First Interstate BancSystem, Inc. (NASDAQ: FIBK) reports fourth quarter 2014 net income of $22.8 million, or $0.49 per share, a 19% increase over third quarter 2014 net income of $19.2 million, or $0.42 per share. Included in fourth quarter net income were non-core expenses related to the acquisition of Mountain West Financial Corp of $2.4 million. Exclusive of non-core items, the Company's fourth quarter 2014 core net income was $24.3 million, or $0.53 per share, as compared to core net income of $22.3 million, or $0.49 per share, for third quarter 2014.

For the year ended December 31, 2014, the Company reported net income of $84.4 million, or $1.87 per share, compared to $86.1 million, or $1.96 per share in 2013. Exclusive of non-core items, which included acquisition costs and litigation accruals, the Company's 2014 core net income was $89.3 million, or $1.98 per share, as compared to core net income of $86.1 million, or $1.96 per share, in 2013.

FOURTH QUARTER HIGHLIGHTS
  • Successful integration of Mountain West Bank operations into First Interstate Bank
  • Continued improvement in asset quality with non-performing assets decreasing $13.4 million to 0.91% of total assets as of December 31, 2014.
  • Net loan charge-offs of $149 thousand, or 0.01% of average loans, annualized
  • 12.7% loan growth year-over-year, of which 4.4% was organic
  • 14.2% deposit growth year-over-year, of which 5.8% was organic

"We delivered another solid quarter of earnings growth driven by positive trends in revenues, improved efficiencies, and improving credit quality," said Ed Garding, President and Chief Executive Officer of First Interstate BancSystem, Inc. "These positive trends have helped us to offset the pressure we are seeing on our net interest margin due to the continued low interest rate environment," Mr. Garding continued. "We are pleased with the smooth integration of Mountain West's banking operations, and we are seeing the positive impact from this acquisition that we anticipated," said Mr. Garding.

"Our improving earnings power has enabled us to increase our quarterly dividend another 25% to $0.20 per common share. We are pleased to be able to generate this strong return for our shareholders and we look forward to delivering another positive year in 2015," said Mr. Garding.

DIVIDEND DECLARATION

On January 22, 2015, the Company's board of directors declared a dividend of $0.20 per common share payable on February 13, 2015 to owners of record as of February 2, 2015. This dividend equates to a 2.9% annual yield based on the $27.85 average closing price of the Company's common stock during fourth quarter 2014, and reflects a 25% increase from dividends paid during third quarter 2014 of $0.16 per common share.

ANNUAL MEETING DATE SET

On January 22, 2015, the Company's Board of Directors voted that the Annual Meeting of Shareholders be held on May 20, 2015, at the First Interstate Bank Operations Center, 1800 Sixth Avenue North, Billings, Montana at 4:00 p.m. Mountain Daylight Time. The record date for determination of shareholders entitled to notice of, and to vote at, the Annual Meeting is March 16, 2015.

RESULTS OF OPERATIONS

Net Interest Income. Deposit growth combined with corresponding increases in interest earning assets resulted in an increase in net interest income on a fully taxable equivalent basis. Net interest income increased $456 thousand to $66.6 million during fourth quarter 2014, as compared to $66.1 million during third quarter 2014, and increased $11.3 million to $252.8 million in 2014, as compared to $241.5 million in 2013. Interest accretion related to the fair valuation of acquired loans contributed $1.1 million of interest income during fourth quarter 2014, as compared to $1.3 million during third quarter 2014.

Despite increases in net interest income, the Company's net interest margin ratio decreased 17 basis points to 3.38% during fourth quarter 2014, as compared to 3.55% during the third quarter 2014. Exclusive of the accelerated interest accretion related to early payoffs of acquired loans and the impact of recoveries of charged-off interest, the Company's net interest margin ratio declined 14 basis points to 3.32% during fourth quarter 2014, as compared to 3.46% during third quarter 2014. During fourth quarter 2014, growth in average deposits outpaced growth in average loans. Excess liquidity was invested in lower yielding interest bearing deposits in banks and investment securities, which caused the Company's net interest margin ratio to decline by approximately 10 basis points compared to third quarter 2014. The remaining 4 basis point compression in net interest margin ratio was primarily due to lower yields on average outstanding loans and a change in loan mix.

During 2014, the Company's net interest margin ratio decreased to 3.49%, from 3.54% in 2013. Declines in yields earned on the Company's loan and investment portfolios were partially offset by increases in average outstanding loans, reductions in funding costs and lower average outstanding time deposits. Exclusive of the accelerated interest accretion related to early payoffs of acquired loans and the impact of recoveries of charged-off interest, the Company's net interest margin ratio was 3.43% during 2014 and 3.52% during 2013.

Non-Interest Income. Non-interest income increased $2.0 million to $31.4 million during fourth quarter 2014, as compared to $29.4 million during third quarter 2014. During fourth quarter 2014, the Company recognized gains aggregating $1.2 million on the sale of two bank buildings, received an insurance death benefit of $823 thousand and recorded a volume bonus of $616 thousand from its card payment network. Also contributing to the increase in non-interest income during fourth quarter 2014, as compared to third quarter 2014, were increases of $1.2 million in debit card interchange fees resulting from higher transaction volumes. Partially offsetting these increases was a $1.8 million seasonal decline in income from the origination and sale of mortgage loans.

