10-Q/A 1 c62912ae10-qa.txt AMENDMENT TO QUARTERLY REPORT DATED 3/31/98 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 March 31, 1998 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 8,021,906 shares of common stock outstanding on March 31, 1998. ================================================================================ 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 March 31, 1998 and December 31, 1997 4 Consolidated Statements of Income Three months ended March 31, 1998 and 1997 5 Consolidated Statements of Comprehensive Income Three months ended March 31, 1998 and year ended December 31, 1997 6 Consolidated Statements of Cash Flows Three months ended March 31, 1998 and 1997 7 Notes to Unaudited Consolidated Financial Statements 8 As fully described in "Notes to Unaudited Consolidated Financial Statements," the Company has restated its 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 14 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 15 Item 2 - Changes in Securities 15 Item 3 - Defaults on Senior Securities 15 Item 4 - Submission of Matters to a Vote of Security Holders 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 15 SIGNATURES 16
2 3 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 March 31, 1998 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. 3 4 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share and per share data) (Unaudited)
March 31, December 31, Assets 1998 1997 ------ ---------- ------------- (Restated) (Restated) Cash and due from banks $ 125,567 136,025 Federal funds sold 70,015 58,675 Interest bearing deposits in banks 20,068 34,447 Investment securities: Available-for-sale 252,040 188,650 Held-to-maturity 214,094 236,953 ---------- ---------- 466,134 425,603 Loans 1,461,818 1,470,414 Less allowance for loan losses 29,022 28,180 ---------- ---------- Net loans 1,432,796 1,442,234 Premises and equipment, net 61,792 61,274 Accrued interest receivable 21,204 22,046 Goodwill, net of accumulated amortization of $9,122 at March 31, 1998 (unaudited) and $8,486 at December 31, 1997 31,165 31,801 Other real estate owned, net 1,441 1,362 Deferred tax asset 6,938 6,635 Other assets 15,000 15,331 ---------- ---------- Total assets $2,252,120 2,235,433 ========== ========== Liabilities and Stockholders' Equity ------------------------------------ Deposits: Noninterest bearing $ 351,991 372,056 Interest bearing 1,485,253 1,432,950 ---------- ---------- Total deposits 1,837,244 1,805,006 Federal funds purchased 2,000 4,025 Securities sold under repurchase agreements 159,578 176,350 Accounts payable and accrued expenses 23,605 21,864 Other borrowed funds 9,676 11,591 Long-term debt 31,355 31,526 ---------- ---------- Total liabilities 2,063,458 2,050,362 Mandatorily redeemable securities of subsidiary trust 40,000 40,000 Stockholders' equity: Common stock without par value; authorized 20,000,000 shares; issued and outstanding 8,021,906 shares as of March 31, 1998 (unaudited) and 8,030,799 shares as of December 31, 1997 11,643 11,860 Retained earnings 136,237 132,311 Accumulated other comprehensive income 782 900 ---------- ---------- Total stockholders' equity 148,662 145,071 ---------- ---------- Total liabilities and stockholders' equity $2,252,120 2,235,433 ========== ==========
See accompanying notes to unaudited consolidated financial statements. 4 5 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except share and per share data) (Unaudited)
For the three months ended March 31, ---------- ---------- 1998 1997 (Restated) (Restated) ---------- ---------- Interest income: Interest and fees on loans $ 35,191 33,330 Interest and dividends on investment securities: Taxable 6,323 5,343 Exempt from Federal taxes 326 251 Interest on deposits with banks 195 85 Interest on Federal funds sold 966 152 --------- --------- Total interest income 43,001 39,161 --------- --------- Interest expense: Interest on deposits 16,237 13,387 Interest on Federal funds purchased 38 318 Interest on securities sold under repurchase agreements 1,774 1,325 Interest on other borrowed funds 108 73 Interest on long-term debt 661 1,289 Interest on mandatorily redeemable securities of subsidiary trust 888 -- --------- --------- Total interest expense 19,706 16,392 --------- --------- Net interest income 23,295 22,769 Provision for loan losses 1,065 1,223 --------- --------- Net interest income after provision for loan losses 22,230 21,546 Other operating income: Income from fiduciary activities 1,206 1,033 Service charges on deposit accounts 2,490 2,379 Data processing 2,304 1,841 Other service charges, commissions, and fees 869 892 Net investment securities gains 42 58 Other real estate income, net of expense 185 134 Other income 414 422 --------- --------- Total other operating income 7,510 6,759 --------- --------- Other operating expenses: Salaries and wages 7,797 6,987 Employee benefits 3,440 3,159 Occupancy expense, net 1,611 1,600 Furniture and equipment expenses 2,052 1,819 FDIC insurance 54 51 Other expenses 5,630 5,384 --------- --------- Total other operating expenses 20,584 19,000 --------- --------- Income before income taxes 9,156 9,305 Income tax expense 3,466 3,548 --------- --------- Net income $ 5,690 5,757 ========= ========= Basic earnings per common share $ 0.71 0.67 ========= ========= Diluted earnings per common share $ 0.70 0.67 ========= ========= Dividends per common share $ 0.22 0.22 ========= =========
