<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 March 31, 1999
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: 406/255-5390
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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
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The Registrant had 7,966,768 shares of common stock outstanding on March 31,
1999.
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> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Comprehensive Income
Three months ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 (unaudited) 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 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>
2
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
ASSETS 1999 December 31,
(unaudited) 1998
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<S> <C> <C>
Cash and due from banks $ 138,415 154,527
Federal funds sold 6,805 31,930
Interest bearing deposits in banks 56 17,562
Investment securities:
Available-for-sale 389,597 379,393
Held-to-maturity 260,634 299,285
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650,231 678,678
Loans 1,512,902 1,484,459
Less allowance for loan losses 29,289 28,803
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Net loans 1,483,613 1,455,656
Premises and equipment, net 64,469 63,382
Accrued interest receivable 23,156 22,433
Goodwill, net of accumulated amortization of $11,542 at March 31,
1999 (unaudited) and $10,950 at December 31, 1998 28,745 29,337
Other real estate owned, net 607 1,113
Deferred tax asset 5,904 5,498
Other assets 19,165 18,717
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$2,421,166 2,478,833
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 376,633 390,998
Interest bearing 1,637,073 1,650,934
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Total deposits 2,013,706 2,041,932
Federal funds purchased 1,300 1,675
Securities sold under repurchase agreements 145,686 173,593
Accrued interest payable 12,351 13,364
Accounts payable and accrued expenses 10,150 10,622
Other borrowed funds 7,006 9,828
Long-term debt 23,838 24,288
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Total liabilities 2,214,037 2,275,302
Mandatorily redeemable preferred securities of subsidiary trust 40,000 40,000
Stockholders' equity:
Common stock without par value; authorized 20,000,000 shares; issued and
outstanding 7,966,768 shares as of March 31, 1999
(unaudited) and 7,988,573 shares as of December 31, 1998 10,145 10,001
Retained earnings 156,658 151,362
Accumulated other comprehensive income 326 2,168
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Total stockholders' equity 167,129 163,531
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$2,421,166 2,478,833
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Book value per common share $ 20.98 20.47
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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 share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
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1999 1998
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<S> <C> <C>
Interest income:
Interest and fees on loans $34,623 35,191
Interest and dividends on investment securities:
Taxable 8,771 6,323
Exempt from Federal taxes 795 326
Interest on deposits with banks 58 195
Interest on Federal funds sold 292 966
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Total interest income 44,539 43,001
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Interest expense:
Interest on deposits 16,579 16,237
Interest on Federal funds purchased 16 38
Interest on securities sold under repurchase agreements 1,468 1,774
Interest on other borrowed funds 83 108
Interest on long-term debt 502 661
Interest on mandatorily redeemable preferred securities of
subsidiary trust 882 888
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Total interest expense 19,530 19,706
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Net interest income 25,009 23,295
Provision for loan losses 786 1,065
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Net interest income after provision for loan losses 24,223 22,230
Non-interest income:
Income from fiduciary activities 1,179 1,101
Service charges on deposit accounts 2,562 2,490
Data processing 1,709 2,078
Other fees 1,379 1,200
Net investment securities gains -- 42
Other real estate income, net 380 185
Other income 436 414
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Total non-interest income 7,645 7,510
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Non-interest expenses:
Salaries and wages 8,961 7,797
Employee benefits 1,929 2,807
Occupancy, net 1,738 1,611
Furniture and equipment 2,261 2,052
FDIC insurance 58 54
Goodwill and core deposits amortization 592 694
Other expenses 5,056 4,936
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Total non-interest expenses 20,595 19,951
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Income before income taxes 11,273 9,789
Income tax expense 4,060 3,715
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Net income $ 7,213 6,074
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Basic earnings per common share $ 0.90 0.75
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Diluted earnings per common share $ 0.89 0.75
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Dividends per common share $ 0.24 0.22
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</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
ended March 31,
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1999 1998
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<S> <C> <C>
Net income $ 7,213 6,074
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities:
Realized and unrealized holding losses arising during period (3,020) (151)
Add: reclassification adjustment for (gains) losses
included in net income -- (42)
