First Interstate BancSystem, Inc. Reports Fourth Quarter 2012 Results

BILLINGS, Mont.--()--First Interstate BancSystem, Inc. (NASDAQ:FIBK) reports fourth quarter 2012 net income available to common shareholders of $16.1 million, or $0.37 per diluted share, as compared to $15.3 million, or $0.35 per diluted share, for third quarter 2012, and $12.4 million, or $0.29 per diluted share, for fourth quarter 2011.

“Our fourth quarter performance capped a strong year for the Company, resulting in a 32% increase in earnings per share year-over-year as well as significant improvements in return on equity and return on assets”

Significant financial statement items for the fourth quarter of 2012 include:

  • Income from the origination and sale of residential mortgage loans increased to a record high level of $12.3 million during the three months ended December 31, 2012. This represented a 5.6% increase over the prior quarter and a 52.4% increase over the same quarter of the prior year;
  • Net interest margin ratio declined 8 basis points during fourth quarter 2012, as compared to third quarter 2012, and 24 basis points as compared to fourth quarter 2011, due to lower yields earned on loan and investment portfolios;
  • Non-performing assets continued to decrease to the lowest level since 2009, declining to $174.6 million, or 2.26% of total assets, as of December 31, 2012, compared to $202.7 million, or 2.72% of total assets, as of September 30, 2012, and $278.9 million, or 3.81% of total assets, as of December 31, 2011; and
  • Provision for loan losses was $8.0 million for the three months ended December 31, 2012, compared to $9.5 million for the three months ended September 30, 2012, and $13.8 million for the three months ended December 31, 2011.
               

RESULTS SUMMARY

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

 
As Of or For the Three Months Ended

Sequential Quarter
% Change

Year

Over Year
% Change

December 31,
2012
      September 30,
2012
      December 31,
2011
           
Net income available to common shareholders $ 16,114       $ 15,292       $ 12,402 5.4 % 29.9 %
Diluted earnings per common share 0.37 0.35 0.29 5.7 % 27.6 %
Dividends paid per common share 0.2500 0.1200 0.1125 108.3 % 122.2 %
Book value per common share 17.35 17.29 16.77 0.3 % 3.5 %
Tangible book value per common share* 12.97 12.90 12.33 0.5 % 5.2 %
Net tangible book value per common share* 14.37 14.30 13.74 0.5 % 4.6 %
Return on average common equity, annualized 8.55 % 8.22 % 6.84 %
Return on average tangible common equity, annualized* 11.45 % 11.07 % 9.31 %
Return on average assets, annualized 0.88 % 0.86 % 0.72 %
 
      As Of or For the Year Ended  
            Year
December 31, December 31, Over Year
        2012       2011       % Change
Net income available to common shareholders $ 54,924 41,124 33.6 %
Diluted earnings per common share 1.27 0.96 32.3 %
Dividends paid per common share 0.61 0.45 35.6 %
Return on average common equity 7.46 % 5.86 %
Return on average tangible common equity* 10.07 % 8.06 %
Return on average assets 0.79 % 0.61 %
 

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

 

“Our fourth quarter performance capped a strong year for the Company, resulting in a 32% increase in earnings per share year-over-year as well as significant improvements in return on equity and return on assets,” said Ed Garding, President and Chief Executive Officer of First Interstate BancSystem, Inc. “Fourth quarter results were driven by continued robust activity in residential mortgage lending. Growth in this area is reflective of strong demand for refinancing in our markets, as well as enhancements we have made in our systems and processes that have enabled us to capture additional market share. We were also pleased to see further improvement in asset quality and a reduction in credit costs during the quarter. Total non-performing assets declined by 37% from the prior year, which reflects the diligent efforts of our lenders and credit officers in managing these assets to satisfactory resolutions,” Garding further noted.

“Moving into 2013, we expect to deliver another year of strong profitability. Although modest loan demand and continued compression in our net interest margin will present challenges for growing our net interest income, we believe we can offset these pressures through further increases in our non-interest income, continued improvement in operating efficiencies, and a reduction in credit costs resulting from continued improvement in asset quality,” said Mr. Garding.

                 

REVENUE SUMMARY

(Unaudited; $ in thousands)

 
For the Three Months Ended

Sequential Quarter
% Change

Year Over Year
% Change

        December 31,
2012
      September 30,
2012
      December 31,
2011
           
Interest income $ 67,601       $ 68,175       $ 72,006 -0.8% -6.1%
Interest expense       6,628         7,170         8,971         -7.6%       -26.1%
Net interest income 60,973 61,005 63,035 -0.1% -3.3%
Non-interest income:
Income from the origination and sale of loans 12,321 11,665 8,087 5.6% 52.4%
Other service charges, commissions and fees 8,774 8,774 8,062 —% 8.8%
Service charges on deposit accounts 4,401 4,395 4,543 0.1% -3.1%
Wealth management revenues 3,659 3,557 3,280 2.9% 11.6%
Investment securities gains, net 53 66 1,488 -19.7% -96.4%
Other income       1,427         1,725         1,537         -17.3%       -7.2%
Total non-interest income       30,635         30,182         26,997         1.5%       13.5%
Total revenues       $ 91,608         $ 91,187         $ 90,032         0.5%       1.8%
Tax equivalent net interest margin ratio       3.55 %       3.63 %       3.79 %                
 
