Exhibit 99
To our shareholders,
First Interstate BancSystem is pleased to announce second quarter 2008 net income to common shareholders of $17,773,000, or $2.22 per diluted share, as compared to $17,625,000, or $2.11 per diluted share, for second quarter 2007.2008 second quarter earnings are the highest second quarter earnings reported in our history. Return on average common equity was 15.66% in second quarter 2008 compared to 16.76% in second quarter 2007, and return on aver- age assets was 1.19% versus 1.43%.
Our financial performance for 2008 includes the results of the First Western Banks acquired January 10, 2008. As of the date of acquisition, the First Western Banks had assets of $918,000,000, loans of $725,000,000 and deposits of $812,000,000. Integration of the ac- quired banks into our existing operations is proceeding as scheduled.
Quarterly Results
Second quarter 2008 net interest income increased 19% to $58,371,000, as compared to the same period in 2007. Our net interest margin ratio decreased 18 basis points to 4.27% in second quarter 2008, as compared to second quarter 2007. This decrease is due, in part, to the deployment of available funding into non-earning assets including premises, equipment, goodwill and core deposit intangible assets recorded as part of the First Western acquisition. In addition, interest free funding sources, including noninterest bearing deposits and equity, comprised a smaller percentage of our funding base during second quarter 2008, as compared to second quarter 2007, further compressing our net interest margin ratio.
During second quarter 2008, we experienced deterioration in credit quality, particularly in real estate development loans, resulting in higher levels of nonperforming and internally risk classified loans. Based on our assessment of risk inherent in our loan portfolio, we recorded provisions for loan losses of $5,321,000 during second quarter 2008, an increase of $3,446,000 compared to second quarter 2007.
Noninterest income of $25,225,000 for second quarter 2008 was $3,061,000, or 14%, higher than second quarter 2007. Approximately 61% of the increase was directly attributable to the acquired banks. The remaining improvement was primarily the result of increases of $440,000 in debit and credit card transaction fees due to higher transactions volumes, $330,000 in income from the origination and sale of residential real estate mortgage loans, $263,000 in wealth management revenues and $254,000 in insurance commissions.
Noninterest expense of $49,661,000 was $7,217,000, or 17%, higher than second quarter 2007. Approximately 87% of the increase was directly attributable to the acquired banks. The remaining increase was primarily due to inflationary wage increases and increases in group medical insurance costs aggregating $2,031,000, increases of $629,000 in equipment depreciation and maintenance expenses and increases of $509,000 in deposit insurance premiums due to expiration of our one-time deposit insurance credit. In addition, we incurred nonrecurring expenses of $450,000 related to employee recruitment and relocation and $237,000 of fraud losses during second quarter 2008. Increases in noninterest expense were substantially offset by a $4,297,000 reversal of impairment on mortgage servicing rights during second quarter 2008, as compared to a $677,000 impairment reversal during second quarter 2007.
On July 8, 2008, we paid dividends of $0.65 per common share.
Year-to-Date Results
Year-to-date net income to common shareholders of $35,080,000, or $4.36 per diluted share, increased $959,000, or 3%, from $34,121,000, or $4.08 per diluted share, during the same period in 2007.
Although year-to-date net interest income of $115,174,000 increased 18%, from the same period in 2007, our net interest margin ratio declined 17 basis points to 4.28% primarily due to the combined effects of deployment of available funding into non-earning assets in conjunction with the First Western acquisition and a decrease in interest free funding sources as a percentage of our funding base.
Financial Highlights
Three Months ended June 30,
| | | | | | | | | | | | | |
| (Unaudited) | | 2008 | | 2007 | | % Change |
| (In thousands, except per share data) | | | | | | | | | | | | |
OPERATING RESULTS | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income | | $ | 18,626 | | | $ | 17,625 | | | | 5.7 | % |
| Net income to common stockholders | | | 17,773 | | | | 17,625 | | | | 0.8 | % |
| Diluted earnings per share | | | 2.22 | | | | 2.11 | | | | 5.2 | % |
| Dividends per share | | | 0.65 | | | | 0.65 | | | | — | |
| | | | | | | | | | | | | |
PERIOD END BALANCES | | | | | | | | | | | | |
| |
| Assets | | | 6,363,964 | | | | 4,934,826 | | | | 29.0 | % |
| Loans | | | 4,570,655 | | | | 3,494,146 | | | | 30.8 | % |
| Investment securities | | | 1,032,942 | | | | 971,929 | | | | 6.3 | % |
| Deposits | | | 4,883,489 | | | | 3,919,388 | | | | 24.6 | % |
| Stockholders’ equity | | | 502,089 | | | | 426,623 | | | | 17.7 | % |
| Common shares outstanding | | | 7,834 | | | | 8,156 | | | | -3.9 | % |
| | | | | | | | | | | | | |
QUARTERLY AVERAGES | | | | | | | | | | | | |
| |
| Assets | | | 6,292,396 | | | | 4,949,635 | | | | 27.1 | % |
| Loans | | | 4,458,678 | | | | 3,418,976 | | | | 30.4 | % |
| Investment securities | | | 1,108,133 | | | | 941,462 | | | | 17.7 | % |
| Deposits | | | 4,833,976 | | | | 3,892,169 | | | | 24.2 | % |
| Stockholders’ equity | | | 506,319 | | | | 421,860 | | | | 20.0 | % |
| Common shares outstanding | | | 7,846 | | | | 8,174 | | | | -4.0 | % |
Year-to-date provisions for loan losses increased $3,934,000 to $7,684,000 during 2008, as compared to the same period in 2007, primarily due to increases in levels of nonperforming and internally risk rated loans during second quarter 2008.
Exclusive of the results of the acquired banks, noninterest income increased $4,216,000, or 10%, and noninterest expense increased $5,254,000, or 6%, during the first half of 2008, as compared to the same period in 2007. Our 2008 performance was positively impacted by a one-time gain on the mandatory redemption of Visa stock of $1,620,000 and a one-time gain of $1,083,000 from the release of escrowed funds related to the December 2006 sale of our interest in iPay Technologies, LLC. These gains were offset by inflationary increases in salaries and benefits expenses, increases in deposit insurance premiums, higher equipment depreciation and maintenance costs and employee recruitment and relocation expenses.
We thank our dedicated team of employees, officers and directors for our continuing success. Due to their commitment to sound banking practices, we did not engage in subprime lending practices and are not experiencing the financial instability that is challenging other financial institutions around the country. Our market areas have not been as severely impacted by the mortgage crisis as many areas of the country. We are fortunate to have the sound economies of Mon-tana, Wyoming and South Dakota to further contribute to our success.
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| Lyle R. Knight | | Terrill R. Moore |
| President | | Executive Vice President |
| Chief Executive Officer | | Chief Financial Officer |
