First Interstate BancSystem, Inc. (NASDAQ:FIBK) reports fourth quarter 2015 net income of $23.4 million, or $0.51 per share, a 16% increase over third quarter 2015 net income of $20.2 million, or $0.44 per share. Exclusive of non-core acquisition and litigation expenses and net investment securities gains, the Company's fourth quarter 2015 core net income was $23.5 million, or $0.52 per share, as compared to core net income of $23.6 million, or $0.52 per share, for third quarter 2015.

For the year ended December 31, 2015, the Company reports net income of $86.8 million, or $1.90 per share, compared to $84.4 million, or $1.87 per share in 2014. During 2015, the Company recorded non-core expenses of $5.8 million, including $794 thousand of acquisition costs and $5.0 million of legal and settlement expenses. Exclusive of non-core acquisition and litigation expenses and net investment securities gains, the Company's 2015 core net income was $90.3 million, or $1.98 per share, as compared to core net income of $89.3 million, or $1.98 per share, in 2014.

HIGHLIGHTS

  • Core pre-tax, pre-provision net income of $38.5 million, a 4.4% increase over the prior quarter and a 2.3% increase from the same period in the prior year.
  • Annual core pre-tax, pre-provision net income of $142.9 million in 2015, a 9.2% increase over the prior year.
  • Net interest margin ratio of 3.49%, a 2 basis point increase from the prior quarter and an 11 basis point increase from the same period in the prior year.
  • Organic loan growth of 6.4% year-over-year, total loan growth of 7.1% year-over-year.
  • Loan to deposit ratio of 74.0% as of December 31, 2015, compared to 69.9% a year ago.

“We finished 2015 with a solid quarter driven by good loan and deposit growth, stable expense levels and a further reduction in criticized loans,” said Kevin Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “We saw healthy loan demand throughout our markets and our loan growth was well balanced across our commercial, commercial real estate, construction, consumer and residential real estate portfolios. With the loan growth generating a higher level of revenue, we were able to improve our efficiency ratio and increase operating leverage," Riley continued.

“Moving into 2016, we anticipate a year of profitable growth driven by continued increases in both net interest income and non-interest income. We continue to implement cost rationalization plans across the organization so that we can maintain stable expense levels while increasing the investment in our digital banking platform. We are excited about enhancing our customer experience with a more robust set of digital banking products and services and believe the investment in our mobile and online banking capabilities will enhance our competitive positioning,” said Riley.

DIVIDEND DECLARATION

On January 21, 2016, the Company's board of directors declared a dividend of $0.22 per common share payable on February 12, 2016 to owners of record as of February 1, 2016. This dividend equates to a 3.1% annual yield based on the $28.90 average closing price of the Company's common stock during fourth quarter 2015, and reflects a 10% increase from dividends paid during fourth quarter 2015 of $0.20 per common share.

ANNUAL MEETING DATE SET

On January 21, 2016, the Company's Board of Directors voted that the Annual Meeting of Shareholders be held on May 25, 2016, at the First Interstate Bank Operations Center, 1800 Sixth Avenue North, Billings, Montana at 4:00 p.m. Mountain Daylight Time. The record date for determination of shareholders entitled to notice of, and to vote at, the Annual Meeting is March 18, 2016.

RESULTS OF OPERATIONS

Fourth Quarter Results:

Net Interest Income. The Company's net interest income, on a fully taxable equivalent or FTE basis, increased $2.1 million to $69.5 million during fourth quarter 2015, as compared to $67.4 million during third quarter 2015, primarily due to an increase in loan yield combined with a 1.0% increase in average outstanding loans, a favorable shift in loan mix quarter-over-quarter and higher recoveries of charged-off interest. Interest accretion attributable to the fair valuation of acquired loans contributed $1.3 million of interest income during fourth quarter 2015, of which approximately $327 thousand was related to early pay-offs. This compares to interest accretion of $1.4 million during third quarter 2015, of which $307 thousand was related to early pay-offs. In addition, the Company recovered previously charged-off interest of $1.0 million during fourth quarter 2015, compared to $679 thousand during third quarter 2015.

The Company's net interest margin ratio increased 2 basis points to 3.49% during fourth quarter 2015, as compared to 3.47% during the third quarter 2015. Exclusive of the accelerated interest accretion related to early payoffs of acquired loans and the impact of recoveries of charged-off interest, the Company's net interest margin ratio remained stable at 3.42% during the third and fourth quarters of 2015, and increased 10 basis points from 3.32% during fourth quarter 2014.

Provision for Loan Losses. The Company recorded a provision for loan losses of $3.3 million during fourth quarter 2015, compared to $1.1 million during third quarter 2015. The higher provision for loan losses in fourth quarter 2015, as compared to third quarter 2015, is reflective of loan growth and increases in specific reserves primarily related to the loans of one commercial real estate borrower.

Non-Interest Income. Non-interest income increased $413 thousand to $30.9 million during fourth quarter 2015, as compared to $30.5 million during third quarter 2015, primarily due to increases in other income resulting from higher returns on deferred compensation plan assets, which were partially offset by decreases in income from the origination and sale of mortgage loans.

