<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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COMMISSION FILE NUMBER 333-3250
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First Interstate BancSystem, Inc.
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(Exact name of registrant as specified in its charter)
Montana 81-0331430
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
PO Box 30918, 401 North 31st Street, Billings, MT 59116-0918
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 406/255-5300
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N/A
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(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days Yes X No
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The Registrant had 8,038,336 shares of common stock and 20,000 shares of
preferred stock outstanding on November 1, 1997.
1
(Total of 16 Pages)
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FIRST INTERSTATE BANCSYSTEM, INC.
Quarterly Report on Form 10-Q
Index Page
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1997, and December 31, 1996 3
Consolidated Statements of Income
Three months ended September 30, 1997 and 1996,
and Nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2 - Managements' Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of
Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------ ---- ----
(unaudited)
-----------
<S> <C> <C>
Cash and due from banks $ 170,043 160,962
Federal funds sold 38,070 4,945
Interest bearing deposits in banks 42 6,545
Investment securities:
Available-for-sale 128,590 124,502
Held-to-maturity 256,197 279,069
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384,787 403,571
Loans, net 1,467,153 1,379,871
Less allowance for loan losses 28,456 27,797
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Net loans 1,438,697 1,352,074
Premises and equipment, net 59,297 58,183
Accrued interest receivable 24,084 19,573
Goodwill 33,493 39,010
Other real estate owned, net 1,006 1,546
Deferred tax asset 6,905 4,921
Other assets 13,013 16,899
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$ 2,169,437 2,068,229
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Liabilities and Stockholders' Equity
- ------------------------------------
Deposits:
Noninterest bearing $ 376,039 385,371
Interest bearing 1,375,453 1,294,053
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Total deposits 1,751,492 1,679,424
Federal funds purchased 20,100 13,450
Securities sold under repurchase agreements 152,974 129,137
Accounts payable and accrued expenses 20,859 22,419
Other borrowed funds 9,845 13,071
Long-term debt 54,081 64,667
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Total liabilities 2,009,351 1,922,168
Stockholders' equity:
Non-voting noncumulative 8.53% preferred stock without
par value; authorized 100,000 shares; issued and
outstanding 20,000 shares 20,000 20,000
Common stock without par value; authorized 20,000,000
shares; issued 7,952,748 shares at September 30, 1997
(unaudited) and 7,913,072 shares at December 31, 1996 9,665 8,941
Retained earnings 129,759 116,613
Unrealized holding gain on investment securities
available-for-sale, net 662 507
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Total stockholders' equity 160,086 146,061
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$ 2,169,437 2,068,229
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Book value per common share $ 17.62 15.93
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 36,186 23,509 104,419 68,109
Interest and dividends on investment securities:
Taxable 5,454 3,187 16,216 10,118
Exempt from Federal taxes 272 243 799 741
Interest on deposit with banks 10 43 107 268
Interest on Federal funds sold 388 239 1,099 839
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Total interest income 42,310 27,221 122,640 80,075
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Interest expense:
Interest on deposits 14,799 9,794 42,269 29,250
Interest on Federal funds purchased 381 178 1,466 437
Interest on securities sold under repurchase agreements 1,688 1,049 4,499 3,155
Interest on other borrowed funds 231 88 750 229
Interest on long-term debt 1,198 246 3,686 835
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Total interest expense 18,297 11,355 52,670 33,906
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Net interest income 24,013 15,866 69,970 46,169
Provision for loan losses 1,007 700 3,288 1,852
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Net interest income after provision for
loan losses 23,006 15,166 66,682 44,317
Other operating income:
Income from fiduciary activities 981 659 3,003 2,182
Service charges on deposit accounts 2,459 1,851 7,369 5,369
Data processing 1,811 1,781 5,478 5,603
Other service charges, commissions, and fees 977 732 2,916 2,025
Net investment securities (losses) gains (1) -- 72 2
Other income 396 318 1,270 900
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Total other operating income 6,623 5,341 20,108 16,081
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Other operating expenses:
Salaries and wages 7,487 5,089 21,689 14,986
Employee benefits 2,066 1,272 5,898 3,935
