First Interstate BancSystem, Inc. Reports Third Quarter Financial Results

BILLINGS, Mont.--(BUSINESS WIRE)--First Interstate BancSystem, Inc. (NASDAQ:FIBK) reports third quarter 2014 net income of $19.2 million, or $0.42 per diluted share. Included in third quarter 2014 net income are non-core expenses related to the acquisition of Mountain West Financial Corp. and litigation accruals aggregating $5.1 million. Exclusive of non-core items, the Company's third quarter 2014 core net income was $22.3 million, or $0.49 per diluted share, as compared to core net income of $21.4 million, or $0.48 per diluted share, for the second quarter 2014.

THIRD QUARTER HIGHLIGHTS

• Successful completion of the merger with Mountain West Financial Corp. on July 31, 2014.

• Improving asset quality as non-performing assets decreased $5.3 million to 1.08% of total assets as of September 30, 2014.
• $5.4 million increase in net interest income; $4.5 million of which was attributable to the acquisition of Mountain West Financial Corp.
• Strong non-interest income growth of $2.8 million, or 10.5%; 2.0% of which was attributable to the acquisition of Mountain West Financial Corp.
• Stable net interest margin of 3.55%, as compared to 3.54% for the second quarter 2014.

“The highlight of the third quarter was the successful completion of our merger with Mountain West Financial Corp.,” said Ed Garding, President and Chief Executive Officer of First Interstate BancSystem, Inc. “Since closing the merger at the end of July, we have been focused on making a smooth transition for Mountain West’s customers and employees. We are pleased with the early results and we expect this merger to deliver strong value for our shareholders," continued Mr. Garding.

“From an organic standpoint, our total loans were relatively flat during the third quarter, while we saw very strong core deposit inflows. The two strongest areas of deposit growth were non-interest bearing and interest bearing demand deposits, which each increased nearly 7% during the third quarter. As a result of the strong inflow, we saw a nice improvement in our deposit mix, with these two categories comprising 56% of our total deposits, up from 49% at the end of last quarter. We ended the quarter with a loan to deposit ratio of under 70%, which gives us a good opportunity to grow our net interest income as we redeploy our excess liquidity into higher yielding assets in the coming quarters,” said Mr. Garding.

DIVIDEND DECLARATION

On October 27, 2014, the Company's Executive Committee declared a dividend of $0.16 per common share payable on November 17, 2014 to owners of record as of November 6, 2014. This dividend equates to a 2.4% annual yield based on the $26.83 average closing price of the Company's common stock during the third quarter 2014.

ACQUISITION

On February 10, 2014, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Mountain West Financial Corp., a Montana-based bank holding company that operates one wholly-owned subsidiary bank, Mountain West Bank, NA, with branches located in five of the Company's current market areas in Montana. The acquisition was completed on July 31, 2014, and the Company merged Mountain West Bank with its existing bank subsidiary, First Interstate Bank, on October 17, 2014.

Consideration for the acquisition was $74.5 million and consisted of cash of $38.5 million and the issuance of 1,378,230 shares of the Company's Class A common stock valued at $26.10 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. As of the acquisition date, Mountain West Financial Corp. had total assets with fair values of $612 million, total loans with fair values of $360 million and deposits with fair values of $515 million. In conjunction with the acquisition, the Company recorded provisional goodwill of $21 million and core deposit intangible assets of $11 million.

RESULTS OF OPERATIONS

Net Interest Income. The Company's net interest income, on a fully taxable equivalent, or FTE, basis, increased $5.3 million to $66.1 million during third quarter 2014, as compared to $60.8 million during second quarter 2014. Net interest income was positively impacted this quarter by the addition of Mountain West Bank and the recognition of $1.3 million of interest accretion related to the fair valuation of acquired loans, $745 thousand of which was due to early loan payoffs. The remaining increase in net FTE interest income was primarily due to one additional accrual day during third quarter 2014.