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)
For the three months ended March 31, ---------- ---------- 1998 1997 (Restated) (Restated) ---------- ---------- Net income $ 5,690 5,757 Other comprehensive income, net of tax: Unrealized gains on investment securities: Unrealized holding gains arising during period (143) (361) Less: reclassification adjustment for gains included in net income 25 35 -------- -------- Other comprehensive income (118) (326) -------- -------- Comprehensive income $ 5,572 5,431 ======== ========
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)
For the three months ended March 31, ------------------------- 1998 1997 (Restated) (Restated) ---------- ---------- Cash flows from operating activities: Net income $ 5,690 $ 5,757 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and other real estate losses 1,065 1,223 Depreciation and amortization 2,189 2,177 Net premium amortization on investment securities (143) 246 Gain on sales of investments (42) (58) Gain on sales of other real estate owned (232) (185) Loss on sales of property and equipment 94 3 Deferred income taxes (240) (660) Decrease in interest receivable 842 323 Decrease in other assets 131 1,859 Increase in accounts payable and accrued expenses 1,792 7,821 -------- -------- Net cash provided by operating activities 11,146 18,506 -------- -------- Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (5,597) (170,215) Available-for-sale (111,356) (442) -------- -------- (116,953) (170,657) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 28,599 162,989 Available-for-sale 22,675 5,696 -------- -------- 51,274 168,685 Proceeds from sales of available-for-sale investment securities 25,152 20,000 Increase in interest bearing deposits in banks 14,379 4,512 Extensions of credit to customers, net of repayments 7,321 (27,010) Recoveries of loans charged-off 797 734 Proceeds from sales of other real estate 408 853 Capital distributions from joint venture 200 -- Capital expenditures, net (2,165) (1,978) -------- -------- Net cash used in investing activities (19,587) (4,861) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits 32,238 (29,968) Net increase (decrease) in Federal funds and repurchase agreements (18,797) 1,874 Net increase (decrease) in other borrowed funds (1,915) 10,827 Proceeds from long-term borrowings 1,428 250 Repayments of long-term borrowings (1,599) (658) Proceeds from issuance of common stock 34 352 Payments to retire common stock (302) (513) Dividends paid on common stock (1,764) (1,722) Dividends paid on preferred stock -- (421) -------- -------- Net cash provided by (used in) financing activities 9,323 (19,979) -------- -------- Net increase (decrease) in cash and cash equivalents 882 (6,334) Cash and cash equivalents at beginning of period 194,700 165,907 -------- -------- Cash and cash equivalents at end of period 195,582 159,573 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest 20,242 18,250 Cash paid during the period for taxes -- 300
Noncash investing and financing activities - The Company transferred loans of $255 and $0 to other real estate owned during the three months ended March 31, 1998 and 1997, respectively. In conjunction with the exercise of stock options, the Company transferred $51 and $46 from accrued liabilities to common stock during the three months ended March 31, 1998 and 1997, respectively. 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 consolidated financial position at March 31, 1998 and December 31, 1997, and the results of consolidated operations and cash flows for each of the three month periods ended March 31, 1998 and 1997 in conformity with generally accepted accounting principles. The balance sheet information at December 31, 1997 is derived from audited consolidated financial statements, however, certain reclassifications have been made to conform to the March 31, 1998 presentation. For additional information regarding the restatement, see Note 5. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components 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. The Company adopted the provisions of SFAS No. 130 as of January 1, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires public business enterprises to disclose selected information about operating segments including segment income, revenues and asset data. Operating segments, as defined in SFAS No. 131, include those components for which financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and making resource allocation determinations for operating components such as those which contribute 10 percent or more of combined revenue, income or assets. The Company adopted the provisions of SFAS No. 131 as of January 1, 1998. As of March 31, 1998, the Company had no reportable segments as defined by SFAS No. 131. