March 28, 2010, 8:05 pm

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem

FIBK - First Interstate BancSystem plans on offering 8.7 million shares at a range of $14-$16. Assuming over-allotments are exercised the deal size will be 10 million shares. Barclays is leading the deal, Davidson, KBW and Sandler O'Neill co-managing. Post-ipo FIBK will have 41.2 million shares outstanding for a market cap of $618 million on a pricing of $15. Ipo proceeds will be utilized to support growth efforts, pay off remaining long term debt and for general corporate purposes.

FIBK's controlling family, led by Chairman Thomas Scott and Vice Chairman James Scott, will own 33% of FIBK post-ipo.

Dividends - FIBK has regularly issued dividends to shareholders. Over the past year dividends have been $0.11 per quarter. Assuming these levels continue post-ipo, FIBK would be paying holders $0.44 per share annually. Annual yield at $15 would be 2.9%.

From the prospectus:

'We are a financial and bank holding company headquartered in Billings, Montana...We currently operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.'

As of 12/31/09, FIBK had assets of $7.1 billion, deposits of $5.8 billion, and loans of $4.5 billion.

Company was established by Homer Scott in 1968 with a focus on serving the communities of Wyoming and Montana. Currently FIBK has 72 locations in 42 communities. FIBK is the largest banking presence in over 1/2 of their communities. Overall, FIBK is ranked first in deposits in Montana and second in Wyoming. 50% of deposits are in Montana, 36% in Wyoming and 14% in South Dakota.

Acquisition: In 1/08 FIBK entered South Dakota with the purchase of First Western Bank and their 18 locations.

Strengths - The biggest strength here is that FIBK has not been operating community banks the past few years in Nevada, California or Florida. The three states in which FIBK does operate(Montana, Wyoming and South Dakota), have seen a more stable real estate valuation as well as a relatively stronger economy overall. Unemployment rates as of 12/09: Montana at 6.7%, Wyoming at 7.5% and South Dakota at 4.7%. Each is well below national 10% average. Economy in FIBK's area driven by agriculture and energy.

FIBK has remained profitable and growing through the tough banking cycle of the past few years. 22 consecutive years of profitability.

Community model - Each of FIBK's local bank presidents have discretion and responsibility for loan deposit decisions. Loans and assets are funded directly from local deposits.

Future expansion to be funded via organic growth and potential acquisitions, including FDIC assisted acquisitions.


Bulk of net revenues are derived from the interest rate spread between loan interest earned and deposit interest paid out. FIBK has been able to retain steady spreads of 4-4 1/2% points over the past 4 years.

FIBK has not leveraged their deposits, on 12/31/09 the loan to deposit ratio was 78%. This is well below the historical 85%-90%, a result of tightening loan standards as well as writing off a number of loans in 2008 and 2009. Loan write-offs have been in the 1% of total loan dollars each of the past two years. While historically this is a pretty large bump up for FIBK it is far below many community banks elsewhere in the US.

Operating income decreased in '08 and '09 due to the increase in loan write-offs. 2010 should continue to see a significant loan write-off amount, most likely again in that 1% of loans outstanding ballpark. Why? FIBK's under-performing loans were at 3% of all loans outstanding as of 12/31/09. We can pretty safely assume FIBK will write-off at least 1/3 of those in 2010. This is significant in that it will be difficult for FIBK to increase the bottom line strongly until under-performing loan levels decrease.

65% of loan portfolio is real estate related. Approximately 50% of loan portfolio are commercial loans.

**On a pricing of $15, FIBK would be coming public at 1.3 X's tangible book value.

As FIBK has tightened loan issuance, cash on hand has grown significantly. With a loan book of $4.5 billion, cash on hand sits at $623 million well above FIBK's $163 million under-performing loan levels. Unless those troubled loans increase significantly, it does appear FIBK's cash reserves are strong enough to handle the write-offs and still maintain adequate capital.

2009 - $197 million in net interest income after writing off $45 million in loan losses. Total revenues were $298 million. Operating income was was 27%, net margins 18%. Note that these are a tad skewed as we are using net revenues after written off loans for margins. Earnings per share were $1.31. On a pricing of $15, FIBK would trade 11-12 X's 2009 earnings.

**Note that FIBK's operating income decreased quarterly throughout 2009. Loan write-offs and tightening of loans given out were to blame along with non-interest income. FIBK is going to have a very difficult time even matching 2009's $1.31 eps. Loan write-offs should increase slightly in 2010, while the rest of FIBK's operations should remain relatively stable. I would expect a net here in 2010 in the $1.25 ballpark net of any future acquisitions.

GBCI is probably the closest public comparable. FIBK and GBCI both with a shade over 3% in under-performing loans and each right around 1.3-1.4 X's book value. GBCI is posting much stronger interest spreads at 4.8% to FIBK's 4%. Reason is simple: GBCI is leveraging their deposits to the tune of 2 1/2 times deposits(2.5) while FIBK does not with loans at 77%(0.77) of deposits. FIBK would seem to be the more conservative of the two.

