First Interstate BancSystem, Inc. reports fourth quarter 2011 net income available to common shareholders of $12.4 million, or $0.29 per diluted share, as compared to $11.1 million, or $0.26 per diluted share, for third quarter 2011 and $10.0 million, or $0.23 per diluted share, for fourth quarter 2010. These reported results are preliminary pending the completion of the external audit of the Company's financial statements and the final results of assessing our goodwill for possible impairment. As a result of the significant and prolonged decrease in market prices for bank shares during the last half of the year, including the Company's common shares, the Company is currently in the process of evaluating goodwill for possible impairment. If it is determined that goodwill is impaired, a reduction in the value of the goodwill carried on the Company's balance sheet as of December 31, 2011 would be recorded. It is likely that any such reduction in the value of goodwill would cause the financial results for the fourth quarter of 2011 to differ materially from the preliminary results being reported today. Goodwill impairment, if any, will not adversely impact the Company's regulatory capital ratios, liquidity, cash balances or tangible equity. The Company expects to complete the evaluation of its goodwill prior to release of its Annual Report on Form 10-K for the year ended December 31, 2011, which is currently scheduled to occur near the end of February.

RESULTS SUMMARY

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

      Three Months Ended      

Sequential
Quarter
% Change

     

Year Over
Year
% Change

December 31,
2011

      September 30,
2011 		      December 31,
2010
Net income $ 13,265 $ 11,921 $ 10,838 11.3 % 22.4 %
Net income available to common shareholders 12,402 11,059 9,975 12.1 % 24.3 %
Diluted earnings per common share 0.29 0.26 0.23 11.5 % 26.1 %
Dividends paid per common share 0.1125 0.1125 0.1125 0.0 % 0.0 %
Book value per common share 16.77 16.70 16.05 0.4 % 4.5 %
Tangible book value per common share* 12.33 12.25 11.55 0.7 % 6.8 %
Net tangible book value per common share* 13.74 13.66 12.96 0.6 % 6.0 %
Return on average common equity, annualized 6.84 % 6.17 % 5.68 %
Return on average assets, annualized 0.72 % 0.65 % 0.58 %
Weighted average common shares outstanding 42,783,770 42,774,259 42,641,145
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards 64,002 67,404 178,650
 
      Twelve Months Ended          

Year Over
Year
% Change

December 31,
2011

         

December 31,
2010

Net income $ 44,546 $ 37,356 19.2 %
Net income available to common shareholders 41,124 33,934 21.2 %
Diluted earnings per common share 0.96 0.85 12.9 %
Dividends paid per common share 0.45 0.45 0.0 %
Return on average common equity 5.86 % 5.22 %
Return on average assets 0.61 % 0.52 %
Weighted average common shares outstanding 42,749,526 39,907,640
Weighted average common shares issuable upon exercise of stock options & non-vested stock awards 97,670 219,725
 

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

On December 13, 2011, the Company declared a quarterly dividend to common shareholders of $0.12 per share. This dividend was paid on January 17, 2012 to shareholders of record as of January 3, 2012.

"The improvement in our fourth quarter results over third quarter was driven largely by higher residential mortgage loan origination activity," said Lyle R. Knight, President and Chief Executive Officer of First Interstate BancSystem, Inc. "Economic conditions in our markets remain stable, but not strong enough to result in any meaningful improvement in commercial loan demand. We are encouraged by the 10% decline in our criticized loans during the fourth quarter, which indicates that our asset quality is improving and our credit costs should continue to be manageable."

REVENUE SUMMARY

(Unaudited; $ in thousands)

      Three Months Ended      

Sequential
Quarter
% Change

     

Year Over
Year
% Change

December 31,
2011

     

September 30,
2011

      December 31,
2010
Interest income $ 72,006 $ 73,483 $ 76,215 -2.0 % -5.5 %
Interest expense 8,971   9,991   13,365   -10.2 % -32.9 %
Net interest income 63,035 63,492 62,850 -0.7 % 0.3 %
Non-interest income:
Other service charges, commissions and fees 8,062 8,479 7,421 -4.9 % 8.6 %
Income from the origination and sale of loans 8,087 5,512 8,027 46.7 % 0.7 %
Service charges on deposit accounts 4,543 4,609 4,327 -1.4 % 5.0 %
Wealth management revenues 3,177 3,202 3,083 -0.8 % 3.0 %
Investment securities gains, net 1,488 38 62 3,815.8 % 2,300.0 %
Other income 1,640   1,285   2,591   27.6 % -36.7 %
Total non-interest income 26,997   23,125   25,511   16.7 % 5.8 %
Total revenues $ 90,032   $ 86,617   $ 88,361   3.9 % 1.9 %
 
Tax equivalent interest margin ratio 3.79 % 3.84 % 3.72 %
 
      Twelve Months Ended          

Year Over
Year
% Change

December 31,
2011

         

December 31,
2010

Interest income $ 292,883 $ 314,546 -6.9 %
Interest expense 42,031   63,107   -33.4 %
Net interest income 250,852 251,439 -0.2 %
Non-interest income:
Other service charges, commissions and fees 31,689 29,494 7.4 %
Income from the origination and sale of loans 21,153 22,868 -7.5 %
Service charges on deposit accounts 17,647 18,181 -2.9 %
Wealth management revenues 13,157 12,387 6.2 %
Investment securities gains, net 1,544 170 808.2 %
Other income 6,682   7,811   -14.5 %
Total non-interest income 91,872   90,911   1.1 %
Total revenues $ 342,724   $ 342,350   0.1 %
 
Tax equivalent interest margin ratio 3.80 % 3.89 %
 

Net Interest Income

Net interest margin decreased 5 basis points during fourth quarter to 3.79%, as compared to 3.84% during third quarter 2011, primarily due to a decline in loan balances and decreased investment yields which were partially offset by further reductions in funding costs, along with a continued shift from higher-costing time deposits to lower-costing demand deposits.

