FIBK

Business Context and Reporting Period

Company: First Interstate BancSystem, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: The Company operates two primary business lines: Community Banking (consumer and commercial services) and Technology Services (data processing and support for financial institutions). The Company is headquartered in Billings, Montana.

Key Financial Metrics

Note: Balance sheet figures are as of June 30, 2003, compared to December 31, 2002, where applicable.

Material Changes vs. Prior Period

• Profitability: Net income increased 8.7% year-over-year for the six-month period, driven by a 33.7% increase in non-interest income.
• Non-Interest Income: Significant growth in "Other service charges, commissions and fees" (up 65.6% YTD), primarily due to higher origination and processing fees on residential real estate loans held for sale, fueled by low interest rates.
• Non-Interest Expense: Increased 11.0% YTD. A major driver was a $2.7 million net impairment charge related to mortgage servicing rights recorded in the first quarter, compared to reversals in the prior year.
• Balance Sheet Growth: Total loans grew 10.2% ($228 million) and deposits grew 4.4% ($128 million) since year-end 2002. Approximately 16% of loan growth and 33% of deposit growth were attributable to the acquisition of Silver Run Bancorporation in January 2003.
• Capital Structure: Long-term debt increased 121.7% to $52.4 million due to new borrowings from the Federal Home Loan Bank. The Company also issued $40 million in new trust preferred securities and redeemed $40 million of older trust preferred securities.

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Impact: The January 2003 acquisition of Silver Run Bancorporation contributed significantly to asset and deposit growth. Goodwill increased by $4.6 million and core deposit intangibles by $0.3 million.
• Unusual Items:
  • Impairment Charges: $2.7 million in impairment charges on mortgage servicing rights were recorded in Q1 2003.
  • Debt Issuance Costs: A $1.9 million write-off of unamortized debt issuance costs occurred in Q2 2003 upon the redemption of older trust preferred securities.
  • Related Party Transaction: The Company purchased an aircraft for $2.55 million from an entity wholly owned by the CEO in April 2003, based on an independent appraisal.
• Asset Quality: Non-performing loans decreased 6.7% to $32 million. The allowance for loan losses was 1.55% of total loans at June 30, 2003.
• Market Risk: The Company maintains a short-term balance sheet structure. Management targets a mix where no more than 5% of the net interest margin is at risk if interest rates vary by one percent over a one-year period. No material changes in market risk were reported.
• Forward-Looking Statements: Management cautions that actual results may differ due to economic conditions, interest rate fluctuations, competition, and regulatory changes.

Investor Verification Checklist

• Loan Portfolio Quality: Verify the trend in non-performing loans and the adequacy of the allowance for loan losses (1.55% of total loans) given the rapid loan growth.
• Mortgage Servicing Rights: Assess the impact of the $2.7 million impairment charge and the sensitivity of future earnings to prepayment speeds and interest rate changes.
• Acquisition Integration: Monitor the integration of Silver Run Bancorporation and the realization of expected synergies.
• Non-Interest Income Sustainability: Evaluate the sustainability of the 65.6% increase in loan origination fees, which is heavily dependent on low interest rate environments.
• Capital Adequacy: Confirm the Company's continued status as "well-capitalized" under Federal Reserve requirements following the debt refinancing and stock recapitalization.