      For the Year Ended      

Year Over Year
% Change

        December 31,
2012
      December 31,
2011
     
Interest income $ 273,900       $ 292,883 -6.5%
Interest expense       30,114         42,031         -28.4%
Net interest income 243,786 250,852 -2.8%
Non-interest income:
Income from the origination and sale of loans 41,790 21,153 97.6%
Other service charges, commissions and fees 34,226 31,689 8.0%
Service charges on deposit accounts 17,412 17,647 -1.3%
Wealth management revenues 14,314 13,575 5.4%
Investment securities gains, net 348 1,544 -77.5%
Other income       6,771         6,264         8.1%
Total non-interest income       114,861         91,872         25.0%
Total revenues       $ 358,647         $ 342,724         4.6%
Tax equivalent net interest margin ratio       3.66 %       3.80 %        
 

Net Interest Income

The Company's net interest margin ratio decreased to 3.55% during fourth quarter 2012, as compared to 3.63% during third quarter 2012. The fourth quarter 2012 net interest margin ratio included $425 thousand of recoveries of charged-off interest. Exclusive of these interest recoveries, the Company's net interest margin ratio was 3.53% during fourth quarter 2012. The decline in the net interest margin ratio, as compared to third quarter 2012, was primarily due to lower yields earned on the Company's loan and investment portfolios. The impact of lower asset yields was partially offset by increases in average outstanding loans and investment securities and a 5 basis point reduction in the cost of interest-bearing liabilities due to a continuing favorable shift in the mix of deposits from higher costing time deposits into non-interest bearing demand deposits.

Decreases in net interest margin ratio during the three and twelve months ended December 31, 2012, as compared to the same periods in 2011, were due to lower outstanding loan balances and lower yields earned on the Company's loan and investment portfolios, which were partially offset by reductions in the cost of interest bearing liabilities combined with a shift from higher-costing savings and time deposits to lower-costing demand deposits.

Non-interest Income

Non-interest income increased during the three and twelve months ended December 31, 2012, as compared to the same periods in 2011 and the three months ended September 30, 2012, primarily due to increases in income from the origination and sale of residential mortgage loans. New loans for home purchases accounted for approximately 35% of our 2012 residential loan production, compared to 44% in 2011.

                 

NON-INTEREST EXPENSE

(Unaudited; $ in thousands)

 
For the Three Months Ended

Sequential Quarter
% Change

Year

Over Year
% Change

        December 31,
2012
      September 30,
2012
      December 31,
2011
           
Non-interest expense:            
Salaries and wages $ 23,288 $ 23,341 $ 22,002 -0.2 % 5.8 %
Employee benefits 6,113 7,447 6,871 -17.9 % -11.0 %
Occupancy, net 3,968 3,793 3,815 4.6 % 4.0 %
Furniture and equipment 3,301 3,231 3,195 2.2 % 3.3 %
Other real estate owned ("OREO") expense, net of income 3,877 2,612 2,021 48.4 % 91.8 %
Outsourced technology services 2,199 2,182 2,245 0.8 % -2.0 %
FDIC insurance premiums 1,652 1,622 1,607 1.8 % 2.8 %
Professional fees 1,059 1,050 1,176 0.9 % -9.9 %
Mortgage servicing rights amortization 910 879 940 3.5 % -3.2 %
Mortgage servicing rights impairment (recovery) (10 ) 55 427 -118.2 % -102.3 %
Core deposit intangibles amortization 355 355 361 0.0 % -1.7 %
Other expenses       11,120         10,497         11,561         5.9 %       -3.8 %
Total non-interest expense       $ 57,832         $ 57,064         $ 56,221         1.3 %       2.9 %
 
           
For the Year Ended   Year

Over Year
% Change

        December 31,
2012
      December 31,
2011
     
Non-interest expense:      
Salaries and wages $ 89,833 $ 83,560 7.5 %
Employee benefits 29,345 27,792 5.6 %
Occupancy, net 15,786 16,223 -2.7 %
Furniture and equipment 12,859 12,562 2.4 %
OREO expense, net of income 9,400 8,652 8.6 %
Outsourced technology services 8,826 8,933 -1.2 %
FDIC insurance premiums 6,470 7,333 -11.8 %
Professional fees 4,044 3,676 10.0 %
Mortgage servicing rights amortization 3,501 3,225 8.6 %
Mortgage servicing rights impairment (recovery) (771 ) 1,275 -160.5 %
Core deposit intangibles amortization 1,420 1,446 -1.8 %
Other expenses       48,922         43,735         11.9 %
Total non-interest expense       $ 229,635         $ 218,412         5.1 %
 

Salaries and wages increased during the three and twelve months ended December 31, 2012, as compared to the same periods in the prior year, primarily due to higher incentive bonus accruals reflective of the Company's improved performance, inflationary wage increases and increases in commissions and overtime related to the substantial increase in residential real estate loan activity.