Compression in the net interest margin ratio during the twelve months ended December 31, 2011, compared to the same period in 2010, was attributable to lower yields earned on the Company's investment and loan portfolios and lower outstanding loan balances, the effects of which were substantially offset by a 37 basis point reduction in the cost of interest bearing liabilities.

Non-interest Income

Other service charges, commissions and fees decreased during fourth quarter 2011, as compared to third quarter 2011, primarily due to decreases in ATM service charges and debit card interchange income, which typically decline during the fourth quarter of the year. Other service charges, commissions and fees increased during the three and twelve months ended December 31, 2011, as compared to the same periods in 2010, primarily due to increases in debit and credit card interchange income and ATM service charges resulting from higher transaction volumes. These increases were partially offset by reductions in mortgage loan servicing fees.

Although regulations became effective on October 1, 2011 that reduced the maximum allowable debit card interchange fee per transaction for large issuers with over $10 billion in assets, the Company qualifies for the small-issuer exemption. Under this exemption the Company did not experience any immediate, significant impact to interchange revenues.

Income from the origination and sale of residential mortgage loans increased during fourth quarter 2011, as compared to third quarter 2011 and fourth quarter 2010, primarily due to increased refinancing activity brought on by a reduction in home mortgage rates. Refinancing activity accounted for approximately 68% of the Company's residential real estate loan originations during fourth quarter 2011, as compared to 53% during third quarter 2011 and 72% during fourth quarter 2010. During the twelve months ended December 31, 2011, refinancing activity accounted for approximately 56% of the Company's residential real estate loan originations, as compared to 60% during the same period in 2010.

Investment securities gains increased during the fourth quarter 2011, as compared to third quarter 2011 and fourth quarter 2010, primarily due to the recognition of unamortized discounts on investment securities called by the issuing agencies during fourth quarter 2011.

Fluctuations in other income during fourth quarter 2011, as compared to third quarter 2011 and fourth quarter 2010, were primarily due to fluctuations in the market values of securities held under deferred compensation plans. Market value adjustments for securities held under deferred compensation plans resulted in other income of $12 thousand during fourth quarter 2011, as compared to expense of $572 thousand during third quarter 2011 and income of $548 thousand during fourth quarter 2010. During the twelve months ended December 31, 2011, market value adjustments for securities held under deferred compensation plans resulted in other income of $161 thousand, as compared to expense of $545 thousand during the same period in 2010.

NON-INTEREST EXPENSE

(Unaudited; $ in thousands)

      Three Months Ended      

Sequential
Quarter
% Change

     

Year Over

Year
% Change

December 31,
2011

     

September 30,
2011

     

December 31,
2010

Non-interest expense:
Salaries, wages and employee benefits $ 28,873 $ 26,888 $ 29,216 7.4 % -1.2 %
Occupancy, net 3,815 4,180 4,207 -8.7 % -9.3 %
Furniture and equipment 3,195 3,018 3,326 5.9 % -3.9 %
Outsourced technology services 2,245 2,235 2,377 0.4 % -5.6 %
Other real estate owned ("OREO") expense, net of income 2,021 2,878 1,541 -29.8 % 31.1 %
FDIC insurance premiums 1,607 1,631 2,584 -1.5 % -37.8 %
Mortgage servicing rights amortization 940 807 1,146 16.5 % -18.0 %
Mortgage servicing rights impairment (recovery) 427 1,168 (2,999 ) -63.4 % 114.2 %
Core deposit intangibles amortization 361 362 432 -0.3 % -16.4 %
Other expenses 12,737   11,874   12,993   7.3 % -2.0 %
Total non-interest expense $ 56,221   $ 55,041   $ 54,823   2.1 % 2.6 %
 
      Twelve Months Ended          

Year Over
Year
% Change

December 31,
2011

         

December 31,
2010

Non-interest expense:
Salaries, wages and employee benefits $ 111,352 $ 112,667 -1.2 %
Occupancy, net 16,223 16,251 -0.2 %
Furniture and equipment 12,562 13,434 -6.5 %
Outsourced technology services 8,933 9,477 -5.7 %
OREO expense, net of income 8,652 7,670 12.8 %
FDIC insurance premiums 7,333 10,044 -27.0 %
Mortgage servicing rights amortization 3,225 4,615 -30.1 %
Mortgage servicing rights impairment (recovery) 1,275 (787 ) 262.0 %
Core deposit intangibles amortization 1,446 1,748 -17.3 %
Other expenses 47,411   45,885   3.3 %

Total non-interest expense

$ 218,412   $ 221,004   -1.2 %
 

Salaries, wages and employee benefits increased in fourth quarter 2011, as compared to third quarter 2011, primarily due to increases in incentive bonus accruals and fluctuations in the market values of securities held under deferred compensation plans. During the three and twelve months ended December 31, 2011, as compared to the same periods in 2010, salaries, wages and employee benefits decreased primarily due to lower group health insurance costs, fluctuations in the market values of securities held under deferred compensation plans and reductions in full-time equivalent employees. These decreases were partially offset by normal inflationary wage increases and increases in incentive bonus accruals.