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises disclosure requirements for pensions and other postretirement benefits. The Company adopted the provisions of SFAS No. 132 as of January 1, 1998. Adoption did not have a material effect on the consolidated financial statements. (2) Computation of Earnings per Share Basic earnings per common share (EPS) is calculated by dividing net income less preferred stock dividends by the weighted average number of shares of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income less preferred stock dividends by the weighted average number of common shares and potential common shares outstanding during the period. Weighted average common shares outstanding for the three month periods ended March 31, 1998 and 1997 were 8,023,800 and 7,941,616, respectively. Weighted average potential common shares were 77,510 and 34,565 for the three month periods ended March 31, 1998 and 1997, respectively. 8 9 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements -- Continued (Dollars in thousands, except share and per share data) (3) Cash Dividends On April 14, 1998, the Company declared and paid a cash dividend on first quarter earnings of $0.23 per share to stockholders of record on that date. It has been the Company's practice to pay quarterly dividends based upon earnings. The April 1998 dividend represents 30% of the Company's net income for the quarter ended March 31, 1998 without taking into effect compensation expense related to stock options. (4) Commitments and Contingencies In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity. The Company owns a 50% ownership interest in an aircraft and is jointly and severally liable for aircraft indebtedness of $1.2 million as of March 31, 1998. 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 $10.3 million as of March 31, 1998. 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 10 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements -- Concluded (Dollars in thousands, except share and per share data) (5) 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 1998 and 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:
March 31, 1998 December 31, 1997 --------------------- ---------------------- Originally Originally Reported Restated Reported Restated ---------- -------- ---------- -------- Consolidated Balance Sheets Deferred tax asset $ 6,015 6,938 5,946 6,635 Other assets 15,003 15,000 15,351 15,331 Total assets 2,251,200 2,252,120 2,234,764 2,235,433 Accounts payable and accrued expenses 21,765 23,605 20,599 21,864 Common stock 11,214 11,643 11,490 11,860 Retained earnings 137,586 136,237 133,277 132,311 ========== ========= ========= =========
For the three months ended ------------------------------------------------- March 31, 1998 March 31, 1997 --------------------- ---------------------- Originally Originally Reported Restated Reported Restated ---------- -------- ---------- -------- Consolidated Statements of Income Employee benefits $ 2,807 3,440 1,996 3,159 ========== ========== ========== ========== Income before income taxes $ 9,789 9,156 10,468 9,305 Income tax expense 3,715 3,466 4,006 3,548 ---------- ---------- ---------- ---------- Net income $ 6,074 5,690 6,462 5,757 ========== ========== ========== ========== Basic earnings per common share $ 0.75 0.71 0.76 0.67 Diluted earnings per common share 0.75 0.70 0.76 0.67 ========== ========== ========== ==========
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, unless otherwise indicated) 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 month periods ended March 31, 1998, with comparisons to 1997 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. OVERVIEW The Company reported net income of $5.7 million, or $0.71 per share for the three months ended March 31, 1998, as compared to $5.8 million, or $0.67 per share recorded in the same period in 1997. Net income available to common shareholders of $5.7 million the three months ended March 31, 1998 increased $354 from $5.3 million for the same period in 1997. EARNING ASSETS Earning assets of $2,018.0 million at March 31, 1998 increased $28.9 million, or 1.5%, from December 31, 1997. The mix of earning assets changed little from December 31, 1997 with loans comprising approximately 72%, investment securities comprising approximately 23% and interest bearing deposits and federal funds sold comprising the remaining 5%. Loans. Total loans decreased $8.6 million, or 0.6%, to $1,461.8 million as of March 31, 1998 from $1,470.4 million as of December 31, 1997. Average loan volumes, however, increased $17.7 million, or 1.2%, to $1,459.5 million as of March 31, 1998 from $1,441.8 million as of December 31, 1997. The growth rate for all major categories of loans, except commercial, declined from previous quarters. Management attributes this decline in growth rate to increasingly competitive loan pricing by competitors in the Company's market areas and a tightening of the Company's credit standards for certain consumer loans. Investment Securities. The Company's investment portfolio is managed to result in the highest yield while meeting the Company's liquidity needs and meeting pledging requirements for public funds deposits and securities sold under repurchase agreements. