First Interstate BancSystem, Inc. Reports Results for First Quarter 2010

BILLINGS, Mont., April 22 /PRNewswire-FirstCall/ -- (Nasdaq: FIBK)

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FIRST QUARTER 2010 FINANCIAL HIGHLIGHTS:

• Diluted earnings per common share of $0.32 for the quarter compared to $0.34 for fourth quarter 2009 and $0.49 for first quarter 2009.
• Net income available to common stockholders of $10.3 million for the quarter compared to $10.7 million in fourth quarter 2009 and $15.8 million in first quarter 2009.
• Net interest margin, on a tax equivalent basis, of 4.00% for the quarter, compared to 4.05% for fourth quarter 2009 and 4.12% for first quarter 2009.  
• Non-performing assets of $177 million, or 2.45% of total assets, as of March 31, 2010 compared to $163 million, or 2.28% of total assets, as of December 31, 2009 and $122 million, or 1.82% of total assets, as of March 31, 2009.
• Allowance for loan losses of $106 million, or 2.37% of total loans, as of March 31, 2010, compared to $103 million, or 2.28% of total loans, as of December 31, 2009 and $92 million, or 1.95% of total loans, as of March 31, 2009.
• Provision for loan losses of $11.9 million for the quarter compared to $13.5 million in fourth quarter 2009 and $9.6 million in first quarter 2009.
• Strengthening of capital position due to completion of initial public offering as evidenced by Tier 1 risk-based capital ratio of 13.04% and total risk-based capital ratio of 15.00% as of March 31, 2010.
• Book value per common share of $15.96 as of March 31, 2010, compared to $16.73 as of December 31, 2009 and $15.87 as of March 31, 2009.
• Tangible book value per common share of $11.43 as of March 31, 2010, compared to $10.53 as of December 31, 2009 and $9.62 as of March 31, 2009.
• Common stock dividends of $0.1125 per share for the quarter compared to $0.1125 per share in fourth quarter 2009 and $0.1625 in first quarter 2009.

First Interstate BancSystem, Inc., parent holding company of First Interstate Bank, reported first quarter 2010 net income available to common stockholders of $10.3 million, or $0.32 per diluted share, as compared to $10.7 million, or $0.34 per diluted share, for fourth quarter 2009, and $15.8 million, or $0.49 per diluted share, for first quarter 2009.  Returns on average common equity and average assets for the three months ended March 31, 2010 were 7.86% and 0.64%, respectively, compared with fourth quarter 2009 returns of 8.07% and 0.65%, respectively, and first quarter 2009 returns of 13.09% and 1.02%, respectively.  

"We are pleased with our first quarter 2010 financial results, especially in light of difficult economic conditions that continue to challenge the credit quality of our loan portfolio, real estate values and growth in our market areas," said Lyle R. Knight, President and Chief Executive Officer.  "During March 2010, we concluded an initial public offering, or IPO, of our Class A common stock, the first bank IPO since July 2007 and the largest since 1998."  The IPO resulted in net proceeds of $153 million, $34 million of which were used to repay variable rate term notes.  The remainder of the IPO net proceeds will be used for general corporate purposes and to support the Company's long-term growth, including potential strategic acquisition opportunities.

Net Interest Income

The Company's net interest margin ratio, on a fully taxable equivalent, or FTE basis, of 4.00% for first quarter 2010, decreased 5 basis points from 4.05% during fourth quarter 2009 and 12 basis points from 4.12% during first quarter 2009.  Compression in net FTE interest margin ratio during first quarter 2010, as compared to the fourth and first quarters of 2009, was largely due to a shift in the mix of interest earning assets from higher-yielding loans to lower-yielding assets, primarily investment securities.  In addition, interest free and low-cost funding sources, such as demand deposits, repurchase agreements and other short-term borrowings comprised a smaller percentage of our funding base, which further compressed our first quarter 2010 net FTE interest margin.  

