10-Q/A 1 c62087a1e10-qa.txt FORM 10-Q/A 1 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 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. 2 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q
Index Page ----- ---- PART I. FINANCIAL INFORMATION Restatement Explanatory Note 3 Item 1 - Financial Statements Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (unaudited) 4 Consolidated Statements of Income Three and six months ended June 30, 2000 and 1999 (unaudited) 5 Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2000 and 1999 (unaudited) 6 Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999 (unaudited) 7 Notes to Unaudited Consolidated Financial Statements 8 As more fully described in "Notes to Unaudited Consolidated Financial Statements," the Company has restated its 1999, 1998 and 1997 consolidated financial statements Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations 11 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 16 Item 2 - Changes in Securities 16 Item 3 - Defaults on Senior Securities 16 Item 4 - Submission of Matters to a Vote of Security Holders 16 Item 5 - Other Information 16 Item 6 - Exhibits and Reports on Form 8-K 16 SIGNATURES 17
2 3 RESTATEMENT EXPLANATORY NOTE In 2000, the Company determined it is 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 June 30, 2000 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. For additional information regarding the restatement, see "Notes to Unaudited Consolidated Financial Statements - Restatement" included in Part I, Item 1. 3 4 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share and per share data) (Unaudited, Restated)
Assets June 30, December 31, ------ 2000 1999 ------------ ------------ 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 12,514 11,643 Other assets 23,542 22,412 ------------ ------------ Total assets $ 2,759,360 2,612,663 ============ ============ 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 12,412 13,318 Other borrowed funds 128,760 41,875 Long-term debt 22,894 23,394 ------------ ------------ Total liabilities 2,539,001 2,399,025 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 7,873 10,831 Retained earnings 179,325 168,837 Accumulated other comprehensive loss, net (6,839) (6,030) ------------ ------------ Total stockholders' equity 180,359 173,638 ------------ ------------ Total liabilities and stockholders' equity $ 2,759,360 2,612,663 ============ ============
See accompanying notes to unaudited consolidated financial statements. 4 5 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited, Restated)
For the three months For the six months ended June 30, ended June 30, --------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- 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 12,148 11,773 24,794 24,108 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 24,638 21,889 48,447 43,950 ------- ------- ------- ------- Income before income taxes 11,990 11,073 22,906 20,901 Income tax expense 4,304 3,984 8,201 7,476 ------- ------- ------- ------- Net income $ 7,686 7,089 14,705 13,425 ======= ======= ======= ======= Basic earnings per common share $ 0.97 0.89 1.85 1.69 Diluted earnings per common share $ 0.96 0.87 1.82 1.66 Dividends per common share $ 0.27 0.27 0.53 0.51
See accompanying notes to unaudited consolidated financial statements. 5 6 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Dollars in thousands) (Unaudited, Restated)
For the three months For the six months ended June 30, ended June 30, ---------------------- ----------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net income $ 7,686 7,089 14,705 13,425 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 $ 8,160 3,147 13,896 7,641 ======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements. 6 7 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited, Restated)
For the six months ended June 30, ------------------------------- 2000 1999 ----------- ---------- Cash flows from operating activities: Net income $ 14,705 13,425 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 (213) (180) Increase in interest receivable (1,605) (566) Increase in other assets (1,178) (2,479) Increase (decrease) in accrued interest payable 1,642 (3,122) Increase (decrease) in accounts payable and accrued expenses (860) 1,339 --------- --------- Net cash provided by operating activities 20,703 14,601 --------- --------- 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 135 213 Payments to retire common stock (3,139) (2,022) Dividends paid on common stock (4,216) (4,066) --------- --------- Net cash provided by financing activities 132,067 45,046 --------- --------- 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 ========= =========
See accompanying notes to unaudited consolidated financial statements. 7 8 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, restated 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. For additional information regarding the restatement, see Note 6. 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.
