<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, 1999
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
(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 7,944,558 shares of common stock outstanding on June 30,
1999.
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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, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income
Three and six months ended June 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows
Six months ended June 30, 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 data)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 138,403 154,527
Federal funds sold 23,580 31,930
Interest bearing deposits in banks 10,165 17,562
Investment securities:
Available-for-sale 379,414 379,393
Held-to-maturity 262,205 299,285
---------- ---------
641,619 678,678
Loans 1,593,710 1,484,459
Less allowance for loan losses 29,509 28,803
---------- ---------
Net loans 1,564,201 1,455,656
Premises and equipment, net 65,251 63,382
Accrued interest receivable 23,004 22,433
Goodwill, net of accumulated amortization of $12,137 at
June 30, 1999 (unaudited) and $10,950 at December 31, 1998 28,387 29,337
Other real estate owned, net 544 1,113
Deferred tax asset 8,444 5,498
Other assets 20,631 18,717
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$2,524,229 2,478,833
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 380,534 390,998
Interest bearing 1,631,648 1,650,934
---------- ---------
Total deposits 2,012,182 2,041,932
Federal funds purchased 43,380 1,675
Securities sold under repurchase agreements 155,475 173,593
Accrued interest payable 10,213 13,364
Accounts payable and accrued expenses 8,272 10,622
Other borrowed funds 66,751 9,828
Long-term debt 20,277 24,288
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Total liabilities 2,316,550 2,275,302
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 7,944,558 shares as of June 30, 1999
(unaudited) and 7,988,573 shares as of December 31, 1998 9,260 10,001
Retained earnings 162,035 151,362
Accumulated other comprehensive income (loss) (3,616) 2,168
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Total stockholders' equity 167,679 163,531
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$2,524,229 2,478,833
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---------- ---------
Book value per common share $ 21.11 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 data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $36,160 36,107 70,783 71,297
Interest and dividends on investment securities:
Taxable 8,635 6,971 17,406 13,294
Exempt from Federal taxes 823 458 1,618 784
Interest on deposit with banks 124 123 182 318
Interest on Federal funds sold 137 832 429 1,798
------- ------ ------ ------
Total interest income 45,879 44,491 90,418 87,491
------- ------ ------ ------
Interest expense:
Interest on deposits 16,305 16,910 32,884 33,147
Interest on Federal funds purchased 590 6 606 44
Interest on securities sold under repurchase
agreements 1,485 1,748 2,953 3,522
Interest on other borrowed funds 284 114 367 222
Interest on long-term debt 494 622 996 1,283
Interest on mandatorily redeemable securities of
subsidiary trust 882 882 1,764 1,770
------- ------ ------ ------
Total interest expense 20,040 20,282 39,570 39,988
------- ------ ------ ------
Net interest income 25,839 24,209 50,848 47,503
Provision for loan losses 786 1,028 1,572 2,093
------- ------ ------ ------
Net interest income after provision for
loan losses 25,053 23,181 49,276 45,410
Other operating income:
Income from fiduciary activities 1,125 1,027 2,304 2,128
Service charges on deposit accounts 2,882 2,607 5,444 5,097
Data processing 1,696 1,753 3,405 3,831
Other service charges, commissions, and fees 1,368 1,234 2,752 2,477
Net investment securities gains (losses) -- (33) 1 9
Other real estate income (expense), net 3 (14) 383 171
Other income 645 624 1,075 995
------- ------ ------ ------
Total other operating income 7,719 7,198 15,364 14,708
------- ------ ------ ------
Other operating expenses:
Salaries and wages 9,014 8,141 17,975 15,938
Employee benefits 2,037 2,393 3,966 5,200
Occupancy expense, net 1,674 1,569 3,412 3,238
Furniture and equipment expense 2,391 2,070 4,652 4,064
FDIC insurance 58 54 116 108
Goodwill amortization 595 579 1,187 1,273
Other expenses 5,208 5,556 10,264 10,492
------- ------ ------ ------
Total other operating expenses 20,977 20,362 41,572 40,313
------- ------ ------ ------
Income before income taxes 11,795 10,017 23,068 19,805
Income tax expense 4,269 3,787 8,329 7,502
------- ------ ------ ------
Net income $ 7,526 6,230 14,739 12,303
------- ------ ------ ------
------- ------ ------ ------
Basic earnings per common share $ 0.95 0.78 1.85 1.53
Diluted earning per common share $ 0.93 0.77 1.82 1.52
Dividends per common share $ 0.28 0.23 0.52 0.45
