News Column

First Interstate BancSystem Updates on 4Q Earnings

February 8, 2014

First Interstate BancSystem, Inc. reports fourth quarter 2013 net income available to common shareholders of $20.8 million, or $0.47 per diluted share, a 29 percent increase over fourth quarter 2012 net income available to common shareholders of $16.1 million, or $0.37 per diluted share.

In a release on Jan. 29, the Company said that for the year ended Dec. 31, 2013, the Company reported net income available to common shareholders of $86.1 million, or $1.96 per diluted share, compared to $54.9 million, or $1.27 per diluted share, during 2012.

Fourth Quarter Financial Highlights

-Net interest income of $61.1 million, an increase of 1.7 percent compared to third quarter 2013

-3.52 percent net interest margin ratio remained unchanged from third quarter 2013

-5.13 percent yield on loans, an increase of 6 basis points from third quarter 2013

-3 percent growth in total loans, as compared to Dec. 31, 2012

-1.48 percent non-performing assets to total assets, a decline from 1.53 percent as of Sept. 30, 2013 and 1.85 percent as of Dec. 31, 2012

-$4 million reversal of provision for loan losses

"We had another solid quarter driven by further improvement in credit quality, with our non-performing assets and criticized assets reaching the lowest levels since 2008," said Ed Garding, President and Chief Executive Officer of First Interstate BancSystem, Inc. "Although we haven't yet seen a significant increase in loan demand in our markets, we continue to grow other parts of our business, such as Wealth Management, which produced a 19 percent increase in revenues during 2013.

"For the full year of 2013, we were able to generate the highest level of net income in the Company's history and increase net income by 57 percent over 2012. Our strong performance has enabled us to increase our quarterly dividend another 14 percent to $0.16 per common share. We are pleased to be able to generate this strong return for our shareholders and we look forward to delivering another positive year in 2014."

Dividend Declaration

On Jan. 23, the Company's Board of Directors declared a dividend of $0.16 per common share payable on Feb. 14, to owners of record as of Feb. 4. This dividend equates to a 2.5 percent annualized yield based on the $25.93 average closing price of the Company's common stock during fourth quarter 2013, and reflects a 14 percent increase from dividends paid during third quarter of $0.14 per common share.

Annual Meeting

On Jan. 23, the Company's Board of Directors voted that the Annual Meeting of Shareholders be held on May 21, at the First Interstate Bank Operations Center, 1800 Sixth Ave., North, Billings, Mont. at 4 p.m. Mountain Daylight Time. The record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting is March 14.

Results of Operations

Net Interest Income. The Company's net interest income, on a fully taxable equivalent, or FTE, basis, increased to $61.1 million during fourth quarter 2013, compared to $60.1 million during third quarter 2013, primarily due to higher yields earned on loans and investment securities, lower yields paid on time deposits and lower average outstanding time deposits. During fourth quarter 2013, the Company's loan yield increased 6 basis points to 5.13 percent, as compared to 5.07 percent during third quarter 2013, and investment securities yield increased 1 basis point to 1.79 percent. In addition, average outstanding time deposits decreased $40.7 million as of Dec. 31, 2013, as compared to Sept. 30, 2013, and the cost of these deposits declined 4 basis points to 0.81 percent during fourth quarter. The Company's net FTE interest margin ratio remained unchanged at 3.52 percent during third and fourth quarter 2013.

Net FTE interest income decreased $1.0 million to $61.1 million during fourth quarter 2013, as compared to $62.1 million during fourth quarter 2012, and $7.0 million to $241.5 million for the year ended Dec. 31, 2013, as compared to $248.5 million during the same period in 2012. The Company's net FTE interest margin ratio decreased 3 basis points to 3.52 percent during fourth quarter 2013 and 12 basis points to 3.54 percent for the year ended Dec. 31, 2013, as compared to the same respective periods in 2012. Declines in yields earned on the Company's loan and investment portfolios during the three and 12 months ended Dec. 31, 2013, as compared to the same periods in 2012, were partially offset by increases in average outstanding loans, reductions in the cost of interest bearing liabilities and lower average outstanding time deposits. Also offsetting the impact of lower asset yields during the three and 12 months ended Dec. 31, 2013, as compared to the same periods in 2012, was the December 2012 contractual repricing of $46 million of junior subordinated debentures from a weighted average fixed interest rate of 7.07 percent to variable rates averaging 2.60 percent over LIBOR.