Employee benefits decreased during fourth quarter 2012, as compared to third quarter 2012 and fourth quarter 2011, primarily due to lower group health insurance costs. During fourth quarter 2012, the Company reversed $1.1 million of previously accrued group health insurance expense to reflect favorable claims experience in 2012.

Employee benefits increased during the twelve months ended December 31, 2012, as compared to the same period in 2011, primarily due to the combined effects of increases in the market values of securities held under deferred compensation plans, higher stock-based compensation expense and increases in profit sharing accruals reflective of the Company's improved performance. These increases were partially offset by decreases in group health insurance expense described above.

Increases in OREO expense during fourth quarter 2012, as compared to third quarter of 2012 and fourth quarter 2011, were primarily due to write-downs in the estimated fair values of OREO properties. During fourth quarter 2012, the Company recorded write-downs in the estimated fair values of OREO properties of $3.3 million, compared to $2.3 million during third quarter 2012 and $1.5 million during fourth quarter 2011. Approximately 75% of fourth quarter 2012 write-downs were attributable to three properties.

Increases in OREO expense during the twelve months ended December 31, 2012, compared to the same period in the prior year, were primarily attributable to additional carrying costs associated with properties foreclosed during the period. During 2012, OREO expenses included net operating expenses of $3.7 million, write-downs in the estimated fair value of OREO properties of $6.7 million and net gains on OREO sales of $1.0 million, as compared to net operating expenses of $1.8 million, write-downs in the estimated fair value of OREO properties of $7.5 million and net gains on OREO sales of $567 thousand during 2011.

Other expenses increased during fourth quarter 2012 compared to third quarter 2012. During fourth quarter 2012, the Company adjusted accruals related to its credit card loyalty program resulting in a reversal of $695 thousand of other expense. This decrease was offset by increases in advertising costs, which fluctuate based on the timing of advertising campaigns. Increases in other expenses during the twelve months ended December 31, 2012, as compared to the same period in 2011, were primarily due to non-recurring expenses recorded during the first and second quarters of 2012, including the accrual of $3.0 million of estimated collection and settlement costs, $1.5 million of donations expense associated with the sale of a bank building to a charitable organization and the write-off of $428 thousand of unamortized issuance costs associated with the redemption of junior subordinated debentures. In addition, debit card processing expenses increased $1.4 million in 2012, as compared to 2011, due to changes in per transaction processing costs and increases in transaction volumes. Increases in debit card processing expense were offset by corresponding increases in debit card processing revenues of $1.1 million, which are included in non-interest income from other service charges, commissions and fees in the tables above and the accompanying income statements.

       

ASSET QUALITY

(Unaudited; $ in thousands)

 
For the Three Months Ended
December 31,         September 30,         December 31,
          2012         2012         2011
Allowance for loan losses - beginning of period $ 99,006 $ 102,794 $ 120,303
Charge-offs (10,291 ) (14,813 ) (22,435 )
Recoveries 3,796 1,525 962
Provision         8,000           9,500           13,751  
Allowance for loan losses - end of period         $ 100,511           $ 99,006           $ 112,581  
 
December 31, September 30, December 31,
          2012         2012         2011
Period end loans $ 4,223,912 $ 4,180,051 $ 4,186,549
Average loans, quarter 4,197,665 4,183,016 4,236,228
Non-performing loans:
Non-accrual loans 107,799 122,931 199,983
Accruing loans past due 90 days or more 2,277 4,339 4,111
Troubled debt restructurings         31,932           35,428           37,376  
Total non-performing loans 142,008 162,698 241,470
Other real estate owned         32,571           39,971           37,452  
Total non-performing assets         $ 174,579           $ 202,669           $ 278,922  
 
As Of or For the Three Months Ended
December 31, September 30, December 31,
          2012         2012         2011
Net charge-offs to average loans, annualized 0.62 % 1.26 % 2.01 %
Provision for loan losses to average loans, annualized 0.76 % 0.90 % 1.29 %
Allowance for loan losses to period end loans 2.38 % 2.37 % 2.69 %
Allowance for loan losses to total non-performing loans 70.78 % 60.85 % 46.62 %
Non-performing loans to period end loans 3.36 % 3.89 % 5.77 %
Non-performing assets to period end loans and other real estate owned 4.10 % 4.80 % 6.60 %
Non-performing assets to total assets         2.26 %         2.72 %         3.81 %
 

As of December 31, 2012, total non-performing loans included $125 million of real estate loans, of which $34 million were construction loans and $74 million were commercial real estate loans. Non-performing construction loans as of December 31, 2012 were comprised of land acquisition and development loans of $23 million, commercial construction loans of $8 million and residential construction loans of $3 million. Decreases in non-performing loans as of December 31, 2012, as compared to September 30, 2012, are primarily due to the movement of non-accrual loans out of the loan portfolio through pay-off, charge-off or foreclosure.

