BILLINGS, Mont.--(BUSINESS WIRE)-- First Interstate BancSystem, Inc. (NASDAQ:FIBK):

SECOND QUARTER 2010 FINANCIAL HIGHLIGHTS:

• Diluted earnings per common share of $0.14 for the quarter, as compared to $0.32 for first quarter 2010 and $0.39 for second quarter 2009.
• Net income available to common stockholders of $5.8 million for the quarter, as compared to $10.3 million in first quarter 2010 and $12.5 million in second quarter 2009.
• Net interest margin, on a tax equivalent basis, of 3.96% for the quarter, as compared to 4.00% for first quarter 2010 and 4.04% for second quarter 2009.
• Provision for loan losses of $19.5 million for the quarter, as compared to $11.9 million in first quarter 2010 and $11.7 million in second quarter 2009.
• Non-performing assets of $200 million, or 2.77% of total assets, as of June 30, 2010, as compared to $177 million, or 2.45% of total assets, as of March 31, 2010 and $167 million, or 2.47% of total assets, as of June 30, 2009.
• Allowance for loan losses of $114 million, or 2.51% of total loans, as of June 30, 2010, as compared to $106 million, or 2.37% of total loans, as of March 31, 2010 and $98 million, or 2.11% of total loans, as of June 30, 2009.
• Tier 1 risk-based capital ratio of 12.87% and total risk-based capital ratio of 14.81% as of June 30, 2010.
• Book value per common share of $16.12 as of June 30, 2010, as compared to $15.96 as of March 31, 2010 and $16.10 as of June 30, 2009.
• Tangible book value per common share of $11.61 as of June 30, 2010, as compared to $11.43 as of March 31, 2010 and $9.85 as of June 30, 2009.
• Common stock dividends of $0.1125 per share for the quarter. Common stock dividends have remained at this quarterly rate since April 2009.

First Interstate BancSystem, Inc. (NASDAQ:FIBK), parent holding company of First Interstate Bank, reports second quarter 2010 net income available to common stockholders of $5.8 million, or $0.14 per diluted share, as compared to $10.3 million, or $0.32 per diluted share, for first quarter 2010 and $12.5 million, or $0.39 per diluted share, for second quarter 2009. Return on average common equity and return on average assets were 3.42% and 0.37%, respectively, for the second quarter of 2010 compared to 7.86% and 0.64%, respectively, in the first quarter of 2010 and 10.01% and 0.80%, respectively, in the second quarter of 2009.

“Today we reported the Company’s second quarter earnings which, although lower than the same quarter of 2009 and the prior quarter, continued to demonstrate First Interstate’s core earnings strength during a period of unsurpassed challenges and economic stress,” said Lyle R. Knight, President and Chief Executive Officer. “Credit costs, as expected, continued to have a negative impact on earnings. During second quarter, we recorded higher provisions for loan losses and as of June 30, 2010 our allowance for loan losses was 2.51% of total loans, as compared to 2.11% as of June 30, 2009. We expect quarterly provisions for loan losses to remain at high levels until we see evidence of a leveling-off or decline in non-performing assets.”

Net Interest Income

Deposit growth combined with corresponding increases in interest earning assets and stable market interest rates resulted in increases in net interest income during the three and six months ended June 30, 2010, as compared to the three months ended March 31, 2010 and the three and six months ended June 30, 2009.

The Company’s net interest margin ratio, on a fully taxable equivalent, or FTE basis, declined 4 basis points to 3.96% during second quarter 2010 from 4.00% during first quarter 2010. This decline reflected the investment of proceeds from the Company’s March 2010 initial public offering, or IPO, in interest bearing deposits, which yielded 25 basis points during second quarter. The Company’s FTE net interest margin decreased 8 basis points and 10 basis points during the three and six months ended June 30, 2010, respectively, from the same periods in 2009. This compression in FTE net interest margin ratio was primarily due to a shift in the mix of interest earning assets from higher-yielding loans to lower-yielding investments.

