<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, 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
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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: 406/255-5390
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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 8,053,707 shares of common stock outstanding on September 30,
1998.
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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
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 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 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults on 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
</TABLE>
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
ASSETS (unaudited) 1997
-------------- ------------
<S> <C> <C>
Cash and due from banks $ 126,720 136,025
Federal funds sold 47,270 58,675
Interest bearing deposits in banks 18,969 34,447
Investment securities:
Available-for-sale 365,006 188,650
Held-to-maturity 225,735 236,953
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590,741 425,603
Loans 1,469,151 1,470,414
Less allowance for loan losses 30,116 28,180
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Net loans 1,439,035 1,442,234
Premises and equipment, net 62,369 61,274
Accrued interest receivable 26,076 22,046
Goodwill, net of accumulated amortization of $10,334 at
September 30, 1998 (unaudited) and $8,486 at December 31, 1997 29,953 31,801
Other real estate owned, net 1,346 1,362
Deferred tax asset 6,302 5,946
Other assets 16,317 15,351
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$2,365,098 2,234,764
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 367,616 372,056
Interest bearing 1,575,745 1,432,950
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Total deposits 1,943,361 1,805,006
Federal funds purchased - 4,025
Securities sold under repurchase agreements 158,111 176,350
Accounts payable and accrued expenses 24,785 20,599
Other borrowed funds 11,378 11,591
Long-term debt 24,563 31,526
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Total liabilities 2,162,198 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 8,053,707 shares as of September 30, 1998
(unaudited) and 8,030,799 shares as of December 31, 1997 12,281 11,490
Retained earnings 147,127 133,277
Unrealized gain on securities available-for-sale 3,492 900
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Total stockholders' equity 162,900 145,667
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$2,365,098 2,234,764
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Book value per common share $ 20.23 18.14
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
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 nine months
ended September 30, ended September 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $36,464 36,186 107,761 104,419
Interest and dividends on investment securities:
Taxable 7,859 5,454 21,153 16,216
Exempt from Federal taxes 575 272 1,359 799
Interest on deposits in banks 179 10 497 107
Interest on Federal funds sold 790 388 2,588 1,099
------- ------ ------- -------
Total interest income 45,867 42,310 133,358 122,640
------- ------ ------- -------
Interest expense:
Interest on deposits 17,600 14,799 50,747 42,269
Interest on Federal funds purchased 1 381 45 1,466
Interest on securities sold under repurchase agreements 1,788 1,688 5,310 4,499
Interest on other borrowed funds 130 231 352 750
Interest on long-term debt 532 1,198 1,815 3,686
Interest on mandatorily redeemable securities of
subsidiary trust 882 - 2,652 -
------- ------ ------- -------
Total interest expense 20,933 18,297 60,921 52,670
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Net interest income 24,934 24,013 72,437 69,970
Provision for loan losses 1,101 1,007 3,194 3,288
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Net interest income after provision for loan losses 23,833 23,006 69,243 66,682
Other operating income:
Income from fiduciary activities 808 981 3,194 3,003
Service charges on deposit accounts 2,646 2,459 7,743 7,369
Data processing 1,959 1,811 6,209 5,478
Other service charges, commissions, and fees 1,482 977 3,392 2,916
Net investment securities gains (losses) 43 (1) 52 72
Other real estate income, net 58 362 229 477
Other income 392 396 1,277 1,270
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Total other operating income 7,388 6,985 22,096 20,585
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Other operating expenses:
Salaries and wages 8,332 7,487 24,270 21,689
Employee benefits 2,354 2,066 7,554 5,898
Occupancy expense, net 1,731 1,554 4,851 4,635
Furniture and equipment expense 1,995 1,908 6,177 5,662
FDIC insurance 54 54 162 155
Other expenses 5,622 5,682 17,387 16,814
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Total other operating expenses 20,088 18,751 60,401 54,853
------- ------ ------- -------
Income before income taxes 11,133 11,240 30,938 32,414
Income tax expense 4,128 4,264 11,630 12,344
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Net income $ 7,005 6,976 19,308 20,070
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------- ------ ------- -------
Basic earnings per common share $ 0.87 0.83 2.41 2.37
Diluted earnings per common share $ 0.87 0.82 2.39 2.36
Dividends per common share $ 0.23 0.25 0.68 0.71
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income $ 7,005 6,976 19,308 20,070
Other comprehensive income:
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains arising
during period 2,660 291 2,664 255
Add: reclassification adjustment for (gains) losses
included in net income (43) 1 (52) (72)
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Other comprehensive income, before tax 2,617 292 2,612 183
Income tax expense related to items of other
comprehensive income (17) - (20) (28)