Decreases in troubled debt restructurings as of December 31, 2012, compared to September 30, 2012, were due to the placement of two restructured commercial real estate loans on non-accrual status during fourth quarter 2012.

During fourth quarter 2012, the Company recorded additions to OREO of $6.7 million, recorded write downs in the fair value of OREO properties of $3.3 million and sold OREO with a net book value of $10.8 million at a net gain of $273 thousand.

Decreases in provisions for loan losses during fourth quarter 2012, as compared to third quarter 2012 and fourth quarter 2011, are reflective of continued improvement in credit quality as evidenced by declining levels of non-performing and criticized loans. As of December 31, 2012, non-performing assets were at their lowest level since fourth quarter 2009.

Recoveries of charged-off loans increased during fourth quarter 2012, compared to third quarter 2012 and fourth quarter 2011, primarily due to a $1.2 million recovery on one large commercial loan charged-off earlier in 2012.

                                               

CREDIT QUALITY TRENDS

(Unaudited; $ in thousands)

 

 

Accruing Loans

Provision for Allowance for

30-89 Days Past

Non-Performing Non-Performing
          Loan Losses         Net Charge-offs         Loan Losses         Due         Loans         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
Q1 2012 11,250 7,929 115,902 58,531 222,765 267,521
Q2 2012 12,000 25,108 102,794 55,074 172,333 226,150
Q3 2012 9,500 13,288 99,006 48,277 162,698 202,669
Q4 2012         8,000           6,495           100,511           34,602           142,008           174,579
 
                               

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
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
 
                                       

LOANS

(Unaudited; $ in thousands)

 
Sequential Year
December 31, September 30, December 31, Quarter Over Year
          2012         2012         2011         % Change           % Change  
Real estate:
Commercial $ 1,497,272 $ 1,513,784 $ 1,553,155 -1.1 % -3.6 %
Construction:
Land acquisition & development 220,196 233,082 278,613 -5.5 % -21.0 %
Residential 49,274 50,895 61,106 -3.2 % -19.4 %
Commercial         65,059           56,097           61,054           16.0 %         6.6 %
Total construction loans         334,529           340,074           400,773           -1.6 %         -16.5 %
Residential 708,339 639,235 571,943 10.8 % 23.8 %
Agricultural         177,244           175,395           175,302           1.1 %         1.1 %
Total real estate loans         2,717,384           2,668,488           2,701,173           1.8 %         0.6 %
Consumer:
Indirect consumer loans 438,245 431,449 407,651 1.6 % 7.5 %
Other consumer loans 137,743 139,984 147,487 -1.6 % -6.6 %
Credit card loans         60,806           58,324           60,933           4.3 %         -0.2 %
Total consumer loans         636,794           629,757           616,071           1.1 %         3.4 %
Commercial 688,753 672,100 693,261 2.5 % -0.7 %
Agricultural 113,627 135,467 119,710 -16.1 % -5.1 %
Other loans, including overdrafts         912           1,359           2,813           -32.9 %         -67.6 %
Loans held for investment 4,157,470 4,107,171 4,133,028 1.2 % 0.6 %
Mortgage loans held for sale         66,442           72,880           53,521           -8.8 %         24.1 %
Total loans         $ 4,223,912           $ 4,180,051           $ 4,186,549           1.0 %         0.9 %
 

Loan demand continues to be challenging with total loans showing only slight growth as of December 31, 2012, compared to September 30, 2012 and December 31, 2011. Management attributes growth in commercial construction loans as of December 31, 2012, compared to September 30, 2012, to overall improvement in economic conditions in the Company's market areas. Residential real estate loans grew during fourth quarter 2012 due to continued retention of selected loan production. Agricultural loans decreased as of December 31, 2012, compared to September 30, 2012, due to seasonal reductions in credit lines. Land acquisition and development and residential construction loans continued to decrease during fourth quarter 2012 primarily due to further movement of lower quality loans out of the loan portfolio through pay-off, charge-off or foreclosure.

                                       

DEPOSITS

(Unaudited; $ in thousands)

 
Sequential Year
December 31, September 30, December 31, Quarter Over Year
          2012         2012         2011         % Change           % Change  
Non-interest bearing demand $ 1,495,309 $ 1,443,773 $ 1,271,709 3.6 % 17.6 %
Interest bearing:
Demand 1,811,905 1,637,214 1,306,509 10.7 % 38.7 %
Savings 1,547,713 1,531,359 1,691,413 1.1 % -8.5 %
Time, $100 and over 594,712 613,586 681,047 -3.1 % -12.7 %
Time, other         790,772           809,800           876,293           -2.3 %         -9.8 %
Total interest bearing         4,745,102           4,591,959           4,555,262           3.3 %         4.2 %
Total deposits         $ 6,240,411           $ 6,035,732           $ 5,826,971           3.4 %         7.1 %
 

Total deposits increased as of December 31, 2012, compared to September 30, 2012 and December 31, 2011. The favorable shift in the composition of deposits away from higher costing time deposits into lower costing demand deposits continued during fourth quarter 2012. As a result, the Company's cost of funds, including non-interest bearing demand deposits, decreased to 0.39% in fourth quarter 2012, compared to 0.43% in third quarter 2012 and 0.55% in fourth quarter 2011.