In February 2011, the FDIC issued a final rule that, among other things, modified the definition of an institution's deposit insurance assessment base and revised assessment rate schedules. These changes, which became effective April 1, 2011, resulted in a reduction in the Company's FDIC insurance premiums.

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 2011 net OREO expense included $562 thousand of net operating expenses, $1.5 million of fair value write-downs and net gains of $33 thousand on the sale of OREO properties. Approximately 75% of write-downs recorded during the current quarter related to properties in our stressed markets, which include the Flathead, Gallatin Valley and Jackson market areas.

Net OREO expense during twelve months ended December 31, 2011 included $1.8 million of net operating expenses, $7.5 million of fair value write-downs and net gains of $567 thousand on the sale of OREO properties, as compared to $1.7 million of net operating expenses, $6.7 million of fair value write-downs and net gains of $708 thousand on the sale of OREO properties during the same period in 2010. Approximately 72% of write-downs recorded during 2011 related to properties in the Flathead, Gallatin Valley and Jackson market areas.

Fluctuations in the fair value of mortgage servicing rights were due to changes in assumptions regarding estimated prepayments of the underlying residential mortgage loans, which typically correspond with changes in market interest rates.

ASSET QUALITY

(Unaudited; $ in thousands)

      Three Months Ended

December 31,
2011

         

September 30,
2011

         

December 31,
2010

Allowance for loan losses - beginning of period $ 120,303 $ 124,579 $ 120,236
Charge-offs (22,435 ) (20,405 ) (18,045 )
Recoveries 962 2,129 789
Provision 13,751   14,000   17,500  
Allowance for loan losses - end of period $ 112,581   $ 120,303   $ 120,480  
 

December 31,
2011

September 30,
2011

December 31,
2010

Period end loans $ 4,186,549 $ 4,275,717 $ 4,367,909
Average loans 4,236,228 4,291,632 4,402,141
Non-performing loans:
Non-accrual loans 199,983 223,961 195,342
Accruing loans past due 90 days or more 4,111 3,001 1,852
Troubled debt restructurings 37,376   35,616   13,490  
Total non-performing loans 241,470 262,578 210,684
Other real estate owned 37,452   25,080   33,632  
Total non-performing assets $ 278,922   $ 287,658   $ 244,316  
Net charge-offs to average loans, annualized 2.01 % 1.69 % 1.56 %
Provision for loan losses to average loans, annualized 1.29 % 1.29 % 1.58 %
Allowance for loan losses to period end loans 2.69 % 2.81 % 2.76 %
Allowance for loan losses to total non-performing loans 46.62 % 45.82 % 57.19 %
Non-performing loans to period end loans 5.77 % 6.14 % 4.82 %
Non-performing assets to period end loans and other real estate owned 6.60 % 6.69 % 5.55 %
Non-performing assets to total assets 3.81 % 3.94 % 3.26 %
 

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 43% of the Company's non-performing assets versus only 18% of the Company's total loans as of December 31, 2011.

Net charged-off loans increased during fourth quarter 2011, as compared to third quarter 2011 and fourth quarter 2010. Approximately 34% of the net charged-off loans during fourth quarter 2011 were located in the Flathead, Gallatin Valley and Jackson market areas. Additionally, approximately 58% of the loans charged-off during fourth quarter 2011 were related to five borrowers, including three construction, one commercial and one residential real estate borrowers.

As of December 31, 2011, total non-performing loans included $216 million of real estate loans, of which $102 million were construction loans and $87 million were commercial real estate loans. Non-performing construction loans as of December 31, 2011 were comprised of land acquisition and development loans of $63 million, commercial construction loans of $25 million and residential construction loans of $14 million.

Non-accrual loans decreased $24 million during fourth quarter 2011, as compared to third quarter 2011, primarily due to an $8 million construction loan returned to accrual status during fourth quarter 2011 and the partial charge-off and reclassification of three loans aggregating $8 million to OREO. Decreases in non-accrual loans due to charge-off, pay-off or foreclosure were partially offset by the loans of one commercial real estate, one consumer real estate and one commercial construction borrower aggregating $21 million that were placed on non-accrual status during fourth quarter 2011. As of December 31, 2011, approximately 39% of the Company's non-accrual loans were in the Flathead, Gallatin Valley and Jackson market areas, including the significant fourth quarter additions described above.

OREO increased during fourth quarter 2011, as compared to third quarter 2011 and fourth quarter 2010. During fourth quarter 2011, the Company recorded additions to OREO of $17 million, which included the three large non-accrual loans mentioned above and one $7 million residential real estate loan. Additionally, the Company wrote down the fair value of OREO properties by $1 million and sold OREO with a net book value of $4 million at a slight gain. As of December 31, 2011, approximately 67% of total OREO was comprised of properties located in the Flathead, Gallatin Valley and Jackson market areas.

