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First Interstate BancSystem, Inc. Reports Second Quarter 2012 Results

First Interstate BancSystem, Inc. (NASDAQ:FIBK) reports second quarter 2012 net income available to common shareholders of $12.2 million, or $0.28 per diluted share, as compared to $11.4 million, or $0.26 per diluted share, for first quarter 2012 and $9.0 million, or $0.21 per diluted share, for second quarter 2011.

Significant financial statement items for the second quarter of 2012 include:

  • Total revenues of $88.8 million during the three months ended June 30, 2012 represented a 2.1% increase over the prior quarter and a 5.6% increase over the same quarter of the prior year;
  • Non-performing assets decreased $41.4 million to $226.2 million, or 3.10% of total assets, as of June 30, 2012, compared to 3.60% of total assets as of March 31, 2012 and 4.05% of total assets as of June 30, 2011;
  • Provisions for loan losses were $12.0 million for the three months ended June 30, 2012, compared to $11.3 million for the three months ended March 31, 2012 and $15.4 million for the three months ended June 30, 2011;
  • Net charge-offs were $25.1 million during the three months ended June 30, 2012, compared to $7.9 million during the three months ended March 31, 2012 and $15.3 million during the three months ended June 30, 2011; and
  • The June 26, 2012 redemption of $41.2 million of 30-year floating rate junior subordinated deferrable interest debentures.
 
RESULTS SUMMARY

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

 
  As Of or For the Three Months Ended   Sequential Quarter

% Change

  Year Over Year

% Change

June 30,

2012
  March 31,

2012
  June 30,

2011
   
Net income available to common shareholders $ 12,157   $ 11,361   $ 9,001 7.0 % 35.1 %
Diluted earnings per common share 0.28 0.26 0.21 7.7 % 33.3 %
Dividends paid per common share 0.1200 0.1200 0.1125 0.0 % 6.7 %
Book value per common share 17.03 16.88 16.51 0.9 % 3.1 %
Tangible book value per common share* 12.63 12.47 12.05 1.3 % 4.8 %
Net tangible book value per common share* 14.03 13.87 13.45 1.2 % 4.3 %
Return on average common equity, annualized 6.69 % 6.32 % 5.23 %
Return on average assets, annualized 0.71 % 0.67 % 0.54 %
 
  For the Six Months Ended   Year Over Year

% Change

    June 30,

2012
  June 30,

2011
 
Net income available to common shareholders $ 23,518   17,663 33.1 %
Diluted earnings per common share 0.55 0.41 34.1 %
Dividends paid per common share 0.2400 0.2250 6.7 %
Return on average common equity, annualized 6.50 % 5.17 %
Return on average assets, annualized 0.69 % 0.53 %
 

* See Non-GAAP Financial Measures included herein for a discussion regarding tangible and net tangible book value per common share.

“We continue to generate strong year-over-year earnings growth, with our second quarter earnings per share increasing by 33% from the same period last year,” said Ed Garding, President and Chief Executive Officer of First Interstate BancSystem, Inc. “We are seeing stable to positive trends in most areas of the business, including an improving deposit mix, continued steady declines in our level of criticized loans and strong capital ratios. We are also starting to see a higher volume of resolutions to problem loans, which is resulting in an overall improvement in our asset quality,” Garding further noted.

 
REVENUE SUMMARY
(Unaudited; $ in thousands)

 

  For the Three Months Ended   Sequential Quarter

% Change

  Year Over Year

% Change

    June 30,

2012
  March 31,

2012
  June 30,

2011
       
Interest income $ 69,067   $ 69,057   $ 73,551 0.0 %

-6.1

%

Interest expense   7,893     8,423     11,024    

-6.3

%

 

-28.4

%

Net interest income 61,174 60,634 62,527 0.9 %

-2.2

%

Non-interest income:
Income from the origination and sale of loans 9,420 8,384 4,109 12.4 % 129.3 %
Other service charges, commissions and fees 8,254 8,424 7,768

-2.0

%

6.3 %
Service charges on deposit accounts 4,455 4,161 4,385 7.1 % 1.6 %
Wealth management revenues 3,815 3,283 3,689 16.2 % 3.4 %
Investment securities gains, net 198 31 16 538.7 % 1,137.5 %
Other income   1,520     2,099     1,624    

-27.6

%

 

-6.4

%

Total non-interest income   27,662     26,382     21,591     4.9 %   28.1 %
Total revenues   $ 88,836     $ 87,016     $ 84,118     2.1 %   5.6 %
Tax equivalent interest margin ratio   3.74 %   3.72 %   3.84 %            
  For the Six Months Ended   Year Over Year

