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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _______ to _______
COMMISSION FILE NUMBER 333-3250
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First Interstate BancSystem, Inc.
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(Exact name of registrant as specified in its charter)
Montana 81-0331430
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
PO Box 30918, 401 North 31st Street, Billings, MT 59116-0918
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 406/255-5300
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N/A
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No
The Registrant had 8,038,336 shares of common stock and 20,000 shares of
preferred stock outstanding on November 1, 1997.
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FIRST INTERSTATE BANCSYSTEM, INC.
Quarterly Report on Form 10-Q
Index Page
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Restatement Explanatory Note 3
Consolidated Balance Sheets
September 30, 1997, and December 31, 1996 4
Consolidated Statements of Income
Three months ended September 30, 1997 and 1996,
and Nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 6
Notes to Unaudited Consolidated Financial
Statements 7
As more fully described in "Notes to Unaudited Consolidated
Financial Statements," the Company has restated its 1997
consolidated financial statements
Item 2 - Managements' Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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RESTATEMENT EXPLANATORY NOTE
In 2000, the Company determined it was necessary to restate the Company's 2000,
1999, 1998 and 1997 consolidated quarterly financial statements to change the
accounting treatment for awards made pursuant to its Nonqualified Stock Option
and Stock Appreciation Rights Plan ("Stock Option Plan") from fixed to variable
plan accounting.
This Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997 amends and restates the previously
filed Form 10-Q in its entirety. In order to preserve the nature and character
of the disclosures set forth in the Form 10-Q as originally filed, no attempt
has been made in this Amendment No. 1 to modify or update such disclosures
except as required to reflect the effects of the restatement and to make
nonsubstantial revisions to the notes to the unaudited consolidated financial
statements. For additional information regarding the restatement, see "Notes to
Unaudited Consolidated Financial Statements - Restatement" included in Part I,
Item 1.
Effective October 7, 1997, the Company's parent company effected a four-for-one
stock split of the parent company's existing common stock. All periods presented
have been restated to give effect to the stock split.
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4
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
September 30,
Assets 1997 December 31,
(Restated) 1996
-------------- -------------
Cash and due from banks $ 170,043 160,962
Federal funds sold 38,070 4,945
Interest bearing deposits in banks 42 6,545
Investment securities:
Available-for-sale 128,590 124,502
Held-to-maturity 256,197 279,069
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384,787 403,571
Loans, net 1,467,153 1,375,479
Less allowance for loan losses 28,456 27,797
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Net loans 1,438,697 1,347,682
Premises and equipment, net 59,297 58,183
Accrued interest receivable 24,084 19,573
Goodwill 33,493 39,010
Other real estate owned, net 1,006 1,546
Deferred tax asset 7,534 4,921
Other assets 12,993 16,899
------------ -----------
Total assets $ 2,170,046 2,063,837
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Liabilities and Stockholders' Equity
Deposits:
Noninterest bearing $ 376,039 385,371
Interest bearing 1,375,453 1,294,053
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Total deposits 1,751,492 1,679,424
Federal funds purchased 20,100 13,450
Securities sold under repurchase agreements 152,974 129,137
Accounts payable and accrued expenses 21,971 18,027
Other borrowed funds 9,845 13,071
Long-term debt 54,081 64,667
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Total liabilities 2,010,463 1,917,776
Stockholders' equity:
Non-voting noncumulative 8.53% preferred stock without
par value; authorized 100,000 shares; issued and
outstanding 20,000 shares 20,000 20,000
Common stock without par value; authorized 20,000,000
shares; issued 7,952,748 shares at September 30, 1997
(unaudited) and 7,913,072 shares at December 31, 1996 10,035 8,941
Retained earnings 128,886 116,613
Unrealized holding gain on investment securities
available-for-sale, net 662 507
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Total stockholders' equity 159,583 146,061
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Total liabilities and stockholders' equity $ 2,170,046 2,063,837
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See accompanying notes to unaudited consolidated financial statements.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
----------------------- ----------------------
1997 1997
(Restated) 1996 (Restated) 1996
----------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 36,186 23,509 104,419 68,109
Interest and dividends on investment
securities:
Taxable 5,454 3,187 16,216 10,118
Exempt from Federal taxes 272 243 799 741
Interest on deposit with banks 10 43 107 268
Interest on Federal funds sold 388 239 1,099 839