Non-interest income decreased slightly to $111.4 million in 2014, as compared to $111.7 million in 2013. Decreases in income for the origination and sale of loans in 2014, as compared to 2013, were largely offset by increases in debit and credit card interchange fees, life insurance income, gains on the sale of two bank buildings and increases in wealth management revenues.

Income from the origination and sale of loans decreased $1.8 million to $5.6 million during fourth quarter 2014, as compared to $7.3 million during third quarter 2014, due to the combined impact of lower home purchase loan production and increased retention of select mortgage loan production in the Company's residential real estate loan portfolio. Overall mortgage loan production decreased 11% during fourth quarter 2014, as compared to third quarter 2014. Loans originated for home purchases accounted for approximately 71% of the Company's mortgage loan production during fourth quarter 2014, as compared to 81% during third quarter 2014. Income from the origination and sale of loans decreased 30% to $23.9 million for the twelve months ended December 31, 2014, as compared to $34.3 million in 2013, with production volume decreasing 18% year-over-year.

Non-Interest Expense. Non-interest expense decreased $3.3 million to $61.7 million during fourth quarter 2014, as compared to $65.0 million during third quarter 2014. Third and fourth quarter 2014 non-interest expense includes $5.0 million and $2.4 million, respectively, of acquisition and pending litigation expenses which the Company considers non-core. Exclusive of these non-core expenses, non-interest expense decreased $621 thousand to $59.3 million during fourth quarter 2014, compared to $59.9 million during third quarter 2014. During fourth quarter 2014, increases in advertising, business meals, entertainment and furniture and equipment expenses were more than offset by lower incentive bonus accruals and decreases in group health insurance costs.

Non-interest expense increased $14.8 million to $236.9 million in 2014, as compared to $222.1 million in 2013. Exclusive of non-core expenses, non-interest expense increased $6.8 million, or 3%, to $228.9 million in 2014, compared to $222.1 million in 2013. Year-over-year increases in non-interest expense are primarily attributable to the additional operating costs of Mountain West Financial Corp, which was acquired on July 31, 2014, and costs associated with software upgrades.

Salaries and wages expense decreased $2.2 million to $23.7 million during fourth quarter 2014, as compared to $25.9 million during third quarter 2014, primarily due to lower incentive bonus accruals and decreases in commissioned pay. Salaries and wages expense increased $2.4 million to $96.5 million in 2014, as compared to $94.2 million in 2013 due to the personnel costs associated with the acquisition of Mountain West Financial Corp and inflationary wage increases. These increases were partially offset by lower incentive bonus accruals.

Employee benefits expense decreased $1.0 million to $6.8 million during fourth quarter 2014, as compared to $7.8 million during third quarter 2014, primarily due to the reversal of previously accrued health insurance expense reflective of favorable claims experienced during 2014. Employee benefits expense for the year ended December 31, 2014 decreased $208 thousand, or less than 1%, to $30.1 million, as compared to $30.3 million in 2013.

Furniture and equipment expense increased $782 thousand to $4.1 million during fourth quarter 2014, compared to $3.3 million during third quarter 2014, due to software costs associated with the implementation of new software systems including software to assist in accounting for acquired credit impaired loans, process mortgage loans and automate certain reconciliation functions. Furniture and equipment expense increased $1.3 million to $13.8 million in 2014, as compared to $12.6 million in 2013 due to the addition of facilities in conjunction with the acquisition of Mountain West Financial Corp and costs associated with software upgrades.

Other expenses increased $1.3 million to $16.6 million during fourth quarter 2014, as compared to $15.3 million during third quarter 2014, primarily due to increases in advertising, business meals and entertainment expenses that typically occur during the fourth quarter of each year. Other expenses increased $3.5 million to $59.2 million in 2014, as compared to $55.7 million in 2013 primarily due to additional costs associated with the acquisition of Mountain West Financial Corp.

BALANCE SHEET

Total loans increased $43 million, or less than 1%, to $4.9 billion as of December 31, 2014, as compared to September 30, 2014. Increases in residential real estate and consumer loans were partially offset by seasonal declines in agricultural loans.

Residential real estate loans grew $43 million to $1.0 billion as of December 31, 2014, from $957 million as of September 30, 2014, due to retention of 1-4 family residential real estate loans that are primarily five to fifteen year adjustable rate and conventional mortgages.

Consumer loans increased $17 million to $762 million as of December 31, 2014, from $745 million as of September 30, 2014, primarily due to increases in indirect consumer loans. Indirect consumer loans grew organically $15 million to $553 million as of December 31, 2014, from $538 million as of September 30, 2014, due to continued expansion of the Company's indirect lending program within existing markets.

Agricultural loans decreased $12 million to $125 million as of December 31, 2014, from $137 million as of September 30, 2014, due to seasonal reductions in operating lines that typically occur during the fourth quarter of each year.