% Change

    June 30,

2012
  June 30,

2011
   
Interest income $ 138,124   $ 147,394

-6.3

%

Interest expense   16,316     23,069    

-29.3

%

Net interest income 121,808 124,325

-2.0

%

Non-interest income:
Income from the origination and sale of loans 17,804 7,554 135.7 %
Other service charges, commissions and fees 16,678 15,148 10.1 %
Service charges on deposit accounts 8,616 8,495 1.4 %
Wealth management revenues 7,098 6,999 1.4 %
Investment securities gains, net 229 18 1,172.2 %
Other income   3,619     3,536     2.3 %
Total non-interest income   54,044     41,750     29.4 %
Total revenues   $ 175,852     $ 166,075     5.9 %
Tax equivalent interest margin ratio   3.73 %   3.78 %      

Net Interest Income

The Company's net interest margin ratio increased to 3.74% during second quarter 2012, as compared to 3.72% during first quarter 2012, primarily due to the recovery of $766 thousand of previously charged-off interest. Exclusive of interest recoveries, the Company's net interest margin ratio would have been approximately 3.70% during second quarter 2012.

Decreases in net interest margin ratio during the three and six months ended June 30, 2012, as compared to the same periods in 2011, were due to lower outstanding loan balances and lower yields earned on the Company's loan and investment portfolios, which were partially offset by reductions in the cost of interest bearing liabilities combined with a shift from higher-costing savings and time deposits to lower-costing demand deposits.

Non-interest Income

Non-interest income increased during the three and six months ended June 30, 2012, as compared to the same periods in the prior year and the three months ended March 31, 2012, primarily due to increases in income from the origination and sale of residential mortgage loans. While refinancing activity represented 59% of the Company's residential loan origination activity during second quarter 2012, new loans for home purchases increased 68% over the prior quarter and 41% from second quarter 2011.

Other income decreased during second quarter 2012, as compared to first quarter 2012 and second quarter 2011, primarily due to fluctuations in earnings on securities held under deferred compensation plans. Decreases in earnings on securities held under deferred compensation plans were partially offset by a $581 thousand gain on the sale of a bank building during second quarter 2012.

 
NON-INTEREST EXPENSE

(Unaudited; $ in thousands)

 
For the Three Months Ended   Sequential Quarter

% Change

  Year Over Year

% Change

  June 30,

2012
  March 31,

2012
  June 30,

2011
       
Non-interest expense:    
Salaries and wages $ 21,640 $ 21,564 $ 20,554 0.4 % 5.3 %
Employee benefits 6,819 8,966 7,335

-23.9

%

-7.0

%

Occupancy, net 4,037 3,988 4,013 1.2 % 0.6 %
Furniture and equipment 3,189 3,138 3,129 1.6 % 1.9 %
Outsourced technology services 2,179 2,266 2,212

-3.8

%

-1.5

%

Other real estate owned ("OREO") expense, net of income 1,806 1,105 2,042 63.4 %

-11.6

%

FDIC insurance premiums 1,601 1,595 1,629 0.4 %

-1.7

%

Professional fees 1,002 933 726 7.4 % 38.0 %
Mortgage servicing rights amortization 817 895 671

-8.7

%

21.8 %
Mortgage servicing rights impairment (recovery) 52 (868 ) 27 106.0 % 92.6 %
Core deposit intangibles amortization 355 355 361 0.0 %

-1.7

%

Other expenses 13,802     13,503     11,493     2.2 %   20.1 %
Total non-interest expense $ 57,299     $ 57,440     $ 54,192    

-0.2

%

  5.7 %
 
  For the Six Months Ended   Year Over Year

% Change
    June 30,

2012
  June 30,

2011
   
Non-interest expense:    
Salaries and wages $ 43,204 $ 40,757 6.0 %
Employee benefits 15,785 14,834 6.4 %
Occupancy, net 8,025 8,228

-2.5

%

Furniture and equipment 6,327 6,349

-0.3

%

Outsourced technology services 4,445 4,453

-0.2

%

FDIC insurance premiums 3,196 4,095

-22.0

%

OREO expense, net of income 2,911 3,753

-22.4

%

Professional fees 1,935 1,505 28.6 %
Mortgage servicing rights amortization 1,712 1,478 15.8 %
Mortgage servicing rights impairment recovery (816 ) (320 ) 155.0 %
Core deposit intangibles amortization 710 723

-1.8

%

Other expenses   27,305     21,295     28.2 %
Total non-interest expense   $ 114,739     $ 107,150     7.1 %

Salaries and wages expense increased during the three and six months ended June 30, 2012, as compared to the same periods in the prior year primarily due to increases in incentive compensation paid in the form of commissions and overtime to the Company's real estate lenders and processors, higher incentive bonus accruals reflective of the Company's improved performance during the first half of 2012 and inflationary wage increases.

Employee benefits expense decreased during second quarter 2012, as compared to first quarter 2012, primarily due to decreases in the market value of securities held under deferred compensation plans and lower payroll tax and group insurance expenses. During second quarter 2012, fluctuations in the market value of securities held under deferred compensation plans resulted in a decrease in employee benefits expense of $356 thousand, as compared to an increase in employee benefits expense of $474 thousand during first quarter 2012 and $197 thousand during second quarter 2011.

