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, 2001 COMMISSION FILE NUMBER: 33-64304 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.) 401 NORTH 31ST STREET BILLINGS, MONTANA 59116 (Address of principal executive offices) (Zip Code) (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 1, 2002 was $43.00. The number of shares outstanding of the registrant's common stock as of February 28, 2002 was 7,844,056. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2002 definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 17, 2002 are incorporated by reference into Part III of this Form 10-K.
PART I 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, 2001, the Company had assets of $3.3 billion, deposits of $2.7 billion and total stockholders' equity of $222 million, making it the largest banking organization in Montana. FIBS operates a wholly-owned bank subsidiary, First Interstate Bank (the "Bank"), with 56 banking offices in 30 Montana and Wyoming communities. The Bank, a Montana corporation organized in 1916, delivers a comprehensive range of loan, deposit and investment products and, mortgage banking and trust services to meet the needs of individual customers, businesses, and municipalities. The Company conducts various other financial-related business activities through wholly-owned non-bank subsidiaries. During 2000, the Company incorporated its technology services division into a separate subsidiary, i_Tech Corporation ("i_Tech"). i_Tech provides technology services to the Bank and to 149 non-affiliated financial institutions in Montana, Wyoming, Idaho, Washington, Oregon and Colorado. Additionally, i_Tech's ATM network provides processing support for over 2,850 ATM locations in 32 states. FIB Capital Trust ("FIB Capital"), 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. Commerce Financial, Inc. ("CFI") was incorporated in 1978. CFI's principal activity has been the liquidation of assets acquired through foreclosure actions by FIBS. FI Reinsurance, Ltd. ("FIR"), domiciled in Nevis Island, West Indies, was formed in 2001 to underwrite, as reinsurer, credit-related life and disability insurance. 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 Montana, Wyoming and surrounding states. COMMUNITY BANKING PHILOSOPHY The banking industry continues to experience 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 Bank is located through community service activities. 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 that are tied to net income and other success measures at the individual banking office 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, to gain efficiency in management of those products and activities and to ensure regulatory compliance. Centralized products and activities include trust, investment, wire transfer, escrow, credit card, technology and escrow services, mortgage servicing, 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 provide economies of scale into the future. -2-
During 2000, the Company acquired Equality State Bankshares, Inc. ("ESB"), a bank holding company with three banking offices. At the date of acquisition, ESB has loans of $64 million and deposits of $80 million. For additional information regarding acquisitions, see "Notes to Consolidated Financial Statements - Acquisitions" included in Part IV, Item 14. The Company has opened 18 new banking offices in Montana and Wyoming since 1998. Among these new offices are 12 full service banking offices located inside retail establishments. The Company intends to continue to expand its presence in the Montana and Wyoming markets through the opening of new banking offices. The Company currently plans to open four additional banking offices in Montana and Wyoming through 2003. Beginning in 1999, the Company accelerated its investment in information systems and staff to support the continued growth of its technology services subsidiary, i_Tech. During 2001, i_Tech opened new item capture facilities in Idaho and Colorado. i_Tech intends to continue to expand into new market areas through aggressive sales efforts. THE BANK During 2001, the Company merged its two bank charters, First Interstate Bank in Montana and First Interstate Bank in Wyoming. The resulting bank, First Interstate Bank ("FIB" or the "Bank"), is headquartered in Billings, Montana. 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. CENTRALIZED SERVICES FIBS and i_Tech provide general oversight and centralized services for the Bank to enable it to serve its 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 Bank, including system support of the general ledger, investment security, loan, deposit, web banking, imaging, management reporting, cash management and e-mail systems. i_Tech also manages the Company's wide-area network and the ATM network used by the Bank and provides item proof and capture services. These technology services are performed through the use of computer hardware owned and maintained by the Bank and software licensed by i_Tech. Credit Administration. FIBS monitors the lending activities of the Bank to maximize the quality and mix of loans, provides centralized loan approval for the Bank's larger loans, evaluates the risk inherent in the Bank's loan portfolio and assists in determining the loan loss reserve including specific reserve allocations. Finance and Accounting. FIBS provides financial and accounting services for the Bank, 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 Bank with incentive and employee benefit administration and compensation, training, employee recruitment and hiring services. Other Support Services. FIBS provides the Bank with legal, compliance, internal auditing, marketing and sales services, general administration and various other support services. -3-
LENDING ACTIVITIES FIBS has comprehensive credit policies establishing Company-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 Bank offers short and long-term real estate, consumer, commercial, agricultural and other loans to individuals and small to medium sized businesses in its 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 Bank provides 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 Bank originates variable and fixed rate real estate mortgages, generally in accordance with the guidelines of the Fannie Mae 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 Bank's 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. Equity lines of credit are generally floating rate, reviewed annually and secured by real property. Approximately 60% of the Company's consumer loans are indirect dealer paper that 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 Bank provides 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. Agricultural Loans. The Bank's 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 Bank offers 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 Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. 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, however, physically transfer the investment securities. As of December 31, 2001, all outstanding repurchase agreements were due in one day. -4-