Occupancy expense, net 1,554 1,019 4,635 3,059
Furniture and equipment expenses 1,908 1,532 5,662 4,283
Other real estate income, net (362) (3) (477) (162)
FDIC insurance 54 1 155 4
Other expenses 5,682 3,148 16,814 9,160
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Total other operating expenses 18,389 12,058 54,376 35,265
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Income before income taxes 11,240 8,449 32,414 25,133
Income tax expense 4,264 3,237 12,344 9,651
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Net income $ 6,976 5,212 20,070 15,482
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Income per common share $ .82 .66 2.36 1.97
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Dividends paid per common share $ .25 .19 .71 .57
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Weighted average common shares outstanding 7,955,388 7,952,340 7,955,452 7,881,780
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
------------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,070 15,482
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and other real estate losses 3,284 1,831
Depreciation and amortization 6,538 3,464
Net premium amortization on investment securities 311 843
Gain on sale of investments (72) (2)
Gain on sale of other real estate owned (479) (229)
(Gain) loss on sale of property and equipment (23) 4
Provision for deferred income taxes (2,292) (1,274)
Increase in interest receivable (4,511) (1,802)
Decrease (increase) in other assets 3,886 (361)
Increase in accounts payable and accrued expenses 6,207 523
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Net cash provided by operating activities 32,919 18,479
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (421,733) (50,164)
Available-for-sale (51,006) (11,509)
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(472,739) (61,673)
Proceeds from maturities and pay downs of
investment securities:
Held-to-maturity 444,692 70,673
Available-for-sale 15,790 12,352
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460,482 83,025
Proceeds from sales of available-for-sale investment securities 31,265 -
Decrease in interest bearing deposits in banks 6,503 17,005
Extensions of credit to customers, net of repayments (97,440) (80,325)
Recoveries on loans charged-off 2,320 909
Proceeds from sale of other real estate owned 1,840 796
Capital expenditures, net (5,487) (4,252)
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Net cash used by investing activities (73,256) (44,515)
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Cash flows from financing activities:
Net increase in deposits 72,068 7,738
Net increase (decrease) in federal funds and repurchase
agreements 30,487 (8,249)
Net (decrease) increase in other borrowed funds (3,226) 5,296
Proceeds from long-term borrowings 3,500 424
Repayment of long-term debt (14,086) (6,057)
Proceeds from issuance of common stock 2,054 3,478
Payments to retire common stock (1,330) (998)
Dividends paid on common stock (5,648) (4,463)
Dividends paid on preferred stock (1,276) -
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Net cash provided (used) by financing activities 82,543 (2,831)
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Net increase (decrease) in cash and cash equivalents 42,206 (28,867)
Cash and cash equivalents at beginning of period 165,907 143,042
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Cash and cash equivalents at end of period $ 208,113 114,175
--------- --------
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (all of which are of a
normal recurring nature) necessary to present fairly the consolidated
financial position at September 30, 1997, and the results of
consolidated operations and cash flows for each of the three and nine
month periods ended September 30, 1997 and 1996 in conformity with
generally accepted accounting principles. The balance sheet information
at December 31, 1996 is derived from audited consolidated financial
statements, however, certain reclassifications have been made to conform
to the September 30, 1997 presentation. Effective October 7, 1997,
First Interstate BancSystem of Montana, Inc. (the "Parent Company")
changed its name to "First Interstate BancSystem, Inc." Also, effective
October 7, 1997, the Parent Company effected a four-for-one stock split
of the Parent Company's existing common stock. All periods presented
have been restated to give effect to the stock split.
(2) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and Federal funds sold for
one-day-periods.
(3) COMPUTATION OF EARNING PER SHARE
Earnings per common share are computed by dividing net income less
preferred stock dividends by the weighted average number of shares of
common stock outstanding during the period presented including dilutive
stock options outstanding.
(4) CASH DIVIDENDS
On October 16, 1997, the Company paid a cash dividend on third quarter
earnings of $0.26 per share to stockholders of record on that date. It
has been the Company's practice to pay quarterly dividends based upon
earnings. The October 1997 dividend represents 30% of the Company's net
income for the quarter ended September 30, 1997.