Commercial real estate loans decreased $47 million to $1.6 billion as of December 31, 2014, from $1.7 billion as of September 30, 2014, and construction loans increased $51 million to $418 million as of December 31, 2014, from $367 million as of September 30, 2014. These fluctuations were due to the fourth quarter 2014 reclassification of certain commercial construction and land acquisition and development loans acquired from Mountain West Financial Corp from the commercial real estate category into the construction loan category consistent with the Company's current loan classification structure.

Premises and equipment decreased $12 million to $195 million as of December 31, 2014, from $207 million as of September 30, 2014, primarily due to the sale of vacated Mountain West Financial Corp property and equipment at its carrying value of $8 million. In addition, during fourth quarter 2014, the Company sold two bank buildings with carrying values totaling $2 million at a net gain of $1.2 million.

Other real estate owned, or OREO, decreased $5 million to $13 million as of December 31, 2014, from $18 million as of September 30, 2014. During fourth quarter 2014, the Company sold OREO properties with carrying values of $5 million at a net gain of $532 thousand. As of December 31, 2014, the composition of OREO properties was 43% land acquisition and development, 34% commercial, 20% residential, 2% agricultural and 1% construction.

Total deposits increased $47 million, or less than 1.0%, to $7.0 billion as of December 31, 2014, as compared to September 30, 2014. During fourth quarter 2014, the Company experienced a shift in the mix of deposits away from interest bearing demand deposits to non-interest bearing demand deposits. As of December 31, 2014, the mix of total deposits was 26% non-interest bearing demand, 30% interest bearing demand, 26% savings and 18% time. This compares to 24% non-interest bearing demand, 32% interest bearing demand, 26% savings and 18% time as of September 30, 2014.

Subordinated debentures held by subsidiary trusts decreased $20 million, to $82 million as of December 31, 2014, from $102 million as of September 30, 2014. During December 2014, the Company repaid $20 million of subordinated debentures acquired as part of the Mountain West Financial Corp acquisition.

ASSET QUALITY

Asset quality continued to improve during fourth quarter 2014 with non-performing assets ending the year at $78 million, or 0.91% of total assets. This compares to $92 million, or 1.08% of total assets, as of September 30, 2014. Additionally, criticized loans remained stable at $353 million as of December 31, 2014, and net loan charge-offs declined to $149 thousand during fourth quarter 2014, as compared to $4 million during third quarter 2014.

The Company recorded a $118 thousand provision for loan losses during fourth quarter 2014, compared to $261 thousand during third quarter 2014. The allowance for loan losses as a percentage of period end loans remained stable at 1.52% as of December 31, 2014, compared to 1.53% as of September 30, 2014. During the year ended December 31, 2014, the Company reversed provisions for loan losses of $6.6 million, as compared to a provision reversals of $6.1 million in 2013. Provision reversals are reflective of continued improvement and stabilization of credit quality.

STOCK REPURCHASE PROGRAM

On January 23, 2015, the Company's board of directors approved the repurchase of up to 1,000,000 shares of the Company's outstanding Class A common stock from time to time through open market or privately negotiated transactions, as market and business conditions permit. Share repurchases will be conducted in a manner intended to comply with the safe harbor provisions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. Repurchased shares will be returned to authorized but unissued shares of Class A common stock in accordance with Montana law.

Fourth Quarter 2014 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss fourth quarter 2014 results at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time) on Wednesday, January 28, 2015. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-877-507-0356 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. Mountain Time) on January 28, 2015 through 9:00 a.m. Eastern Time (7:00 a.m. Mountain Time) on February 28, 2015, by dialing 1-877-344-7529 (using conference ID 10057253). 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 79 banking offices, including detached drive-up facilities, in 41 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 Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. Any statements about our plans, objectives, expectations, strategies, beliefs, or future performance or events constitute forward-looking statements. Such statements are identified as those that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "may" or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other important factors that could cause actual results to differ materially from any results, performance or events expressed or implied by such forward-looking statements. 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 report: continuing or worsening business and economic conditions, adverse economic conditions affecting Montana, Wyoming and western South Dakota, credit losses, lending risk, adequacy of the allowance for loan losses, impairment of goodwill, changes in interest rates, access to low-cost funding sources, dependence on the Company's management team, ability to attract and retain qualified employees, governmental regulation and changes in regulatory, tax and accounting rules and interpretations, failure of technology, inability to meet liquidity requirements, failure to manage growth, competition, ineffective internal operational controls, environmental remediation and other costs, reliance on external vendors, litigation pertaining to fiduciary responsibilities, failure to effectively implement technology-driven products and services, soundness of other financial institutions, inability of our bank subsidiary to pay dividends, implementation of new lines of business or new product or service offerings, change in dividend policy, volatility of Class A common stock, decline in market price of Class A common stock, dilution as a result of future equity issuances, uninsured nature of any investment in Class A common stock, voting control of Class B stockholders, anti-takeover provisions, controlled company status, and subordination of common stock to Company debt.

These factors are not necessarily all of the factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.