Non-Interest Income. Non-interest income decreased to $25.7 million during fourth quarter 2013, as compared to $27.6 million during third quarter 2013 and $30.6 million during fourth quarter 2012, primarily due to lower income from the origination and sale of mortgage loans.

Income from the origination and sale of loans decreased to $5.6 million during fourth quarter 2013, as compared to $7.9 million during third quarter 2013, and $12.3 million during fourth quarter 2012. Management attributes these declines to the combined impact of lower demand for refinancing loans and seasonal declines in loans originated for home purchases. The Company's mortgage loan production decreased 24 percent during fourth quarter 2013, as compared to third quarter 2013, and 50 percent, as compared to fourth quarter 2012. Loans originated for home purchases accounted for approximately 67 percent of the Company's mortgage loan production during fourth quarter 2013, as compared to 72 percent during the third quarter 2013 and 32 percent during fourth quarter 2012. Income from the origination and sale of loans decreased 18 percent to $34.3 million for the 12 months ended Dec. 31, 2013, as compared to $41.8 million in 2012, with production volume decreasing 23 percent year-over-year.

Wealth management revenues decreased to $4.4 million during fourth quarter 2013, as compared to $4.6 million during third quarter 2013. Third quarter 2013 wealth management revenues included revenues of $370 thousand related to the sale of two multi-million dollar life insurance policies. Wealth management revenues increased to $4.4 million and $17.1 million for the three and 12 months ended Dec. 31, 2013, respectively, as compared to $3.7 million and $14.3 million during the same respective periods in 2012, due to the addition of new wealth management customers and increases in market values of new and existing assets under trust management.

Other income increased to $2.2 million during fourth quarter 2013, as compared to $1.4 million during third quarter 2013 and fourth quarter 2012, primarily due to increases in earnings on securities held under deferred compensation plans.

Non-Interest Expense. Non-interest expense increased to $57.8 million during fourth quarter 2013, as compared to $52.6 million during third quarter 2013, and remained flat as compared to $57.8 million during fourth quarter 2012. For the year ended Dec. 31, 2013, non-interest expense decreased to $222.1 million, as compared to $229.6 million in 2012.

Salaries and wages expense increased to $24.3 million during the three months ended Dec. 31, 2013, as compared to $22.8 million during third quarter 2013 and $23.3 million during fourth quarter 2012. Salaries and wages expense increased to $94.0 million for the year ended Dec. 31, 2013, as compared to $89.8 million in 2012. These increases reflect higher incentive compensation accruals resulting from the Company's improved financial performance.

Variations in net OREO expense between periods were primarily due to fluctuations in fair value write-downs, net gains and losses recorded on the sales and net operating expenses. Fourth quarter 2013 net OREO expense included $381 thousand of net operating expenses, $948 thousand of fair value write-downs and net gains of $37 thousand on the sale of OREO properties. This compares to $542 thousand of net operating expenses and net gains of $525 thousand during third quarter 2013, and $883 thousand of net operating expenses, $3.3 million of fair value write-downs and net gains of $273 thousand during fourth quarter 2012. During the 12 months ended Dec. 31, 2013, net OREO expense included $2.0 million of net operating expenses, $3.5 million of fair value write-downs and net gains of $3.2 million, compared to $3.7 million of net operating expenses, $6.7 million of fair value write-downs and net gains of $1.0 million during 2012.

Other expenses increased to $15.1 million during fourth quarter 2013, as compared to $12.7 million during third quarter 2013. Historically, the Company's other expenses trend higher in the fourth quarter of the year, as compared to the third quarter. Other expenses remained flat at $15.1 million during fourth quarter 2013, as compared to $15.1 during fourth quarter 2012, and decreased 10 percent to $57.3 million during year ended Dec. 31, 2013, as compared to $63.6 million in 2012. During the first and second quarters of 2012, the Company accrued $3.0 million of loan collection and settlement costs related to one borrower, recorded donations expense of $1.5 million associated with the sale of a bank building to a charitable organization and wrote off $428 thousand of unamortized debt issuances costs. Exclusive of these non-core expenses, other expense decreased 2.4 percent during 2013, as compared to 2012, primarily due to decreases in FDIC insurance premiums.