For the six months ended June 30, 2012, as compared to the same period in 2011, decreases in the market values of securities held under deferred compensation plans were more than offset by increases in stock-based compensation expense, higher profit sharing accruals reflective of improved performance and increases in group medical insurance costs.

Increases in OREO expense during second quarter 2012, as compared to first quarter of 2012, were attributable to additional carrying costs associated with properties foreclosed during the period. Second quarter 2012 OREO expense included net operating expenses of $1.3 million, compared with net operating expenses of $453 thousand during first quarter 2012. Decreases in OREO expense during the three and six months ended June 30, 2012, as compared to the same periods in the prior year, were primarily the result of write-downs in the estimated fair value of OREO properties. During the three and six months ended June 30, 2012, the Company wrote-down the estimated fair value of OREO properties by $580 thousand and $1.1 million, respectively, as compared to write-downs of $2.0 million and $3.5 million during the same respective periods in the prior year.

Included in other expenses for second quarter 2012, is $1.5 million of donation expense associated with the second quarter 2012 sale of a bank building to a charitable organization. In addition, unamortized issuance costs of $428 thousand associated with redeemed junior subordinated debentures were charged to other expense during second quarter 2012. Other expense increased during the six months ended June 30, 2012, as compared to the same period in 2011, primarily due to increased donations expense and the write-off of unamortized debt issuance costs discussed above, and the accrual of $3.0 million of estimated collection and settlement costs during the first quarter 2012.

 
ASSET QUALITY

(Unaudited; $ in thousands)

 
  For the Three Months Ended
    June 30,

2012
  March 31,

2012
  June 30,

2011
Allowance for loan losses - beginning of period $ 115,902   $ 112,581   $ 124,446
Charge-offs (26,745 ) (9,087 ) (16,102 )
Recoveries 1,637 1,158 835
Provision   12,000     11,250     15,400  
Allowance for loan losses - end of period   $ 102,794     $ 115,902     $ 124,579  
 
    June 30,

2012
  March 31,

2012
  June 30,

2011
Period end loans $ 4,169,963 $ 4,158,616 $ 4,281,260
Average loans 4,159,565 4,165,203 4,269,637
Non-performing loans:
Non-accrual loans 129,923 180,910 229,662
Accruing loans past due 90 days or more 6,451 5,017 2,194
Troubled debt restructurings   35,959     36,838     31,611  
Total non-performing loans 172,333 222,765 263,467
Other real estate owned   53,817     44,756     28,323  
Total non-performing assets   $ 226,150     $ 267,521     $ 291,790  
 
Net charge-offs to average loans, annualized 2.43 % 0.76 % 1.43 %
Provision for loan losses to average loans, annualized 1.16 % 1.08 % 1.45 %
Allowance for loan losses to period end loans 2.47 % 2.79 % 2.91 %
Allowance for loan losses to total non-performing loans 59.65 % 52.03 % 47.28 %
Non-performing loans to period end loans 4.13 % 5.36 % 6.15 %
Non-performing assets to period end loans and other real estate owned 5.35 % 6.36 % 6.77 %
Non-performing assets to total assets   3.10 %   3.60 %   4.05 %

As of June 30, 2012, total non-performing loans included $152 million of real estate loans, of which $53 million were construction loans and $80 million were commercial real estate loans. Non-performing construction loans as of June 30, 2012 were comprised of land acquisition and development loans of $39 million, commercial construction loans of $11 million and residential construction loans of $3 million.

Non-performing loans decreased 23% as of June 30, 2012, as compared to March 31, 2012, primarily due to the movement of non-accrual loans out of the loan portfolio through charge-off or foreclosure.

Net charged-off loans increased during second quarter 2012, as compared to first quarter 2012 and second quarter 2011. Nine borrowers accounted for 73% of loans charged-off during second quarter 2012. Charge-offs during second quarter 2012 were primarily comprised of land development, commercial construction and commercial real estate loans.

During second quarter 2012, the Company recorded additions to OREO of $20 million. Approximately 75% of these additions were attributable to the loans of five borrowers. Second quarter 2012 OREO additions were partially offset by write downs of the fair value of OREO properties of $568 thousand and sales of OREO with a net book value of $10 million at a slight gain.