</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,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,526 6,230 14,739 12,303
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains (losses)
arising during period (6,461) 147 (9,481) (4)
Add: reclassification adjustment for (gains) losses
included in net income (1) 33 (1) (9)
------- ------ ------ ------
Other comprehensive income (loss), before tax (6,462) 180 (9,482) (13)
Income tax benefit (expense) related to items of other
comprehensive income 2,520 (70) 3,698 5
------- ------ ------ ------
Other comprehensive income (loss), after tax (3,942) 110 (5,784) (8)
------- ------ ------ ------
Comprehensive income $ 3,584 6,340 8,955 12,295
------- ------ ------ ------
------- ------ ------ ------
</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,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,739 12,303
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan loss 1,572 2,093
Depreciation and amortization 4,901 4,622
Net premium amortization on investment securities 146 208
Gain on sales of investments -- (9)
Gain on sales of other real estate owned (415) (240)
Loss (gain) on sales of property and equipment (20) 127
Provision for deferred income taxes 567 (2,144)
Increase in interest receivable (566) (1,859)
Increase in other assets (1,919) (1,201)
Increase (decrease) in accrued interest payable (3,122) 267
Increase (decrease) in accounts payable and accrued expenses (1,166) 1,664
-------- --------
Net cash provided by operating activities 14,717 15,831
-------- --------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (49,859) (42,894)
Available-for-sale (38,117) (168,663)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 86,898 52,960
Available-for-sale 28,694 35,449
Proceeds from sales of available-for-sale investment securities -- 28,191
Extensions of credit to customers, net of repayments (110,590) (17,837)
Recoveries of loans charged-off 1,238 1,240
Proceeds from sales of other real estate 1,258 731
Acquisition of branch banks (5,833) --
Capital distributions from joint venture 125 200
Capital expenditures, net (5,332) (3,297)
-------- --------
Net cash used in investing activities (91,518) (113,920)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (25,626) 89,559
Net increase (decrease) in Federal funds and repurchase agreements 23,587 (16,780)
Net increase in other borrowed funds 56,923 311
Proceeds from long-term borrowings -- 1,428
Repayment of long-term borrowings (4,011) (8,373)
Net decrease in debt issuance costs 48 21
Proceeds from issuance of common stock 466 75
Payments to retire common stock (2,391) (764)
Dividends paid on common stock (4,066) (3,609)
-------- --------
Net cash provided by financing activities 44,930 61,868
-------- --------
Net decrease in cash and cash equivalents (31,871) (36,221)
Cash and cash equivalents at beginning of period 204,019 229,147
-------- --------
Cash and cash equivalents at end of period $172,148 192,926
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 8,012 8,770
Cash paid during period for interest 42,901 39,721
-------- --------
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</TABLE>
Noncash Investing and Financing Activities:
The Company transferred loans of $274 and $458 to other real estate owned during
the six months ended June 30, 1999 and 1998, respectively. In January 1999,
the Company exchanged stock appreciation rights for stock options resulting
in an increase in stockholders' equity of $1.2 million.
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 consolidated
financial position at June 30, 1999 and December 31, 1998, and the
results of operations and cash flows for each of the periods ended
June 30, 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 June 30, 1999
presentation.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. In June, 1999, FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133 - an amendment
of FASB Statement No. 133", deferring the effective date of SFAS No. 133
to all fiscal quarters or fiscal years beginning after June 15, 2000. As
of June 30, 1999, 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 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 and six month periods ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Three months ended Six months ended
6/30/99 6/30/98 6/30/99 6/30/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares 7,946,806 8,014,509 7,946,806 8,019,154
Weighted average potential common shares 149,797 69,191 140,317 59,021
</TABLE>
(3) CASH DIVIDENDS
On July 14, 1999, the Company declared and paid a cash dividend on second
quarter earnings of $0.28 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 1999 dividend represents 30% of the Company's net
income for the quarter ended June 30, 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
<PAGE>
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 June
30, 1999.