Balance Sheet

Total loans increased to $4,345 million as of Dec. 31, 2013, from $4,332 million as of Sept. 30, 2013 and $4,224 million as of Dec. 31, 2012, with the most notable growth occurring in residential real estate loans. Residential real estate loans increased to $868 million as of Dec. 31, 2013, from $842 million as of Sept. 30, 2013 and $708 million as of Dec. 31, 2012, due to continued retention of certain residential loans with contractual terms of fifteen years or less and increased housing demand in the Company's market areas.

Consumer loans were $672 million as of Dec. 31, 2013 and Sept. 30, 2013, an increase from $637 million as of Dec. 31, 2012. Year- over-year growth in consumer loans occurred primarily in indirect loans, which increased to $476 million as of Dec. 31, 2013, from $438 million as of Dec. 31, 2012, due to expansion of the Company's indirect lending program within existing markets.

Commercial real estate loans decreased to $1,449 million as of Dec. 31, 2013, from $1,497 million as of Dec. 31, 2012, primarily due to weak loan demand combined with the movement of lower quality loans out of the portfolio through charge-off, pay-off and foreclosure. Commercial real estate loans slightly increased to $1,449 as of Dec. 31, 2013, from $1,441 as of Sept. 30, 2013.

Agricultural loans decreased to $112 million as of Dec. 31, 2013, from $124 million as of Sept. 30, 2013 and $114 million as of Dec. 31, 2012. Agricultural loans typically decline during the fourth quarter due to seasonal reductions in credit lines.

Total deposits increased to $6,134 million as of Dec. 31, 2013, from $6,109 million as of Sept. 30, 2013 and decreased from $6,240 million as of Dec. 31, 2012. During fourth quarter 2013, the mix of deposits continued to shift away from higher costing time deposits to lower costing demand and savings deposits. As of Dec. 31, 2013, time deposits comprised 19.4 percent of total deposits, as compared to 20.3 percent as of Sept. 30, 2013 and 22.2 percent as of Dec. 31, 2012.

OREO decreased to $16 million as of Dec. 31, 2013, from $19 million as of Sept. 30, 2013 and $32.6 million as of Dec. 31, 2012. During fourth quarter 2013, the Company sold OREO properties with carrying values of $3 million at a $37 thousand net gain, and during the year ended Dec. 31, 2013, the Company sold OREO properties with carrying values of $25 million at a $3.2 million net gain. As of Dec. 31, 2013, the composition of OREO properties was 15 percent residential real estate, 60 percent land and land development and 25 percent commercial.

The Company purchased $45 million of bank owned life insurance covering select officers and directors of the Company's banking subsidiary during fourth quarter 2013. An additional $15 million of bank owned life insurance was purchased during first quarter 2014.

Asset Quality

Non-performing loans increased slightly to $97 million as of Dec. 31, 2013, from $96 million as of Sept. 30, 2013, primarily due to an increase in commercial and commercial real estate loans on non- accrual status during fourth quarter. Non-performing loans decreased to $97 million as of Dec. 31, 2013 from $110 million as of Dec. 31, 2012, due to the movement of non-accrual loans out of the loan portfolio through pay-off, charge-off and upgrade.

The Company charged off loans of $6 million during fourth quarter 2013, compared to $5 million during third quarter 2013 and $10 million during fourth quarter 2012. Approximately 33 percent of fourth quarter 2013 charge-offs was attributable to one commercial loan. Recoveries of charged-off loans were $2 million during fourth quarter 2013, compared to $2 million during third quarter 2013 and $4 million during fourth quarter 2012.

During fourth quarter 2013, the Company reversed $4.0 million of provision for loan losses, as compared to reversing $3.0 million of provision during third quarter 2013 and recording of additional provisions of $8.0 million during fourth quarter 2012. The fourth quarter 2013 reversal of provision is reflective of continued improvement in and stabilization of credit quality as evidenced by declining levels of non-performing and criticized loans. As of Dec. 31, 2013, non-performing assets and total criticized assets were at their lowest quarterly levels since 2008.

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