<PAGE> 1
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, 2000
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.
---------------------------------
(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 7,919,032 shares of common stock outstanding on September 30,
2000.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 (unaudited) 3
Consolidated Statements of Income
Three and nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 (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 13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Defaults on Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE> 3
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Assets September 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
Cash and due from banks $ 169,534 146,943
Federal funds sold 15,025 10,415
Interest bearing deposits in banks 7,411 4,948
Investment securities:
Available-for-sale 368,451 344,053
Held-to-maturity 216,641 246,456
----------- -----------
Total investment securities 585,092 590,509
Loans 1,945,875 1,722,961
Less allowance for loan losses 31,864 29,599
----------- -----------
Net loans 1,914,011 1,693,362
Premises and equipment, net 86,642 74,106
Accrued interest receivable 31,770 24,506
Goodwill and core deposit intangible, net of accumulated
amortization of $16,168 at September 30, 2000 and $13,714
at December 31, 1999 43,308 32,374
Other real estate owned, net 2,819 1,445
Deferred tax asset 8,692 9,674
Other assets 24,203 21,984
----------- -----------
$ 2,888,507 2,610,266
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing $ 442,264 398,391
Interest bearing 1,870,596 1,719,792
----------- -----------
Total deposits 2,312,860 2,118,183
Federal funds purchased 36,305 900
Securities sold under repurchase agreements 224,516 188,024
Accrued interest payable 17,488 13,331
Accounts payable and accrued expenses 8,898 7,723
Other borrowed funds 13,232 41,875
Long-term debt 44,052 23,394
----------- -----------
Total liabilities 2,657,351 2,393,430
Mandatorily redeemable preferred securities of subsidiary trust 40,000 40,000
Stockholders' equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000
shares; no shares issued or outstanding as of
September 30, 2000 or December 31, 1999 -- --
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 7,919,032 shares as of September 30, 2000
and 7,993,250 shares as of December 31, 1999 7,363 10,788
Retained earnings 187,984 172,078
Accumulated other comprehensive loss, net (4,191) (6,030)
----------- -----------
Total stockholders' equity 191,156 176,836
----------- -----------
$ 2,888,507 2,610,266
=========== ===========
Book value per common share $ 24.14 22.12
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 46,922 38,301 131,329 109,084
Interest and dividends on investment securities:
Taxable 7,715 8,558 23,387 25,964
Exempt from Federal taxes 902 859 2,679 2,477
Interest on deposits in banks 34 34 89 216
Interest on Federal funds sold 506 437 958 866
--------- --------- ---------- ----------
Total interest income 56,079 48,189 158,442 138,607
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 20,779 17,002 57,470 49,886
Interest on Federal funds purchased 537 697 1,521 1,303
Interest on securities sold under repurchase agreements 2,861 1,798 7,734 4,751
Interest on other borrowed funds 1,083 432 2,949 799
Interest on long-term debt 827 572 1,833 1,568
Interest on mandatorily redeemable preferred securities
of subsidiary trust 883 883 2,647 2,647
--------- --------- ---------- ----------
Total interest expense 26,970 21,384 74,154 60,954
--------- --------- ---------- ----------
Net interest income 29,109 26,805 84,288 77,653
Provision for loan losses 1,222 931 3,698 2,503
--------- --------- ---------- ----------
Net interest income after provision for loan losses 27,887 25,874 80,590 75,150
Non-interest income:
Income from fiduciary activities 1,298 1,152 3,646 3,306
Service charges on deposit accounts 3,204 2,971 9,131 8,415
Data services 2,112 1,856 6,401 5,091
Other service charges, commissions, and fees 2,107 1,845 6,002 5,128
Net investment securities gains 1 16 45 17
Other real estate income, net 475 (24) 790 359
Other income 1,021 816 2,853 1,891
--------- --------- ---------- ----------
Total non-interest income 10,218 8,632 28,868 24,207
--------- --------- ---------- ----------
Non-interest expense:
Salaries, wages and employee benefits 13,637 11,572 38,732 33,513
Occupancy, net 2,075 1,833 5,963 5,245