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 $9.7 million as of June 30, 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 and six month periods
ended June 30, 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 $7.5 million, or $0.95 per share,
during the second quarter of 1999, as compared to $6.2 million, or $0.78 per
share, recorded during the same period in 1998. Year-to-date through June 30,
1999, the Company reported net income of $14.7 million, or $1.85 per share, as
compared to $12.3 million, or $1.53 per share, for the same period in 1998.
Increases in earnings are largely the result of net interest income generated
through internal loan and deposit growth.
9
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EARNING ASSETS
LOANS. Total loans increased $110 million, or 7.4%, to $1,594 million as
of June 30, 1999 from $1,484 million as of December 31, 1998. All major
categories of loans increased from December 31, 1998 with the most significant
growth occurring in commercial and indirect consumer lending. Management
attributes this growth, in part, to expansion of its market presence through new
branch openings and marketing activities; and, in part to a renewed focus on
opportunities in the indirect consumer lending area.
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 $37 million, or 5.5%, to $642 million as of June
30, 1999, from $679 million as of December 31, 1998. Proceeds from maturities,
sales and principal payments during the first six months of 1999 were used to
fund increases in loans.
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, are used by the Company's
banking subsidiaries to fund the daily liquidity needs of the Company. Interest
bearing deposits in banks and Federal funds sold decreased $15 million, in
aggregate, to $34 million as of June 30, 1999 from $49 million as of December
31, 1998. Funds temporarily invested in interest bearing deposits in banks and
Federal funds sold at December 31, 1998 were invested in higher yielding assets,
principally loans.
INCOME FROM EARNING ASSETS. Interest income increased $2.9 million, or
3.3%, to $90.4 million for the six months ended June 30, 1999 from $87.5
million for the same period in 1998. Interest income of $45.9 million in the
second quarter of 1999 increased $1.4 million, or 3.1%, from the same period
in the prior year. These increases are due to greater volumes of interest
earning assets generated through internal growth. On a fully-taxable
equivalent basis, average earning assets for the six months ended June 30,
1999 of $2,196 million yielded 8.39% while average earning assets of $2,015
million for the six months ended June 30, 1998 yielded 8.81%. This decrease
in yield is due to shifts in the mix of earning assets from higher yielding
loans to investment securities which produce a lower yield, as well as
overall rate reductions resulting from decreases in prime rate during the
last half of 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 $30 million, or 1.5%, to $2,012
million as of June 30, 1999 from $2,042 million as of December 31, 1998. This
decrease in deposits is a typical seasonal decrease that historically occurs
during the first half of the year.
LONG-TERM DEBT. Long-term debt decreased $4.0 million, or 16.5%, to $20
million as of June 30, 1999 from $24 million as of December 31, 1998 due
primarily to the prepayment of two Federal Home Loan Bank notes scheduled to
mature in 2006 and 2016.
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 and repurchase agreements
with primarily commercial depositors. Other funding sources increased $81
million, or 43.5%, to $266 million as of June 30, 1999 from $185 million as of
December 31, 1998. Increases in other funding sources were used to support loan
growth.
10
<PAGE>
COST OF OTHER FUNDING SOURCES. Interest expense for the three months
ended June 30, 1999 of $20.0 million decreased $242,000, or 1.2%, from the
same period in 1998. Year-to-date interest expense through June 30, 1999 of
$39.6 million decreased $418,000, or 1.0%, from the same period in 1998.
Average interest bearing liabilities and trust preferred securities of $1,890
million increased $161.9 million, or 9.4%, from $1,728 million for the same
period in 1998. The rate on average interest bearing liabilities and trust
preferred securities decreased 45 basis points to 4.22% for the six months
ended June 30, 1999 from 4.67% for the same period in 1998.
EQUITY
During 1998, the Company determined that 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 $25.8 million during the second quarter of 1999
increased $1.6 million, or 6.7%, from $24.2 million during the same period in
the prior year. Year-to-date net interest income of $50.8 million through June
30, 1999 increased $3.3 million, or 7.0%, from $47.5 million for the same period
in the prior year. On a fully-taxable equivalent basis, the net interest margin
ratio of 4.76% for the six months ended June 30, 1999 decreased 5 basis points
from 4.81% for the same period in the prior year.