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 Competition within Montana and Wyoming for banking and related business is strong. The Bank competes with both state and nationally chartered commercial banks for deposits, loans and trust accounts, and with savings and loan associations, savings banks and credit unions for deposits and loans. In addition, there is significant competition with other financial institutions including personal loan companies, mortgage banking companies, finance companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers all actively engaged in providing various types of loans and other financial services. 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 competitors vary in size and include national, regional and local operations. EMPLOYEES At December 31, 2001, the Company employed 1,494 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. REGULATION AND SUPERVISION Financial 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 that relate to the regulation of FIBS and the Bank. 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 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. -5-
The Bank FIB is subject to the supervision of and regular examination by the Federal Reserve and the State of Montana. If either of the foregoing regulatory agencies determines 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 Bank has not been the subject of any such actions by regulatory agencies. The FDIC insures the deposits of the Bank in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See "Premiums for Deposit Insurance" herein. Restrictions on Transfers of Funds to FIBS and the Bank A large portion of FIBS's revenues are, and will continue to be, dividends paid by the Bank. The Bank is limited, under both state and federal law, in the amount of dividends that may be paid from time to time. In general, the Bank is limited, without the prior consent of its state and federal banking regulators, to paying dividends that 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 Bank, specific regulatory dividend limitations or prohibitions in certain circumstances. The Bank is not subject to a specific regulatory dividend limitation other than generally applicable limitations. 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 Bank and FIBS are also limited under applicable state and federal law and regulations. The Bank 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. Effect of Government Policies and Legislation Banking depends on interest rate differentials. In general, the difference between the interest rate paid by the Bank on deposits and borrowings and the interest rate received by the Bank on loans extended to customers and on investment securities comprises a major portion of the Bank's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and potential growth of the Bank is 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 Bank are impossible to predict. -6-
Capital Standards The federal banking agencies have adopted minimum capital requirements for insured banks that are applicable to the Bank. 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, 2001, the Bank 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. Neither the Bank nor 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" and "Notes to Consolidated Financial Statements - Regulatory Capital" included in Part IV, Item 14. 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 Bank 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 Bank currently is assessed the most favorable deposit insurance premiums under the risk-based premium system. Community Reinvestment Act and Fair Lending Developments The Bank is 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 Bank 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." FIB received an "outstanding" rating on its most recent examination. -7-
RISK FACTORS Asset Quality A significant source of risk for the Company arises from the possibility that losses will be sustained by the Bank 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." 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. For additional information regarding interest rate risk, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Cash Flow." Economic Conditions; Limited Geographic Diversification The Company's banking 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 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. -8-
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 Thomas W. Scott, Chief Executive Officer, Lyle R. Knight, President and Chief Operating Officer, Terrill R. Moore, Senior Vice President and Chief Financial Officer, or Ed Garding, Senior Vice President and Chief Credit 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 Several 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 Bank. Moreover, the Banking and Branching Act has increased competition in the Bank's 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." 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 48.77% of the outstanding common stock of the Company. Many of these directors and executive officers are members of the Scott family, which collectively owns 80.86% 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 91.73% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 8.27% without such restrictions. FIBS has the right to acquire some or all the restricted stock at fair market value per share determined as 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 2001, the Company repurchased 20,050 shares of its unrestricted stock 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 -9-
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 (1999-2001), FIBS has repurchased a total of 382,573 shares of common stock, 362,523 of which were restricted by the shareholder agreements. FIBS repurchased the stock at the price determined in accordance with the shareholder agreements. FIBS's repurchases of stock are subject to corporate law and regulatory restrictions that 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 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 preferred 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 is one of the two partners, owning a 50% interest in the partnership. As of December 31, 2001, the Company leases approximately 68,087 square feet of space for operations in the building. The Company also leases space for operations, technology services, and 21 banking offices in 27 buildings. All other banking offices 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. -10-