Fluctuations in the provision for loan losses result from management's assessment of the adequacy of the Company's allowance for loan losses. Management expects quarterly provisions for loan losses to decline as credit quality improves.

Following is a summary of the Company's credit quality trends since the start of 2009.

CREDIT QUALITY TRENDS

(Unaudited; $ in thousands)

     

Provision for
Loan Losses

     

Net Charge-
offs

     

Allowance for
Loan Losses

     

Accruing
Loans 30-89
Days Past Due

     

Non-
Performing
Loans

     

Non-
Performing
Assets

Q1 2009 $ 9,600 $ 4,693 $ 92,223 $ 98,980 $ 103,653 $ 122,300
Q2 2009 11,700 5,528 98,395 88,632 135,484 167,273
Q3 2009 10,500 7,147 101,748 91,956 125,083 156,958
Q4 2009 13,500 12,218 103,030 63,878 124,678 163,078
Q1 2010 11,900 8,581 106,349 62,675 133,042 177,022
Q2 2010 19,500 11,521 114,328 99,334 158,113 200,451
Q3 2010 18,000 12,092 120,236 47,966 202,008 237,304
Q4 2010 17,500 17,256 120,480 57,011 210,684 244,312
Q1 2011 15,000 11,034 124,446 68,021 249,878 281,873
Q2 2011 15,400 15,267 124,579 70,145 263,467 291,790
Q3 2011 14,000 18,276 120,303 62,165 262,578 287,658
Q4 2011 13,751 21,473 112,581 75,603 241,470 278,922
 

Accruing loans past due 30-89 days increased during fourth quarter 2011, as compared to third quarter 2011, primarily due to one commercial real estate loan that was 49 days past due as of December 31, 2011 and in the process of extension.

Following is a summary of the Company's criticized loans since the start of 2009.

CRITICIZED LOANS

(Unaudited; $ in thousands)

     

Other Assets
Especially
Mentioned

      Substandard       Doubtful       Total
Q1 2009 $ 163,402 $ 231,861 $ 40,356 $ 435,619
Q2 2009 230,833 242,751 48,326 521,910
Q3 2009 239,320 271,487 60,725 571,532

Q4 2009

279,294 271,324 69,603 620,221
Q1 2010 312,441 311,866 64,113 688,420
Q2 2010 319,130 337,758 92,249 749,137
Q3 2010 340,075 340,973 116,003 797,051
Q4 2010 305,925 303,653 133,353 742,931
Q1 2011 293,899 299,072 135,862 728,833
Q2 2011 268,450 309,029 149,964 727,443
Q3 2011 261,501 305,145 134,367 701,013
Q4 2011 240,903 269,794 120,165 630,862
 

ASSETS

(Unaudited; $ in thousands)

     

December 31,
2011

     

September 30,
2011

     

December 31,
2010

     

Sequential
Quarter
% Change

     

Year Over
Year
% Change

Cash and cash equivalents $ 472,447 $ 504,227 $ 685,618 -6.3 % -31.1 %
Investment securities 2,169,645 2,045,796 1,933,403 6.1 % 12.2 %
Loans 4,186,549 4,275,717 4,367,909 -2.1 % -4.2 %
Less allowance for loan losses 112,581   120,303   120,480   -6.4 % -6.6 %
Net loans 4,073,968 4,155,414 4,247,429 -2.0 % -4.1 %
Other assets 609,467   601,717   634,520   1.3 % -3.9 %
Total assets $ 7,325,527   $ 7,307,154   $ 7,500,970   0.3 % -2.3 %
 

LOANS

(Unaudited; $ in thousands)

     

December 31,
2011

     

September 30,
2011

     

December 31,
2010

     

Sequential
Quarter
% Change

     

Year Over
Year
% Change

Real estate loans:
Commercial $ 1,553,155 $ 1,561,788 $ 1,565,665 -0.6 % -0.8 %
Construction:
Land acquisition & development 278,613 296,407 329,720 -6.0 % -15.5 %
Residential 61,106 67,261 99,196 -9.2 % -38.4 %
Commercial 61,054   64,098   98,542   -4.7 % -38.0 %
Total construction loans 400,773   427,766   527,458   -6.3 % -24.0 %
Residential 571,943 586,425 549,604 -2.5 % 4.1 %
Agricultural 175,302   177,121   182,794   -1.0 % -4.1 %
Total real estate loans 2,701,173   2,753,100   2,825,521   -1.9 % -4.4 %
Consumer:
Indirect consumer loans 407,651 415,245 423,552 -1.8 % -3.8 %
Other consumer loans 147,487 151,611 162,137 -2.7 % -9.0 %
Credit card loans 60,933   60,283   60,891   1.1 % 0.1 %
Total consumer loans 616,071   627,139   646,580   -1.8 % -4.7 %
Commercial 693,261 703,010 730,471 -1.4 % -5.1 %
Agricultural 119,710 136,728 116,546 -12.4 % 2.7 %
Other loans, including overdrafts 2,813   3,252   2,383   -13.5 % 18.0 %
Loans held for investment 4,133,028   4,223,229   4,321,501   -2.1 % -4.4 %
Mortgage loans held for sale 53,521   52,488   46,408   2.0 % 15.3 %
Total loans $ 4,186,549   $ 4,275,717   $ 4,367,909   -2.1 % -4.2 %
 

Total loans decreased as of December 31, 2011, as compared to September 30, 2011 and December 31, 2010. Management attributes declines in total loans to weak loan demand in the Company's market areas, the result of continuing economic uncertainty, and to movement of lower quality loans out of the loan portfolio through charge-off, pay-off or foreclosure.