Income from the origination and sale of loans decreased $701 thousand to $7.3 million during fourth quarter 2015, as compared to $8.0 million during third quarter 2015, due to seasonal declines in mortgage loan production which typically occur during the fourth quarter of each year. Mortgage loan production decreased 5% during fourth quarter 2015, as compared to third quarter 2015. This compares to an 11% decline during fourth quarter 2014, as compared to third quarter 2014. Loans originated for home purchases accounted for approximately 66% of fourth quarter 2015 loan production, as compared to approximately 74% during third quarter 2015.

Non-Interest Expense. Non-interest expense decreased $4.6 million to $60.9 million during fourth quarter 2015, as compared to $65.5 million during third quarter 2015. During the fourth quarter of 2015, the Company recorded non-core acquisition related expenses of $166 thousand, as compared to non-core acquisition, legal and settlement expenses of $5.6 million recorded during third quarter 2015. Exclusive of these non-core acquisition and litigation settlement expenses, non-interest expense increased $839 thousand, or 1.4%, to $60.8 million during fourth quarter 2015, compared to $59.9 million during third quarter 2015. During fourth quarter 2015, increases in employee benefits and OREO expenses were largely offset by decreases in salaries and wages expense.

Salaries and wages expense decreased $911 thousand to $24.5 million during fourth quarter 2015, as compared to $25.5 million during third quarter 2015. Lower incentive compensation accruals during the fourth quarter of 2015, as compared to third quarter 2015, were partially offset by separation payment expense of $730 thousand.

Employee benefits expense increased $264 thousand to $7.6 million during fourth quarter 2015, as compared to $7.3 million during third quarter 2015, primarily due to higher returns on deferred compensation plan assets and increases in group health insurance costs. These increases were partially offset by decreases in profit sharing plan accruals.

The Company recorded net OREO expense of $129 thousand during fourth quarter 2015, as compared to net OREO income of $720 thousand during third quarter 2015, due to decreases in net gains recorded on the sale of properties. During fourth quarter 2015, the Company recorded net gains of $129 thousand, as compared to net gains of $1.1 million recorded during third quarter 2015.

Year-to-Date Results:

Net Interest Income. Net FTE interest income increased $15.9 million to $268.7 million during 2015, as compared to $252.8 million in 2014, primarily due to growth in average loans and investment securities combined with a shift in the mix of deposits away from higher costing time deposit into lower costing demand and savings deposits.

The Company's net interest margin ratio was 3.46% during 2015, as compared to 3.49% in 2014. Exclusive of the accelerated interest accretion related to early payoffs of acquired loans and the impact of recoveries of charged-off interest, the Company's net interest margin ratio was 3.40% during 2015, as compared to 3.43% during 2014.

Provision for Loan Losses. During the year ended December 31, 2015, the Company recorded provisions for loan losses of $6.8 million, as compared to a $6.6 million reversal of provisions for loan losses in 2014. Year-over-year increases in provisions for loan losses are reflective of loan growth and increases in specific reserves on impaired loans.

Non-Interest Income. Non-interest income increased $9.5 million to $120.9 million in 2015, as compared to $111.4 million in 2015. The increase was primarily driven by increases in income from the origination and sale of mortgage loans, increases in other service charges, commissions and fees and higher wealth management revenues.

Income from the origination and sale of loans increased $6.0 million to $30.0 million for the year ended December 31, 2015, as compared to $23.9 million in 2014, due to a 25% increase in mortgage loan production volume year-over-year. Loans originated for home purchases accounted for approximately 66% of 2015 loan production, as compared to approximately 75% of loan production in 2014.

Non-Interest Expense. Non-interest expense increased $11.1 million to $248.0 million in 2015, as compared to $236.9 million in 2014. Exclusive of non-core acquisition and litigation settlement expenses, non-interest expense increased $13.4 million to $242.2 million in 2015, compared to $228.9 million in 2014. The year-over-year increase is largely attributable to the additional operating expenses of Mountain West Financial Corp ("Mountain West"), which was acquired on July 31, 2014, and Absarokee Bancorporation, Inc. ("Absarokee"), which was acquired on July 24, 2015.

Salaries and wages expense increased $4.9 million to $101.5 million in 2015, as compared to $96.5 million in 2014 due to inflationary wage increases, higher commissions paid to mortgage loan originators due to higher loan production volumes, increased personnel costs resulting from the Mountain West and Absarokee acquisitions and separation payment expense recorded during fourth quarter 2015. These increases were partially offset by lower incentive compensation accruals reflective of changes to the Company's 2015 short-term incentive plan.

Employee benefits expense increased $608 thousand to $30.7 million in 2015, as compared to $30.1 million in 2014, primarily due to higher group health insurance cost reflective of increased claim costs in 2015 and increased benefits costs resulting from the Mountain West and Absarokee acquisitions. These increases were partially offset by lower returns on deferred compensation plan assets during 2015, as compared to 2014.

Furniture and equipment expense increased $1.7 million to $15.5 million in 2015, as compared to $13.8 million in 2014, primarily due to costs associated with the implementation of new software systems placed into service during the last half of 2014, the continued upgrade of systems during 2015 and increased maintenance and equipment costs resulting from the Mountain West and Absarokee acquisitions.

Net OREO income increased $1.2 million, to $1.5 million in 2015, as compared to $272 thousand in 2014, primarily due to increases in net gains recorded on the sale of OREO properties. The Company recorded net gains on the sale of OREO properties of $3.0 million in 2015, as compared to $1.8 million in 2014.

