1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER: 33-64304 FIRST INTERSTATE BANCSYSTEM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) <TABLE> <S> <C> MONTANA 81-0331430 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 401 NORTH 31ST STREET BILLINGS, MONTANA 59116 (Address of principal executive offices) (Zip Code) </TABLE> (406) 255-5390 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value (appraised minority value) of the common stock of the registrant held by non-affiliates of the registrant as of March 21, 2001 was $39.00. The number of shares outstanding of the registrant's common stock as of March 31, 2001 was 7,873,455. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2000 definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 18, 2001 are incorporated by reference into Part III of this Form 10-K. -1-
2 PART I RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS In 2000, the Company determined it is necessary to restate the Company's 1999, 1998 and 1997 consolidated financial statements to change the accounting treatment for awards made pursuant to its Nonqualified Stock Option and Stock Appreciation Rights Plan (the "Stock Option Plan") from fixed to variable plan accounting. Financial information contained in this report relating to calendar years 1999, 1998 and 1997 has been restated to reflect the foregoing change in accounting treatment. During April 2001, the Company will amend previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the calendar years ended 1999, 1998 and 1997 to reflect the restatements. For additional information regarding the restatement, see "Notes to Consolidated Financial Statements - Restatement" included in Part IV, Item 14. ITEM 1. BUSINESS THE COMPANY First Interstate BancSystem, Inc. ("FIBS" and collectively with its subsidiaries, the "Company"), incorporated in Montana in 1971, is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. FIBS is headquartered in Billings, Montana. At December 31, 2000, the Company had assets of $2.9 billion, deposits of $2.4 billion and total stockholders' equity of $198 million, making it the largest banking organization in Montana and Wyoming. FIBS operates two wholly-owned bank subsidiaries (collectively, the "Banks" and individually a "Bank") with 52 banking offices in 31 Montana and Wyoming communities. The Company, through the Banks, delivers a comprehensive range of consumer and commercial banking services to individual and business customers. These services primarily include acceptance of checking, savings and time deposits; cash management; fee-based trust and brokerage services; extensions of commercial, consumer, real estate and agricultural credit; safe deposit box rental; night depository services and wire transfers. Trust services offered to individuals, non-profit organizations and corporate clients include corporate pension plans, individual retirement plans, 401(k) plans and cash management. Brokerage services are provided through third party broker-dealers. There are currently 13 registered brokerage representatives serving 29 communities within the Company's market areas. The Company conducts various other financial-related business activities through three wholly-owned non-bank subsidiaries, i_Tech Corporation ("i_Tech"), FIB Capital Trust ("FIB Capital") and Commerce Financial, Inc. ("CFI"). During 2000, the Company incorporated its technology services division into a separate subsidiary, i_Tech. i_Tech provides technology services to the Banks and to 37 non-affiliated financial institutions in Montana, Wyoming, Idaho, Washington, Oregon and Colorado. Additionally, i_Tech's ATM network provides processing support for over 1,575 ATM locations in 32 states. FIB Capital, a statutory business trust incorporated under Delaware law in 1997, was formed for the exclusive purpose of issuing mandatorily redeemable trust preferred securities ("trust preferred securities") and using the proceeds to purchase junior subordinated debentures ("subordinated debentures") issued by FIBS. CFI was incorporated in 1978 to originate and broker secured real estate transactions. During the past nine years, CFI's principal activity has been the liquidation of assets acquired through foreclosure actions by FIBS. COMMUNITY BANKING PHILOSOPHY The banking industry is undergoing change with respect to regulatory matters, consolidation, consumer needs and economic and market conditions. The Company believes that it can best address this changing environment through its "Strategic Vision." The Company's Strategic Vision emphasizes providing its customers full service commercial and consumer banking at a local level using a personalized service approach, while serving and strengthening the communities in which the Banks are located through community service activities. -2-
3 The Company grants significant flexibility to its banking offices in delivering and pricing products at a local level in response to market considerations and customer needs. This flexibility enables the banking offices to remain competitive and enhances the relationships between the banking offices and the customers they serve. The Company also emphasizes accountability, however, by establishing performance and incentive standards for the Banks that are tied to net income at the individual branch and market level. The Company believes this combination of flexibility and accountability allows the banking offices to provide personalized customer service while remaining attentive to financial performance. The Company has centralized certain products and business activities to provide consistent service levels to customers Company-wide and to gain efficiency in management of those products and activities. Centralized products and activities include credit cards, mortgage servicing, wire transfer, escrow and technology services, internet banking and selected operational activities. GROWTH STRATEGY The Company's growth strategy includes growing internally and expanding into new and complementary markets when appropriate opportunities arise. The Company believes it has in place an infrastructure that will allow for growth and yield economies of scale into the future. Much of the Company's growth in recent years has resulted from acquisitions of other banks. During 1999, the Company acquired two in-store banking offices of First National Bank of Montana (collectively "FNM Banks") and Security State Bank Shares ("SSBS"), a one-bank holding company with three banking offices. Immediately prior to the acquisitions, the FNM Banks had loans of $1 million and deposits of $4 million, and SSBS had loans of $35 million and deposits of $56 million. During 2000, the Company acquired Equality State Bankshares, Inc. ("ESB"), a one-bank holding company with three banking offices. Immediately prior to the acquisition, ESB has loans of $64 million and deposits of $80 million. For additional information regarding acquisitions, see "Notes to Consolidated Financial Statements - Acquisitions and Expansion" included in Part IV, Item 14. The Company has opened 14 new banking offices in Montana and Wyoming since 1997. Among these new offices are eight in-store banks, full service banking offices located inside retail establishments. The Company intends to continue to expand its presence in the Montana and Wyoming markets through new bank office openings. The Company currently plans to open seven additional in-store facilities in Montana and Wyoming through 2003. Beginning in 1999, the Company accelerated its investment in systems and staff to support the continued growth of its technology services subsidiary, i_Tech. The Company intends to continue to expand into new market areas through aggressive sales efforts and establishment of additional item capture facilities. Growth is expected to center in a six-state region surrounding Montana and Wyoming. THE BANKS First Interstate Bank in Montana ("FIB Montana"), a Montana chartered bank organized in 1916, has 34 banking offices in 20 Montana communities. As of December 31, 2000, FIB Montana held assets and deposits totaling $1.8 billion and $1.4 billion, respectively. FIB Montana is the largest bank in Montana. FIB Montana's main office is located in Billings, Montana. First Interstate Bank in Wyoming ("FIB Wyoming"), a Wyoming chartered bank organized in 1893, has 18 banking offices in 11 Wyoming communities. As of December 31, 2000, FIB Wyoming held assets and deposits totaling $1.1 billion and $944 million, respectively. FIB Wyoming's main office is located in Sheridan, Wyoming. The Company's banking offices are located in communities of approximately 700 to 90,000 people, but serve larger market areas due to the limited number of financial institutions in other nearby communities. The Company believes that the communities served provide a stable core deposit and funding base, as well as economic diversification across a number of industries, including agriculture, energy, mining, timber processing, tourism, government services, education and medical services. -3-
4 The Company's banking offices operate with significant flexibility and are responsible for pricing loans and deposits, lending decisions and community relations. FIBS emphasizes accountability, however, by establishing performance and incentive standards for the Banks which are tied to net income at the individual banking office and market level. FIBS and i_Tech provide general oversight and centralized services for the Banks to enable them to serve their markets more effectively. These services include technology services, credit administration, finance and accounting, human asset management and other support services. Technology Services. i_Tech provides technology services to the Banks including system maintenance for the general ledger, investment security, loan, deposit and e-mail systems. i_Tech also manages the Company's wide-area network and the ATM network used by the Banks. These technology services are performed through the use of computer hardware owned and maintained by the Banks and software licensed by i_Tech. Credit Review. FIBS monitors the lending activities of the Banks to maximize the quality and mix of loans, evaluate the risk inherent in each Bank's loan portfolio and recommend general loan loss reserve percentages and specific reserve allocations. Finance and Accounting. FIBS provides financial and accounting services for the Banks, including internal and external reporting, asset/liability management, investment portfolio analysis and capital management. Human Asset Management. Through its human asset management group, FIBS provides the Banks with incentive and employee benefit administration and compensation, training, employee recruitment and hiring services. Other Support Services. FIBS provides the Banks with legal and compliance services, internal auditing services, marketing services, sales services, general administration, planning coordination and various other support services. LENDING ACTIVITIES FIBS has comprehensive credit policies establishing system-wide underwriting and documentation standards to assist Bank management in the lending process and limit risk to the Company. The credit policies establish lending authorities based on the experience level and authority of the lending officer, the type of loan and the type of collateral. The policies also establish thresholds at which loan requests must be approved by a Bank committee and/or by FIBS. The Banks offer short and long-term commercial, consumer, real estate, agricultural and other loans to individuals and small to medium sized businesses in each of their market areas. While each loan must meet minimum underwriting standards established in the Company's credit policies, lending officers are granted certain levels of flexibility in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community needs in each market area. Real Estate Loans. The Banks provide interim and permanent financing for both single-family and multi-unit properties, medium term loans for commercial, agricultural and industrial property and/or buildings, and equity lines of credit secured by real estate. The Banks originate variable and fixed rate real estate mortgages, generally in accordance with the guidelines of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Loans originated in accordance with these guidelines are sold in the secondary market. Real estate loans not sold in the secondary market are typically secured by first liens on the financed property and generally mature in less than 15 years. Consumer Loans. The Banks' consumer loans include personal loans, credit card loans and equity lines of credit. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis. Credit cards are offered to customers in the Company's market areas and are generally unsecured. Equity lines of credit are generally floating rate, reviewed annually and secured by personal property. Over two-thirds of the Company's consumer loans are indirect dealer paper which is created when the Company purchases consumer loan contracts advanced for the purchase of automobiles, boats and other consumer goods from consumer products dealers. Commercial Loans. The Banks provide a mix of variable and fixed rate commercial loans. The loans are typically made to small and medium sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansions. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with the business operations as the primary source of repayment, but also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. -4-
5 Agricultural Loans. The Banks' agricultural loans generally consist of short and medium-term loans and lines of credit that are generally used for crops, livestock, equipment and general operating purposes. Agricultural loans are generally secured by assets such as livestock or equipment and are repaid from the operations of the farm or ranch. Agricultural loans generally have maturities of five years or less, with operating lines for one production season. For additional information about the Company's loan portfolio, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Loans." FUNDING SOURCES The Banks offer traditional depository products including checking, savings and time deposits. Additional funding sources include federal funds purchased for one day periods, repurchase agreements with primarily commercial depositors, time deposits brokered outside the Company's market areas and short-term borrowings from the Federal Home Loan Bank of Seattle. Deposits at the Banks are insured by the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. As of December 31, 2000, approximately 34.9%, 24.3% and 40.8% of the Company's deposits consisted of demand, savings and time deposits, respectively. Under repurchase agreements, the Company sells investment securities held by the Company to a customer under an agreement to repurchase the investment security at a specified time or on demand. The Company does not transfer the investment securities on its financial statements or otherwise. As of December 31, 2000, all outstanding repurchase agreements were due in one day. For additional information on the Banks' funding sources, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Deposits" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Other Borrowed Funds." COMPETITION The financial and technology services businesses in Montana and Wyoming are highly competitive. Several of the Company's competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a competitive array of financial and technology services similar to the Company. The Company competes in its markets on the basis of its Strategic Vision philosophy, timely and responsive customer service and general market presence. The Banks compete for loans, deposits and financial services customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. Moreover, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Banking and Branching Act") creates the potential for increased competition in the Banks' markets, particularly from larger, multi-state banks. See "Regulation and Supervision". The Banks' principal competitors include Wells Fargo & Company, U.S. Bancorp and Community First Bankshares, Inc. With respect to total deposits, the Company believes the Banks rank first in market share to all other competitors in Montana and Wyoming. See "Risk Factors - Competition." i_Tech's competitors vary in size and include national, regional and local operations. While historically the technology services industry has been highly decentralized, there is an accelerating trend toward consolidation resulting in fewer companies competing over larger geographic regions. i_Tech's primary competitors include FiServ and Jack Henry. EMPLOYEES At December 31, 2000, the Company employed 1,389 full-time equivalent employees. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. -5-
6 REGULATION AND SUPERVISION Bank holding companies and commercial banks are subject to extensive regulation under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of FIBS and the Banks. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. First Interstate BancSystem, Inc. As a financial holding company, FIBS is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to supervision and regulation by the Federal Reserve. Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. FIBS is required to obtain the prior approval of the Federal Reserve for the acquisition of 5% or more of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve is also required for the merger or consolidation of FIBS and another bank holding company. As a financial holding company, FIBS may engage in certain business activities that are financial in nature or incidental to financial activities as well as all activities authorized to bank holding companies. FIBS may engage in the financial activities provided that it remains a financial holding company and meets certain regulatory standards of being well-capitalized and well-managed. FIBS must notify the Federal Reserve of its financial activities within a specified time period following its initial engagement in each business or activity. The Banks FIB Montana is subject to the supervision of and regular examination by the Federal Reserve and the State of Montana. FIB Wyoming is subject to the supervision of and regular examination by the FDIC and the State of Wyoming. If any of the foregoing regulatory agencies determine that the financial condition, capital resources, asset quality, earning prospects, management, liquidity or other aspects of a bank's operations are unsatisfactory or that a bank or its management is violating or has violated any law or regulation, various remedies are available to such agencies. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of a bank, to assess civil monetary penalties, to remove officers and directors and to terminate a bank's deposit insurance, which would result in a revocation of a bank's charter. The Banks have not been the subjects of any such actions by their respective regulatory agencies. The FDIC insures the deposits of the Banks in the manner and to the extent provided by law. For this protection, the Banks pay a semiannual statutory assessment. See "Premiums for Deposit Insurance" herein. Restrictions on Transfers of Funds to FIBS and the Banks A large portion of FIBS's revenues are, and will continue to be, dividends paid by the Banks. The Banks are limited, under both state and federal law, in the amount of dividends that may be paid from time to time. In general, each Bank is limited, without the prior consent of its state and federal banking regulators, to paying dividends which do not exceed the current year net profits together with retained earnings from the two preceding calendar years. A state or federal banking regulator may impose, by regulatory order or agreement of the Banks, specific regulatory dividend limitations or prohibitions in certain circumstances. Neither of the Banks is subject to a specific regulatory dividend limitation other than the general limitations. -6-
7 In addition to regulatory dividend limitations, the Bank dividends are, in certain circumstances, limited by covenants in FIBS's debt instruments. Financial transactions between the Banks and FIBS are also limited under applicable state and federal law and regulations. The Banks may not lend funds to, or otherwise extend credit to or for the benefit of, FIBS or FIBS affiliates, except on specified types and amounts of collateral and other terms. Common Liability Under federal law, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly controlled FDIC-insured institution in danger of default. These provisions can have the effect of making one bank responsible for FDIC-insured losses at another bank. Effect of Government Policies and Legislation Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by the Banks on their deposits and borrowings and the interest rate received by the Banks on loans extended to their customers and on investment securities comprises a major portion of the Banks' earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and potential growth of the Banks are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States government securities, by adjusting the required level of reserves for financial institutions subject to the Federal Reserve's reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial service providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial service providers are frequently made in Congress, in the Montana and Wyoming legislatures and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such changes might have on FIBS or the Banks are impossible to predict. Capital Standards The federal banking agencies have adopted minimum capital requirements for insured banks that are applicable to the Banks. In addition, the Federal Reserve has adopted minimum capital requirements that are applicable to FIBS. The capital requirements are intended to, among other things, provide a means for evaluating the capital adequacy and soundness of the institutions. The Federal banking agencies may also set higher capital requirements for particular institutions in specified circumstances under Federal laws and regulations. At December 31, 2000, the Banks and FIBS each met the "well-capitalized" requirements applicable to the respective institution. The "well-capitalized" standard is the highest level of the minimum capital requirements established by the Federal agencies. None of the Banks or FIBS is subject to a minimum capital requirement other than those applicable to banks or bank holding companies generally. For more information concerning the capital ratios of FIBS, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Capital Resources." -7-
8 Compliance and Safety and Soundness Standards The federal banking agencies have adopted guidelines establishing standards for safety and soundness, asset quality, and earnings, as required by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). These standards are designed to identify potential concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance fund. If a federal banking agency determines that an institution fails to meet any of these standards, the agency may require the institution to submit an acceptable plan to achieve compliance with the standard. If the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency. Premiums for Deposit Insurance Deposits in the Banks are insured by the FDIC in accordance with the Federal Deposit Insurance Act (the "FDIA"). Insurance premiums are assessed semiannually by the FDIC at a level sufficient to maintain the insurance reserves required under the FDIA and relevant regulations. The insurance premium charged to a bank is determined based upon risk assessment criteria, including relevant capital levels, results of bank examinations by state and federal regulators, and other information. The Banks currently are assessed the most favorable deposit insurance premiums under the risk-based premium system. In addition to the insurance premium, the FDIC is authorized to collect funds from FDIC-insured institutions sufficient to pay interest on Financing Corporation ("FICO") bonds. The FICO bond assessments are adjusted quarterly by the FDIC and are not based upon risk assessment of insured institutions. Effective for 2000 the FICO assessment on the Banks is an annualized 0.0212% of deposits, an increase from an annualized 0.0184% in 1999. Community Reinvestment Act and Fair Lending Developments The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities or in authorizing expansion activities by the Banks and FIBS. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." Based on the most recent examinations, FIB Montana received an "outstanding" rating and FIB Wyoming was rated "satisfactory." TRADEMARK LICENSE AGREEMENT The Company is the licensee under a trademark license agreement granting it an exclusive, nontransferable license to use the "First Interstate" name and logo in the states of Montana and Wyoming with additional rights in selected other states. RISK FACTORS Asset Quality A significant source of risk for the Company arises from the possibility that losses will be sustained by the Banks because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that management believes are appropriate to mitigate this risk by assessing the likelihood of nonperformance, monitoring loan performance and diversifying the Company's credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business - Lending Activities." -8-