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Total interest income 42,310 27,221 122,640 80,075
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Interest expense:
Interest on deposits 14,799 9,794 42,269 29,250
Interest on Federal funds purchased 381 178 1,466 437
Interest on securities sold under
repurchase agreements 1,688 1,049 4,499 3,155
Interest on other borrowed funds 231 88 750 229
Interest on long-term debt 1,198 246 3,686 835
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Total interest expense 18,297 11,355 52,670 33,906
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Net interest income 24,013 15,866 69,970 46,169
Provision for loan losses 1,007 700 3,288 1,852
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Net interest income after provision
for loan losses 23,006 15,166 66,682 44,317
Other operating income:
Income from fiduciary activities 981 659 3,003 2,182
Service charges on deposit accounts 2,459 1,851 7,369 5,369
Data processing 1,811 1,781 5,478 5,603
Other service charges, commissions,
and fees 977 732 2,916 2,025
Net investment securities (losses) gains (1) -- 72 2
Other income 396 318 1,270 900
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Total other operating income 6,623 5,341 20,108 16,081
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Other operating expenses:
Salaries and wages 7,487 5,089 21,689 14,986
Employee benefits 2,347 1,272 7,338 3,935
Occupancy expense, net 1,554 1,019 4,635 3,059
Furniture and equipment expenses 1,908 1,532 5,662 4,283
Other real estate income, net (362) (3) (477) (162)
FDIC insurance 54 1 155 4
Other expenses 5,682 3,148 16,814 9,160
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Total other operating expenses 18,670 12,058 55,816 35,265
--------- --------- --------- ---------
Income before income taxes 10,959 8,449 30,974 25,133
Income tax expense 4,153 3,237 11,777 9,651
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Net income $ 6,806 5,212 19,197 15,482
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Income per common share $ 0.80 0.66 2.25 1.97
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Dividends paid per common share $ 0.25 0.19 .71 .57
========= ========= ========= =========
Weighted average common shares outstanding 7,955,388 7,952,340 7,955,452 7,881,780
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
For the nine months
ended September 30,
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1997
(Restated) 1996
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Cash flows from operating activities:
Net income $ 19,197 15,482
Adjustments to reconcile net income to net cash provided
by operating activities:
Provisions for loan and other real estate losses 3,284 1,831
Depreciation and amortization 6,538 3,464
Net premium amortization on investment securities 311 843
Gain on sale of investments (72) (2)
Gain on sale of other real estate owned (479) (229)
(Gain) loss on sale of property and equipment (23) 4
Provision for deferred income taxes (2,921) (1,274)
Increase in interest receivable (4,511) (1,802)
Decrease (increase) in other assets 3,906 (361)
Increase in accounts payable and accrued expenses 7,365 523
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Net cash provided by operating activities 32,595 18,479
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Cash flows from investing activities: Purchases of investment
securities:
Held-to-maturity (421,733) (50,164)
Available-for-sale (51,006) (11,509)
Proceeds from maturities and pay downs of investment securities:
Held-to-maturity 444,692 70,673
Available-for-sale 15,790 12,352
Proceeds from sales of available-for-sale investment securities 31,265 --
Decrease in interest bearing deposits in banks 6,503 17,005
Extensions of credit to customers, net of repayments (97,440) (80,325)
Recoveries on loans charged-off 2,320 909
Proceeds from sale of other real estate owned 1,840 796
Capital expenditures, net (5,487) (4,252)
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Net cash used by investing activities (73,256) (44,515)
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Cash flows from financing activities:
Net increase in deposits 72,068 7,738
Net increase (decrease) in federal funds and repurchase agreements 30,487 (8,249)
Net (decrease) increase in other borrowed funds (3,226) 5,296
Proceeds from long-term borrowings 3,500 424
Repayment of long-term debt (14,086) (6,057)
Proceeds from issuance of common stock 2,245 3,478
Payments to retire common stock (1,197) (998)
Dividends paid on common stock (5,648) (4,463)
Dividends paid on preferred stock (1,276) --
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Net cash provided (used) by financing activities 82,867 (2,831)
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Net increase (decrease) in cash and cash equivalents 42,206 (28,867)
Cash and cash equivalents at beginning of period 165,907 143,042
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Cash and cash equivalents at end of period $208,113 114,175
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Noncash Investing and Financing Activities:
The Company transferred loans of $817 and $569 to other real estate owned during
the nine months ended September 30, 1997 and 1996, respectively. In conjunction
with stock option exercises, the Company transferred $46 from accrued
liabilities to stockholders' equity during the nine months ended September 30,
1997.