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Other comprehensive loss, before tax (3,020) (193)
Income tax expense related to items of other comprehensive income 1,178 75
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Other comprehensive loss, after tax (1,842) (118)
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Comprehensive income $ 5,371 5,956
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</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)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,213 $ 6,074
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and other real estate losses 786 1,065
Depreciation and amortization 2,292 2,189
Net discount accretion on investment securities (22) (143)
Gain on sales of investments -- (42)
Gain on sales of other real estate owned (403) (232)
Loss (gain) on sales of property and equipment (25) 94
Provision for deferred income taxes 634 (6)
Decrease (increase) in interest receivable (723) 842
Decrease (increase) in other assets (472) 145
Increase (decrease) in accrued interest payable (1,013) 534
Increase in accounts payable and accrued expenses 712 632
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Net cash provided by operating activities 8,979 11,152
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Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (25,574) (5,597)
Available-for-sale (32,582) (111,356)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 64,225 28,599
Available-for-sale 19,518 22,675
Proceeds from sales of available-for-sale investment securities -- 25,152
Extensions of credit to customers, net of repayments (29,761) 7,321
Recoveries of loans charged-off 824 797
Proceeds from sales of other real estate 1,103 408
Capital distributions from joint venture -- 200
Capital expenditures, net (2,762) (2,165)
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Net cash used in investing activities (5,009) (33,966)
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Cash flows from financing activities:
Net increase (decrease) in deposits (28,226) 32,238
Net decrease in Federal funds and repurchase agreements (28,282) (18,797)
Net decrease in other borrowed funds (2,822) (1,915)
Proceeds from long-term borrowings -- 1,428
Repayments of long-term borrowings (450) (1,599)
Net decrease in debt issuance costs 24 3
Proceeds from issuance of common stock 178 58
Payments to retire common stock (1,218) (334)
Dividends paid on common stock (1,917) (1,765)
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Net cash provided by (used in) financing activities (62,713) 9,317
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Net decrease in cash and cash equivalents (58,743) (13,497)
Cash and cash equivalents at beginning of period 204,019 229,147
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Cash and cash equivalents at end of period 145,276 215,650
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest 20,543 20,242
Cash paid during the period for taxes 3,995 --
</TABLE>
Noncash investing and financing activities - The Company transferred loans of
$194 and $255 to other real estate owned during the three month periods ended
March 31, 1999 and 1998.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
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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 financial position at
March 31, 1999 and December 31, 1998, and the results of operations and
cash flows for the three month periods ended March 31, 1999 and 1998 in
conformity with generally accepted accounting principles. The balance
sheet information at December 31, 1998 is derived from audited consolidated
financial statements, however, certain reclassifications have been made to
conform to the March 31, 1999 presentation.
In June 1998, the Financial Standards Accounting Board issued Statement of
Financial Accounting Standard 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 March 31, 1999, the Company was
not engaged in hedging activities nor did it hold any free-standing
derivative instruments.
(2) PER SHARE DATA
Basic earnings per common share (EPS) is calculated by dividing net income
by the weighted average number of common shares outstanding during the
period presented. Diluted earnings per common share is calculated by
dividing net income 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 month periods ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended
3/31/99 3/31/98
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<S> <C> <C>
Weighted average common shares 7,982,673 8,023,800
Weighted average potential common shares 134,962 77,510
</TABLE>
There were no anti-dilutive potential common shares outstanding as of March
31, 1999 or 1998.
(3) CASH DIVIDENDS
On April 15, 1999, the Company declared and paid a cash dividend on first
quarter earnings of $0.27 per share to stockholders of record on that date.
It has been the Company's practice to pay quarterly dividends based upon
earnings. The April 1999 dividend represents 30% of the Company's net
income for the quarter ended March 31, 1999.
(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.
7
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The Company owns a 50% ownership interest in an aircraft and is jointly and
severally liable for aircraft indebtedness of $1.6 million as of March 31,
1999. The indebtedness is funded by a banking subsidiary of the Company.
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
$9.8 million as of March 31, 1999.
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 month period ended
March 31, 1999, with comparisons to 1998 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.
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 check payments; loan originations, extensions, and repayments;
and management of investment securities. Additional sources of liquidity
include Federal funds lines, other borrowings and access to the capital
markets.