9 Interest Rate Risk Banking companies' earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest earning assets and interest bearing liabilities and the level of non-performing assets. Fluctuations in interest rates affect the demand of customers for the Company's products and services. The Company is subject to interest rate risk to the degree that its interest bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. Economic Conditions; Limited Geographic Diversification The Company's operations are located in Montana and Wyoming. As a result of the geographic concentration of its operations, the Company's results depend largely upon economic conditions in these areas. Although markets served by the Company are economically diverse, a deterioration in economic conditions could adversely impact the quality of the Company's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. Ability of the Company to Execute Its Business Strategy The financial performance and profitability of the Company will depend on its ability to execute its business strategy and manage its future growth. Although the Company believes that it has substantially integrated the recently acquired banks into the Company's operations, there can be no assurance that unforeseen issues relating to the assimilation or prior operations of these banks, including the emergence of any material undisclosed liabilities, will not materially adversely affect the Company. In addition, any future acquisitions or other future growth may present operating and other problems that could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. The Company's financial performance will also depend on the Company's ability to maintain profitable operations through implementation of its Strategic Vision. Moreover, the Company's future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, there can be no assurance that the Company will be able to continue the growth or maintain the level of profitability it has recently experienced. Dependence on Key Personnel The Company's success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Company for many years. The loss or unavailability of any of its key executives, including Homer A. Scott, Jr., Chairman of the Board, Thomas W. Scott, Chief Executive Officer, Lyle R. Knight, President and Chief Operating Officer, or Terrill R. Moore, Senior Vice President and Chief Financial Officer, could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. See Part III, Item 10, "Directors and Executive Officers of Registrant." Competition The banking and financial services business in both Montana and Wyoming is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation and legislation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial services providers. The Banks compete for loans, deposits and financial services customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial services providers. Several of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Banks. Moreover, the Banking and Branching Act has increased competition in the Banks' markets, particularly from larger, multi-state banks. There can be no assurance that the Company will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. See "Business - Competition" and "Business - Regulation and Supervision." -9-
10 Government Regulation and Monetary Policy The Company and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts its banking business, undertakes new investments and activities and obtains financing. This regulation is designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Company's securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Company. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, and any unfavorable change in these conditions could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. See "Business-Regulation and Supervision." Control by Affiliates The directors and executive officers of the Company beneficially own approximately 50.66% of the outstanding common stock of the Company. Many of these directors and executive officers are members of the Scott family, which collectively owns approximately 81.08% of the outstanding common stock. By virtue of such ownership, these affiliates are able to control the election of directors and the determination of the Company's business, including transactions involving any merger, share exchange, sale of assets outside the ordinary course of business and dissolution. Lack of Trading Market; Market Prices The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 91.88% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 8.12% without such restrictions. FIBS has the right of first refusal to purchase the restricted stock at the minority appraised value per share based upon the most recent quarterly appraisal available to FIBS. All stock not subject to such restrictions may be sold at a price per share that is acceptable to the shareholder. FIBS has no obligation to purchase unrestricted stock, but has historically purchased such stock in order to reduce the amount of its stock not subject to transfer restrictions. During 2000, 44,909 shares of its unrestricted stock were repurchased by the Company from participants in the Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. ("Savings Plan"). All shares were repurchased at the most recent minority appraised value at the repurchase date. The appraised minority value of the FIBS common stock represents the estimated fair market valuation of a minority block of such stock, taking into account adjustments for the lack of marketability of the stock and other factors. This value does not represent an actual trading price between a willing buyer and seller of the FIBS common stock in an informed, arm's-length transaction. As such, the appraised minority value is only an estimate as of a specific date, and there can be no assurance that such appraisal is an indication of the actual value holders of the FIBS common stock may realize with respect to shares held by them. Moreover, the estimated fair market value of the FIBS common stock may be materially different at any date other than the valuation dates. FIBS has no obligation, by contract, policy or otherwise to purchase stock from any shareholder desiring to sell, or to create any market for the stock. Historically, it has been the practice of FIBS to repurchase common stock to maintain a shareholder base with restrictions on sale or transfer of the stock. In the last three calendar years (1998-2000), FIBS has repurchased a total of 390,704 shares of common stock, 316,525 of which were restricted by the shareholder agreements. FIBS repurchased the stock at the price determined in accordance with the shareholder agreements. FIBS repurchases of stock are subject to corporate law and regulatory restrictions which could prevent stock repurchases. See also Part II, Item 5, "Market for Registrant's Common Equity and Related Stockholder Matters." There is a limited public market for the trust preferred securities. Future trading prices of the trust preferred securities depend on many factors including, among other things, prevailing interest rates, the operating results and financial condition of the Company and the market for similar securities. As a result of the existence of FIBS's right to defer interest payments on or, subject to prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, shorten the stated maturity of the subordinated debentures, the market price of the trust preferred securities may be more volatile than the market prices of subordinated debentures that are not subject to such optional deferrals or reduction in maturity. There can be no assurance as to the market prices for the -10-
11 trust preferred securities or the subordinated debentures that may be distributed in exchange for the trust preferred securities if the Company exercises its right to dissolve FIB Capital. Forward-Looking Statements Certain statements contained in this document including, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that 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, among others, the following: general economic and business conditions in those areas in which the Company operates; demographic changes; competition; fluctuations in interest rates; changes in business strategy or development plans; changes in governmental regulation; credit quality; the availability of capital to fund the expected expansion of the Company's business; and other factors referenced in this document, including, without limitation, information under the captions "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, shareholders, trust security holders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 2. PROPERTIES The Company is the anchor tenant in a commercial building in which the Company's principal executive offices are located in Billings, Montana. The building is owned by a joint venture partnership in which FIB Montana is one of the two partners, owning a 50% interest in the partnership. As of December 31, 2000, the Company leases approximately 69,794 square feet of space for operations in the building. The Company also leases space for operations and 19 branch facilities in 21 buildings. All other branches are located in Company-owned facilities. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits. In the opinion of management, following consultation with legal counsel, the pending lawsuits 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 Company's business, financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DESCRIPTION OF FIBS CAPITAL STOCK The authorized capital stock of FIBS consists of 20,000,000 shares of common stock without par value, of which 7,899,168 shares were outstanding as of December 31, 2000, and 100,000 shares of preferred stock without par value, none of which were outstanding as of December 31, 2000. Common Stock Each share of the common stock is entitled to one vote in the election of directors and in all other matters submitted to a vote of stockholders. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election if they choose to do so, subject to the rights of the holders of the preferred stock. Voting for directors is noncumulative. -11-
12 Subject to the preferential rights of any preferred stock that may at the time be outstanding, each share of common stock has an equal and ratable right to receive dividends when, if and as declared by the Board of Directors out of assets legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock will be entitled to share equally and ratably in the assets available for distribution after payments to creditors and to the holders of any preferred stock that may at the time be outstanding. Holders of common stock have no conversion rights or preemptive or other rights to subscribe for any additional shares of common stock or for other securities. All outstanding common stock is fully paid and non-assessable. The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 91.88% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 8.12% held by 16 shareholders without such restrictions, including the Company's 401(k) plan which holds 76.2% of the unrestricted shares. See also Part I, Item 1, "Risk Factors - Lack of Trading Market; Market Prices." Quarter-end minority appraisal values for the past two years, determined by Alex Sheshunoff & Co. Investment Banking are as follows: <TABLE> <CAPTION> Appraised Valuation As Of Minority Value --------------- -------------- <S> <C> December 31, 1998 $ 37.00 March 31, 1999 39.00 June 30, 1999 40.00 September 30, 1999 40.00 December 31, 1999 40.00 March 31, 2000 39.00 June 30, 2000 38.00 September 30, 2000 38.00 December 31, 2000 39.00 </TABLE> As of December 31, 2000, options for 386,256 shares of the FIBS common stock were outstanding at various exercise prices, ranging from $6.75 to $40.00. The aggregate cash proceeds to be received by FIBS upon exercise of all options outstanding at December 31, 2000 would be $10.7 million, or a weighted average exercise price of $27.82 per share. The appraised minority value as of December 31, 2000 was $39.00. See also Part I, Item 1, "Risk Factors - Lack of Trading Market; Market Prices." Resale of FIBS stock may be restricted pursuant to the Securities Act of 1933 and applicable state securities laws. In addition, most shares of FIBS stock are subject to one of three shareholder's agreements: - Members of the Scott family, as majority shareholders of FIBS, are subject to a shareholder's agreement ("Scott Agreement"). The Scott family, under the Scott Agreement, has agreed to limit the transfer of shares owned by members of the Scott family to family members or charities, or with FIBS's approval, to the Company's officers, directors, advisory directors, or to the Company's Savings Plan. - Charities that receive gifts of FIBS common stock from shareholders subject to an existing shareholder's agreement are subject to a shareholder's agreement ("Charity Shareholder's Agreement"), which gives the Company the right to repurchase the stock in any of the following events: 1) the charity's intention to sell the stock, 2) transfer of the stock by operation of law, and 3) at any other time as determined by the Company. - Shareholders of the Company who are not Scott family members or charities, with the exception of 16 shareholders who own an aggregate of 641,387 shares of unrestricted stock, are subject to a shareholder's agreement ("Shareholder's Agreement"). The Shareholder's Agreement grants FIBS the option to purchase the stock in any of the following events: 1) the shareholder's intention to sell the stock, 2) the shareholder's death, 3) transfer of the stock by operation of law, 4) termination of the shareholder's status as a director, officer or employee of the Company, and 5) total disability of the shareholder. Stock subject to the Shareholder's Agreement may not be sold or transferred by the -12-
13 shareholder without triggering FIBS's option to acquire the stock in accordance with the terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement allows FIBS to repurchase any of the FIBS stock acquired by the shareholder after January 1, 1994 if FIBS determines that the number of shares owned by the shareholder is excessive in view of a number of factors including but not limited to (a) the relative contribution of the shareholder to the economic performance of the Company, (b) the effort being put forth by the shareholder and (c) the level of responsibility of the shareholder. Purchases of FIBS common stock made through the Company's Savings Plan are not restricted by the Shareholder's Agreement, due to requirements of Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code. However, since the Savings Plan does not allow distributions "in kind," any distributions from an employee's account in the Savings Plan will allow, and may require, the Trust Department of FIB Montana (the "Plan Trustee"), to sell the FIBS stock. While FIBS has no obligation to repurchase the stock, it is possible that FIBS will repurchase FIBS stock sold by the Savings Plan. Any such repurchases would be upon terms set by the Plan Trustee and accepted by FIBS. There are 483 record shareholders of FIBS as of December 31, 2000, including the Company's Savings Plan as trustee for 488,995 shares held on behalf of 833 individual participants in the plan. 228 individuals in the Savings Plan also own shares of FIBS stock outside of the Plan. The Plan Trustee votes the shares based on the instructions of each participant. In the event the participant does not provide the Plan Trustee with instructions, the Plan Trustee votes those shares in accordance with voting instructions received from a majority of the participants in the Plan. Dividends It is the policy of FIBS to pay a dividend to all common shareholders quarterly. Dividends are declared and paid in the month following the calendar quarter and the amount has historically been determined based upon a percentage of net income for the calendar quarter immediately preceding the dividend payment date. Since 1996, the Company has paid dividends of approximately 30% of quarterly net income without taking into effect compensation expense related to stock options. The Board of Directors of FIBS has no current intention to change its dividend policy, but no assurance can be given that the Board may not, in the future, change or eliminate the payment of dividends. Historical quarterly dividends for 1999 and 2000 are as follows: <TABLE> <CAPTION> Month Declared Amount Total Cash Quarter and Paid Per Share Dividend ------- -------- --------- -------- <S> <C> <C> <C> 1st quarter 1999 April 1999 $ .27 $ 2,149,368 2nd quarter 1999 July 1999 .28 2,223,894 3rd quarter 1999 October 1999 .28 2,240,818 4th quarter 1999 January 2000 .26 2,073,423 1st quarter 2000 April 2000 .27 2,142,112 2nd quarter 2000 July 2000 .28 2,216,554 3rd quarter 2000 October 2000 .30 2,373,769 4th quarter 2000 January 2001 .28 2,209,055 </TABLE> Dividend Restrictions For a description of restrictions on the payment of dividends, see "Regulation and Supervision - Restrictions on Transfers of Funds to FIBS and the Banks." -13-
14 Preferred Stock The authorized capital stock of FIBS includes 100,000 shares of preferred stock. The FIBS Board of Directors is authorized, without approval of the holders of common stock, to provide for the issuance of preferred stock from time to time in one or more series in such number and with such designations, preferences, powers and other special rights as may be stated in the resolution or resolutions providing for such preferred stock. FIBS Board of Directors may cause FIBS to issue preferred stock with voting, conversion and other rights that could adversely affect the holders of the common stock or make it more difficult to effect a change of control of the Company. Sales of Unregistered Securities During 2000, the Company issued 2,600 unregistered shares of its common stock to one individual exercising stock options. The weighted average exercise price for these stock options was $39.00 per share. These sales were made pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933. For additional information regarding stock options, see "Notes to Consolidated Financial Statements - Employee Benefit Plans" included in Part IV, Item 14. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data with respect to the Company's consolidated financial position as of December 31, 2000 and 1999 and its results of operations for the fiscal years ended December 31, 2000, 1999 and 1998, has been derived from the consolidated financial statements of the Company included in Part IV, Item 14. This data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and such consolidated financial statements, including the notes thereto. FIVE YEAR SUMMARY (Dollars in thousands except share and per share data) <TABLE> <CAPTION> Years ended December 31, 2000(6) 1999(6) 1998 1997 1996 (Restated)(7) (Restated)(7) (Restated) (7) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operating Data: Interest income $ 216,095 188,081 179,414 165,808 117,925 Interest expense 101,955 83,178 81,652 72,663 50,019 - ------------------------------------------------------------------------------------------------------------------- Net interest income 114,140 104,903 97,762 93,145 67,906 Provision for loan losses 5,280 3,563 4,170 4,240 3,844 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 108,860 101,340 93,592 88,905 64,062 Noninterest income 39,854 32,957 29,964 27,570 24,141 Noninterest expense 101,158 91,340 83,577 76,483 53,609 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 47,556 42,957 39,979 39,992 34,594 Income tax expense 17,176 15,229 15,100 15,103 13,351 - ------------------------------------------------------------------------------------------------------------------- Net income $ 30,380 27,728 24,879 24,889 21,243 =================================================================================================================== Net income applicable to common stock $ 30,380 27,728 24,879 23,435 20,818 Basic earnings per common share 3.83 3.48 3.10 2.95 2.65 Diluted earnings per common share(1) 3.78 3.42 3.08 2.93 2.64 Dividends per common share 1.11 1.07 0.94 0.98 0.78 Weighted average common shares outstanding - diluted 8,044,531 8,111,316 8,087,809 7,987,921 7,881,024 =================================================================================================================== </TABLE> -14-
15 FIVE YEAR SUMMARY (CONTINUED) (Dollars in thousands except per share data) <TABLE> <CAPTION> Years ended December 31, 2000(6) 1999(6) 1998 1997 1996 (Restated)(7) (Restated)(7) (Restated)(7) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operating Ratios: Return on average assets 1.10% 1.09% 1.07 1.18 1.41 Return on average common stockholders' equity 16.81 16.60 16.24 16.45 17.84 Average stockholders' equity to average assets 6.52 6.58 6.60 7.15 8.08 Net interest margin 4.73 4.71 4.76 5.00 5.15 Net interest spread 4.12 4.13 4.08 4.32 4.47 Common stock dividend payout ratio(2) 28.98 30.75 30.32 33.22 29.17 Ratio of earnings to fixed charges(3): Excluding interest on deposits 5.16x 5.70x 6.77x 4.79x 8.74x Including interest on deposits 1.46x 1.51x 1.49x 1.53x 1.68x =================================================================================================================== Balance Sheet Data at Year End: Total assets $ 2,933,262 2,612,663 2,479,994 2,235,433 2,063,837 Loans 1,972,323 1,722,961 1,484,459 1,470,414 1,375,479 Allowance for loan losses 32,820 29,599 28,803 28,180 27,797 Investment securities 626,807 590,509 678,678 425,603 403,571 Deposits 2,365,225 2,118,183 2,041,932 1,805,006 1,679,424 Other borrowed funds 11,138 41,875 9,828 11,591 13,071 Long-term debt 37,000 23,394 24,288 31,526 64,667 Trust preferred securities 40,000 40,000 40,000 40,000 - Stockholders' equity 197,986 173,638 162,275 145,071 146,061 =================================================================================================================== Asset Quality Ratios at Year End: Nonperforming assets to total loans and other real estate owned ("OREO")(4) 1.54% 1.89 1.29 1.15 1.20 Allowance for loan losses to total loans 1.66 1.72 1.94 1.92 2.02 Allowance for loan losses to nonperforming loans(5) 119.73 94.84 159.63 181.90 185.10 Net charge-offs to average loans 0.17 0.27 0.24 0.27 0.17 =================================================================================================================== Regulatory Capital Ratios at Year End: Tier 1 risk-based capital 8.55% 9.62 9.81 9.63 7.35 Total risk-based capital 10.36 11.69 12.22 12.15 9.98 Leverage ratio 6.78 7.15 7.05 6.91 5.28 =================================================================================================================== </TABLE> (1) Diluted earnings per common share represent the amount of earnings available to each share of common stock outstanding during the period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. (2) Dividends per common share divided by basic earnings per common share. (3) For purposes of computing the ratio of earnings to fixed charges, earnings represents income before income taxes and fixed charges. Fixed charges represent interest expense and preferred stock dividends, which dividends commenced in October 1996 and concluded in October 1997. Deposits include interest bearing deposits and repurchase agreements. Without including preferred stock dividends in fixed charges and excluding interest on deposits, the ratio of earnings to fixed charges for the years ended December 31, 1997 and 1996 were 5.68x and 9.91x, respectively. Without including preferred stock dividends in fixed charges and including interest on deposits, the ratio of earnings to fixed charges for the years ended December 31, 1997 and 1996 were 1.55x and 1.68x, respectively. (4) For purposes of computing the ratio of non-performing assets to total loans and OREO, non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest, restructured loans and OREO. -15-