Furniture and equipment 2,667 2,692 8,060 7,344
FDIC insurance 106 57 329 173
Goodwill and core deposit intangible amortization 917 773 2,454 1,960
Other expenses 6,520 5,902 19,132 16,377
--------- --------- ---------- ----------
Total non-interest expense 25,922 22,829 74,670 64,612
--------- --------- ---------- ----------
Income before income taxes 12,183 11,677 34,788 34,745
Income tax expense 4,366 4,209 12,449 12,538
--------- --------- ---------- ----------
Net income $ 7,817 7,468 22,339 22,207
========= ========= ========== ==========
Basic earnings per common share $ 0.99 0.94 2.82 2.79
Diluted earnings per common share $ 0.97 0.92 2.77 2.74
Dividends per common share $ 0.28 0.28 0.81 0.79
</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 nine months
ended September 30, ended September 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,817 7,468 22,339 22,207
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains (losses)
arising during period 4,342 116 3,060 (9,365)
Reclassification adjustment for gains
included in net income (1) (16) (45) (17)
-------- -------- -------- --------
Other comprehensive income (loss), before tax 4,341 100 3,015 (9,382)
Income tax benefit (expense) related to items of other
comprehensive income (1,693) (39) (1,176) 3,659
-------- -------- -------- --------
Other comprehensive income (loss), after tax 2,648 61 1,839 (5,723)
-------- -------- -------- --------
Comprehensive income $ 10,465 7,529 24,178 16,484
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
--------------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,339 22,207
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,698 2,503
Depreciation and amortization 9,072 7,939
Net premium amortization on investment securities 219 308
Gain on sales of investments (45) (17)
Gain on sales of other real estate owned (410) (415)
Gain on sales of property and equipment (176) (17)
Provision (benefit) for deferred income taxes (401) 679
Increase in interest receivable (6,480) (5,159)
Decrease (increase) in other assets (2,092) 61
Increase in accrued interest payable 3,923 352
Increase (decrease) in accounts payable and accrued expenses 567 (1,040)
--------- ---------
Net cash provided by operating activities 30,214 27,401
--------- ---------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (8,924) (61,560)
Available-for-sale (35,590) (40,460)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 37,466 98,381
Available-for-sale 23,174 42,473
Proceeds from sales of investment securities:
Held-to-maturity 2,001 7,009
Available-for-sale 7,556 --
Extensions of credit to customers, net of repayments (164,290) (169,327)
Recoveries of loans charged-off 1,908 2,125
Proceeds from sales of other real estate 980 1,258
Acquisition of branch banks, net of cash acquired (13,288) 9,469
Capital distributions from joint venture 100 125
Capital expenditures, net (18,363) (10,990)
--------- ---------
Net cash used in investing activities (167,270) (121,497)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 114,595 (3,810)
Net increase in Federal funds purchased and repurchase agreements 71,897 63,632
Net increase (decrease) in other borrowed funds (30,643) 35,022
Proceeds from long-term borrowings 24,900 5,500
Repayment of long-term borrowings (4,242) (9,557)
Net decrease in debt issuance costs 71 71
Proceeds from issuance of common stock 1,815 2,581
Payments to retire common stock (5,240) (3,568)
Dividends paid on common stock (6,433) (6,290)
--------- ---------
Net cash provided by financing activities 166,720 83,581
--------- ---------
Net increase (decrease) in cash and cash equivalents 29,664 (10,515)
Cash and cash equivalents at beginning of period 162,306 204,019
--------- ---------
Cash and cash equivalents at end of period $ 191,970 193,504
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 11,360 12,402
Cash paid during period for interest 70,231 60,573
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
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 September 30, 2000 and December 31, 1999, and the results of
operations and cash flows for each of the periods ended September 30,
2000 and 1999 in conformity with generally accepted accounting
principles. The balance sheet information at December 31, 1999 is derived
from audited consolidated financial statements; however, certain
reclassifications have been made to conform to the September 30, 2000
presentation.
