1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to ------- ------- COMMISSION FILE NUMBER 333-3250 -------- FIRST INTERSTATE BANCSYSTEM, INC. --------------------------------- (Exact name of registrant as specified in its charter) Montana 81-0331430 - ----------------------------- ---------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) (Identification No.) PO Box 30918, 401 North 31st Street, Billings, MT 59116-0918 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 406/255-5390 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No --- --- The Registrant had 7,919,032 shares of common stock outstanding on September 30, 2000.
2 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q <TABLE> <CAPTION> INDEX PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (unaudited) 3 Consolidated Statements of Income Three and nine months ended September 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Comprehensive Income Three and nine months ended September 30, 2000 and 1999 (unaudited) 5 Consolidated Statements of Cash Flows Nine months ended September 30, 2000 and 1999 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations 9 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 13 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 14 Item 2 - Changes in Securities 14 Item 3 - Defaults on Senior Securities 14 Item 4 - Submission of Matters to a Vote of Security Holders 14 Item 5 - Other Information 14 Item 6 - Exhibits and Reports on Form 8-K 14 SIGNATURES 15 </TABLE> 2
3 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share and per share data) (Unaudited) <TABLE> <CAPTION> Assets September 30, December 31, 2000 1999 ------------ ----------- <S> <C> <C> Cash and due from banks $ 169,534 146,943 Federal funds sold 15,025 10,415 Interest bearing deposits in banks 7,411 4,948 Investment securities: Available-for-sale 368,451 344,053 Held-to-maturity 216,641 246,456 ----------- ----------- Total investment securities 585,092 590,509 Loans 1,945,875 1,722,961 Less allowance for loan losses 31,864 29,599 ----------- ----------- Net loans 1,914,011 1,693,362 Premises and equipment, net 86,642 74,106 Accrued interest receivable 31,770 24,506 Goodwill and core deposit intangible, net of accumulated amortization of $16,168 at September 30, 2000 and $13,714 at December 31, 1999 43,308 32,374 Other real estate owned, net 2,819 1,445 Deferred tax asset 8,692 9,674 Other assets 24,203 21,984 ----------- ----------- $ 2,888,507 2,610,266 =========== =========== Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 442,264 398,391 Interest bearing 1,870,596 1,719,792 ----------- ----------- Total deposits 2,312,860 2,118,183 Federal funds purchased 36,305 900 Securities sold under repurchase agreements 224,516 188,024 Accrued interest payable 17,488 13,331 Accounts payable and accrued expenses 8,898 7,723 Other borrowed funds 13,232 41,875 Long-term debt 44,052 23,394 ----------- ----------- Total liabilities 2,657,351 2,393,430 Mandatorily redeemable preferred securities of subsidiary trust 40,000 40,000 Stockholders' equity: Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of September 30, 2000 or December 31, 1999 -- -- Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,919,032 shares as of September 30, 2000 and 7,993,250 shares as of December 31, 1999 7,363 10,788 Retained earnings 187,984 172,078 Accumulated other comprehensive loss, net (4,191) (6,030) ----------- ----------- Total stockholders' equity 191,156 176,836 ----------- ----------- $ 2,888,507 2,610,266 =========== =========== Book value per common share $ 24.14 22.12 =========== =========== </TABLE> See accompanying notes to unaudited consolidated financial statements. 3
4 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, -------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $ 46,922 38,301 131,329 109,084 Interest and dividends on investment securities: Taxable 7,715 8,558 23,387 25,964 Exempt from Federal taxes 902 859 2,679 2,477 Interest on deposits in banks 34 34 89 216 Interest on Federal funds sold 506 437 958 866 --------- --------- ---------- ---------- Total interest income 56,079 48,189 158,442 138,607 --------- --------- ---------- ---------- Interest expense: Interest on deposits 20,779 17,002 57,470 49,886 Interest on Federal funds purchased 537 697 1,521 1,303 Interest on securities sold under repurchase agreements 2,861 1,798 7,734 4,751 Interest on other borrowed funds 1,083 432 2,949 799 Interest on long-term debt 827 572 1,833 1,568 Interest on mandatorily redeemable preferred securities of subsidiary trust 883 883 2,647 2,647 --------- --------- ---------- ---------- Total interest expense 26,970 21,384 74,154 60,954 --------- --------- ---------- ---------- Net interest income 29,109 26,805 84,288 77,653 Provision for loan losses 1,222 931 