The Company's net interest margin ratio increased to 3.55% during third quarter 2014, as compared to 3.54% during the second quarter 2014. The yield on interest earning assets was 3.80% during the third quarter and the second quarter of 2014. Funding costs declined to 0.26% during the third quarter 2014, a one basis point reduction from second quarter 2014. The fair value discount on the early payoffs of acquired loans of $745 thousand had a positive impact of 5 basis points this quarter. The Company recovered charged off interest of $732 thousand this quarter, compared to $1.4 million during second quarter 2014. Exclusive of the fair value discount on the early payoff of acquired loans and the impact of interest recoveries, the Company's net interest margin ratio was 3.47% during the third quarter 2014 and 3.46% during the second quarter of 2014.

Non-Interest Income. Non-interest income increased $2.8 million to $29.4 million during third quarter 2014, as compared to $26.6 million during second quarter 2014. The increase attributable to the acquisition of Mountain West Bank was $523 thousand, with the remaining $2.3 million growth due to increases in income from the origination and sale of mortgage loans, debit and credit card interchange fees, service charges on deposit accounts and wealth management revenues.

Income from the origination and sale of loans increased $1.0 million to $7.4 million during third quarter 2014, as compared to $6.4 million during second quarter 2014, primarily due to increased mortgage loan production. The Company's mortgage loan production increased during third quarter 2014, as compared to second quarter 2014, as a result of a 10% increase in purchase volume. Loans originated for home purchases accounted for approximately 81% of the Company's mortgage loan production during third quarter 2014, as compared to 76% during second quarter 2014.

Other service charges, commissions and fees increased $759 thousand to $10.5 million during third quarter 2014, as compared to $9.7 million during second quarter 2014, primarily due to higher interchange fees earned on debit and credit card transactions resulting from higher transaction volumes.

Wealth management revenues increased $548 thousand to $5.2 million during third quarter 2014, as compared to $4.6 million during second quarter 2014, primarily due to a change in fee schedules effective July 1^st and as a result of one-time administration fees.

Non-Interest Expense. Non-interest expense increased $9.1 million to $65.0 million during third quarter 2014, as compared to $55.9 million during second quarter 2014. Included in non-interest expense are $5.1 million of expenses which the Company considers to be non-core related to the acquisition and pending litigation. Exclusive of these non-core expenses, core non-interest expense was $59.9 million during third quarter 2014, compared to $55.3 million during second quarter 2014. Increases in core non-interest expense during third quarter 2014, as compared to second quarter 2014, were primarily due to inclusion of two months of Mountain West Bank operating expenses of $3.0 million, higher salaries and wages expense, and an increase in other expenses.

Salaries and wages expense increased $1.5 million to $25.9 million during third quarter 2014, as compared to $24.4 million during second quarter 2014, primarily due to the additional Mountain West Bank salary expense and also as a result of increases in commissioned pay reflective of increased mortgage loan origination.

Employee benefits expense increased $677 thousand to $7.8 million during third quarter 2014, as compared to $7.1 million during second quarter 2014, primarily due to the additional Mountain West Bank employee benefits expense. Additionally, during second quarter 2014, employee benefits expense was reduced by $500 thousand due to the reversal of previously accrued health insurance expense reflective of favorable claims experienced during the first half of 2014.

Other expenses increased $1.5 million to $15.3 million during third quarter 2014, as compared to $13.8 million during second quarter 2014, primarily due to the addition of Mountain West Bank operating expenses and also as a result of debit and credit card issuance costs related to the breach of payment data systems of major retailers.

BALANCE SHEET

Total loans increased $348 million to $4.9 billion as of September 30, 2014, from $4.5 billion as of June 30, 2014, as a result of the acquisition of Mountain West Bank. Exclusive of the acquisition, overall loan growth was flat for the third quarter 2014.

Residential real estate loans grew $63 million to $957 million as of September 30, 2014. Growth of $44 million is attributable to the acquisition, and $19 million was the result of the origination of 1-4 family residential real estate loans not meeting the requirements for sale on the secondary market. These loans are generally five to fifteen year adjustable rate and conventional mortgages.

Consumer loans increased $38 million to $745 million as of September 30, 2014, with an increase of $9 million attributable to the acquisition, and the remainder primarily due to increases in indirect consumer loans. Indirect consumer loans grew organically $26 million to $538 million as of September 30, 2014. Management attributes the increase in indirect consumer loans to continued expansion of the Company's indirect lending program within existing markets.

