First Interstate BancSystem, Inc. Reports Third Quarter Earnings, Including Strong Revenue Growth and Improved Net Interest Margin

First Interstate BancSystem, Inc. (NASDAQ: FIBK) reports third quarter 2017 net income of $27.3 million, or $0.48 per share. This compares to net income of $21.9 million, or $0.45 per share, during second quarter 2017, and $25.2 million, or $0.56 per share, during third quarter 2016.

HIGHLIGHTS

• Successful data system integration of Bank of the Cascades ("BOTC") on August 11, 2017.
• Acquisition related expenses of $13.0 million this quarter, compared to $10.1 million in the second quarter 2017. The after-tax impact of acquisition related expenses on earnings per share was $0.15 and $0.14 per share for the respective periods.
• Net interest margin expansion of 11 basis points over the prior quarter.
• Strong net interest income growth on a fully-taxable equivalent basis of $21.5 million, or 26.8%, quarter-over-quarter.
• Stable non-interest income, with growth of $1.1 million, or 2.9%, quarter-over-quarter. Exclusive of the one-time gain on sale related to the custodial rights to the Company's health savings accounts ("HSA") in the second quarter, non-interest income increased $4.5 million, or 13.4%, quarter-over-quarter.
• Asset quality improved in third quarter 2017, with a $6.8 million decrease in non-performing assets and a $7.1 million decrease in criticized loans as compared to the second quarter 2017.
• Addition of two highly experienced banking professionals in pivotal roles and as members of our team: Jodi Delahunt Hubbell, Chief Banking Officer- West and Renee Newman, President- Wealth Management.

“We successfully completed the integration of Bank of the Cascades during the third quarter and we are starting to see the positive impact of this acquisition on our financial performance,” said Kevin P. Riley, President and Chief Executive Officer of First Interstate BancSystem, Inc. “We are seeing positive trends in revenue, net interest margin, operating efficiencies and credit quality, which produced an improved level of profitability, excluding our acquisition-related costs. Our overall level of balance sheet growth was lower than expected in the third quarter, as stronger production trends in our new Northwest markets were offset by declining loan balances within our legacy markets. Despite the lower level of loan growth, we anticipate further improvement in our profitability going forward as we fully capitalize on the synergies created from our combination with Bank of the Cascades.”

DIVIDEND DECLARATION

On October 16, 2017, the Company's board of directors declared a dividend of $0.24 per common share, payable on November 13, 2017, to owners of record as of October 31, 2017. The dividend equates to a 2.63% annual yield based on the $36.23 average closing pricing of the Company's common stock during the third quarter 2017.

ACQUISITION

On November 17, 2016, the Company entered into an agreement and plan of merger to acquire Cascade Bancorp, parent company of BOTC, an Oregon-based community bank with 46 banking offices across Oregon, Idaho and Washington. The acquisition was completed on May 30, 2017, and the Company merged BOTC with its existing bank subsidiary, First Interstate Bank, on August 11, 2017.

Consideration for the acquisition totaled $541.0 million and consisted of cash of $155.0 million and the issuance of 11.3 million shares of the Company's Class A common stock valued at $34.30 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. As of the acquisition date, Cascade Bancorp had total assets with fair values of $3.3 billion, total loans with fair values of $2.1 billion and deposits with fair values of $2.7 billion. The Company has recorded the fair values of the assets and liabilities acquired from BOTC only provisionally, and will finalize the amounts in the coming months. In conjunction with the acquisition, the Company recorded provisional goodwill of $232.2 million and core deposit intangible assets of $48.0 million.

NET INTEREST INCOME

The Company's net interest income, on a fully taxable equivalent basis, increased $21.5 million, or 26.8%, to $101.9 million during third quarter 2017, as compared to $80.4 million during second quarter 2017, and increased $30.2 million, or 42.0%, from $71.7 million during third quarter 2016. The increase in net interest income from the prior quarter was attributable to the full quarter impact of BOTC.

Net interest income was positively impacted this quarter by the recovery of previously charged-off interest of $2.0 million, compared to $2.1 million during second quarter 2017 and $1.8 million during the third quarter of 2016.

Interest accretion attributable to the fair valuation of acquired loans contributed $2.7 million to interest income during the third quarter of 2017, of which approximately $1.7 million was related to early payoffs. This compares to interest accretion of $1.7 million during the second quarter of 2017, of which approximately $0.3 million was related to early payoffs.

The Company's net interest margin expanded 11 basis points to 3.71% during the third quarter of 2017, from 3.60% during the second quarter of 2017. Exclusive of the impact of the recovery of charged-off interest and the impact of interest accretion on acquired loans, the Company's net interest margin ratio was 3.54% this quarter compared to 3.43% during the second quarter of 2017 and 3.42% during the third quarter of 2016 as additional floating rate loans have risen above rate floors and deposit costs have remained stable.

PROVISION FOR LOAN LOSSES

The Company recorded a provision for loan losses of $3.4 million during the third quarter of 2017, compared to $2.4 million during second quarter 2017, and $2.4 million during third quarter 2016. Fluctuations in the provision for loan losses reflect management's estimate of possible loan losses based upon evaluation of the borrowers' ability to repay, collateral value securing loans, loan loss trends, and estimated effects of current economic conditions on our loan portfolio.