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Other comprehensive income, after tax 2,600 292 2,592 155
------- ----- ------ ------
Comprehensive income $ 9,605 7,268 21,900 20,225
------- ----- ------ ------
------- ----- ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-----------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,308 20,070
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and other real estate losses 3,194 3,284
Depreciation and amortization 6,616 6,538
Net premium amortization on investment securities 316 311
Gain on sales of investments (52) (72)
Gain on sales of other real estate owned (240) (479)
Loss (gain) on sales of property and equipment 135 (23)
Provision for deferred income taxes (1,900) (2,292)
Increase in interest receivable (4,030) (4,511)
Decrease (increase) in other assets (1,166) 3,886
Increase in accounts payable and accrued expenses 4,186 6,207
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Net cash provided by operating activities 26,367 32,919
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Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (67,159) (421,733)
Available-for-sale (280,997) (51,006)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 77,989 444,692
Available-for-sale 93,863 15,790
Proceeds from sales of available-for-sale investment securities 15,038 31,265
Decrease in interest bearing deposits in banks 15,478 6,503
Extensions of credit to customers, net of repayments (3,047) (97,440)
Recoveries of loans charged-off 2,318 2,320
Proceeds from sales of other real estate 990 1,840
Capital distributions from joint venture 200 -
Capital expenditures, net (5,998) (5,487)
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Net cash used in investing activities (151,325) (73,256)
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Cash flows from financing activities:
Net increase in deposits 138,355 72,068
Net increase (decrease) in Federal funds and repurchase agreements (22,264) 30,487
Net decrease in other borrowed funds (213) (3,226)
Proceeds from long-term borrowings 2,428 3,500
Repayment of long-term borrowings (9,391) (14,086)
Proceeds from issuance of common stock 2,257 2,054
Payments to retire common stock (1,466) (1,330)
Dividends paid on common stock (5,458) (5,648)
Dividends paid on preferred stock - (1,276)
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Net cash provided by financing activities 104,248 82,543
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Net decrease in cash and cash equivalents (20,710) (42,206)
Cash and cash equivalents at beginning of period 194,700 165,907
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Cash and cash equivalents at end of period $ 173,990 208,113
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--------- -------
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 12,520 13,873
Cash paid during period for interest 46,151 37,713
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--------- -------
Noncash Investing and Financing Activities:
The Company transferred loans of $734 and $817 to other real estate owned during
the nine months ended September 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 September 30, 1998 and December 31, 1997 and the results of
consolidated operations and cash flows for the periods ended September 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 September 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
September 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 September 30, 1998, the Company
was not engaged in hedging activities nor did it hold any derivative
instruments.
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share data)
(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 nine month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/98 9/30/97 9/30/98 9/30/97
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares 8,024,038 7,909,050 8,024,016 7,915,639
Weighted average potential common shares 73,400 46,338 65,455 39,749
</TABLE>
(3) CASH DIVIDENDS
On October 14, 1998, the Company declared and 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 1998 dividend represents 30% of the Company's net
income for the quarter ended September 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 September
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 $10.1 million as of September 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.
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share data)
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.
<PAGE>
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 nine month periods
ended September 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 $7.0 million, or $0.87 per share for
the three months ended September 30, 1998, as compared to $6.9 million, or $0.83
per share recorded in the same period in 1997. For the year to date period ended
September 30, 1998, net income was $19.3 million, or $2.41 per share, as
compared to $20.1 million, or $2.37 per share for the same period in 1997.
EARNING ASSETS
LOANS. Total loans decreased $1.3 million, or 0.1%, to $1,469.2 million as
of September 30, 1998 from $1,470.4 million as of December 31, 1997. Management
attributes the 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.
During the third quarter of 1998, total loans decreased $16.4 million, or
1.1%, from the second quarter of 1998. Approximately 80% of this decrease is
attributable to the pay-off of four loans.
INVESTMENT SECURITIES. The Company's investment portfolio is managed to
result in the highest yield while prudently managing balance sheet risks,
addressing 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 $165.1 million, or 38.8%, to $590.7 million
as of September 30, 1998, from $425.6 million as of December 31, 1997. Additions
to the investment portfolio during the nine-month period were funded through
growth in funding sources, primarily deposits.