See accompanying notes to unaudited consolidated financial statements.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited, restated
consolidated financial statements contain all adjustments (all of which
are of a normal recurring nature) necessary to present fairly the
consolidated financial position at September 30, 1997, and the results of
consolidated operations and cash flows for each of the three and nine
month periods ended September 30, 1997 and 1996 in conformity with
generally accepted accounting principles. The balance sheet information at
December 31, 1996 is derived from audited consolidated financial
statements, however, certain reclassifications have been made to conform
to the September 30, 1997 presentation. For additional information
regarding the restatement, see Note 10.
Effective October 7, 1997, First Interstate BancSystem of Montana, Inc.
(the "Parent Company") changed its name to "First Interstate BancSystem,
Inc."
(2) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and Federal funds sold for
one-day-periods.
(3) Computation of Earnings Per Share
Earnings per common share are computed by dividing net income less
preferred stock dividends by the weighted average number of shares of
common stock outstanding during the period presented including dilutive
stock options outstanding.
(4) Cash Dividends
On October 16, 1997, the Company paid a cash dividend on third quarter
earnings of $0.26 per share to stockholders of record on that date. It has
been the Company's practice to pay quarterly dividends based upon
earnings. The October 1997 dividend represents 30% of the Company's net
income for the quarter ended September 30, 1997 without taking into effect
compensation expense related to stock options.
(5) Allowance for Loan Losses
Transactions in the allowance for loan losses for the three month and nine
month periods ended September 30, 1997 and 1996 are summarized below:
For the three months For the nine months
ended September 30, ended September 30,
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1997 1996 1997 1996
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Balance at beginning of period $ 28,757 15,406 27,797 15,171
Provision charged to operating
expense 1,007 700 3,288 1,852
Less loans charged-off (1,975) (451) (4,949) (2,016)
Add back recoveries of loans
previously charged-off 667 261 2,320 909
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Balance at end of period $ 28,456 15,916 28,456 15,916
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
(6) Other Real Estate Owned (OREO)
Other real estate owned consists of the following:
September 30, December 31,
1997 1996
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Other real estate $ 1,468 2,057
Less allowance for OREO losses 462 511
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$ 1,006 1,546
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A summary of transactions in the allowance for OREO losses follows:
For the three months For the nine months
ended September 30, ended September 30,
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1997 1996 1997 1996
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Balance at beginning of period $ 462 548 511 554
Provision reversal during period -- (21) (4) (21)
Loss on dispositions -- (16) (45) (22)
Balance at end of period $ 462 511 462 511
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Changes in the balance of other real estate owned for the nine months
ended September 30, 1997 and 1996 are summarized as follows: Nine months ended
September 30,
Nine months ended September 30,
--------------------------------------------
1997 1996
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Balance at beginning of period $ 2,057 1,903
Add transfers from loans 817 569
Less writedowns charged to reserves (45) --
Cash proceeds from sales 1,840 796
Less gains on sales 479 229
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Net basis of OREO sold (1,361) (567)
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Balance at end of period $ 1,468 1,905
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(7) Acquisitions
On February 5, 1997, First Interstate Bank of Montana, N.A. purchased the
assets of Mountain Financial, a loan production office located in Eureka,
Montana. The total cash purchase price of the assets acquired aggregated
$1,726, of which $166 was for premises and equipment and the remaining
$1,560 was for loans acquired.
During June 1997, the Company finalized its allocation of purchase price
related to the 1996 acquisitions of First Interstate Bank of Montana, N.A.,
First Interstate Bank of Wyoming, N.A. and Mountain Bank of Whitefish.
