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Jim Scott
Jim Scott, right, vice chairman of the First Interstate Bank board of directors and Lyle Knight, chief executive and president of First Interstate Bank stand in the board room recently. Photo by JAMES WOODCOCK/Gazette Staff

BILLINGS - The Scott family, heirs to the First Interstate Bank empire and the nearly 500,000-acre Padlock Ranch that sprawls across Wyoming and Montana, considered selling stock to the public in 1999 but backed away.

Now the family has asked for approval from the U.S. Securities and Exchange Commission to sell up to $115 million worth of Class A common stock shares in the bank by mid-July.

In 42 years, Billings-based First Interstate BancSystem Inc. has grown from a single bank in Sheridan, Wyo., to a group of 72 banks in Montana, Wyoming and South Dakota. And, since 1998, the bank's assets have grown from $2.2 billion to more than $7 billion at the end of 2009.

The pending stock sale could raise outside capital for any members of the extended Scott family or other investors who want to cash out. It could also raise money for more growth as the recession continues to drag some unhealthy banks into bargain territory.

Like most U.S. banks, First Interstate had a rough 2009, including significant losses on real estate loans. And the bank found itself in technical default on its loan for the purchase of several South Dakota-based banks.

Still, the bank managed to increase its profits last year by 8 percent.

And that hasn't gone unnoticed by other banking insiders.

Last August, US Banker magazine ranked First Interstate sixth among the nation's top 100 best-run mid-sized banks. Glacier Bancorp, of Kalispell, was 17th.

"Who would think there would be that kind of growth in rural America?" said Chief Executive and President Lyle R. Knight, the bank's first top executive from outside the family. "People are successful here, and these are people of great values. This is a great place to do business."

As Montana's largest state-chartered bank, and Wyoming's second-largest after Wells Fargo, there should be strong interest in a stock sale.

"With the great reputation they have, customers and noncustomers have asked to buy their stock for 50 years," said Bill Coffee, president of the competing Stockman Bank.

Certified Public Accountant Jim Swain, who manages the Billings office of accounting firm Galusha, Higgins, Galusha, agreed that there is buzz about the stock sale, especially given the current economy.

"The flavor of the prospectus is this is not a bank in crisis but a bank in transition," Swain said, after reviewing parts of the SEC stock sale filing that runs nearly 300 pages.

*****

First Interstate won't see many changes if it goes public, said Jim Scott, one of five second-generation family heirs and vice chairman of the board of directors.

"Some of the largest companies in the country are public family companies, and I bet the family wouldn't be a household word," Scott said.

The public stock sale allows the bank to raise cash, be listed on the NASDAQ exchange (symbol FIBK) and have an easier time turning private stock held by the 74 Scott family members and some employees into cash.

"Even though banks have been beaten up and they won't get what they would have two or three years ago, they may be saying, ‘We want to get some money, but we certainly aren't giving up the flag,' " Swain said.

Normally, when a company goes public, regulatory reports and expenses jump and the company runs the risk of losing some control to the new investors. Even if an estimated 15 percent of the bank's stock is eventually traded publicly, the Scotts will keep a firm family hand on the reins. They will continue to run the show, as illustrated by pages of anti-takeover language and other restrictions that protect the family in the stock filing.

Even though it is privately controlled, First Interstate has been filing SEC reports for a decade because more than 500 investors own stock. Also for the past six years, the bank has followed the stricter governance rules for publicly traded companies.

"We've followed the highest standards even though we didn't have to, because that's what we do," Scott said.

Knight announced his retirement well in advance and went public again when the board asked him to stay on the job another year, until March 2012.

"How many CEOs announce their retirement three years in advance in a public forum to the SEC?" he said. "We want everyone to know what's going on."

Montana Banking Commissioner Annie Goodwin said the stock offering is a good move, given today's pressures on profits and sharply escalating costs.

"I'm not surprised, and I think it is a very good opportunity for the public to take part in owning part of this bank," Goodwin said.

*****

The recession took a smaller bite out of Montana and Wyoming than other regions, but First Interstate's stock filing still used bleak terms to describe last year: "In 2009, we continued to face one of the most challenging banking environments in history."