Conclusion - Solid community bank coming pretty fully valued for 2010. FIBK appears in no danger of running into liquidity and/or operational troubles. However, outside of acquisitions, growth is going to be difficult to come by over the next year due to increases in doubtful loans and the needed cash horde to sustain any write-off increases. If cash is sitting on the balance sheet, it impacts the interest rate spreads in which FIBK puts money on the bottom line, Indeed spreads in 2009 shrank to just over 4%, from the historical norm of 4.5%(since 2005). Reason is 100% combination of loan write-offs and the large amount of cash on hand. Neutral in range here, would become very interested if pricing occurs closer to tangible book value. Solid conservatively run community bank operating in a region driven by agriculture and energy.

March 16, 2010, 7:00 am

FNGN - Financial Engines

FNGN - Financial Engines

FNGN - Financial Engines plans to offer 10.6 million shares at a range of $9-$11. Insiders will be selling 4.7 million shares in the deal. Assuming over-allotments are exercised, the deal size will be 12.2 million shares with insider sales remaining the same at 4.7 million shares. Goldman Sachs and UBS are leading the deal, Cowen and Piper Jaffray are co-managing. Post-ipo FNGN will have 41.1 million shares outstanding for a market cap of $410 million on a pricing of $10. Ipo proceeds will be used for general corporate purposes.

Note that FNGN does have a significant amount of option shares that will be exercised over the next few years. Currently FNGN has 11.6 million shares in the form of granted options at an exercise price of $6.07 average.

Foundation Capital will own 14% of FNGN post-ipo, Enterprise Associates 11% and Oak Hill Capital 7%. None of these three entities are selling any shares on ipo.

From the prospectus:

'We are a leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsored defined contribution retirement plans, such as 401(k) plans.'

Investment advice for the 'common man' focusing on assisting those in retirement plans, notably workplace 401k plans. FNGN focuses on the mass market 401k and other retirement plans via automated web based technology platforms. One can imagine the labor expenses if the approach were actually a 1-to-1, face-to-face or voice-to-voice investment advice business plan focusing on the millions of employees with 401k's and/or other similar retirement plans. FNGN's solution is web based auto-generated advice. Who developed this auto-generated advice?

Financial Engines’ web-based advice is generated using portfolio-analysis programs designed by its co-founder, Nobel laureate William F. Sharpe. FNGN's automated analysis offers specific advice including whether to buy or sell certain funds available under the 401k plan while evaluating investments on factors including asset mix, fund expense, manager performance, risk and tax efficiency.

Approximately half of users have less than $20,000 of retirement assets. This is mass retirement investment advice running counter to most advisor outfits which offer specific fee based advice to higher net worth clients. For FNGN this means one thing: Volume, Volume and...Volume. FNGN needs many 401k accounts to significantly grow their assets under management and in turn grow fees. Growth here is driven by selling in their services to large companies with many employees under the 401k umbrella.

FNGN's three services:

Professional Management - Managed account service designed for plan participants who want affordable, personalized and professional portfolio management services, investment advice and retirement help from an independent investment advisor without the conflicts of interest that can arise when an advisor offers proprietary products. This is FNGN's growth area. When a company's 401k plan offers FNGN's services, plan participants can elect to remove themselves from the decision making/allocation process and have FNGN make those decisions for them. It is portfolio management for the 'little guy' essentially. FNGN currently has 391,000 managed accounts totaling $25.7 billion in assets. **Professional management accounted for 62% of 2009 revenues.

Online Advice - Internet-based service that offers personalized advice to plan participants who wish to take a more active role in personally managing their retirement portfolios.

Retirement Evaluation - Highlights specific risks in a plan participant’s retirement account and assess the likelihood of achieving the plan participant’s retirement income goals.

Customers include 116 of the Fortune 500 and 8 of the Fortune 20. FNGN currently has 354 plan sponsors utilizing all three services above totaling 3.9 million participants and $269 billion in assets under management. **9.5% of these assets are under FNGN's direct professional management.

Since 2004, Financial Engines has retained 97% of its contracted 401(k) sponsors each year.

**This is an easily scalable business here. FNGN has built their proprietary web platforms and can easily scale them to however many plan participants they add. This point may be the strongest pull to this deal. FNGN has already spent significant capital building their platform and are well ahead of competitors in their core business. Fidelity is really the only pension plan selling FNGN's services that also competes with them in a fashion. Other direct competitors include Morningstar (MORN) GuidedChoice and ProManage. Note that investment management for MORN accounts for only 20% or so of their revenues.