3,698 2,503 --------- --------- ---------- ---------- Net interest income after provision for loan losses 27,887 25,874 80,590 75,150 Non-interest income: Income from fiduciary activities 1,298 1,152 3,646 3,306 Service charges on deposit accounts 3,204 2,971 9,131 8,415 Data services 2,112 1,856 6,401 5,091 Other service charges, commissions, and fees 2,107 1,845 6,002 5,128 Net investment securities gains 1 16 45 17 Other real estate income, net 475 (24) 790 359 Other income 1,021 816 2,853 1,891 --------- --------- ---------- ---------- Total non-interest income 10,218 8,632 28,868 24,207 --------- --------- ---------- ---------- Non-interest expense: Salaries, wages and employee benefits 13,637 11,572 38,732 33,513 Occupancy, net 2,075 1,833 5,963 5,245 Furniture and equipment 2,667 2,692 8,060 7,344 FDIC insurance 106 57 329 173 Goodwill and core deposit intangible amortization 917 773 2,454 1,960 Other expenses 6,520 5,902 19,132 16,377 --------- --------- ---------- ---------- Total non-interest expense 25,922 22,829 74,670 64,612 --------- --------- ---------- ---------- Income before income taxes 12,183 11,677 34,788 34,745 Income tax expense 4,366 4,209 12,449 12,538 --------- --------- ---------- ---------- Net income $ 7,817 7,468 22,339 22,207 ========= ========= ========== ========== Basic earnings per common share $ 0.99 0.94 2.82 2.79 Diluted earnings per common share $ 0.97 0.92 2.77 2.74 Dividends per common share $ 0.28 0.28 0.81 0.79 </TABLE> See accompanying notes to unaudited consolidated financial statements. 4
5 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, --------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 7,817 7,468 22,339 22,207 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on investment securities: Realized and unrealized holding gains (losses) arising during period 4,342 116 3,060 (9,365) Reclassification adjustment for gains included in net income (1) (16) (45) (17) -------- -------- -------- -------- Other comprehensive income (loss), before tax 4,341 100 3,015 (9,382) Income tax benefit (expense) related to items of other comprehensive income (1,693) (39) (1,176) 3,659 -------- -------- -------- -------- Other comprehensive income (loss), after tax 2,648 61 1,839 (5,723) -------- -------- -------- -------- Comprehensive income $ 10,465 7,529 24,178 16,484 ======== ======== ======== ======== </TABLE> See accompanying notes to unaudited consolidated financial statements. 5
6 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> For the nine months ended September 30, -------------------------- 2000 1999 -------- ------- <S> <C> <C> Cash flows from operating activities: Net income $ 22,339 22,207 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,698 2,503 Depreciation and amortization 9,072 7,939 Net premium amortization on investment securities 219 308 Gain on sales of investments (45) (17) Gain on sales of other real estate owned (410) (415) Gain on sales of property and equipment (176) (17) Provision (benefit) for deferred income taxes (401) 679 Increase in interest receivable (6,480) (5,159) Decrease (increase) in other assets (2,092) 61 Increase in accrued interest payable 3,923 352 Increase (decrease) in accounts payable and accrued expenses 567 (1,040) --------- --------- Net cash provided by operating activities 30,214 27,401 --------- --------- Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (8,924) (61,560) Available-for-sale (35,590) (40,460) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 37,466 98,381 Available-for-sale 23,174 42,473 Proceeds from sales of investment securities: Held-to-maturity 2,001 7,009 Available-for-sale 7,556 -- Extensions of credit to customers, net of repayments (164,290) (169,327) Recoveries of loans charged-off 1,908 2,125 Proceeds from sales of other real estate 980 1,258 Acquisition of branch banks, net of cash acquired (13,288) 9,469 Capital distributions from joint venture 100 125 Capital expenditures, net (18,363) (10,990) --------- --------- Net cash used in investing activities (167,270) (121,497) --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits 114,595 (3,810) Net increase in Federal funds purchased and repurchase agreements 71,897 63,632 Net increase (decrease) in other borrowed funds (30,643) 35,022 Proceeds from long-term borrowings 24,900 5,500 Repayment of long-term borrowings (4,242) (9,557) Net decrease in debt issuance costs 71 71 Proceeds from issuance of common stock 1,815 2,581 Payments to retire common stock (5,240) (3,568) Dividends paid on common stock (6,433) (6,290) --------- --------- Net cash provided by financing activities 166,720 83,581 --------- --------- Net increase (decrease) in cash and cash equivalents 29,664 (10,515) Cash and cash equivalents at beginning of period 162,306 204,019 --------- --------- Cash and cash equivalents at end of period $ 191,970 193,504 ========= ========= Supplemental disclosure of cash flow information: Cash paid during period for taxes $ 11,360 12,402 Cash paid during period for interest 70,231 60,573 ========= ========= </TABLE> See accompanying notes to unaudited consolidated financial statements. 6