16 (5) For purposes of computing the ratio of allowance for loan losses to non-performing loans, non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest and restructured loans. (6) For information regarding bank acquisitions in 2000 and 1999, see "Notes to Consolidated Financial Statements - Acquisitions and Expansion" included in Part IV, Item 14. (7) Selected financial data for 1999, 1998 and 1997 has been restated. For information regarding the restatement, see "Notes to Consolidated Financial Statements - Restatement" included in Part IV, Item 14. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with the information under Part II, Item 6, "Selected Consolidated Financial Data" and the Company's consolidated financial statements, including the notes thereto, and other financial data appearing elsewhere in this document. Certain statements included in the following discussion constitute "forward-looking statements" which involve various risks and uncertainties. The Company's actual results may differ significantly from those anticipated in such forward-looking statements. Factors that might cause such a difference include, without limitation, the ability of the Company to execute its business strategy, interest rate risk, economic conditions, government regulation, competition and asset quality. For additional information concerning these and other factors, see Part I, Item 1, "Business - Risk Factors." RESULTS OF OPERATIONS Increases in the Company's earnings during recent years have been effected through a successful combination of acquisitions and internal growth. Internal growth experienced by the Company is reflected by an increased volume of customer loans and deposits, without giving effect to acquisitions. The Company's internal growth has largely been accomplished through its effective offering and promotion of competitively priced products and services. Internal loan growth is primarily responsible for increases in net income from 1998 through 2000. Net income was $30.4 million, or $3.78 per diluted share, in 2000 as compared to $27.7 million, or $3.42 per diluted share, in 1999 and $24.9 million, or $3.08 per diluted share, in 1998. Net Interest Income Net interest income, the largest source of the Company's operating income, is derived from interest, dividends and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest bearing liabilities primarily include deposits and various forms of indebtedness. The following table presents, for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest earning assets, and interest expense and rates paid on average interest bearing liabilities. Average balances are averaged daily balances. AVERAGE BALANCE SHEETS, YIELDS AND RATES <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------- ------------------------------- ----------------------------- Average Average Average Average Average Average (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans(1)(2) $ 1,865,125 180,255 9.66% $ 1,598,594 149,105 9.33% $ 1,469,741 143,435 9.76% U.S. and agency securities 414,274 25,809 6.23 464,954 27,777 5.97 416,965 25,006 6.00 Federal funds sold 21,167 1,400 6.61 24,854 1,304 5.25 64,351 3,457 5.37 Other securities 90,238 5,699 6.32 102,828 6,458 6.28 71,170 4,610 6.48 Tax exempt securities(2) 77,784 5,617 7.22 72,755 5,250 7.22 43,578 3,290 7.55 Interest bearing deposits in banks 1,641 112 6.83 7,071 353 4.99 18,992 997 5.25 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets 2,470,229 218,892 8.86 2,271,056 190,247 8.38 2,084,797 180,795 8.67 Noninterest earning assets 300,827 268,723 237,110 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 2,771,056 $ 2,539,779 $ 2,321,907 ==================================================================================================================================== </TABLE> -16-
17 AVERAGE BALANCE SHEETS, YIELDS AND RATES (CONTINUED) <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ ----------------------------- ------------------------------ Average Average Average Average Average Average (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest bearing liabilities and trust preferred securities: Demand deposits $ 368,710 6,961 1.89% 346,711 6,084 1.75% $ 320,088 6,673 2.08% Savings deposits 556,930 22,470 4.03 539,513 19,482 3.61 464,527 18,077 3.89 Time deposits 876,350 50,774 5.79 785,307 41,959 5.34 754,725 43,498 5.76 Borrowings(3) 278,721 15,525 5.57 221,037 9,998 4.52 172,725 7,550 4.37 Long-term debt 31,293 2,696 8.62 24,556 2,126 8.66 28,085 2,327 8.29 Trust preferred securities 40,000 3,529 8.82 40,000 3,529 8.82 40,000 3,527 8.82 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities and trust preferred securities 2,152,004 101,955 4.74 1,957,124 83,178 4.25 1,780,150 81,652 4.59 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest bearing deposits 407,241 387,969 360,628 Other noninterest bearing liabilities 31,036 27,675 27,956 Stockholders' equity 180,775 167,011 153,173 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 2,771,056 $ 2,539,779 $ 2,321,907 ==================================================================================================================================== Net FTE interest income $ 116,937 $107,069 $99,143 Less FTE adjustments(2) (2,797) (2,166) (1,381) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income per consolidated statements of income $ 114,140 $104,903 $97,762 ==================================================================================================================================== Interest rate spread 4.12% 4.13% 4.08% ==================================================================================================================================== Net yield on interest earning assets(4) 4.73% 4.71% 4.76% ==================================================================================================================================== </TABLE> (1) Average loan balances include nonaccrual loans. Loan fees included in interest income were $8.7 million, $8.7 million and $8.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. (2) Interest income and average rates for tax exempt loans and securities are presented on a fully-taxable equivalent (FTE) basis. (3) Includes interest on Federal funds purchased, securities sold under repurchase agreements and other borrowed funds. Excludes long-term debt. (4) Net yield on interest earning assets during the period equals (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities and trust preferred securities, divided by (ii) average interest earning assets for the period. Net interest income on a fully-taxable equivalent basis ("FTE") increased 9.2% to $116.9 million in 2000 from $107.1 million in 1999 primarily due to increases in the prime lending rate and continued strong loan demand, principally in commercial and commercial real estate loans. Approximately 31% of this increase is directly attributable to new branches opened or acquired in 1999 and 2000. A higher mix of loans in earning assets has kept the net yield on earning assets stable at 4.12%, a 1 basis point decrease from the prior year. Net FTE interest income increased 8.1% to $107.1 million in 1999 compared to $99.1 million in 1998. This increase is primarily due to internal growth in interest earning assets, principally commercial real estate and indirect consumer loans. The net yield on earning assets decreased 5 basis points to 4.71% in 1999 from 4.76% in 1998 due primarily to competitive pressure. Customer loan fees, included in net interest income, decreased less than 1% in 2000 from the prior year. Customer loan fees increased 7.4% to $8.7 million in 1999 from $8.1 million in 1998. Increases in consumer, commercial and credit card loan fees each year have been offset by decreases in real estate loan fees. 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. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods. -17-
18 The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from estimated changes in average asset and liability balances (volume) and estimated changes in average interest rates (rate). Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other. ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES <TABLE> <CAPTION> (Dollars in thousands) Year ended December 31, 2000 December 31, 1999 December 31, 1998 compared with compared with compared with December 31, 1999 December 31, 1998 December 31, 1997 favorable (unfavorable) favorable (unfavorable) favorable (unfavorable) -------------------------- --------------------------- ------------------------ Volume Rate Net Volume Rate Net Volume Rate Net - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans(1) $ 24,860 6,290 31,150 12,575 (6,905) 5,670 2,727 409 3,136 U.S. and agency securities (3,028) 1,060 (1,968) 2,878 (107) 2,771 4,270 255 4,525 Federal funds sold (193) 289 96 (2,122) (31) (2,153) 1,312 (65) 1,247 Other securities (791) 32 (759) 2,051 (203) 1,848 3,101 42 3,143 Tax exempt securities(1) 363 4 367 2,203 (243) 1,960 1,685 (132) 1,553 Interest bearing deposits in banks (271) 30 (241) (626) (18) (644) 604 (55) 549 - ----------------------------------------------------------------------------------------------------------------------------- Total change 20,940 7,705 28,645 16,959 (7,507) 9,452 13,699 454 14,153 - ----------------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities and trust preferred securities: Demand deposits 386 491 877 555 (1,144) (589) 325 (21) 304 Savings deposits 629 2,359 2,988 2,918 (1,513) 1,405 1,836 220 2,056 Time deposits 4,864 3,951 8,815 1,763 (3,302) (1,539) 7,366 393 7,759 Borrowings(2) 2,609 2,918 5,527 2,112 336 2,448 (519) (777) (1,296) Long-term debt 583 (13) 570 (292) 91 (201) (2,329) (509) (2,838) Trust preferred securities - - - - 2 2 3,015 (11) 3,004 - ----------------------------------------------------------------------------------------------------------------------------- Total change 9,071 9,706 18,777 7,056 (5,530) 1,526 9,694 (705) 8,989 - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in FTE net interest income(1) $ 11,869 (2,001) 9,868 9,903 (1,977) 7,926 4,005 1,159 5,164 ============================================================================================================================= </TABLE> (1) Interest income and average rates for tax exempt loans and securities are presented on a fully-taxable equivalent (FTE) basis. (2) Includes interest on Federal funds purchased, securities sold under repurchase agreements and other borrowed funds. Provision for Loan Losses The provision for loan losses creates an allowance for loan losses inherent in the portfolio. The loan loss provision for each year 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 the underlying collateral on problem loans and the general economic conditions in the Company's markets. The Company performs a quarterly assessment of the 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 provisions for potential loan losses. Specific allocations are made for loans where the probability of a loss can be defined and reasonably determined, while the balance of the provisions for loan losses are based on historical data, delinquency trends, economic conditions in the Company's markets and industry averages. Annual fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses. Ultimate loan losses may vary from current estimates. The provision for loan losses increased 47.2% to $5.3 million in 2000 from $3.6 million in 1999. This increase is primarily the result of loan growth, increases in potential problem loans and softening economic conditions in the Company's market areas, particularly in agriculture, health care, transportation and hotel/motel market sectors. The provision for loan losses decreased $600,000 in 1999 to $3.6 million from $4.2 million in 1998. This decrease was primarily the result of management's assessment of the adequacy of the allowance for loan losses based on then current economic conditions and loan portfolio quality. -18-
19 Noninterest Income The principal sources of noninterest income include service charges on deposit accounts; technology services revenues; other service charges, commissions and fees; and, income from fiduciary activities, comprised principally of fees earned on trust assets. Noninterest income increased 20.9% to $39.9 million in 2000 from $33.0 million in 1999, and 10.0% to $33.0 million in 1999 from $30.0 million in 1998. These increases in noninterest income were a function of changes in each of the principal categories, as discussed below. Service charges on deposit accounts increased 10.5% to $12.6 million in 2000 from $11.4 million in 1999. Approximately 47% of this increase is directly attributable to new branches opened or acquired in 1999 and 2000. The remaining increase occurred primarily in overdraft fees. Service charges on deposit accounts increased 9.6% to $11.4 million in 1999 from $10.4 million in 1998 primarily due to increases in overdraft fees. Technology services revenues increased 22.9% to $10.2 million in 2000 from $8.3 million in 1999. Approximately 29% of this increase resulted from the addition of one new customer during the fourth quarter of 1999. The remaining increase is primarily due to increases in the number of customers using the Company's back-room processing services and higher ATM transaction volumes combined with greater numbers of ATMs supported by the Company's ATM network. The Company's ATM network expanded from 630 locations at year end 1997 to 986 locations at year end 1998, 1,270 locations at year end 1999, and to 1,575 locations at year end 2000. There were no increases in basic charges for data services in 2000, 1999 or 1998. Exclusive of a non-recurring termination fee of $354,000 received in 1998, technology services revenues for 1999 of $8.3 million increased 7.8% from $7.7 million in 1998 primarily due to a greater number of customers using the Company's ATM network and a corresponding increase in transaction volumes. Other service charges, commissions and fees increased 14.0% to $6.5 million in 2000 from $5.7 million in 1999. This increase is primarily attributable to loan servicing income resulting from strong loan demand and ATM fee income resulting from higher debit card and foreign ATM transaction volumes combined with increases in fees for foreign ATM transactions. Other service charges, commissions and fees increased 14.0% to $5.7 million in 1999 from $5.0 million in 1998 primarily due to loan servicing income and the acquisition of a servicing portfolio totaling approximately $165.8 million at its acquisition date in January 1999. Revenues from fiduciary activities increased 8.9% to $4.9 million in 2000 from $4.5 million in 1999 primarily due to growth in customer assets under trust management, mineral rights fee income and increases in fees charged for trust services. Revenues from fiduciary activities increased 12.5% to $4.5 million in 1999 from $4.0 million in 1998 primarily due to increases in the value of assets under trust management combined with growth in customer assets under trust management and an increase in fees charged for trust services. Average customer assets under trust management were $1.4 billion and $1.3 billion in 2000 and 1999, respectively. Net OREO income increased to $689,000 in 2000 from $366,000 in 1999 and $134,000 in 1998. Variations in net OREO income during the periods resulted principally from fluctuations in gains and losses on sales of OREO. OREO income is directly related to prevailing economic conditions, and such income could decrease significantly should an unfavorable shift occur in the economic conditions of the Company's markets. Other income increased 77.8% to $4.8 million in 2000 from $2.7 million in 1999. Approximately 27% of this increase occurred in investment services revenues. The Company began expanding the range and scope of investment services offered through its banking offices in December 1997 and currently employs 13 registered investment services representatives serving 29 communities. Other significant components of the current year increase include fourth quarter adjustments to record insurance company demutualization stocks of $409,000 and the recognition of the Company's share of undistributed earnings in an unconsolidated joint venture partnership of $737,000. The remaining increase is primarily due to a $269,000 gain recognized on the sale of an aircraft and the recovery of a $101,000 prior year non-credit loss. Other income increased 28.6% to $2.7 million in 1999 from $2.1 million in 1998 primarily due to brokerage service fees. Noninterest Expense Noninterest expense increased 10.8% to $101.2 million in 2000 from $91.3 million in 1999 and increased 9.2% to $91.3 million in 1999 from $83.6 million in 1998. Significant components of these increases are discussed below. -19-
20 Salaries, wages and employee benefits expense increased 7.9% to $51.8 million in 2000 from $48.0 million in 1999. Approximately $2.1 million of the increase is directly attributable to new branches opened or acquired since January 1999. The remaining increase is primarily due to inflationary wage increases, increases in administrative staffing levels to support the Company's expanding number of branches and growth in the brokerage services division. Increases in salaries, wages and employee benefits expense in 2000 were partially offset by a $3.1 million decrease resulting from the remeasurement of compensation expense related to outstanding stock options. Salaries, wages and employee benefits expense increased 9.1% to $48.0 million in 1999 from $44.0 million in 1998. Approximately 33% of this increase resulted from remeasurement of compensation expense related to outstanding stock options. The remaining increase was due primarily to inflationary wage increases and the additional staffing requirements of new banking offices opened or acquired during 1999. Given the Company's present growth strategy, employee and related compensation expenses are expected to continue to increase. For additional information relating to the Company's Stock Option Plan, see "Notes to Consolidated Financial Statements - Employee Benefit Plans" included in Part IV, Item 14. Occupancy expense increased 14.1% to $8.1 million in 2000 from $7.1 million in 1999 and 10.9% to $7.1 million in 1999 from $6.4 million in 1998. These increases are primarily due to additional rent and depreciation expenses associated with internal growth, bank acquisitions and the remodeling of existing facilities. Given the Company's present growth strategy, occupancy expense is expected to continue to rise. Furniture and equipment expenses increased 4.9% to $10.7 million in 2000 from $10.2 million in 1999. Approximately 61% of this increase is directly attributable to new branches opened or acquired since January 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 the introduction of check-imaging technology. Furniture and equipment expenses increased 20.0% to $10.2 million in 1999 from $8.5 million in 1998. Approximately 30% of this increase is due to additional depreciation expense associated with a reduction in the estimated useful life of a main frame computer. The remaining increase is primarily due to depreciation expense associated with investments in technology and costs associated with new banking offices opened or acquired in 1999. Given the Company's present growth strategy, furniture and equipment costs are expected to continue to increase. FDIC insurance premiums of $438,000 in 2000 increased 88.0% from $233,000 in 1999 due to an increase in the FDIC FICO bond assessment effective January 1, 2000. FDIC insurance rates reflect the Company's well-capitalized rating by the FDIC. Goodwill and core deposit intangible amortization expense increased 21.4% to $3.4 million in 2000 from $2.8 million in 1999 and 12.0% to $2.8 million in 1999 from $2.5 million in 1998 due to acquisitions in July 1999 and August 2000. Other expenses primarily include advertising and public relations costs; legal, audit and other professional fees; office supply, postage, freight and telephone expenses; and mortgage servicing intangible amortization. Other expenses increased 16.1% to $26.7 million in 2000 from $23.0 million in 1999. Approximately 25% of this increase is directly attributable to new branches opened or acquired since January 1999, In addition, the Company recorded two non-credit losses aggregating $863,000, net of recoveries, during 2000. Management believes there is potential for recovery of these losses in future quarters. The remaining increase is primarily due to advertising and public relations expense; ATM operating expenses and mortgage servicing intangible amortization expense. Other expenses increased 4.5% to $23.0 million in 1999 from $22.0 million in 1998 primarily due to new banking offices opened or acquired during 1999, mortgage servicing intangible amortization expense related to growth in the loan servicing portfolio and expenses related to the donation of land. Income Tax Expense The Company's effective federal tax rate was 31.3%, for the years ended December 31, 2000 and 1999 and 32.5% for the year ended December 31, 1998. The lower effective rates in 1999 and 2000 are principally due to increases in tax-exempt interest income. State income tax applies only to pretax earnings of entities operating within Montana. The Company's effective state tax rate was 4.8%, 4.2% and 5.3% for years ended December 31, 2000, 1999 and 1998, respectively. -20-
21 FINANCIAL CONDITION Total assets increased 12.2% to $2,933 million as of December 31, 2000 from $2,613 million as of December 31, 1999. This increase was primarily due to acquisitions in 2000 and internal growth in loans funded primarily by customer deposits. Total assets increased 5.4% to $2,613 million as of December 31, 1999 from $2,480 million as of December 31, 1998 due primarily to the banking offices acquired in 1999 and internal growth in loans funded by decreases in investment securities, increases in other borrowings and acquired customer deposits. Loans Total loans increased 14.5% to $1,972 million as of December 31, 2000 from $1,723 million as of December 31, 1999. All major categories of loans increased from December 31, 1999 with the exception of agricultural loans, which decreased slightly. Management attributes growth to expansion of the Company's market presence through a combination of successful marketing activities, acquisitions and new branch openings combined with generally strong loan demands in the Company's market areas. Approximately $64 million of the increase in total loans is attributable to acquisitions in 2000. Approximately $60 million of the remaining increase relates to 5 commercial and 4 real estate loans advanced in 2000. Total loans increased 16.1% to $1,723 million as of December 31, 1999 from $1,484 million as of December 31, 1998. All major categories of loans increased from December 31, 1998 with the most significant growth occurring in commercial real estate and indirect consumer loans. Management attributes this growth in part to expansion of its market presence through acquisitions, new branch openings and marketing activities, and to a renewed focus on opportunities in the indirect lending area. The Company's loan portfolio consists of a mix of commercial, consumer, real estate, agricultural and other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities served by the Company. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could have a material adverse effect on the borrowers' abilities to repay their loans. The following tables present the composition of the Company's loan portfolio as of the dates indicated: LOANS OUTSTANDING <TABLE> <CAPTION> As of December 31, ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 Percent 1999 Percent 1998 Percent 1997 Percent 1996 Percent - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans Real estate(1) $ 954,933 48.5% $ 806,320 46.8% $ 681,670 45.9% $ 683,212 46.5% $ 600,007 43.6% Consumer 495,445 25.1 463,414 26.9 379,197 25.5 412,231 28.0 410,258 29.8 Commercial 420,706 21.3 344,371 20.0 311,040 21.0 261,513 17.8 272,888 19.8 Agricultural 95,387 4.8 106,887 6.2 106,707 7.2 107,649 7.3 90,883 6.6 Other loans 5,852 0.3 1,969 0.1 5,845 0.4 5,809 0.4 1,443 0.2 - --------------------------------------------------------------------------------------------------------------------------------- Total loans 1,972,323 100.0% 1,722,961 100.0% 1,484,459 100.0% 1,470,414 100.0% 1,375,479 100.0% - --------------------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses 32,820 29,599 28,803 28,180 27,797 - --------------------------------------------------------------------------------------------------------------------------------- Net loans $ 1,939,503 $1,693,362 $1,455,656 $1,442,234 $ 1,347,682 ================================================================================================================================= Ratio of allowance to total loans 1.66% 1.72% 1.94% 1.92% 2.02% ================================================================================================================================= </TABLE> (1) Includes consumer, commercial and agricultural loans secured by real estate as follows: <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Consumer $ 148,312 117,881 102,622 93,510 74,607 Commercial 519,817 435,006 351,229 264,842 198,570 Agricultural 96,019 87,711 60,459 56,397 52,689 </TABLE> -21-