INTEREST BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD. Interest bearing
deposits in banks 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
correspondent banks. Interest bearing deposits in banks decreased $15.5 million,
or 44.9%, to $19.0 million as of September 30, 1998 from $34.4 million as of
December 31, 1997. Federal funds sold decreased $11.4 million, or 19.4%, to
$47.3 million as of September 30, 1998 compared to $58.7 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 available for sale investment securities or used to
reduce other borrowings and long-term debt.
<PAGE>
INCOME FROM EARNING ASSETS Interest income was $45.9 million for the three
month period ended September 30, 1998, as compared to $42.3 million for the same
period in 1997. The increase of $3.6 million, or 8.4%, resulted from increases
in earning assets, primarily available-for-sale investment securities, generated
through internal growth. For the nine months ended September 30, 1998 and 1997,
interest income was $133.4 million and $122.6 million, respectively. Total
average earning assets of $2,044.5 million increased $197.1 million, or 10.7%,
over the nine month average in 1997. Yields on average loans and investment
securities each increased 8 basis points during the first nine months of 1998 as
compared to the same period in the prior year, however, the yield on average
earning assets decreased 16 basis points due to shifts in the mix of average
earning assets from higher yielding loans to investment securities which produce
a lower yield.
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 $138.4 million, or 7.7%, to $1,943.4
million as of September 30, 1998 from $1,805.0 million as of December 31, 1997.
Internal growth in deposits of 7.7% during 1998 is significantly greater than
the 4.3% growth rate experienced during the same period in 1997 and is the
result of successful efforts to gain market share system-wide, through
competitive rates and the opening of two new branches in 1998. Yields on
interest-bearing deposits increased 30 basis points to 4.49% during the first
nine months of 1998 compared to 4.19% during the same period in 1997 due to
increased rates and a change in mix toward higher yielding deposit products.
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 $29.4 million, or 10.5%, to $194.1 million as of September 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 nine months of 1998.
RECAPITALIZATION. During the fourth quarter 1997, the Company issued $40.0
million of mandatorily redeemable preferred securities of a 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 $1.9
million, or 48.4%, to $1.8 million for the nine months ended September 30, 1998
from $3.7 million for the same period in 1997. Interest expense related to the
trust preferred securities of $2.7 million was recorded during the first nine
months of 1998.
COSTS OF FUNDS. Interest expense was $20.9 million for the three months
ended September 30, 1998, as compared to $18.3 million for the same period in
1997. The increase of $2.6 million, or 14.4%, resulted from increases in
interest-bearing liabilities, primarily deposits generated through internal
growth. Interest expense increased $8.3 million, or 15.7%, to $61.0 million for
the nine month period ended September 30, 1998 compared to $52.7 million for the
same period in 1997. Total average interest-bearing liabilities and trust
preferred securities of $1,749.5 million at September 30, 1998 increased $160.0
million from September 30, 1997. Costs of average funds of 7.02% during the
first nine months of 1998 were 34 basis points higher than the same period last
year. During the first nine months of 1998, the increase in interest bearing
liabilities and trust preferred securities contributed $7.9 million towards the
increase, while the 34 basis point increase in costs of funds caused a $3.1
million increase.
<PAGE>
NET INTEREST INCOME
Net interest income, the largest contributor to earnings, was $72.4 million
for the nine months ended September 30, 1998, an increase of $2.5 million, or
3.5%, from $70.0 million for the same period in the prior year. Third quarter
net interest income of $24.9 million increased $921,000, or 3.8%, from the same
period in 1997. The net interest margin decreased to 4.80% during the first nine
months of 1998 compared to 5.11% during the same period in 1997 reflecting
increasing competitive pressure on both deposit rates and loan pricing combined
with significant deposit growth and a slower rate of loan growth.
NON-PERFORMING ASSETS
Non-performing assets include non-performing loans which are those loans in
a non-accrual status, loans which have been treated as troubled debt
restructurings and loans past due 90 days and still accruing interest. Also
included in the total of non-performing assets are foreclosed and in-substance
foreclosed real estate properties. Non-performing assets were 0.7% of total
assets as of September 30, 1998 compared to 0.8% as of December 31, 1997.
NON-PERFORMING LOANS. Non-performing loans increased 4.5% to $16.2 million
as of September 30, 1998 as compared to $15.0 million as of December 31, 1997
due to slight deteriorations in all market sectors.
OTHER REAL ESTATE OWNED. Net other real estate owned ("OREO") was $1.3
million at September 30, 1998 as compared to $1.4 million at December 31, 1997.