Other expenses increased $5.4 million to $64.6 million in 2015, as compared to $59.2 million in 2014. During 2015, the Company recorded write-downs aggregating $806 thousand in the fair value of two vacated bank buildings held for sale and recorded a one-time contract termination fee of $876 thousand related to a change in payment service provider. In addition, the Company recorded fraud losses of $1.7 million in 2015, as compared to $1.2 million in 2014, due to unusually high fraudulent credit card activity during the first half of 2015. The remaining year-over-year increase in other expense was primarily due to professional fees associated with the identification and execution of revenue enhancement strategies and a change in trust platform, additional legal expense of approximately $1.0 million in conjunction with legal settlements reached in 2015 and additional operating expenses resulting from the Mountain West and Absarokee acquisitions.

BALANCE SHEET

Total assets increased $124 million to $8.7 billion as of December 31, 2015, from $8.6 billion as of September 30, 2015. This increase was due to the deployment of funds generated primarily through organic growth in deposits and securities sold under repurchase agreements, into loans and interest bearing deposits in banks.

Total loans increased $70 million, or 1.3%, to $5.2 billion as of December 31, 2015, as compared to $5.1 billion as of September 30, 2015, with all major categories of loans, except agricultural loans, experiencing organic loan growth.

The most significant growth occurred in commercial real estate loans, which increased $42 million to $1.8 billion as of December 31, 2015, from $1.7 billion as of September 30, 2015. Management attributes this growth to continuing business expansion within the Company's market areas.

Agricultural loans decreased $13 million to $142 million as of December 31, 2015, from $155 million as of September 30, 2015, due to seasonal reductions in operating lines that typically occur during the fourth quarter of the year.

Total deposits increased $53 million, or less than 1.0%, to $7.1 billion as of December 31, 2015, as compared to $7.0 billion as of September 30, 2015. During the fourth quarter of 2015, the Company continued to experience a shift in the mix of deposits away from higher costing time deposits into lower costing savings and demand deposits. As of December 31, 2015, the mix of total deposits was 26% non-interest bearing demand, 31% interest bearing demand, 27% savings and 16% time.

Securities sold under repurchase agreements increased $73 million to $511 million as of December 31, 2015, from $438 million as of September 30, 2015, primarily due to fluctuations in the liquidity of our customers. All outstanding repurchase agreements were due in one day.

Long-term debt decreased $15 million to $28 million as of December 31, 2015, from $43 million as of September 30, 2015, due to the early repayment of a $15 million variable rate subordinated term loan with an original maturity date of February 28, 2018. There were no prepayment penalties associated with the repayment.

ASSET QUALITY

Asset quality remained stable during fourth quarter 2015 with non-performing assets ending the year at $78 million, or 0.90% of total assets, unchanged from September 30, 2015. Criticized loans showed improvement during fourth quarter, decreasing $23 million to $320 million as of December 31, 2015, from $344 million as of September 30, 2015, due to loan repayment and credit upgrades. In addition, net loan charge-offs declined to $728 thousand during fourth quarter 2015, as compared to $3 million during third quarter 2015.

The Company's allowance for loan losses as a percentage of period end loans increased slightly to 1.46% as of December 31, 2015, compared to 1.43% as of September 30, 2015.

ACQUISITION

On March 26, 2015, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Absarokee Bancorporation, Inc. ("Absarokee"), a Montana-based bank holding company that operated one subsidiary bank, United Bank, with branches located in three Montana communities adjacent to the Company's existing market areas. The acquisition was completed on July 24, 2015 for cash consideration of $7.2 million. Immediately subsequent to the acquisition, United Bank was merged with and into the Company's existing bank subsidiary, First Interstate Bank. As of the date of the acquisition, Absarokee had total assets of $73 million, loans of $38 million and deposits of $64 million.

Fourth Quarter 2015 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss fourth quarter 2015 results at 11:00 a.m. Eastern Time (9:00 a.m. Mountain Time) on Thursday, January 28, 2016. 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 January 28, 2016 through 9:00 a.m. Eastern Time (7:00 a.m. Mountain Time) on February 28, 2016, by dialing 1-877-344-7529 (using conference ID 10078575). 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 81 banking offices, including detached drive-up facilities, in 45 communities in Montana, Wyoming and 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.

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary

(Unaudited, $ in thousands, except per share data)

