FIBK

Business Context and Reporting Period

Company: First Interstate BancSystem, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Overview: A financial and bank holding company headquartered in Billings, Montana, operating 72 banking offices in Montana, Wyoming, and western South Dakota. The period includes the impact of an Initial Public Offering (IPO) of Class A common stock concluded on March 29, 2010, which raised net proceeds of approximately $153 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income available to common stockholders decreased 31.3% for the three months ended September 30, 2010 ($7.9 million) compared to the same period in 2009 ($11.5 million). For the nine-month period, net income available to common stockholders decreased 39.8% ($24.0 million vs. $39.8 million).
• Provision for Loan Losses: The provision increased significantly to $18.0 million for the quarter (up from $10.5 million in 2009) and $49.4 million for the nine months (up from $31.8 million in 2009), reflecting deteriorating asset quality.
• Non-Performing Assets (NPA): NPAs increased 45.5% to $237.3 million (5.29% of total loans and OREO) from $163.1 million (3.57%) at year-end 2009. This increase is concentrated in resort and second-home markets (Flathead, Gallatin Valley, Jackson).
• Capital Strength: Stockholders' equity increased 29.6% to $744.7 million, primarily driven by the March 2010 IPO. Regulatory capital ratios improved significantly; Total Risk-Based Capital ratio rose to 15.18% from 11.68%.
• Loan Portfolio: Total loans decreased 1.7% to $4.45 billion, driven by declines in construction loans ($73 million decrease) and consumer loans ($30 million decrease, largely due to a student loan portfolio sale).

Outlook, Risks, and Management Commentary

• Asset Quality Outlook: Management expects non-performing assets to continue increasing in future quarters due to challenging economic conditions, particularly in real estate-dependent markets. Net charge-offs were $12.1 million for the quarter and $32.2 million for the nine months.
• Interest Rate Environment: Net interest margin compressed (down 11 basis points for the quarter) due to higher levels of non-accrual loans and a shift in asset mix from higher-yielding loans to lower-yielding investment securities funded by IPO proceeds.
• Regulatory Impact: The company is monitoring the Dodd-Frank Act and Basel III standards. The company opted out of the FDIC Transaction Account Guarantee (TAG) program effective July 1, 2010, which reduced FDIC insurance premiums.
• Non-Interest Income: Income from loan origination and sales decreased 42.2% for the nine months due to a decline in refinancing activity compared to early 2009. Wealth management revenues increased 17.4% due to higher trust assets and fee schedule revisions.
• Liquidity: Liquidity remains strong with $542.4 million in cash and cash equivalents. The company maintains access to capital markets and wholesale funding sources.

Investor Verification Checklist

• Asset Quality Concentration: Verify the specific exposure and recovery rates in the Flathead, Gallatin Valley, and Jackson market areas, which account for approximately 55% of non-performing assets.
• Allowance Adequacy: Assess the sufficiency of the $120.2 million allowance for loan losses (2.70% of loans) given the rising trend in non-performing assets and net charge-offs.
• Margin Compression: Monitor the trajectory of the Net FTE Interest Margin, which has declined due to the deployment of IPO proceeds into lower-yielding assets and elevated non-accrual loan levels.
• Regulatory Capital: Confirm the impact of Basel III capital standards on future capital requirements, particularly regarding the treatment of trust preferred securities.
• Loan Growth: Evaluate the sustainability of loan demand in the current economic climate, noting the 1.7% decline in total loans year-over-year.