Non-interest Income

Non-interest income of $19.5 million during first quarter 2010 decreased $2.7 million, or 12.2%, from $22.2 during fourth quarter 2009 and $6.7 million, or 25.6%, from $26.2 million during first quarter 2009.  The first quarter 2010 decrease from the fourth and first quarters of 2009 was largely the result of lower income from the origination and sale of residential mortgage loans.  Income from the origination and sale of residential mortgage loans decreased $1.9 million, or 37.1%, from fourth quarter 2009 and $6.9 million, or 67.8%, from first quarter 2009.  With long-term interest rates remaining relatively low since late 2008, the spike in refinancing activity that occurred in first quarter 2009 has declined substantially.  Refinancing activity accounted for 85% of the Company's residential real estate loan originations during first quarter 2009, as compared to 47% during first quarter 2010.  Lower income due to declines in refinancing activity was partially offset by income from the origination of loans for new home purchases, which increased 12% during first quarter 2010, as compared to first quarter 2009.  If long-term interest rates remain at their existing levels or increase, income from the origination and sale of loans is expected to remain below levels reported in 2009.

Non-interest expense of $52.7 million during first quarter 2010 decreased $2.4 million, or 4.4%, from $55.2 million during fourth quarter 2009 and increased $2.3 million, or 4.6%, from $50.4 million during first quarter 2009.  Significant components of the changes in non-interest expense include:

• FDIC insurance premiums - FDIC insurance premiums of $2.5 million during first quarter 2010 increased $67,000, or 2.8%, from $2.4 million during fourth quarter 2009 and $620,000, or 33.8%, from $1.8 million during first quarter 2009.  During 2009, the FDIC increased its assessment rates and imposed changes to the risk-based assessment framework.  Increases in deposit insurance expense during first quarter 2010, as compared to first quarter 2009, were due to increases in fee assessment rates.  Management expects FDIC insurance premiums to remain at high levels for the foreseeable future.
• Mortgage servicing rights amortization - mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income.  Changes in estimated servicing period caused amortization expense to vary between periods.  Mortgage servicing rights amortization of $1.1 million during first quarter 2010 decreased $91,000, or 7.4%, from $1.2 million during fourth quarter 2009 and $1.8 million, or 61.2%, from $2.9 million during first quarter 2009.
• Mortgage servicing rights impairment (recovery) – mortgage servicing rights are evaluated quarterly for impairment based on the fair value of the mortgage servicing rights.  Impairment adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for changes in impairment through a charge to current period earnings. During first quarter 2010, we reversed previously recorded impairment of $50,000, as compared to $255,000 during fourth quarter 2009 and $2.8 million during first quarter 2009.

The Company recorded provision for loan losses of $11.9 million during first quarter 2010, as compared to $13.5 million during fourth quarter 2009 and $9.6 million during first quarter 2009.  The allowance for loan losses as a percent of total loans increased to 2.37% as of March 31, 2010, compared to 2.28% as of December 31, 2009 and 1.95% as of March 31, 2009.  Increases in the allowance for loan losses as a percentage of total loans were primarily attributable to additional reserves recorded based on the estimated effects of current economic conditions on our loan portfolio and increases in past due, non-performing and internally risk classified loans.  

Nonperforming assets were 3.91% of total loans and other real estate owned as of March 31, 2010 compared to 3.57% as of December 31, 2009 and 2.58% as of March 31, 2009.  Total non-performing assets of $177 million increased $14 million, or 8.6%, from $163 million as of December 31, 2009 and $55 million, or 44.7%, from $122 million as of March 31, 2009.  Increases in non-performing assets were attributable to general declines in markets dependent upon resort communities and second home sales, and declines in real estate prices.  In addition, increasing unemployment has negatively impacted the credit performance of commercial and real estate related loans. This market turmoil has led to increased levels of delinquency, a lack of consumer confidence, increased market volatility and a widespread reduction of general business activities in the Company's market areas. The continuing impact of the current difficult economic conditions and rising unemployment levels in the Company's market areas is expected to further increase non-performing assets in future quarters.

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

The Company exceeds "well capitalized" requirements under all regulatory capital guidelines.  Significant increases in capital ratios at March 31, 2010, as compared to December 31, 2009 and March 31, 2009, reflect the impact of additional capital raised from the Company's IPO in March 2010.

Total assets of $7.2 billion as of March 31, 2010 increased 1.1% from $7.1 billion as of December 31, 2009 and 7.3% from $6.7 billion as of March 31, 2009, due to organic growth.  IPO proceeds of $119 million, net of IPO costs and after repayment of the Company's variable rate term notes, are included in cash and cash equivalents in the table above.  

Investment securities were $1.5 billion, or 21.1% of total assets, as of March 31, 2010, compared to $1.4 billion, or 20.3% of total assets, as of December 31, 2009 and $1.0 billion, or 15.6% of total assets, as of March 31, 2009.  During third quarter of 2009, the Company began investing its excess liquidity, as represented by higher levels of federal funds sold, into investment securities classified as available-for-sale and maturing within thirty-six months.

