<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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _______ to _______
COMMISSION FILE NUMBER 333-3250
FIRST INTERSTATE BANCSYSTEM, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0331430
- -------------------------------- -------------------
(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: 406/255-5390
--------------------
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
----- -----
The Registrant had 8,009,346 shares of common stock outstanding on June 30,
1998.
1
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
<TABLE>
<CAPTION>
Index Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
And Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Defaults on Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
ASSETS 1998 December 31,
(unaudited) 1997
---------- ---------
<S> <C> <C>
Cash and due from banks $ 140,103 136,025
Federal funds sold 45,750 58,675
Interest bearing deposits in banks 7,073 34,447
Investment securities:
Available-for-sale 293,651 188,650
Held-to-maturity 226,679 236,953
---------- ---------
520,330 425,603
Loans 1,485,589 1,470,414
Less allowance for loan losses 29,309 28,180
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Net loans 1,456,280 1,442,234
Premises and equipment, net 61,095 61,274
Accrued interest receivable 23,905 22,046
Goodwill, net of accumulated amortization of $9,759 at
June 30, 1998 (unaudited) and $8,486 at December 31, 1997 30,528 31,801
Other real estate owned, net 1,329 1,362
Deferred tax asset 8,113 5,946
Other assets 16,331 15,351
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$2,310,837 2,234,764
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---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 369,273 372,056
Interest bearing 1,525,292 1,432,950
---------- ---------
Total deposits 1,894,565 1,805,006
Federal funds purchased - 4,025
Securities sold under repurchase agreements 163,595 176,350
Accounts payable and accrued expenses 22,530 20,599
Other borrowed funds 11,902 11,591
Long-term debt 24,581 31,526
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Total liabilities 2,117,173 2,049,097
Mandatorily redeemable securities of subsidiary trust 40,000 40,000
Stockholders' equity:
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 8,009,346 shares as of June 30, 1998
(unaudited) and 8,030,799 shares as of December 31, 1997 10,801 11,490
Retained earnings 141,971 133,277
Unrealized gain on securities available-for-sale 892 900
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Total stockholders' equity 153,664 145,667
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$2,310,837 2,234,764
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---------- ---------
Book value per common share $ 19.19 18.14
---------- ---------
---------- ---------
</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 share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $36,107 34,903 71,297 68,233
Interest and dividends on investment securities:
Taxable 6,971 5,419 13,294 10,762
Exempt from Federal taxes 458 276 784 527
Interest on deposit with banks 123 12 318 97
Interest on Federal funds sold 832 559 1,798 711
------- ------- ------- -------
Total interest income 44,491 41,169 87,491 80,330
------- ------- ------- -------
Interest expense:
Interest on deposits 16,910 14,083 33,147 27,470
Interest on Federal funds purchased 6 767 44 1,085
Interest on securities sold under repurchase agreements 1,748 1,486 3,522 2,811
Interest on other borrowed funds 114 446 222 519
Interest on long-term debt 622 1,199 1,283 2,488
Interest on mandatorily redeemable securities of
subsidiary trust 882 - 1,770 -
------- ------- ------- -------
Total interest expense 20,282 17,981 39,988 34,373
------- ------- ------- -------
Net interest income 24,209 23,188 47,503 45,957
Provision for loan losses 1,028 1,058 2,093 2,281
Net interest income after provision for loan losses 23,181 22,130 45,410 43,676
Other operating income:
Income from fiduciary activities 1,180 989 2,386 2,022
Service charges on deposit accounts 2,607 2,531 5,097 4,910
Data processing 1,946 1,826 4,250 3,667
Other service charges, commissions, and fees 1,041 1,047 1,910 1,939
Net investment securities gains (losses) (33) 15 9 73
Other income 471 452 885 874
------- ------- ------- -------
Total other operating income 7,212 6,860 14,537 13,485
------- ------- ------- -------
Other operating expenses:
Salaries and wages 8,141 7,215 15,938 14,202
Employee benefits 2,393 1,836 5,200 3,832
Occupancy expense, net 1,509 1,481 3,120 3,081
Furniture and equipment expense 2,130 1,935 4,182 3,754
Other real estate expense (income), net 14 19 (171) (115)
FDIC insurance 54 50 108 101
Other expenses 6,135 5,748 11,765 11,132
------- ------- ------- -------
Total other operating expenses 20,376 18,284 40,142 35,987
------- ------- ------- -------
Income before income taxes 10,017 10,706 19,805 21,174
Income tax expense 3,787 4,074 7,502 8,080
------- ------- ------- -------
Net income $ 6,230 6,632 12,303 13,094
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per common share $ 0.78 0.80 1.53 1.54
Diluted earning per common share $ 0.77 0.79 1.52 1.54
Dividends per common share $ 0.23 0.25 0.45 0.46