22 The following table presents the maturity distribution of the Company's loan portfolio and the sensitivity of the loans to changes in interest rates as of December 31, 2000: MATURITIES AND INTEREST RATE SENSITIVITIES <TABLE> <CAPTION> Within One Year to After (Dollars in thousands) One Year Five Years Five Years Total - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Real estate $ 307,408 437,560 209,965 954,933 Consumer 241,650 246,866 6,929 495,445 Commercial 258,320 126,940 35,446 420,706 Agriculture 76,890 17,324 1,173 95,387 Other loans 5,852 - - 5,852 - ------------------------------------------------------------------------------------------------------------------------ $ 890,120 828,690 253,513 1,972,323 ======================================================================================================================== Loans at fixed interest rates $ 508,794 668,188 114,093 1,291,075 Loans at variable interest rates 361,707 160,502 139,420 661,629 Nonaccrual loans 19,619 - - 19,619 - ------------------------------------------------------------------------------------------------------------------------ $ 890,120 828,690 253,513 1,972,323 ======================================================================================================================== </TABLE> For additional information concerning the Company's loan portfolio and its credit administration policies, see Part I, Item 1, "Business-Lending Activities." Investment Securities The Company's investment portfolio is managed to attempt to obtain the highest yield while meeting the Company's risk tolerance and liquidity needs and to satisfy 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. Federal funds sold are additional investments which are classified as cash equivalents rather than as investment securities. Investment securities classified as available-for-sale are recorded at fair market value, while investment securities classified as held-to-maturity are recorded at cost. Unrealized gains or losses, net of the deferred tax effect, on available-for-sale securities are reported as increases or decreases in stockholders' equity. Investment securities increased 6.1% to $627 million as of December 31, 2000 from $591 million as of December 31, 1999. The majority of this increase occurred in U.S. Government agencies and corporate securities and resulted in a slight increase in the duration of the portfolio. Investment securities decreased 13.0% to $591 million as of December 31, 1999 from $679 million as of December 31, 1998. Proceeds from maturities, sales and principal payments received in 1999 were reinvested or used to fund increases in loans. The following table sets forth the book value, percentage of total investment securities and average yield for the Company's investment securities as of December 31, 2000: SECURITIES MATURITIES AND YIELD <TABLE> <CAPTION> % of Total Weighted Book Investment Average (Dollars in thousands) Value Securities Yield(1) - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> U.S. Treasury securities Maturing within one year $ 44,043 7.0% 6.20% Maturing in one to five years 21,517 3.4 6.14 Maturing after ten years 444 0.1 6.66 - --------------------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 373 - --------------------------------------------------------------------------------------------------------------------- Total 66,377 10.6 6.18 - --------------------------------------------------------------------------------------------------------------------- </TABLE> -22-
23 SECURITIES MATURITIES AND YIELD, CONTINUED <TABLE> <CAPTION> % of Total Weighted Book Investment Average (Dollars in thousands) Value Securities Yield(1) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> U.S. Government agency securities Maturing within one year $ 16,933 2.7 5.99 Maturing in one to five years 211,780 33.8 6.10 Maturing in five to ten years 10,962 1.7 6.54 - ----------------------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 1,297 - ----------------------------------------------------------------------------------------------------------------------- Total 240,972 38.5 6.11 - ----------------------------------------------------------------------------------------------------------------------- Tax exempt securities Maturing within one year 2,560 0.4 7.70 Maturing in one to five years 12,458 1.9 7.68 Maturing in five to ten years 55,777 8.9 6.99 Maturing after ten years 7,746 1.2 7.64 - ----------------------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 99 - ----------------------------------------------------------------------------------------------------------------------- Total 78,640 12.5 7.18 - ----------------------------------------------------------------------------------------------------------------------- Corporate securities Maturing within one year 25,178 4.0 6.94 Maturing in one to five years 16,792 2.7 6.12 - ----------------------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale - - ----------------------------------------------------------------------------------------------------------------------- Total 41,970 6.7 6.61 - ----------------------------------------------------------------------------------------------------------------------- Other mortgage-backed securities Maturing within one year 33,626 5.4% 6.36% Maturing in one to five years 87,799 14.0 6.45 Maturing in five to ten years 28,021 4.5 6.51 Maturing after ten years 37,361 6.0 7.09 - ----------------------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale (1,258) - ----------------------------------------------------------------------------------------------------------------------- Total 185,549 29.6 6.57 - ----------------------------------------------------------------------------------------------------------------------- Equity securities with no stated maturity 13,069 2.1 Mark-to-market adjustments on securities available-for-sale 230 - ----------------------------------------------------------------------------------------------------------------------- Total 13,299 2.1 - ----------------------------------------------------------------------------------------------------------------------- Total $ 626,807 100.0% 6.43% ======================================================================================================================= </TABLE> (1) Average yields have been calculated on a fully-taxable basis. The maturities noted above reflect $135,194 of investment securities at their final maturities although they have call provisions within the next year. As of December 31, 1999, the Company had U.S. Treasury securities, U.S. Government agency securities, tax exempt securities, corporate securities, other mortgage-backed securities and equity securities with carrying values of $121,051, $172,234, $76,835, $30,564, $177,713 and $12,112, respectively. As of December 31, 1998, the Company had U.S. Treasury securities, U.S. Government agency securities, tax exempt securities, corporate securities, other mortgage-backed securities and equity securities with carrying values of $163,842, $157,566, $68,414, $64,673, $213,190 and $10,993, respectively. For additional information concerning investment securities, see "Notes to Consolidated Financial Statements - Investment Securities" included in Part IV, Item 14. -23-
24 Deposits The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base, which is the Company's primary funding source. The Company's deposits consist primarily of interest bearing demand, saving, IRA and time deposit accounts. For additional information concerning the Company's deposits, including its use of repurchase agreements, as discussed below, see Part I, Item 1, "Business - Funding Sources." Deposits increased 11.7% to $2,365 million as of December 31, 2000 as compared to $2,118 million as of December 31, 1999. Approximately $80 million of this increase is attributable to acquisitions in 2000. The remaining increase is the result of internal growth. Deposits increased 3.7% to $2,118 million as of December 31, 1999, as compared to $2,042 million as of December 31, 1998 primarily due to bank acquisitions. For additional information concerning customer deposits as of December 31, 2000 and 1999, see "Notes to Consolidated Financial Statements - Deposits" included in Part IV, Item 14. Other Borrowed Funds In addition to deposits, the Company also uses other traditional funding sources to support its earning asset portfolio including other borrowed funds consisting primarily of short-term borrowings from the Federal Home Loan Bank of Seattle; repurchase agreements with commercial depositors; and, on a seasonal basis, Federal funds purchased. Other borrowed funds decreased 73.8% to $11 million as of December 31, 2000 from $42 million as of December 31, 1999 and increased 320.0% to $42 million as of December 31, 1999 from $10 million as of December 31, 1998. Fluctuations in the balance of other borrowed funds are primarily due to a $30 million, 90 day note payable to the Federal Home Loan Bank of Seattle obtained in 1999 to mitigate possible liquidity risks associated with Year 2000. The advance matured and was repaid on January 18, 2000. For additional information on other borrowed funds as of December 31, 2000 and 1999, see "Notes to Consolidated Financial Statements - Long-Term Debt and Other Borrowed Funds" included in Part IV, Item 14. Federal Funds Purchased and Securities Sold Under Repurchase Agreements The following table sets forth certain information regarding Federal funds purchased and repurchase agreements as of the dates indicated: <TABLE> <CAPTION> As of and for the years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> Federal funds purchased: Balance at period end $ 19,535 900 1,675 Average balance 25,735 32,405 1,321 Maximum amount outstanding at any month-end 48,110 69,260 15,340 Average interest rate: During the year 6.24% 5.06% 4.99% At period end 5.35% 4.74% 4.12% Securities sold under repurchase agreements: Balance at period end $ 229,078 188,024 173,593 Average balance 206,595 163,974 162,583 Maximum amount outstanding at any month-end 240,751 209,464 173,593 Average interest rate: During the year 5.24% 4.29% 4.32% At period end 5.17% 4.80% 3.94% </TABLE> Long-Term Debt The Company's long-term debt is comprised principally of an unsecured revolving term loan and unsecured subordinated notes. Long-term debt increased 60.9% to $37 million as of December 31, 2000 from $23 million as of December 31, 1999. Additional borrowings were used to fund acquisitions in 2000. Long-term debt decreased 4.2% to $23 million as of December 31, 1999 from $24 million as of December 31, 1998. -24-
25 For additional information on long-term debt as of December 31, 2000 and 1999, see "Notes to Consolidated Financial Statements - Long-Term Debt and Other Borrowed Funds" included in Part IV, Item 14. Non-Performing Assets Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, restructured loans and OREO. Management generally places loans on non-accrual when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. Approximately $1,943,000, $1,424,000, $1,062,000, $763,000 and $405,000 of gross interest income would have been accrued if all loans on non-accrual had been current in accordance with their original terms for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively. Restructured loans are those where the Company has granted a concession on the interest rate or original repayment terms due to financial difficulties of the borrower. OREO consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings with a provision for losses on foreclosed property in the period in which they are identified. The following table sets forth information regarding non-performing assets as of the dates indicated: <TABLE> <CAPTION> As of December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Non-performing loans: Nonaccrual loans $ 19,619 22,854 10,699 9,681 6,822 Accruing loans past due 90 days or more 5,158 4,695 4,039 4,883 6,432 Restructured loans 2,635 3,660 3,306 928 1,763 - ------------------------------------------------------------------------------------------------------------------- Total non-performing loans 27,412 31,209 18,044 15,492 15,017 OREO 3,028 1,445 1,113 1,362 1,546 - ------------------------------------------------------------------------------------------------------------------- Total non-performing assets $ 30,440 32,654 19,157 16,854 16,563 =================================================================================================================== Non-performing assets to total loans and OREO 1.54% 1.89% 1.29% 1.15% 1.20% =================================================================================================================== </TABLE> Non-performing loans decreased 12.9% to $27 million as of December 31, 2000 compared to $31 million as of December 31, 1999 primarily due to loan paydowns by one commercial borrower. Non-performing loans increased 72.2% to $31 million as of December 31, 1999 compared to $18 million as of December 31, 1998 principally due to one commercial loan of $10 million placed on non-accrual in 1999 and continued slight deterioration in the agricultural market sector. In addition to the non-performing loans included in the table above, management has identified potential problem loans of approximately $48 million as of December 31, 2000. Potential problem loans are defined as performing loans for which management has serious doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may result in future non-performing loans. At December 31, 2000, approximately $14 million had been provided for these loans in the allowance for loan losses. Potential problem loans increased 26.3% to $48 million as of December 31, 2000 from $38 million as of December 31, 1999 due primarily to downgrading the loans of five commercial and one agricultural borrower. Potential problem loans increased 18.8% to $38 million as of December 31, 1999 from $32 million at December 31, 1998 due primarily to downgrading the loans of one commercial real estate borrower. -25-
26 There can be no assurance that the Company has identified all of its potential problem loans. Furthermore, management cannot predict the extent to which economic conditions in the Company's market areas may worsen or the full impact such conditions may have on the Company's loan portfolio. Accordingly, there can be no assurances that other loans will not become 90 days or more past due, be placed on non-accrual or become restructured loans or OREO in the future. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in its loan portfolio and economic conditions in the Company's market areas. See "Provision for Loan Losses" herein. The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when management determines that collection has become unlikely. Consumer loans are generally charged off when they become 120 days past due. Other loans, or portions thereof, are charged off when they become 180 days past due unless they are well-secured and in the process of collection. Recoveries are recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses as of the dates and for the years indicated. <TABLE> <CAPTION> As of and for the years ended December 31, 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Balance at the beginning of period $ 29,599 28,803 28,180 27,797 15,171 Allowance of acquired banking offices 1,019 1,574 - - 10,553 Charge-offs: Real estate 81 278 370 141 27 Consumer 4,369 4,192 3,988 5,607 2,384 Commercial 1,192 2,753 1,920 1,132 1,127 Agricultural 164 386 349 71 220 - -------------------------------------------------------------------------------------------------------------------- Total charge-offs 5,806 7,609 6,627 6,951 3,758 Recoveries: Real estate 20 51 213 246 9 Consumer 1,485 1,429 1,500 1,816 974 Commercial 1,138 1,464 1,315 732 850 Agricultural 85 324 52 300 154 - -------------------------------------------------------------------------------------------------------------------- Total recoveries 2,728 3,268 3,080 3,094 1,987 - -------------------------------------------------------------------------------------------------------------------- Net charge-offs 3,078 4,341 3,547 3,857 1,771 Provision for loan losses 5,280 3,563 4,170 4,240 3,844 - -------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 32,820 29,599 28,803 28,180 27,797 ==================================================================================================================== Period end loans $ 1,972,323 1,722,961 1,484,459 1,470,414 1,375,479 Average loans 1,865,125 1,598,594 1,469,741 1,441,800 1,014,901 Net charge-offs to average loans 0.17% 0.27% 0.24% 0.27% 0.17% Allowance to period end loans 1.66% 1.72% 1.94% 1.92% 2.02% ==================================================================================================================== </TABLE> Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the allowance for loan losses. Although management believes that the allowance for loan losses is adequate to provide for both potential losses and estimated inherent losses in the portfolio, future provisions will be subject to on-going evaluations of the inherent risk in the portfolio. If the economy declines or asset quality deteriorates, material additional provisions could be required. -26-
27 The following table provides a summary of the allocation of the allowance for loan losses for specific loan categories as of the dates indicated. The allocations presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amount available for future losses that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> (Dollars in thousands) As of December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ % Of % Of % Of % Of % Of Loan Loan Loan Loan Loan Category Category Category Category Category Allocated to Total Allocated to Total Allocated to Total Allocated to Total Allocated to Total Reserves Loans Reserves Loans Reserves Loans Reserves Loans Reserves Loans - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Real estate $ 11,645 48.5% $ 8,268 46.8% $ 4,443 45.9% $ 1,579 46.5% $ 1,495 43.6% Consumer 4,632 25.1 4,460 26.9 3,874 25.5 4,409 28.0 3,901 29.8 Commercial 5,360 21.3 5,655 20.0 4,748 21.0 5,047 17.8 4,040 19.8 Agricultural 2,194 4.8 2,214 6.2 1,942 7.2 2,515 7.3 1,757 6.6 Other loans 29 0.3 10 0.1 29 0.4 29 0.4 7 0.2 Unallocated 8,960 NA 8,992 NA 13,767 NA 14,601 NA 16,597 NA - ------------------------------------------------------------------------------------------------------------------------------ Totals $ 32,820 100.0% $ 29,599 100.0% $ 28,803 100.0% $ 28,180 100.0% $ 27,797 100.0% ============================================================================================================================== </TABLE> Allocated reserves presented above for 1997 and prior years have not been restated to reflect reclassifications of loans secured by real estate, which are included in other categories of loans in those years. Management does not believe that the impact on trends presented without such reclassification is significant. Liquidity and Cash Flow 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. Net cash provided by operating activities, primarily net income, totaled $45 million for 2000, $36 million for 1999 and $38 million in 1998. Net cash used for investing activities totaled $233 million in 2000, $127 million in 1999 and $277 million in 1998. Investing activities principally include investment security transactions and net extensions of credit to customers. Net cash provided by financing activities, primarily generated through increases in customer deposits, borrowing advances or issuance of securities or stock, totaled $195 million in 2000, $49 million in 1999 and $214 million in 1998. For additional information concerning cash flows, see the "Consolidated Statements of Cash Flows" included in Part IV, Item 14. -27-
28 As a holding company, FIBS is a corporation separate and apart from the Banks, and therefore, provides for its own liquidity. Substantially all of FIBS's revenues are obtained from management fees, dividends declared and paid by the Banks and net revenues generated through data services. As of December 31, 2000, the Banks had approximately $32.5 million available to be paid as dividends to FIBS. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to FIBS. See Part I, Item 1, "Business-Regulation and Supervision." Management of FIBS believes that such restrictions will not have an impact on the ability of FIBS to meet its ongoing cash obligations. In connection with acquisitions in 1996, the Company issued subordinated notes and shares of noncumulative perpetual preferred stock. The subordinated notes are held by an institutional investor, bear interest at 7.5% per annum, are unsecured and mature in increasing annual payments during the period from October 2002 to October 2006. For additional information concerning the revolving term loan and the subordinated notes, see "Notes to Consolidated Financial Statements - Long Term Debt and Other Borrowed Funds" included in Part IV, Item 14. The noncumulative perpetual preferred stock was redeemed on November 7, 1997 with a portion of the proceeds from issuance of trust preferred securities by FIB Capital. The trust preferred securities are unsecured, bear interest at a rate of 8.625%, and mature on December 1, 2027. Interest distributions are payable quarterly, however, the Company may defer interest payments at any time for a period not exceeding 20 consecutive quarters. The trust preferred securities may be redeemed prior to maturity at the Company's option on or after December 1, 2002 or at any time in the event of unfavorable changes in tax laws or regulations in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company has guaranteed the payment of distributions and payments for redemption or liquidation of the trust preferred securities to the extent of funds held by FIB Capital. The remaining proceeds from the issuance of trust preferred securities were used to reduce the Company's revolving term loan. For additional information concerning the trust preferred securities see "Notes to Consolidated Financial Statements - Mandatorily Redeemable Preferred Securities of Subsidiary Trust" included in Part IV, Item 14. Capital Resources Stockholders' equity increased 13.8% to $198 million as of December 31, 2000 from $174 million as of December 31, 1999 and 7.4% to $174 million as of December 31, 1999 from $162 million as of December 31, 1998 primarily due to increases in retained earnings. Stockholders' equity is influenced primarily by earnings, dividends and, to a lesser extent, sales and redemptions of common stock involving employees of the Company and changes in the unrealized holding gains or losses, net of taxes, on available-for-sale investment securities. For the years ended December 31, 2000, 1999 and 1998, the Company paid aggregate cash dividends to stockholders of $9 million, $9 million and $8 million, respectively. Pursuant to FDICIA, the Federal Reserve and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 2000, each of the Banks had levels of capital which met or exceeded the well-capitalized guidelines. For additional information concerning the capital levels of the Company, see "Notes to Consolidated Financial Statements - Regulatory Matters" contained in Part IV, Item 14. Interest Rate Risk Management The Company's primary earnings source is the net interest margin, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments and the mix of interest bearing assets and liabilities. -28-