Non-interest Income

Non-interest income increased 7.8% to $21.0 million during second quarter 2010, as compared to $19.5 million during first quarter 2010 and decreased 22.8%, as compared to $27.3 million during second quarter 2009. Non-interest income of $40.5 million for the six months ended June 30, 2010, decreased 24.2% compared to $53.5 million during the same period in 2009. Decreases in non-interest income during the three and six months ended June 30, 2010, as compared to the same periods in 2009, were primarily due to lower income from the origination and sale of residential mortgage loans. As expected, the spike in refinancing activity that occurred early in 2009 has declined substantially and income from the origination and sale of loans is expected to continue to remain below levels reported in 2009. Income from the origination and sale of loans increased during second quarter 2010 as compared to first quarter 2010 primarily due to seasonal fluctuations in new home purchases combined with an increase in closings on purchased home loans due to Federal tax incentives for first time and other qualifying homebuyers. Purchased home loan originations during the second quarter of 2010 increased 76% over first quarter 2010 and 27% as compared to the second quarter of 2009.

Non-interest expense increased 5.1% to $55.4 million during second quarter 2010, as compared to $52.7 million during first quarter 2010 and 1.3%, as compared to $54.7 million during second quarter 2009. Non-interest expense of $108.2 million for the six months ended June 30, 2010, increased 2.8%, as compared to $105.2 million for the same period in 2009. Significant components of the changes in non-interest expense include:

Salaries, wages and employee benefits expense – salaries, wages and employee benefits expense decreased 2.5% to $27.4 million for the three months ended June 30, 2010, as compared to $28.1 million for the three months ended March 31, 2010 and decreased 7.3% and 3.6% during the three and six months ended June 30, 2010, respectively, as compared to the same periods in the prior year. Decreases in salaries, wages and employee benefits expense were primarily due to lower incentive bonus and profit sharing accruals reflective of the Company’s performance results during the three and six months ended June 30, 2010.

FDIC insurance premiums – FDIC insurance premiums for the three and six months ended June 30, 2010 decreased 51.8% and 30.4%, respectively, as compared to the same periods in 2009, due to a special FDIC insurance assessment levied during the second quarter of 2009. The special assessment, which was applicable to all insured depository institutions, resulted in additional FDIC insurance expense of $3.1 million during second quarter 2009. The Company expects FDIC insurance premiums to remain at high levels for the foreseeable future.

Mortgage servicing rights amortization - mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Changes in the estimated servicing period caused amortization expense to vary between periods. Mortgage servicing rights amortization was $1.1 million during second quarter 2010, as compared to $1.1 million during first quarter 2010 and $2.1 million during second quarter 2009. Mortgage servicing rights amortization decreased 55.6% to $2.2 million for the six months ended June 30, 2010, as compared to $5.1 million during the same period in 2009.

Mortgage servicing rights impairment (recovery) – mortgage servicing rights are evaluated quarterly for impairment based on the fair value of the mortgage servicing rights. Impairment adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for changes in impairment through a charge to current period earnings. Fluctuations in the fair value of mortgage servicing rights are primarily due to changes in assumptions regarding prepayments of the underlying mortgage loans, which typically correspond with changes in market interest rates. During second quarter 2010, the Company recorded impairment of $271 thousand, as compared to reversing previously recorded impairment of $50 thousand during first quarter 2010 and $4.4 million during second quarter 2009. During the six months ended June 30, 2010, the Company recorded impairment of $221 thousand, as compared to a reversal of previously recorded impairment of $7.3 million during the same period in 2009.

Other real estate expense, net of income - variations in net other real estate owned, or OREO, expense between periods is primarily due to write-downs of the estimated fair value of OREO properties. Net OREO expense was $3.0 million during second quarter 2010, as compared to $541 thousand during first quarter 2010 and $649 thousand during second quarter 2009. Net OREO expense for the six months ended June 30, 2010 was $3.5 million, as compared to $919 thousand during the same period in 2009. Increases in net OREO expense were primarily due to the second quarter 2010 write-downs of the estimated fair values of one residential property located in Jackson Hole, Wyoming and one land development property pending sale in the Flathead area around Kalispell, Montana.