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net income $6,230 6,632 12,303 13,094
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains (losses)
arising during period 64 210 5 (35)
Add: reclassification adjustment for (gains) losses
included in net income 33 (15) (9) (73)
------- ------ ------ ------
Other comprehensive income (loss), before tax 97 195 (4) (108)
Income tax benefit (expense) related to items of other
comprehensive income 13 (6) (4) (29)
------- ------ ------ ------
Other comprehensive income (loss), after tax 110 189 (8) (137)
------- ------ ------ ------
Comprehensive income $6,340 6,821 12,295 12,957
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
------------------------
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,303 13,094
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and other real estate losses 2,093 2,277
Depreciation and amortization 4,622 4,153
Net premium amortization on investment securities 208 289
Gain on sales of investments (9) (73)
Gain on sales of other real estate owned (240) (190)
Loss (gain) on sales of property and equipment 127 (14)
Provision for deferred income taxes (2,144) (1,655)
Increase in interest receivable (1,859) (1,493)
Decrease (increase) in other assets (1,180) 1,177
Increase in accounts payable and accrued expenses 1,931 615
--------- -------
Net cash provided by operating activities 15,852 18,180
--------- -------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (42,894) (333,219)
Available-for-sale (168,663) (237)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 52,960 298,953
Available-for-sale 35,449 9,579
Proceeds from sales of available-for-sale investment securities 28,191 31,158
Decrease in interest bearing deposits in banks 27,374 6,508
Extensions of credit to customers, net of repayments (17,837) (99,191)
Recoveries of loans charged-off 1,240 1,652
Proceeds from sales of other real estate 731 879
Capital distributions from joint venture 200 -
Capital expenditures, net (3,297) (3,619)
--------- -------
Net cash used in investing activities (86,546) (87,537)
--------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits 89,559 (6,389)
Net increase (decrease) in Federal funds and repurchase agreements (16,780) 48,851
Net increase in other borrowed funds 311 24,201
Proceeds from long-term borrowings 1,428 1,750
Repayment of long-term borrowings (8,373) (10,233)
Proceeds from issuance of common stock 75 139
Payments to retire common stock (764) (730)
Dividends paid on common stock (3,609) (3,656)
Dividends paid on preferred stock - (846)
--------- -------
Net cash provided by financing activities 61,847 53,087
--------- -------
Net decrease in cash and cash equivalents (8,847) (16,270)
Cash and cash equivalents at beginning of period 194,700 165,907
--------- -------
Cash and cash equivalents at end of period $ 185,853 149,637
--------- -------
--------- -------
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 8,770 9,213
Cash paid during period for interest 27,389 21,454
--------- -------
--------- -------
Noncash Investing and Financing Activities:
The Company transferred loans of $458 and $237 to other real estate owned during
the six months ended June 30, 1998 and 1997, respectively.
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and 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 June 30, 1998 and December 31, 1997, and the results of
consolidated operations and cash flows for each of the six month periods
ended June 30, 1998 and 1997 in conformity with generally accepted
accounting principles. The balance sheet information at December 31, 1997
is derived from audited consolidated financial statements, however, certain
reclassifications have been made to conform to the June 30, 1998
presentation.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components 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. First Interstate
BancSystem, Inc. and Subsidiaries (the "Company") adopted the provisions of
SFAS No. 130 as of January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement requires public
business enterprises to disclose selected information about operating
segments including segment income, revenues and asset data. Operating
segments, as defined in SFAS No. 131, include those components for which
financial information is available and evaluated regularly by the chief
operating decision maker in assessing performance and making resource
allocation determinations for operating components such as those which
contribute 10 percent or more of combined revenue, income or assets. The
Company adopted the provisions of SFAS No. 131 as of January 1, 1998. As
of June 30, 1998, the Company had no reportable segments as defined by SFAS
No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises disclosure
requirements for pensions and other postretirement benefits. The Company
adopted the provisions of SFAS No. 132 as of January 1, 1998. Adoption did
not have a material effect on the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The statement is effective for all fiscal quarters or fiscal
years beginning after June 15, 1999. As of June 30, 1998, the Company was
not engaged in hedging activities nor did it hold any derivative
instruments.