29 The ability to optimize the net interest margin is largely dependent upon the achievement of an interest rate spread which can be managed during periods of fluctuating 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. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest bearing liabilities which either reprice or mature within a given period of time. The difference is known as interest rate sensitivity gap. The following table shows interest rate sensitivity gaps for different intervals as of December 31, 2000: <TABLE> <CAPTION> Three Three One Months Months Year to After (Dollars in thousands) or Less to One Year Five Years Five Years Total - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest earning assets: Loans(1) $ 685,686 367,038 764,552 135,428 1,952,704 Investment securities(2) 61,928 73,598 351,159 140,122 626,807 Interest bearing deposits in banks 771 - - - 771 Federal funds sold 1,510 - - - 1,510 - ---------------------------------------------------------------------------------------------------------------------- Total interest earning assets $ 749,895 440,636 1,115,711 275,550 2,581,792 ====================================================================================================================== Interest bearing liabilities and trust preferred securities: Interest bearing demand accounts(3) $ 28,805 86,416 268,849 - 384,070 Savings deposits(3) 450,406 30,494 94,868 - 575,768 Time deposits, $100 or more(4) 97,903 147,040 38,656 - 283,599 Other time deposits 154,765 371,873 153,464 123 680,225 Federal funds purchased 19,535 - - - 19,535 Securities sold under repurchase agreements 229,078 - - - 229,078 Other borrowed funds 11,138 - - - 11,138 Long-term debt 11,899 572 18,360 6,169 37,000 Trust preferred securities - - - 40,000 40,000 - ---------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities and trust preferred securities $ 1,003,529 636,395 574,197 46,292 2,260,413 ====================================================================================================================== Rate gap $ (253,634) (195,759) 541,514 229,258 321,379 Cumulative rate gap (253,634) (449,393) 92,121 321,379 Cumulative rate gap as a percentage of total interest earning assets (9.82)% (17.41)% 3.57% 12.45% ====================================================================================================================== </TABLE> Assumptions used: (1) Does not include nonaccrual loans of $19,619. (2) Adjusted to reflect: (a) expected shorter maturities based upon the Company's historical experience of early prepayments of principal, and (b) the redemption of callable securities on their next call date. (3) Includes savings deposits paying interest at market rates in the three month or less category. All other deposit categories, while technically subject to immediate withdrawal, actually display sensitivity characteristics that generally fall within one and five years. Their allocation is presented based on that historical analysis. (4) Included in the three month to one year category are deposits of $69,164 maturing in three to six months. As noted in footnote 3 above, interest bearing demand accounts and savings deposits are allocated based on historical analysis of their interest sensitivity characteristics although they are technically subject to immediate withdrawal. If these deposits were included in the three month or less category, the above table would reflect a negative three month gap of $734 million, a negative cumulative one year gap of $813 million and a positive cumulative one to five year gap of $92 million. -29-
30 The balance sheet structure is primarily short-term in nature with most assets and liabilities repricing or maturing in less than five years. Management monitors the sensitivity of net interest margin by utilizing income simulation models and traditional interest rate gap analysis. The income simulation model involves a degree of estimation based on certain assumptions management believes to be reasonable including estimated cash flows, prepayments, repricing characteristics, actual maturities, deposit growth and retention, and the relative sensitivity of assets and liabilities to change in market interest rates. The relative sensitivity is important to consider since the Company's deposit base is not subject to the same degree of interest sensitivity as its assets. The Company attempts to maintain a mix of interest earning assets and deposits such that no more than 5% of the net interest margin will be at risk over a one year period should interest rates vary one percent. However, there can be no assurance as to the actual effect changes in interest rates will have on the Company's net interest margin. At December 31, 2000, the Company's one year cumulative liability sensitive gap totaled $449 million representing 17.4% of total interest earning assets. This position gradually changed from year end 1999 when the Company's gap position was liability sensitive by $248 million or 10.8% of total interest earning assets. In evaluating exposure to interest rate risk, management does not view the gap amounts in the preceding table as presenting an unusually high risk potential. However, no assurances can be given that the Company is not at risk in the event of rate increases or decreases. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk. The business of the Company and the composition of its balance sheet consists of investments in interest earning assets (primarily loans and investment securities) which are primarily funded by interest bearing liabilities (deposits and indebtedness). Such financial instruments have varying levels of sensitivity to changes in market interest rates. Interest rate risk results when, due to different maturity dates and repricing intervals, interest rate indices for interest earning assets decrease relative to interest bearing liabilities, thereby creating a risk of decreased net earnings and cash flow. The following tables provide information about the Company's market sensitive financial instruments, categorized by maturity and the instruments' fair values at December 31, 2000 and 1999. The table constitutes a "forward-looking statement." For a description of the Company's policies with respect to managing risks associated with changing interest rates, see Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation-Financial Condition-Interest Rate Risk Management." Although the Company characterizes some of its interest-sensitive assets as securities available-for-sale, such securities are not purchased with a view to sell in the near term. Rather, such securities may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk. Thus, all interest-sensitive assets described below are non-trading. See "Notes to Consolidated Financial Statements-Summary of Significant Accounting Policies" included in Part IV, Item 14. <TABLE> <CAPTION> December 31, 2000 Expected Maturity/Principal Repayment ------------------------------------------------------------------------------------ (Dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Interest-sensitive assets: Cash and short-term investments $ 169,245 - - - - - 169,245 Net loans 949,937 338,884 217,052 158,056 102,638 157,506 1,924,073 Securities available-for-sale 47,827 76,149 68,552 99,747 28,669 77,037 397,981 Securities held-to-maturity 74,198 37,299 16,335 17,285 6,723 76,400 228,240 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-sensitive assets $ 1,241,207 452,332 301,939 275,088 138,030 310,943 2,719,539 ============================================================================================================================== Interest-sensitive liabilities and trust preferred securities: Total deposits excluding time deposits 728,589 144,174 144,174 384,464 - - 1,401,401 Time deposits 782,403 119,651 31,418 9,183 19,300 87 962,042 Federal funds purchased 19,535 - - - - - 19,535 Securities sold under repurchase agreements 229,078 - - - - - 229,078 Other borrowed funds 11,138 - - - - - 11,138 Long-term debt 10,503 5,284 5,082 4,880 7,674 4,636 38,059 Trust preferred securities - - - - - 37,200 37,200 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-sensitive liabilities and trust preferred securities $ 1,781,246 269,109 180,674 398,527 26,974 41,923 2,698,453 ============================================================================================================================== </TABLE> -30-
31 <TABLE> <CAPTION> December 31, 1999 Expected Maturity/Principal Repayment ------------------------------------------------------------------------------- (Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Interest-sensitive assets: Cash and short-term investments $ 162,306 - - - - - 162,306 Net loans 781,501 297,498 208,351 134,173 116,361 148,951 1,686,835 Securities available-for-sale 143,515 65,496 58,195 24,247 7,988 44,612 344,053 Securities held-to-maturity 54,613 55,328 37,610 16,639 8,606 66,832 239,628 - -------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive assets $ 1,141,935 418,322 304,156 175,059 132,955 260,395 2,432,822 ========================================================================================================================== Interest-sensitive liabilities and trust preferred securities: Total deposits excluding time deposits $ 686,205 135,754 135,754 362,012 - - 1,319,725 Time deposits 535,141 211,319 27,833 14,836 7,064 335 796,528 Federal funds purchased 900 - - - - - 900 Securities sold under repurchase agreements 188,024 - - - - - 188,024 Other borrowed funds 41,875 - - - - - 41,875 Long-term debt 1,952 1,781 4,339 4,063 3,787 7,568 23,490 Trust preferred securities - - - - - 41,600 41,600 - -------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive liabilities and trust preferred securities $ 1,454,097 348,854 167,926 380,911 10,851 49,503 2,412,142 ========================================================================================================================== </TABLE> The prepayment projections of net loans are based on experience and do not take into account any allowance for loan losses. The expected maturities of securities are based upon contractual maturities adjusted for projected prepayments of principal and assumes no reinvestment of proceeds. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. All other financial instruments are stated at contractual maturities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of FIBS and subsidiaries are contained elsewhere herein [see Item 14(a)1]: <TABLE> <S><C> Report of KPMG LLP, Independent Auditors Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements </TABLE> As more fully described in "Notes to the Consolidated Financial Statements", the Company has restated 1999, 1998 and 1997 consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information concerning "Directors and Executive Officers of Registrant" is set forth under the heading "Directors and Executive Officers" in the Company's 2000 definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 18, 2001 (the "Proxy Statement") and is incorporated herein by reference. -31-
32 Information concerning "Compliance With Section 16(a) of the Securities and Exchange Act of 1934" is set forth under the heading "Compliance With Section 16(a) of the Securities and Exchange Act of 1934" (the "Exchange Act") in the Company's Proxy Statement and is herein incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information concerning "Executive Compensation" is set forth under the heading "Director and Executive Compensation" in the Company's Proxy Statement and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning "Security Ownership of Certain Beneficial Owners and Management" is set forth under the heading "Security Ownership of Principal Shareholders and Management" in the Company's Proxy Statement and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning "Certain Relationships and Related Transactions" is set forth under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement and is herein incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Following are the Company's audited consolidated financial statements. -32-
33 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- KPMG LLP The Board of Directors and Stockholders First Interstate BancSystem, Inc.: We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 25 to the consolidated financial statements, the Company has restated its 1999 and 1998 consolidated financial statements to account for its stock option plan as a variable plan under APB Opinion 25, "Accounting for Stock Issued to Employees". /s/ KPMG LLP Billings, Montana January 26, 2001 -33-
34 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) <TABLE> <CAPTION> December 31, 2000 1999 (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Cash and due from banks $ 166,964 146,943 Federal funds sold 1,510 10,415 Interest bearing deposits in banks 771 4,948 Investment securities: Available-for-sale 397,981 344,053 Held-to-maturity (estimated market values of $228,240 and $239,628 at December 31, 2000 and 1999, respectively) 228,826 246,456 - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities 626,807 590,509 - ------------------------------------------------------------------------------------------------------------------------------- Loans 1,972,323 1,722,961 Less allowance for loan losses 32,820 29,599 - ------------------------------------------------------------------------------------------------------------------------------- Net loans 1,939,503 1,693,362 - ------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 91,075 74,106 Accrued interest receivable 28,442 24,506 Goodwill and core deposit intangible, net of accumulated amortization of $17,163 in 2000 and $13,714 in 1999 42,481 32,374 Other real estate owned, net 3,028 1,445 Deferred tax asset 7,282 11,643 Other assets 25,399 22,412 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,933,262 2,612,663 =============================================================================================================================== Liabilities and Stockholders' Equity Deposits: Noninterest bearing $ 441,563 398,391 Interest bearing 1,923,662 1,719,792 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits 2,365,225 2,118,183 - ------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased 19,535 900 Securities sold under repurchase agreements 229,078 188,024 Accrued interest payable 19,026 13,331 Accounts payable and accrued expenses 14,274 13,318 Other borrowed funds 11,138 41,875 Long-term debt 37,000 23,394 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,695,276 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 December 31, 2000 and 1999 - - Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,899,168 shares and 7,993,250 shares as of December 31, 2000 and 1999, respectively 7,101 10,831 Retained earnings 190,410 168,837 Accumulated other comprehensive income (loss), net 475 (6,030) - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 197,986 173,638 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,933,262 2,612,663 =============================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -34-
35 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, 2000 1999 1998 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest income: Interest and fees on loans $ 179,477 148,827 143,236 Interest and dividends on investment securities: Taxable 31,515 34,242 29,616 Exempt from Federal taxes 3,591 3,355 2,108 Interest on deposits in banks 112 353 997 Interest on Federal funds sold 1,400 1,304 3,457 - ------------------------------------------------------------------------------------------------------------------------------- Total interest income 216,095 188,081 179,414 - ------------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 80,205 67,525 68,248 Interest on Federal funds purchased 1,605 1,639 66 Interest on securities sold under repurchase agreements 10,836 7,035 7,023 Interest on other borrowed funds 3,084 1,324 461 Interest on long-term debt 2,696 2,126 2,327 Interest on mandatorily redeemable preferred securities of subsidiary trust 3,529 3,529 3,527 Total interest expense 101,955 83,178 81,652 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 114,140 104,903 97,762 Provision for loan losses 5,280 3,563 4,170 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 108,860 101,340 93,592 Noninterest income: Income from fiduciary activities 4,910 4,495 4,006 Service charges on deposit accounts 12,590 11,373 10,379 Technology services 10,171 8,274 8,081 Other service charges, commissions and fees 6,512 5,684 4,951 Investment securities gains, net 133 19 282 Other real estate income, net 689 366 134 Other income 4,849 2,746 2,131 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,854 32,957 29,964 - ------------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries, wages and employee benefits 51,814 48,034 43,980 Occupancy, net 8,063 7,085 6,418 Furniture and equipment 10,692 10,218 8,524 FDIC insurance 438 233 215 Goodwill and core deposit intangible amortization expense 3,449 2,764 2,464 Other expenses 26,702 23,006 21,976 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 101,158 91,340 83,577 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 47,556 42,957 39,979 Income tax expense 17,176 15,229 15,100 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 30,380 27,728 24,879 =============================================================================================================================== Basic earnings per share $ 3.83 3.48 3.10 Diluted earnings per share 3.78 3.42 3.08 =============================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -35-
36 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands, except share and per share data) <TABLE> <CAPTION> Accumulated other Total Common Retained comprehensive stockholders' stock earnings income (loss) equity - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Balance at December 31, 1997, restated $ 11,860 132,311 900 145,071 Comprehensive income: Net income - 24,879 - 24,879 Unrealized gains on available-for-sale investment securities, net of reclassification adjustment - - 1,268 1,268 ----------- Total comprehensive income 26,147 ----------- Common stock transactions: 112,274 shares retired (3,739) - - (3,739) 70,048 shares issued 2,347 - - 2,347 Cash dividends declared: Common ($0.94 per share) - (7,551) - (7,551) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998, restated 10,468 149,639 2,168 162,275 Comprehensive income: Net income - 27,728 - 27,728 Unrealized losses on available-for-sale investment securities, net of reclassification adjustment - - (8,198) (8,198) ----------- Total comprehensive income - - - 19,530 ----------- Common stock transactions: 87,201 shares retired (3,271) - - (3,271) 91,878 shares issued 3,634 - - 3,634 Cash dividends declared: Common ($1.07 per share) - (8,530) - (8,530) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999, restated 10,831 168,837 (6,030) 173,638 Comprehensive income: Net income - 30,380 - 30,380 Unrealized gains on available-for-sale investment securities, net of reclassification adjustment - - 6,505 6,505 ----------- Total comprehensive income 36,885 ----------- Common stock transactions: 124,718 shares retired (4,904) - - (4,904) 30,636 shares issued 1,174 - - 1,174 Cash dividends declared: Common ($1.11 per share) - (8,807) - (8,807) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 $ 7,101 190,410 475 197,986 ==================================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -36-
37 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Year Ended December 31, 2000 1999 1998 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 30,380 27,728 24,879 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of joint venture (737) - - Provisions for loan and other real estate losses 5,280 3,583 4,215 Depreciation and amortization 12,432 11,025 9,270 Donation of land - 359 - Net premium amortization on investment securities 113 453 286 Net gain on sale of investments (133) (19) (282) Gain on sale of other real estate owned (758) (446) (248) Gain on sale of loans (1,711) (1,496) (894) Loss (gain) on sale of premises and equipment (194) 15 346 Deferred income taxes 286 (594) (796) Increase in accrued interest receivable (3,152) (2,068) (387) Increase in other assets (2,884) (2,902) (3,362) Increase (decrease) in accrued interest payable 5,461 (62) 2,058 Increase (decrease) in accounts payable and accrued expenses 422 584 2,550 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 44,805 36,160 37,635 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (60,472) (72,390) (163,430) Available-for-sale (105,624) (38,747) (388,698) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 78,948 129,667 101,048 Available-for-sale 50,042 64,838 166,326 Proceeds from sales of available-for-sale investment securities 28,458 2,483 33,718 Extensions of credit to customers, net of repayments (190,889) (209,403) (21,053) Recoveries on loans charged-off 2,728 3,268 3,080 Proceeds from sale of other real estate owned 1,535 1,708 1,727 Acquisitions of banking offices, net of cash and cash equivalents acquired (15,288) 9,424 - Capital distribution from joint venture 300 325 321 Capital expenditures, net of sales (22,606) (17,782) (9,568) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (232,868) (126,609) (276,529) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 166,960 15,670 236,926 Net increase (decrease) in federal funds purchased and repurchase agreements 59,689 13,656 (5,107) Net increase (decrease) in other borrowed funds (32,737) 32,047 (1,763) Borrowings of long-term debt 29,000 5,527 2,371 Repayment of long-term debt (15,394) (9,720) (9,609) Net decrease (increase) in debt issuance costs 95 95 (40) Proceeds from issuance of common stock 1,100 3,262 2,278 Payments to retire common stock (4,904) (3,271) (3,739) Dividends paid on common stock (8,807) (8,530) (7,551) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 195,002 48,736 213,766 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,939 (41,713) (25,128) Cash and cash equivalents at beginning of year 162,306 204,019 229,147 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 169,245 162,306 204,019 =============================================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 96,494 83,211 79,594 Cash paid during the year for taxes 15,666 15,761 16,865 =============================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -37-
38 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. The Company, through the branch offices of its banking subsidiaries, provides a full range of banking services to individual and corporate customers throughout the states of Montana and Wyoming. The Company is subject to competition from other financial institutions and financial service providers, and is also subject to the regulations of various government agencies and undergoes periodic examinations by those regulatory authorities. The following is a summary of significant accounting policies utilized by the Company: PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of First Interstate BancSystem, Inc. (Parent Company) and its operating subsidiaries: First Interstate Bank in Montana ("FIB Montana"), First Interstate Bank in Wyoming ("FIB Wyoming"), Commerce Financial, Inc., FIB Capital Trust and i_Tech Corporation. All material intercompany transactions have been eliminated in consolidation. BASIS OF PRESENTATION. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. Management relies on market evaluations and historical experience in determining the adequacy of the allowance for loan losses. Independent appraisals are obtained for significant properties in the process of foreclosure. Management believes that the allowances for losses on loans and real estate owned are adequate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions which may affect the borrowers' ability to pay or regulatory requirements. In addition to purchasing and selling Federal funds for their own account, the Company purchases and sells Federal funds as an agent. These and other assets held in an agency or fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold for one day periods, and interest bearing deposits in banks with original maturities of less than three months. At December 31, 2000 the Company was required to have aggregate reserves, exclusive of cash on hand, with the Federal Reserve Bank of approximately $9,709. Also, approximately $18,500 of additional compensating balance was maintained with the Federal Reserve Bank to mitigate the payment of service charges for check clearing services. -38-