 
CREDIT QUALITY TRENDS

(Unaudited; $ in thousands)

 
   

Provision for

Loan Losses

  Net Charge-offs  

Allowance for

Loan Losses

 

Accruing Loans

30-89 Days

Past Due

 

Non-Performing

Loans

 

Non-Performing

Assets

Q1 2009   $ 9,600   $ 4,693   $ 92,223   $ 98,980   $ 103,653   $ 122,300
Q2 2009 11,700 5,528 98,395 88,632 135,484 167,273
Q3 2009 10,500 7,147 101,748 91,956 125,083 156,958
Q4 2009 13,500 12,218 103,030 63,878 124,678 163,078
Q1 2010 11,900 8,581 106,349 62,675 133,042 177,022
Q2 2010 19,500 11,521 114,328 99,334 158,113 200,451
Q3 2010 18,000 12,092 120,236 47,966 202,008 237,304
Q4 2010 17,500 17,256 120,480 57,011 210,684 244,312
Q1 2011 15,000 11,034 124,446 68,021 249,878 281,873
Q2 2011 15,400 15,267 124,579 70,145 263,467 291,790
Q3 2011 14,000 18,276 120,303 62,165 262,578 287,658
Q4 2011 13,751 21,473 112,581 75,603 241,470 278,922
Q1 2012 11,250 7,929 115,902 58,531 222,765 267,521
Q2 2012   12,000     25,108     102,794     55,074     172,333     226,150
CRITICIZED LOANS

(Unaudited; $ in thousands)

 
   

Other Assets

Especially

Mentioned

  Substandard   Doubtful   Total
Q1 2009   $ 163,402   $ 231,861   $ 40,356   $ 435,619
Q2 2009 230,833 242,751 48,326 521,910
Q3 2009 239,320 271,487 60,725 571,532
Q4 2009 279,294 271,324 69,603 620,221
Q1 2010 312,441 311,866 64,113 688,420
Q2 2010 319,130 337,758 92,249 749,137
Q3 2010 340,075 340,973 116,003 797,051
Q4 2010 305,925 303,653 133,353 742,931
Q1 2011 293,899 299,072 135,862 728,833
Q2 2011 268,450 309,029 149,964 727,443
Q3 2011 261,501 305,145 134,367 701,013
Q4 2011 240,903 269,794 120,165 630,862
Q1 2012 242,071 276,165 93,596 611,832
Q2 2012   220,509     243,916     81,473     545,898
 
LOANS

(Unaudited; $ in thousands)

 
    June 30,

2012
  March 31,

2012
  June 30,

2011
  Sequential Quarter

% Change

  Year Over Year

% Change

Real estate:          
Commercial $ 1,517,400 $ 1,533,624 $ 1,555,964 -1.1 % -2.5 %
Construction:
Land acquisition & development 240,550 272,874 312,690 -11.8 % -23.1 %
Residential 51,193 50,332 63,364 1.7 % -19.2 %
Commercial   59,911     65,196     76,740     -8.1 %   -21.9 %
Total construction loans   351,654     388,402     452,794     -9.5 %   -22.3 %
Residential 572,018 562,588 578,739 1.7 % -1.2 %
Agricultural   171,087     171,685     177,728     -0.3 %   -3.7 %
Total real estate loans   2,612,159     2,656,299     2,765,225     -1.7 %   -5.5 %
Consumer:
Indirect consumer loans 418,604 407,389 413,825 2.8 % 1.2 %
Other consumer loans 144,442 142,144 152,704 1.6 % -5.4 %
Credit card loans   58,166     56,540     59,655     2.9 %   -2.5 %
Total consumer loans   621,212     606,073     626,184     2.5 %   -0.8 %
Commercial 720,010 708,397 724,158 1.6 % -0.6 %
Agricultural 138,115 128,599 133,898 7.4 % 3.1 %
Other loans, including overdrafts   2,319     568     3,297     308.3 %   -29.7 %
Loans held for investment 4,093,815 4,099,936 4,252,762 -0.1 % -3.7 %
Mortgage loans held for sale   76,148     58,680     28,498     29.8 %   167.2 %
Total loans   $ 4,169,963     $ 4,158,616     $ 4,281,260     0.3 %   -2.6 %

Total loans increased as of June 30, 2012, compared to March 31, 2012, with all major categories of loans except real estate showing growth. Decreases in real estate loans as of June 30, 2012, as compared to March 31, 2012, are primarily attributable to the movement of lower quality loans out of the loan portfolio through charge-off or foreclosure combined with low loan demand. Growth in residential real estate loans as of June 30, 2012, compared to March 31, 2012, is attributable to the retention of some loan production that has typically been sold in the secondary market.