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 7,848,704 shares were outstanding as of December 31, 2001, and 100,000 shares of preferred stock without par value, none of which were outstanding as of December 31, 2001. 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. 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 91.73% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 8.27% held by 16 shareholders without such restrictions, including the Company's 401(k) plan which holds 76.51% 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, 1999 $ 40.00 March 31, 2000 39.00 June 30, 2000 38.00 September 30, 2000 38.00 December 31, 2000 39.00 March 31, 2001 39.00 June 30, 2001 40.00 September 30, 2001 42.00 December 31, 2001 43.00 </TABLE> As of December 31, 2001, options for 24,170 shares of the FIBS common stock were outstanding at various exercise prices, ranging from $7.61 to $42.00. The aggregate cash proceeds to be received by FIBS upon exercise of all options outstanding at December 31, 2001 would be $638,334, or a weighted average exercise price of $26.41 per share. The appraised minority value as of December 31, 2001 was $43.00. See also Part I, Item 1, "Risk Factors - Lack of Trading Market; Market Prices." -11-
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 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. - Shareholders of the Company who are not Scott family members, with the exception of 16 shareholders who own an aggregate of 648,799 shares of unrestricted stock, are subject to shareholder's agreements ("Shareholder's Agreement"). Stock subject to the Shareholder's Agreement may not be sold or transferred without triggering the Company's option to acquire the stock in accordance with the terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement grants the Company the right to repurchase all or some of the stock at any time. 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 (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 531 record shareholders of FIBS as of December 31, 2001, including the Company's Savings Plan as trustee for 496,407 shares held on behalf of 876 individual participants in the plan. 246 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 or benefit 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 2000 and 2001 are as follows: <TABLE> <CAPTION> Month Declared Amount Total Cash Quarter and Paid Per Share Dividend ------- -------- --------- -------- <S> <C> <C> <C> 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 1st quarter 2001 April 2001 .25 1,966,110 2nd quarter 2001 July 2001 .31 2,427,846 3rd quarter 2001 October 2001 .34 2,676,300 4th quarter 2001 January 2002 .30 2,352,927 </TABLE> -12-
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 Bank." 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 2001, the Company issued 1,400 shares of its common stock to one of its former executive officers exercising stock options. The weighted average exercise price of the options was $15.80 per share. The shares were immediately redeemed by the Company at the minority appraised value of $40.00 per share. During 2001, the Company issued 3,613 unregistered shares of its common stock to 53 senior officers valued at an aggregate of $137,294 as part of the incentive bonuses paid to them. These issuances were made in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933. 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, 2001 and 2000 and its results of operations for the fiscal years ended December 31, 2001, 2000 and 1999, 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, 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operating Data: Interest income $ 219,126 211,797 183,362 174,715 163,007 Interest expense 93,984 101,789 83,015 81,494 72,510 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 125,142 110,008 100,347 93,221 90,497 Provision for loan losses 7,843 5,280 3,563 4,170 4,240 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 117,299 104,728 96,784 89,051 86,257 Noninterest income 52,034 44,151 37,676 34,663 30,371 Noninterest expense 120,249 101,323 91,503 83,735 76,636 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 49,084 47,556 42,957 39,979 39,992 Income tax expense 17,901 17,176 15,229 15,100 15,103 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 31,183 30,380 27,728 24,879 24,889 ============================================================================================================================= Net income applicable to common stock $ 31,183 30,380 27,728 24,879 23,435 Basic earnings per common share 3.97 3.83 3.48 3.10 2.95 Diluted earnings per common share 3.94 3.78 3.42 3.08 2.93 Dividends per common share 1.18 1.11 1.07 0.94 0.98 Weighted average common shares outstanding - diluted 7,921,694 8,044,531 8,111,316 8,087,809 7,987,921 ============================================================================================================================= </TABLE> -13-
FIVE YEAR SUMMARY, CONTINUED (Dollars in thousands except share and per share data) <TABLE> <CAPTION> Years ended December 31, 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operating Ratios: Return on average assets 1.01% 1.10 1.09 1.07 1.18 Return on average common stockholders' equity 14.89 16.81 16.60 16.24 16.45 Average stockholders' equity to average assets 6.80 6.52 6.58 6.60 7.15 Net interest margin 4.66 4.59 4.54 4.55 4.87 Net interest spread 4.11 4.00 3.97 3.90 4.21 Common stock dividend payout ratio(1) 29.72 28.98 30.75 30.32 33.22 Ratio of earnings to fixed charges(2): Excluding interest on deposits 7.76x 5.23x 5.78x 6.91x 4.85x Including interest on deposits 1.52x 1.46x 1.51x 1.49x 1.53x ============================================================================================================================= Balance Sheet Data at Year End: Total assets $3,314,716 2,933,262 2,612,663 2,479,994 2,235,433 Loans 2,157,968 1,972,323 1,722,961 1,484,459 1,470,414 Allowance for loan losses 34,091 32,820 29,599 28,803 28,180 Investment securities 693,178 613,708 578,647 667,935 416,208 Deposits 2,708,613 2,365,225 2,118,183 2,041,932 1,805,006 Other borrowed funds 8,095 11,138 41,875 9,828 11,591 Long-term debt 34,331 37,000 23,394 24,288 31,526 Trust preferred securities 40,000 40,000 40,000 40,000 40,000 