All forward-looking statements attributable to us or persons acting on our 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 we do 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 we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary

(Unaudited, $ in thousands, except per share data)
 
      2014     2013

INCOME STATEMENT SUMMARIES
4th Qtr     3rd Qtr     2nd Qtr     1st Qtr 4th Qtr
Net interest income $ 65,516 $ 65,082 $ 59,727 $ 58,136 $ 59,974
Net interest income on a fully-taxable equivalent ("FTE") basis 66,585

 
66,129 60,806 59,243 61,109
Provision for loan losses 118 261 (2,001 ) (5,000 ) (4,000 )
Non-interest income:
Other service charges, commissions and fees 11,429 10,458 9,699 9,156 9,458
Income from the origination and sale of loans 5,554 7,346 6,380 4,660 5,602
Wealth management revenues 4,775 5,157 4,609 4,455 4,350
Service charges on deposit accounts 4,432 4,331 3,929 3,875 4,086
Investment securities gains (losses), net (19 ) (8 ) 17 71 (25 )
Other income 5,190   2,079   1,937   1,889   2,203  
Total non-interest income 31,361 29,363 26,571 24,106 25,674
Non-interest expense:
Salaries and wages 23,717 25,914 24,440 22,442 24,335
Employee benefits 6,812 7,841 7,164 8,313 7,289
Occupancy, net 4,770 4,534 4,253 4,239 4,206
Furniture and equipment 4,120 3,338 3,157 3,201 3,192
Outsourced technology services 2,468 2,346 2,309 2,300 2,382
Other real estate owned (income) expense, net (61 ) (58 ) (134 ) (19 ) 1,292
Core deposit intangible amortization 855 688 354 354 354
Non-core expenses 2,368 5,052 597
Other expenses 16,604   15,303   13,780   13,508   14,735  
Total non-interest expense 61,653   64,958   55,920   54,338   57,785  
Income before taxes 35,106 29,226 32,379 32,904 31,863
Income taxes 12,330   10,071   11,302   11,511   11,088  
Net income $ 22,776   $ 19,155   $ 21,077   $ 21,393   $ 20,775  
Core net income** $ 24,260   $ 22,302   $ 21,438   $ 21,349   $ 20,791  
 

PER COMMON SHARE DATA
Net income - basic $ 0.50 $ 0.43 $ 0.48 $ 0.49 $ 0.47
Net income - diluted 0.49 0.42 0.47 0.48 0.47
Core net income - diluted 0.53 0.49 0.48 0.48 0.47
Cash dividend paid 0.16 0.16 0.16 0.16 0.14
Book value at period end 19.85 19.40 18.95 18.60 18.15
Tangible book value at period end** 15.07 14.61 14.71 14.37 13.89
 

OUTSTANDING COMMON SHARES
At period-end 45,788,415 45,672,922 44,255,012 44,390,095 44,155,063
Weighted-average shares - basic 45,485,548 44,911,858 44,044,260 43,997,815 43,888,261
Weighted-average shares - diluted 46,037,344 45,460,288 44,575,963 44,620,776 44,541,497
 

SELECTED ANNUALIZED RATIOS
Return on average assets 1.05 % 0.93 % 1.12 % 1.16 % 1.10 %
Core return on average assets** 1.12 1.09 1.14 1.16 1.10
Return on average common equity 10.09 8.55 10.18 10.74 10.32
Core return on average common equity** 10.75 9.96 10.36 10.72 10.32
Return on average tangible common equity** 13.34 11.17 13.16 14.00 13.49
Net FTE interest income to average earning assets 3.38 3.55 3.54 3.52 3.52
 
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary

(Unaudited, $ in thousands, except per share data)
 
      2014     2013

INCOME STATEMENT SUMMARIES
Net interest income $ 248,461 $ 236,967
Net interest income on a fully-taxable equivalent ("FTE") basis 252,763 241,460
Provision for loan losses (6,622 ) (6,125 )
Non-interest income:
Other service charges, commissions and fees 40,742 35,977
Income from the origination and sale of loans 23,940 34,254
Wealth management revenues 18,996 17,085
Service charges on deposit accounts 16,567 16,837
Investment securities gains (losses), net 61 1
Other income 11,095   7,525  
Total non-interest income 111,401 111,679
Non-interest expense:
Salaries and wages 96,513 94,155
Employee benefits 30,130 30,338
Occupancy, net 17,796 16,587
Furniture and equipment 13,816 12,554
Outsourced technology services 9,423 9,029
Other real estate owned (income) expense, net (272 ) 2,291
Core deposit intangible amortization 2,251 1,418
Non-core expenses 8,017
Other expenses 59,195   55,697  
Total non-interest expense 236,869   222,069  
Income before taxes 129,615 132,702
Income taxes 45,214   46,566  
Net income $ 84,401   $

86,136
 
Core net income** $ 89,349   $

86,135
 
 

PER COMMON SHARE DATA
Net income - basic $ 1.89 $ 1.98
Net income - diluted 1.87 1.96
Core net income - diluted 1.98 1.96
Cash dividend paid 0.64 0.41
 