(2) COMPUTATION OF EARNINGS PER SHARE
Basic earnings per common share (EPS) is calculated by dividing net income
less preferred stock dividends by the weighted average number of common
shares outstanding during the period presented. Diluted earnings per
common share is calculated by dividing net income less preferred stock
dividends by the weighted average number of common shares and potential
common shares outstanding during the period. The following table shows
weighted average common shares and weighted average potential common shares
for the three and six month periods ended June 30, 1998 and 1997.
7
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
6/30/98 6/30/97 6/30/98 6/30/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares 8,014,509 7,794,688 8,019,154 7,900,260
Weighted average potential common shares 69,191 38,336 59,021 36,448
</TABLE>
(3) CASH DIVIDENDS
On July 15, 1998, the Company declared and paid a cash dividend on second
quarter earnings of $0.23 per share to stockholders of record on that date.
It has been the Company's practice to pay quarterly dividends based upon
earnings. The July 1998 dividend represents 30% of the Company's net
income for the quarter ended June 30, 1998.
(4) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various claims
and litigation. In the opinion of management, following consultation with
legal counsel, the ultimate liability or disposition thereof will not have
a material adverse effect on the consolidated financial condition, results
of operations or liquidity.
The Company owns a 50% ownership interest in an aircraft and is jointly and
severally liable for aircraft indebtedness of $1.7 million as of June 30,
1998.
The Company is an anchor tenant in a building owned by a joint venture
partnership in which the Company owns a 50% partnership interest. The
Company is jointly and severally liable for joint venture partnership
indebtedness of $10.2 million as of June 30, 1998.
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.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 six month periods
ended June 30, 1998, with comparisons to 1997 as applicable. All earnings per
share figures presented are basic and do not account for the dilutive effect of
potential common shares.
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.
OVERVIEW
The Company reported net income of $6.2 million, or $0.78 per share for the
three months ended June 30, 1998, as compared to $6.6 million, or $0.80 per
share recorded in the same period in 1997. For the year to date period ended
June 30, 1998, net income was $12.3 million, or $1.53 per share, as compared to
$13.1 million, or $1.54 per share for the same period in 1997.
EARNING ASSETS
Earning assets of $2,058.7 million at June 30, 1998 increased $69.6
million, or 3.5%, from December 31, 1997. As of June 30, 1998, loans comprised
72% of total earning assets, investment securities comprised 25%, and Federal
funds sold and interest bearing deposits in banks comprised the remaining 3%
compared to 74%, 21% and 5%, respectively, as of December 31, 1997.
LOANS. Total loans increased $15.2 million, or 1.0%, to $1,485.6 million
as of June 30, 1998 from $1,470.4 million as of December 31, 1997. Growth in
agricultural and commercial loans was partially offset by decreases in real
estate and consumer loans. Growth in net loans of 1% during the first six
months of 1998 was significantly lower than the 7% growth rate experienced
during the same period of 1997. Management attributes this decline in growth
rate to increasingly competitive loan pricing by competitors in the Company's
market areas and the Company's unwillingness to expand credit risk to meet
competition for certain consumer loans.
INVESTMENT SECURITIES. The Company's investment portfolio is managed to
result in the highest yield while meeting the Company's liquidity needs and
meeting pledging requirements for public funds deposits 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 increased $94.7 million, or 22.3%, to $520.3 million
as of June 30, 1998, from $425.6 million as of December 31, 1997. Additions to
the investment portfolio during the six-month period were funded through growth
in funding sources, primarily deposits.
INTEREST BEARING DEPOSITS IN BANK AND FEDERAL FUNDS SOLD. Interest bearing
deposits in bank consist of funds on deposit with the Federal Home Loan Bank.
These deposits, along with Federal funds sold for one day periods, are used by
the Company to fund daily liquidity needs, including the cash requirements of
9
<PAGE>
correspondent banks. Interest bearing deposits in banks decreased $27.3
million, or 79.5%, to $7.1 million as of June 30, 1998 from $34.4 million as
of December 31, 1997. Federal funds sold decreased $13.0 million , or 22.0%,
to $45.8 million as of June 30, 1998 compared to $58.8 million as of December
31, 1997. Funds temporarily invested in interest bearing deposits in banks
and Federal funds sold at December 31, 1997 were invested in higher yielding
investments, principally loans and available for sale investment securities
or used to reduce other borrowings and long-term debt.