In June 1998, the Financial Standards Accounting 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 2000, FASB issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133", addressing a
limited number of implementation issues in applying SFAS No. 133. SFAS
Nos. 133 and 138 are effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management expects that adoption will not
have a material effect on the consolidated financial statements, results
of operations or liquidity of the Company. As of September 30, 2000, 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 nine month periods ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares 7,905,605 7,953,331 7,930,220 7,957,010
Weighted average potential common shares 114,285 147,442 123,157 144,021
</TABLE>
(3) Cash Dividends
On October 13, 2000, the Company declared and paid a cash dividend on
third quarter earnings of $0.30 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 2000 dividend represents 30% of the
Company's net income for the quarter ended September 30, 2000.
(4) Non-Cash Investing and Financing Activities
The Company transferred loans of $1,425 and $459 to other real estate
owned during the nine months ended September 30, 2000 and 1999,
respectively.
In June 2000, the Company finalized its allocation of purchase price
related to 1999 acquisitions. Changes in preliminary estimates of the
fair value of premises, equipment and loans, net of deferred taxes,
resulted in a $260 increase in goodwill.
In January 1999, the Company exchanged stock appreciation rights for
stock options resulting in an increase in stockholders' equity of $1,200.
7
<PAGE> 8
(5) 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 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 $9.0 million as of September 30, 2000.
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.
(6) Acquisitions
On August 1, 2000, the Company purchased all of the outstanding stock of
Equality Bankshares, Inc., a one-bank holding company with three branch
offices located in Cheyenne, Evansville and Mills, Wyoming ("Cheyenne
acquisition"). The total cash purchase price paid at closing of $20.3
million was funded through available cash on hand and a $19.0 million
advance on the Company's revolving term note. At the purchase date,
Equality Bankshares, Inc. had total loans of approximately $64 million
and total deposits of approximately $80 million. Excess purchase price
over the fair value of identifiable net assets is being amortized using
the straight-line method over a period of 20 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.
8
<PAGE> 9
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, 2000, with comparisons to 1999 as applicable. All earnings
per share figures are presented on a diluted basis.
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.
The Company's current liquidity position is supported by the management
of its investment portfolio, which provides a structured flow of maturing and
reinvestable funds that could be converted to cash, should the need arise. In
addition, maturing balances in the Company's loan portfolio provide options for
cash flow management. The ability to redeploy these funds is an important source
of immediate to long-term liquidity. Additional sources of liquidity include
customer deposits, Federal funds lines, borrowings and access to capital
markets.
As a holding company, First Interstate BancSystem, Inc. ("FIBS") is a
corporation separate and apart from its subsidiaries, and therefore, provides
for its own liquidity. A large portion of FIBS's revenues are dividends received
from its banking subsidiaries. In general, each banking subsidiary is limited,
without the prior consent of its state and federal regulators, to paying
dividends that do not exceed the current year net profits together with retained
earnings from the two preceding calendar years. In addition, state or federal
regulators may impose regulatory dividend limitations or prohibitions in certain
circumstances. The banking subsidiaries are not subject to dividend limitations
other than general limitations.
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.
9
<PAGE> 10
OVERVIEW
The Company recorded net income of $7.8 million, or $0.97 per share,
during the third quarter of 2000 compared to $7.5 million, or $0.92 per share,
for the same period in 1999. Third quarter 2000 net income surpassed second
quarter 2000 net income of $7.5 million, or $0.93 per share, primarily due to a
gain on the sale of other real estate and the partial recovery of a previously
recorded non-credit loss.
Net income for the nine month period ended September 30, 2000 of $22.3
million, or $2.77 per share, increased $132,000, or 0.6%, from $22.2 million, or
$2.74 per share, for the same period in 1999. Increases in net interest income
and non-interest income during the first nine months of 2000 were offset by
higher provisions for loan losses, two non-credit losses aggregating $863,000
(net of recoveries) recorded in 2000 and the short-term dilutive effects of
sixteen new branches opened or acquired since January 1999.
EARNING ASSETS
Earning assets of $2,553 million at September 30, 2000 increased $224
million, or 9.6 %, from $2,329 million at December 31, 1999 primarily due to
loan growth.
Loans. Total loans increased $223 million, or 12.9%, to $1,946 million as
of September 30, 2000 from $1,723 million as of December 31, 1999. All
categories of loans increased from December 31, 1999 with the exception of
agricultural loans, which decreased slightly. Management attributes loan growth
to expansion of the Company's market presence through a combination of
successful marketing activities, acquisitions and new branch openings combined
with generally strong loan demand in the Company's marketing areas.