 
DEPOSITS

(Unaudited; $ in thousands)

 
    June 30,

2012
  March 31,

2012
  June 30,

2011
  Sequential Quarter

% Change

  Year Over Year

% Change

Non-interest bearing demand   $ 1,337,777   $ 1,284,823   $ 1,109,905   4.1 %   20.5 %
Interest bearing:
Demand 1,586,962 1,618,174 1,233,039 -1.9 % 28.7 %
Savings 1,495,230 1,480,435 1,703,548 1.0 % -12.2 %
Time, $100 and over 641,070 671,014 772,567 -4.5 % -17.0 %
Time, other   840,340     856,388     975,606     -1.9 %   -13.9 %
Total interest bearing   4,563,602     4,626,011     4,684,760     -1.3 %   -2.6 %
Total deposits   $ 5,901,379     $ 5,910,834     $ 5,794,665     -0.2 %   1.8 %

Total deposits remained stable as of June 30, 2012, as compared to March 31, 2012, and increased slightly compared to June 30, 2011. As a result of a regulatory change allowing businesses to receive interest on checking accounts, the Company discontinued its savings sweep product resulting in a shift of approximately $300 million from savings deposits into interest-bearing demand deposits during first quarter 2012. During second quarter 2012, the Company continued to experience a favorable shift in the composition of deposits away from higher-costing time deposits into non-interest bearing demand deposits.

REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS

On June 26, 2012, the Company redeemed $41.2 million of 30-year junior subordinated deferrable interest debentures issued by the Company to an unconsolidated subsidiary trust. Unamortized issuance costs of $428 thousand were charged to other expenses on the date of redemption. The redemption of the junior subordinated debentures caused a mandatory redemption of $40 million of 30-year floating rate mandatorily redeemable capital trust preferred securities issued by the unconsolidated subsidiary trust to third-party investors.

 
CAPITAL

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

 
    June 30,

2012
  March 31,

2012
  June 30,

2011
  Sequential Quarter

% Change

  Year Over Year

% Change

Preferred stockholders' equity   $ 50,000   $ 50,000   $ 50,000   0.0 %   0.0 %
Common stockholders' equity 718,070 709,781 686,948 1.2 % 4.5 %
Accumulated other comprehensive income, net   18,265     19,494     22,397     -6.3 %   -18.4 %
Total stockholders' equity   $ 786,335     $ 779,275     $ 759,345     0.9 %   3.6 %
Book value per common share $ 17.03 $ 16.88 $ 16.51 0.9 % 3.1 %
Tangible book value per common share* $ 12.63 $ 12.47 $ 12.05 1.3 % 4.8 %
Net tangible book value per common share *   $ 14.03     $ 13.87     $ 13.45     1.2 %   4.3 %
Weighted average common shares outstanding for basic earnings per common share computation   42,966,926     42,783,769     42,781,894     0.4 %   0.4 %
Weighted average common shares outstanding for diluted earnings per common share computation   43,060,204     42,982,543     42,896,611     0.2 %   0.4 %
 

* See Non-GAAP Financial Measures included herein for a discussion of tangible and net tangible book value per common share.

 
CAPITAL RATIOS
(Unaudited)
 
    June 30,

2012
  March 31,

2012
  June 30,

2011
Tangible common stockholders' equity to tangible assets*   7.67 % 7.48 %   7.38 %
Net tangible common stockholders' equity to tangible assets* 8.52 % 8.32 % 8.24 %
Tier 1 common capital to total risk weighted assets 11.51 % ** 11.35 % 10.56 %
Leverage ratio 9.54 % ** 10.01 % 9.69 %
Tier 1 risk-based capital 14.22 % ** 14.90 % 14.03 %
Total risk-based capital   16.20 % ** 16.89 %   16.01 %
 

* See Non-GAAP Financial Measures included herein for a discussion of tangible and net tangible common stockholders' equity to tangible assets.

** Preliminary estimate - may be subject to change.
 

The Company's leverage, tier 1 and total risk-based capital ratios declined as of June 30, 2012, compared to March 31, 2012, due to the mandatory redemption of $40 million of capital trust preferred securities issued by an unconsolidated subsidiary of the Company that qualified as tier 1 capital under current regulatory capital guidelines. As of June 30, 2012, the Company had capital levels that, in all cases, exceeded the “well capitalized” requirements under all regulatory capital guidelines.

Second Quarter 2012 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss second quarter 2012 results at 11:00 a.m. Eastern Time (9:00 a.m. MDT) on Tuesday, July 24, 2012. 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 www.FIBK.com. The call will be recorded and made available for replay after 1:00 p.m. Eastern Time (11:00 a.m. MDT) on July 24, 2012 through August 24, 2012 by dialing 1-877-344-7529 (using conference ID 10015558). 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 decreased levels of criticized loans, stabilization of the loan portfolio, the Company's level of allowance for loan losses, manageability of credit costs and levels of profitability. 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; sweeping changes in regulation of financial institutions due to passage of the Dodd-Frank Act; 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; reliance on external vendors; 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; capital required to support the Company’s bank subsidiary; soundness of other financial institutions; impact of Basel III capital standards and forthcoming new capital rules proposed for U.S. banks; inability of our bank subsidiary to pay dividends; change in dividend policy; lack of public market for our Class A common stock; volatility of Class A common stock; voting control of Class B stockholders; 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; anti-takeover provisions; controlled company status; subordination of common stock to Company debt; uncertainties associated with introducing new products or lines of business; and, downgrade of the U.S. credit rating.