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, tax exempt securities, corporate securities, other mortgage-backed securities and other equity securities. Investment securities increased $40.5 million, or 9.5%, to $466.1 million as of March 31, 1998, from $425.6 million as of December 31, 1997. Additions to the investment portfolio during the three-month period were funded through growth in funding sources, primarily deposits. Interest Bearing Deposits in Bank and Federal Funds Sold. Interest bearing deposits in bank consist of funds on deposit with the Federal Home Loan Bank. These deposits, along with Federal funds sold, are used by the Company's banking subsidiaries to fund the daily liquidity needs of the Company, including cash requirements of correspondent banks. Interest bearing deposits in bank decreased $14.4 million to $20.1 million as of March 31, 1998. This decrease was offset by increases in Federal funds sold, which increased 11 12 $11.3 million to $70.0 million as of March 31, 1998. Average interest bearing deposits in banks and Federal funds sold increased $37.2 million to $84.6 million as of March 31, 1998 from $47.4 million as of December 31, 1997. Funds generated from deposit growth during the first quarter of 1998 exceeded the funding requirements of the loan portfolio and were temporarily invested in Federal funds and interest bearing deposits in bank. Income from Earning Assets. Interest income increased $3.8 million, or 9.8%, to $43.0 million for the three months ended March 31, 1998 from $39.2 million for the same period in 1997. This increase resulted from greater volumes of interest earning assets generated through internal growth. Total average earning assets at March 31, 1998 of $1,990.5 million yielded 8.76% during the first quarter of 1998 while average earning assets of $1,879.6 million at March 31, 1997 yielded 8.88% for the same period. 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 $32.2 million, or 1.8%, to $1,837.2 million as of March 31, 1998 from $1,805.0 million as of December 31, 1997. Seasonal decreases in total deposits that have historically occurred during the first quarter of the year were offset in 1998 by internal growth resulting from the Company's successful efforts to gain market share system-wide. Yields on interest-bearing deposits increased 15 basis points to 4.46% during the first quarter of 1998 compared to 4.31% during 1997. Other Funding Sources. Other funding sources include Federal funds purchased for one day periods, other borrowed funds consisting primarily of short-term borrowings from the Federal Home Loan Bank repurchase agreements with primarily commercial depositors and long-term debt. These other funding sources decreased $20.9 million, or 9.3%, to $202.6 million as of March 31, 1998 from $223.5 million as of December 31, 1997. Because the Company's funding requirements were primarily met through deposit growth, other funding sources decreased during the first quarter of 1998. Recapitalization. During the fourth quarter 1997, the Company issued $40.0 million of mandatorily redeemable preferred securities of subsidiary trust ("trust preferred securities"). Proceeds from the issuance were used to redeem long-term indebtedness and preferred stock. As a result of this recapitalization, interest expense on long-term indebtedness decreased $628, or 48.7%, to $661 for the three months ended March 31, 1998 from $1.3 million for the same period in 1997 and interest expense of $888 on the trust preferred securities was recorded during the first quarter of 1998. Costs of Funds. Interest expense increased $3.3 million, or 20.2%, to $19.7 million for the three month period ended March 31, 1998 compared to $16.4 million for the same period in 1997. This increase is due to higher volumes of interest bearing liabilities, primarily deposits, the issuance of $40.0 million of trust preferred securities and increases in the average costs of funds. Total average interest-bearing liabilities and trust preferred securities of $1,704.6 million at March 31, 1998 increased $109.2 million from March 31, 1997. Costs of average funds of 4.69% during the first quarter of 1998 were 32 basis points higher than the same period last year. NET INTEREST INCOME Net interest income of $23.3 million for the quarter ended March 31, 1998 increased $526, or 2.3%, from $22.8 million for the same period in the prior year. However, increasing competitive pressure on both deposit rates and loan pricing combined with significant deposit growth and a slower rate of loan growth have caused the net interest margin ratio to decrease 41 basis points to 4.79% for the three months ended March 31, 1998, from 5.20% for the same period in 1997. 