Goodwill and core deposit intangible assets increased $21 million and $10 million, to $205 million and $14 million, respectively, as of September 30, 2014, as a result of the acquisition.

Total deposits increased $780 million to $7.0 billion as of September 30, 2014, from $6.2 billion as of June 30, 2014, as a result of an increase in deposits from the acquisition of $512 million and organic growth of $268 million. During third quarter 2014, the mix of deposits continued to shift away from higher costing time deposits to lower costing demand deposits, the result of sustained low interest rates. As of September 30, 2014, time deposits comprised 18.0% of total deposits, as compared to 18.4% of total deposits as of June 30, 2014.

Subordinated debentures held by subsidiary trusts increased $20 million, to $103 million as of September 30, 2014 as a result of the merger with Mountain West Financial Corp. The Company intends to repay the $20 million of Mountain West Financial Corp. debentures by year end.

ASSET QUALITY

Non-performing assets continued to decrease during third quarter 2014, ending the quarter at $92 million, or 1.08% of total assets, as of September 30, 2014, the lowest level since 2008. This compares to $97 million, or 1.27% of total assets as of June 30, 2014.

During third quarter 2014, the Company recorded net charged-off loans of $4 million, which was comprised of gross charge-offs of $6 million and gross recoveries of $2 million.

The Company recorded a $261 thousand provision for loan losses during third quarter 2014, compared to a $2 million reversal in the second quarter 2014, as a result of an increase in criticized assets in third quarter. The allowance for loan losses as a percentage of period end loans decreased to 1.53% as of September 30, 2014, from 1.74% as of June 30, 2014, due to the addition of Mountain West Bank loans, which were recorded at fair value on the date of acquisition and for which no allowance for loan losses was required under generally accepted accounting principles as of September 30, 2014.

STOCK REPURCHASE

Pursuant to a stock repurchase program approved by the Company's Board of Directors on November 25, 2013, the Company repurchased and retired 36,703 shares of its Class A common stock during third quarter 2014. The shares were repurchased in a combination of open market and privately negotiated transactions at an aggregate weighted average purchase price of $25.47 per share. Under the stock repurchase program, the Company may repurchase up to an additional 1,637,879 shares of its Class A common stock prior to expiration of the plan on November 25, 2014.

Third Quarter 2014 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss third quarter 2014 results at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time) on Tuesday, October 28, 2014. The conference call will be accessible by telephone and through the Internet. Participants may join the call by dialing 1-877-507-0356 or by logging on to www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. Mountain Time) on October 28, 2014 through 9:00 a.m. Eastern Time (7:00 a.m. Mountain Time) on November 28, 2014, by dialing 1-877-344-7529 (using conference ID 10053260). The call will also be archived on our website, www.FIBK.com, for one year.

About First Interstate BancSystem, Inc.

First Interstate BancSystem, Inc. is a financial and bank holding company incorporated in 1971 and headquartered in Billings, Montana. The Company operates 79 banking offices, including detached drive-up facilities, in 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 Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results

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

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

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

*Preliminary estimate - may be subject to change.

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

(1) Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs, which is not material.

(2) Interest income and average rates for tax exempt loans and securities are presented on an FTE basis.

(3) Net FTE interest margin during the period equals the difference between annualized interest income on interest earning assets and the annualized interest expense on interest bearing liabilities, divided by average interest earning assets for the period.

(4) Calculated by dividing total annualized interest on interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.

Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principles in the United States of America, or GAAP, this release contains certain non-GAAP financial measures that management uses to provide supplemental perspectives on capital adequacy, operating results, performance trends and financial condition. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. As a result, the usefulness of these measures to investors may be limited, and they should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.

The Company adjusts certain capital adequacy measures to exclude intangible assets except mortgage servicing rights. Management believes these non-GAAP financial measures, which are intended to complement the capital ratios defined by banking regulators, are useful to investors in evaluating the Company's performance due to the importance that analysts place on these ratios and also allow investors to compare certain aspects of the Company's capitalization to other companies.

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

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