LIABILITIES

(Unaudited; $ in thousands)

     

December 31,
2011

     

September 30,
2011

     

December 31,
2010

     

Sequential
Quarter
% Change

     

Year Over
Year
% Change

Deposits $ 5,826,971 $ 5,851,319 $ 5,925,713 -0.4 % -1.7 %
Securities sold under repurchase agreements 516,243 475,522 620,154 8.6 % -16.8 %
Accounts payable and accrued expenses 42,248 37,266 38,915 13.4 % 8.6 %
Accrued interest payable 8,123 8,786 13,178 -7.5 % -38.4 %
Long-term debt 37,200 37,469 37,502 -0.7 % -0.8 %
Other borrowed funds 7 5,122 4,991 -99.9 % -99.9 %
Subordinated debentures held by subsidiary trusts 123,715   123,715   123,715   0.0 % 0.0 %
Total liabilities $ 6,554,507   $ 6,539,199   $ 6,764,168   0.2 % -3.1 %
 

DEPOSITS

(Unaudited; $ in thousands)

     

December 31,
2011

     

September 30,
2011

     

December 31,
2010

     

Sequential
Quarter
% Change

     

Year Over
Year
% Change

Non-interest bearing demand $ 1,271,709 $ 1,243,703 $ 1,063,869 2.3 % 19.5 %
Interest bearing:
Demand 1,306,509 1,308,122 1,218,078 -0.1 % 7.3 %
Savings 1,691,413 1,662,602 1,718,521 1.7 % -1.6 %
Time, $100 and over 681,047 704,518 908,044 -3.3 % -25.0 %
Time, other 876,293   932,374   1,017,201   -6.0 % -13.9 %
Total interest bearing 4,555,262   4,607,616   4,861,844   -1.1 % -6.3 %
Total deposits $ 5,826,971   $ 5,851,319   $ 5,925,713   -0.4 % -1.7 %

Deposits decreased slightly as of December 31, 2011, as compared to September 30, 2011 and December 31, 2010. During fourth quarter 2011, the Company continued to experience a shift in the mix of deposits away from higher-costing time deposits to lower-costing demand deposits.

STOCKHOLDERS' EQUITY

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

     

December 31,
2011

     

September 30,
2011

     

December 31,
2010

     

Sequential
Quarter
% Change

     

Year Over
Year
% Change

Preferred stockholders' equity $ 50,000 $ 50,000 $ 50,000 0.0 % 0.0 %
Common stockholders' equity 701,986 693,873 677,427 1.2 % 3.6 %
Accumulated other comprehensive income, net 19,034   24,082   9,375   -21.0 % 103.0 %
Total stockholders' equity $ 771,020   $ 767,955   $ 736,802   0.4 % 4.6 %
Book value per common share $ 16.77 $ 16.70 $ 16.05 0.4 % 4.5 %
Tangible book value per common share* $ 12.33 $ 12.25 $ 11.55 0.7 % 6.8 %

Net tangible book value per common share*

$ 13.74 $ 13.66 $ 12.96 0.6 % 6.0 %
 

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

CAPITAL RATIOS

(Unaudited)

   

December 31,
2011

       

September 30,
2011

         

December 31,
2010

Tangible common stockholders' equity to tangible assets* 7.43 % 7.40 % 6.76 %
Net tangible common stockholders' equity to tangible assets* 8.28 % 8.25 % 7.59 %
Tier 1 common capital to total risk weighted assets 11.04 % ** 10.78 % 10.12 %
Leverage ratio 9.84 % ** 9.77 % 9.27 %
Tier 1 risk-based capital 14.55 % ** 14.28 % 13.53 %
Total risk-based capital 16.54 % ** 16.26 % 15.50 %
 

* 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.

As of December 31, 2011, the Company had capital levels that, in all cases, exceeded the "well capitalized" requirements under all regulatory capital guidelines.

Fourth Quarter 2011 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss fourth quarter 2011 results at 11:00 a.m. Eastern Time (9:00 a.m. MDT) on Tuesday, January 31, 2012. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-877-317-6789 or by logging on to www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. MDT) on January 31, 2012 through January 31, 2013 by dialing 1-877-344-7529 (using conference ID 10008257). 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 71 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 decreased levels of criticized loans, stabilization of the loan portfolio, the Company's level of allowance for loan losses, manageability of credit costs and levels of profitability. 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:

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;
  • sweeping changes in regulation of financial institutions due to passage of the Dodd-Frank Act;
  • 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;
  • reliance on external vendors;
  • 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 III capital standards and forthcoming new capital rules proposed for U.S. banks;
  • inability of our bank subsidiary to pay dividends;
  • change in dividend policy;
  • lack of public market for our Class A common stock;
  • volatility of Class A common stock;
  • voting control of Class B stockholders;
  • 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;
  • anti-takeover provisions;
  • controlled company status; and
  • subordination of common stock to Company debt.