Revenues are primarily derived from management fees based on the value of assets managed (assets under management) for plan participants. In addition FNGN derives revenues from recurring subscription platform fees for access to FNGN''s services. A strength here is that revenues are recurring and are also based on 401k's which themselves tend to have recurring regular contributions.

Sales into sponsors are made either directly or through one of eight retirement plan providers. These are ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe Price and Vanguard. JPMorgan, Vanguard and ING directly accounted for approximately 18%, 10% and 8% of 2009 revenues.

FNGN's selling point - US companies have shifted from a defined pension plan system to a defined contribution (401k/IRA) retirement system. The result is that most baby boomers and generation X'ers are not remotely close to a retirement nest egg and will be seeking ways to maximize retirement plan assets going forward. FNGN offers independent and unconflicted advice, as FNGN is not recommending buying and/or selling anything they also manage.

Proprietary technology - It appears FNGN's technology platforms incorporate a version of 'Modern Portfolio Theory' used by many large pensions and institutions. They consist of the following:

Optimization Engine - Makes personalized investment recommendations, chosen from the investment options available within each plan. In addition FNGN recommends a level of savings to reach retirement goals.

Simulation Engine - Model the risk and return characteristics of more than 30,000 securities taking into account factors such as asset class exposures, expenses, turnover, manager performance, active management risk, stock specific risk and the security’s tax-efficiency.

Advice Engine - Appears to exist to minimize the risk of holding too much exposure in company stock as opposed to spreading the risk to other assets. Think Enron or Lehman employees here whom held most of their retirement in their company stock and watched it all disappear.

**Okay we have a proprietary technology platform already built and easily scalable to huge numbers of users if needed. We've a recurring revenue model which also is based on contributions that tend to be recurring themselves. FNGN has 8 large pension plans selling in their services which include simply web-based advice all the way to active technology/automated driven 401k portfolio management. This is one heck of a business model here, about as good as it gets. In 2008, the stock and bond markets (outside of US Treasuries that is) took a beating as we are all well aware. Many mutual funds saw assets under management decline by massive amounts. With their strong business model and the fact they do not manage funds themselves, FNGN's assets under management declined by only 4% in 2008. That is very significant in a year in which asset managers across the spectrum took a sound beating.

We should also note that FNGN is the sole provider of services offered in each of the 354 plan sponsors which offer the full suite of FNGN's services. There is no competition once FNGN sells into a sponsor.

Risks here are fairly obvious. If one of the retirement plans stops offering FNGN's services (notably JP Morgan, Vanguard or ING), growth would be stymied going forward. Also if a large company drops FNGN from their plans, revenues would take a hit. This recently happened with competitor Morningstar.


Approximately $1 1/2 per share in net cash post-ipo.

**Assets under professional active management grew 65% in 2009 after dipping just 4% in 2008. These directly managed assets accounted for 62% of 2009 revenues. All of FNGN's growth is coming from this segment.

As of 12/31/09, assets under FNGN's active management were:

Cash 5%

Bonds 25%

Domestic Equity 50%

International Equity 20%

2009 - Revenues were $85 million, a 20% increase over 2008. Operating expense ratio was 92%, operating margins 8%. While at first glance this looks very thin, FNGN is moving swiftly into solid operating profits. In 2009, while revenues grew by 20%, operating expenses grew just 5.5%. Most of that growth in expenses was stock compensation related due to the implied rise in FNGN's share value. Fold that out post-ipo and operating expenses are flat here. Again this is the power of FNGN's business model and technology platform. FNGN has extensive loss carry-forwards as 2009 was their first year of operating profits. Post-ipo the tax rate for 2010 appears as if it will be in the 25% ballpark, so that what we will plug in for 2009. Net margins for '09 were 5.7%, eps $0.12.

2010 - FNGN had a sharp rise in assets under management the fourth quarter of 2009. This should translate into solid growth for 2010 as the bulk of revenues are derived as a percentage of assets under management. Total revenues should be in the $115-$120 million ballpark, a 43% increase over 2009. The stronger growth is due to the easy first half of 2009 comparables. Operating expense ratio should dip from 90% to 80%. Again FNGN is growing revenues far quicker than expenses creating a strong economy of scale here. Plugging in 25% tax rate, net margins should be 10%. Earnings per share should be $0.40-$0.45. On a pricing of $10, FNGN would trade 23 X's 2010 estimates.

MORN is FNGN's closest public comparable. Keep in mind that MORN derives 20% of annual revenues from investment management, FNGN 60%.

MORN - $2.4 billion market cap projecting 11% revenue growth in 2010 currently trading 22 X's '10 estimates. $7 per share in cash on hand.

FNGN - $410 million market cap on a $10 pricing. 43% revenue growth in 2010 trading 23 X's 2010 estimates. $1 1/2 per share in cash on hand.

Conclusion - Fantastic business plan and solid execution past two years. If FNGN continues on current pace, the bottom line will continue to expand quickly. Strong recommend in range.

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