Approximately $64 million of the increase in total loans is attributable to the
Cheyenne acquisition. Of the remaining increase, approximately $57 million
relates to three commercial and four real estate loans advanced in 2000.
Income from Earning Assets. Interest income for the third quarter of 2000
of $56.1 million increased $7.9 million, or 16.4%, from $48.2 million for the
same period in the prior year. Year-to-date interest income through September
30, 2000 of $158.4 million increased $19.8 million, or 14.3%, from $138.6
million for the same period in 1999. Increases are due primarily to strong loan
demand and increases in the prime lending rate. On a fully taxable equivalent
basis, average earning assets for the nine month period ended September 30, 2000
of $2,436 million yielded 8.80% while average earning assets of $2,243 million
for the same period in 1999 yielded 8.35%. New branches opened or acquired since
January 1999 contributed $5.5 million of interest income during the nine months
ended September 30, 2000.
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 $195 million, or 9.2%, to $2,313
million as of September 30, 2000 from $2,118 million as of December 31, 1999.
Approximately $80 million of the increase in deposits is attributable to the
Cheyenne acquisition. The remaining increase is the result of internal growth.
Increases in deposits were primarily used to fund loan growth.
Other Borrowed Funds. In addition to deposits, the Company also uses
short-term borrowings from the Federal Home Loan Bank of Seattle, repurchase
agreements with depositors, and, on a seasonal basis, Federal funds purchased.
Other borrowed funds increased $43 million, or 18.6%, to $274 million as of
September 30, 2000 from $231 million as of December 31, 1999. Increases in other
borrowed funds were primarily used to fund loan growth.
Long-term Debt. Long-term debt increased $21 million, or 91.3%, to $44
million as of September 30, 2000 from $23 million as of December 31, 2000.
Additional borrowings were used to fund the Cheyenne acquisition in August 2000.
Cost of Funding Sources. Interest expense for the three month period
ended September 30, 2000 of $27.0 million increased $5.6 million, or 26.2%, from
$21.4 million for the same period in 1999. Interest expense increased $13.2
million, or 21.6%, to $74.2 million for the nine months ended September 30, 2000
from $61.0
10
<PAGE> 11
million for the same period in 1999. These increases are primarily due to
increases in the volume of interest-bearing liabilities combined with increases
in interest rates since September 30, 1999. Average interest-bearing liabilities
and trust preferred securities of $2,123 million during the nine months ended
September 30, 2000 cost 4.67% while average interest-bearing liabilities and
trust preferred securities of $1,929 million during the nine months ended
September 30, 1999 cost 4.23%. New branches opened or acquired since January
1999 recorded interest expense of $2.5 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. On a fully-taxable equivalent basis ("FTE"), net interest income of
$86.3 million for the nine months ended September 30, 2000 increased $7.1
million, or 9.0%, from $79.2 million for the same period in the prior year. A
higher mix of loans in earning assets has kept the net interest margin ratio
stable at 4.73% for the nine months ended September 30, 2000 as compared to
4.72% for the same period in 1999.
PROVISION FOR LOAN LOSS
Provision for Loan Losses. The provision for loan losses creates an
allowance for expected loan losses. 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 underlying collateral on problem loans and 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. Based on this analysis,
which includes reviewing historical loss trends, current economic conditions,
industry concentrations and specific reviews of assets classified with
identified weaknesses, the Company makes provision for loan losses. The
provision for loan losses for the quarter ended September 30, 2000 of $1.2
million increased $291,000, or 31.3%, from $931,000 for the same period in the
prior year. The provision for loan losses increased $1.2 million, or 48.0%, to
$3.7 million for the nine months ended September 30, 2000 from $2.5 million for
the same period in 1999. The increase in the provision for loan losses between
periods is primarily the result of loan growth and increases in non-performing
loans.
Non-Performing Loans. Non-performing loans include loans past due 90 days
or more and still accruing interest, non-accrual loans and restructured loans.
Non-performing loans increased $1.3 million, or 4.2%, to $32.5 million as of
September 30, 2000 from $31.2 million as of December 31, 1999. However, the
ratio of non-performing loans to total loans at September 30, 2000 was 1.67% as
compared to 1.81% at December 31, 1999 and 1.95% at September 30, 1999.