A more detailed discussion of each of the foregoing risks is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed February 28, 2011. 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 Annual Report on Form 10-K for the year ended December 31, 2010.

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,
2011

         

September 30,
2011

         

December 31,
2010

Assets                          
Cash and due from banks $ 142,502 $ 135,229 $ 107,035
Federal funds sold 309 2,119 2,114
Interest bearing deposits in banks       329,636             366,879             576,469
Total cash and cash equivalents       472,447             504,227             685,618
Investment securities:
Available-for-sale 2,016,864 1,896,385 1,786,335
Held-to-maturity (estimated fair values of $161,877, $157,639 and $146,508 at December 31, 2011, September 30, 2011 and December 31, 2010, respectively)       152,781             149,411             147,068
Total investment securities       2,169,645             2,045,796             1,933,403
Loans held for investment 4,133,028 4,223,229 4,321,501
Mortgage loans held for sale       53,521             52,488             46,408
Total loans       4,186,549             4,275,717             4,367,909
Less allowance for loan losses       112,581             120,303             120,480
Net loans       4,073,968             4,155,414             4,247,429
Premises and equipment, net of accumulated depreciation 184,771 185,742 188,138
Goodwill 183,673 183,673 183,673
Company-owned life insurance 74,880 74,362 73,056
Other real estate owned ("OREO"), net of write-downs 37,452 25,080 33,632
Accrued interest receivable 31,974 34,994 33,628
Mortgage servicing rights, net of accumulated amortization and impairment reserve 11,555 11,909 13,191
Deferred tax asset, net 9,628 8,393 18,472
Core deposit intangibles, net of accumulated amortization 7,357 7,719 8,803
Other assets       68,177             69,845             81,927
Total assets       $ 7,325,527             $ 7,307,154             $ 7,500,970
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 1,271,709 $ 1,243,703 $ 1,063,869
Interest bearing       4,555,262             4,607,616             4,861,844
Total deposits       5,826,971             5,851,319             5,925,713
Securities sold under repurchase agreements 516,243 475,522 620,154
Accounts payable and accrued expenses 42,248 37,266 38,915
Accrued interest payable 8,123 8,786 13,178
Long-term debt 37,200 37,469 37,502
Other borrowed funds 7 5,122 4,991
Subordinated debentures held by subsidiary trusts       123,715             123,715             123,715
Total liabilities       6,554,507             6,539,199             6,764,168
Stockholders' equity:
Preferred stock 50,000 50,000 50,000
Common stock 266,842 266,317 264,174
Retained earnings 435,144 427,556 413,253
Accumulated other comprehensive income, net       19,034             24,082             9,375
Total stockholders' equity       771,020             767,955             736,802
Total liabilities and stockholders' equity       $ 7,325,527             $ 7,307,154             $ 7,500,970
 

CONSOLIDATED STATEMENTS OF INCOME

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

      Three Months Ended
       

December 31,
2011

         

September 30,
2011

         

December 31,
2010

Interest income:                    
Interest and fees on loans $ 60,529 $ 61,372 $ 65,044
Interest and dividends on investment securities:
Taxable 10,023 10,721 9,665
Exempt from federal taxes 1,196 1,188 1,145
Interest on deposits in banks 256 200 360
Interest on federal funds sold       2             2             1  
Total interest income       72,006             73,483             76,215  
Interest expense:
Interest on deposits 6,854 7,905 11,202
Interest on securities sold under repurchase agreements 150 137 247
Interest on long-term debt 493 498 493
Interest on subordinated debentures held by subsidiary trusts       1,474             1,451             1,423  
Total interest expense       8,971             9,991             13,365  
Net interest income 63,035 63,492 62,850
Provision for loan losses       13,751             14,000             17,500  
Net interest income after provision for loan losses       49,284             49,492             45,350  
Non-interest income:
Other service charges, commissions and fees 8,062 8,479 7,421
Income from the origination and sale of loans 8,087 5,512 8,027
Service charges on deposit accounts 4,543 4,609 4,327
Wealth management revenues 3,177 3,202 3,083
Investment securities gains, net 1,488 38 62
Other income       1,640             1,285             2,591  
Total non-interest income       26,997             23,125             25,511  
Non-interest expense:
Salaries, wages and employee benefits 28,873 26,888 29,216
Occupancy, net 3,815 4,180 4,207
Furniture and equipment 3,195 3,018 3,326
Outsourced technology services 2,245 2,235 2,377
OREO expense, net of income 2,021 2,878 1,541
FDIC insurance premiums 1,607 1,631 2,584
Mortgage servicing rights amortization 940 807 1,146
Mortgage servicing rights impairment (recovery) 427 1,168 (2,999 )
Core deposit intangibles amortization 361 362 432
Other expenses       12,737             11,874             12,993  
Total non-interest expense       56,221             55,041             54,823  
Income before income tax expense 20,060 17,576 16,038
Income tax expense       6,795             5,655             5,200  
Net income 13,265 11,921 10,838
Preferred stock dividends       863             862             863  
Net income available to common shareholders       $ 12,402             $ 11,059             $ 9,975  
 
Basic earnings per common share $ 0.29 $ 0.26 $ 0.23
Diluted earnings per common share       $ 0.29             $ 0.26             $ 0.23  
 