Stockholders' equity 222,069 197,986 173,638 162,275 145,071 ============================================================================================================================= Asset Quality Ratios at Year End: Nonperforming assets to total loans and other real estate owned ("OREO")(3) 1.24% 1.54 1.89 1.29 1.15 Allowance for loan losses to total loans 1.58 1.66 1.72 1.94 1.92 Allowance for loan losses to nonperforming loans(4) 129.16 119.73 94.84 159.63 181.90 Net charge-offs to average loans 0.32 0.17 0.27 0.24 0.27 ============================================================================================================================= Regulatory Capital Ratios at Year End: Tier 1 risk-based capital 8.73% 8.55 9.62 9.81 9.63 Total risk-based capital 10.33 10.36 11.69 12.22 12.15 Leverage ratio 6.77 6.78 7.15 7.05 6.91 ============================================================================================================================= </TABLE> (1) Dividends per common share divided by basic earnings per common share. (2) 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 year ended December 31, 1997 was 5.76x. Without including preferred stock dividends in fixed charges and including interest on deposits, the ratio of earnings to fixed charges for the year ended December 31, 1997 was 1.55x. (3) 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. (4) 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. 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, -14-
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 a combination of effective offering and promotion of competitively priced products and services and the opening of several de novo banking offices. Net income was $31.2 million, or $3.94 per diluted share, in 2001 as compared to $30.4 million, or $3.78 per diluted share, in 2000 and $27.7 million, or $3.42 per diluted share, in 1999. 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 BALANCE SHEETS, YIELDS AND RATES <TABLE> <CAPTION> Years Ended December 31, -------------------------------- 2001 -------------------------------- Average Average (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest earning assets: Loans(1)(2) $2,056,179 181,845 8.84% U.S. and agency securities 444,462 27,067 6.09 Federal funds sold 72,368 2,709 3.74 Other securities 75,983 4,343 5.72 Tax exempt securities(2) 79,380 5,747 7.24 Interest bearing deposits in banks 20,014 466 2.33 - -------------------------------------------------------------------------------------------------- Total interest earning assets 2,748,386 222,177 8.08 Noninterest earning assets 331,719 - -------------------------------------------------------------------------------------------------- Total assets $3,080,105 ================================================================================================== Interest bearing liabilities and trust preferred securities: Demand deposits $ 403,285 5,421 1.34% Savings deposits 640,101 18,654 2.91 Time deposits 990,616 55,567 5.61 Borrowings(3) 250,306 7,969 3.18 Long-term debt 41,032 2,844 6.93 Trust preferred securities 40,000 3,529 8.82 - -------------------------------------------------------------------------------------------------- Total interest bearing liabilities and trust preferred securities 2,365,340 93,984 3.97 - -------------------------------------------------------------------------------------------------- Noninterest bearing deposits 471,798 Other noninterest bearing liabilities 33,551 Stockholders' equity 209,416 - -------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,080,105 ================================================================================================== </TABLE> <TABLE> <CAPTION> Years Ended December 31, -------------------------------- 2000 -------------------------------- Average Average (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest earning assets: Loans(1)(2) $1,865,125 176,742 9.48% U.S. and agency securities 414,274 25,809 6.23 Federal funds sold 21,167 1,400 6.61 Other securities 77,872 4,914 6.31 Tax exempt securities(2) 77,784 5,617 7.22 Interest bearing deposits in banks 1,641 112 6.83 - -------------------------------------------------------------------------------------------------- Total interest earning assets 2,457,863 214,594 8.73 Noninterest earning assets 313,193 - -------------------------------------------------------------------------------------------------- Total assets $2,771,056 ================================================================================================== Interest bearing liabilities and trust preferred securities: Demand deposits $ 368,710 6,961 1.89% Savings deposits 556,930 22,470 4.03 Time deposits 876,350 50,774 5.79 Borrowings(3) 278,721 15,525 5.57 Long-term debt 31,293 2,530 8.08 Trust preferred securities 40,000 3,529 8.82 - -------------------------------------------------------------------------------------------------- Total interest bearing liabilities and trust preferred securities 2,152,004 101,789 4.73 - -------------------------------------------------------------------------------------------------- Noninterest bearing deposits 407,241 Other noninterest bearing liabilities 31,036 Stockholders' equity 180,775 - -------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,771,056 ================================================================================================== </TABLE> <TABLE> <CAPTION> Years Ended December 31, -------------------------------- 1999 -------------------------------- Average Average (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest earning assets: Loans(1)(2) $1,598,594 145,164 9.33% U.S. and agency securities 464,954 27,777 5.97 Federal funds sold 24,854 1,304 5.25 Other securities 91,606 5,680 6.20 Tax exempt securities(2) 72,755 5,250 7.22 Interest bearing deposits in banks 7,071 353 4.99 - -------------------------------------------------------------------------------------------------- Total interest earning assets 2,259,834 185,528 8.21 Noninterest earning assets 279,945 - -------------------------------------------------------------------------------------------------- Total assets $2,539,779 ================================================================================================== Interest bearing liabilities and trust preferred securities: Demand deposits $ 346,711 6,084 1.75% Savings deposits 539,513 19,482 3.61 Time deposits 785,307 41,959 5.34 Borrowings(3) 221,037 9,998 4.52 Long-term debt 24,556 1,963 7.99 Trust preferred securities 40,000 3,529 8.82 - -------------------------------------------------------------------------------------------------- Total interest bearing liabilities and trust preferred securities 1,957,124 83,015 4.24 - -------------------------------------------------------------------------------------------------- Noninterest bearing deposits 387,969 Other noninterest bearing liabilities 27,675 Stockholders' equity 167,011 - -------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,539,779 ================================================================================================== </TABLE> -15-
