179 0.15
Borrowings (3) 5,833 - - 5,256 1 0.08 6,060 2 0.13
Long-term debt 37,506 493 5.21 37,658 512 5.39 76,139 850 4.43

Subordinated debentures held by subsidiary trusts
  123,715       1,423       4.56     123,715       1,526       4.89     123,715       1,476       4.73  
 
Total interest bearing liabilities 5,555,347 13,365 0.95 5,432,883 15,220 1.11 5,391,091 19,094 1.41
 
Non-interest bearing deposits 1,095,947 1,046,112 1,004,191
Other non-interest bearing liabilities 53,094 59,515 65,001
Stockholders' equity   746,745               740,200               573,978            
 

Total liabilities and stockholders' equity
$ 7,451,133             $ 7,278,710             $ 7,034,261            
 
Net FTE interest income $ 63,949 $ 64,841 $ 64,733
Less FTE adjustments (2)         (1,099 )               (1,097 )               (1,149 )      
 

Net interest income from consolidated statements of income
      $ 62,850               $ 63,744               $ 63,584        
 
Interest rate spread             3.55 %             3.69 %             3.84 %
 
Net FTE interest margin (4)             3.72 %             3.89 %             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.
 

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)
      For the twelve months ended December 31,
2010     2009
Average         Average Average         Average
Balance     Interest     Rate Balance     Interest     Rate
 
Interest earning assets:
Loans (1)(2) $ 4,482,219 $ 268,279 5.99 % $ 4,660,189 $ 281,799 6.05 %
Investment securities 1,663,211 49,626 2.98 1,152,561 50,335 4.37
Interest bearing deposits in banks 429,657 1,093 0.25 199,316 520 0.26
Federal funds sold   6,238       22       0.35     105,423       253       0.24  
Total interest earnings assets 6,581,325 319,020 4.85 6,117,489 332,907 5.44
Non-earning assets   665,012               687,110            
Total assets $ 7,246,337             $ 6,804,599            
 
Interest bearing liabilities:
Demand deposits 1,135,208 3,430 0.30 % 1,083,054 4,068 0.38 %
Savings deposits 1,530,844 8,934 0.58 1,321,625 10,033 0.76
Time deposits 2,143,899 41,585 1.94 2,129,313 59,125 2.78
Repurchase agreements 480,276 879 0.18 422,713 776 0.18
Borrowings (3) 5,779 3 0.05 57,016 1,367 2.40
Long-term debt 46,024 2,433 5.29 79,812 3,249 4.07

Subordinated debentures held by subsidiary trusts
  123,715       5,843       4.72     123,715       6,280       5.08  
 
Total interest bearing liabilities 5,465,745 63,107 1.15 5,217,248 84,898 1.63
 
Non-interest bearing deposits 1,021,409 965,226
Other non-interest bearing liabilities 58,778 66,862
Stockholders' equity   700,405               555,263            
 

Total liabilities and stockholders' equity
$ 7,246,337             $ 6,804,599            
 
Net FTE interest income $ 255,913 $ 248,009
Less FTE adjustments (2)         (4,474 )               (4,873 )      
 

Net interest income from consolidated statements of income
      $ 251,439               $ 243,136        
 
Interest rate spread             3.70 %             3.81 %
 
Net FTE interest margin (4)             3.89 %             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 December 31, 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       December 31,     September 30,     December 31,
(Unaudited; $ in thousands except share and per share data) 2010 2010 2009
Total stockholders' equity (GAAP) $ 736,802 $ 744,703 $ 574,434

Less goodwill and other intangible assets (excluding mortgage servicing rights)
192,518 192,952 194,273
Less preferred stock   50,000     50,000     50,000  
Tangible common stockholders' equity (Non-GAAP) $ 494,284 $ 501,751 $ 330,161
Add deferred tax liability for deductible goodwill   60,499     60,499     60,499  
Net tangible common stockholders' equity (Non-GAAP) $ 554,783   $ 562,250   $ 390,660  
 
Common shares outstanding 42,800,694 42,798,040 31,349,588
 
Book value per common share $ 16.05 $ 16.23 $ 16.73
Tangible book value per common share $ 11.55 $ 11.72 $ 10.53
Net tangible book value per common share $ 12.96 $ 13.14 $ 12.46
 
Total assets (GAAP) $ 7,500,970 $ 7,329,201 $ 7,137,653

Less goodwill and other intangible assets (excluding mortgage servicing rights)
  192,518     192,952     194,273  
Tangible assets (Non-GAAP) $ 7,308,452   $ 7,136,249  

 
$ 6,943,380  
 
Tangible common stockholders' equity to tangible assets 6.76 % 7.03 % 4.76 %
Net tangible common stockholders' equity to tangible assets 7.59 % 7.88 % 5.63 %

Copyright Business Wire 2010