NON-PERFORMING AND CLASSIFIED ASSETS
Non-performing assets include non-performing loans and real property
acquired through foreclosure. Non-performing loans include loans on a
non-accrual status, loans past due 90 days or more and still accruing
interest and loans restructured due to financial difficulties of the
borrower. The ratio of non-performing assets to total loans and other real
estate owned of 1.24% at June 30, 1999 declined from 1.29% at December 31,
1998.
The Company classifies its loans on a regular basis as substandard,
doubtful and loss. Substandard loans are inadequately protected by the
current sound worth and paying capacity of the obligor or the collateral
pledged. Doubtful loans have the weaknesses of substandard loans with the
additional characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions and values,
highly questionable and improbable. Loans classified as loss are considered
uncollectible and of such little value that their continuance as bankable
assets is not warranted. The ratio of classified loans to total loans of
3.05% at June 30, 1999 declined from 3.37% at December 31, 1998.
Subsequent to June 30, 1999, the Company downgraded one commercial loan
causing the ratio of non-performing assets to total loans and other real
estate owned to increase to 1.89% and the ratio of classified loans to total
loans to increase to 3.70%. Management does not anticipate a significant
direct impact to earnings as a result of this commercial loan downgrade. It
is management's opinion that the allowance for loan loss is adequate to
absorb any potential loss.
PROVISION FOR LOAN LOSS
The loan loss provision 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
allowance for loan losses is maintained at a level that is, in management's
judgment, adequate to absorb losses inherent in the loan portfolio.
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 provision estimates. The provision for loan
losses decreased $242,000, or 23.5%, to $786,000 for the three months ended
June 30, 1999 from $1 million for the same period in the prior year. During
the six months ended June 30, 1999, the provision for loan losses decreased
$521,000, or 24.9%, from 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 $521,000, or 7.2%, to $7.7 million for
the quarter ended June 30, 1999 from $7.2 million for the same period in 1998.
Year-to-date other operating income of $15.4 million through June 30, 1999
increased $656,000, or 4.5%, from the same period in 1998. All four principal
categories showed increases over the prior year except data processing fees.
Significant fluctuations are discussed below:
DATA PROCESSING FEES. Data processing fees of $1.7 million for the three
months ended June 30, 1999 decreased $57,000, or 3.3%, from the same period in
the prior year. For the six month period ended June 30, 1999, data processing
fees of $3.4 million decreased $426,000, or 11.1%, from $3.8 million for the
same period in the prior year. These decreases are primarily due to a
non-recurring termination fee of $300,000 received during the first quarter of
the prior year.
11
<PAGE>
INCOME FROM FIDUCIARY ACTIVITIES. Revenues from fiduciary activities
increased 9.5% and 8.3% for the three and six month periods ended June 30, 1999
from the same periods in the prior year due to increases in the value of assets
under trust management.
OTHER SERVICE CHARGES, COMMISSIONS AND FEES. Other service charges,
commissions and fees of $1.4 million for the three months ended June 30, 1999
increased $134,000, or 10.9%, from the same period in the prior year. For the
six months ended June 30, 1999, other service charges, commission and fees
increased $275,000, or 11.1% to $2.8 million from $2.5 million for the same
period in the prior year. Increases are primarily due to loan servicing income
resulting from strong loan demands combined with the acquisition of mortgage
servicing rights in January 1999.
OTHER REAL ESTATE INCOME. Net other real estate (OREO) income increased
$212,000 to $383,000 for the six months ended June 30, 1999 as compared to
$171,000 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 $615,000, or 3.0%, to $21.0 million
for the quarter ended June 30, 1999 from $20.4 million for the same period in
1998. Year-to-date other operating expenses through June 30, 1999 of $41.6
million increased $1.3 million, or 3.1%, from the same period in 1998.
Significant components of the increased are discussed below:
SALARIES AND WAGES EXPENSE. Salaries and wages expense of $9.0 million
during the second quarter of 1999, increased $873,000, or 10.7%, from the second
quarter of 1998. Year-to-date salaries and wages expense increased $2.1 million,
or 12.8%, to $18.0 million for the six months ended June 30, 1999 as compared to
$15.9 million for the same period in the prior year. Increases are primarily
attributable to inflationary wage increases and the additional staffing
requirements of new branch banks opened or acquired since June 1998.