7 FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (1) Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position at September 30, 2000 and December 31, 1999, and the results of operations and cash flows for each of the periods ended September 30, 2000 and 1999 in conformity with generally accepted accounting principles. The balance sheet information at December 31, 1999 is derived from audited consolidated financial statements; however, certain reclassifications have been made to conform to the September 30, 2000 presentation. In June 1998, the Financial Standards Accounting Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133", addressing a limited number of implementation issues in applying SFAS No. 133. SFAS Nos. 133 and 138 are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management expects that adoption will not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. As of September 30, 2000, the Company was not engaged in hedging activities nor did it hold any derivative instruments. (2) Computation of Earnings per Share Basic earnings per common share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. The following table shows weighted average common shares and weighted average potential common shares for the three and nine month periods ended September 30, 2000 and 1999. <TABLE> <CAPTION> Three months ended Nine months ended 9/30/00 9/30/99 9/30/00 9/30/99 ------- ------- ------- ------- <S> <C> <C> <C> <C> Weighted average common shares 7,905,605 7,953,331 7,930,220 7,957,010 Weighted average potential common shares 114,285 147,442 123,157 144,021 </TABLE> (3) Cash Dividends On October 13, 2000, the Company declared and paid a cash dividend on third quarter earnings of $0.30 per share to stockholders of record on that date. It has been the Company's practice to pay quarterly dividends based upon earnings. The October 2000 dividend represents 30% of the Company's net income for the quarter ended September 30, 2000. (4) Non-Cash Investing and Financing Activities The Company transferred loans of $1,425 and $459 to other real estate owned during the nine months ended September 30, 2000 and 1999, respectively. In June 2000, the Company finalized its allocation of purchase price related to 1999 acquisitions. Changes in preliminary estimates of the fair value of premises, equipment and loans, net of deferred taxes, resulted in a $260 increase in goodwill. In January 1999, the Company exchanged stock appreciation rights for stock options resulting in an increase in stockholders' equity of $1,200. 7
8 (5) Commitments and Contingencies In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity. The Company is an anchor tenant in a building owned by a joint venture partnership in which the Company owns a 50% partnership interest. The Company is jointly and severally liable for joint venture partnership indebtedness of $9.0 million as of September 30, 2000. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, in varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend for no more than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. (6) Acquisitions On August 1, 2000, the Company purchased all of the outstanding stock of Equality Bankshares, Inc., a one-bank holding company with three branch offices located in Cheyenne, Evansville and Mills, Wyoming ("Cheyenne acquisition"). 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, Equality Bankshares, Inc. had total loans of approximately $64 million and total deposits of approximately $80 million. Excess purchase price over the fair value of identifiable net assets is being amortized using the straight-line method over a period of 20 years. The intangible value of depositor relationships is being amortized using an accelerated method based on an estimated runoff of the related deposits, not exceeding 10 years. 8