39 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) INVESTMENT SECURITIES. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Debt securities that may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk, or other factors, and any marketable equity securities, are classified as available-for-sale and carried at fair value. The unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of stockholders' equity. Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account assets and reported at fair value. The Company did not carry any trading account assets during 2000, 1999 or 1998. Management determines the appropriate classification of securities at the time of purchase and at each reporting date management reassesses the appropriateness of the classification. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for accretion of discounts to maturity, amortization of premiums over the estimated average life of the security, or in the case of callable securities, through the first call date. Such amortization and accretion is included in interest income with interest and dividends. Realized gains and losses, and declines in value judged to be other-than-temporary, are included in investment securities gains (losses). The cost of securities sold is based on the specific identification method. LOANS. Loans are reported at the principal amount outstanding. Interest is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal unless such past due loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgement of management, the loans are estimated to be fully collectible as to both principal and interest. Renegotiated loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty. Significant loan origination fees and prepaid interest, net of related costs, are recognized over the expected lives of the related loans as an adjustment of yield. Origination fees on loans sold to the secondary market are recognized when the loan is sold. The amortization of deferred loan fees and costs and the accretion of unearned discounts on non-performing loans is discontinued during periods of non-performance. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses which is charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance balance is an amount that management believes will be adequate to absorb losses inherent in existing loans and leases, based on evaluations of the collectibility and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, leases and commitments, and current and anticipated economic conditions that affect the borrowers' ability to pay. -39-
40 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The Company also establishes a reserve for losses on specific loans which are deemed to be impaired. Groups of small balance homogeneous basis loans (generally consumer loans) are evaluated for impairment collectively. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect, on a timely basis, all principal and interest according to the contractual terms of the loan's original agreement. The amount of the impairment is measured using cash flows discounted at the loan's effective interest rate, except when it is determined that the primary source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current value of the collateral, reduced by anticipated selling costs, is used to measure impairment instead of discounted cash flows. The Company's impaired loans are those non-consumer loans which are non-accrual or a troubled debt restructuring. Interest income is recognized on impaired loans only to the extent that cash payments are received. GOODWILL AND CORE DEPOSIT INTANGIBLE. The excess purchase price over the fair value of identifiable net assets from acquisitions is allocated between goodwill and the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions ("core deposit intangible"). Goodwill is amortized using the straight-line method over periods of primarily 15 to 25 years. Core deposit intangible is amortized using an accelerated method based on an estimated runoff of the related deposits, over an original period not exceeding 10 years. PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is provided over estimated useful lives of 5 to 50 years for buildings and improvements and 3 to 15 years for furniture and equipment using straight-line methods. Leasehold improvements are amortized using straight-line methods over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Depreciation expense was $8,983 in 2000, $8,261 in 1999 and $6,692 in 1998. LONG-LIVED ASSETS. Long-lived assets, including premises and equipment, enterprise goodwill and certain identifiable intangibles (e.g. excess purchase price, core deposit intangibles), are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. The amount of the impairment loss, if any, is based on the asset's fair value, which may be estimated by discounting the expected future cash flows. There were no impairment losses recognized during 2000, 1999 or 1998. OTHER REAL ESTATE OWNED. Real estate acquired in satisfaction of loans is carried at the lower of the recorded investment in the property at the date of foreclosure or its current fair value less selling cost ("Net Realizable Value"). The value of the underlying loan is written down to the fair market value of the real estate acquired by a charge to the allowance for loan losses, if necessary, at the date of foreclosure. A provision to the real estate owned valuation allowance is charged against other real estate expense for any current or subsequent write-downs to Net Realizable Value. Operating expenses of such properties, net of related income, and gains on sales are included in other real estate income, net. SERVICING ASSETS. The Company recognizes as assets the rights to service mortgage loans for others, whether acquired or internally originated. Servicing assets are initially recorded at fair value based on comparable market quotes and are amortized in proportion to and over the period of estimated net servicing income. Amortization expense of $890, $660 and $317 was recognized in 2000, 1999 and 1998, respectively. Servicing assets are periodically evaluated for impairment by discounting the expected future cash flows, taking into consideration the estimated level of prepayments based on current industry expectations and the predominant risk characteristics of the underlying loans including loan type, note rate and loan term. There were no impairment losses recognized in 2000, 1999 or 1998. The principal balance of mortgage loans serviced for others are not included in the accompanying financial statements. The unpaid balances of these loans were approximately $619,538 and $476,479 at December 31, 2000 and 1999, respectively. -40-
41 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice, income for trust services is recognized on the basis of cash received. However, use of this method in lieu of accrual basis accounting does not materially affect reported earnings. INCOME TAXES. The Parent Company and its subsidiaries have elected to be included in a consolidated Federal income tax return. For state income tax purposes, the combined taxable income of the Parent Company and its subsidiaries is apportioned between the states in which operations take place. Federal and state income taxes attributable to the subsidiaries, computed on a separate return basis, are paid to or received from the Parent Company. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. PER SHARE DATA. Basic earnings per common share is calculated by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. 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 stock outstanding during the period. STOCK-BASED COMPENSATION. The Company measures compensation cost for stock-based employee compensation plans based on the intrinsic value of the award. Intrinsic value is the excess of the fair value of the underlying stock over the amount an employee must pay to acquire the stock. COMPREHENSIVE INCOME. Comprehensive income includes net income, as well as other changes in stockholders' equity that result from transactions and economic events other than those with stockholders. The Company's only significant element of other comprehensive income is unrealized gains and losses on available-for-sale securities. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," addressing a limited number of implementation issues in applying SFAS No. 133. SFAS Nos. 133 and 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption on January 1, 2001 is not anticipated to have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. As of December 31, 2000, the Company was not engaged in hedging activities nor did it hold any derivative instruments which required adjustments to carrying values under SFAS Nos. 133 or 138. Upon adoption of SFAS No. 133, the Company transferred held-to-maturity investment securities with amortized costs and market values of $104 million and $103 million, respectively, into the available-for-sale investment category. Net unrealized holding gains of $569,000 on the transferred securities will be reported in accumulated other comprehensive income. -41-
42 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125". SFAS No. 140 revises accounting standards for securitizations and transfers of financial assets and collateral and requires certain disclosures, but carries forward most of SFAS No. 125's provisions without change. SFAS No. 140 is effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. Adoption of these provisions did not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management expects that adoption of these provisions will not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. RECLASSIFICATIONS. Certain reclassifications have been made to the 1999 and 1998 amounts to conform to the 2000 presentation. (2) REGULATORY MATTERS The Company is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as defined in the regulations. As of December 31, 2000, the Company exceeded all capital adequacy requirements to which it is subject. As of December 31, 2000, the most recent notification from the Federal Reserve Bank categorized the Company and the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier 1 risk-based, and leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios and selected minimum regulatory thresholds as of December 31, 2000 and 1999 are presented in the following table: <TABLE> <CAPTION> Adequately Well Actual Capitalized Capitalized ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 2000: Total risk-based capital: Consolidated $ 235,731 10.4% $ 182,019 8.0% $ 227,524 10.0% FIB Montana 158,209 11.1 113,649 8.0 142,062 10.0 FIB Wyoming 94,198 11.1 67,616 8.0 84,520 10.0 Tier 1 risk-based capital: Consolidated 194,533 8.6 91,009 4.0 136,514 6.0 FIB Montana 140,347 9.9 56,825 4.0 85,237 6.0 FIB Wyoming 83,578 9.9 33,808 4.0 50,712 6.0 Leverage capital ratio: Consolidated 194,533 6.8 114,736 4.0 143,420 5.0 FIB Montana 140,347 7.9 70,709 4.0 88,386 5.0 FIB Wyoming 83,578 7.7 43,570 4.0 54,463 5.0 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> -42-
43 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Adequately Well Actual Capitalized Capitalized ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 1999: Total risk-based capital: Consolidated $ 227,009 11.7% $ 155,388 8.0% $ 194,235 10.0% FIB Montana 149,184 11.8 101,354 8.0 126,693 10.0 FIB Wyoming 77,406 11.6 53,352 8.0 66,690 10.0 Tier 1 risk-based capital: Consolidated 186,927 9.7 77,694 4.0 116,541 6.0 FIB Montana 133,291 10.5 50,677 4.0 76,016 6.0 FIB Wyoming 69,002 10.4 26,676 4.0 40,014 6.0 Leverage capital ratio: Consolidated 186,927 7.2 104,631 4.0 130,788 5.0 FIB Montana 133,291 7.8 68,440 4.0 85,551 5.0 FIB Wyoming 69,002 7.7 35,872 4.0 44,839 5.0 =============================================================================================================================== </TABLE> (3) INVESTMENT SECURITIES The amortized cost and approximate market values of investment securities are summarized as follows: <TABLE> <CAPTION> Available-for-Sale Gross Gross Estimated Amortized unrealized unrealized market December 31, 2000 cost gains losses value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 19,469 373 - 19,842 Obligations of U.S. Government agencies 213,779 1,658 (361) 215,076 States, county and municipal securities 4,692 99 - 4,791 Other mortgage-backed securities 146,231 117 (1,375) 144,973 Other securities 13,069 230 - 13,299 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 397,240 2,477 (1,736) 397,981 =============================================================================================================================== </TABLE> <TABLE> <CAPTION> Held-to-Maturity Gross Gross Estimated Amortized unrealized unrealized market December 31, 2000 cost gains losses value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 46,535 221 (1) 46,755 Obligations of U.S. Government agencies 25,896 135 (76) 25,955 States, county and municipal securities 73,849 694 (381) 74,162 Corporate securities 41,970 10 (335) 41,645 Other mortgage-backed securities 40,576 3 (856) 39,723 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 228,826 1,063 (1,649) 228,240 =============================================================================================================================== </TABLE> Gross gains of $138 and gross losses of $5 were realized on the sale of available-for-sale securities in 2000. Other securities available-for-sale include restricted equity stocks of the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank ("FHLB") carried at amortized costs of $3,406 and $9,412, respectively, at December 31, 2000. -43-
44 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Available-for-Sale Gross Gross Estimated Amortized unrealized unrealized market December 31, 1999 cost gains losses value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 47,080 4 (133) 46,951 Obligations of U.S. Government agencies 155,604 - (4,509) 151,095 States, county and municipal securities 5,454 96 (8) 5,542 Corporate securities 4,220 - (14) 4,206 Other mortgage-backed securities 129,332 101 (5,286) 124,147 Other securities 11,985 127 - 12,112 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 353,675 328 (9,950) 344,053 =============================================================================================================================== </TABLE> <TABLE> <CAPTION> Held-to-Maturity Gross Gross Estimated Amortized unrealized unrealized market December 31, 1999 cost gains losses value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 74,100 81 (66) 74,115 Obligations of U.S. Government agencies 21,139 - (597) 20,542 States, county and municipal securities 71,293 42 (2,525) 68,810 Corporate securities 26,358 - (448) 25,910 Other mortgage-backed securities 53,566 - (3,315) 50,251 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 246,456 123 (6,951) 239,628 =============================================================================================================================== </TABLE> Gross gains of $20 and gross losses of $1 were realized on the sale of available-for-sale securities in 1999. Gross gains of $284 and gross losses of $2 were realized on the sale of available-for-sale securities in 1998. Other securities available-for-sale include restricted equity stocks of the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank ("FHLB") carried at amortized costs of $3,152 and $8,522, respectively, at December 31, 1999. Maturities of investment securities at December 31, 2000 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. <TABLE> <CAPTION> December 31, 2000 Available-for-Sale Held-to-Maturity - ------------------------------------------------------------------------------------------------------------------------------- Amortized Estimated Amortized Estimated cost market value cost market value - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Within one year $ 47,940 47,827 74,400 74,198 After one but within five years 272,305 273,118 78,041 77,642 After five years but within ten years 34,236 34,078 60,524 60,701 After ten years 29,690 29,659 15,861 15,699 - ------------------------------------------------------------------------------------------------------------------------------- Total 384,171 384,682 228,826 228,240 - ------------------------------------------------------------------------------------------------------------------------------- No stated maturity 13,069 13,299 - - - ------------------------------------------------------------------------------------------------------------------------------- Total $ 397,240 397,981 228,826 228,240 =============================================================================================================================== </TABLE> At December 31, 2000, the Company had investment securities callable within one year with amortized costs and estimated market values of $135,194 and $134,629, respectively. These investment securities are primarily classified as available-for-sale and are primarily included in the after one but within five years category in the table above. -44-
45 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Maturities of securities do not reflect rate repricing opportunities present in adjustable rate mortgage-backed and corporate securities. At December 31, 2000 and 1999, the Company had variable rate securities with amortized costs of $4,120 and $6,776, respectively. There are no significant concentrations of investments at December 31, 2000 (greater than 10 percent of stockholders' equity) in any individual security issuer, except for U.S. Government or agency-backed securities. Investment securities with amortized cost of $466,946 and $429,058 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits, securities sold under repurchase agreements and for other purposes required or permitted by law. The approximate market value of securities pledged at December 31, 2000 and 1999 was $466,413 and $420,323, respectively. All securities sold under repurchase agreements are with customers and generally mature on the next banking day. The Company retains possession of the underlying securities sold under repurchase agreements. (4) LOANS Major categories and balances of loans included in the loan portfolios are as follows: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Real estate (1) $ 954,933 806,320 Consumer (2) 495,445 463,414 Commercial 420,706 344,371 Agricultural 95,387 106,887 Other loans, including overdrafts 5,852 1,969 - ------------------------------------------------------------------------------------------------------------------------------- Total loans $ 1,972,323 1,722,961 =============================================================================================================================== </TABLE> (1) Includes residential, agricultural, commercial, consumer, construction and other loans secured by real estate of $112,543, $96,019, $519,817, $148,312, $66,010 and $12,232, respectively, as of December 31, 2000 and $103,079, $87,711, $435,006, $117,881, $48,669 and $13,974, respectively, as of December 31, 1999. (2) Includes indirect loans of $319,224 and $318,711 at December 31, 2000 and 1999, respectively. At December 31, 2000, the Company had no concentrations of loans which exceeded 10% of total loans other than the categories disclosed above. Nonaccrual loans amounted to $19,619 and $22,854 at December 31, 2000 and 1999, respectively. If interest on nonaccrual loans had been accrued, such income would have approximated $1,943 and $1,424, respectively. Loans contractually past due ninety days or more aggregating $5,158 on December 31, 2000 and $4,695 on December 31, 1999 were on accrual status. Such loans are deemed adequately secured and in the process of collection. Impaired loans at December 31, 2000 and 1999 are $20,675 and $24,187, respectively. Included in impaired loans at December 31, 2000 and 1999 are $2,249 and $4,331, respectively, of loans which have an impairment allowance of $1,092 and $2,997, respectively, included in the Company's allowance for loan losses. The average recorded investment in impaired loans for the years ended December 31, 2000, 1999 and 1998 was approximately $22,324, $17,494 and $10,652, respectively. If interest on impaired loans had been accrued, the amount of interest income on impaired loans during 2000, 1999 and 1998 would have been approximately $2,043, $1,536 and $984, respectively. -45-
46 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Also included in impaired loans at December 31, 2000 and 1999 are loans with a carrying value of $2,635 and $3,660, respectively, the terms of which have been modified in troubled debt restructurings. Restructured debt includes nonaccrual loans of $650 and $1,539 at December 31, 2000 and 1999, respectively. The interest income recognized on restructured loans approximated $176, $192 and $109 during the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, there were no material commitments to lend additional funds to borrowers whose existing loans have been restructured or are classified as nonaccrual. Most of the Company's business activity is with customers within the states of Montana and Wyoming. Loans where the customers or related collateral are out of the Company's trade area are not significant and management's anticipated credit losses arising from these transactions compare favorably with the Company's credit loss experience on its loan portfolio as a whole. Certain executive officers and directors of the Company and certain corporations and individuals related to such persons, incurred indebtedness in the form of loans, as customers, of $25,757 at December 31, 2000 and $17,600 at December 31, 1999. During 2000, new loans and advances on existing loans of $47,995 were funded and repayments totaled $39,838. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable risk of collectibility. (5) ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows: <TABLE> <CAPTION> Year ending December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 29,599 28,803 28,180 Allowance of acquired banking offices 1,019 1,574 - Provision charged to operating expense 5,280 3,563 4,170 Less loans charged-off (5,806) (7,609) (6,627) Add back recoveries of loans previously charged-off 2,728 3,268 3,080 - ------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 32,820 29,599 28,803 =============================================================================================================================== </TABLE> (6) PREMISES AND EQUIPMENT Premises and equipment and related accumulated depreciation are as follows: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Land $ 12,606 9,540 Buildings and improvements 74,811 62,706 Furniture and equipment 40,713 34,757 - ------------------------------------------------------------------------------------------------------------------------------- 128,130 107,003 Less accumulated depreciation 37,055 32,897 - ------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net $ 91,075 74,106 =============================================================================================================================== </TABLE> The Parent Company and a branch office lease premises from an affiliated partnership (see note 13). -46-