A more detailed discussion of each of the foregoing risks is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, filed February 28, 2012. These factors and the other risk factors described in the Company's periodic and current reports filed with the Securities and Exchange Commission from time to time, however, are not necessarily all of the important factors that could cause the Company's actual results, performance or achievements to differ materially from those expressed in or implied by any of the Company's forward-looking statements. Other unknown or unpredictable factors also could harm the Company's results. Investors and others are encouraged to read the more detailed discussion of the Company's risks contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

All forward-looking statements attributable to the Company or persons acting on the Company's 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 the Company does 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 the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.

 
CONSOLIDATED BALANCE SHEETS

(Unaudited, $ in thousands)

 
    June 30,

2012
  March 31,

2012
  June 30,

2011
Assets      
Cash and due from banks $ 146,577 $ 128,341 $ 130,413
Federal funds sold 2,854 304 1,764
Interest bearing deposits in banks   387,222     494,279     283,314
Total cash and cash equivalents   536,653     622,924     415,491
Investment securities:
Available-for-sale 1,913,983 1,955,436 1,873,864
Held-to-maturity (estimated fair values of $177,532, $166,932 and $153,448 at June 30, 2012, March 31, 2012 and June 30, 2011, respectively)   166,926     158,070     148,865
Total investment securities   2,080,909     2,113,506     2,022,729
Loans held for investment 4,093,815 4,099,936 4,252,762
Mortgage loans held for sale   76,148     58,680     28,498
Total loans   4,169,963     4,158,616     4,281,260
Less allowance for loan losses   102,794     115,902     124,579
Net loans   4,067,169     4,042,714     4,156,681
Premises and equipment, net of accumulated depreciation 187,367 185,230 186,529
Goodwill 183,673 183,673 183,673
Company-owned life insurance 75,849 75,342 74,080
Other real estate owned ("OREO"), net of write-downs 53,817 44,756 28,323
Accrued interest receivable 30,936 30,407 33,588
Mortgage servicing rights, net of accumulated amortization and impairment reserve 11,985 11,833 13,218
Core deposit intangibles, net of accumulated amortization 6,647 7,002 8,080
Deferred tax asset, net 5,017 9,571 10,466
Other assets   65,154     67,348     69,933
Total assets   $ 7,305,176     $ 7,394,306     $ 7,202,791
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing $ 1,337,777 $ 1,284,823 $ 1,109,905
Interest bearing   4,563,602     4,626,011     4,684,760
Total deposits   5,901,379     5,910,834     5,794,665
Securities sold under repurchase agreements 455,993 491,058 435,039
Accounts payable and accrued expenses 33,589 43,972 35,395
Accrued interest payable 8,215 8,255 11,712
Long-term debt 37,181 37,191 37,480
Other borrowed funds 7 6 5,440
Subordinated debentures held by subsidiary trusts   82,477     123,715     123,715
Total liabilities   6,518,841     6,615,031     6,443,446
Stockholders’ equity:
Preferred stock 50,000 50,000 50,000
Common stock 269,698 268,411 265,639
Retained earnings 448,372 441,370 421,309
Accumulated other comprehensive income, net   18,265     19,494     22,397
Total stockholders’ equity   786,335     779,275     759,345
Total liabilities and stockholders’ equity   $ 7,305,176     $ 7,394,306     $ 7,202,791
 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, $ in thousands, except per share data)
 
  Three Months Ended
    June 30,

2012
  March 31,

2012
  June 30,

2011
Interest income:    
Interest and fees on loans $ 58,084 $ 57,910 $ 61,475
Interest and dividends on investment securities:
Taxable 9,458 9,705 10,649
Exempt from federal taxes 1,240 1,204 1,194
Interest on deposits in banks 279 237 227
Interest on federal funds sold   6     1     6
Total interest income   69,067     69,057     73,551
Interest expense:
Interest on deposits 5,779 6,262 8,903
Interest on securities sold under repurchase agreements 152 156 171
Interest on long-term debt 495 498 495
Interest on subordinated debentures held by subsidiary trusts   1,467     1,507     1,455
Total interest expense   7,893     8,423     11,024
Net interest income 61,174 60,634 62,527
Provision for loan losses   12,000     11,250     15,400
Net interest income after provision for loan losses   49,174     49,384     47,127
Non-interest income:
Income from the origination and sale of loans 9,420 8,384 4,109
Other service charges, commissions and fees 8,254 8,424 7,768
Service charges on deposit accounts 4,455 4,161 4,385
Wealth management revenues 3,815 3,283 3,689
Investment securities gains, net 198 31 16
Other income   1,520     2,099     1,624
Total non-interest income   27,662     26,382     21,591
Non-interest expense:
Salaries and wages 21,640 21,564 20,554
Employee benefits 6,819 8,966 7,335
Occupancy, net 4,037 3,988 4,013
Furniture and equipment 3,189 3,138 3,129
Outsourced technology services 2,179 2,266 2,212
OREO expense, net of income 1,806 1,105 2,042
FDIC insurance premiums 1,601 1,595 1,629
Professional fees 1,002 933 726
Mortgage servicing rights amortization 817 895 671
Mortgage servicing rights impairment (recovery) 52 (868 ) 27
Core deposit intangibles amortization 355 355 361
Other expenses   13,802     13,503     11,493
Total non-interest expense   57,299     57,440     54,192
Income before income tax expense 19,537 18,326 14,526
Income tax expense   6,527     6,112     4,672
Net income 13,010 12,214 9,854
Preferred stock dividends   853     853     853
Net income available to common shareholders   $ 12,157     $ 11,361     $ 9,001
 