CAPITAL ADEQUACY. The objective of capital adequacy is to provide
adequate capitalization to assure depositor, investor and regulatory
confidence. The intent is to provide sufficient capital funds to support
growth and to absorb fluctuations in income so that operations can continue
in periods of uncertainty while at the same time ensuring investable funds
are available to foster expansion.
OVERVIEW
The Company reported net income of $7.2 million, or $0.90 per share for
the three months ended March 31, 1999, as compared to $6.1 million, or $0.75
per share recorded in the same period in 1998. This increase in earnings is
largely due to net interest income provided through internal growth in both
deposits and loans.
9
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EARNING ASSETS
Earning assets of $2,170 million at March 31, 1999 decreased $43
million, or 1.9%, from $2,213 million at December 31, 1998. The mix of
earning assets changed little from December 31, 1998 with loans comprising
approximately 70% and investment securities comprising approximately 30% at
March 31, 1999 compared to 67% and 31%, respectively, at December 31, 1998.
LOANS. Total loans increased $29 million, or 1.9%, to $1,513 million as
of March 31, 1999 from $1,484 million as of December 31, 1998. All major
categories of loans, except residential real estate and agriculture,
increased from December 31, 1998 with the most dramatic growth occurring in
commercial, commercial real estate and indirect consumer lending. Management
attributes this growth to its continuing business strategy of being a lending
bank.
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 decreased $29 million, or 4.2%, to $650
million as of March 31, 1999, from $679 million as of December 31, 1998.
Proceeds from maturities, sales and principal payments during the first
quarter were used to fund increases in other earning assets, primarily loans,
and to reduce borrowings.
INTEREST BEARING DEPOSITS IN BANKS 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, are used by the
Company's banking subsidiaries to fund the daily liquidity needs of the
Company. Interest bearing deposits in bank and Federal funds sold decreased
$43 million, in aggregate, to $7 million as of March 31, 1999 from $49
million as of December 31, 1998. This decrease is primarily due to a decline
in available funds resulting from seasonal decreases in customer deposits at
the Company's banking subsidiaries. Available funds were invested in higher
yielding assets, principally loans, and used to reduce borrowings.
INCOME FROM EARNING ASSETS. Interest income increased $1.5 million, or
3.6%, to $44.5 million for the three months ended March 31, 1999 from $43.0
million for the same period in 1998. This increase resulted from greater
volumes of interest earning assets generated through internal growth. Total
average earning assets at March 31, 1999 of $2,175 million yielded 8.31%
during the first quarter of 1999 while average earning assets of $1,991
million at March 31, 1998 yielded 8.76% for the same period in 1998.
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 decreased $28 million, or 1.4%, to $2,014
million as of March 31, 1999 from $2,042 million as of December 31, 1998.
This decrease in deposits is an expected seasonal decrease that historically
occurs during the first half of the year. Yields on interest-bearing deposits
decreased 15 basis points to 4.11% during the first quarter of 1999 compared
to 4.46% during the first quarter of 1998.
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 $31 million, or 15.1%, to $178 million as of March 31, 1999
from $209 million as of December 31, 1998. Yields on other funding sources
decreased 54 basis points to 4.57% for the three months ended March 31, 1999
from 5.11% for the same period in the prior year. Because the Company's
funding requirements were primarily met through the liquidation of investment
securities, interest bearing deposits in bank and Federal funds sold, other
funding sources decreased during the first quarter of 1999.
10
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EQUITY
During 1998, the Company determined the future grants of stock options
would no longer include stock appreciation rights (SARs). Grantees with
outstanding SARs were given an election to convert their SARs to stock
options with similar terms in a one-for-one exchange. In January 1999,
106,300 SARs were exchanged for stock options resulting in an increase in
stockholders' equity and a reduction of accrued expenses of $1 million.
NET INTEREST INCOME
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest earning assets and interest bearing liabilities.
The volume of loans, investment securities and other earning assets, compared
to the volume of interest bearing deposits and indebtedness, combined with
the spread, produces the changes in net interest income between periods. Net
interest income of $25.0 million for the quarter ended March 31, 1999
increased $1.7 million, or 7.4%, from $23.3 million for the same period in
the prior year. The net interest margin ratio of 4.75% for the three months
ended March 31, 1999 decreased 4 basis points from 4.79% for the same period
in the prior year.