NON-INTEREST INCOME
The Company's principal sources of non-interest income include service
charges on deposit accounts; data services revenues; income from fiduciary
activities, comprised principally of fees earned on trust assets; and, other
service charges, commissions and fees. Non-interest income increased $1.6
million, or 18.6% to $10.2 million for the three months ended September 30, 2000
from $8.6 million for the same period in 1999. Year-to-date through September
30, 2000, non-interest income increased $4.7 million, or 19.4%, to $28.9 million
as compared to $24.2 million for the same period in 1999. All significant
categories of non-interest income showed quarter-to-date and year-to-date
increases from prior year. Significant fluctuations are discussed below:
Income from Fiduciary Activities. Income from fiduciary activities of
$1.3 million during the third quarter of 2000 increased $146,000, or 12.2%, from
$1.2 million for the same period in 1999. Year-to-date through September 30,
2000, income from fiduciary activities increased $340,000, or 10.3%, to $3.6
million from $3.3 million for the same period in 1999. These increases are
primarily attributable to growth in customer assets under trust management.
Service Charges on Deposit Accounts. Service charges on deposit accounts
of $3.2 million for the quarter ended September 30, 2000 increased $233,000, or
7.8%, from $3.0 million for the same period in 1999. Year-to-date through
September 30, 2000, service charges on deposit accounts of $9.1 million
increased $716,000, or 8.5%, from $8.4 million for the same period in 1999.
Approximately 44% of the year-to-date increase is directly attributable to new
branches opened or acquired since the beginning of 1999. The remaining increase
occurred primarily in overdraft fee charges.
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Data Services Revenues. Data services revenues increased $256,000, or
13.5%, to $2.1 million for the quarter ended September 30, 2000 from $1.9
million for the same period in 1999. Year-to-date through September 30, 2000,
data services revenues of $6.4 million increased $1.3 million, or 25.5%, from
$5.1 million during the same period in 1999. Approximately 34% of this increase
results from the addition of one new customer during the fourth quarter of 1999.
The remaining increase is primarily due to increases in ATM transaction volumes
combined with greater numbers of ATMs supported by the Company's ATM network.
Other Service Charges, Commissions and Fees. Other service charges,
commissions and fees of $2.1 million for the three months ended September 30,
2000 increased $262,000, or 14.6%, from $1.8 million for the same period in
1999. Year-to-date through September 30, 2000, other service charges,
commissions and fees of $6.0 million increased $874,000, or 17.1%, from $5.1
million for the same period in 1999. These increases are primarily attributable
to loan servicing income resulting from strong loan demand; ATM fee income
resulting from higher debit card and foreign ATM transaction volumes combined
with increases in fees for foreign ATM transactions; and, correspondent
processing fees resulting from increases in the number of correspondent banks
using the Company's back-room processing services.
Other Real Estate Income. Net other real estate (OREO) income increased
$431,000, or 120.1%, to $790,000 for the nine months ended September 30, 2000
from $359,000 for the same period in 1999. Variations in net OREO income during
the periods are principally the result of fluctuations in gains and losses on
sales of OREO.
Other Income. Other income, primarily brokerage fees, check printing
income and foreign exchange fees, increased $205,000, or 25.1%, to $1.0 million
for the three months ended September 30, 2000 from $816,000 for the same period
in the prior year. For the nine months ended September 30, 2000, other income of
$2.9 million increased $1.0 million, or 52.6%, from $1.9 million during the same
period in the prior year. Approximately 46% of the year-to-date increase
occurred in brokerage fees and is the result of expansion in the number of
markets served by the Company's brokerage offices. The remaining increase is
primarily due to the recovery of a $101,000 prior year non-credit loss and a
$269,000 gain recognized on the sale of an aircraft.