 
  2015   2014

INCOME STATEMENT SUMMARIES

 4th Qtr   3rd Qtr   2nd Qtr   1st Qtr 4th Qtr
Net interest income $ 68,420 $ 66,330 $ 65,288 $ 64,325 $ 65,516
Net interest income on a fully-taxable equivalent ("FTE") basis 69,492 67,400 66,399 65,381 66,585
Provision for loan losses 3,289 1,098 1,340 1,095 118
Non-interest income:
Other service charges, commissions and fees 11,019 11,095 11,173 9,867 11,429
Income from the origination and sale of loans 7,282 7,983 8,802 5,906 5,554
Wealth management revenues 4,840 5,233 4,897 4,937 4,775
Service charges on deposit accounts 4,655 4,379 4,053 3,944 4,432
Investment securities gains (losses), net 62 23 46 6 (19 )
Other income 3,037   1,769   2,799   3,122   5,190  
Total non-interest income 30,895 30,482 31,770 27,782 31,361
Non-interest expense:
Salaries and wages 24,549 25,460 26,093 25,349 23,717
Employee benefits 7,576 7,312 8,070 7,780 6,812
Occupancy, net 4,445 4,413 4,529 4,492 4,770
Furniture and equipment 4,179 3,849 3,703 3,793 4,120
Outsourced technology services 2,548 2,520 2,593 2,463 2,468
Other real estate owned (income) expense, net 129 (720 ) (823 ) (61 ) (61 )
Core deposit intangible amortization 837 842 855 854 855
Non-core acquisition and litigation expenses 166 5,566 (7 ) 70 2,368
Other expenses 16,512   16,260   16,965   14,852   16,604  
Total non-interest expense 60,941   65,502   61,978   59,592   61,653  
Income before taxes 35,085 30,212 33,740 31,420 35,106
Income taxes 11,654   10,050   11,518   10,440   12,330  
Net income $ 23,431   $ 20,162   $ 22,222   $ 20,980   $ 22,776  
Core net income** $ 23,496   $ 23,610   $ 22,189   $ 21,020   $ 24,260  
Core pre-tax, pre-provision net income** $ 38,478   $ 36,853   $ 35,027   $ 32,579   $ 37,611  
 

PER COMMON SHARE DATA

Net income - basic $ 0.52 $ 0.45 $ 0.49 $ 0.46 $ 0.50
Net income - diluted 0.51 0.44 0.49 0.46 0.49
Core net income - diluted 0.52 0.52 0.49 0.46 0.53
Cash dividend paid 0.20 0.20 0.20 0.20 0.16
Book value at period end 20.92 20.70 20.32 20.13 19.85
Tangible book value at period end** 16.19 15.94 15.58 15.36 15.07
 

OUTSTANDING COMMON SHARES

At period-end 45,428,225 45,345,007 45,506,583 45,429,468 45,788,415
Weighted-average shares - basic 45,066,171 45,150,104 45,143,122 45,378,230 45,485,548
Weighted-average shares - diluted 45,549,075 45,578,978 45,606,686 45,840,191 46,037,344
 

SELECTED ANNUALIZED RATIOS

Return on average assets 1.07 % 0.94 % 1.06 % 1.00 % 1.05 %
Core return on average assets** 1.07 1.10 1.06 1.00 1.12
Return on average common equity 9.83 8.60 9.68 9.38 10.09
Core return on average common equity** 9.86 10.07 9.66 9.40 10.75
Return on average tangible common equity** 12.73 11.20 12.65 12.35 13.34
Net FTE interest income to average earning assets 3.49 3.47 3.47 3.43 3.38
Core efficiency ratio ** 59.62 61.12 63.14 63.04 59.71
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary - continued

(Unaudited, $ in thousands, except per share data)

 
2015   2014

INCOME STATEMENT SUMMARIES

Net interest income $ 264,363 $ 248,461
Net interest income on a fully-taxable equivalent ("FTE") basis 268,671 252,763
Provision for loan losses 6,822 (6,622 )
Non-interest income:
Other service charges, commissions and fees 43,154 40,742
Income from the origination and sale of loans 29,973 23,940
Wealth management revenues 19,907 18,996
Service charges on deposit accounts 17,031 16,567
Investment securities gains (losses), net 137 61
Other income 10,727   11,095  
Total non-interest income 120,929 111,401
Non-interest expense:
Salaries and wages 101,451 96,513
Employee benefits 30,738 30,130
Occupancy, net 17,879 17,796
Furniture and equipment 15,524 13,816
Outsourced technology services 10,124 9,423
Other real estate owned (income) expense, net (1,475 ) (272 )
Core deposit intangible amortization 3,388 2,251
Non-core acquisition and litigation expenses 5,795 8,017
Other expenses 64,589   59,195  
Total non-interest expense 248,013   236,869  
Income before taxes 130,457 129,615
Income taxes 43,662   45,214  
Net income $ 86,795   $ 84,401  
Core net income** $ 90,314   $ 89,349  
Core pre-tax, pre-provision net income** $ 142,937   $ 130,949  
 

PER COMMON SHARE DATA

Net income - basic $ 1.92 $ 1.89
Net income - diluted 1.90 1.87
Core net income - diluted 1.98 1.98
Cash dividend paid 0.80 0.64
 

OUTSTANDING COMMON SHARES

Weighted-average shares - basic 45,184,091 44,615,060
Weighted-average shares - diluted 45,646,418 45,210,561
 

SELECTED ANNUALIZED RATIOS

Return on average assets 1.02 % 1.06 %
Core return on average assets** 1.06 1.12
Return on average common equity 9.37 9.86
Core return on average common equity** 9.75 10.44
Return on average tangible common equity** 12.23 12.88
Net FTE interest income to average earning assets 3.46 3.49
Core efficiency ratio** 61.70 62.34
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary - continued

(Unaudited, $ in thousands)