47 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (7) OTHER REAL ESTATE OWNED Other real estate owned (OREO) consists of the following: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> OREO $ 3,038 1,465 Less allowance for OREO losses 10 20 - ------------------------------------------------------------------------------------------------------------------------------- $ 3,028 1,445 =============================================================================================================================== </TABLE> A summary of changes in the allowance for OREO losses follows: <TABLE> <CAPTION> Year ending December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 20 477 462 Provision during the year - 20 45 Property writedowns (10) (477) (30) - ------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 10 20 477 =============================================================================================================================== </TABLE> (8) SERVICING ASSETS The Company had servicing assets, net of accumulated amortization, of $4,964 and $3,673 at December 31, 2000 and 1999, respectively. Servicing assets of $2,181 and $2,546 were capitalized in 2000 and 1999, respectively. Included in capitalized servicing assets were $1,143 and $981 of servicing assets acquired from other institutions during 2000 and 1999, respectively. At December 31, 2000, the estimated fair value of the Company's servicing assets was $6,685. The fair value of servicing assets was determined using discount rates ranging from 9.0% to 17.0% and monthly prepayment speeds ranging from 0.7% to 3.1% depending upon the stratification of the specific servicing asset. (9) CASH SURRENDER VALUE OF LIFE INSURANCE The Company maintains key-executive life insurance policies on certain principal shareholders. Under these policies, the Company receives the cash surrender value if the policy is terminated, or receives all benefits payable upon the death of the insured. The aggregate face amount of the key-executive insurance was $7,000 at December 31, 2000 and 1999. Cash surrender values are recorded net of outstanding policy loans, since the Company has no current plans for repayment. Outstanding policy loans at December 31, 2000 and 1999 are $2,811 and $2,753, respectively. The net cash surrender value of key-executive insurance policies included in other assets is $626 and $558 at December 31, 2000 and 1999, respectively. The Company has also obtained insurance policies covering certain other key officers. The net cash surrender value of these policies is $2,460 and $2,140 at December 31, 2000 and 1999, respectively, and is included in other assets. Upon retirement, the officers have the option of entering into split-dollar contracts with the Company which provide continuing post-employment insurance coverage for a specified death benefit amount. The Company accrues the earned portion of the post-employment benefit through the specified vesting date. -47-
48 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The Company has received common stock as a result of the demutualization of certain insurance companies. Demutualization stocks of $473 and $67 at December 31, 2000 and 1999, respectively, are included in other assets. Unrealized gains resulting from market value adjustments of $406 and $67 in 2000 and 1999, respectively, are included in non-interest income. No unrealized holding gains or losses were recorded in 1998. (10) DEPOSITS Deposits are summarized as follows: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Noninterest bearing demand $ 441,563 398,391 Interest bearing: Demand 384,070 367,770 Savings 575,768 553,564 Time, $100 and over 283,599 203,475 Time, other 680,225 594,983 - ------------------------------------------------------------------------------------------------------------------------------- Total interest bearing 1,923,662 1,719,792 - ------------------------------------------------------------------------------------------------------------------------------- $ 2,365,225 2,118,183 =============================================================================================================================== </TABLE> Maturities of time deposits at December 31, 2000 are as follows: <TABLE> <CAPTION> Time, $100 and Over Total Time - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 2001 $ 244,943 771,581 2002 28,865 123,667 2003 5,671 33,701 2004 1,136 9,554 2005 2,984 25,198 Thereafter - 123 - ------------------------------------------------------------------------------------------------------------------------------- $ 283,599 963,824 =============================================================================================================================== </TABLE> Interest expense on time deposits of $100 or more was $13,889, $11,087 and $11,466 for the years ended December 31, 2000, 1999 and 1998, respectively. (11) INCOME TAXES Income tax expense (benefit) consists of the following: <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current: Federal $ 14,668 13,873 13,698 State 2,222 1,950 2,198 - ------------------------------------------------------------------------------------------------------------------------------- 16,890 15,823 15,896 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> -48-
49 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Deferred: Federal $ 226 (440) (705) State 60 (154) (91) - ------------------------------------------------------------------------------------------------------------------------------- 286 (594) (796) - ------------------------------------------------------------------------------------------------------------------------------- $ 17,176 15,229 15,100 =============================================================================================================================== </TABLE> Total income tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 2000, 1999 and 1998 to income before income taxes as a result of the following: <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Tax expense at the statutory tax rate $ 16,645 15,035 13,993 Increase (decrease) in tax resulting from: Tax-exempt income (1,749) (1,212) (881) State income tax, net of Federal income tax benefit 1,483 1,167 1,370 Amortization of nondeductible goodwill 452 310 312 Other, net 345 (71) 306 - ------------------------------------------------------------------------------------------------------------------------------- $ 17,176 15,229 15,100 =============================================================================================================================== </TABLE> The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax asset relate to the following: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred tax assets: Loans, principally due to allowance for loan losses $ 11,378 10,368 Other real estate owned, principally due to differences in bases 83 278 Employee benefits 2,779 2,962 Investment securities, unrealized losses - 3,592 Other 619 430 - ------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets 14,859 17,630 - ------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Fixed assets, principally differences in bases and depreciation (923) (601) Investment in joint venture partnership, principally due to differences in depreciation of partnership assets (823) (913) Prepaid amounts (665) (342) Investment securities, principally differences in bases (1,444) (1,058) Investment securities, unrealized gains (266) - Goodwill and core deposit intangibles (2,598) (2,137) Mortgage servicing rights (698) (760) Other (160) (176) - ------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities (7,577) (5,987) - ------------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 7,282 11,643 =============================================================================================================================== </TABLE> -49-
50 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income in the periods which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at December 31, 2000 management continues to believe it is more likely than not that the Company will realize the benefits of these deductible differences. The Company had current income taxes receivable of $174 and $428 at December 31, 2000 and 1999, respectively. (12) LONG-TERM DEBT AND OTHER BORROWED FUNDS A summary of long-term debt follows: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Parent Company: Unsecured revolving term loan due June 30, 2005, interest payable quarterly at variable interest rates (8.76% weighted average rate at December 31, 2000) $ 11,550 - 7.50% subordinated notes, unsecured, interest payable semi-annually, due in increasing annual principal payments beginning October 1, 2002 in the amount of $3,400 with final maturity on October 1, 2006 20,000 20,000 Variable rate equipment note, principal and interest payable quarterly through March 30, 2005 (8.48% rate at December 31, 2000) 2,572 - Various unsecured notes payable to former stockholders at various rates of 6.21% to 7.14% due in annual principal installments through January 2001 57 141 Variable rate, unsecured term notes due on demand, interest payable monthly (weighted average rate of 7.00% at December 31, 2000) 100 - Subsidiaries: Various notes payable to FHLB, interest due monthly at various rates and maturities (weighted average rate of 6.36% at December 31, 2000) 2,381 2,906 10% note payable on repossessed property due in annual payments of $41 maturing January 15, 2018 340 347 - ------------------------------------------------------------------------------------------------------------------------------- $ 37,000 23,394 =============================================================================================================================== </TABLE> Maturities of long-term debt at December 31, 2000 follow: <TABLE> <S> <C> 2001 $ 922 2002 4,214 2003 4,548 2004 4,906 2005 16,246 Thereafter 6,164 - ------------------------------------------------------------------------------------------------------------------------------- $ 37,000 =============================================================================================================================== </TABLE> -50-
51 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) In connection with its borrowings, the Company has agreed to certain restrictions dealing with, among other things, minimum capital ratios, the sale or issuance of capital stock and the maximum amount of dividends. The Company has a $25,000 unsecured revolving term loan with its primary lender. As of December 31, 2000, $11,550 was advanced on the loan. The revolving facility requires an annual commitment fee of 0.10% on the unadvanced amount and an annual commitment fee of 0.05% on the total amount of the commitment. The Company may elect at various dates either prime or a Eurodollar rate which varies depending on the Company's capital ratios. The variable rate equipment note is secured by a Cessna Citation aircraft. The notes payable to FHLB are secured by FHLB stock, unencumbered residential real estate mortgages and certain mortgage-backed securities. The following is a summary of other borrowed funds, all of which mature within one year: <TABLE> <CAPTION> December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest bearing demand notes issued to the United States Treasury, secured by investment securities (6.31% weighted average rate at December 31, 2000) $ 11,138 11,725 Notes payable paid in 2000 - 30,150 - ------------------------------------------------------------------------------------------------------------------------------- $ 11,138 41,875 =============================================================================================================================== </TABLE> The Company has Federal funds lines of credit with third parties amounting to $105 million, subject to funds availability. These lines are subject to cancellation without notice. The Company has available lines of credit with the FHLB of approximately $139 million. (13) EMPLOYEE BENEFIT PLANS PROFIT SHARING PLAN. The Company has a noncontributory profit sharing plan. To be eligible for the profit sharing plan, an employee must complete one year of employment and 1,000 hours or more of service. Quarterly contributions are determined by the Company's Board of Directors, but are not to exceed, on an individual basis, the lesser of 25% of compensation or $30. Company contributions to this plan of $1,186, $1,150 and $1,032 were expensed in 2000, 1999 and 1998, respectively. SAVINGS PLAN. In addition, the Company has a contributory employee savings plan. Eligibility requirements for this plan are the same as those for the profit sharing plan as discussed in the preceding paragraph. Employee participation in the plan is at the option of the employee. The Company contributes $1.25 for each $1.00 of employee contributions up to 4% of the participating employee's compensation. Company contributions to this plan of $1,490, $1,321 and $1,164 were expensed in 2000, 1999 and 1998, respectively. STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and Stock Appreciation Rights Plan ("Stock Option Plan") for certain officers and directors of the Company. Stock option and stock appreciation rights ("SARs") awards are granted at the discretion of the Company's Board of Directors. Stock options and SARs granted prior to 1993 have a per share exercise price equal to the book value of the underlying common shares at the date of grant. Stock options and SARs granted in 1993 and thereafter have a per share exercise price equal to fair value at the date of grant. Each option granted under the Stock Option Plan can be immediately exercised for periods of seven or ten years from the date of grant. Stock issued upon exercise of options is subject to a shareholder agreement granting the Company a right of first refusal to repurchase the stock. The Company accounts for the Stock Option Plan as a variable plan with compensation cost expensed each period from the date of grant to the measurement date based on the fair value of the Company's common stock at the end of the period. The recorded benefit related to this plan was $593 in 2000 and the recorded expense related to this plan -51-
52 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) was $2,505 and $1,249 in 1999 and 1998, respectively. At December 31, 2000 and 1999, the Company had recognized liabilities of $4,129 and $5,595, respectively, related to obligations under this plan (see note 25). During 1998, the Company determined that it would discontinue the issuance of SARS. In conjunction with that decision, grantees with outstanding SARs were allowed to convert the SARs to stock options with similar terms in a one-for-one exchange. In January 1999, 106,300 SARs were exchanged for stock options. Information with respect to the Company's stock options and SARs are as follows: <TABLE> <CAPTION> 2000 1999 1998 -------------------- ------------------- ------------------- Year ended December 31, Options SARs Options SARs Options SARs - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding, beginning of year 322,300 6,000 169,280 115,140 123,204 91,452 Granted 101,456 - 90,700 - 51,700 26,700 Exercised (35,000) (1,600) (43,980) (2,840) (5,624) (3,012) Expired (2,500) - - - - - Conversion of SARs to options - - 106,300 (106,300) - - - ------------------------------------------------------------------------------------------------------------------------------- Outstanding, end of year 386,256 4,400 322,300 6,000 169,280 115,140 =============================================================================================================================== </TABLE> Information with respect to the weighted-average stock option exercise prices are as follows: <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Granted during year $ 39.95 $ 33.14 $ 28.25 Exercised during year 14.54 12.01 6.16 Expired during year 38.60 - - SARs converted during year - 17.16 - Outstanding, end of year 27.82 22.64 17.69 =============================================================================================================================== </TABLE> Stratification and additional detail regarding the exercisable options outstanding at December 31, 2000 are as follows: <TABLE> <CAPTION> Exercise Number Weighted-average Weighted-average price range outstanding remaining life exercise price - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> $6.75 - $15.80 70,900 2.87 years $ 12.32 $17.85 - $24.74 106,700 6.25 years 21.61 $32.00 - $40.00 208,656 7.26 years 36.25 =============================================================================================================================== </TABLE> As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company continues to account for its stock based employee compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and its related interpretations. SFAS No. 123 requires the disclosure of pro forma net income and earnings per share as if the Company had accounted for its stock based employee compensation arrangements in accordance with the provisions of SFAS No. 123. The Company has administered the Stock Option Plan to historically allow an option holder to elect settlement in cash and therefore the accounting treatment under SFAS No. 123 is consistent with that required for variable awards under APB 25. Accordingly, the application of SFAS No. 123 to the Company's Stock Option Plan would not result in a difference to reported net income or earnings per share. -52-
53 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (14) 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 Parent Company and the Billings office of FIB Montana are the anchor tenants in a building owned by a partnership in which FIB Montana is one of the two partners, and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. At December 31, 2000 the partnership has indebtedness of $8,893 which has full recourse to the partners. Total rents, including maintenance, paid to the partnership were $1,503 in 2000, $1,445 in 1999 and $1,360 in 1998. The Company also leases certain premises and equipment from third parties under operating leases. Total rental expense to third parties was $2,119 in 2000, $1,691 in 1999 and $1,351 in 1998. The total future minimum rental commitments, exclusive of maintenance and operating costs, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2000 are as follows: <TABLE> <CAPTION> Third parties Partnership Total - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> For the year ending December 31: 2001 $ 1,517 1,013 2,530 2002 1,528 1,013 2,541 2003 1,429 1,006 2,435 2004 1,246 983 2,229 2005 1,107 791 1,898 Thereafter 2,316 - 2,316 - ------------------------------------------------------------------------------------------------------------------------------- $ 9,143 4,806 13,949 =============================================================================================================================== </TABLE> (15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK 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, to 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 less 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 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. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Generally, all standby letters of credit and commitments to extend credit are subject to annual renewal. At December 31, 2000 and 1999, stand-by letters of credit in the amount of $34,506 and $27,126, respectively, were outstanding. Commitments to extend credit to existing and new borrowers -53-
54 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) approximated $433,304 at December 31, 2000, which includes $70,245 on unused credit card lines and $80,824 with commitment maturities beyond one year. Commitments to extend credit to existing and new borrowers approximated $413,957 at December 31, 1999, which includes $60,093 on unused credit card lines and $100,800 with commitment maturities beyond one year. The Company had no significant commitments to sell loans as of December 31, 2000. (16) CAPITAL STOCK At December 31, 2000, 91.88% of the common stock held by stockholders are subject to stockholder's agreements (Agreements). Under the Agreements, the Company has a right of first refusal to repurchase shares from the stockholder at minority interest appraised value in the event of a proposed sale of shares to a third party, death, disability or termination of employment. Additionally, shares purchased by officers, directors and employees after 1993 are also subject to repurchase at the Company's discretion. (17) MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST On October 1, 1997, the Company established FIB Capital Trust ("Trust"), a wholly-owned statutory business trust. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities ("Trust Preferred Securities") in the aggregate amount of $40,000 and using the proceeds to purchase junior subordinated debentures ("Subordinated Debentures") issued by the parent company. The sole assets of the Trust are the Subordinated Debentures. The Trust Preferred Securities bear a cumulative fixed interest rate of 8.625% and mature on December 1, 2027. Interest distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company guaranteed the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. The obligations of the Company under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the Trust Preferred Securities. The Subordinated Debentures are unsecured, bear interest at a rate of 8.625% per annum and mature on December 1, 2027. Interest is payable quarterly. The Company may defer the payment of interest at any time from time to time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and the Company's ability to pay dividends on its common shares will be restricted. Subject to approval by the Federal Reserve Bank, the Trust Preferred Securities may be redeemed prior to maturity at the Company's option on or after December 1, 2002. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) FIB Capital becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by Parent Company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for FIB Capital to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as "Tier 1 capital" under the Federal Reserve capital adequacy guidelines. The Trust Preferred Securities qualify as Tier 1 capital under regulatory definitions. Issuance costs consisting primarily of underwriting discounts and professional fees of $2,363 were capitalized and are being amortized through maturity to interest expense using the straight-line method. -54-
55 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (18) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Following is condensed financial information of First Interstate BancSystem, Inc. During 2000 the Company incorporated its technology services division into a separate non-bank subsidiary. Prior to incorporation, the technology services division was a department of the parent company. <TABLE> <CAPTION> December 31, 2000 1999 (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Condensed balance sheets: Cash and cash equivalents $ 254 4,979 Investment in subsidiaries, at equity: FIB Montana 159,022 150,227 FIB Wyoming 106,891 77,020 Non-bank subsidiary - Commerce Financial, Inc. 1,377 920 Non-bank subsidiary - FIB Capital Trust 1,237 1,237 Non-bank subsidiary - i_Tech 3,955 - - ------------------------------------------------------------------------------------------------------------------------------- Total investment in subsidiaries 272,482 229,404 Goodwill, net of accumulated amortization 1,467 1,757 Property and equipment 4,204 1,476 Other assets 7,575 9,324 - ------------------------------------------------------------------------------------------------------------------------------- $ 285,982 246,940 =============================================================================================================================== Other liabilities $ 10,559 11,170 Subordinated debentures - FIB Capital Trust 41,237 41,237 Long-term debt 36,200 20,895 - ------------------------------------------------------------------------------------------------------------------------------- 87,996 73,302 Stockholders' equity 197,986 173,638 - ------------------------------------------------------------------------------------------------------------------------------- $ 285,982 246,940 =============================================================================================================================== </TABLE> <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Condensed statements of income: Dividends from subsidiary banks $ 22,107 23,857 24,207 Other interest income 98 172 140 Other income, primarily management fees from subsidiaries 4,235 3,436 2,528 - ------------------------------------------------------------------------------------------------------------------------------- Total income 26,440 27,465 26,875 - ------------------------------------------------------------------------------------------------------------------------------- Salaries and benefits 4,958 6,967 5,488 Interest expense 6,375 5,605 5,709 Other operating expenses, net 4,255 3,891 3,869 - ------------------------------------------------------------------------------------------------------------------------------- Total expenses 15,588 16,463 15,066 - ------------------------------------------------------------------------------------------------------------------------------- Technology services income, net of direct - ------------------------------------------------------------------------------------------------------------------------------- operating expenses - 3,317 2,905 Earnings before income tax benefit 10,852 14,319 14,714 Income tax benefit 3,992 3,461 3,119 - ------------------------------------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiaries 14,844 17,780 17,833 Undistributed earnings of subsidiaries 15,536 9,948 7,046 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 30,380 27,728 24,879 =============================================================================================================================== </TABLE> -55-