Changes in preliminary estimates of the fair value of loans, other assets
and other liabilities resulted in a $3.4 million decrease in goodwill.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
(8) Commitments and Contingencies
In the normal course of business, the Company is named or threatened to be
named as defendant in various lawsuits, some of which involve claims for
substantial amounts of actual and/or punitive damages. With respect to each
of these suits it is the opinion of management, following consultation with
legal counsel, the suits are without merit or in the event the plaintiff
prevails, the ultimate liability or disposition thereof will not have a
material adverse effect on the consolidated financial condition or the
results of operations.
During 1985, the Company entered into a partnership agreement for the
purpose of purchasing certain land and building with an aggregate cost of
approximately $20,000. The Company is a tenant in the building and owns a
50% undivided interest in the property. Indebtedness of the partnership in
the amount of $10,512 at September 30, 1997 is guaranteed by each of the
partners.
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.
(9) Accounting Pronouncements Not Yet Adopted
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
revises the manner in which earnings per share is calculated. The statement
is effective for financial statements issued for periods ending after
December 15, 1997 and is not expected to have a significant impact on the
Company's earnings per share.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which lists required disclosures about capital
structure that had been included in a number of previously existing
separate statements and opinions. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format
for that financial statement but requires that an entity display an amount
representing comprehensive income for the period in that financial
statement. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
(10) Restatement
In 2000, the Company determined that fixed plan accounting treatment
historically afforded its Stock Option Plan was not consistent with
certain elements of the Stock Option Plan's operations and accounting
guidance contained in APB Opinion 25 and related interpretations.
Accordingly, the Company has restated the accompanying unaudited 1997
consolidated financial statements to reflect variable plan accounting
treatment for awards made pursuant to its Stock Option Plan.
The following is a summary of the effect of such restatement on the
Company's consolidated financial statements:
September 30, 1997
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Originally
Reported Restated
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Consolidated Balance Sheets
Deferred tax asset $ 6,905 7,534
Other assets 13,013 12,993
Total assets 2,169,437 2,170,046
Accounts payable and accrued expenses 20,859 21,971
Common stock 9,665 10,035
Retained earnings 129,759 128,886
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For the three months ended
September 30, 1997
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Originally
Reported Restated
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Consolidated Statements of Income
Employee benefits $ 2,066 2,347
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Income before income taxes $ 11,240 10,959
Income tax expense 4,264 4,153
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Net income $ 6,976 6,806
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Net income per common share $ 0.82 0.80
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
For the nine months ended
September 30, 1997
---------------------------
Originally
Reported Restated
------------ -----------
Consolidated Statements of Income
Employee benefits $ 5,898 7,338
=========== ==========
Income before income taxes $ 32,414 30,974
Income tax expense 12,344 11,777
----------- ----------
Net income $ 20,070 19,197
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Net income per common share $ 2.36 2.25
=========== ==========
Included in the 1997 restated financial statement amounts for the nine
months ended September 30, 1997 are compensation expense of $1,000 and a
reduction in tax expense of $394 related to periods prior to 1997. The
impact on 1997 net income and earnings per share is a decrease to net
income of $606 and a decrease of $0.08 to income per common share.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
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, 1997, with comparisons to 1996 as applicable.
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.
ACQUISITION ACTIVITY
On October 1, 1996, the Company acquired First Interstate Bank of Montana,
N.A. and First Interstate Bank of Wyoming, N.A., which collectively included six
branch banks (the "FIB Banks"). In December 1996, the Company acquired Mountain
Bank of Whitefish ("FIB Whitefish"), which included two branch locations.
Immediately prior to the acquisitions, the FIB Banks had assets of $553.2
million and deposits of $423.9 million, and FIB Whitefish had assets of $66.9
million and deposits of $54.4 million. In connection with the acquisitions, the
Company increased its staffing at both the holding company and branch levels to
provide administrative, data processing and other operational support to
facilitate integregation and operation of such banks. The FIB Banks and FIB
Whitefish are collectively referred to as the "Acquired Banks" throughout this
discussion.
ASSET LIABILITY MANAGEMENT
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 income is largely
dependent on the Company's ability to manage the sensitivity of net interest
income to actual or potential changes in interest rates. The Company uses
interest sensitivity "gap" analysis, income simulation models, and, to a limited
extent, duration analysis (including estimation of borrower prepayment options)
to evaluate the potential effects of changing interest rates on its interest
margin.