6
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the three month and
nine month periods ended September 30, 1997 and 1996 are summarized
below:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 28,757 15,406 27,797 15,171
Provision charged to operating expense 1,007 700 3,288 1,852
Less loans charged-off (1,975) (451) (4,949) (2,016)
Add back recoveries of loans previously charged-off 667 261 2,320 909
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Balance at end of period $ 28,456 15,916 28,456 15,916
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</TABLE>
(6) OTHER REAL ESTATE OWNED (OREO)
Other real estate owned consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Other real estate $ 1,468 2,057
Less allowance for OREO losses 462 511
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$ 1,006 1,546
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------------ ------------
</TABLE>
A summary of transactions in the allowance for OREO losses follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 462 548 511 554
Provision reversal during period - (21) (4) (21)
Loss on dispositions - (16) (45) (22)
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Balance at end of period $ 462 511 462 511
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</TABLE>
(Continued)
7
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in Thousands, except per share data)
Changes in the balance of other real estate owned for the nine months
ended September 30, 1997 and 1996 are summarized as follows:
Nine months ended September 30,
---------------------------------------
1997 1996
---- ----
Balance at beginning of period $ 2,057 1,903
Add transfers from loans 817 569
Less writedowns charged to reserves (45) -
Cash proceeds from sales 1,840 796
Less gains on sales 479 229
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Net basis of OREO sold (1,361) (567)
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Balance at end of period $ 1,468 1,905
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(7) ACQUISITIONS
On February 5, 1997, First Interstate Bank of Montana, N.A. purchased
the assets of Mountain Financial, a loan production office located in
Eureka, Montana. The total cash purchase price of the assets acquired
aggregated $1,726, of which $166 was for premises and equipment and the
remaining $1,560 was for loans acquired.
During June 1997, the Company finalized its allocation of purchase price
related to the 1996 acquisitions of First Interstate Bank of Montana,
N.A., First Interstate Bank of Wyoming, N.A. and Mountain Bank of
Whitefish. Changes in preliminary estimates of the fair value of
loans, other assets and other liabilities resulted in a $3.4 million
decrease in goodwill.
(8) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named or
threatened to be named as defendant in various lawsuits, some of which
involve claims for substantial amounts of actual and/or punitive
damages. With respect to each of these suits it is the opinion of
management, following consultation with legal counsel, the suits are
without merit or in the event the plaintiff prevails, the ultimate
liability or disposition thereof will not have a material adverse effect
on the consolidated financial condition or the results of operations.
During 1985, the Company entered into a partnership agreement for the
purpose of purchasing certain land and building with an aggregate cost
of approximately $20,000. The Company is a tenant in the building and
owns a 50% undivided interest in the property. Indebtedness of the
partnership in the amount of $10,512 at September 30, 1997 is guaranteed
by each of the partners.
(Continued)
8
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in Thousands, except per share data)
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, in
varying degrees, elements of credit and interest rate risk in excess of
amounts recorded in the consolidated balance sheet.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Most commitments extend for
no more than two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds various collateral
supporting those commitments for which collateral is deemed necessary.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the commitment
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
(9) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which revises the manner in which earnings per share is calculated.
The statement is effective for financial statements issued for periods
ending after December 15, 1997 and is not expected to have a
significant impact on the Company's earnings per share.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which lists required disclosures
about capital structure that had been included in a number of
previously existing separate statements and opinions. SFAS No.
129 is effective for financial statements for periods ending after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. This statement does not require a specific
format for that financial statement but requires that an entity display
an amount representing comprehensive income for the period in that
financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
The following discussion focuses on significant factors affecting the
financial condition and results of operations of First Interstate BancSystem,
Inc. and Subsidiaries ("the Company") during the three and nine month periods
ended September 30, 1997, with comparisons to 1996 as applicable.
FORWARD LOOKING STATEMENTS
Certain statements contained in this review are "forward looking
statements" that involve risk and uncertainties. The Company wishes to
caution readers that the following factors, among others, may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include general
economic and business conditions in those areas in which the Company
operates, credit quality, demographic changes, competition, fluctuations in
interest rates, changes in business strategy or development plans, and
changes in governmental regulations.
ACQUISITION ACTIVITY
On October 1, 1996, the Company acquired First Interstate Bank of
Montana, N.A. and First Interstate Bank of Wyoming, N.A., which collectively
included six branch banks (the "FIB Banks"). In December 1996, the Company
acquired Mountain Bank of Whitefish ("FIB Whitefish"), which included two
branch locations. Immediately prior to the acquisitions, the FIB Banks had
assets of $553.2 million and deposits of $423.9 million, and FIB Whitefish
had assets of $66.9 million and deposits of $54.4 million. In connection
with the acquisitions, the Company increased its staffing at both the holding
company and branch levels to provide administrative, data processing and
other operational support to facilitate integregation and operation of such
banks. The FIB Banks and FIB Whitefish are collectively referred to as the
"Acquired Banks" throughout this discussion.