The Company records OREO at the lower of fair value less estimated costs to
sell. Estimated losses that result from the ongoing periodic valuation of these
properties are charged to earnings with a provision for losses on foreclosed
property in the period in which they are identified.
ALLOWANCE FOR LOAN LOSSES AND PROVISION. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of risk inherent in its loan portfolio and economic conditions in the Company's
market areas. The allowance is increased by provisions charged against earnings
and reduced by net loan charge-offs. Recoveries are generally recorded only when
cash payments are received.
Loans charged-off were $3.6 million, or an annualized 0.32% of average
loans for the first nine months of 1998, an increase of $1.4 million from the
first nine months of 1997. Recoveries of $2.3 million for the first nine months
of 1998 did not change from the same period in 1997.
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 third quarter of 1998
was $1.1 million, compared to $1.0 million for the same period in 1997.
Provisions of $3.2 million and $3.3 million were recorded during the nine months
ended September 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.
<PAGE>
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 and the
Federal Home Loan Bank. Additionally, the Company had $10.0 million available on
its revolving term loan at September 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 $7.4 million for the quarter ended September 30, 1998,
$403,000, or 5.8%, higher than that recorded during the same period in 1997. For
the nine months ended September 30, 1998 and 1997, other operating income was
$22.1 million and $20.6 million, respectively. Increases in other operating
income are primarily due to increases in data processing fees, other service
charges, commissions and fees and income from fiduciary activities.
DATA PROCESSING FEES. The Company serviced approximately 820 locations in
its ATM network at September 30, 1998 compared to approximately 600 locations at
September 30, 1997. Data processing fees of $2.0 million were recorded during
the third quarter of 1998, a $148,000, or 8.2%, increase from the same period in
1997. For the nine months ended September 30, 1998, data processing fees
increased $731,000, or 15.9%, to $6.2 million from $5.5 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. Income from fiduciary activities is
dependent on the market value of assets under trust management. Income from
fiduciary activities of $3.2 million for the nine months ended September 30,
1998 increased $191,000, or 6.7%, from $3.0 million for the same period in 1997.
However, income from fiduciary activities in the third quarter of 1998 of
$808,000 decreased $173,000, or 17.6%, from the same period last year and
$219,000, or 21.3%, from the second quarter of 1998. Third quarter decreases are
due primarily to declines in the market value of assets under trust management
during the three months ended September 30, 1998.
OTHER SERVICE CHARGES, COMMISSIONS AND FEES. Other service charges,
commissions and fees of $1.5 million for the quarter ended September 30, 1998
increased $505,000, or 51.7%, from $977,000 for the same period in 1997.
Year-to-date other service charges, commissions and fees increased $476,000, or
16.3%, to $3.4 million for the nine month period ended September 30,1998 from
$2.9 million for the same period in 1997. These quarter-to-date and year-to-date
increases over the prior year are primarily due to increased brokerage revenues
resulting from expansion in the range and scope of services offered.
OTHER OPERATING EXPENSE
Other operating expenses increased $1.4 million, or 8.9%, to $20.1 million
for the quarter ended September 30, 1998 from $18.8 million for the same period
in 1997. For the nine months ended September 30, 1998, other operating expenses
increased $5.5 million, or 10.1%, to $60.4 million as compared to $54.9 million
for the same period in 1997. The main components of the increase include
salaries and wages expense and employee benefits expense.
<PAGE>
SALARIES AND WAGES EXPENSE. Salaries and wages expense, the largest
component of other operating expenses, was $8.3 million for the second quarter
of 1998, up $845,000, or 11.3%, from the same period in 1997. For the nine
months ended September 30, 1998 and 1997, salaries and wages expense totaled
$24.3 million and $21.7 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 five new branch banks opened
since September 30, 1997.
EMPLOYEE BENEFITS EXPENSE. Employee benefits expense increased $288,000, or
13.9%, to $2.4 million for the quarter ended September 30, 1998 from $2.1
million for the same period in 1997. Employee benefits expense was up $1.7
million, or 28.1%, to $7.6 million for the nine months ended September 30, 1998
from $5.9 million for the same period in 1997. During the first nine months of
1998, the Company recorded adjustments to its regular stock appreciation rights
accruals of $891,000 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.
YEAR 2000
During 1997 the Company established a Year 2000 Taskforce charged with the
responsibility of ensuring all internal and external information and
non-information technology systems critical to business functions are Year 2000
compliant. The taskforce developed a five phase "key step plan". Each phase is
identified and described below:
- - Education - during this phase Year 2000 issues relating to the Company are
identified, resources are committed and an overall strategy is developed.