EARNING ASSETS
Earning assets of $1.9 billion at September 30, 1997 increased $99.5
million, or 5.6%, from December 31, 1996 primarily due to growth in loan volume.
The mix of earning assets changed little from December 31, 1996 with net loans
comprising approximately 78%, held-to-maturity investment securities comprising
approximately 14% and interest bearing deposits, available-for-sale investment
securities and federal funds sold comprising the remaining 8%.
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Loans. Total loans increased 6.3% to $1,467.2 million as of September 30,
1997 from $1,379.9 million as of December 31, 1996. All major categories of
loans showed increases in volumes during this period due to continued strong
economic conditions in the Company's markets, internal growth resulting from the
Company's marketing activities, and certain seasonal increases, particularly in
agricultural lending following traditional pay-downs during the fourth quarter.
The growth in loans during the first nine months of 1997 was slightly lower than
the growth rate during the first nine months of 1996 due primarily to a slowing
in the growth of consumer and real estate loans.
Investment Securities. The Company's investment portfolio is managed to
meet the Company's liquidity needs and is utilized for pledging requirements for
deposits of state and political subdivisions 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 4.7% to $384.8 million as of September 30,
1997, as compared to $403.6 million as of December 31, 1996. Cash proceeds from
maturities, sales and principal payments during the first nine months of 1997
were generally used to provide additional liquidity to fund increases in other
earning assets.
Federal Funds Sold. Federal funds sold increased approximately $33.1
million to $38.1 million as of September 30, 1997 from $4.9 million as of
December 31, 1996. The Company's banking subsidiaries use federal funds sold to
fund the cash requirements of correspondent banks. Average federal funds sold
through September 30, 1997 of $26.1 million reflects a slight variance from 1996
average federal funds sold of $25.5 million.
Income from Earning Assets. Income from earning assets increased 53.2% to
$122.6 million for the nine months ended September 30, 1997 from $80.1 million
for the comparable period in 1996. The increase was due primarily to the
significant increase in loans, the Company's highest yielding asset. Loan volume
increases resulted principally from the Acquired Banks. Without taking into
account the Acquired Banks, interest income for the nine months ended September
30, 1997 would have been approximately $80.9 million, an increase of $800 from
the same period in the prior year. This increase generally reflects a higher
volume of loans processed as a result of the Company's promotional and customer
development activities. The yield on average interest earning assets for the
first nine months of 1997 was 8.88% compared to 8.96% for the same period in the
prior year.
Income from earnings assets of $42.3 million for the quarter ended
September 30, 1997 increased $15.1 million from $27.2 million for the same
period in the prior year. Approximately 80% of this increase is related to the
Acquired Banks.
FUNDING SOURCES
The Company utilizes various traditional funding sources to support its
earning asset portfolio including deposits, borrowings, federal funds purchased
and repurchase agreements.
Deposits. Total deposits increased 4.3% to $1,751.5 million as of
September 30, 1997 from $1,679.4 million as of December 31, 1996. Increases of
$81.4 million in interest-bearing deposits for the first nine months of 1997
were partially offset by decreases of $9.3 million in non-interest bearing
deposits during the same period. The Company historically has experienced
similar seasonal cycles in overall deposit growth during the first nine months
of the year.
Federal Funds Purchased and Other Borrowed Funds. Federal funds purchased
for one day periods and other borrowed funds consisting primarily of short-term
borrowings from the Federal Home Loan Bank increased $3.4 million to $29.9
million as of September 30, 1997 from $26.5 million as ofDecember 31, 1996. The
increased borrowings were the result of funding requirements related to
increases in loans and Federal funds sold during the first nine months of 1997.
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Long Term Debt. During the first nine months of 1997, the Company reduced
its long-term indebtedness by $10.6 million or 16.4%. Payments of approximately
$10.0 million on the Company's revolving term debt were funded by earnings of
the Parent Company's banking subsidiaries.