ASSET LIABILITY MANAGEMENT
The primary objective of the company's asset liability management
process is to optimize net interest income while prudently managing balance
sheet risks by understanding the levels of risk accompanying its decisions
and monitoring and managing these risks. The ability to optimize net
interest income is largely dependent on the Company's ability to manage the
sensitivity of net interest income to actual or potential changes in interest
rates. The Company uses interest sensitivity "gap" analysis, income
simulation models, and, to a limited extent, duration analysis (including
estimation of borrower prepayment options) to evaluate the potential effects
of changing interest rates on its interest margin.
EARNING ASSETS
Earning assets of $1.9 billion at September 30, 1997 increased $99.5
million, or 5.6%, from December 31, 1996 primarily due to growth in loan
volume. The mix of earning assets changed little from December 31, 1996 with
net loans comprising approximately 78%, held-to-maturity investment
securities comprising approximately 14% and interest bearing deposits,
available-for-sale investment securities and federal funds sold comprising
the remaining 8%.
10
<PAGE>
LOANS. Total loans increased 6.3% to $1,467.2 million as of
September 30, 1997 from $1,379.9 million as of December 31, 1996. All major
categories of loans showed increases in volumes during this period due to
continued strong economic conditions in the Company's markets, internal
growth resulting from the Company's marketing activities, and certain
seasonal increases, particularly in agricultural lending following
traditional pay-downs during the fourth quarter. The growth in loans during
the first nine months of 1997 was slightly lower than the growth rate during
the first nine months of 1996 due primarily to a slowing in the growth of
consumer and real estate loans.
INVESTMENT SECURITIES. The Company's investment portfolio is managed to
meet the Company's liquidity needs and is utilized for pledging requirements
for deposits of state and political subdivisions and securities sold under
repurchase agreements. The portfolio is comprised of U.S. Treasury
securities, U.S. government agency securities, tax exempt securities,
corporate securities, other mortgage-backed securities, and other equity
securities.
Investment securities decreased 4.7% to $384.8 million as of September
30, 1997, as compared to $403.6 million as of December 31, 1996. Cash
proceeds from maturities, sales and principal payments during the first nine
months of 1997 were generally used to provide additional liquidity to fund
increases in other earning assets.
FEDERAL FUNDS SOLD. Federal funds sold increased approximately $33.1
million to $38.1 million as of September 30, 1997 from $4.9 million as of
December 31, 1996. The Company's banking subsidiaries use federal funds sold
to fund the cash requirements of correspondent banks. Average federal funds
sold through September 30, 1997 of $26.1 million reflects a slight variance
from 1996 average federal funds sold of $25.5 million.
INCOME FROM EARNING ASSETS. Income from earning assets increased 53.2% to
$122.6 million for the nine months ended September 30, 1997 from $80.1 million
for the comparable period in 1996. The increase was due primarily to the
significant increase in loans, the Company's highest yielding asset. Loan
volume increases resulted principally from the Acquired Banks. Without taking
into account the Acquired Banks, interest income for the nine months ended
September 30, 1997 would have been approximately $80.9 million, an increase of
$800 from the same period in the prior year. This increase generally reflects a
higher volume of loans processed as a result of the Company's promotional and
customer development activities. The yield on average interest earning assets
for the first nine months of 1997 was 8.88% compared to 8.96% for the same
period in the prior year.
Income from earnings assets of $42.3 million for the quarter ended
September 30, 1997 increased $15.1 million from $27.2 million for the same
period in the prior year. Approximately 80% of this increase is related to
the Acquired Banks.
FUNDING SOURCES
The Company utilizes various traditional funding sources to support its
earning asset portfolio including deposits, borrowings, federal funds
purchased and repurchase agreements.
DEPOSITS. Total deposits increased 4.3% to $1,751.5 million as of
September 30, 1997 from $1,679.4 million as of December 31, 1996. Increases
of $81.4 million in interest-bearing deposits for the first nine months of
1997 were partially offset by decreases of $9.3 million in non-interest
bearing deposits during the same period. The Company historically has
experienced similar seasonal cycles in overall deposit growth during the
first nine months of the year.
FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Federal funds
purchased for one day periods and other borrowed funds consisting primarily
of short-term borrowings from the Federal Home Loan Bank increased $3.4
million to $29.9 million as of September 30, 1997 from $26.5 million as
ofDecember 31, 1996. The increased borrowings were the result of funding
requirements related to increases in loans and Federal funds sold during the
first nine months of 1997.
11
<PAGE>
LONG TERM DEBT. During the first nine months of 1997, the Company
reduced its long-term indebtedness by $10.6 million or 16.4%. Payments of
approximately $10.0 million on the Company's revolving term debt were funded
by earnings of the Parent Company's banking subsidiaries.