Savings deposits decreased as of December 31, 2012, compared to December 31, 2011. As a result of regulatory changes allowing businesses to receive interest on checking accounts, the Company discontinued its savings sweep product resulting in a shift of approximately $300 million from savings deposits into demand deposits during first quarter 2012.

REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS

On June 26, 2012, the Company redeemed $41.2 million of 30-year junior subordinated deferrable interest debentures issued by the Company to an unconsolidated subsidiary trust. The redemption of the junior subordinated debentures caused a mandatory redemption of $40 million of 30-year floating rate mandatorily redeemable capital trust preferred securities issued by the unconsolidated subsidiary trust to third-party investors.

                       

CAPITAL

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

 
As of or For the Three Months Ended
                Sequential Year
December 31, September 30, December 31, Quarter Over Year
          2012         2012         2011         % Change           % Change  
Preferred stockholders' equity $ $ 50,000 $ 50,000 -100.0 % -100.0 %
Common stockholders' equity 735,195 729,059 701,986 0.8 % 4.7 %
Accumulated other comprehensive income, net         15,991           18,811           19,034           -15.0 %         -16.0 %
Total stockholders' equity         $ 751,186           $ 797,870           $ 771,020           -5.9 %         -2.6 %
Book value per common share $ 17.35 $ 17.29 $ 16.77 0.3 % 3.5 %
Tangible book value per common share* 12.97 12.90 12.33 0.5 % 5.2 %

Net tangible book value per common share*

        14.37           14.30           13.74           0.5 %         4.6 %
 
Weighted average common shares outstanding for basic earnings per common share computation         43,032,697           42,989,564           42,783,770           0.1 %         0.6 %
 
Weighted average common shares outstanding for diluted earnings per common share computation         43,198,076           43,120,077           42,847,772           0.2 %         0.8 %
 

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

 

On December 18, 2012, the Company provided notice to preferred stockholders of its intention to redeem the preferred stock on January 18, 2013. Upon notice to holders of the redemption, the preferred stock was reclassified from stockholders' equity to a liability in accordance with generally accepted accounting principles. The preferred stock was redeemed on January 18, 2013 at an aggregate redemption price of $50.2 million, which represented par value plus unpaid and accrued dividends.

                     

CAPITAL RATIOS

(Unaudited)

 
December 31, September 30, December 31,
          2012         2012         2011
Tangible common stockholders' equity to tangible assets* 7.46 % 7.67 % 7.43 %
Net tangible common stockholders' equity to tangible assets* 8.26 % 8.50 % 8.28 %
Tier 1 common capital to total risk weighted assets 11.94 % ** 11.81 % 11.04 %
Leverage ratio 8.81 % ** 9.56 % 9.84 %
Tier 1 risk-based capital 13.60 % ** 14.53 % 14.55 %
Total risk-based capital         15.59 % **       16.52 %         16.54 %
 

* 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, 2012, the Company had capital levels that, in all cases, exceeded the “well capitalized” requirements under all regulatory capital guidelines.

Fourth Quarter 2012 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss fourth quarter 2012 results at 11:00 a.m. Eastern Standard Time (9:00 a.m. MST) on Tuesday, January 29, 2013. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-888-317-6016 or by logging on to www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Standard Time (11:00 a.m. MST) on January 29, 2013 through March 4, 2013 by dialing 1-877-344-7529 (using conference ID 10023660). The call will also be archived on our website, www.FIBK.com, for one year.

About First Interstate BancSystem, Inc.

First Interstate BancSystem, Inc. is a financial and bank holding company incorporated in 1971 and headquartered in Billings, Montana. The Company operates 72 banking offices in 42 communities in Montana, Wyoming and western South Dakota. Through First Interstate Bank, the Company delivers a comprehensive range of banking products and services to individuals, businesses, municipalities and other entities throughout the Company's market areas.

Cautionary Statement

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are covered by the safe harbor provisions of such sections. These statements include statements about 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: 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; subordination of common stock to Company debt; uncertainties associated with introducing new products or lines of business; and, downgrade of the U.S. credit rating.

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, 2011, filed February 28, 2012. 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, 2011.

All forward-looking statements attributable to the Company or persons acting on the Company's behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made and the Company does not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.