 
  2015   2014

BALANCE SHEET SUMMARIES

 Dec 31 Sept 30   Jun 30   Mar 31 Dec 31
Assets:
Cash and cash equivalents $ 780,457 $ 708,295 $ 506,434 $ 637,803 $ 798,670
Investment securities 2,057,505 2,067,636 2,139,433 2,340,904 2,287,110
Loans held for investment:
Commercial real estate 1,793,258 1,750,797 1,704,073 1,670,829 1,639,422
Construction real estate 430,719 419,260 403,228 406,305 418,269
Residential real estate 1,032,851 1,020,445 999,038 997,123 999,903
Agricultural real estate 156,234 163,116 158,506 156,734 167,659
Consumer 844,353 831,961 799,126 768,462 762,471
Commercial 792,416 778,648 819,119 754,149 740,073
Agricultural 142,151 154,855 142,629 117,569 124,859
Other 1,339 1,712 2,905 377 3,959
Mortgage loans held for sale 52,875   55,686   75,322   55,758   40,828  
Total loans 5,246,196 5,176,480 5,103,946 4,927,306 4,897,443
Less allowance for loan losses 76,817   74,256   76,552   75,336   74,200  
Net loans 5,169,379   5,102,224   5,027,394   4,851,970   4,823,243  
Premises and equipment, net 190,812 190,386 189,488 192,748 195,212
Goodwill and intangible assets (excluding mortgage servicing rights) 215,119 215,843 215,958 216,815 218,870
Company owned life insurance 187,253 185,990 177,625 154,741 153,821
Other real estate owned, net 6,254 8,031 11,773 15,134 13,554
Mortgage servicing rights, net 15,621 15,336 14,654 14,093 14,038
Other assets 105,796   110,789   103,459   104,334   105,418  
Total assets $ 8,728,196   $ 8,604,530   $ 8,386,218   $ 8,528,542   $ 8,609,936  
 
Liabilities and stockholders' equity:
Deposits:
Non-interest bearing $ 1,823,716 $ 1,832,535 $ 1,757,641 $ 1,757,664 $ 1,791,364
Interest bearing 5,265,221   5,203,259   5,046,760   5,210,495   5,214,848  
Total deposits 7,088,937   7,035,794   6,804,401   6,968,159   7,006,212  
Securities sold under repurchase agreements 510,635 437,533 469,145 462,073 502,250
Accounts payable, accrued expenses and other liabilities 67,769 67,062 62,272 58,335 72,006
Long-term debt 27,885 43,089 43,068 43,048 38,067
Subordinated debentures held by subsidiary trusts 82,477   82,477   82,477   82,477   82,477  
Total liabilities 7,777,703   7,665,955   7,461,363   7,614,092   7,701,012  
Stockholders' equity:
Common stock 311,720 309,167 313,125 310,544 323,596
Retained earnings 638,367 623,967 612,875 599,727 587,862
Accumulated other comprehensive income (loss) 406   5,441   (1,145 ) 4,179   (2,534 )
Total stockholders' equity 950,493   938,575   924,855   914,450   908,924  
Total liabilities and stockholders' equity $ 8,728,196   $ 8,604,530   $ 8,386,218   $ 8,528,542   $ 8,609,936  
 

CONSOLIDATED CAPITAL RATIOS

Total risk-based capital 15.36 % * 15.28 % 15.37 % 15.43 % 16.15 %
Tier 1 risk-based capital 13.99 * 13.83 13.88 13.94 14.52
Tier 1 common capital to total risk-weighted assets 12.69 * 12.52 12.55 12.58 13.08
Leverage Ratio 10.12 * 10.13 10.11 9.73 9.61
Tangible common stockholders' equity to tangible assets** 8.64 8.62 8.68 8.39 8.22
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Financial Summary - continued

(Unaudited, $ in thousands)

 
  2015   2014

ASSET QUALITY

 Dec 31   Sep 30   Jun 30   Mar 31 Dec 31
Allowance for loan losses $ 76,817 $ 74,256 $ 76,552 $ 75,336 $ 74,200
As a percentage of period-end loans 1.46 % 1.43 % 1.50 % 1.53 % 1.52 %
 
Net charge-offs (recoveries) during quarter $ 728 $ 3,394 $ 124 $ (41 ) $ 149
Annualized as a percentage of average loans 0.06 % 0.26 % 0.01 % — % 0.01 %
 
Non-performing assets:
Non-accrual loans $ 66,385 $ 66,359 $ 70,848 $ 73,941 $ 62,182
Accruing loans past due 90 days or more 5,602   3,357   2,153   5,175   2,576  

Total non-performing loans

71,987 69,716 73,001 79,116 64,758
Other real estate owned 6,254   8,031   11,773   15,134   13,554  
Total non-performing assets 78,241 77,747 84,774 94,250 78,312
As a percentage of:
Total loans and OREO 1.49 % 1.50 % 1.66 % 1.91 % 1.59 %
Total assets 0.90 % 0.90 % 1.01 % 1.11 % 0.91 %
 

ASSET QUALITY TRENDS

   Provision for Loan Losses   Net

Charge-offs (Recoveries)