Three months ended Six months ended 6/30/00 6/30/99 6/30/00 6/30/99 ------- ------- ------- ------- 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
(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 without taking into effect compensation expense/benefit related to stock options. (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 conjunction with the exercise of stock options, the Company transferred $46 and $215 from accrued liabilities to common stock 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. 8 9 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (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. (6) 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 2000 and 1999 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:
June 30, 2000 December 31, 1999 -------------------------------------------------------------------------------------------------------------------- Originally Originally Reported Restated Reported Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets Deferred tax assets $ 10,746 12,514 9,674 11,643 Other assets 23,317 23,542 21,984 22,412 Total assets 2,757,367 2,759,360 2,610,266 2,612,663 Accounts payable and accrued expenses 7,793 12,412 7,723 13,318 Common stock 7,440 7,873 10,788 10,831 Retained earnings 182,384 179,325 172,078 168,837 ====================================================================================================================
9 10 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data)
For the three months ended June 30, 2000 June 30, 1999 ------------------------------------------------------------------------------------------------------------------------ Originally Originally Reported Restated Reported Restated ------------------------------------------------------------------------------------------------------------------------ Consolidated Statements of Income Employee benefits $ 12,446 12,148 11,051 11,773 ======================================================================================================================== Net income before income taxes $ 11,692 11,990 11,795 11,073 Income tax expense 4,187 4,304 4,269 3,984 ------------------------------------------------------------------------------------------------------------------------ Net income $ 7,505 7,686 7,526 7,089 ======================================================================================================================== Basic earnings per share $ 0.95 0.97 0.95 0.89 Diluted earnings per share 0.93 0.96 0.93 0.87 ========================================================================================================================
For the six months ended June 30, 2000 June 30, 1999 ------------------------------------------------------------------------------------------------------------------------ Originally Originally Reported Restated Reported Restated ------------------------------------------------------------------------------------------------------------------------ Consolidated Statements of Income Employee benefits $ 25,095 24,794 21,941 24,108 ======================================================================================================================== Net income before income taxes $ 22,605 22,906 23,068 20,901 Income tax expense 8,083 8,201 8,329 7,476 ------------------------------------------------------------------------------------------------------------------------ Net income $ 14,522 14,705 14,739 13,425 ======================================================================================================================== Basic earnings per share $ 1.83 1.85 1.85 1.69 Diluted earnings per share 1.80 1.82 1.82 1.66 ========================================================================================================================
10 11 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. 11 12 OVERVIEW The Company recorded net income of $7.7 million, or $0.96 per share, during the second quarter of 2000 as compared to $7.1 million, or $0.87 per share, during the same period in 1999. Net income for the six month period ended June 30, 2000 of $14.7 million, or $1.82 per share, increased $1.3 million, or 9.7%, from $13.4 million, or $1.66 per share, for the same period in 1999. Increases in net interest income and non-interest income and decreases in compensation expense related to remeasurement of outstanding stock options during the first half of 2000 were partially 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. 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. 12 13 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. 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 13 14 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 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 $2.7 million, or 12.3%, to $24.6 million for the quarter ended June 30, 2000 from $21.9 million for the same period in 1999. For the six month period ending June 30, 2000, other operating expense increased $4.4 million, or 10.0%, to $48.4 million as compared to $44.0 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 $0.3 million, or 2.5%, to $12.1 million for the three months ended June 30, 2000 as compared to $11.8 million for the same period in the prior year. Salaries, wages and employee benefits expense of $24.8 million for the six month period ended June 30, 2000 increased $0.7 million, or 2.90%, from $24.1 million for the same period in 1999. Approximately $1.0 million 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. Increases in salaries, wages and employee benefits expense were substantially offset by a $2.5 million decrease resulting from the remeasurement of compensation expense related to outstanding stock options. 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. 14 15 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. 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. 15 16 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:
Matter For Against Not Voted ----------------------------------------------------------------------------------------------------- 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
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. 16 17 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 April 30, 2001 /s/ THOMAS W. SCOTT ------------------------------- ----------------------------------- Thomas W. Scott Chief Executive Officer Date April 30, 2001 /s/ TERRILL R. MOORE ------------------------------- ----------------------------------- Terrill R. Moore Senior Vice President and Chief Financial Officer 17