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion focuses on significant factors affecting the financial condition and results of operations of First Interstate BancSystem, Inc. and subsidiaries ("the Company") during the three and nine month periods ended September 30, 2000, with comparisons to 1999 as applicable. All earnings per share figures are presented on a diluted basis. FORWARD LOOKING STATEMENTS Certain statements contained in this review are "forward looking statements" that involve risk and uncertainties. The Company wishes to caution readers that the following factors, among others, may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions in those areas in which the Company operates, credit quality, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans and changes in governmental regulations. ASSET LIABILITY MANAGEMENT Interest Rate Sensitivity. The primary objective of the Company's asset liability management process is to optimize net interest income while prudently managing balance sheet risks by understanding the levels of risk accompanying its decisions and monitoring and managing these risks. The ability to optimize net interest margin is largely dependent on the achievement of an interest rate spread that can be managed during fluctuations of interest rates. Interest sensitivity is a measure of the extent to which net interest income will be affected by market interest rates over a period of time. Management monitors the sensitivity of net interest margin by utilizing income simulation models and traditional gap analysis. Liquidity. The objective of liquidity management is to maintain the Company's ability to meet the day-to-day cash flow requirements of its customers who either wish to withdraw funds or require funds to meet their credit needs. The Company manages its liquidity position to meet the needs of its customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of its stockholders. The Company monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position, principally through deposit receipts and check payments; loan originations, extensions, and repayments; and management of investment securities. The Company's current liquidity position is 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. In addition, maturing balances in the Company's loan portfolio provide options for cash flow management. The ability to redeploy these funds is an important source of immediate to long-term liquidity. Additional sources of liquidity include customer deposits, Federal funds lines, borrowings and access to capital markets. As a holding company, First Interstate BancSystem, Inc. ("FIBS") is a corporation separate and apart from its subsidiaries, and therefore, provides for its own liquidity. A large portion of FIBS's revenues are dividends received from its banking subsidiaries. In general, each banking subsidiary is limited, without the prior consent of its state and federal regulators, to paying dividends that do not exceed the current year net profits together with retained earnings from the two preceding calendar years. In addition, state or federal regulators may impose regulatory dividend limitations or prohibitions in certain circumstances. The banking subsidiaries are not subject to dividend limitations other than general limitations. Capital Adequacy. The objective of capital adequacy is to provide adequate capitalization to assure depositor, investor and regulatory confidence. The intent is to provide sufficient capital funds to support growth and to absorb fluctuations in income so that operations can continue in periods of uncertainty while at the same time ensuring investable funds are available to foster expansion. 9
10 OVERVIEW The Company recorded net income of $7.8 million, or $0.97 per share, during the third quarter of 2000 compared to $7.5 million, or $0.92 per share, for the same period in 1999. Third quarter 2000 net income surpassed second quarter 2000 net income of $7.5 million, or $0.93 per share, primarily due to a gain on the sale of other real estate and the partial recovery of a previously recorded non-credit loss. Net income for the nine month period ended September 30, 2000 of $22.3 million, or $2.77 per share, increased $132,000, or 0.6%, from $22.2 million, or $2.74 per share, for the same period in 1999. Increases in net interest income and non-interest income during the first nine months of 2000 were offset by higher provisions for loan losses, two non-credit losses aggregating $863,000 (net of recoveries) recorded in 2000 and the short-term dilutive effects of sixteen new branches opened or acquired since January 1999. EARNING ASSETS Earning assets of $2,553 million at September 30, 2000 increased $224 million, or 9.6 %, from $2,329 million at December 31, 1999 primarily due to loan growth. Loans. Total loans increased $223 million, or 12.9%, to $1,946 million as of September 30, 2000 from $1,723 million as of December 31, 1999. All categories of loans increased from December 31, 1999 with the exception of agricultural loans, which decreased slightly. Management attributes loan 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 demand in the Company's marketing areas. Approximately $64 million of the increase in total loans is attributable to the Cheyenne acquisition. Of the remaining increase, approximately $57 million relates to three commercial and four real estate loans advanced in 2000. Income from Earning