AVERAGE BALANCE SHEETS, YIELDS AND RATES, CONTINUED <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------------------------------------ 2001 2000 1999 ---------------------------- ---------------------------- ---------------------------- 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> Net FTE interest income $128,193 $112,805 $102,513 Less FTE adjustments(2) (3,051) (2,797) (2,166) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income per consolidated statements of income $125,142 $110,008 $100,347 ==================================================================================================================================== Interest rate spread 4.11% 4.00% 3.97% ==================================================================================================================================== Net yield on interest earning assets(4) 4.66% 4.59% 4.54% ==================================================================================================================================== </TABLE> (1) Average loan balances include nonaccrual loans. Loan fees included in interest income were $7.2 million, $5.2 million and $4.8 million for the years ended December 31, 2001, 2000 and 1999, 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 13.6% to $128.2 million in 2001 from $112.8 in 2000 primarily due to a more rapid decline in the cost of funds than the decline in the yield on interest earning assets in combination with strong growth in loans and deposits. A higher mix of loans in earning assets allowed the net yield on earning assets to increase 11 basis points to 4.11% in 2001 from 4.00% in 2000. Net FTE interest income increased 10.0% to $112.8 million in 2000 from $102.5 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 banking offices opened or acquired in 2000 and 1999. Customer loan fees, included in net interest income, increased 38.4% to $7.2 million in 2001 from $5.2 million in 2000. All major categories of loan fees increased with the most significant increases occurring in commercial and consumer loan fees. Customer loan fees increased 8.3% to $5.2 million in 2000 from $4.8 million in 1999 primarily due to increases in consumer, real estate and commercial loan business. 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. 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 (Dollars in thousands) <TABLE> <CAPTION> Year ended December 31, 2001 December 31, 2000 December 31, 1999 compared with compared with compared with December 31, 2000 December 31, 1999 December 31, 1998 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) $18,105 (13,002) 5,103 24,203 7,375 31,578 12,229 (6,556) 5,673 U.S. and agency securities 1,881 (623) 1,258 (3,028) 1,060 (1,968) 2,878 (107) 2,771 Federal funds sold 3,386 (2,077) 1,309 (193) 289 96 (2,122) (31) (2,153) Other securities (119) (452) (571) (852) 86 (766) 1,939 (114) 1,825 Tax exempt securities(1) 115 15 130 363 4 367 2,203 (243) 1,960 Interest bearing deposits in banks 1,254 (900) 354 (271) 30 (241) (626) (18) (644) - -------------------------------------------------------------------------------------------------------------------------- Total change 24,622 (17,039) 7,583 20,222 8,844 29,066 16,501 (7,069) 9,432 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> -16-
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES, CONTINUED (Dollars in thousands) <TABLE> <CAPTION> Year ended December 31, 2001 December 31, 2000 December 31, 1999 compared with compared with compared with December 31, 2000 December 31, 1999 December 31, 1998 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 bearing liabilities and trust preferred securities: Demand deposits 653 (2,193) (1,540) 386 491 877 555 (1,144) (589) Savings deposits 3,356 (7,172) (3,816) 629 2,359 2,988 2,918 (1,513) 1,405 Time deposits 6,620 (1,827) 4,793 4,864 3,951 8,815 1,763 (3,302) (1,539) Borrowings(2) (1,583) (5,973) (7,556) 2,609 2,918 5,527 2,112 336 2,448 Long-term debt 787 (473) 314 539 28 567 (273) 67 (206) Trust preferred securities -- -- -- -- -- -- -- 2 2 - ------------------------------------------------------------------------------------------------------------------------------- Total change 9,833 (17,638) (7,805) 9,027 9,747 18,774 7,075 (5,554) 1,521 - ------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in FTE net interest income (1) $14,789 599 15,388 11,195 (903) 10,292 9,426 (1,515) 7,911 =============================================================================================================================== </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 known and inherent in the loan portfolio at each balance sheet date. The Company performs a quarterly assessment of the risks inherent in its loan portfolio, as well as a detailed review of each significant asset with identified weaknesses. Based on this analysis, the Company records a provision for loan losses in order to maintain the allowance for loan losses at assessed levels. Periodically, provisions are made for loans where the probable loss can be individually identified and reasonably determined, while the balance of the provisions for loan losses are based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. 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. See additional information concerning the provision for loan losses, see "Critical Accounting Policies" included herein. The provision for loan losses increased 48.5% to $7.8 million in 2001 from $5.3 million in 2000 and 48.2% to $5.3 million in 2000 from $3.6 million in 1999. These increases are primarily the result of increases in problem loans, softening economic conditions in the Company's market areas, particularly in agriculture, health care, transportation and hotel/motel market sectors, and slowing regional and national economies. 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 17.9% to $52.0 million in 2001 from $44.2 million in 2000, and 17.2% to $44.2 million in 2000 from $37.7 million in 1999. 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 16.2% to $14.6 million in 2001 from $12.6 million in 2000. Approximately 38% of this increase is directly attributable to new banking offices opened or acquired since June 2000. The remaining increase occurred primarily in overdraft fees. Service charges on deposit accounts increased 10.7% to $12.6 million in 2000 from $11.4 million in 1999 primarily due to new banking offices opened or acquired during 1999 and 2000 and increases in volume of overdraft fees. Technology services revenues were flat in 2001 as compared to the prior year. Increases in core data processing revenues were largely offset by decreases in item processing revenues. 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. -17-