- - Assessment - during the assessment phase three areas of concern are
identified: internal computing systems and programs consisting of hardware,
software, networks, processing platforms and computer programs;
environmental and non-information technologys systems including security
systems, heating, ventilation and air conditioning systems, elevators, and
vault systems; and, external vendors and suppliers including entities
providing the Company with hardware, software, and office equipment.
- - Renovation - code enhancements, hardware and software upgrades, system
replacements, vendor certifications are completed during the renovation
phase.
- - Validation - in this phase, systems will be tested to ensure they will
function properly in the Year 2000. Any errors noted during the validation
phase will be corrected and the systems will be retested. This phase will
continue until all systems are compliant.
- - Special Support - the Company will provide staffing support to monitor all
systems as the new century approaches and develop contingency plans in the
event a system fails.
Currently, the Company has completed the education and assessment phases of
the key step plan and the renovation phase is substantially complete with only
minor enhancements remaining. The validation phase is currently in process. All
critical business systems should be validated by December 31, 1998. Initial
validation of core banking applications and hardware are complete and were
successful. The Company's internal audit department will audit validation
results.
Contingency planning which is included in the special support phase has
also begun and a Remediation Contingency plan has been completed addressing the
mitigation of risks associated with failure to successfully complete renovation,
validation or implementation of the Year 2000 readiness plan. A second
contingency plan is in development. This plan, called the Business Resumption
Contingency Plan, will address mitigation of risks associated with system
failures at critical dates including staffing issues, security concerns, utility
failures, hotsite identification and backup system identification. This plan is
scheduled for completion by December 31, 1998.
<PAGE>
Management currently estimates total costs of the Company's Year 2000
compliance to be less than $300,000, $100,000 of which have already been
incurred. Of the 39 critical business systems identified, only one system is an
internally developed system. The cost of renovation of external systems is
generally included in the annual maintenance fees paid to suppliers and has not
been included in the cost estimates presented. All Year 2000 costs are expensed
as incurred.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of third parties to remediate their own Year 2000
issues. The failure of third parties with which the Company has financial or
operational relationships such as clearing organizations, regulatory agencies,
business customers, suppliers and utilities, to remediate their technology
systems in a timely manner could result in a material financial risk to the
Company. While the Company exercises no control over such third parties, the
Company's Year 2000 project plan includes a survey assessment of critical third
parties response and remediation plans and their potential impact to the
Company.
The Company's expectations about future costs and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of September 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.
<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 September 30, 1998.
<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 12, 1998 /s/ THOMAS W. SCOTT
---------------------- --------------------
Thomas W. Scott
President and Chief Executive Officer
Date November 12, 1998 /s/ TERRILL R. MOORE
---------------------- ---------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 126,720
<INT-BEARING-DEPOSITS> 18,969
<FED-FUNDS-SOLD> 47,270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 365,006
<INVESTMENTS-CARRYING> 225,735
<INVESTMENTS-MARKET> 230,115
<LOANS> 1,469,151
<ALLOWANCE> 30,116
<TOTAL-ASSETS> 2,365,098
<DEPOSITS> 1,943,361
<SHORT-TERM> 169,489
<LIABILITIES-OTHER> 51,378<F1>
<LONG-TERM> 24,563
0
0
<COMMON> 12,281
<OTHER-SE> 150,619
<TOTAL-LIABILITIES-AND-EQUITY> 2,365,098
<INTEREST-LOAN> 107,761
<INTEREST-INVEST> 22,512
<INTEREST-OTHER> 3,085
<INTEREST-TOTAL> 133,358
<INTEREST-DEPOSIT> 50,747
<INTEREST-EXPENSE> 60,921
<INTEREST-INCOME-NET> 72,437
<LOAN-LOSSES> 3,194
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 60,401
<INCOME-PRETAX> 30,938
<INCOME-PRE-EXTRAORDINARY> 19,308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,308
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 4.74
<LOANS-NON> 12,287
<LOANS-PAST> 2,776
<LOANS-TROUBLED> 2,806
<LOANS-PROBLEM> 79,099
<ALLOWANCE-OPEN> 28,180
<CHARGE-OFFS> 3,576
<RECOVERIES> 2,318
<ALLOWANCE-CLOSE> 30,116
<ALLOWANCE-DOMESTIC> 3,385
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26,731
<FN>
<F1>INCLUDES $40,000 MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST.
</FN>
</TABLE>