Assets. Interest income for the third quarter of 2000 of $56.1 million increased $7.9 million, or 16.4%, from $48.2 million for the same period in the prior year. Year-to-date interest income through September 30, 2000 of $158.4 million increased $19.8 million, or 14.3%, from $138.6 million for the same period in 1999. Increases are due primarily to strong loan demand and increases in the prime lending rate. On a fully taxable equivalent basis, average earning assets for the nine month period ended September 30, 2000 of $2,436 million yielded 8.80% while average earning assets of $2,243 million for the same period in 1999 yielded 8.35%. New branches opened or acquired since January 1999 contributed $5.5 million of interest income during the nine months ended September 30, 2000. FUNDING SOURCES The Company utilizes traditional funding sources to support its earning asset portfolio including deposits, borrowings, Federal funds purchased and repurchase agreements. Deposits. Total deposits increased $195 million, or 9.2%, to $2,313 million as of September 30, 2000 from $2,118 million as of December 31, 1999. Approximately $80 million of the increase in deposits is attributable to the Cheyenne acquisition. The remaining increase is the result of internal growth. Increases in deposits were primarily used to fund loan growth. Other Borrowed Funds. In addition to deposits, the Company also uses short-term borrowings from the Federal Home Loan Bank of Seattle, repurchase agreements with depositors, and, on a seasonal basis, Federal funds purchased. Other borrowed funds increased $43 million, or 18.6%, to $274 million as of September 30, 2000 from $231 million as of December 31, 1999. Increases in other borrowed funds were primarily used to fund loan growth. Long-term Debt. Long-term debt increased $21 million, or 91.3%, to $44 million as of September 30, 2000 from $23 million as of December 31, 2000. Additional borrowings were used to fund the Cheyenne acquisition in August 2000. Cost of Funding Sources. Interest expense for the three month period ended September 30, 2000 of $27.0 million increased $5.6 million, or 26.2%, from $21.4 million for the same period in 1999. Interest expense increased $13.2 million, or 21.6%, to $74.2 million for the nine months ended September 30, 2000 from $61.0 10
11 million for the same period in 1999. These increases are primarily due to increases in the volume of interest-bearing liabilities combined with increases in interest rates since September 30, 1999. Average interest-bearing liabilities and trust preferred securities of $2,123 million during the nine months ended September 30, 2000 cost 4.67% while average interest-bearing liabilities and trust preferred securities of $1,929 million during the nine months ended September 30, 1999 cost 4.23%. New branches opened or acquired since January 1999 recorded interest expense of $2.5 million. NET INTEREST INCOME The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. On a fully-taxable equivalent basis ("FTE"), net interest income of $86.3 million for the nine months ended September 30, 2000 increased $7.1 million, or 9.0%, from $79.2 million for the same period in the prior year. A higher mix of loans in earning assets has kept the net interest margin ratio stable at 4.73% for the nine months ended September 30, 2000 as compared to 4.72% for the same period in 1999. PROVISION FOR LOAN LOSS Provision for Loan Losses. The provision for loan losses creates an allowance for expected loan losses. The loan loss provision is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of underlying collateral on problem loans and general economic conditions in the Company's markets. The Company performs a quarterly assessment of risks inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Company makes provision for loan losses. The provision for loan losses for the quarter ended September 30, 2000 of $1.2 million increased $291,000, or 31.3%, from $931,000 for the same period in the prior year. The provision for loan losses increased $1.2 million, or 48.0%, to $3.7 million for the nine months ended September 30, 2000 from $2.5 million for the same period in 1999. The increase in the provision for loan losses between periods is primarily the result of loan growth and increases in non-performing loans. Non-Performing Loans. Non-performing loans include loans past due 90 days or more and still accruing interest, non-accrual loans and restructured loans. Non-performing loans increased $1.3 million, or 4.2%, to $32.5 million as of September 30, 2000 from $31.2 million as of December 31, 1999. However, the ratio of non-performing loans to total loans at September 30, 2000 was 1.67% as compared to 1.81% at December 31, 1999 and 1.95% at September 30, 1999. NON-INTEREST INCOME The Company's principal