 

CONSOLIDATED BALANCE SHEETS

(Unaudited, $ in thousands)

                       
December 31, September 30, December 31,
          2012         2012         2011
Assets
Cash and due from banks $ 177,978 $ 124,275 $ 142,502
Federal funds sold 730 1,215 309
Interest bearing deposits in banks         622,624           485,845           329,636
Total cash and cash equivalents         801,332           611,335           472,447
Investment securities:
Available-for-sale 1,995,258 1,979,154 2,016,864

Held-to-maturity (estimated fair values of $218,933, $199,078, $161,877 at December 31, 2012, September 30, 2012 and December 31, 2011, respectively)

        208,223           187,573           152,781
Total investment securities         2,203,481           2,166,727           2,169,645
Loans held for investment 4,157,470 4,107,171 4,133,028
Mortgage loans held for sale         66,442           72,880           53,521
Total loans 4,223,912 4,180,051 4,186,549
Less allowance for loan losses         100,511           99,006           112,581
Net loans         4,123,401           4,081,045           4,073,968
Premises and equipment, net of accumulated depreciation 187,565 188,851 184,771
Goodwill 183,673 183,673 183,673
Company-owned life insurance 76,729 76,371 74,880
Other real estate owned ("OREO"), net of write-downs 32,571 39,971 37,452
Accrued interest receivable 28,869 33,416 31,974
Mortgage servicing rights, net of accumulated amortization and impairment reserve 12,653 12,334 11,555
Core deposit intangibles, net of accumulated amortization 5,937 6,291 7,357
Deferred tax asset, net 2,597 1,638 9,628
Other assets         62,953           59,500           68,177
Total assets         $ 7,721,761           $ 7,461,152           $ 7,325,527
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing $ 1,495,309 $ 1,443,773 $ 1,271,709
Interest bearing         4,745,102           4,591,959           4,555,262
Total deposits         6,240,411           6,035,732           5,826,971
Securities sold under repurchase agreements 505,785 460,805 516,243
Accounts payable and accrued expenses 48,208 40,386 42,248
Accrued interest payable 6,502 6,706 8,123
Long-term debt 37,160 37,170 37,200
Other borrowed funds 32 6 7
Preferred stock pending redemption 50,000
Subordinated debentures held by subsidiary trusts         82,477           82,477           123,715
Total liabilities         6,970,575           6,663,282           6,554,507
Stockholders’ equity:
Preferred stock 50,000 50,000
Common stock 271,335 270,553 266,842
Retained earnings 463,860 458,506 435,144
Accumulated other comprehensive income, net         15,991           18,811           19,034
Total stockholders’ equity         751,186           797,870           771,020
Total liabilities and stockholders’ equity         $ 7,721,761           $ 7,461,152           $ 7,325,527
 
       

CONSOLIDATED STATEMENTS OF INCOME

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

 
Three Months Ended
December 31,         September 30,         December 31,
          2012         2012         2011
Interest income:
Interest and fees on loans $ 57,470 $ 57,418 $ 60,529
Interest and dividends on investment securities:
Taxable 8,490 9,194 10,023
Exempt from federal taxes 1,256 1,223 1,196
Interest on deposits in banks 383 336 256
Interest on federal funds sold         2           4           2
Total interest income         67,601           68,175           72,006
Interest expense:
Interest on deposits 4,851 5,414 6,854
Interest on securities sold under repurchase agreements 127 144 150
Interest on long-term debt 486 502 493
Interest on preferred stock pending redemption 131
Interest on subordinated debentures held by subsidiary trusts         1,033           1,110           1,474
Total interest expense         6,628           7,170           8,971
Net interest income 60,973 61,005 63,035
Provision for loan losses         8,000           9,500           13,751
Net interest income after provision for loan losses         52,973           51,505           49,284
Non-interest income:
Income from the origination and sale of loans 12,321 11,665 8,087
Other service charges, commissions and fees 8,774 8,774 8,062
Service charges on deposit accounts 4,401 4,395 4,543
Wealth management revenues 3,659 3,557 3,280
Investment securities gains, net 53 66 1,488
Other income         1,427           1,725           1,537
Total non-interest income         30,635           30,182           26,997
Non-interest expense:
Salaries and wages 23,288 23,341 22,002
Employee benefits 6,113 7,447 6,871
Occupancy, net 3,968 3,793 3,815
Furniture and equipment 3,301 3,231 3,195
OREO expense, net of income 3,877 2,612 2,021
Outsourced technology services 2,199 2,182 2,245
FDIC insurance premiums 1,652 1,622 1,607
Professional fees 1,059 1,050 1,176
Mortgage servicing rights amortization 910 879 940
Mortgage servicing rights impairment (10 ) 55 427
Core deposit intangibles amortization 355 355 361
Other expenses         11,120           10,497           11,561
Total non-interest expense         57,832           57,064           56,221
Income before income tax expense 25,776 24,623 20,060
Income tax expense         8,931           8,468           6,795
Net income 16,845 16,155 13,265
Preferred stock dividends         731           863           863
Net income available to common shareholders         $ 16,114           $ 15,292           $ 12,402
 
Basic earnings per common share $ 0.37 $ 0.36 $ 0.29
Diluted earnings per common share         $ 0.37           $ 0.35           $ 0.29
 
       