EXPENSE OF INTEREST BEARING LIABILITIES. Interest expense increased
55.3% to $52.7 million for the nine months ended September 30, 1997 from
$33.9 million for the comparable period in 1996. This increase was due
primarily to the customer deposits and indebtedness incurred in connection
with the Acquired Banks. Without the Acquired Banks, interest expense would
have increased approximately $2.5 million due to higher levels of interest
bearing liabilities associated with internal growth. The rate on average
interest bearing liabilities of 4.48% in the first nine months of 1997
decreased 5 basis points from 4.53% for the same period in the prior year.
The Company's interest expense for the three months ended September 30,
1997 was $18.3 million, a $6.9 million or 61.1% increase over the same period
in 1996. Interest expense of the Acquired Banks and additional interest
costs of funding their acquisitons accounted for nearly all of the increase.
NET INTEREST INCOME. Net interest income is derived from interest,
dividends and fees received from interest-earning assets, less interest
expense incurred on interest bearing liabilities. Net interest margin
increased 51.5% to $70.0 million for the nine months ended September 30, 1997
from $46.2 million for the same period in the prior year. This increase
resulted primarily from the incremental net interest income provided by the
Acquired Banks. Without giving effect to the Acquired Banks, management
estimates net interest income for the nine months ended September 30, 1997
would have been approximately $46.6 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is maintained at a
level that is, in management's judgment, adequate to absorb losses inherent in
the loan portfolio given past, present and expected conditions. Fluctuations in
the provision for loan losses result from management's assessment of the
adequacey of the allowance for loan losses. Actual loan losses may vary from
current estimates.
The provision for loan losses increased 77.5% to $3.3 million for the
nine months ended September 30, 1997 from $1.9 million for the same period in
the prior year. Approximately $1.3 million of the increase is attributable to
the Acquired Banks. The remaining increase resulted from higher loan volumes
and an increase in classified assets.
The provision for loan losses increased $307 for the quarter ended
September 30, 1997 from the same period in the prior year. This increase
relates principally to the Acquired Banks.
LIQUIDITY
The Company actively manages its liquidity position through established
policies and procedures. Management has also developed contingency plans to
address potential liquidity needs. The Company's current liquidity position
is supported largely through core deposits and from its investment portfolio.
The current investment portfolio contains a mix of maturities which
provide a structured flow of maturing and reinvestable funds that can be
converted to cash, should the need arise. Maturing balances in the loan
portfolio also provide options for managing cash flows and provide an
important source of intermediate and long-term liquidity.
Alternate sources of liquidity are provided by Federal funds lines
carried with upstream and downstream correspondent banks. Additional
liquidity could also be generated through borrowings from the Federal Reserve
Bank of Minneapolis and the Federal Home Loan Bank of Seattle. Additionally,
the Company had $8.8 million available on its revolving term loan at
September 30, 1997.
12
<PAGE>
OTHER OPERATING INCOME AND EXPENSE
OTHER OPERATING INCOME
Principal sources of other operating income include service charges on
deposit accounts, data processing fees, income from fiduciary activities,
comprised principally of fees earned on trust assets, and other service
charges, commissions and fees. Other operating income increased 25.0% to
$20.1 million for the nine months ended September 30, 1997 from $16.1 million
for the nine months ended September 30, 1996. Exclusive of income
attributable to the Acquired Banks, other operating income for the three and
nine months ended September 30, 1997 was comparable to the same period in the
prior year.
All categories of other operating income increased quarter-to-date and
year-to-date except data processing income. Increases in data processing
income for the nine months ended September 30, 1997 compared to the same
period in 1996 were more than offset by non-recurring accounting adjustments
made in January 1996.
OTHER OPERATING EXPENSES
Other operating expenses increased 52.5% to $18.4 million for the
quarter ended September 30, 1997 from $12.1 for the same period in 1996.