  Allowance for Loan Losses   Accruing Loans 30-89 Days Past Due   Accruing TDRs   Non-Performing Loans   Non-Performing Assets
Q4 2012 $ 8,000 $ 6,495 $ 100,511 $ 34,602 $ 31,932 $ 110,076 $ 142,647
Q1 2013 500 3,107 97,904 41,924 35,787 100,535 133,005
Q2 2013 375 (249 ) 98,528 39,408 23,406 105,471 128,253
Q3 2013 (3,000 ) 2,538 92,990 39,414 21,939 96,203 114,740
Q4 2013 (4,000 ) 3,651 85,339 26,944 21,780 96,671 112,175
Q1 2014 (5,000 ) (1,032 ) 81,371 41,034 19,687 89,778 106,372
Q2 2014 (2,001 ) 1,104 78,266 24,250 23,531 80,660 97,085
Q3 2014 261 4,296 74,231 38,400 20,956 73,263 91,759
Q4 2014 118 149 74,200 28,848 20,952 64,758 78,312
Q1 2015 1,095 (41 ) 75,336 40,744 16,070 79,116 94,250
Q2 2015 1,340 124 76,552 31,178 15,127 73,001 84,774
Q3 2015 1,098 3,394 74,256 38,793 16,702 69,716 77,747
Q4 2015 3,289 728 76,817 42,869 15,419 71,987 78,241

CRITICIZED LOANS

   Special Mention   Substandard   Doubtful   Total
Q4 2012 $ 209,933 $ 215,188 $ 42,459 $ 467,580
Q1 2013 197,645 197,095 43,825 438,565
Q2 2013 192,390 161,786 52,266 406,442
Q3 2013 180,850 168,278 42,415 391,543
Q4 2013 159,081 154,100 45,308 358,489
Q1 2014 174,834 161,103 31,672 367,609
Q2 2014 160,271 155,744 29,115 345,130
Q3 2014 156,469 156,123 39,450 352,042
Q4 2014 154,084 163,675 34,854 352,613
Q1 2015 140,492 156,887 37,476 334,855
Q2 2015 155,707 159,899 31,701 347,307
Q3 2015 155,157 163,846 24,547 343,550
Q4 2015 127,270 162,785 30,350 320,405

*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.

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Average Balance Sheets

(Unaudited, $ in thousands)

 
  Three Months Ended
December 31, 2015   September 30, 2015   December 31, 2014
Average

Balance

  Interest   Average

Rate

Average
Balance 		  Interest   Average
Rate 		Average
Balance 		  Interest   Average
Rate
Interest earning assets:            

Loans (1)(2)

$ 5,194,970 $ 64,711 4.94 % $ 5,141,484 $ 62,577 4.83 % $ 4,870,509 $ 61,619 5.02 %
Investment securities (2) 2,059,585 8,958 1.73 2,097,835 8,927 1.69 2,195,178 9,413 1.70
Interest bearing deposits in banks 644,967 535 0.33 471,682 342 0.29 745,171 504 0.27
Federal funds sold 1,090     1     0.36   2,876     4     0.55   597     —     —  
Total interest earnings assets 7,900,612 74,205 3.73 7,713,877 71,850 3.70 7,811,455 71,536 3.63
Non-earning assets 772,523           781,559           774,963          
Total assets $ 8,673,135           $ 8,495,436           $ 8,586,418          
Interest bearing liabilities:
Demand deposits $ 2,145,748 $ 546 0.10 % $ 2,086,112 $ 528 0.10 % $ 2,148,522 $ 538 0.10 %
Savings deposits 1,949,512 645 0.13 1,924,612 645 0.13 1,845,601 634 0.14
Time deposits 1,142,342 2,127 0.74 1,150,223 2,068 0.71 1,252,410 2,369 0.75
Repurchase agreements 464,104 69 0.06 433,007 55 0.05 481,901 56 0.05
Other borrowed funds 5 — — 6 — — 11 — —
Long-term debt 37,707 704 7.41 43,200 544 5.00 38,037 558 5.82
Subordinated debentures held by subsidiary trusts 82,477     622     2.99   82,477     610     2.93   98,930     796     3.19  
Total interest bearing liabilities 5,821,895 4,713 0.32 5,719,637 4,450 0.31 5,865,412 4,951 0.33
Non-interest bearing deposits 1,847,528 1,787,419 1,751,023
Other non-interest bearing liabilities 58,250 58,623 74,378
Stockholders’ equity 945,462           929,757           895,605          
Total liabilities and stockholders’ equity $ 8,673,135           $ 8,495,436           $ 8,586,418          
Net FTE interest income 69,492 67,400 66,585
Less FTE adjustments (2)     (1,072 )         (1,070 )         (1,069 )    
Net interest income from consolidated statements of income     $ 68,420           $ 66,330           $ 65,516      
Interest rate spread         3.41 %         3.39 %         3.30 %
Net FTE interest margin (3)         3.49 %         3.47 %         3.38 %
Cost of funds, including non-interest bearing demand deposits (4)         0.24 %         0.24 %         0.26 %

(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.