sources of non-interest income include service charges on deposit accounts; data services revenues; income from fiduciary activities, comprised principally of fees earned on trust assets; and, other service charges, commissions and fees. Non-interest income increased $1.6 million, or 18.6% to $10.2 million for the three months ended September 30, 2000 from $8.6 million for the same period in 1999. Year-to-date through September 30, 2000, non-interest income increased $4.7 million, or 19.4%, to $28.9 million as compared to $24.2 million for the same period in 1999. All significant categories of non-interest income showed quarter-to-date and year-to-date increases from prior year. Significant fluctuations are discussed below: Income from Fiduciary Activities. Income from fiduciary activities of $1.3 million during the third quarter of 2000 increased $146,000, or 12.2%, from $1.2 million for the same period in 1999. Year-to-date through September 30, 2000, income from fiduciary activities increased $340,000, or 10.3%, to $3.6 million from $3.3 million for the same period in 1999. These increases are primarily attributable to growth in customer assets under trust management. Service Charges on Deposit Accounts. Service charges on deposit accounts of $3.2 million for the quarter ended September 30, 2000 increased $233,000, or 7.8%, from $3.0 million for the same period in 1999. Year-to-date through September 30, 2000, service charges on deposit accounts of $9.1 million increased $716,000, or 8.5%, from $8.4 million for the same period in 1999. Approximately 44% of the year-to-date increase is directly attributable to new branches opened or acquired since the beginning of 1999. The remaining increase occurred primarily in overdraft fee charges. 11
12 Data Services Revenues. Data services revenues increased $256,000, or 13.5%, to $2.1 million for the quarter ended September 30, 2000 from $1.9 million for the same period in 1999. Year-to-date through September 30, 2000, data services revenues of $6.4 million increased $1.3 million, or 25.5%, from $5.1 million during the same period in 1999. Approximately 34% of this increase results from the addition of one new customer during the fourth quarter of 1999. The remaining increase is primarily due to increases in ATM transaction volumes combined with greater numbers of ATMs supported by the Company's ATM network. Other Service Charges, Commissions and Fees. Other service charges, commissions and fees of $2.1 million for the three months ended September 30, 2000 increased $262,000, or 14.6%, from $1.8 million for the same period in 1999. Year-to-date through September 30, 2000, other service charges, commissions and fees of $6.0 million increased $874,000, or 17.1%, from $5.1 million for the same period in 1999. These increases are primarily attributable to loan servicing income resulting from strong loan demand; ATM fee income resulting from higher debit card and foreign ATM transaction volumes combined with increases in fees for foreign ATM transactions; and, correspondent processing fees resulting from increases in the number of correspondent banks using the Company's back-room processing services. Other Real Estate Income. Net other real estate (OREO) income increased $431,000, or 120.1%, to $790,000 for the nine months ended September 30, 2000 from $359,000 for the same period in 1999. Variations in net OREO income during the periods are principally the result of fluctuations in gains and losses on sales of OREO. Other Income. Other income, primarily brokerage fees, check printing income and foreign exchange fees, increased $205,000, or 25.1%, to $1.0 million for the three months ended September 30, 2000 from $816,000 for the same period in the prior year. For the nine months ended September 30, 2000, other income of $2.9 million increased $1.0 million, or 52.6%, from $1.9 million during the same period in the prior year. Approximately 46% of the year-to-date increase occurred in brokerage fees and is the result of expansion in the number of markets served by the Company's brokerage offices. The remaining increase is primarily due to the recovery of a $101,000 prior year non-credit loss and a $269,000 gain recognized on the sale of an aircraft. OTHER OPERATING EXPENSE Other operating expenses increased $3.1 million, or 13.6%, to $25.9 million for the quarter ended September 30, 2000 from $22.8 million for the same period in 1999. Year-to-date through September 30, 2000, other operating expense of $74.7 million increased $10.1 million, or 15.6%, from $64.6 million for the same period in the prior year. Significant components of this increase are discussed below: Salaries, Wages and Employee Benefits Expenses. Salaries, wages and employee benefits expenses increased $2.0 million, or 17.2%, to $13.6 million for the