OUTSTANDING COMMON SHARES
Weighted-average shares - basic 44,615,060 43,566,681
Weighted-average shares - diluted 45,210,561 44,044,602
 

SELECTED ANNUALIZED RATIOS
Return on average assets 1.06 % 1.16 %
Core return on average assets** 1.12 1.16
Return on average common equity 9.86 11.05
Core return on average common equity** 10.44 11.05
Return on average tangible common equity** 12.88 14.59
Net FTE interest income to average earning assets 3.49 3.54
 
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary - continued

(Unaudited, $ in thousands)
 
      2014     2013

BALANCE SHEET SUMMARIES
Dec 31   Sept 30     Jun 30     Mar 31 Dec 31
Assets:
Cash and cash equivalents $ 798,670 $ 819,963 $ 503,648 $ 610,531 $ 534,827
Investment securities 2,287,110 2,169,774 2,093,985 2,095,088 2,151,543
Loans held for investment:
Commercial real estate 1,639,422 1,686,509 1,464,947 1,452,967 1,449,174
Construction real estate 418,269 367,420 361,009 354,349 351,635
Residential real estate 999,903 957,282 894,502 868,836 867,912
Agricultural real estate 167,659 158,940 162,428 160,570 173,534
Consumer 762,471 745,482 707,035 670,406 671,587
Commercial 740,073 736,908 727,482 707,237 676,544
Agricultural 124,859 136,587 130,280 108,376 111,872
Other 3,959 2,316 2,016 3,626 1,734
Mortgage loans held for sale 40,828   62,938   56,663   38,471   40,861  
Total loans 4,897,443 4,854,382 4,506,362 4,364,838 4,344,853
Less allowance for loan losses 74,200   74,231   78,266   81,371   85,339  
Net loans 4,823,243   4,780,151   4,428,096   4,283,467   4,259,514  
Premises and equipment, net 195,212 207,181 180,341 179,942 179,690
Goodwill and intangible assets (excluding mortgage servicing rights) 218,870 218,799 187,502 187,858 188,214
Company owned life insurance 153,821 152,761 138,899 138,027 122,175
Other real estate owned, net 13,554 18,496 16,425 16,594 15,504
Mortgage servicing rights, net 14,038 13,894 13,443 13,474 13,546
Other assets 105,418   100,333   89,040   92,844   99,638  
Total assets $ 8,609,936   $ 8,481,352   $ 7,651,379   $ 7,617,825   $ 7,564,651  
 
Liabilities and stockholders' equity:
Deposits:
Non-interest bearing $ 1,791,364 $ 1,637,151 $ 1,533,484 $ 1,458,460 $ 1,491,683
Interest bearing 5,214,848   5,322,348   4,645,558   4,676,677   4,642,067  
Total deposits 7,006,212   6,959,499   6,179,042   6,135,137   6,133,750  
Securities sold under repurchase agreements 502,250 432,478 462,985 488,898 457,437
Accounts payable, accrued expenses and other liabilities 72,006 63,713 51,456 48,770 52,489
Long-term debt 38,067 36,882 36,893 36,905 36,917
Subordinated debentures held by subsidiary trusts 82,477   102,916   82,477   82,477   82,477  
Total liabilities 7,701,012   7,595,488   6,812,853   6,792,187   6,763,070  
Stockholders' equity:
Common stock 323,596 321,132 283,697 286,553 285,535
Retained earnings 587,862 572,362 560,469 546,444 532,087
Accumulated other comprehensive income (loss) (2,534 ) (7,630 ) (5,640 ) (7,359 ) (16,041 )
Total stockholders' equity 908,924   885,864   838,526   825,638   801,581  
Total liabilities and stockholders' equity $ 8,609,936   $ 8,481,352   $ 7,651,379   $ 7,617,825   $ 7,564,651  
 

CONSOLIDATED CAPITAL RATIOS
Total risk-based capital 16.15 % * 16.34 % 16.69 % 16.83 % 16.75 %
Tier 1 risk-based capital 14.52 * 14.71 15.02 15.16 14.93
Tier 1 common capital to total risk-weighted assets 13.08 * 12.89 13.45 13.55 13.31
Leverage Ratio 9.61 * 10.42 10.35 10.27 10.08
Tangible common stockholders' equity to tangible assets** 8.22 8.07 8.72 8.58 8.32
 
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary - continued

(Unaudited, $ in thousands)
 
      2014     2013

ASSET QUALITY
Dec 31     Sep 30     Jun 30     Mar 31 Dec 31
Allowance for loan losses $ 74,200 $ 74,231 $ 78,266 $ 81,371 $ 85,339
As a percentage of period-end loans 1.52 % 1.53 % 1.74 % 1.86 % 1.96 %
 
Net charge-offs (recoveries) during quarter $ 149 $ 4,296 $ 1,104 $ (1,032 ) $ 3,651
Annualized as a percentage of average loans 0.01 % 0.36 % 0.10 % (0.10 )% 0.34 %
 