PROVISION FOR LOAN LOSS
The loan loss provision for each year is dependent on many factors,
including loan growth, net charge-offs, changes in the composition of the
loan portfolio, delinquencies, management's assessment of the quality of the
loan portfolio, the value of the underlying collateral on problem loans and
the general economic conditions in the Company's markets. The Company
performs a quarterly assessment of risks inherent in its loan portfolio, as
well as a detailed review of each asset determined to have identified
weaknesses. 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 decreased $279,000, or 26.2%, to
$786,000 for the three months ended March 31, 1999 from $1 million for the
same period in the prior year.
OTHER OPERATING INCOME
The Company's 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 fee income. Other operating income increased $135,000, or 1.8%, to
$7.6 million for the three months ended March 31, 1999 from $7.5 million for
the same period in 1998 with all four of the principal categories showing
increases except data processing fees. Significant fluctuations are discussed
below:
DATA PROCESSING FEES. Data processing fees decreased $369,000, or 17.8%,
to $1.7 million for the quarter ended March 31, 1999 from $2.1 million for
the same period in 1998 primarily due to a non-recurring termination fee of
$300,000 recorded during the first quarter of 1998.
INCOME FROM FIDUCIARY ACTIVITIES. Revenues from fiduciary activities
increased 7.1% to $1.2 million for the three months ended March 31, 1999 from
$1.1 million for the three months ended March 31, 1998 due to increases in
the value of assets under trust management.
OTHER FEE INCOME. Other fee income, comprised of other service charges,
commissions and fees, increased $179,000, or 14.9%, to $1.4 million for the
quarter ended March 31, 1999 as compared to $1.2 million for the same period
in the prior year. Approximately $104,000 of this increase is due to
increases in brokerage service fees. The Company began expanding the range
and scope of brokerage services offered through its banking subsidiaries in
December 1997. The remaining increase is primarily due to loan servicing
income resulting from strong loan demands combined with the acquisition of
servicing rights for 3,769 loans purchased in January 1999.
11
<PAGE>
OTHER REAL ESTATE INCOME. Net other real estate (OREO) income increased
$195,000 to $380,000 for the three months ended March 31, 1999 as compared to
$185,000 during the same period in 1998. Variations in net OREO income during
the periods resulted principally from fluctuations in gains and losses on
sales of OREO. Net
OREO income is directly related to prevailing economic conditions, and such
income could decrease significantly should an unfavorable shift occur in the
economic conditions of the Company's markets.
OTHER OPERATING EXPENSE
Other operating expenses increased $644,000, or 3.2%, to $20.6 million
for the quarter ended March 31, 1999 from $20.0 million for the same period
in 1998. Increases in salaries and wages, furniture and equipment and
occupancy expenses were partially offset by decreases in employee benefits
expense.
SALARIES AND WAGES EXPENSE. Salaries and wages expense increased $1.2
million, or 14.9%, to $9.0 million for the three months ended March 31, 1999
as compared to $7.8 million for the same period in the prior year. This
increase is primarily attributable to inflationary wage increases and the
additional staffing requirements needed to support the three new branch banks
opened since March 1998.
EMPLOYEE BENEFITS EXPENSE. Employee benefits expense decreased $878,000,
or 31.3%, to $1.9 million for the quarter ended March 31, 1999 from $2.8
million for the same period in 1998. Exclusive of non-recurring expense of
$290,000 for group health insurance premiums recorded during the first
quarter of 1998, employee benefits expense decreased $588,000 or 20.9%. In
January 1999, the holders of SARs were provided an option to exchange their
SARs for stock options. All holders opted for this exchange resulting in a
decrease in SAR expense of $760,000 during the first quarter of 1999. This
decrease was partially offset by increases in employee benefits expense
attributable to increases in staffing levels and inflation as discussed above.
OCCUPANCY. Occupancy expense increased $127,000, or 7.9%, to $1.7
million for the three months ended March 31, 1999 compared to $1.6 million
for the same period in 1998. This increase is primarily due to additional
depreciation and rent expenses associated with the addition of new facilities
and remodeling of existing facilities.
