<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 June 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
--------
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 7,919,239 shares of common stock outstanding on June 30,
2000.
<PAGE> 2
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
June 30, 2000 and December 31, 1999 (unaudited) 3
Consolidated Statements of Income
Three and six months ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows
Six months ended June 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 June 30, December 31,
------ 2000 1999
------------ ------------
<S> <C> <C>
Cash and due from banks $ 152,789 146,943
Federal funds sold 18,620 10,415
Interest bearing deposits in banks 3,544 4,948
Investment securities:
Available-for-sale 341,882 344,053
Held-to-maturity 223,467 246,456
------------ ------------
Total investment securities 565,349 590,509
Loans 1,874,737 1,722,961
Less allowance for loan losses 30,889 29,599
------------ ------------
Net loans 1,843,848 1,693,362
Premises and equipment, net 81,048 74,106
Accrued interest receivable 25,939 24,506
Goodwill and core deposit intangible, net of accumulated
amortization of $15,251 at June 30, 2000 and $13,714
at December 31, 1999 31,097 32,374
Other real estate owned, net 1,070 1,445
Deferred tax asset 10,746 9,674
Other assets 23,317 21,984
------------ ------------
$ 2,757,367 2,610,266
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Non-interest bearing $ 393,934 398,391
Interest bearing 1,743,637 1,719,792
------------ ------------
Total deposits 2,137,571 2,118,183
Federal funds purchased 19,695 900
Securities sold under repurchase agreements 202,696 188,024
Accrued interest payable 14,973 13,331
Accounts payable and accrued expenses 7,793 7,723
Other borrowed funds 128,760 41,875
Long-term debt 22,894 23,394
------------ ------------
Total liabilities 2,534,382 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
June 30, 2000 or December 31, 1999 -- --
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 7,919,239 shares as of June 30, 2000
and 7,993,250 shares as of December 31, 1999 7,440 10,788
Retained earnings 182,384 172,078
Accumulated other comprehensive loss, net (6,839) (6,030)
------------ ------------
Total stockholders' equity 182,985 176,836
------------ ------------
$ 2,757,367 2,610,266
============ ============
Book value per common share $ 23.11 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 six months
ended June 30, ended June 30,
---------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 43,809 36,160 84,407 70,783
Interest and dividends on investment securities:
Taxable 7,743 8,635 15,672 17,406
Exempt from Federal taxes 894 823 1,777 1,618
Interest on deposits in banks 33 124 55 182
Interest on Federal funds sold 276 137 452 429
--------- --------- ---------- ----------
Total interest income 52,755 45,879 102,363 90,418
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 18,667 16,305 36,691 32,884
Interest on Federal funds purchased 533 590 984 606
Interest on securities sold under repurchase agreements 2,523 1,485 4,873 2,953
Interest on other borrowed funds 1,504 284 1,866 367
Interest on long-term debt 499 494 1,006 996
Interest on mandatorily redeemable preferred securities
of subsidiary trust 882 882 1,764 1,764
--------- --------- ---------- ----------
Total interest expense 24,608 20,040 47,184 39,570
--------- --------- ---------- ----------
Net interest income 28,147 25,839 55,179 50,848
Provision for loan losses 1,231 786 2,476 1,572
--------- --------- ---------- ----------
Net interest income after provision for loan losses 26,916 25,053 52,703 49,276
Non-interest income:
Income from fiduciary activities 1,164 1,050 2,348 2,154
Service charges on deposit accounts 3,066 2,882 5,927 5,444
Data services 2,172 1,604 4,289 3,235
Other service charges, commissions, and fees 2,030 1,724 3,895 3,283
Net investment securities gains 44 1 44 1
Other real estate income, net 255 3 315 383
Other income 981 645 1,832 1,075
--------- --------- ---------- ----------
Total non-interest income 9,712 7,909 18,650 15,575
--------- --------- ---------- ----------
Non-interest expense:
Salaries, wages and employee benefits 12,446 11,051 25,095 21,941
Occupancy, net 1,954 1,674 3,888 3,412
Furniture and equipment 2,748 2,391 5,393 4,652
FDIC insurance 115 58 223 116
Goodwill and core deposit intangible amortization 773 595 1,537 1,187
Other expenses 6,900 5,398 12,612 10,475
--------- --------- ---------- ----------
Total non-interest expense 24,936 21,167 48,748 41,783
--------- --------- ---------- ----------
Income before income taxes 11,692 11,795 22,605 23,068
Income tax expense 4,187 4,269 8,083 8,329
--------- --------- ---------- ----------
Net income $ 7,505 7,526 14,522 14,739
========= ========= ========== ==========
Basic earnings per common share $ 0.95 0.95 1.83 1.85
Diluted earnings per common share $ 0.93 0.93 1.80 1.82
Dividends per common share $ 0.27 0.27 0.53 0.51
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
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,
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 7,505 7,526 14,522 14,739
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities:
Realized and unrealized holding gains (losses)
arising during period 821 (6,461) (1,282) (9,481)