Non-performing assets:
Non-accrual loans $ 62,182 $ 71,915 $ 79,166 $ 88,114 $ 94,439
Accruing loans past due 90 days or more 2,576   1,348   1,494   1,664   2,232  
Total non-performing loans 64,758 73,263 80,660 89,778 96,671
Other real estate owned 13,554   18,496   16,425   16,594   15,504  
Total non-performing assets 78,312 91,759 97,085 106,372 112,175
As a percentage of:
Total loans and OREO 1.59 % 1.88 % 2.15 % 2.43 % 2.57 %
Total assets 0.91 % 1.08 % 1.27 % 1.40 % 1.48 %
 
                  Accruing            
Provision Net Allowance Loans 30-89 Non- Non-
for Loan Charge-offs for Loan Days Past Accruing Performing Performing
ASSET QUALITY TRENDS Losses (Recoveries) Losses Due TDRs Loans Assets
Q4 2011 $ 13,751 $ 21,473 $ 112,581 $ 75,603 $ 37,376 $ 204,094 $ 241,546
Q1 2012 11,250 7,929 115,902 58,531 36,838 185,927 230,683
Q2 2012 12,000 25,108 102,794 55,074 35,959 136,374 190,191
Q3 2012 9,500 13,288 99,006 48,277 35,428 127,270 167,241
Q4 2012 8,000 6,495 100,511 34,602 31,932 110,076 142,647
Q1 2013 500 3,107 97,904 41,924 35,787 100,535 133,005
Q2 2013 375 (249 ) 98,528 39,408 23,406 105,471 128,253
Q3 2013 (3,000 ) 2,538 92,990 39,414 21,939 96,203 114,740
Q4 2013 (4,000 ) 3,651 85,339 26,944 21,780 96,671 112,175
Q1 2014 (5,000 ) (1,032 ) 81,371 41,034 19,687 89,778 106,372
Q2 2014 (2,001 ) 1,104 78,266 24,250 23,531 80,660 97,085
Q3 2014 261 4,296 74,231 38,400 20,956 73,263 91,759
Q4 2014 118 149 74,200 28,848 20,952 64,758 78,312
 

CRITICIZED LOANS
      Special Mention     Substandard     Doubtful     Total
Q4 2011 $ 240,903 $ 269,794 $ 120,165 $ 630,862
Q1 2012 242,071 276,165 93,596 611,832
Q2 2012 220,509 243,916 81,473 545,898
Q3 2012 223,306 229,826 66,179 519,311
Q4 2012 209,933 215,188 42,459 467,580
Q1 2013 197,645 197,095 43,825 438,565
Q2 2013 192,390 161,786 52,266 406,442
Q3 2013 180,850 168,278 42,415 391,543
Q4 2013 159,081 154,100 45,308 358,489
Q1 2014 174,834 161,103 31,672 367,609
Q2 2014 160,271 155,744 29,115 345,130
Q3 2014 156,469 156,123 39,450 352,042
Q4 2014 154,084 163,675 34,854 352,613
 

*Preliminary estimate - may be subject to change.

**See Non-GAAP Financial Measures included herein for a discussion regarding core net income, tangible book value per common share, core return on average assets, core return on average common equity, return on average tangible common equity and tangible common stockholders' equity to tangible assets.

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Average Balance Sheets

(Unaudited, $ in thousands)
 
      Three Months Ended
December 31, 2014     September 30, 2014     December 31, 2013
Average         Average Average         Average Average         Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest earning assets:
Loans (1) (2) $ 4,870,509 $ 61,619 5.02 % $ 4,751,928 $ 61,445 5.13 % $ 4,323,504 $ 55,920 5.13 %
Investment securities (2) 2,195,178 9,413 1.70 2,094,449 8,953 1.70 2,134,052 9,649 1.79
Interest bearing deposits in banks 745,171 504 0.27 548,794 374 0.27 430,912 275 0.25
Federal funds sold 597             1,909     3       0.62   789       1       0.50  
Total interest earnings assets 7,811,455 71,536 3.63 7,397,080 70,775 3.80 6,889,257 65,845 3.79
Non-earning assets 774,963               753,324                 601,996                  
Total assets $ 8,586,418               $ 8,150,404                 $ 7,491,253                  
Interest bearing liabilities:
Demand deposits $ 2,148,522 $ 538 0.10 % $ 2,100,931 $ 532 0.10 % $ 1,807,865 $ 510 0.11 %
Savings deposits 1,845,601 634 0.14 1,751,595 616 0.14 1,600,723 592 0.15
Time deposits 1,252,410 2,369 0.75 1,217,023 2,339 0.76 1,219,796 2,484 0.81
Repurchase agreements 481,901 56 0.05 439,739 52 0.05 431,397 62 0.06
Other borrowed funds 11 1,781 27 6.01 14
Long-term debt 38,037 558 5.82 36,886 482 5.18 36,983 486 5.21
Subordinated debentures held by subsidiary trusts 98,930     796       3.19   89,142     598       2.66   82,477       602       2.90  
Total interest bearing liabilities 5,865,412 4,951 0.33 5,637,097 4,646 0.33 5,179,255 4,736 0.36
Non-interest bearing deposits 1,751,023 1,570,121 1,461,126
Other non-interest bearing liabilities 74,378 54,722 51,674
Stockholders' equity 895,605               888,464                 799,198                  
Total liabilities and stockholders' equity $ 8,586,418               $ 8,150,404                 $ 7,491,253                  
Net FTE interest income 66,585 66,129 61,109
Less FTE adjustments (2)       (1,069 )               (1,047 )                 (1,135 )        
Net interest income from consolidated statements of income       $ 65,516                 $ 65,082                   $ 59,974          
Interest rate spread             3.30 %               3.47 %                 3.43 %
Net FTE interest margin (3)             3.38 %               3.55 %                 3.52 %
Cost of funds, including non-interest bearing demand deposits (4)             0.26 %               0.26 %                 0.28 %
 