12 13 PROVISION FOR LOAN LOSS 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 adequacy of the allowance for loan losses. Actual loan losses may vary from current estimates. The provision for loan losses decreased $158, or 12.9%, to $1.1 million for the three months ended March 31, 1998 from $1.2 million for the same period in the prior year. 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 repayments; loan originations, extensions, and repayments; and management of investment securities. 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 $19.3 million available on its revolving term loan at March 31, 1998. OTHER OPERATING INCOME AND EXPENSE OTHER OPERATING INCOME The Company's principal sources of other operating income include service charges on deposit accounts, other service charges, data processing fees and income from fiduciary activities. Other operating income increased $700, or 10.6%, to $7.3 million for the three months ended March 31, 1998 from $6.6 million for the same period in 1997 primarily due to increases in data processing fees and income from fiduciary activities. Data Processing Fees. The Company serviced approximately 690 locations in its ATM network at March 31, 1998 compared to approximately 500 locations at March 31, 1997. Data processing fees increased $463, or 25.2%, to $2.3 million for the quarter ended March 31, 1998 from $1.8 million for the same period in 1997 primarily due to a non-recurring termination fee of $300 recorded during the first quarter of 1998. The remaining increase is due to a greater number of data processing customers using the Company's ATM network and increases in core processing transaction volumes. Income from Fiduciary Activities. Revenues from fiduciary activities increased $173, or 16.8%, to $1.2 million for the three months ended March 31, 1998 from $1.0 million for the same period in 1997. The increase in revenues results primarily from increases in the value of assets under trust management. 13 14 OTHER OPERATING EXPENSE Other operating expenses increased $1.6 million, or 8.4%, to $20.6 million for the quarter ended March 31, 1998 from $19.0 million for the same period in 1997. The main components of this increase include salaries and wages, employee benefits and furniture and equipment expenses. Salaries and Wages Expense. Salaries and wages expense increased $810, or 11.6%, to $7.8 million for the three months ended March 31, 1998 as compared to $7.0 million for the same period in the prior year primarily due to: 1) inflationary wage increases; 2) increases in administrative personnel providing support services for the data processing division and the banks acquired in late 1996; and, 3) staffing for the five new branches opened since March 31, 1997. Employee Benefits Expense. Employee benefits expense increased $281, or 8.9%, to $3.4 million for the quarter ended March 31, 1998 from $3.2 million for the same period in 1997. 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. Exclusive of this adjustment, employee benefits expense increased $1.2 million, or 54.5%, for the three months ended March 31, 1998 as compared to the same period in the prior year. Approximately $740 of the increase relates to remeasurement of compensation expense related to outstanding stock options. In addition, during the first quarter of 1998, the Company recorded a non-recurring expense of $290 for group health insurance premiums due to a change in the provider's billing periods. The remaining increase in employee benefits expense resulted from increases in salaries and wages as discussed above. Furniture and Equipment Expense. Furniture and equipment expense increased $233, or 12.8%, to $2.1 million for the three months ended March 31, 1998 from $1.8 million for the same period in 1997 primarily due to increases in depreciation expense. Contributing to the increase in depreciation expense were: 1) data processing equipment additions; 2) upgrades of various other computer hardware and software used in the Company's operations; and, 3) building, furniture and equipment additions associated with new branch openings. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 1998, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation SK as presented in the Company's December 31, 1997 Form 10-K. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR INDEBTEDNESS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 March 31, 1998. 15 16 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 15, 2001 /s/ THOMAS W. SCOTT ------------------------ ----------------------------------------- Thomas W. Scott Chief Executive Officer Date May 15, 2001 /s/ TERRILL R. MOORE ------------------------ ----------------------------------------- Terrill R. Moore Senior Vice President and Chief Financial Officer 16