NON-INTEREST INCOME

Total non-interest income increased $1.1 million, or 2.9%, to $38.3 million during third quarter 2017, as compared to $37.2 million during second quarter 2017. Total non-interest income increased $3.1 million, or 8.9%, from $35.2 million during third quarter 2016.

Third quarter increases over the prior quarter were partially attributable to the full quarter impact of the acquired BOTC non-interest income revenue streams, partially offset by the second quarter one-time gain of $3.4 million recognized on the sale of the custodial rights to all the Company's HSAs held by First Interstate Bank. In total, the Company sold the custodial rights to HealthEquity for $6.2 million, of which $3.1 million was attributable to BOTC and considered a fair market value purchase accounting adjustment.

Payment services revenues increased $2.1 million, or 20.9%, to $12.4 million during third quarter 2017, as compared to $10.2 million during second quarter 2017, largely due to seasonality experienced in the summer travel season as well as the addition of BOTC.

Service charges on deposit accounts increased $0.8 million, or 16.7%, to $5.9 million during third quarter 2017, as compared to $5.1 million during second quarter 2017. Similarly, mortgage banking revenues increased $0.6 million, or 8.0%, to $8.3 million during third quarter 2017, as compared to $7.6 million during second quarter 2017. Increases in both revenue streams are partially attributable to the full quarter impact of the acquisition. During third quarter 2017, loans originated for home purchases accounted for approximately 70.4% of production, as compared to 78.5% of production during the second quarter 2017 and 56.4% of production during the same period last year.

Other income decreased $2.8 million, or 48.6% to $3.0 million during third quarter 2017, as compared to $5.8 million during second quarter 2017. Second quarter included a $3.4 million gain related to the sale of the Company's HSA custodial rights, while third quarter included a $0.3 million purchase price adjustment due to attrition in the HSA portfolio between the second quarter date of sale and third quarter conversion of balances. Exclusive of these items, other income increased $0.9 million during the quarter.

Investment securities losses of $0.4 million this quarter include $0.7 million of gains on the sale of securities offset by $1.1 million paid to terminate our existing interest rate swap contract. Higher levels of core deposits available from the BOTC acquisition resulted in the determination that funding from the interest rate swap contract was not necessary.

NON-INTEREST EXPENSE

Non-interest expense increased $14.3 million, or 17.7%, to $94.7 million during third quarter 2017, as compared to $80.4 million during second quarter 2017, with the increase primarily attributable to the full quarter impact of the BOTC acquisition.

Included in non-interest expenses for the third and second quarter 2017 are $13.0 million and $10.1 million of expenses, respectively, related to the acquisition. The after-tax impact of acquisition related expenses on earnings per share was $0.15 and $0.14 per share for the respective periods. Exclusive of acquisition related expenses, non-interest expense was $81.6 million during the third quarter of 2017, compared to $70.3 million during second quarter 2017 and $64.2 million during third quarter 2016, with the increase primarily attributable to the BOTC transaction. Acquisition related costs are detailed below for the recent quarters.

Salary and wage expenses increased $6.6 million, or 23.6%, to $34.7 million during third quarter 2017, as compared to $28.0 million during second quarter 2017, with the increase due primarily to ongoing costs associated with staffing the expanded footprint following the BOTC acquisition as well as $1.0 million of severance and hiring costs unrelated to the acquisition.

Core deposit intangible amortization expense increased $0.8 million, from $1.1 million during second quarter 2017, to $1.9 million during third quarter 2017 and increased $1.0 million from $0.9 million during third quarter 2016. The increase in amortization expense is directly attributable to the higher level of core deposit intangibles recorded as a result of the acquisition.

Other expenses increased $2.1 million, or 8.8%, to $25.5 million during third quarter 2017, as compared to $23.4 million during second quarter 2017, primarily due to normal fluctuations in operating expenses and the full-quarter impact of the acquisition of BOTC.

BALANCE SHEET

Total loans remained stable at $7.6 billion as of September 30, 2017 compared to June 30, 2017, and increased $2.1 billion over the December 31, 2016 balance of $5.5 billion due primarily to the BOTC acquisition.

As compared to the prior quarter, total real estate loans were stable at $5.1 billion as of September 30, 2017. Within the portfolio, residential real estate loans decreased $23.8 million, or 1.6%, to $1.5 billion as of September 30, 2017, while construction loans increased $22.0 million, or 3.2%, to $703.2 million as of September 30, 2017.

Indirect consumer loans increased $9.8 million, or 1.3%, to $788.8 million as of September 30, 2017, from $779.0 million as of June 30, 2017, with the increase entirely attributable to growth in the legacy footprint.

Commercial loans remained stable at $1.2 billion as of September 30, 2017, decreasing $24.7 million, or 2.0%, from June 30, 2017 levels, while agriculture loans increased $3.6 million, or 2.4%, to $152.7 million as of September 30, 2017.