Add: reclassification adjustment for gains
included in net income (44) (1) (44) (1)
--------- --------- --------- ---------
Other comprehensive income (loss), before tax 777 (6,462) (1,326) (9,482)
Income tax benefit (expense) related to items of other
comprehensive income (303) 2,520 517 3,698
--------- --------- --------- ---------
Other comprehensive income (loss), after tax 474 (3,942) (809) (5,784)
--------- --------- --------- ---------
Comprehensive income $ 7,979 3,584 13,713 8,955
========= ========= ========= =========
</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 six months
ended June 30,
-------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,522 14,739
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss 2,476 1,572
Depreciation and amortization 5,906 4,901
Net premium amortization on investment securities 199 147
Gain on sales of investments (44) (1)
Gain on sales of other real estate owned (326) (415)
Loss (gain) on sales of property and equipment 1 (20)
Provision for deferred income taxes (414) 567
Increase in interest receivable (1,605) (566)
Increase in other assets (1,380) (1,919)
Increase (decrease) in accrued interest payable 1,642 (3,122)
Increase (decrease) in accounts payable and accrued expenses 70 (1,166)
----------- ----------
Net cash provided by operating activities 21,047 14,717
----------- ----------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (2,917) (49,859)
Available-for-sale (21,717) (38,117)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 23,801 86,898
Available-for-sale 14,984 28,694
Proceeds from sales of investment securities:
Held-to-maturity 2,001 --
Available-for-sale 7,555 --
Extensions of credit to customers, net of repayments (154,637) (110,590)
Recoveries of loans charged-off 1,475 1,238
Proceeds from sales of other real estate 701 1,258
Acquisition of branch banks -- (5,833)
Capital distributions from joint venture 100 125
Capital expenditures, net (11,469) (5,332)
----------- ----------
Net cash used in investing activities (140,123) (91,518)
----------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 19,388 (25,626)
Net increase in Federal funds purchased and repurchase agreements 33,467 23,587
Net increase in other borrowed funds 86,885 56,923
Repayment of long-term borrowings (500) (4,011)
Net decrease in debt issuance costs 47 48
Proceeds from issuance of common stock 775 466
Payments to retire common stock (4,123) (2,391)
Dividends paid on common stock (4,216) (4,066)
----------- ----------
Net cash provided by financing activities 131,723 44,930
----------- ----------
Net increase (decrease) in cash and cash equivalents 12,647 (31,871)
Cash and cash equivalents at beginning of period 162,306 204,019
----------- ----------
Cash and cash equivalents at end of period $ 174,953 172,148
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during period for taxes $ 8,210 8,012
Cash paid during period for interest 45,542 42,901
=========== ==========
</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
June 30, 2000 and December 31, 1999, and the results of operations and cash
flows for each of the periods ended June 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 June 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 or 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 June 30, 2000, the Company was not engaged in hedging
activities nor did it hold any freestanding 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, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Six months ended
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares 7,924,667 7,953,548 7,942,664 7,968,030
Weighted average potential common shares 123,402 149,797 127,641 142,571
</TABLE>
(3) Cash Dividends
On July 14, 2000, 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 2000 dividend represents 30% of the Company's net income
for the quarter ended June 30, 2000.
(4) Non-Cash Investing and Financing Activities
The Company transferred loans of $0 and $274 to other real estate owned
during the six months ended June 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 $9.2 million as of June 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.
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 six month periods
ended June 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 also 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. Maturing balances in the Company's loan portfolio also 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 which 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.
OVERVIEW
The Company recorded net income of $7.5 million, or $0.93 per share, during
the second quarters of 2000 and 1999. Net income for the six month period ended
June 30, 2000 of $14.5 million, or $1.80 per share, decreased $217,000, or 1.5%,
from $14.7 million, or $1.82 per share, for the same period in 1999. Increases
in net interest income and non-interest income during the first half of 2000
were more than offset by higher provisions for loan losses, a $988,000
non-credit loss recorded during second quarter 2000 and the short-term adverse
effects of eight new branches opened or acquired since January 1999.
9
<PAGE> 10
EARNING ASSETS
Earning assets of $2,462 million at June 30, 2000 increased $133 million,
or 5.7 %, from $2,329 million at December 31, 1999 primarily due to internally
generated loan growth.