56 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Year ended December 31, 2000 1999 1998 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Condensed statements of cash flows: Cash flows from operating activities: Net income $ 30,380 27,728 24,879 Adjustments to reconcile net income to cash provided by operating activities: Undistributed earnings of subsidiaries (15,536) (9,948) (7,046) Net gain on sale of equipment (200) - - Depreciation and amortization 414 297 389 Provision for deferred income taxes 334 (485) (425) Other, net (2) 994 1,531 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 15,390 18,586 19,328 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net increase in advances to non-bank subsidiary 625 475 163 Purchase of investments - - (79) Capital expenditures, net of sales (2,282) (380) - Capitalization of subsidiary (1,000) - - Acquisitions of banking offices, net of cash acquired (20,152) (11,455) - - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (22,809) (11,360) 84 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Borrowings of long-term debt 30,921 5,527 2,371 Repayments of long-term debt (15,616) (5,853) (9,321) Debt issuance costs - - (40) Dividends paid on common stock (8,807) (8,530) (7,551) Payments to retire common stock (4,904) (3,271) (3,739) Issuance of common stock 1,100 3,262 2,278 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 2,694 (8,865) (16,002) - ------------------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (4,725) (1,639) 3,410 Cash and cash equivalents, beginning of year 4,979 6,618 3,208 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 254 4,979 6,618 =============================================================================================================================== </TABLE> Noncash Investing and Financing Activities - During 1999, the Company increased its net investment in aircraft, recorded related debt of $761, and transferred the gross investment of $1,102 to property and equipment. In conjunction with the exercise of stock options, the Company transferred $74, $324 and $51 in 2000, 1999 and 1998, respectively, from accrued liabilities to common stock. -56-
57 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (19) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular instrument. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding comparable market interest rates, future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For financial instruments bearing a variable interest rate, it is presumed that recorded book values are reasonable estimates of fair value. The methods and significant assumptions used to estimate fair values for the various financial instruments are set forth below. FINANCIAL ASSETS. Due to the liquid and/or short-term nature of cash, cash equivalents and interest bearing deposits in bank, carrying value of these instruments approximates market value. Fair values of investment securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value of fixed rate loans is calculated by discounting scheduled cash flows adjusted for prepayment estimates using discount rates based on secondary market sources, if available, or based on estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category. The fair value of adjustable rate loans approximates the carrying value of these instruments due to the frequent repricing, provided there have been no changes in credit quality since origination. FINANCIAL LIABILITIES AND TRUST SECURITIES. The fair value of demand deposits, savings accounts, federal funds purchased and securities sold under repurchase agreements is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using external market rates currently offered for deposits with similar remaining maturities. The carrying value of the interest bearing demand notes to the United States Treasury is deemed an approximation of fair value due to the frequent repayment and repricing at market rates. The revolving term loan, equipment note and unsecured demand notes bear interest at floating market rates and, as such, carrying amounts are deemed to reflect fair value. The fair value of the subordinated notes and notes payable to the FHLB were estimated by discounting future cash flows using current rates for advances with similar characteristics. Fair value of the Trust Preferred Securities is based on quoted market price. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. It is not practicable to estimate the fair value of commitments to extend credit because information necessary to support fair value estimations is not readily available and amounts are not anticipated to be significant. A summary of the estimated fair values of financial instruments follows: <TABLE> <CAPTION> 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Carrying Estimated Carrying Estimated As of December 31, Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Financial assets: Cash and short-term investments $ 169,245 169,245 162,306 162,306 Securities available-for-sale 397,981 397,981 344,053 344,053 Securities held-to-maturity 228,826 228,240 246,456 239,628 Net loans 1,939,503 1,924,073 1,693,362 1,686,835 - ------------------------------------------------------------------------------------------------------------------------------------ Total financial assets $ 2,735,555 2,719,539 2,446,177 2,432,822 ==================================================================================================================================== </TABLE> -57-
58 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Carrying Estimated Carrying Estimated As of December 31, Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Financial liabilities and trust preferred securities: Total deposits, excluding time deposits $ 1,401,401 1,401,401 1,319,725 1,319,725 Time deposits 963,824 962,042 798,458 796,528 Federal funds purchased 19,535 19,535 900 900 Securities sold under repurchase agreements 229,078 229,078 188,024 188,024 Other borrowed funds 11,138 11,138 41,875 41,875 Long-term debt 37,000 38,059 23,394 23,490 Trust Preferred Securities 40,000 37,200 40,000 41,600 - ------------------------------------------------------------------------------------------------------------------------------------ Total financial liabilities and trust preferred securities $ 2,701,976 2,698,453 2,412,376 2,412,142 ==================================================================================================================================== </TABLE> (20) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> For the year ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income basic and diluted $ 30,380 27,728 24,879 =============================================================================================================================== Average outstanding shares - basic 7,924,589 7,967,953 8,020,221 Add: effect of dilutive stock options 119,942 143,363 67,588 - ------------------------------------------------------------------------------------------------------------------------------- Average outstanding shares - diluted 8,044,531 8,111,316 8,087,809 =============================================================================================================================== Basic earnings per share $ 3.83 3.48 3.10 =============================================================================================================================== Diluted earnings per share $ 3.78 3.42 3.08 =============================================================================================================================== </TABLE> Stock options to purchase 100,206 and 750 shares for the years ended December 31, 2000 and 1999, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the fair value of the shares and, therefore, the effect would be antidilutive. There were no antidilutive stock options outstanding for the year ended December 31, 1998. (21) ACQUISITIONS AND EXPANSION FIRST NATIONAL BANK OF MONTANA, HELENA AND BELGRADE BRANCHES. On May 7, 1999, FIB Montana acquired the net assets of the Helena and Belgrade branches of First National Bank of Montana (the "Acquired Branches"). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1999 includes the results of operations of the Acquired Branches since the date of purchase. -58-
59 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) SECURITY STATE BANK SHARES. On July 9, 1999, the Company acquired all of the outstanding ownership of Security State Bank Shares (SSBS) and its bank subsidiary, Security State Bank and Trust Company (SSB&T). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1999 includes SSBS' results of operations since the date of purchase. SSBS was subsequently dissolved and SSB&T was merged with FIB Montana. During June 2000, the Company finalized its allocation of purchase price related to the acquisition. Changes in preliminary estimates of the fair value of loans, property and equipment resulted in a net increase in goodwill of $260. EQUALITY BANKSHARES, INC. On August 1, 2000, the Company purchased all of the outstanding stock of Equality Bankshares, Inc. (EBSI) and its bank subsidiary, The Equality State Bank (ESB). The total cash purchase price paid at closing of $20.3 million was funded through available cash on hand and a $19.0 million advance on the Company's revolving term note. At the purchase date, EBSI had gross loans of approximately $64 million and deposits of approximately $80 million. The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 2000 includes EBSI's results of operations since the date of purchase. EBSI was subsequently dissolved and ESB was merged with FIB Wyoming. The premium paid and estimated fair value adjustments have been pushed down to the acquired entities. The preliminary allocation of purchase price is subject to change as fair value estimates are finalized. The premium paid over the historical carrying value was $13,295 which has currently been allocated to core deposit intangible of $1,868 and goodwill of $11,428. Core deposit intangible is being amortized using an accelerated method over 10 years. Goodwill is being amortized using the straight-line method over 20 years. (22) COMPREHENSIVE INCOME - RECLASSIFICATION ADJUSTMENTS The reconciliation of unrealized holding gains (losses) arising during the period to the net change in unrealized gain (loss) for the year ended December 31, 2000 is as follows: <TABLE> <CAPTION> Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Disclosure of reclassification amount: Unrealized and realized holding gains (losses) arising during the period, net of income tax expense (benefit) of $3,910, $(4,933) and $884 in 2000, 1999 and 1998, respectively $ 6,586 (8,186) 1,440 Less reclassification adjustment for gains included in net income, net of income tax of $52, $7 and $110 in 2000, 1999 and 1998, respectively (81) (12) (172) - ------------------------------------------------------------------------------------------------------------------------------ Net unrealized gain (loss) on available-for-sale investment securities $ 6,505 (8,198) 1,268 ============================================================================================================================== </TABLE> (23) NONCASH INVESTING AND FINANCING ACTIVITIES The Company transferred loans of $1,841, $524 and $1,275 to other real estate owned in 2000, 1999 and 1998, respectively. In conjunction with the exercise of stock options, the Company transferred $74, $324 and $51 in 2000, 1999 and 1998, respectively, from accrued liabilities to common stock. In conjunction with acquisitions during 2000 and 1999, the Company received assets with fair values of $103.2 million and $76.6 million, respectively, and assumed liabilities of $82.9 million and $64.7 million, respectively. During 1999, the Company transferred other assets of $342 to premises and equipment. -59-
60 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED (Dollars in thousands, except share and per share data) (24) SEGMENT REPORTING The Company currently operates in one significant business segment - community banking. The Company's chief operating decision maker evaluates the Company's performance and allocates resources to this segment based on consolidated performance measurements consistent with those of the consolidated financial statements. Revenue and contribution margins of the investment services and technology services businesses are not material. The Company does not fully allocate assets or costs to these businesses. (25) RESTATEMENT In 2000, the Company determined that fixed plan accounting treatment historically afforded its Stock Option Plan (Note 13) was not consistent with certain elements of the Stock Option Plan's operations and accounting guidance contained in APB 25, and related interpretations. Accordingly, the Company has restated the accompanying 1999 and 1998 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: <TABLE> <CAPTION> December 31, December 31, 1999 1998 ------------------------- ------------------------- Originally Originally Consolidated Balance Sheets Reported Restated Reported Restated ------------------------- ------------------------- <S> <C> <C> <C> <C> Deferred tax assets $ 9,674 11,643 $ 5,498 6,657 Other assets 21,984 22,412 18,717 18,719 Total assets 2,610,266 2,612,663 2,478,833 2,479,994 Accounts payable and accrued expenses 7,723 13,318 10,622 13,039 Common stock 10,788 10,831 10,001 10,468 Retained earnings 172,078 168,837 151,362 149,639 ========================= ========================= </TABLE> <TABLE> <CAPTION> For the year ended December 31, 1999 1998 ------------------------- ------------------------- Originally Originally Consolidated Statements of Income Reported Restated Reported Restated ------------------------- ------------------------- <S> <C> <C> <C> <C> Salaries, wages and employee benefits $ 45,529 48,034 42,731 43,980 ========================= ========================= Net income before income taxes $ 45,462 42,957 41,228 39,979 Income tax expense 16,216 15,229 15,592 15,100 ------------------------- ------------------------- Net income $ 29,246 27,728 25,636 24,879 ========================= ========================= Basic earnings per share $ 3.67 3.48 3.20 3.10 Diluted earnings per share 3.61 3.42 3.17 3.08 ========================= ========================= </TABLE> The December 31, 1997 common stock balance has been increased by $370 and retained earnings decreased by $966 to record the cumulative effect of the compensatory employee stock option grants prior to 1998. -60-
61 (a) 2. Financial statement schedules All other schedules to the consolidated financial statements of the Registrant are omitted since the required information is either not applicable, deemed immaterial, or is shown in the respective financial statements or in notes thereto. (a) 3. Exhibits 3.1(1) Restated Articles of Incorporation dated February 27, 1986 3.2(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.3(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.4(6) Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 3.5(3) Bylaws of First Interstate BancSystem, Inc. 3.6(10) Amendment to Bylaws of First Interstate BancSystem, Inc. dated March 18, 1999 4.1(4) Specimen of common stock certificate of First Interstate BancSystem, Inc. 4.2(1) Stockholder's Agreement for non-Scott family members 4.3(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.4(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.5(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.7(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.8(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.9(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.10(7) Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6) 10.1(2) Loan Agreement dated October 1, 1996, between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A., Colorado National Bank, N.A. and Wells Fargo Bank, N.A. 10.2(10) First Amendment to Loan Agreement between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A. dated August 20, 1999 10.3 Second Amendment to Loan Agreement between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A. dated August 1, 2000 10.4(2) Note Purchase Agreement dated August 30, 1996, between First Interstate BancSystem, Inc. and the Montana Board of Investments 10.5(1) Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank Montana and addendum thereto 10.6(1) + Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.7(8) + Employee Stock Purchase Plan of First Interstate BancSystem, Inc. dated May 1, 1998 10.8(9) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members dated January 11, 1999 10.9(9) Specimen of Charity Shareholder's Agreement with Charitable Shareholders 10.10(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.11(3) Trademark License Agreement between Wells Fargo & Company and First Interstate BancSystem, Inc. 10.12(6) + Resignation Agreement between First Interstate BancSystem, Inc. and William H. Ruegamer 10.13 + Employment Agreement between First Interstate BancSystem, Inc. and Lyle R. Knight 10.14 + First Interstate BancSystem, Inc. Executive Non-Qualified Deferred Compensation Plan dated November 20, 1998 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of First Interstate BancSystem, Inc. 23.1 Consent of KPMG LLP, Independent Auditors
62 + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-84540. (2) Incorporated by reference to the Registrant's Form 8-K dated October 1, 1996. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-25633. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-3250. (5) Incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-1, No. 33-84540. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-37847. (7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1997, No. 33-64304. (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-53011. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-76825. (10) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999, No. 033-64304. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2000. (c) Exhibits See Item 14(a)3 above. (d) Financial Statements Schedules See Item 14(a)2 above.
63 EXHIBIT INDEX Exhibit No. Description 3.1(1) Restated Articles of Incorporation dated February 27, 1986 3.2(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.3(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.4(6) Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 3.5(3) Bylaws of First Interstate BancSystem, Inc. 3.6(10) Amendment to Bylaws of First Interstate BancSystem, Inc. dated March 18, 1999 4.1(4) Specimen of common stock certificate of First Interstate BancSystem, Inc. 4.2(1) Stockholder's Agreement for non-Scott family members 4.3(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.4(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.5(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.7(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.8(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.9(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.10(7) Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6) 10.1(2) Loan Agreement dated October 1, 1996, between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A., Colorado National Bank, N.A. and Wells Fargo Bank, N.A. 10.2(10) First Amendment to Loan Agreement between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A. dated August 20, 1999 10.3 Second Amendment to Loan Agreement between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A. dated August 1, 2000 10.4(2) Note Purchase Agreement dated August 30, 1996, between First Interstate BancSystem, Inc. and the Montana Board of Investments 10.5(1) Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank Montana and addendum thereto 10.6(1) + Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.7(8) + Employee Stock Purchase Plan of First Interstate BancSystem, Inc. dated May 1, 1998 10.8(9) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members dated January 11, 1999 10.9(9) Specimen of Charity Shareholder's Agreement with Charitable Shareholders 10.10(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.11(3) Trademark License Agreement between Wells Fargo & Company and First Interstate BancSystem, Inc. 10.12(6) + Resignation Agreement between First Interstate BancSystem, Inc. and William H. Ruegamer 10.13 + Employment Agreement between First Interstate BancSystem, Inc. and Lyle R. Knight 10.14 + First Interstate BancSystem, Inc. Executive Non-Qualified Deferred Compensation Plan dated November 20, 1998 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of First Interstate BancSystem, Inc. 23.1 Consent of KPMG LLP, Independent Auditors + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-84540. (2) Incorporated by reference to the Registrant's Form 8-K dated October 1, 1996. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-25633.
64 (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-3250. (5) Incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-1, No. 33-84540. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-37847. (7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1997, No. 33-64304. (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-53011. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-76825. (10) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999, No. 033-64304.
65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Billings, State of Montana. First Interstate BancSystem, Inc. By: /s/ LYLE R. KNIGHT APRIL 13, 2001 --------------------------------------- ----------------- Lyle R. Knight Date President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated. <TABLE> <S> <C> By: /s/ HOMER A. SCOTT, JR. APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Homer A. Scott, Jr. Date Chairman By: /s/ DAN S. SCOTT APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Dan S. Scott, Director Date By: /s/ JAMES R. SCOTT APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- James R. Scott, Vice Chairman of the Board Date By: /s/ SANDRA A. SCOTT SUZOR APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Sandra A. Scott Suzor, Director Date By: /s/ JOHN M. HEYNEMAN, JR. APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- John M. Heyneman, Jr., Director Date By: /s/ JOEL T. LONG APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Joel T. Long, Director Date By: /s/ JAMES W. HAUGH APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- James W. Haugh, Director Date By: /s/ DAVID H. CRUM APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- David H. Crum, Director Date By: /s/ TERRY W. PAYNE APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Terry W. Payne, Director Date By: /s/ THOMAS W. SCOTT APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Thomas W. Scott Date Chief Executive Officer and Director (Principal executive officer) By: /s/ LYLE R. KNIGHT APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Lyle R. Knight Date President, Chief Operating Officer and Director By: /s/ TERRILL R. MOORE APRIL 13, 2001 ------------------------------------------------------------------------- ----------------- Terrill R. Moore Date Senior Vice President and Chief Financial Officer (Principal financial and accounting officer) </TABLE> SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT The Registrant has not yet provided any annual report to security holders covering the 2000 fiscal year, nor has any proxy statement, form of proxy or other proxy soliciting material been sent to any security holder of the Registrant with respect to the Registrant's 2000 annual meeting of shareholders. If any such annual report or proxy material is sent to security holders subsequent to the filing of this Annual Report on Form 10-K, the Registrant shall furnish copies of such report and material to the Commission when it is sent to security holders.