Goodwill and intangible assets, excluding mortgage servicing rights, decreased $2.3 million, from $526.3 million as of June 30, 2017, to $524.0 million as of September 30, 2017. The decrease is attributable to intangible amortization during the quarter as well as adjusting provisional amounts related to goodwill and core deposit intangibles acquired in the BOTC acquisition.

Total deposits decreased $0.1 billion to $9.9 billion as of September 30, 2017, from $10.0 billion as of June 30, 2017, with a $154.1 million decrease in interest bearing accounts driven by the transfer of the $55.2 million HSA portfolio partially offset by a $67.5 million increase in non-interest bearing deposits. As of September 30, 2017, the mix of total deposits was 29.9% non-interest bearing demand, 27.1% interest bearing demand, 31.1% savings and 11.9% time, consistent with the prior quarter and a slight shift from December 31, 2016 as BOTC deposit balances were more heavily weighted to non-interest bearing demand deposits.

CREDIT QUALITY

As of September 30, 2017, non-performing assets decreased by 7.0% to $90.5 million, compared to $97.3 million as of June 30, 2017. Non-accrual loans decreased approximately $2.2 million, to $74.5 million as of September 30, 2017, as compared to $76.7 million during second quarter 2017. Accruing loans past due 90 days or more decreased $3.7 million, or 39.5%, from June 30, 2017 primarily due to improvements in residential and agricultural real estate loans, partially offset by an increase in commercial real estate loans. Other real estate owned decreased $0.9 million primarily as a result of a third quarter net dispositions.

Criticized loans decreased $7.1 million, or 1.6%, to $422.6 million as of September 30, 2017, from $429.7 million as of June 30, 2017, and increased $50.3 million from $372.2 million as of December 31, 2016. The increase over December 31, 2016 was primarily a result of the BOTC acquisition.

Net loan charge-offs increased $1.7 million to $4.6 million during third quarter 2017, as compared to $2.9 million during second quarter 2017, and increased $3.1 million from $1.5 million from third quarter 2016. Third quarter net charge-offs were comprised of several loans for which specific reserves had been established in prior quarters. The Company's allowance for loan losses as a percentage of period end loans remained relatively stable at 0.99% as of September 30, 2017 as compared to 1.00% as of June 30, 2017, and decreased from 1.39% as of December 31, 2016 primarily as a result of higher acquired loan balances from BOTC, which were recorded at fair value in purchase accounting, with no corresponding allowance for loan losses. The provisional purchase accounting mark on the loans acquired in the BOTC transaction was $31.7 million.

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 the following non-GAAP financial measures that management uses to evaluate capital adequacy: (i) tangible book value per common share; (ii) tangible common stockholders' equity to tangible assets; (iii) tangible assets, (iv) tangible common stockholders' equity, and (v) return on average tangible common equity. 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.

See the Non-GAAP Financial Measures table included herein for a reconciliation of the above described non-GAAP financial measures to their most directly comparable GAAP financial measures.

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: declining business and economic conditions, adverse economic conditions affecting Montana, Wyoming, South Dakota, Oregon, Washington and Idaho, lending risk, changes in interest rates, credit losses, adequacy of the allowance for loan losses, declining oil and gas prices, declining demand for coal, additional regulatory requirements now that our assets exceed $10 billion, failure to integrate or profitably operate acquired organizations, access to low-cost funding sources, impairment of goodwill, changes in accounting standards, 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, stringent capital requirements, future FDIC insurance premium increases, CFPB restrictions on our ability to originate and sell mortgage loans, failure of technology, cyber-security, unfavorable resolution of litigation, inability to meet liquidity requirements, environmental remediation and other costs, ineffective internal operational controls, competition, reliance on external vendors, soundness of other financial institutions, failure to effectively implement technology-driven products and services, inability of our bank subsidiary to pay dividends, risks associated with introducing new lines of business, products or services, implementation of new lines of business or net product or services offerings, successful completion of the merger and integration of Cascade Bancorp, uninsured nature of any investment in Class A and Class B common stock, volatility of Class A and Class B common stock, decline in market price of Class A common stock, litigation pertaining to fiduciary responsibilities, change in dividend policy, uninsured nature of any investment in Class A and Class B common stock, voting control of Class B stockholders, anti-takeover provisions, dilution as a result of future equity issuances, 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.

Third Quarter 2017 Conference Call for Investors

First Interstate BancSystem, Inc. will host a conference call to discuss third quarter 2017 results at 11 a.m. Eastern Time (9 a.m. Mountain Time) on Tuesday, October 31, 2017. 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 p.m. Eastern Time (11 a.m. Mountain Time) on October 31, 2017 through 9 a.m. Eastern Time (7 a.m. Mountain Time) on November 30, 2017, by dialing 1-877-344-7529 (using conference ID 10112999). 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 banking offices, including detached drive-up facilities, in communities across Montana, Wyoming, South Dakota, Washington, Oregon and Idaho. 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.

^{(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.}

^{(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.}

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First Interstate BancSystem, Inc.
Margie Morse, 406-255-5053
Investor Relations Officer
[email protected]
www.FIBK.com