Loans. Total loans increased $152 million, or 8.9%, to $1,875 million as of
June 30, 2000 from $1,723 million as of December 31, 1999. All categories of
loans increased from December 31, 1999 with the most significant growth
occurring in commercial and real estate lending. Approximately 36% of loan
growth is due to four commercial and four real estate loans advanced during the
first six months of 2000. Management attributes the remaining growth in part to
expansion of its market presence through a combination of successful marketing
activities, new branch openings and generally strong loan demand in the
Company's marketing areas.
Income from Earning Assets. Interest income for the second quarter 2000 of
$52.8 million increased $6.9 million, or 15.0%, from $45.9 million for the same
period in the prior year. Year-to-date interest income through June 30, 2000 of
$102.4 million increased $12.0 million, from $90.4 million for the same period
in 1999. Increases are due primarily to strong loan demand and increases in
prime rate. On a fully taxable equivalent basis, average earning assets for the
six month period ended June 30, 2000 of $2,389 million yielded 8.72% while
average earning assets of $2,202 million for the same period in 1999 yielded
8.47%. New branches opened or acquired since May 1999 contributed $2.5 million
of interest income during the first six months of 2000 on average earning assets
of $60 million.
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 $20 million, or 0.9%, to $2,138 million
as of June 30, 2000 from $2,118 million as of December 31, 1999. Seasonal
decreases in total deposits that historically occur during the first half of the
year were offset in 2000 by internal growth. Increases in deposits were used
primarily to fund loan growth.
Other Funding Sources. In addition to deposits, the Company also uses
short-term borrowings from the Federal Home Loan Bank of Seattle, repurchase
agreements with depositors, long-term borrowings and, on a seasonal basis,
Federal funds purchased. Other funding sources increased $120 million, or 47.3%,
to $374 million as of June 30, 2000 from $254 million as of December 31, 1999
primarily due to increases in short-term borrowings from the Federal Home Loan
Bank. Increases in other funding sources were used to fund loan growth.
Cost of Funding Sources. Interest expense for the three month period ended
June 30, 2000 of $24.6 million increased $4.6 million, or 23.0%, from $20.0
million for the same period in 1999. Interest expense increased $7.6 million, or
19.2%, to $47.2 million for the six months ended June 20, 2000 from $39.6
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 June 30, 1999. Average interest-bearing liabilities and
trust preferred securities of $2,082 million during the six months ended June,
2000 yielded 4.56% while average interest-bearing liabilities and trust
preferred securities of $1,890 million during the six months ended June 30, 1999
yielded 4.22%. New branches opened or acquired since May 1999 recorded interest
expense of $1.2 million on average interest-bearing liabilities of $54 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. Net
interest income on a fully-taxable equivalent ("FTE") basis of $56.5 million for
the six months ended June 30, 2000 increased $4.6 million, or 8.9%, from $51.9
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 4.75% for the six months
ended June 30, 2000 and 1999.
10
<PAGE> 11
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 June 30, 2000 of $1.2 million
increased $445,000, or 56.6%, from $786,000 for the same period in the prior
year. The provision for loan losses increased $904,000, or 56.5%, to $2.5
million for the six months ended June 30, 2000 from $1.6 million for the same
period in 1999. Increases are primarily due to loan growth combined with
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 $9.6 million, or 50.0%, to $28.8 million as of
June 30, 2000 as compared to $19.2 million as of June 30, 1999 primarily due to
the loans of one commercial borrower aggregating $9 million placed on
non-accrual during the third quarter of 1999. However, non-performing loans as
of June 30, 2000 have decreased $2.4 million to $28.8 million from $31.2 million
as of December 31, 2000. The ratio of non-performing loans to total loans at
June 30, 2000 was 1.53% as compared to 1.81% at December 31, 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 $1.8
million, or 22.8%, to $9.7 million for the three months ended June 30, 2000 from
$7.9 million for the same period in 1999. For the six month period ended June
30, 2000, non-interest income increased $3.1 million, or 19.9%, to $18.7 million
as compared to $15.6 million for the same period in 1999. All principal
categories of non-interest income showed quarter-to-date and year-to-date
increases from prior year. Significant fluctuations are discussed below:
Service Charges on Deposit Accounts. Service charges on deposit accounts of
$3.1 million for the quarter ended June 30, 2000 increased $184,000, or 6.4%,
from $2.9 million for the same period in 1999. For the six month period ended
June 30, 2000 service charges on deposit accounts of $5.9 million increased
$483,000, or 9.0%, from $5.4 million for the same period in 1999. Approximately
34% of the year-to-date increase is directly attributable to the new branches
opened or acquired since May 1999. The remaining increase is primarily
attributable to overdraft fees.