CONSOLIDATED STATEMENTS OF INCOME

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

 
Twelve Months Ended
December 31,         December 31,
          2012         2011
Interest income:
Interest and fees on loans $ 230,882 $ 245,767
Interest and dividends on investment securities:
Taxable 36,847 41,304
Exempt from federal taxes 4,923 4,749
Interest on deposits in banks 1,235 1,050
Interest on federal funds sold         13           13
Total interest income         273,900           292,883
Interest expense:
Interest on deposits 22,306 33,533
Interest on securities sold under repurchase agreements 579 695
Interest on long-term debt 1,981 1,975
Interest on preferred stock pending redemption 131
Interest on subordinated debentures held by subsidiary trusts         5,117           5,828
Total interest expense         30,114           42,031
Net interest income: 243,786 250,852
Provision for loan losses         40,750           58,151
Net interest income after provision for loan losses         203,036           192,701
Non-interest income:
Income from the origination and sale of loans 41,790 21,153
Other service charges, commissions and fees 34,226 31,689
Service charges on deposit accounts 17,412 17,647
Wealth management revenues 14,314 13,575
Investment securities gains, net 348 1,544
Other income         6,771           6,264
Total non-interest income         114,861           91,872
Non-interest expense:
Salaries and wages 89,833 83,560
Employee benefits 29,345 27,792
Occupancy, net 15,786 16,223
Furniture and equipment 12,859 12,562
OREO expense, net of income 9,400 8,652
Outsourced technology services 8,826 8,933
FDIC insurance premiums 6,470 7,333
Professional fees 4,044 3,676
Mortgage servicing rights amortization 3,501 3,225
Mortgage servicing rights impairment (recovery) (771 ) 1,275
Core deposit intangibles amortization 1,420 1,446
Other expenses         48,922           43,735
Total non-interest expense         229,635           218,412
Income before income tax expense 88,262 66,161
Income tax expense         30,038           21,615
Net income 58,224 44,546
Preferred stock dividends         3,300           3,422
Net income available to common shareholders         $ 54,924           $ 41,124
 
Basic earnings per common share $ 1.28 $ 0.96
Diluted earnings per common share         $ 1.27           $ 0.96
 
     

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 
Three Months Ended  
December 31, 2012           September 30, 2012           December 31, 2011  
Average             Average         Average             Average         Average             Average
        Balance       Interest       Rate         Balance       Interest       Rate         Balance       Interest       Rate
Interest earning assets:
Loans (1) (2) $ 4,197,665 $ 57,915 5.49 % $ 4,183,016 $ 57,872 5.50 % $ 4,236,228 $ 60,928 5.71 %
Investment securities (2) 2,156,668 10,471 1.93 2,098,576 11,123 2.11 2,071,372 11,910 2.28
Interest bearing deposits in banks 600,385 383 0.25 525,149 336 0.25 401,654 256 0.25
Federal funds sold       2,074         2         0.38           3,006         4         0.53           973         2         0.82  
Total interest earnings assets 6,956,792 68,771 3.93 6,809,747 69,335 4.05 6,710,227 73,096 4.32
Non-earning assets       623,822                           633,551                           618,712                  
Total assets       $ 7,580,614                           $ 7,443,298                           $ 7,328,939                  
Interest bearing liabilities:
Demand deposits $ 1,705,963 $ 548 0.13 % $ 1,613,136 $ 589 0.15 % $ 1,300,105 $ 601 0.18 %
Savings deposits 1,528,788 741 0.19 1,523,347 873 0.23 1,689,109 1,217 0.29
Time deposits 1,404,913 3,562 1.01 1,452,688 3,952 1.08 1,598,361 5,036 1.25
Repurchase agreements 496,321 127 0.10 501,640 144 0.11 487,734 150 0.12
Other borrowed funds 20 6 5,589
Long-term debt 37,163 486 5.20 37,174 502 5.37 37,315 493 5.24
Preferred stock pending redemption 7,609 131 6.85
Subordinated debentures held by subsidiary trusts       82,477         1,033         4.98           82,477         1,110         5.35           123,715         1,474         4.73  
Total interest bearing liabilities 5,263,254 6,628 0.50 5,210,468 7,170 0.55 5,241,928 8,971 0.68
Non-interest bearing deposits 1,475,600 1,399,585 1,269,423
Other non-interest bearing liabilities 49,855 43,511 47,956
Stockholders’ equity       791,905                           789,734                           769,632                  
Total liabilities and stockholders’ equity       $ 7,580,614                           $ 7,443,298                           $ 7,328,939                  
Net FTE interest income $ 62,143 $ 62,165 $ 64,125
Less FTE adjustments (2)               (1,170 )                         (1,160 )                         (1,090 )        
Net interest income from consolidated statements of income               $ 60,973                           $ 61,005                           $ 63,035          
Interest rate spread                       3.43 %                         3.50 %                         3.64 %
Net FTE interest margin (3)                       3.55 %                         3.63 %                         3.79 %
Cost of funds, including non-interest bearing demand deposits (4)                       0.39 %                         0.43 %                         0.55 %
 

(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 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.