INCOME FROM EARNING ASSETS Interest income was $44.5 million for the three
month period ended June 30, 1998, as compared to $41.2 million for the same
period in 1997. The increase of $3.3 million, or 8.1%, resulted from increases
in earning assets, primarily loans and investments, generated through internal
growth. For the six months ended June 30, 1998 and 1997, interest income was
$87.5 million and $80.3 million, respectively. Total average earning assets of
$2,014.6 million increased $185.0 million, or 10.1%, over the six month average
in 1997. The yield on average earning assets was 8.76% during the first six
months of 1998, as compared to 8.85% during the same period in 1997. During the
first six months of 1998, the increase in average earning assets contributed
$8.1 million towards the increase over the same period in 1997, while the 9
basis point reduction in yield caused a $941,000 decrease.
FUNDING SOURCES
The Company utilizes traditional funding sources to support its earning
asset portfolio including deposits, borrowings, federal funds purchased and
repurchase agreements.
DEPOSITS. Total deposits increased $89.6 million, or 5.0%, to $1,894.6
million as of June 30, 1998 from $1,805.0 million as of December 31, 1997.
Seasonal decreases in total deposits that have historically occurred during the
first six months of the year were offset in 1998 by internal growth resulting
from the Company's successful efforts to gain market share system-wide. Yields
on interest-bearing deposits increased 67 basis points to 4.89% during the first
six months of 1998 compared to 4.22% during the same period in 1997.
OTHER FUNDING SOURCES. Other funding sources include Federal funds
purchased for one day periods, other borrowed funds consisting primarily of
short-term borrowings from the Federal Home Loan Bank, repurchase agreements
with primarily commercial depositors and long-term debt. These other funding
sources decreased $23.4 million, or 10.5%, to $200.1 million as of June 30,
1998 from $223.5 million as of December 31, 1997. Because the Company's
funding requirements were primarily met through deposit growth, funding from
other sources was reduced during the first six months of 1998.
RECAPITALIZATION. During the fourth quarter 1997, the Company issued
$40.0 million of mandatorily redeemable preferred securities of subsidiary trust
("trust preferred securities"). Proceeds from the issuance were used to redeem
long-term indebtedness and preferred stock. As a result of this
recapitalization, interest expense on long-term indebtedness decreased $1.2
million, or 48.4%, to $1.3 million for the six months ended June 30, 1998 from
$2.5 million for the same period in 1997. Interest expense related to the trust
preferred securities of $1.8 million was recorded during the first six months of
1998.
COSTS OF FUNDS. Interest expense was $20.3 million for the three
months ended June 30, 1998, as compared to $18.0 million for the same period
in 1997. The increase of $2.3 million, or 12.8%, resulted from increases in
interest-bearing liabilities, primarily deposits generated through internal
growth. Interest expense increased $5.6 million, or 16.3%, to $40.0 million
for the six month period ended June 30, 1998 compared to $34.4 million for
the same period in 1997. Total average interest-bearing liabilities and
trust preferred securities of $1,727.6 million at June 30, 1998 increased
$167.0 million from June 30, 1997. Costs of average funds of 4.67% during
the first six months of 1998 were 23 basis points higher than the same period
last year. During the first six months of 1998, the increase in interest
bearing liabilities and trust preferred securities contributed $3.9 million
towards the increase, while the 23 basis point increase in costs of funds
caused a $1.7 million increase.
10
<PAGE>
NET INTEREST INCOME
Net interest income of $24.2 million for the quarter ended June 30, 1998
increased $1.0 million, or 4.4%, from $23.2 million for the same period in the
prior year. Year-to-date net interest income of $47.5 million increased $1.5
million, or 3.4%, from the same period in 1997. The net interest margin was
4.81% during the first six months of 1998 as compared to 5.11% during the same
period in 1997. This decline in net interest margin is the result of
increasing competitive pressure on both deposit rates and loan pricing
combined with significant deposit growth and a slower rate of loan growth.