Data Services Revenues. Data services revenues increased $568,000, or
35.5%, to $2.2 million for the quarter ended June 30, 2000 from $1.6 million for
the same period in 1999. For the six month period ended June 30, 2000, data
services revenues of $4.3 million increased $1.1 million, or 34.4%, from $3.2
million during the same period in 1999. Approximately 27% of this increase is
related to one new core-processing customer added during the fourth quarter of
1999. The remaining increase is primarily due to a greater number of ATMs
supported in the Company's network and corresponding increases in transaction
volumes.
Other Service Charges, Commissions and Fees. Other service charges,
commissions and fees of $2.0 million for the three months ended June 30, 2000
increased $306,000, or 18.0%, from $1.7 million for the same period in 1999. For
the six months ended June 30, 2000, other service charges, commissions and fees
increased $612,000, or 18.6%, to $3.9 million as compared to $3.3 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 and increases in fees
for foreign ATM transactions; and, correspondent processing fees resulting from
increases in number of correspondent banks using the Company's back-room
processing services.
Other Income. Other income, primarily brokerage fees, check printing income
and foreign exchange fees, increased $336,000, or 52.1%, to $981,000 for the
three months ended June 30, 2000 from $645,000 for the
11
<PAGE> 12
same period in the prior year. For the six months ended June 30, 2000, other
income of $1.8 million increased $757,000, or 68.8%, from $1.1 million during
the same period in the prior year. Approximately 42% of the year-to-date
increase is attributable to increased brokerage fees resulting from continuing
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.
OTHER OPERATING EXPENSE
Other operating expenses increased $3.7 million, or 17.5%, to $24.9 million
for the quarter ended June 30, 2000 from $21.2 million for the same period in
1999. For the six month period ending June 30, 2000, other operating expense
increased $6.9 million, or 16.5%, to $48.7 million as compared to $41.8 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 $1.3 million, or 11.7%, to $12.4 million
for the three months ended June 30, 2000 as compared to $11.1 million for the
same period in the prior year. Salaries, wages and employee benefits expense of
$25.1 million for the six month period ended June 30, 2000 increased $3.2
million, or 14.6%, from $21.9 million for the same period in 1999. Approximately
30% of the year-to-date increase is directly attributable to new branches opened
or acquired since May 1999. The remaining increase is primarily due to
inflationary wage increases and increases in staffing levels resulting from
expansion of brokerage services and growth in the data services division.
Occupancy. Occupancy expense increased $280,000, or 16.5%, to $2.0 million
for the three months ended June 30, 2000 compared to $1.7 million for the same
period in 1999. Year-to-date through June 30, 2000, occupancy expense of $3.9
million increased $476,000, or 14.0%, from $3.4 million during the same period
in the prior year. Approximately 47% of the year-to-date increase is directly
attributable to new branches opened or acquired since May 1999. The remaining
increase is primarily due to increased depreciation associated with the recent
remodel of existing facilities.
Furniture and Equipment. Furniture and equipment expenses increased
$357,000, or 14.9% to $2.7 million for the three months ended June 30, 2000 from
$2.4 million for the same period in 1999. Year-to-date through June 30, 2000,
furniture and equipment expense increased $741,000, or 15.8%, to $5.4 million as
compared to $4.7 million for the same period in the prior year. Approximately
20% of the year-to-date increase is directly attributable to new branches opened
or acquired since May 1999. The remaining increase 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 $115,000 and $223,000 for the three and six months ended
June 30, 2000, respectively, are approximately double the amounts recorded
during the same periods in 1999. The increase 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 $773,000 for the quarter ended June
30, 2000 increased $178,000, or 29.9%, from $595,000 during the same period in
1999. Year-to-date goodwill and core deposit amortization expense of $1.5
million through June 30, 2000 increased $350,000, or 29.2%, from $1.2 million
for the same period in 1999. Increases in goodwill and core deposit intangible
amortization expense result from an acquisition occurring in July 1999.
Other Expenses. Other expenses increased $1.5 million, or 27.8%, to $6.9
million for the quarter ended June 30, 2000 from $5.4 million for the same
period in 1999. Other expenses of $12.6 million for the six months ended June
30, 2000 increased $2.1 million, or 20.0%, from $10.5 million during the same
period in 1999. Approximately 32% of the year-to-date increase is directly
attributable to new branches opened or acquired since May 1999. The remaining
increase is primarily due to a non-credit loss of $988,000 recorded during the
second quarter 2000. Management believes there is potential for recovery of this
loss in future quarters.
12
<PAGE> 13
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of June 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.
13
<PAGE> 14
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
June 30, 2000.
14
<PAGE> 15
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 11, 2000 /s/ THOMAS W. SCOTT
--------------------------- ---------------------------------------
Thomas W. Scott
Chief Executive Officer
Date August 11, 2000 /s/ TERRILL R. MOORE
--------------------------- ---------------------------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
15