Basic earnings per common share $ 0.28 $ 0.26 $ 0.21
Diluted earnings per common share   $ 0.28     $ 0.26     $ 0.21
 
CONSOLIDATED STATEMENTS OF INCOME

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

 
  Six Months Ended
    June 30,

2012
  June 30,

2011
Interest income:  
Interest and fees on loans $ 115,994 $ 123,866
Interest and dividends on investment securities:
Taxable 19,163 20,560
Exempt from federal taxes 2,444 2,365
Interest on deposits in banks 516 594
Interest on federal funds sold   7     9  
Total interest income   138,124     147,394  
Interest expense:
Interest on deposits 12,041 18,774
Interest on securities sold under repurchase agreements 308 408
Interest on long-term debt 993 984
Interest on subordinated debentures held by subsidiary trusts   2,974     2,903  
Total interest expense   16,316     23,069  
Net interest income: 121,808 124,325
Provision for loan losses   23,250     30,400  
Net interest income after provision for loan losses   98,558     93,925  
Non-interest income:
Income from the origination and sale of loans 17,804 7,554
Other service charges, commissions and fees 16,678 15,148
Service charges on deposit accounts 8,616 8,495
Wealth management revenues 7,098 6,999
Investment securities gains, net 229 18
Other income   3,619     3,536  
Total non-interest income   54,044     41,750  
Non-interest expense:
Salaries and wages 43,204 40,757
Employee benefits 15,785 14,834
Occupancy, net 8,025 8,228
Furniture and equipment 6,327 6,349
Outsourced technology services 4,445 4,453
FDIC insurance premiums 3,196 4,095
OREO expense, net of income 2,911 3,753
Professional fees 1,935 1,505
Mortgage servicing rights amortization 1,712 1,478
Mortgage servicing rights impairment recovery (816 ) (320 )
Core deposit intangibles amortization 710 723
Other expenses   27,305     21,295  
Total non-interest expense   114,739     107,150  
Income before income tax expense 37,863 28,525
Income tax expense   12,639     9,165  
Net income 25,224 19,360
Preferred stock dividends   1,706     1,697  
Net income available to common shareholders   $ 23,518     $ 17,663  
 
Basic earnings per common share $ 0.55 $ 0.41
Diluted earnings per common share   $ 0.55     $ 0.41  
 
AVERAGE BALANCE SHEETS
(Unaudited, $ in thousands)
 
  Three Months Ended
June 30, 2012   March 31, 2012   June 30, 2011
    Average

Balance

Interest Average

Rate

  Average

Balance

Interest Average

Rate

  Average

Balance

Interest Average

Rate

Interest earning assets:    
Loans (1) (2) $ 4,159,565 $ 58,564 5.66 % $ 4,165,203 $ 58,374 5.64 % $ 4,269,637 $ 61,926 5.82 %
Investment securities (2) 2,094,148 11,414 2.19 2,143,438 11,604 2.18 2,019,187 12,533 2.49
Interest bearing deposits in banks 442,698 279 0.25 374,899 237 0.25 359,446 227 0.25
Federal funds sold   3,668   6   0.66     609   1   0.66     3,871   6   0.62  
Total interest earnings assets 6,700,079 70,263 4.22 6,684,149 70,216 4.23 6,652,141 74,692 4.50
Non-earning assets   633,454         619,137         617,221      
Total assets   $ 7,333,533         $ 7,303,286         $ 7,269,362      
Interest bearing liabilities:
Demand deposits $ 1,596,076 $ 606 0.15 % $ 1,582,805 $ 646 0.16 % $ 1,263,466 $ 847 0.27 %
Savings deposits 1,482,986 934 0.25 1,449,239 1,015 0.28 1,711,210 1,753 0.41
Time deposits 1,496,597 4,239 1.14 1,540,789 4,601 1.20 1,780,542 6,303 1.42
Repurchase agreements 493,450 152 0.12 513,407 156 0.12 469,459 171 0.15
Other borrowed funds 33 35 5,459
Long-term debt 37,184 495 5.35 37,194 498 5.39 37,485 495 5.30
Subordinated debentures held by subsidiary trusts   120,996   1,467   4.88     123,715   1,507   4.90     123,715   1,455   4.72  
Total interest bearing liabilities 5,227,322 7,893 0.61 5,247,184 8,423 0.65 5,391,336 11,024 0.82
Non-interest bearing deposits 1,277,091 1,232,874 1,089,909
Other non-interest bearing liabilities 47,781 50,071 47,791
Stockholders’ equity   781,339         773,157         740,326      
Total liabilities and stockholders’ equity   $ 7,333,533         $ 7,303,286         $ 7,269,362      
Net FTE interest income $ 62,370 $ 61,793 $ 63,668
Less FTE adjustments (2)     (1,196 )       (1,159 )       (1,141 )  
Net interest income from consolidated statements of income     $ 61,174         $ 60,634         $ 62,527    
Interest rate spread       3.61 %       3.58 %       3.68 %
Net FTE interest margin (3)       3.74 %       3.72 %       3.85 %
Cost of funds, including non-interest bearing demand deposits (4)       0.49 %       0.52 %       0.68 %
 