three months ended September 30, 2000 as compared to $11.6 million for the same period in the prior year. Salaries, wages and employee benefits expense of $38.7 million for the nine month period ended September 30, 2000 increased $5.2 million, or 15.5%, from $33.5 million for the same period in 1999. Approximately 27% of the year-to-date 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. Occupancy. Occupancy expense increased $242,000, or 13.4%, to $2.1 million for the three months ended September 30, 2000 compared to $1.8 million for the same period in 1999. Year-to-date through September 30, 2000, occupancy expense of $6.0 million increased $718,000, or 13.8%, from $5.2 million during the sam period in the prior year. Approximately 39% of the year-to-date increase is directly attributable to new branches opened or acquired since January 1999. The remaining increase is primarily due to increased depreciation associated with the remodel and upgrade of existing facilities. Furniture and Equipment. Furniture and equipment expenses decreased $25,000, or 0.9% to $2.7 million for the three months ended September 30, 2000 from $2.7 million for the same period in 1999. Year-to-date through September 30, 2000, furniture and equipment expense increased $716,000, or 9.8%, to $8.1 million as compared to $7.3 million for the same period in the prior year. Approximately 27% of the year-to-date increase is directly attributable to new branches opened or acquired since January 1999. The remaining increase 12
13 is largely due to depreciation expense associated with the Company's continuing investment in technology and other costs of upgrading computer hardware and software, principally associated with introducing check-imaging technology. FDIC Insurance. Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums of $106,000 and $329,000 for the three and nine months ended September 30, 2000, respectively, are approximately double the amounts recorded during the same periods in 1999. The increase in premiums resulted from an increase in FDIC FICO bond assessment effective January 1, 2000. FDIC deposit insurance rates reflect the Company's well-capitalized rating by the FDIC. Goodwill and Core Deposit Intangible Amortization. Goodwill and core deposit intangible amortization expense of $917,000 for the quarter ended September 30, 2000 increased $144,000, or 18.6%, from $773,000 during the same period in 1999. Year-to-date through September 30, 2000, goodwill and core deposit amortization expense of $2.5 million increased $494,000, or 24.7%, from $2.0 million for the same period in 1999. Increases in goodwill and core deposit intangible amortization expense are the result of acquisitions in July 1999 and August 2000. Other Expenses. Other expenses increased $618,000, or 10.5%, to $6.5 million for the quarter ended September 30, 2000 from $5.9 million for the same period in 1999. Other expenses of $19.1 million for the nine months ended September 30, 2000 increased $2.7 million, or 16.5%, from $16.4 million during the same period in 1999. Approximately 31% of the year-to-date 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 the second and third quarters of 2000. Management believes there is potential for recovery of these losses in future quarters. The remaining year-to-date increase is primarily due to advertising, public relations and travel expenses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2000, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in the Company's December 31, 1999 Form 10-K. 13
14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in legal proceedings from December 31, 1999. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR INDEBTEDNESS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matter was submitted to a vote of security holders at the Annual Meeting of Shareholders of First Interstate BancSystem, Inc. on April 27, 2000: <TABLE> <CAPTION> Matter For Against Not Voted --------------------------------------------------------------------------------------------- <S> <C> <C> <C> Election of Directors: Lyle R. Knight 7,313,490 1,639 645,263 James R. Scott 7,315,129 -- 645,263 Sandra A. Suzor 7,314,807 322 645,263 </TABLE> ITEM 5. OTHER INFORMATION Not applicable or required. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule. (b) No reports were filed on Form 8-K during the quarter ended September 30, 2000. 14
15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: FIRST INTERSTATE BANCSYSTEM, INC. Date November 10, 2000 /s/ THOMAS W. SCOTT ------------------------------- -------------------------------- Thomas W. Scott Chief Executive Officer Date November 10, 2000 /s/ TERRILL R. MOORE ------------------------------- -------------------------------- Terrill R. Moore Senior Vice President and Chief Financial Officer 15