 
       

AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 
Twelve Months Ended  
December 31, 2012           December 31, 2011  
Average             Average         Average             Average
          Balance       Interest       Rate         Balance       Interest       Rate
Interest earning assets:
Loans (1) (2) $ 4,176,439 $ 232,724 5.57 % $ 4,275,128 $ 247,492 5.79 %
Investment securities (2) 2,123,231 44,613 2.10 2,026,192 48,795 2.41
Interest bearing deposits in banks 486,203 1,235 0.25 414,375 1,050 0.25
Federal funds sold         2,341         13         0.56           2,231         13         0.58  
Total interest earnings assets 6,788,214 278,585 4.10 6,717,926 297,350 4.43
Non-earning assets         627,498                           618,454                  
Total assets         $ 7,415,712                           $ 7,336,380                  
Interest bearing liabilities:
Demand deposits $ 1,624,687 $ 2,390 0.15 % $ 1,269,676 $ 3,057 0.24 %
Savings deposits 1,496,254 3,562 0.24 1,714,294 6,448 0.38
Time deposits 1,473,501 16,354 1.11 1,737,401 24,028 1.38
Repurchase agreements 501,192 579 0.12 500,882 695 0.14
Other borrowed funds 16 5,582
Long-term debt 37,185 1,981 5.33 37,442 1,975 5.27
Preferred stock pending redemption 1,913 131 6.85
Subordinated debentures held by subsidiary trusts         102,307         5,117         5.00           123,715         5,828         4.71  
Total interest bearing liabilities 5,237,055 30,114 0.58 5,388,992 42,031 0.78
Non-interest bearing deposits 1,346,787 1,146,535
Other non-interest bearing liabilities 47,799 48,532
Stockholders’ equity         784,071                           752,321                  
Total liabilities and stockholders’ equity         $ 7,415,712                           $ 7,336,380                  
Net FTE interest income $ 248,471 $ 255,319
Less FTE adjustments (2)                 (4,685 )                         (4,467 )        
Net interest income from consolidated statements of income                 $ 243,786                           $ 250,852          
Interest rate spread                         3.52 %                         3.65 %
Net FTE interest margin (3)                         3.66 %                         3.80 %
Cost of funds, including non-interest bearing demand deposits (4)                         0.46 %                         0.64 %
 

(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 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.

 

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; (v) tangible assets, and (vi) return on average tangible common equity.

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, 2012 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.

For purposes of computing return on average tangible common equity, average tangible common equity equals average common stockholders' equity less average goodwill and average other intangible assets (except mortgage servicing rights). Return on average tangible common equity is calculated by dividing net income available to common shareholders by average tangible common equity.

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, September 30, December 31,
          2012         2012         2011
Total stockholders’ equity (GAAP) $ 751,186 $ 797,870 $ 771,020
Less goodwill and other intangible assets (excluding mortgage servicing rights) 189,637 189,994 191,065
Less preferred stock                   50,000           50,000  
Tangible common stockholders’ equity (Non-GAAP) 561,549 557,876 529,955
Add deferred tax liability for deductible goodwill         60,499           60,499           60,499  
Net tangible common stockholders’ equity (Non-GAAP)         $ 622,048           $ 618,375           $ 590,454  
Total assets (GAAP) $ 7,721,761 $ 7,461,152 $ 7,325,527
Less goodwill and other intangible assets (excluding mortgage servicing rights)         189,637           189,994           191,065  
Tangible assets (Non-GAAP)         $ 7,532,124           $ 7,271,158           $ 7,134,462  
 
Common shares outstanding 43,290,323 43,252,383 42,984,174
Book value per common share $ 17.35 $ 17.29 $ 16.77
Tangible book value per common share $ 12.97 $ 12.90 $ 12.33
Net tangible book value per common share $ 14.37 $ 14.30 $ 13.74
Tangible common stockholders’ equity to tangible assets (Non-GAAP) 7.46 % 7.67 % 7.43 %
Net tangible common stockholders’ equity to tangible assets (Non-GAAP)         8.26 %         8.50 %         8.28 %
 
        Average For the Three Months Ended         Average For the Year Ended
December 31,         September 30,         December 31, December 31,         December 31,
          2012         2012         2011         2012         2011
Total stockholders’ equity (GAAP) $ 791,905 $ 789,734 $ 769,632 $ 784,071 $ 752,321
Less goodwill and other intangible assets (excluding mortgage servicing rights) 189,839 $ 190,206 191,275 190,381 191,823
Less preferred stock         42,391           50,000           50,000           48,087           50,000  
Tangible common stockholders' equity (Non-GAAP)         $ 559,675           $ 549,528           $ 528,357           $ 545,603           $ 510,498  
 
As Of or For the Three Months Ended As Of or For the Year Ended
December 31, September 30, December 31, December 31, December 31,
          2012         2012         2011         2012         2011
Net income to available to common shareholders, annualized $ 64,106 $ 60,836 $ 49,204 $ 54,924 $ 41,124
Return on average tangible common equity (Non-GAAP)         11.45 %         11.07 %         9.31 %         10.07 %         8.06 %

Contacts

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

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