FURNITURE AND EQUIPMENT. Furniture and equipment expenses increased
$209,000, or 10.2% to $2.3 million for the three months ended March 31, 1999
from $2.1 million for the same period in 1998. This increase is primarily the
result of depreciation, repairs and maintenance expenses associated with
additional branches opened since March 1998 and the remodeling of Company
facilities. Also contributing to the increase are costs with upgrades of
various computer hardware and software used in the Company's operations.
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 technology 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.
12
<PAGE>
- - 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, assessment and
renovation phases of the key step plan and the validation phase is
substantially complete for all critical business systems. Validation will
continue through 1999 as new software releases and hardware upgrades are
received and implemented. Validation of all secondary systems is currently
expected to be completed by September 30, 1999. To date, the validation phase
has not revealed any material Year 2000 issues in any of the Company's
internal systems or programs. The Company's internal audit department has
been reviewing validation results.
The Company is in the process of developing a contingency plan. 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, customer communication, utility
failures, hot-site identification and backup system identification. This plan
is currently anticipated to be completed by June 30, 1999.
Management currently estimates total costs of the Company's Year 2000
compliance to be less than $300,000, of which $163,000 has already been
incurred. Of the 39 critical business systems identified, only one system is
an internally developed system. The cost of renovation of external system 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.
ACQUISITIONS
On May 7, 1999, First Interstate Bank in Montana purchased the net
assets of the Helena and Belgrade branches of First National Bank of Montana
at a premium of $225,000. At the purchase date, the acquired branches had
loans and deposits of approximately $1 million and $4 million, respectively.
The Company has entered into a definitive agreement to purchase all of
the outstanding stock of Security State Bank Shares, a one-bank holding
company with three branch offices located in Polson, Montana. The total cash
purchase price to be paid at closing is $11.8 million. The transaction is
expected to close during the second quarter of 1999. Security State Bank
Shares has total loans of approximately $35 million and total deposits of
approximately $62 million.
13
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of March 31, 1999, there have been no material changes in the quantitative
and qualitative information about market risk provided pursuant to Item 305
of Regulation S-K as presented in the Company's December 31, 1998 Form 10-K.
14
<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 March 31, 1999.
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 May 14, 1999 /s/ THOMAS W. SCOTT
------------------------------- ---------------------------------------
Thomas W. Scott
President and Chief Executive Officer
Date May 14, 1999 /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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 138,415
<INT-BEARING-DEPOSITS> 56
<FED-FUNDS-SOLD> 6,805
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 389,597
<INVESTMENTS-CARRYING> 260,634
<INVESTMENTS-MARKET> 261,302
<LOANS> 1,512,902
<ALLOWANCE> 29,289
<TOTAL-ASSETS> 2,421,166
<DEPOSITS> 2,013,706
<SHORT-TERM> 153,992
<LIABILITIES-OTHER> 62,501<F1>
<LONG-TERM> 23,838
0
0
<COMMON> 10,145
<OTHER-SE> 156,984
<TOTAL-LIABILITIES-AND-EQUITY> 2,421,166
<INTEREST-LOAN> 34,623
<INTEREST-INVEST> 9,566
<INTEREST-OTHER> 350
<INTEREST-TOTAL> 44,539
<INTEREST-DEPOSIT> 16,579
<INTEREST-EXPENSE> 19,530
<INTEREST-INCOME-NET> 25,009
<LOAN-LOSSES> 786
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 20,595
<INCOME-PRETAX> 11,273
<INCOME-PRE-EXTRAORDINARY> 7,213
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,213
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 4.66
<LOANS-NON> 11,461
<LOANS-PAST> 5,083
<LOANS-TROUBLED> 2,829
<LOANS-PROBLEM> 96,795
<ALLOWANCE-OPEN> 28,803
<CHARGE-OFFS> 1,124
<RECOVERIES> 824
<ALLOWANCE-CLOSE> 29,289
<ALLOWANCE-DOMESTIC> 3,479
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,810
<FN>
<F1>Includes $40,000 mandatorily redeemable securities of subsidiary trust.
</FN>
</TABLE>