Expense of Interest Bearing Liabilities. Interest expense increased 55.3%
to $52.7 million for the nine months ended September 30, 1997 from $33.9 million
for the comparable period in 1996. This increase was due primarily to the
customer deposits and indebtedness incurred in connection with the Acquired
Banks. Without the Acquired Banks, interest expense would have increased
approximately $2.5 million due to higher levels of interest bearing liabilities
associated with internal growth. The rate on average interest bearing
liabilities of 4.48% in the first nine months of 1997 decreased 5 basis points
from 4.53% for the same period in the prior year.
The Company's interest expense for the three months ended September 30,
1997 was $18.3 million, a $6.9 million or 61.1% increase over the same period in
1996. Interest expense of the Acquired Banks and additional interest costs of
funding their acquisitons accounted for nearly all of the increase.
Net Interest Income. Net interest income is derived from interest,
dividends and fees received from interest-earning assets, less interest expense
incurred on interest bearing liabilities. Net interest margin increased 51.5% to
$70.0 million for the nine months ended September 30, 1997 from $46.2 million
for the same period in the prior year. This increase resulted primarily from the
incremental net interest income provided by the Acquired Banks. Without giving
effect to the Acquired Banks, management estimates net interest income for the
nine months ended September 30, 1997 would have been approximately $46.6
million.
Provision for Loan Losses. The provision for loan losses is maintained at
a level that is, in management's judgment, adequate to absorb losses inherent in
the loan portfolio given past, present and expected conditions. Fluctuations in
the provision for loan losses result from management's assessment of the
adequacey of the allowance for loan losses. Actual loan losses may vary from
current estimates.
The provision for loan losses increased 77.5% to $3.3 million for the nine
months ended September 30, 1997 from $1.9 million for the same period in the
prior year. Approximately $1.3 million of the increase is attributable to the
Acquired Banks. The remaining increase resulted from higher loan volumes and an
increase in classified assets.
The provision for loan losses increased $307 for the quarter ended
September 30, 1997 from the same period in the prior year. This increase relates
principally to the Acquired Banks.
LIQUIDITY
The Company actively manages its liquidity position through established
policies and procedures. Management has also developed contingency plans to
address potential liquidity needs. The Company's current liquidity position is
supported largely through core deposits and from its investment portfolio.
The current investment portfolio contains a mix of maturities which
provide a structured flow of maturing and reinvestable funds that can be
converted to cash, should the need arise. Maturing balances in the loan
portfolio also provide options for managing cash flows and provide an important
source of intermediate and long-term liquidity.
Alternate sources of liquidity are provided by Federal funds lines carried
with upstream and downstream correspondent banks. Additional liquidity could
also be generated through borrowings from the Federal Reserve Bank of
Minneapolis and the Federal Home Loan Bank of Seattle. Additionally, the Company
had $8.8 million available on its revolving term loan at September 30, 1997.
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OTHER OPERATING INCOME AND EXPENSE
OTHER OPERATING INCOME
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 service charges,
commissions and fees. Other operating income increased 25.0% to $20.1 million
for the nine months ended September 30, 1997 from $16.1 million for the nine
months ended September 30, 1996. Exclusive of income attributable to the
Acquired Banks, other operating income for the three and nine months ended
September 30, 1997 was comparable to the same period in the prior year.
All categories of other operating income increased quarter-to-date and
year-to-date except data processing income. Increases in data processing income
for the nine months ended September 30, 1997 compared to the same period in 1996
were more than offset by non-recurring accounting adjustments made in January
1996.
OTHER OPERATING EXPENSES
Other operating expenses increased 54.5% to $18.7 million for the
quarter ended September 30, 1997 from $12.1 for the same period in 1996.