Non-performing assets were 4.35% of total loans and other real estate owned as of June 30, 2010 compared to 3.91% as of March 31, 2010 and 3.56% as of June 30, 2009. Difficult economic conditions continued to have a negative impact on businesses and consumers in the Company’s market areas during second quarter 2010, especially in three market areas with economies dependent upon resort and second home communities. These market areas include the Flathead area around Kalispell, Montana, the Gallatin Valley area around Bozeman, Montana and the Jackson Hole, Wyoming market area. Residential and second home subdivisions in these market areas were overbuilt and are now experiencing severely depressed real estate values and limited sales activity. These three markets accounted for approximately 56% of the Company’s non-performing assets as of June 30, 2010 versus 21% of the Company’s total loans as of the same date. The continuing significant impact of current economic conditions, particularly in the three market areas noted, is expected to further increase non-performing assets in future quarters.

As of June 30, 2010, total non-performing loans included $135 million of real estate loans, of which $70 million were construction loans and $54 million were commercial real estate loans. Non-performing construction loans as of June 30, 2010 were comprised of land acquisition and development loans of $44 million, residential construction loans of $15 million and commercial construction loans of $11 million. Approximately 85% of loans with balances exceeding $1 million that were placed on nonaccrual during second quarter 2010 were located in the three market areas described above.

Based on management’s assessment of the adequacy of our allowance for loan losses, the Company recorded provisions for loan losses of $19.5 million during second quarter 2010, as compared to $11.9 million during first quarter 2010 and $11.7 million during second quarter 2009. Provisions for loan losses were $31.4 million for the six months ended June 30, 2010, as compared to $21.3 million for the same period in 2009. Increased provisions for loan losses reflect management’s estimation of the effect of current economic conditions on the Company’s loan portfolio. Specific loan loss reserves accounted for 75% of the second quarter 2010 provision for loan losses, while 25% was due to increases in general reserve requirements. As of June 30, 2010, the Company’s allowance for loan losses was 2.51% of total loans, as compared to 2.37% as of March 31, 2010 and 2.11% as of June 30, 2009.

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

Total assets of $7.2 billion as of June 30, 2010 increased less than 1.0% from March 31, 2010 and 6.6% from June 30, 2009, due to organic growth. Significant changes are discussed below:

Investment securities were $1.6 billion, or 22.6% of total assets, as of June 30, 2010, compared to $1.5 billion, or 21.1% of total assets, as of March 31, 2010 and $1.1 billion, or 15.6% of total assets, as of June 30, 2009. During the third quarter of 2009, the Company began investing excess liquidity into investment securities classified as available-for-sale. With lower market interest rates and the purchase of relatively short-term securities, the estimated duration of the Company’s investment securities portfolio decreased to 1.7 years as of June 30, 2010, from 2.5 years as of June 30, 2009.

Total loans increased 1.8% to $4.6 billion as of June 30, 2010 from $4.5 billion as of March 31, 2010, with the most significant growth occurring in commercial loans. Commercial loans of $778 million as of June 30, 2010 increased $49 million, or 6.7%, from $729 million as of March 31, 2010 primarily due to advances to both existing and new borrowers.

Total loans decreased 2.2% to $4.6 billion as of June 30, 2010, from $4.7 billion as of June 30, 2009. Management attributes this decrease to the impact of the broad recession on borrowers in the Company’s market areas, and to a lesser extent, the movement of lower quality loans out of the loan portfolio through loan charge-off or foreclosure.

Total liabilities were $6.5 billion as of June 30, 2010, as compared to $6.5 billion as of March 31, 2010 and $6.2 billion as of June 30, 2009. Significant changes are discussed below:

Other borrowed funds were $7 million as of June 30, 2010 compared to $6 million as of March 31, 2010 and $58 million as of June 30, 2009. The increase from March 31, 2010 was due to timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal government. Year-over-year decreases in other borrowed funds were due to the scheduled repayments and maturities of short-term Federal Home Loan Bank borrowings.