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Average Balance Sheets - continued

(Unaudited, $ in thousands)

 
Twelve Months Ended
December 31, 2015   December 31, 2014
Average

Balance

  Interest   Average

Rate

Average
Balance 		  Interest   Average
Rate
Interest earning assets:        

Loans (1)(2)

$ 5,056,810 $ 248,015 4.90 % $ 4,602,907 $ 233,273 5.07 %
Investment securities (2) 2,191,968 37,167 1.70 2,122,587 36,755 1.73
Interest bearing deposits in banks 508,314 1,537 0.30 506,067 1,334 0.26
Federal funds sold 2,079     12     0.58   1,391     7     0.50  
Total interest earnings assets 7,759,171 286,731 3.70 7,232,952 271,369 3.75
Non-earning assets 762,535           715,846          
Total assets $ 8,521,706           $ 7,948,798          
Interest bearing liabilities:
Demand deposits $ 2,101,988 $ 2,105 0.10 % $ 1,992,565 $ 2,094 0.11 %
Savings deposits 1,908,091 2,541 0.13 1,723,073 2,444 0.14
Time deposits 1,171,952 8,461 0.72 1,198,053 9,241 0.77
Repurchase agreements 456,255 231 0.05 454,265 237 0.05
Other borrowed funds 6 — — 8 — —
Long-term debt 40,521 2,300 5.68 37,442 2,016 5.38
Subordinated debentures held by subsidiary trusts 82,477     2,422     2.94   88,304     2,574     2.91  
Total interest bearing liabilities 5,761,290 18,060 0.31 5,493,710 18,606 0.34
Non-interest bearing deposits 1,774,696 1,543,079
Other non-interest bearing liabilities 59,670 56,147
Stockholders’ equity 926,050           855,862          
Total liabilities and stockholders’ equity $ 8,521,706           $ 7,948,798          
Net FTE interest income 268,671 252,763
Less FTE adjustments (2)     (4,308 )         (4,302 )    
Net interest income from consolidated statements of income     $ 264,363           $ 248,461      
Interest rate spread         3.39 %         3.41 %
Net FTE interest margin (3)         3.46 %         3.49 %
Cost of funds, including non-interest bearing demand deposits (4)         0.24 %         0.26 %

(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 interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by average interest earning assets for the period.

(4) Calculated by dividing total 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 certain 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 may be presented before or net of estimated income tax expense.

In addition, the Company adjusts net income to exclude income tax expense and provision for loan losses. Management believes this non-GAAP financial measure is useful to investors in evaluating operating trends by excluding pre-tax amounts which the Company views as fluctuating widely based on economic conditions.

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

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Non-GAAP Financial Measures

(Unaudited, $ in thousands, except share and per share data)

 
  2015   2014

As Of or For the Quarter Ended

 Dec 31   Sep 30   Jun 30   Mar 31 Dec 31
Net income $ 23,431 $ 20,162 $ 22,222 $ 20,980 $ 22,776
Add back: income tax expense 11,654 10,050 11,518 10,440 12,330
Add back: provision for loan losses 3,289   1,098   1,340   1,095   118  
Pre-tax, pre-provision net income $ 38,374   $ 31,310   $ 35,080   $ 32,515   $ 35,224  
 
Net income $ 23,431 $ 20,162 $ 22,222 $ 20,980 $ 22,776
Adj: investment securities (gains) losses, net (62 ) (23 ) (46 ) (6 ) 19
Plus: acquisition & nonrecurring litigation expenses 166 5,566 (7 ) 70 2,368
Adj: income taxes (39 ) (2,095 ) 20   (24 ) (903 )
Total core net income (A) 23,496   23,610   22,189   21,020   24,260  
 
Net income $ 23,431 $ 20,162 $ 22,222 $ 20,980 $ 22,776
Add back: income tax expense 11,654 10,050 11,518 10,440 12,330
Add back: provision for loan losses 3,289 1,098 1,340 1,095 118
Adj: investment securities (gains) losses, net (62 ) (23 ) (46 ) (6 ) 19
Plus: acquisition & nonrecurring litigation expenses 166   5,566   (7 ) 70   2,368  
Core pre-tax, pre-provision net income $ 38,478   $ 36,853   $ 35,027   $ 32,579   $ 37,611  
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Non-GAAP Financial Measures - continued

(Unaudited, $ in thousands, except share and per share data)

 
  2015   2014

As Of or For the Quarter Ended

 Dec 31   Sep 30   Jun 30   Mar 31 Dec 31
Total non-interest income $ 30,895 $ 30,482 $ 31,770 $ 27,782 $ 31,361
Adj: investment securities (gains) losses, net (62 ) (23 ) (46 ) (6 ) 19  
Total core non-interest income 30,833 30,459 31,724 27,776 31,380
Net interest income 68,420   66,330   65,288   64,325   65,516  
Total core revenue (B) $ 99,253   $ 96,789   $ 97,012   $ 92,101   $ 96,896  
 
Total non-interest expense $ 60,941 $ 65,502 $ 61,978 $ 59,592 $ 61,653
Less: acquisition & nonrecurring litigation expenses (166 ) (5,566 ) 7   (70 ) (2,368 )
Core non-interest expense (C) $ 60,775   $ 59,936   $ 61,985   $ 59,522   $ 59,285  
 
Total quarterly average stockholders' equity (D) $ 945,462 $ 929,757 $ 921,229 $ 907,293 $ 895,605
Less: average goodwill and other intangible assets (excluding mortgage servicing rights) (215,496 ) (215,829 ) (216,457 ) (218,511 ) (218,407 )
Average tangible common stockholders' equity (E) $ 729,966   $ 713,928   $ 704,772   $ 688,782   $ 677,198  
 
Total stockholders' equity, period-end $ 950,493 $ 938,575 $ 924,855 $ 914,450 $ 908,924
Less: goodwill and other intangible assets (excluding mortgage servicing rights) (215,119 ) (215,843 ) (215,958 ) (216,815 ) (218,870 )
Total tangible common stockholders' equity (F) $ 735,374   $ 722,732   $ 708,897   $ 697,635   $ 690,054  
 