Other service charges, commission and fees primarily include origination and processing fees on real estate loans held for resale, loan servicing fee income, credit card fees, brokerage revenues, debit card interchange fees and ATM service charge revenue. Other service charges, commissions and fees increased 43.9% to $16.7 million in 2001 from $11.6 million in 2000. Origination and processing fees on real estate loans sold in the secondary market increased $4.0 million in 2001 as compared to the prior year principally due to increased refinancing activity resulting from decreases in residential lending rates. The remaining increase is primarily attributable to loan servicing fee income generated through internal growth and the acquisition of loan servicing rights in December 2000 and increases in debit card interchange fees resulting from higher transaction volumes. Other service charges, commissions and fees increased 9.1% to $11.6 million in 2000 from $10.6 million in 1999 primarily due to loan servicing income generated through internal growth and increases in ATM fee income resulting from higher debit card and foreign ATM transaction volumes combined with increases in fees for foreign ATM transactions. Revenues from fiduciary activities are largely dependent on the fair value of assets under trust management. As a result of stock market value declines in 2001, revenues from fiduciary activities decreased 4.2% to $4.7 million in 2001 from $4.9 million in 2000. Revenues from fiduciary activities increased 9.2% to $4.9 million in 2000 from $4.5 million in 1999 primarily due to growth in customer assets, including mineral rights, under trust management and increases in fees charged for trust services. The Company recorded net OREO expense of $130,000 in 2001 as compared to net OREO income of $689,000 in 2000 and $366,000 in 1999. Variations in net OREO income or expense during the periods is primarily the result of fluctuations in gains and losses on sales of OREO. OREO income or expense 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 41.6% to $5.7 million in 2001 from $4.0 million in 2000 primarily due to premium revenues of $1.3 million related to reinsurance of credit-related life and disability insurance (see discussion of increases in other operating expenses herein). In addition, during 2001, the Company recorded non-recurring revenue related to the demutualization of life insurance company stock and the partial recovery of three previously recorded non-credit losses. Other income increased 61.3% to $4.0 million in 2000 from $2.5 million in 1999 principally due to non-recurring fourth quarter adjustments to record life insurance company demutualization stocks and the recognition of the Company's share of undistributed earnings in an unconsolidated joint venture partnership. The remaining increase was primarily due to the gain recognized on the sale of an aircraft and the partial recovery of a prior year non-credit loss. Noninterest Expense Noninterest expense increased 18.7% to $120.2 million in 2001 from $101.3 million in 2000 and increased 10.7% to $101.3 million in 2000 from $91.5 million in 1999. Significant components of these increases are discussed below. Salaries, wages and employee benefits expense increased 18.9% to $61.6 million in 2001 from $51.8 million in 2000. Approximately 28% of the increase is directly attributable to new banking offices opened or acquired since June 2000. In addition, $1.1 million of the increase is due to compensation expense related to outstanding stock options. The remaining increase is primarily due to increases in administrative staffing levels to support the Company's expanding number of banking offices, increases in group health insurance premiums and inflationary wage increases. 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 banking offices opened or acquired in 2000 and 1999. The remaining increase is primarily due to inflationary wage increases, increases in administrative staffing levels to support the Company's expanding number of banking offices 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. 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 18.6% to $9.6 million in 2001 from $8.1 million in 2000 and 13.8% to $8.1 million in 2000 from $7.1 million in 1999. These increases are primarily due to additional rent and depreciation expenses associated with internal growth, bank acquisitions and the remodeling of existing facilities. -18-
Furniture and equipment expenses increased 14.7% to $12.3 million in 2001 from $10.7 million in 2000. Approximately 26% of this increase is directly attributable to new banking offices opened or acquired since June 2000. The remaining increase is largely due to maintenance and depreciation expenses associated with the Company's continued upgrade of facilities and depreciation expense associated with furnishing the Company's new item proof and capture facilities in Colorado and Idaho. Furniture and equipment expense increased 4.6% to $10.7 million in 2000 from $10.2 million in 1999 primarily due to new banking offices opened or acquired in 2000 and 1999 and increased depreciation expense associated technology upgrades. FDIC insurance premiums of $442,000 remained stable in 2001 compared to $438,000 in 2000. 