(1)   Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs, which is not material.
 
(2) Interest income and average rates for tax exempt loans and securities are presented on an FTE basis.
 
(3) Net FTE interest margin during the period equals the difference between annualized interest income on interest earning assets and the annualized interest expense on interest bearing liabilities, divided by average interest earning assets for the period.
 
(4) Calculated by dividing total annualized interest on interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.
 
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Average Balance Sheets

(Unaudited, $ in thousands)
 
      Twelve Months Ended
December 31, 2014     December 31, 2013
Average         Average Average         Average
Balance     Interest     Rate Balance     Interest     Rate
Interest earning assets:
Loans (1) (2) $ 4,602,907 $ 233,273 5.07 % $ 4,281,673 $ 222,450 5.20 %
Investment securities (2) 2,122,587 36,755 1.73 2,151,495 38,695 1.80
Interest bearing deposits in banks 506,067 1,334 0.26 391,515 992 0.25
Federal funds sold 1,391     7       0.50   2,852     18       0.63  
Total interest earnings assets 7,232,952 271,369 3.75 6,827,535 262,155 3.84
Non-earning assets 715,846               600,919              
Total assets $ 7,948,798               $ 7,428,454              
Interest bearing liabilities:
Demand deposits $ 1,992,565 $ 2,094 0.11 % $ 1,751,990 $ 1,963 0.11 %
Savings deposits 1,723,073 2,444 0.14 1,566,211 2,445 0.16
Time deposits 1,198,053 9,241 0.77 1,289,108 11,392 0.88
Repurchase agreements 454,265 237 0.05 456,840 294 0.06
Other borrowed funds 8 10
Long-term debt 37,442 2,016 5.38 37,102 1,936 5.22
Preferred stock pending redemption 2,329 159 6.83
Subordinated debentures held by subsidiary trusts 88,304     2,574       2.91   82,477     2,506       3.04  
Total interest bearing liabilities 5,493,710 18,606 0.34 5,186,067 20,695 0.40
Non-interest bearing deposits 1,543,079 1,411,270
Other non-interest bearing liabilities 56,147 51,587
Stockholders' equity 855,862               779,530              
Total liabilities and stockholders' equity $ 7,948,798               $ 7,428,454              
Net FTE interest income 252,763 241,460
Less FTE adjustments (2)       (4,302 )               (4,493 )        
Net interest income from consolidated statements of income       $ 248,461                 $ 236,967          
Interest rate spread             3.41 %             3.44 %
Net FTE interest margin (3)             3.49 %             3.54 %
Cost of funds, including non-interest bearing demand deposits (4)             0.26 %             0.31 %
 
(1)   Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs, which is not material.
 
(2) Interest income and average rates for tax exempt loans and securities are presented on an FTE basis.
 
(3) Net FTE interest margin during the period equals the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by average interest earning assets for the period.
 
(4) Calculated by dividing total interest on interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.
 

Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principles in the United States of America, or GAAP, this release contains certain non-GAAP financial measures that management uses to provide supplemental perspectives on capital adequacy, operating results, performance trends and financial condition. These non-GAAP financial measures 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 Company adjusts certain capital adequacy measures to exclude intangible assets except mortgage servicing rights. Management believes these non-GAAP 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 the Company's capitalization to other companies.

The Company also adjusts earnings and certain performance ratios to exclude non-core revenues and expenses, including investment securities net gains or losses, acquisition expenses consisting primarily of travel expenses and professional fees, and nonrecurring litigation expenses. Management believes these non-GAAP financial measures are useful to investors in evaluating operating trends by excluding amounts which the Company views as unrelated to its normalized operations. These non-core income and expense adjustments are presented net of estimated income tax expense.