CONSOLIDATED STATEMENTS OF INCOME

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

      Twelve Months Ended December 31,
        2011                 2010
Interest income:                
Interest and fees on loans $ 245,767 $ 266,472
Interest and dividends on investment securities:
Taxable 41,304 42,338
Exempt from federal taxes 4,749 4,621
Interest on deposits in banks 1,050 1,093
Interest on federal funds sold       13                   22  
Total interest income       292,883                   314,546  
Interest expense:
Interest on deposits 33,533 53,949
Interest on securities sold under repurchase agreements 695 879
Interest on other borrowed funds -- 3
Interest on long-term debt 1,975 2,433
Interest on subordinated debentures held by subsidiary trusts       5,828                   5,843  
Total interest expense       42,031                   63,107  
Net interest income 250,852 251,439
Provision for loan losses       58,151                   66,900  
Net interest income after provision for loan losses       192,701                   184,539  
Non-interest income:
Other service charges, commissions and fees 31,689 29,494
Income from the origination and sale of loans 21,153 22,868
Service charges on deposit accounts 17,647 18,181
Wealth management revenues 13,157 12,387
Investment securities gains, net 1,544 170
Other income       6,682                   7,811  
Total non-interest income       91,872                   90,911  
Non-interest expense:
Salaries, wages and employee benefits 111,352 112,667
Occupancy, net 16,223 16,251
Furniture and equipment 12,562 13,434
Outsourced technology services 8,933 9,477
OREO expense, net of income 8,652 7,670
FDIC insurance premiums 7,333 10,044
Mortgage servicing rights amortization 3,225 4,615
Mortgage servicing rights impairment (recovery) 1,275 (787 )
Core deposit intangibles amortization 1,446 1,748
Other expenses       47,411                   45,885  
Total non-interest expense       218,412                   221,004  
Income before income tax expense 66,161 54,446
Income tax expense       21,615                   17,090  
Net income 44,546 37,356
Preferred stock dividends       3,422                   3,422  
Net income available to common shareholders       $ 41,124                   $ 33,934  
 
Basic earnings per common share $ 0.96 $ 0.85
Diluted earnings per common share       $ 0.96                   $ 0.85  
 

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

      Three Months Ended
December 31, 2011       September 30, 2011       December 31, 2010
        Average

Balance

    Interest     Average

Rate

      Average

Balance

    Interest     Average

Rate

      Average

Balance

    Interest     Average

Rate

Interest earning assets:                                    
Loans (1) (2) $ 4,236,228 $ 60,928 5.71 % $ 4,291,632 $ 61,801 5.71 % $ 4,402,141 $ 65,482 5.90 %
Investment securities (2) 2,071,372 11,910 2.28 2,064,019 12,594 2.42 1,849,445 11,471 2.46
Interest bearing deposits in banks 401,654 256 0.25 311,768 200 0.25 562,277 360 0.25
Federal funds sold       973       2       0.82         1,858       2       0.43         1,208       1       0.33  
Total interest earnings assets 6,710,227 73,096 4.32 6,669,277 74,597 4.44 6,815,071 77,314 4.50
Non-earning assets       618,712                     615,472                     636,062              
Total assets       $ 7,328,939                     $ 7,284,749                     $ 7,451,133              
Interest bearing liabilities:
Demand deposits $ 1,300,105 $ 601 0.18 % $ 1,265,339 $ 775 0.24 % $ 1,183,446 $ 878 0.29 %
Savings deposits 1,689,109 1,217 0.29 1,712,739 1,478 0.34 1,677,125 2,092 0.49
Time deposits 1,598,361 5,036 1.25 1,699,633 5,652 1.32 1,992,179 8,232 1.64
Repurchase agreements 487,734 150 0.12 477,612 137 0.11 535,543 247 0.18
Other borrowed funds 5,589 -- -- 5,584 -- -- 5,833 -- --
Long-term debt 37,315 493 5.24 37,473 498 5.27 37,506 493 5.21
Subordinated debentures held by subsidiary trusts       123,715       1,474       4.73         123,715       1,451       4.65         123,715       1,423       4.56  
Total interest bearing liabilities 5,241,928 8,971 0.68 5,322,095 9,991 0.74 5,555,347 13,365 0.95
Non-interest bearing deposits 1,269,423 1,153,800 1,095,947
Other non-interest bearing liabilities 47,956 47,412 53,094
Stockholders' equity       769,632                     761,442                     746,745              
Total liabilities and stockholders' equity       $ 7,328,939                     $ 7,284,749                     $ 7,451,133              
Net FTE interest income $ 64,125 $ 64,606 $ 63,949
Less FTE adjustments (2)             (1,090 )                   (1,114 )                   (1,099 )      
Net interest income from consolidated statements of income             $ 63,035                     $ 63,492                     $ 62,850        
Interest rate spread                   3.64 %                   3.70 %                   3.55 %
Net FTE interest margin (3)                   3.79 %                   3.84 %                   3.72 %
Cost of funds, including non-interest bearing demand deposits (4)                   0.55 %                   0.61 %                   0.80 %
 
(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 a 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.
 