OTHER OPERATING EXPENSE
Other operating expenses increased $3.1 million, or 13.6%, to $25.9
million for the quarter ended September 30, 2000 from $22.8 million for the same
period in 1999. Year-to-date through September 30, 2000, other operating expense
of $74.7 million increased $10.1 million, or 15.6%, from $64.6 million for the
same period in the prior year. Significant components of this increase are
discussed below:
Salaries, Wages and Employee Benefits Expenses. Salaries, wages and
employee benefits expenses increased $2.0 million, or 17.2%, to $13.6 million
for the three months ended September 30, 2000 as compared to $11.6 million for
the same period in the prior year. Salaries, wages and employee benefits expense
of $38.7 million for the nine month period ended September 30, 2000 increased
$5.2 million, or 15.5%, from $33.5 million for the same period in 1999.
Approximately 27% of the year-to-date increase is directly attributable to new
branches opened or acquired since January 1999. The remaining increase is
primarily due to inflationary wage increases, increases in administrative
staffing levels to support the Company's expanding number of branches, and
growth in the brokerage services division.
Occupancy. Occupancy expense increased $242,000, or 13.4%, to $2.1
million for the three months ended September 30, 2000 compared to $1.8 million
for the same period in 1999. Year-to-date through September 30, 2000, occupancy
expense of $6.0 million increased $718,000, or 13.8%, from $5.2 million during
the sam period in the prior year. Approximately 39% of the year-to-date increase
is directly attributable to new branches opened or acquired since January 1999.
The remaining increase is primarily due to increased depreciation associated
with the remodel and upgrade of existing facilities.
Furniture and Equipment. Furniture and equipment expenses decreased
$25,000, or 0.9% to $2.7 million for the three months ended September 30, 2000
from $2.7 million for the same period in 1999. Year-to-date through September
30, 2000, furniture and equipment expense increased $716,000, or 9.8%, to $8.1
million as compared to $7.3 million for the same period in the prior year.
Approximately 27% of the year-to-date increase is directly attributable to new
branches opened or acquired since January 1999. The remaining increase
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is largely due to depreciation expense associated with the Company's continuing
investment in technology and other costs of upgrading computer hardware and
software, principally associated with introducing check-imaging technology.
FDIC Insurance. Federal Deposit Insurance Corporation ("FDIC") deposit
insurance premiums of $106,000 and $329,000 for the three and nine months ended
September 30, 2000, respectively, are approximately double the amounts recorded
during the same periods in 1999. The increase in premiums resulted from an
increase in FDIC FICO bond assessment effective January 1, 2000. FDIC deposit
insurance rates reflect the Company's well-capitalized rating by the FDIC.
Goodwill and Core Deposit Intangible Amortization. Goodwill and core
deposit intangible amortization expense of $917,000 for the quarter ended
September 30, 2000 increased $144,000, or 18.6%, from $773,000 during the same
period in 1999. Year-to-date through September 30, 2000, goodwill and core
deposit amortization expense of $2.5 million increased $494,000, or 24.7%, from
$2.0 million for the same period in 1999. Increases in goodwill and core deposit
intangible amortization expense are the result of acquisitions in July 1999 and
August 2000.
Other Expenses. Other expenses increased $618,000, or 10.5%, to $6.5
million for the quarter ended September 30, 2000 from $5.9 million for the same
period in 1999. Other expenses of $19.1 million for the nine months ended
September 30, 2000 increased $2.7 million, or 16.5%, from $16.4 million during
the same period in 1999. Approximately 31% of the year-to-date increase is
directly attributable to new branches opened or acquired since January 1999. In
addition, the Company recorded two non-credit losses aggregating $863,000, net
of recoveries, during the second and third quarters of 2000. Management believes
there is potential for recovery of these losses in future quarters. The
remaining year-to-date increase is primarily due to advertising, public
relations and travel expenses.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of September 30, 2000, 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, 1999 Form
10-K.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in legal
proceedings from December 31, 1999.
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 April 27, 2000:
<TABLE>
<CAPTION>
Matter For Against Not Voted
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Election of Directors:
Lyle R. Knight 7,313,490 1,639 645,263
James R. Scott 7,315,129 -- 645,263
Sandra A. Suzor 7,314,807 322 645,263
</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 September 30, 2000.
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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 10, 2000 /s/ THOMAS W. SCOTT
------------------------------- --------------------------------
Thomas W. Scott
Chief Executive Officer
Date November 10, 2000 /s/ TERRILL R. MOORE
------------------------------- --------------------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
15