(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 a 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.

 
AVERAGE BALANCE SHEETS

(Unaudited, $ in thousands)

 
Six Months Ended
June 30, 2012   June 30, 2011
  Average

Balance

Interest Average

Rate

  Average

Balance

Interest Average

Rate

Interest earning assets:  
Loans (1) (2) $ 4,162,384 $ 116,938 5.65 % $ 4,286,512 $ 124,762 5.87 %
Investment securities (2) 2,118,793 23,018 2.18 1,984,000 24,291 2.47
Interest bearing deposits in banks 408,799 516 0.25 472,994 594 0.25
Federal funds sold 2,139   7   0.66     3,061   9   0.59  
Total interest earnings assets 6,692,115 140,479 4.22 6,746,567 149,656 4.47
Non-earning assets 626,295         619,837      
Total assets $ 7,318,410         $ 7,366,404      
Interest bearing liabilities:
Demand deposits $ 1,589,440 $ 1,253 0.16 % $ 1,256,414 $ 1,681 0.27 %
Savings deposits 1,466,113 1,948 0.27 1,727,886 3,753 0.44
Time deposits 1,518,693 8,840 1.17 1,827,269 13,340 1.47
Repurchase agreements 503,428 308 0.12 519,392 408 0.16
Other borrowed funds 34 5,577
Long-term debt 37,189 993 5.37 37,490 984 5.29
Subordinated debentures held by subsidiary trusts 122,356   2,974   4.89     123,715   2,903   4.73  
Total interest bearing liabilities 5,237,253 16,316 0.63 5,497,743 23,069 0.85
Non-interest bearing deposits 1,254,983 1,080,379
Other non-interest bearing liabilities 48,926 49,395
Stockholders’ equity 777,248         738,887      
Total liabilities and stockholders’ equity $ 7,318,410         $ 7,366,404      
Net FTE interest income $ 124,163 $ 126,587
Less FTE adjustments (2)   (2,355 )       (2,262 )  
Net interest income from consolidated statements of income   $ 121,808         $ 124,325    
Interest rate spread     3.59 %       3.62 %
Net FTE interest margin (3)     3.73 %       3.78 %
Cost of funds, including non-interest bearing demand deposits (4)     0.51 %       0.71 %
 

(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 a 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.

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; (iv) net tangible common stockholders' equity to tangible assets; and (v) 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, 2012 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.

 
NON-GAAP FINANCIAL MEASURES

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

 
    June 30,

2012
  March 31,

2012
  June 30,

2011
Total stockholders’ equity (GAAP)   786,335   779,275   759,345
Less goodwill and other intangible assets (excluding mortgage servicing rights) 190,351 190,708 191,792
Less preferred stock   50,000     50,000     50,000  
Tangible common stockholders’ equity (Non-GAAP) $ 545,984 $ 538,567 $ 517,553
Add deferred tax liability for deductible goodwill   60,499     60,499     60,499  
Net tangible common stockholders’ equity (Non-GAAP)   $ 606,483     $ 599,066     $ 578,052  
Total assets (GAAP) 7,305,176 7,394,306 7,202,791
Less goodwill and other intangible assets (excluding mortgage servicing rights)   190,351     190,708     191,792  
Tangible assets (Non-GAAP)   7,114,825     7,203,598     7,010,999  
 
Common shares outstanding 43,228,750 43,190,975 42,964,921
Book value per common share $ 17.03 $ 16.88 $ 16.51
Tangible book value per common share $ 12.63 $ 12.47 $ 12.05
Net tangible book value per common share $ 14.03 $ 13.87 $ 13.45
Tangible common stockholders’ equity to tangible assets (Non-GAAP) 7.67 % 7.48 % 7.38 %
Net tangible common stockholders’ equity to tangible assets (Non-GAAP)   8.52 %   8.32 %   8.24 %

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