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 in 2001, 2000 and 1999 reflect the Company's well-capitalized rating by the FDIC. Goodwill amortization expense increased 9.0% to $2.2 million in 2001 from $2.0 million in 2000 and 20.0% to $2.0 million in 2000 from $1.7 million in 1999 due to acquisitions during the third quarters of 2000 and 1999. For additional information regarding goodwill, see "Critical Accounting Policies" included herein and "Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies" included n Part IV, Item 14. Core deposit intangibles amortization expense of $1.4 million in 2001 and 2000 increased 32.2% from $1.1 million in 1999 primarily due to acquisitions in 1999 and 2000. Other expenses primarily include advertising and public relations costs; legal, audit and other professional fees; office supply, postage, freight and telephone expenses; and loan servicing rights amortization and impairment charges. Other expenses increased 21.8% to $32.7 million in 2001 from $26.9 million in 2000. Approximately 22% of this increase is attributable to new banking offices opened or acquired since June 2000. In addition, the Company recorded insurance reserves and claims of $1.1 million related to its reinsurance of credit-related life and disability insurance and impairment of capitalized loan servicing rights of $1.1 million. The remaining increase is primarily due to employee education, professional fees related to regulatory reporting and increases in ATM, postage, express mail, supply and telephone expenses. Other expenses increased 16.0% to $26.9 million in 2000 from $23.2 million in 1999 principally due to new banking offices opened or acquired in 2000 and 1999, two non-credit losses aggregating $863,000, net of recoveries, and increases in advertising, public relations, ATM and loan servicing intangible amortization expenses. Income Tax Expense The Company's effective federal tax rate was 30.7%, 31.3% and 31.3% for the years ended December 31, 2001, 2000 and 1999, respectively. State income tax applies only to pretax earnings of entities operating within Montana, Colorado and Idaho. The Company's effective state tax rate was 4.8%, 4.2% and 5.3% for years ended December 31, 2001, 2000 and 1999, respectively. Lines of Business The Company is managed along two primary business lines, community banking and technology services. The community banking line encompasses commercial and consumer banking services provided to individual customers, businesses and municipalities. These services primarily include the acceptance of deposits, extension of credit, fee-based investment services and mortgage servicing. The technology services line encompasses technology services provided by i_Tech to affiliated and non-affiliated financial institutions including ATM processing support, item proof and capture, wide area network services and system support. Additional information regarding the Company's business segments, see "Notes to Consolidated Financial Statements - Business Line Reporting" included in Part IV, Item 14. -19-
The following table summarizes the Company's business line results, for the years indicated: BUSINESS LINE RESULTS <TABLE> <CAPTION> Net Income (Loss) ------------------------------------------- Year ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> <C> Community Banking 37,673 34,125 33,297 Technology Services 3,050 2,954 1,999 Other (9,540) (6,699) (7,568) - ------------------------------------------------------------------------------ Consolidated 31,183 30,380 27,728 ============================================================================== </TABLE> Community banking net income increased 10.4% to $37.7 million in 2001 from $34.1 million in 2000. This increase is primarily due to internally generated growth in net interest income and increases in processing and origination fees on residential real estate loans resold in the secondary market. These increases were partially offset by net losses incurred by new banking offices opened or acquired since June, 2000 and increases in administrative staffing levels to support the Company's expanding number of banking offices. Community banking net income increased 2.5% to $34.1 million in 2000 from $33.3 million in 1999 primarily due to growth in net interest income resulting from a combination of acquisitions and internal growth. In addition, the Company experienced growth in investment services revenues and earnings in unconsolidated joint ventures. These increases were partially offset by net losses incurred by new banking offices opened or acquired since 1999 and increases in administrative staffing levels to support the Company's expanding number of banking offices. Technology services revenues increased 3.2% to $3.1 million in 2001 from $3.0 million in 2000 primarily due to increases in core data processing revenues from affiliates. Technology services revenues increased 47.8% to $3.0 million in 2000 from $2.0 million in 1999 primarily due to the addition of one new customer during the fourth quarter of 1999 and higher ATM transaction volumes combined with increases in the number of ATMs supported by the Company's ATM network. Other includes the net funding cost of the Parent Company, compensation expense or benefit related to outstanding stock options, the operating results of non-bank subsidiaries except i_Tech and intercompany eliminations. Other net losses increased 42.4% to $9.5 million in 2001 from $6.7 million in 2000 primarily due to increases in compensation expense related to outstanding stock options, increases in interest expense primarily due to borrowings used to fund acquisitions in 2000, increases in salaries, wages and employee benefits expenses and the establishment of an allowance for loan losses by the Parent Company. Other net losses decreased 11.5% to $6.7 million in 2000 from $7.6 million in 1999 primarily due to compensation benefit related to outstanding stock options. FINANCIAL CONDITION Total assets increased 13.0% to $3,315 million as of December 31, 2001 from $2,933 million as of December 31, 2000. This increase was due to internal growth in loans and increases in investment securities and cash equivalents funded primarily by customer deposits. Loans Total loans increased 9.4% to $2,158 million as of December 31, 2001 from $1,973 million as of December 31, 2000. All major categories of loans increased from December 31, 2000 with the exception of consumer loans, which decreased slightly. The most significant growth occurred in loans secured by residential real estate. During 2001, the Company continued to expand its market presence through a combination of marketing activities and opening new banking offices. Total loans increased 14.5% to $1,973 million as of December 31, 2000 from $1,723 million as of December 31, 1999 primarily due to acquisitions and the opening of new banking offices combined with generally strong loan demand in the Company's market areas. The Company's loan portfolio consists of a mix of real estate, consumer, commercial, 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 that could have a material adverse effect on the borrowers' abilities to repay their loans. -20-