Year-to-date other operating expenses increased 58.1% to $55.8 million for the
nine months ended September 30, 1997 from $35.3 million for the same period in
the prior year. These increases resulted primarily from both direct and indirect
expenses attributable to the Acquired Banks. Direct expenses totaled
approximately $19.3 million for the first nine months of 1997. A significant
portion of the remaining increase was due to various indirect expenses
associated with the Company's need to increase its data processing support and
other operating services to the Acquired Banks which had operated as dependent
branch offices prior to their acquisition by the Company. Increases in
administrative personnel and other resources to provide such support and
services were necessary to facilitate integration of the Acquired Banks into the
Company's operations. In addition, goodwill including core deposit intangible,
associated with the acquisition of the banks resulted in increased amortization
expense of approximately $1.5 million for the nine months ended September 30,
1997. Also during the first quarter of 1997, the Company recorded compensation
expense related to stock options of $1.0 million for periods prior to 1997 as a
result of restating the financial statements to reflect variable plan accounting
for awards made pursuant to the Company's stock option plan. For additional
information regarding the restatement, see "Restatement Explanatory Note"
included in Part I and "Notes to Unaudited Consolidated Financial
Statements-Restatement" included in Part I, Item 1.
Salaries and benefits expense. Salaries and benefits expense of $29.0
million for the nine months ended September 30, 1997 increased 53.4% over the
same period in 1996. Salaries and benefits expenses for the three month period
ended September 30, 1997 increased 54.6% from the third quarter of the prior
year. These increases are primarily due to the direct and indirect expenses
attributable to the Acquired Banks, as discussed above. The indirect expenses
were related particularly to the Company's data processing division and bank
operation centers. In addition, $1.0 million of the increase relates to periods
prior to 1997 and is the result of the restatement previously discussed. The
remainder of the increase in salaries and benefits expense was principally
inflationary in nature.
Furniture, equipment and occupancy expense. Exclusive of increases
directly related to the acquired banks, occupancy, furniture and equipment
expenses increased approximately $295 or 11.6% during the three month period
ended September 30, 1997 and $945 or 12.9% for the nine month period ended
September 30, 1997. Increases are primarily the result of higher depreciation,
maintenance and other costs related the expansion of the ATM network, additions
of data processing equipment and various other computer hardware and software,
including upgrades, used in the Company's operations.
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Other real estate owned. Other real estate owned ("OREO") losses,
including provision for losses on OREO, are included net of any gains on sales
of OREO. Variations in net OREO expense during the periods resulted principally
from fluctuations in such gains. OREO expense is directly related to prevailing
economic conditions, and such expense could increase significantly should an
unfavorable shift occur in the economic conditions of the Company's markets.
Federal deposit insurance. Federal Deposit Insurance Corporation
("FDIC") deposit insurance premiums increased to $155 for the nine months ended
September 30, 1997 from $4 for the same prior-year period. This increase
resulted from an increase in FDIC premium assessments which became effective
January 1, 1997.
Other expenses. Other expenses increased $2.5 million for the three
months ended September 30, 1997 compared to the same period in the prior year.
Approximately $1.9 million of the increase related directly to the acquired
banks. The remaining increase resulted primarily from a non-recurring accrual
for post-employment benefits related to the resignation of a key officer.
Other expenses increased $7.7 million for the nine months ended
September 30, 1997 compared to the same period in the prior year. Company
management estimates approximately $6.3 million of the year-to-date increase
related directly to the Acquired Banks. The remaining increase is principally
due to the non-recurring accrual discussed above, budgeted increases in
advertising costs, increases in postage, supply and telephone expenses resulting
from growth in the Company's deposit base, and increases in legal and
professional fees due principally to revision of the Company's job evaluation
system and corporate financial planning activities.
Other quarter-to-date and year-to-date variances in other expense from
the same periods in the previous year are not considered individually
significant.
CAPITAL MANAGEMENT
On November 7, 1997, the Company issued $40.0 million of 8.625% Trust
Preferred Securities, through FIB Capital, a business trust subsidiary organized
in October 1997. A portion of the proceeds were used to redeem the $20.0 million
non-voting, noncumulative preferred stock. The remainder of the proceeds of the
offering will be used to reduce revolving term debt. In conjunction with the
redemption of the Company's preferred stock, a $500 prepayment penalty was
incurred.
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PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
Not applicable or not required
ITEM 6 EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) No reports of Form 8-K were filed for the quarter
ended September 30, 1997.
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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 May 16, 2001 /s/ Thomas W. Scott
------------------- -----------------------------------------
Thomas W. Scott
Chief Executive Officer
Date May 16, 2001 /s/ Terrill R. Moore
------------------- -----------------------------------------
Terrill R. Moore
Senior Vice President
and Chief Financial Officer
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