Total assets $ 8,728,196 $ 8,604,530 $ 8,386,218 8,528,542 8,609,936
Less: goodwill and other intangible assets (excluding mortgage servicing rights) (215,119 ) (215,843 ) (215,958 ) (216,815 ) (218,870 )
Tangible assets (G) $ 8,513,077   $ 8,388,687   $ 8,170,260   $ 8,311,727   $ 8,391,066  
 
Total quarterly average assets (H) $ 8,673,135 $ 8,495,436 $ 8,427,110 $ 8,489,413 $ 8,586,418
 
Total common shares outstanding, period end (I) 45,428,225 45,345,007 45,506,583 45,429,468 45,788,415
Weighted-average common shares - diluted (J) 45,549,075 45,578,978 45,606,686 45,840,191 46,037,344
 
Core earnings per share, diluted (A/J) $ 0.52 $ 0.52 $ 0.49 $ 0.46 $ 0.53
Tangible book value per share, period-end (F/I) 16.19 15.94 15.58 15.36 15.07
 
Annualized net income (K) $ 92,960 $ 79,991 $ 89,132 $ 85,086 $ 90,361
Annualized core net income (L) 93,218 93,670 89,000 85,248 96,249
 
Core return on average assets (L/H) 1.07 % 1.10 % 1.06 % 1.00 % 1.12 %
Core return on average common equity (L/D) 9.86 10.07 9.66 9.40 10.75
Return on average tangible common equity (K/E) 12.73 11.20 12.65 12.35 13.34
Tangible common stockholders' equity to tangible assets (F/G) 8.64 8.62 8.68 8.39 8.22
 
Core non-interest expense (C) $ 60,775 $ 59,936 $ 61,985 $ 59,522 $ 59,285
Less: amortization of core deposit intangible (837 ) (842 ) (855 ) (854 ) (855 )
Adj: OREO (expense) income (129 ) 720   823   61   61  
Non-interest expense for core efficiency ratio (M) $ 59,809   $ 59,814   $ 61,953   $ 58,729   $ 58,491  
 
Total core revenue (B) $ 99,253 $ 96,789 $ 97,012 $ 92,101 $ 96,896
Add: FTE adjustments 1,072   1,070   1,111   1,056   1,069  
Total core revenue for core efficiency ratio (N) $ 100,325   $ 97,859   $ 98,123   $ 93,157   $ 97,965  
 
Core efficiency ratio (M/N) 59.62 % 61.12 % 63.14 % 63.04 % 59.71 %
 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Non-GAAP Financial Measures - continued

(Unaudited, $ in thousands, except share and per share data)

 
    Dec 31,     Dec 31,

As Of or For the Year Ended

 2015 2014
Net income (A) $ 86,795 $ 84,401
Add back: income tax expense 43,662 45,214
Add back: provision for loan losses 6,822   (6,622 )
Pre-tax, pre-provision net income $ 137,279   $ 122,993  
 
Net income $ 86,795 $ 84,401
Adj: investment securities (gains) losses, net (137 ) (61 )
Plus: acquisition & nonrecurring litigation expenses 5,795 8,017
Adj: income taxes (2,139 ) (3,008 )
Total core net income (B) $ 90,314   $ 89,349  
 
Net income $ 86,795 $ 84,401
Add back: income tax expense 43,662 45,214
Add back: provision for loan losses 6,822 (6,622 )
Adj: investment securities (gains) losses, net (137 ) (61 )
Plus: acquisition & nonrecurring litigation expenses 5,795   8,017  
Core pre-tax, pre-provision net income $ 142,937   $ 130,949  
 
Total non-interest income $ 120,929 $ 111,401
Adj: investment securities (gains) losses, net (137 ) (61 )
Total core non-interest income 120,792 111,340
Net interest income 264,363   248,461  
Total core revenue (C) $ 385,155   $ 359,801  
 
Total non-interest expense $ 248,013 $ 236,869
Less: acquisition & nonrecurring litigation expenses (5,795 ) $ (8,017 )
Core non-interest expense (D) $ 242,218   $ 228,852  
 
Total average stockholders' equity (E) 926,050 $ 855,862
Less: average goodwill and other intangible assets (excluding mortgage servicing rights) (216,494 ) $ (200,740 )
Average tangible common stockholders' equity (F) $ 709,556   $ 655,122  
 
Total average assets (G) $ 8,521,706 $ 7,948,798
 
Weighted-average common shares - diluted (H) 45,646,418 45,210,561
 
Core earnings per share, diluted (B/H) $ 1.98 $ 1.98
 
Core return on average assets (B/G) 1.06 % 1.12 %
Core return on average common equity (B/E) 9.75 10.44
Return on average tangible common equity (A/F) 12.23 12.88
 
Core non-interest expense (D) $ 242,218 $ 228,852
Less: amortization of core deposit intangible (3,388 ) (2,251 )
Adj: OREO (expense) income 1,475   272  
Non-interest expense for core efficiency ratio (I) $ 240,305   $ 226,873  
 
Total core revenue (C) $ 385,155 $ 359,923
Add: FTE adjustments 4,308   4,032  
Total core revenue for core efficiency ratio (J) $ 389,463   $ 363,955  
 
Core efficiency ratio (I/J) 61.70 % 62.34 %