Year-to-date other operating expenses increased 54.2% to $54.4 million for
the nine months ended September 30, 1997 from $35.3 million for the same
period in the prior year. These increases resulted primarily from both
direct and indirect expenses attributable to the Acquired Banks. Direct
expenses totaled approximately $19.3 million for the first nine months of
1997. A significant portion of the remaining increase was due to various
indirect expenses associated with the Company's need to increase its data
processing support and other operating services to the Acquired Banks which
had operated as dependent branch offices prior to their acquisition by the
Company. Increases in administrative personnel and other resources to
provide such support and services were necessary to facilitate integration of
the Acquired Banks into the Company's operations. In addition, goodwill
including core deposit intangible, associated with the acquistion of the
banks resulted in increased amortization expense of approximately $1.5
million for the nine months ended September 30, 1997.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense of $27.6
million for the nine months ended September 30, 1997 increased 45.8% over the
same period in 1996. Salaries and benefits expenses for the three month
period ended September 30, 1997 increased 50.2% from the third quarter of the
prior year. These increases are primarily due to the direct and indirect
expenses attributable to the Acquired Banks, as discussed above. The
indirect expenses were related particularly to the Company's data processing
division and bank operation centers. The remainder of the increase in
salaries and benefits expense was principally inflationary in nature.
FURNITURE, EQUIPMENT AND OCCUPANCY EXPENSE. Exclusive of increases
directly related to the acquired banks, occupancy, furniture and equipment
expenses increased approximately $295 or 11.6% during the three month period
ended September 30, 1997 and $945 or 12.9% for the nine month period ended
September 30, 1997. Increases are primarily the result of higher
depreciation, maintenance and other costs related the expansion of the ATM
network, additions of data processing equipment and various other computer
hardware and software, including upgrades, used in the Company's operations.
OTHER REAL ESTATE OWNED. Other real estate owned ("OREO") losses,
including provision for losses on OREO, are included net of any gains on
sales of OREO. Variations in net OREO expense during the periods resulted
principally from fluctuations in such gains. OREO expense is directly
related to prevailing economic conditions, and such expense could increase
significantly should an unfavorable shift occur in the economic conditions of
the Company's markets.
FEDERAL DEPOSIT INSURANCE. Federal Deposit Insurance Corporation
("FDIC") deposit insurance premiums increased to $155 for the nine months
ended September 30, 1997 from $4 for the same prior-year period. This
increase resulted from an increase in FDIC premium assessments which became
effective January 1, 1997.
13
<PAGE>
OTHER EXPENSES. Other expenses increased $2.5 million for the three
months ended September 30, 1997 compared to the same period in the prior
year. Approximately $1.9 million of the increase related directly to the
acquired banks. The remaining increase resulted primarily from a
non-recurring accrual for post-employment benefits related to the resignation
of a key officer.
Other expenses increased $7.7 million for the nine months ended
September 30, 1997 compared to the same period in the prior year. Company
management estimates approximately $6.3 million of the year-to-date increase
related directly to the Acquired Banks. The remaining increase is
principally due to the non-recurring accrual discussed above, budgeted
increases in advertising costs, increases in postage, supply and telephone
expenses resulting from growth in the Company's deposit base, and increases
in legal and professional fees due principally to revision of the Company's
job evaluation system and corporate financial planning activities.
Other quarter-to-date and year-to-date variances in other expense from
the same periods in the previous year are not considered individually
significant.
CAPITAL MANAGEMENT
On November 7, 1997, the Company issued $40.0 million of 8.625% Trust
Preferred Securities, through FIB Capital, a business trust subsidiary
organized in October 1997. A portion of the proceeds were used to redeem the
$20.0 million non-voting, noncumulative preferred stock. The remainder of
the proceeds of the offering will be used to reduce revolving term debt. In
conjunction with the redemption of the Company's preferred stock, a $500
prepayment penalty was incurred.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
Not applicable or not required
ITEM 6 EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) No reports of Form 8-K were filed for the quarter
ended September 30, 1997.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
FIRST INTERSTATE BANCSYSTEM, INC.
Date November 14, 1997 /s/ Thomas W. Scott
---------------------- -------------------------
Thomas W. Scott
President and Chief Executive Officer
Date November 14, 1997 /s/ Terrill R. Moore
---------------------- -------------------------
Terrill R. Moore
Senior Vice President
and Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND
ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 170,043
<INT-BEARING-DEPOSITS> 42
<FED-FUNDS-SOLD> 38,070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,590
<INVESTMENTS-CARRYING> 256,197
<INVESTMENTS-MARKET> 256,949
<LOANS> 1,467,153
<ALLOWANCE> 28,456
<TOTAL-ASSETS> 2,169,437
<DEPOSITS> 1,751,492
<SHORT-TERM> 182,919
<LIABILITIES-OTHER> 20,859
<LONG-TERM> 54,081
0
20,000
<COMMON> 9,665
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<INTEREST-LOAN> 104,419
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<EXTRAORDINARY> 0
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<NET-INCOME> 20,070
<EPS-PRIMARY> 2.36
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