The bank qualified for, but didn't accept, federal Troubled Asset Relief Program bailout money, and it made no subprime housing loans.

The bank loaned about 5 percent less money last year, and the number of bad loans went from under 1 percent to 2.27 percent. Most banks saw their bad loans increase, and First Interstate's rate remains well within the acceptable range set by federal and state regulators.

Significant declines in the value of homes and other assets, a cash crunch and a lack of consumer confidence have hit banks hard. First Interstate repossessed $32 million in real estate by the end of September, compared with $6 million for 2008, a jump of 429 percent.

On the opposite side of the ledger, some expenses rose, including payments to support the Federal Deposit Insurance Corporation, which insures deposits. The FDIC has drained its coffers rescuing failed banks.

First Interstate paid the FDIC $9.7 million for the first nine months of 2009, a hike of 437 percent over 2008 premiums.

"In the banking industry, the healthy banks have to pay the costs of those who failed," Knight said.

*****

In January 2008, First Interstate Bank completed its purchase of 18 First Western banks based in western South Dakota for $251 million, or double the book value, according to D.A. Davidson & Co., one of four companies underwriting the coming stock sale.

Money from a stock sale would be used to pay off a $34 million note in the South Dakota deal. The money also could finance general corporate expenses and strategic acquisitions.

Coffee of Stockman Bank said that by selling stock, First Interstate can shore up its capital and be ready for more buying opportunities.

"South Dakota is a great business state, but they may have paid too much. Then the markets changed," he said, adding that he thinks the purchase is a savvy long-term move.

Just 10 months after completing the buy, First Interstate was in technical violation of its covenants on a loan and had to amend the contract in November. The next month, the bank had to redo the loan agreement again to meet stricter federal lending standards.

Two years ago, First Interstate sold i_Tech, its technology services business, for $40 million. The bank pocketed $27 million.

Also last year, to conserve cash, the bank cut its quarterly dividends by 20 cents to 45 cents per share.

*****

The lengthy SEC filing contains some interesting details about the bank's operations.

• Lyle Knight, the first non-Scott family chief executive of the bank, received a compensation package in 2009 totaling $1,353,082. That included $544,677 in salary, stock awards of $529,993, a bonus of $207,442 and $70,970 is other compensation such as profit sharing, saving plans and insurance.

• Billings developer Richard A. "Rick" Dorn, who served on the bank's board last year, sold some land along Sixth Avenue North in Billings that now houses First Interstate's new Operations Center.

A local developer pieced together Dorn's property with another parcel and sold the site to First Interstate for $1.3 million, according to the SEC filing and Knight. First Interstate's ethics policy requires all employees and directors to avoid actual or perceived conflicts of interest, but the board approved the sale.

"Because of Rick's involvement, it was disclosed to the board and it was arm's length," Knight said. That means the buyers and sellers act independently and neither is pressured by the other party.

Dorn said he abstained from voting on the land sale. His term on the board ended in May 2009.

• Like many companies trying to attract key executive talent, First Interstate paid moving expenses and home subsidies to Julie Castle. In 2007, Castle quit her job with Bank of America in Boston and moved to Billings to work as president of wealth management, the bank's investment business. First Interstate paid Castle and her husband a total of $633,779, initially for moving expenses and home maintenance, and eventually to help make up for the loss of value on their previous home. Homes prices in the Boston area dropped sharply during the depths of the housing crisis.

In addition, the bank paid $20,000 in 2008 to Castle's husband, who owned a charter business, for a year he spent analyzing the economics of First Interstate's airplane usage.

*****

A stock sale wouldn't change the culture of remaining a community bank, Jim Scott said, and the family will continue its policy of donating generously to community causes, a minimum of 2 percent of pre-tax earnings.

In 2009, the bank's foundation contributed $2.28 million, or 2.8 percent of pre-tax earnings, to charitable causes in the Billings area. The family's foundation, the Homer A. and Mildred A. Scott Foundation, contributed another $960,000 around Sheridan, Wyo.

Whatever transition comes next for First Interstate, the goal is to continue a 22-year unbroken record of producing profits.

"We are confident about where we invest, and we're confident about where we grow. We want to be here for a long, long time," Knight said.

 

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