EMPLOYEE BENEFITS EXPENSE. Employee benefits expense decreased $356,000,
or 14.9%, to $2.0 million for the quarter ended June 30, 1999 from $2.4 million
for the same period in 1998. Employee benefits expense for the six months ended
June 30, 1999 decreased $1.2 million, or 23.7%, from the same period in the
prior year. This decrease is primarily due to the exchange of stock appreciation
rights for stock options that occurred during the first quarter of 1999. The
decrease was partially offset by additional expense attributable to staffing
requirements and inflation as discussed above.
FURNITURE AND EQUIPMENT. Furniture and equipment expenses for
the second quarter of 1999 increased $321,000, or 15.5% to $2.4 million from
$2.1 million for the same period in 1998. Furniture and equipment expense
increased $588,000, or 14.5%, to $4.7 million for the six months ended June 30,
1999 from $4.1 million for the same period in 1998. The increases are due
to new branch additions since June 30, 1998 and continued investment in
technology.
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.
12
<PAGE>
- - 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.
- - 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 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 completed development of a Business Resumption Contingency
Plan ("Plan") during the second quarter of 1999. The Plan addresses 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.
Management currently estimates total costs of the Company's Year 2000
compliance to be less than $300,000, of which $200,000 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 $236,000. At the purchase date, the acquired branches had loans and
deposits of approximately $1 million and $4 million, respectively.
13
<PAGE>
On July 9, 1999, the Company purchased 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 paid at closing was
$11.9 million. The purchase was funded through available cash on hand and a $2.5
million advance on the Company's revolving term note. At the purchase date,
Security State Bank Shares had total loans of approximately $35 million and
total deposits of approximately $53 million, respectively. Excess purchase price
over the fair value of identifiable net assets is being amortized using the
straight-line method over a period of 25 years. The intangible value of
depositor relationships is being amortized using an accelerated method based on
an estimated runoff of the related deposits, not exceeding 10 years.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of June 30, 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
The following matter was submitted to a vote of security
holders at the Annual Meeting of Shareholders of First Interstate
BancSystem, Inc. on May 20, 1999:
<TABLE>
<CAPTION>
Matter For Against Withheld/For
---------------------------------------------------------------------
<S> <C> <C> <C>
Election of all directors 7,818,208 1,152 136,692
</TABLE>
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, 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 August 13, 1999 /s/ THOMAS W. SCOTT
------------------------------- -------------------------------------
Thomas W. Scott
Chief Executive Officer
Date August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 138,403
<INT-BEARING-DEPOSITS> 10,165
<FED-FUNDS-SOLD> 23,580
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 379,414
<INVESTMENTS-CARRYING> 262,205
<INVESTMENTS-MARKET> 258,789
<LOANS> 1,593,710
<ALLOWANCE> 29,509
<TOTAL-ASSETS> 2,524,229
<DEPOSITS> 2,012,182
<SHORT-TERM> 66,751
<LIABILITIES-OTHER> 58,485<F1>
<LONG-TERM> 20,277
0
0
<COMMON> 9,260
<OTHER-SE> 158,419
<TOTAL-LIABILITIES-AND-EQUITY> 2,524,229
<INTEREST-LOAN> 70,783
<INTEREST-INVEST> 19,206
<INTEREST-OTHER> 429
<INTEREST-TOTAL> 90,418
<INTEREST-DEPOSIT> 32,884
<INTEREST-EXPENSE> 39,570
<INTEREST-INCOME-NET> 50,848
<LOAN-LOSSES> 1,572
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 41,572
<INCOME-PRETAX> 23,068
<INCOME-PRE-EXTRAORDINARY> 23,068
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,739
<EPS-BASIC> 1.85
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 8.30
<LOANS-NON> 12,153
<LOANS-PAST> 2,693
<LOANS-TROUBLED> 4,381
<LOANS-PROBLEM> 97,343
<ALLOWANCE-OPEN> 28,803
<CHARGE-OFFS> 2,104
<RECOVERIES> 1,238
<ALLOWANCE-CLOSE> 29,509
<ALLOWANCE-DOMESTIC> 4,130
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,379
<FN>
<F1> INCLUDES $40,000 MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST
</FN>
</TABLE>