Total loans of $4.5 billion as of March 31, 2010 decreased 1.0% from December 31, 2009 and 5.2% from March 31, 2009.  Management attributes these decreases to the continuing impact of the broad recession on borrowers in our market areas, and to a lesser extent, the movement of lower quality loans out of the loan portfolio through charge-off, pay-off or foreclosure.    

Real estate construction loans of $596 million as of March 31, 2010 decreased $41 million, or 6.5%, from $637 million as of December 31, 2009 and $155 million, or 20.6%, from $750 million as of March 31, 2009.  Management attributes these decreases to general declines in demand for housing, particularly in markets dependent upon resort communities and second home sales, the replacement of construction loans with permanent financing loans and the movement of lower quality loans out of the loan portfolio through loan charge-off or foreclosure.

Total liabilities of $6.5 billion as of March 31, 2010 decreased 1.2% from $6.6 billion as of December 31, 2009 and increased 5.0% from $6.2 billion as of March 31, 2009.

Securities sold under repurchase agreements of $462 million as of March 31, 2010 decreased $13 million, or 2.7%, from $474 million as of December 31, 2009 and increased $73 million, or 18.7%, from $389 million as of March 31, 2009, primarily due to fluctuations in the liquidity needs of customers.

Other borrowed funds of $6 million as of March 31, 2010, increased $422,000, or 7.8%, from $5 million as of December 31, 2009, primarily due to timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal government.  Other borrowed funds as of March 31, 2010 decreased $52 million, or 90.0%, from $58 million as of March 31, 2009, due to the scheduled repayments and maturities of short-term Federal Home Loan Bank borrowings.

Long-term debt of $39 million as of March 31, 2010 decreased $34 million, or 46.8%, from $73 million as of December 31, 2009 and $43 million, or 52.4% from $82 million as of March 31, 2009.  Decreases in long-term debt were primarily due to the repayment of variable rate term notes and, to a lesser extent, scheduled repayments of long-term Federal Home Loan Bank borrowings.  

Total deposits of $5.8 billion as of March 31, 2010 remained stable as compared to December 31, 2009 and increased $339 million, or 6.2%, from $5.4 billion as of March 31, 2009.  During the first quarter of 2010, there was a slight shift in the mix of deposits from lower-cost demand deposits to higher costing savings and time deposits.  Organic growth in deposits experienced throughout 2009 slowed in first quarter 2010.  

Total stockholders' equity of $733 million as of March 31, 2010 increased $158 million, or 27.5%, from $574 million as of December 31, 2009 and $184 million, or 33.7%, from $548 million as of March 31, 2009.  

On March 5, 2010, upon obtaining stockholder approval, the Company redesignated its existing common stock as Class B common stock with five votes per share, convertible into Class A common stock on a share for share basis, created a new class of common stock designated as Class A common stock, with one vote per share, and effected a 4:1 stock split of Class B common stock.

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

Remaining increases in stockholders' equity during first quarter 2010, as compared to the fourth and first quarters of 2009 were primarily due to the retention of earnings.

On March 25, 2010, the Company declared a quarterly dividend to common stockholders of $0.1125 per share to be paid on April 9, 2010 to shareholders of record as of April 5, 2010.  

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 March 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.

First Quarter 2010 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss first quarter 2010 results at 1:00 p.m. Eastern Time (11:00 a.m. MDT) on Friday, April 23, 2010.  The conference call will be accessible by telephone and through the Internet.  Participants may join the call by dialing 1-800-860-2442 (using conference ID 439763) or by logging on to http://www.talkpoint.com/viewer/starthere.asp?Pres=130629.  The call will be recorded and made available for replay after 4:00 p.m. Eastern Time (2:00 p.m. MDT) on April 23 through May 4, 2010 by dialing 1-877-344-7529.  The call will also be archived on our website, www.FIBK.com.  

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 economic conditions, continuing challenges, unemployment levels, use of IPO net proceeds, income from the origination and sale of loans, FDIC insurance premiums and non-performing assets.  Forward-looking statements involve known and unknown risks and uncertainties that are difficult to predict. Therefore, our 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 our 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 our 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 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.  Investors and others are encouraged to read the more detailed discussion of our risks contained in our most recently filed prospectus, which discussion in incorporated herein by reference.

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.

SOURCE First Interstate BancSystem, Inc.