PROVISION FOR LOAN LOSS
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 adequacy of the allowance
for loan losses. Actual loan losses may vary from current estimates. The
provision for loan losses for the second quarter of 1998 was $1.0 million,
compared to $1.1 million for the same period in 1997. Provisions of $2.1
million and $2.3 million were recorded during the six months ended June 30, 1998
and 1997, respectively.
ASSET LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY. 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 margin is largely dependent on the achievement of an interest rate
spread that can be managed during fluctuations of interest rates. Interest
sensitivity is a measure of the extent to which net interest income will be
affected by market interest rates over a period of time. Management monitors
the sensitivity of net interest margin by utilizing income simulation models and
traditional gap analysis.
LIQUIDITY. The objective of liquidity management is to maintain the
Company's ability to meet the day-to-day cash flow requirements of its customers
who either wish to withdraw funds or require funds to meet their credit needs.
The Company manages its liquidity position to meet the needs of its customers,
while maintaining an appropriate balance between assets and liabilities to meet
the return on investment objectives of its stockholders. The Company monitors
the sources and uses of funds on a daily basis to maintain an acceptable
liquidity position, principally through deposit receipts and repayments; loan
originations, extensions, and repayments; and management of investment
securities.
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 $10.0 million available on its revolving term loan at June 30, 1998.
OTHER OPERATING INCOME AND EXPENSE
OTHER OPERATING INCOME
The Company's principal sources of other operating income include service
charges, data processing fees and income from fiduciary activities. Other
operating income totaled $7.2 million for the quarter ended June 30, 1998,
$352,000, or 5.1%, higher than that recorded during the same period in 1997.
For the six months ended June 30, 1998 and 1997, other operating income was
$14.5 million and $13.5 million, respectively. Increases in other operating
income for the three and six months ended June 30, 1998 from the same periods in
1997 are primarily due to increases in data processing fees and income from
fiduciary activities.
11
<PAGE>
DATA PROCESSING FEES. The Company serviced approximately 760 locations in
its ATM network at June 30, 1998 compared to approximately 542 locations at June
30, 1997. Data processing fees of $1.9 million were recorded during the second
quarter of 1998, a $120,000, or 6.6%, increase from the same period in 1997.
For the six months ended June 30, 1998, data processing fees increased $583,000,
or 15.9%, to $4.3 million from $3.7 million for the same period in 1997.
Increases are due to a non-recurring termination fee of $300,000 recorded during
the first quarter of 1998, a greater number of data processing customers using
the Company's ATM network and increases in core processing transaction volumes.
INCOME FROM FIDUCIARY ACTIVITIES. Increases in the value of assets under
trust management have resulted in increases in revenues from fiduciary
activities during the three and six month periods ended June 30, 1998 as
compared to the same periods in 1997. Revenues from fiduciary activities
increased $191,000, or 19.3%, to $1.2 million for the three months ended June
30, 1998 from $989,000 for the same period in 1997 and year-to-date revenues
through June 30, 1998 increased $364,000, or 18.0%, to $2.4 million from $2.0
million for the same period in 1997.
OTHER OPERATING EXPENSE
Other operating expenses increased $2.1 million, or 11.4%, to $20.4 million
for the quarter ended June 30, 1998 from $18.3 million for the same period in
1997. For the six months ended June 30, 1998, other operating expenses
increased $4.1 million, or 11.6%, to $40.1 million as compared to $36.0 million
for the same period in 1997. The main components of the increase include
salaries and wages expense, employee benefits expense, furniture and
equipment expenses and other expenses.
SALARIES AND WAGES EXPENSE. Salaries and wages expense, the largest
component of other operating expenses, was $8.1 million for the second quarter
of 1998, up $926,000, or 12.8%, from the same period in 1997. For the six
months ended June 30, 1998 and 1997, salaries and wages expense amounted to
$15.9 million and $14.2 million, respectively. The increase over 1997 is
primarily attributable to inflationary wage increases, the addition of
administrative personnel providing support for the data processing division
including the Year 2000 conversion and staffing of the six new branch banks
opened since June 30, 1997.