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

      Year Ended December 31,
2011       2010
        Average

Balance

    Interest     Average

Rate

      Average

Balance

    Interest     Average

Rate

Interest earning assets:                      
Loans (1) (2) $ 4,275,128 $ 247,492 5.79 % $ 4,482,219 $ 268,279 5.99 %
Investment securities (2) 2,026,192 48,795 2.41 1,663,211 49,626 2.98
Interest bearing deposits in banks 414,375 1,050 0.25 429,657 1,093 0.25
Federal funds sold       2,231       13       0.58         6,238       22       0.35  
Total interest earnings assets 6,717,926 297,350 4.43 6,581,325 319,020 4.85
Non-earning assets       618,454                     665,012              
Total assets       $ 7,336,380                     $ 7,246,337              
Interest bearing liabilities:
Demand deposits $ 1,269,676 $ 3,057 0.24 % $ 1,135,208 $ 3,430 0.30 %
Savings deposits 1,714,294 6,448 0.38 1,530,844 8,934 0.58
Time deposits 1,737,401 24,028 1.38 2,143,899 41,585 1.94
Repurchase agreements 500,882 695 0.14 480,276 879 0.18
Other borrowed funds 5,582 -- -- 5,779 3 0.05
Long-term debt 37,442 1,975 5.27 46,024 2,433 5.29
Subordinated debentures held by subsidiary trusts       123,715       5,828       4.71         123,715       5,843       4.72  
Total interest bearing liabilities 5,388,992 42,031 0.78 5,465,745 63,107 1.15
Non-interest bearing deposits 1,146,535 1,021,409
Other non-interest bearing liabilities 48,532 58,778
Stockholders' equity       752,321                     700,405              
Total liabilities and stockholders' equity       $ 7,336,380                     $ 7,246,337              
Net FTE interest income $ 255,319 $ 255,913
Less FTE adjustments (2)             (4,467 )                   (4,474 )      
Net interest income from consolidated statements of income             $ 250,852                     $ 251,439        
Interest rate spread                   3.65 %                   3.70 %
Net FTE interest margin (3)                   3.80 %                   3.89 %
Cost of funds, including non-interest bearing demand deposits (4)                   0.64 %                   0.97 %
 
(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 a 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 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; (iv) net tangible common stockholders' equity to tangible assets; and (v) 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, 2011 was $184 million, of which approximately $159 million is deductible for income tax purposes over an original period of 15 years. The calculation of net tangible book value takes into account the full amount of tax benefit of approximately $60 million associated with deductible goodwill assuming the Company will continue to have income sufficient to allow it to recognize this benefit in future periods.

For purposes of computing tangible common stockholders' equity to tangible assets, tangible assets equals total assets less goodwill and other intangible assets (except mortgage servicing rights). Tangible common stockholders' equity to tangible assets is calculated as tangible common stockholders' equity divided by tangible assets.

For purposes of computing net tangible common stockholders' equity to tangible assets, net tangible common stockholders' equity equals common stockholders' equity less goodwill (adjusted for associated deferred tax liability) and other intangible assets (except mortgage servicing rights). Net tangible common stockholders' equity to tangible assets is calculated as net tangible common stockholders' equity divided by tangible assets.

Management believes that these non-GAAP financial measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from stockholders' equity and retain the effect of unrealized losses on securities and other components of accumulated other comprehensive income (loss) in stockholders' equity. Management also believes that such financial measures, which are intended to complement the capital ratios defined by banking regulators, are useful to investors in evaluating the Company's performance due to the importance that analysts place on these ratios and also allow investors to compare certain aspects of our capitalization to other companies. These non-GAAP financial measures, however, may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. As a result, the usefulness of these measures to investors may be limited, and they should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.

The following table reconciles the above described non-GAAP financial measures to their most directly comparable GAAP financial measures as of the dates indicated.

NON-GAAP FINANCIAL MEASURES

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

     

December 31,
2011

         

September 30,
2011

         

December 31,
2010

Total stockholders' equity (GAAP) 771,020 767,955 736,802
Less goodwill and other intangible assets (excluding mortgage servicing rights) 191,065 191,428 192,518
Less preferred stock 50,000   50,000   50,000  
Tangible common stockholders' equity (Non-GAAP) $ 529,955 $ 526,527 $ 494,284
Add deferred tax liability for deductible goodwill 60,499   60,499   60,499  
Net tangible common stockholders' equity (Non-GAAP) $ 590,454   $ 587,026   $ 554,783  
Common shares outstanding 42,984,174 42,979,732 42,800,694
Book value per common share $ 16.77 $ 16.70 $ 16.05
Tangible book value per common share $ 12.33 $ 12.25 $ 11.55
Net tangible book value per common share $ 13.74 $ 13.66 $ 12.96
Total assets (GAAP) $ 7,325,527 $ 7,307,154 $ 7,500,970
Less goodwill and other intangible assets (excluding mortgage servicing rights) 191,065   191,428   192,518  
Tangible assets (Non-GAAP) $ 7,134,462   $ 7,115,726   $ 7,308,452  
Tangible common stockholders' equity to tangible assets (Non-GAAP) 7.43 % 7.40 % 6.76 %
Net tangible common stockholders' equity to tangible assets (Non-GAAP) 8.28 % 8.25 % 7.59 %

First Interstate BancSystem, Inc.
Marcy Mutch
Investor Relations Officer
(406) 255-5322
investor.relations@fib.com