The following table reconciles the above described non-GAAP financial measures to their most directly comparable GAAP financial measures as of the dates indicated.
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Reconciliation of Non-GAAP Financial Measures

(Unaudited, $ in thousands, except share and per share data)
 
          2014     2013

As Of or For the Quarter Ended
Dec 31     Sep 30     Jun 30     Mar 31 Dec 31
Net income $ 22,776 $ 19,155 $ 21,077 $ 21,393 $ 20,775
Adj: investment securities (gains) losses, net 19 8 (17 ) (71 ) 25
Plus: acquisition & nonrecurring litigation expenses 2,368 5,052 597
Adj: income taxes (903 ) (1,913 ) (219 ) 27   (9 )
Total core net income (A) 24,260   22,302   21,438   21,349   20,791  
 
Total non-interest income $ 31,361 $ 29,363 $ 26,571 $ 24,106 $ 25,674
Adj: investment securities (gains) losses, net 19   8   (17 ) (71 ) 25  
Total core non-interest income 31,380 29,371 26,554 24,035 25,699
Net interest income 65,516   65,082   59,727   58,136   59,974  
Total core revenue $ 96,896   $ 94,453   $ 86,281   $ 82,171   $ 85,673  
 
Total non-interest expense $ 61,653 $ 64,958 $ 55,920 $ 54,338 $ 57,785
Less: acquisition & nonrecurring litigation expenses (2,368 ) (5,052 ) (597 )    
Core non-interest expense $ 59,285   $ 59,906   $ 55,323   $ 54,338   $ 57,785  
 
Total quarterly average stockholders' equity (B) $ 895,605 $ 888,464 $ 830,117 $ 807,940 $ 799,198
Less: average goodwill and other intangible assets (excluding mortgage servicing rights) (218,407 ) (208,346 ) (187,710 ) (188,078 ) (188,415 )

Average tangible common stockholders' equity
(C) $ 677,198   $ 680,118   $ 642,407   $ 619,862   $ 610,783  
 
Total stockholders' equity, period-end $ 908,924 $ 885,864 $ 838,526 $ 825,638 $ 801,581
Less: goodwill and other intangible assets (excluding mortgage servicing rights) (218,870 ) (218,799 ) (187,502 ) (187,858 ) (188,214 )
Total tangible common stockholders' equity (D) $ 690,054   $ 667,065   $ 651,024   $ 637,780   $ 613,367  
 
Total assets $ 8,609,936 $ 8,481,352 $ 7,651,379 7,617,825 7,564,651
Less: goodwill and other intangible assets (excluding mortgage servicing rights) (218,870 ) (218,799 ) (187,502 ) (187,858 ) (188,214 )
Tangible assets (E) $ 8,391,066   $ 8,262,553   $ 7,463,877   $ 7,429,967   $ 7,376,437  
 
Total quarterly average assets (F) $ 8,586,418 $ 8,150,404 $ 7,556,122 $ 7,487,960 $ 7,491,253
 
Total common shares outstanding, period end (G) 45,788,415 45,672,922 44,255,012 44,390,095 44,155,063
Weighted-average common shares - diluted (H) 46,037,344 45,460,288 44,575,963 44,620,776 44,541,497
 
Core earnings per share, diluted (A/H) $ 0.53 $ 0.49 $ 0.48 $ 0.48 $ 0.47
Tangible book value per share, period-end (D/G) 15.07 14.61 14.71 14.37 13.89
 
Annualized net income (I) $ 90,361 $ 75,995 $ 84,540 $ 86,761 $ 82,423
Annualized core net income (J) 96,249 88,481 85,988 86,582 82,486
 
Core return on average assets (J/F) 1.12 % 1.09 % 1.14 % 1.16 % 1.10 %
Core return on average common equity (J/B) 10.75 9.96 10.36 10.72 10.32
Return on average tangible common equity (I/C) 13.34 11.17 13.16 14.00 13.49
Tangible common stockholders' equity to tangible assets (D/E) 8.22 8.07 8.72 8.58 8.32
 
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Reconciliation of Non-GAAP Financial Measures (continued)

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

As Of or For the Year Ended
          Dec 31, 2014     Dec 31, 2013
Net income $ 84,401 $

86,136
Adj: investment securities (gains) losses, net (61 ) (1 )
Plus: acquisition & nonrecurring litigation expenses 8,017
Adj: income taxes (3,008 )  
Total core net income (A) 89,349   86,135  
 
Total non-interest income $ 111,401 $ 111,679
Adj: investment securities (gains) losses, net (61 ) (1 )
Total core non-interest income 111,340 111,678
Net interest income 248,461   236,967  
Total core revenue $ 359,801   $ 348,645  
 
Total non-interest expense $ 236,869 $ 222,069
Less: acquisition & nonrecurring litigation expenses (8,017 )  
Core non-interest expense $ 228,852   $ 222,069  
 
Total average stockholders' equity (B) $ 855,862 $ 779,530
Less: average goodwill and other intangible assets (excluding mortgage servicing rights) (200,740 ) (188,954 )
Average tangible common stockholders' equity (C) $ 655,122   $ 590,576  
 
Total average assets (D) $ 7,948,798 $ 7,428,454
 
Total common shares outstanding, period end (E) 45,788,415 44,155,063
Weighted-average common shares - diluted (F) 45,210,561 44,044,602
 
Core earnings per share, diluted (A/F) $ 1.98 $ 1.96
 
Net income (G) $ 84,401 $

86,136
Core net income (H) 89,349 86,135
 
Core return on average assets (H/D) 1.12 % 1.16 %
Core return on average common equity (H/B) 10.44 11.05
Return on average tangible common equity (G/C) 12.88 14.59

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