Long-term debt was $38 million as of June 30, 2010, as compared to $39 million as of March 31, 2010 and $80 million as of June 30, 2009. Sequential quarter decreases in long-term debt were due to scheduled repayments of long-term borrowings. Year-over-year decreases in long-term debt were primarily due to the early extinguishment of variable rate term notes in March 2010 and, to a lesser extent, scheduled repayments of long-term Federal Home Loan Bank borrowings.

Total deposits were $5.8 billion as of June 30, 2010, as compared to $5.8 billion as of March 31, 2010 and $5.5 billion as of June 30, 2009. Increases in deposits were solely the result of organic growth. In addition, the Company has experienced a slight shift in the mix of deposits away from higher costing time deposits to lower costing savings and non-interest bearing demand deposits.

Total stockholders’ equity was $740 million as of June 30, 2010, as compared to $733 million as of March 31, 2010 and $554 million as of June 30, 2009.

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

Remaining increases in stockholders’ equity during the three months ended June 30, 2010 as compared to first quarter 2010 and during the three and six months ended June 30, 2010, as compared to the same periods in 2009, were primarily due to increases in other comprehensive income, primarily unrealized gains on available-for-sale investment securities.

On May 27, 2010, the Company declared a quarterly dividend to common stockholders of $0.1125 per share. This dividend was paid on July 12, 2010 to shareholders of record as of July 1, 2010.

The Company exceeds “well capitalized” requirements under all regulatory capital guidelines. Significant increases in capital ratios at June 30, 2010, as compared to June 30, 2009, reflect the impact of additional capital raised from the Company’s IPO in March 2010.

Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principals in the United States of America, or GAAP, this release contains the following non-GAAP financial measures that management uses to evaluate capital adequacy: (i) tangible book value per common share, (ii) net tangible book value per common share, (iii) tangible common stockholders’ equity to tangible assets and (iv) net tangible common stockholders’ equity to tangible assets.

For purposes of computing tangible book value per common share, tangible book value equals common stockholders’ equity less goodwill and other intangible assets (except mortgage servicing rights). Tangible book value per common share is calculated as tangible common stockholders’ equity divided by shares of common stock outstanding.

For purposes of computing net tangible book value per common share, net tangible book value equals common stockholders’ equity less goodwill (adjusted for associated deferred tax liability) and other intangible assets (except mortgage servicing rights). Net tangible book value per common share is calculated as net tangible common stockholders’ equity divided by shares of common stock outstanding. The Company’s goodwill as of June 30, 2010 was $184 million, of which approximately $159 million is deductible for income tax purposes over an original period of 15 years. The calculation of net tangible book value takes into account the full amount of tax benefit of approximately $60 million associated with deductible goodwill assuming the Company will continue to have income sufficient to allow it to recognize this benefit in future periods.

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

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

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

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

Second Quarter 2010 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss second quarter 2010 results at 1:00 p.m. Eastern Time (11:00 a.m. MDT) on Friday, July 23, 2010. 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 http://www.talkpoint.com/viewer/starthere.asp?Pres=131580. The call will be recorded and made available for replay after 4:00 p.m. Eastern Time (2:00 p.m. MDT) on July 23 through 9:00 a.m. Eastern Time (7:00 a.m. MDT) on August 9, 2010 by dialing 1-877-344-7529 (using conference ID 442252). 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 quarterly provisions for loan losses, income from the origination and sale of loans, FDIC insurance premiums and non-performing assets. Forward-looking statements involve known and unknown risks and uncertainties that are difficult to predict. Therefore, 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;

• changes in or noncompliance with governmental regulations;

• effects of recent legislative and regulatory efforts to stabilize financial markets;

• dependence on the Company’s management team;

• ability to attract and retain qualified employees;

• failure of technology;

• disruption of vital infrastructure and other business interruptions;

• illiquidity in the credit markets;

• inability to meet liquidity requirements;

• lack of acquisition candidates;

• failure to manage growth;

• competition;

• inability to manage risks in turbulent and dynamic market conditions;

• ineffective internal operational controls;

• environmental remediation and other costs;

• failure to effectively implement technology-driven products and services;

• litigation pertaining to fiduciary responsibilities;