EMPLOYEE BENEFITS EXPENSE. Employee benefits expense increased $557,000,
or 30.3%, to $2.4 million for the quarter ended June 30, 1998 from $1.8 million
for the same period in 1997. Employee benefits expense was up $1.4 million, or
35.7%, to $5.2 million for the six months ended June 30, 1998 from $3.8 million
for the same period in 1997. During the first six months of 1998, the Company
recorded adjustments to its regular stock option accruals of $570,000 for stock
appreciation rights as a result of a 16% increase in the appraised value of its
common stock. The remaining increase in employee benefits expense resulted from
increases in salaries and wages.
FURNITURE AND EQUIPMENT EXPENSE. Furniture and equipment expense increased
$195,000, or 10.1%, to $2.1 million for the three months ended June 30, 1998
from $1.9 million for the same period in 1997. Year-to-date furniture and
equipment expense through June 30, 1998 was $4.2 million, a $428,000, or 11.4%,
increase from $3.8 million for the same period in the prior year. Increases are
primarily due to depreciation expense resulting from additions of data
processing equipment, upgrades of various other computer hardware and software
used in the Company's operations and asset additions associated with new branch
openings.
OTHER EXPENSES. Other expenses primarily include advertising and public
relations costs, professional fees, office supplies, postage and telephone
expenses, and other losses. Other expenses, $6.1 million for the three months
ended June 30, 1998, increased $387,000, or 6.7%, from $5.7 million for the same
period in 1997. Year-to-date through June 1998, other expenses were $11.7
million, a $633,000, or 5.7%, increase from $11.1 million for the same period in
the prior year. Approximately $151,000 of the year-to-date increase relates to
the six new branches opened since June 30, 1997. The remaining quarter-to-date
and year-to-date increases are due primarily to advertising and public relations
expenses and losses on disposal of fixed assets.
12
<PAGE>
Advertising and public relation expenses for the three and six month
periods ended June 30, 1998 were approximately $41,000 and $215,000,
respectively, higher than in the same periods in 1997. These increases are
attributable to budgeted increases in advertising expense for the first half
of 1998 combined with fluctuations in the timing of public relation events in
the current year compared to 1997.
During 1998, the Company wrote-off obsolete micro-computer equipment.
Losses on disposal of $166,000 and $259,000 were recorded during the three
and six month periods ended June 30, 1998, respectively.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of June 30, 1998, there have been no material changes in the quantitative
and qualitative information about market risk provided pursuant to Item 305
of Regulation SK as presented in the Company's December 31, 1997 Form 10-K.
13
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR INDEBTEDNESS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable or required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) No reports were filed on Form 8-K during the quarter ended
June 30, 1998.
14
<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 August 14, 1998 /s/ THOMAS W. SCOTT
-------------------------- --------------------------------------
Thomas W. Scott
President and Chief Executive Officer
Date August 14, 1998 /s/ TERRILL R. MOORE
-------------------------- --------------------------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
15
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 140,103
<INT-BEARING-DEPOSITS> 7,073
<FED-FUNDS-SOLD> 45,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 293,651
<INVESTMENTS-CARRYING> 226,679
<INVESTMENTS-MARKET> 228,438
<LOANS> 1,485,589
<ALLOWANCE> 29,309
<TOTAL-ASSETS> 2,310,837
<DEPOSITS> 1,894,565
<SHORT-TERM> 175,497
<LIABILITIES-OTHER> 62,530<F1>
<LONG-TERM> 24,581
0
0
<COMMON> 10,801
<OTHER-SE> 142,863
<TOTAL-LIABILITIES-AND-EQUITY> 2,310,837
<INTEREST-LOAN> 71,297
<INTEREST-INVEST> 14,078
<INTEREST-OTHER> 2,116
<INTEREST-TOTAL> 87,491
<INTEREST-DEPOSIT> 33,147
<INTEREST-EXPENSE> 39,988
<INTEREST-INCOME-NET> 47,503
<LOAN-LOSSES> 2,093
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 40,142
<INCOME-PRETAX> 12,303
<INCOME-PRE-EXTRAORDINARY> 12,303
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,303
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 4.76
<LOANS-NON> 13,491
<LOANS-PAST> 3,326
<LOANS-TROUBLED> 1,072
<LOANS-PROBLEM> 82,690
<ALLOWANCE-OPEN> 28,180
<CHARGE-OFFS> 2,204
<RECOVERIES> 1,240
<ALLOWANCE-CLOSE> 29,309
<ALLOWANCE-DOMESTIC> 3,178
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26,131
<FN>
<F1>INCLUDES $40,000 MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST
</FN>
</TABLE>