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) 2001 Percent 2000 Percent 1999 Percent - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans Real estate $1,137,160 52.8% $ 954,933 48.5% $ 806,320 46.8% Consumer 483,636 22.4 495,445 25.1 463,414 26.9 Commercial 434,330 20.1 420,706 21.3 344,371 20.0 Agricultural 95,513 4.4 95,387 4.8 106,887 6.2 Other loans 7,329 0.3 5,852 0.3 1,969 0.1 - ---------------------------------------------------------------------------------------------------- Total loans 2,157,968 100.0% 1,972,323 100.0% 1,722,961 100.0% - ---------------------------------------------------------------------------------------------------- Less allowance for loan losses 34,091 32,820 29,599 - ---------------------------------------------------------------------------------------------------- Net loans $2,123,877 $1,939,503 $1,693,362 ==================================================================================================== Ratio of allowance to total loans 1.58% 1.66% 1.72% ==================================================================================================== </TABLE> <TABLE> <CAPTION> As of December 31, ------------------------------------------------- (Dollars in thousands) 1998 Percent 1997 Percent - ------------------------------------------------------------------------- <S> <C> <C> <C> <C> Loans Real estate $ 681,670 45.9% $ 683,212 46.5% Consumer 379,197 25.5 412,231 28.0 Commercial 311,040 21.0 261,513 17.8 Agricultural 106,707 7.2 107,649 7.3 Other loans 5,845 0.4 5,809 0.4 - ------------------------------------------------------------------------- Total loans 1,484,459 100.0% 1,470,414 100.0% - ------------------------------------------------------------------------- Less allowance for loan losses 28,803 28,180 - ------------------------------------------------------------------------- Net loans $1,455,656 $1,442,234 ========================================================================= Ratio of allowance to total loans 1.94% 1.92% ========================================================================= </TABLE> 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, 2001: 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 $ 515,729 500,386 121,045 1,137,160 Consumer 239,290 235,346 9,000 483,636 Commercial 244,116 155,974 34,240 434,330 Agriculture 78,927 15,447 1,139 95,513 Other loans 7,329 -- -- 7,329 - --------------------------------------------------------------------------------------- $1,085,391 907,153 165,424 2,157,968 ======================================================================================= Loans at fixed interest rates $ 670,420 654,158 18,384 1,342,962 Loans at variable interest rates 396,698 252,995 147,040 796,733 Nonaccrual loans 18,273 -- -- 18,273 - --------------------------------------------------------------------------------------- $1,085,391 907,153 165,424 2,157,968 ======================================================================================= </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 that are classified as cash equivalents rather than as investment securities. Investment securities classified as available-for-sale are recorded at fair value, while investment securities classified as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the deferred tax effect, on available-for-sale securities are reported as increases or decreases in accumulated other comprehensive income or loss, a component of stockholders' equity. -21-
Investment securities increased 12.9% to $693 million as of December 31, 2001 from $614 million as of December 31, 2000 primarily due to investment of funds generated through internal deposit growth. Mortgage backed securities comprised 51.1% of the total investment portfolio as of December 31, 2001 as compared to 30.2% in 2000. In attempting to obtain the Company's investment portfolio objectives, mortgage backed securities are currently the primary reinvestment selection for maturing and prepaying investments. Investment securities increased 6.1% to $614 million as of December 31, 2000 from $578 million as of December 31, 1999. The majority of this increase occurred in U.S. Government agencies and corporate securities. On January 1, 2001, the Company adopted the provision of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In conjunction with the initial application of SFAS No. 133, the Company transferred held-to-maturity investment securities with amortized costs and fair values of $104 million and $103 million, respectively, to available-for-sale investment securities to better conform to the Company's investment objectives. Upon adoption of SFAS No. 133, the Company recorded net unrealized holding losses of $569,000, net of tax, related to the transferred securities. 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, 2001: 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 $ 21,499 3.1% 6.13% Maturing after ten years 517 0.1 5.83 - ----------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 548 - ----------------------------------------------------------------------------------------------------------- Total 22,564 3.3 6.12 - ----------------------------------------------------------------------------------------------------------- U.S. Government agency securities Maturing within one year $ 19,920 2.9 5.73 Maturing in one to five years 145,107 20.9 5.92 - ----------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 4,898 - ----------------------------------------------------------------------------------------------------------- Total 169,925 24.5 5.89 - ----------------------------------------------------------------------------------------------------------- Tax exempt securities Maturing within one year 2,292 0.3 8.39 Maturing in one to five years 18,518 2.7 7.22 Maturing in five to ten years 53,798 7.8 6.96 Maturing after ten years 8,719 1.3 7.35 - ----------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale -- - ----------------------------------------------------------------------------------------------------------- Total 83,327 12.0 7.09 - ----------------------------------------------------------------------------------------------------------- Corporate securities Maturing within one year 16,690 2.4 6.12 Maturing in one to five years 57 0.0 9.00 - ----------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale -- - ----------------------------------------------------------------------------------------------------------- Total 16,747 2.4 6.13 - ----------------------------------------------------------------------------------------------------------- </TABLE> -22-
SECURITIES MATURITIES AND YIELD, CONTINUED <TABLE> <CAPTION> % of Total Weighted Book Investment Average (Dollars in thousands) Value Securities Yield(1) - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Mortgage-backed securities Maturing within one year 130,312 18.8 6.39 Maturing in one to five years 147,938 21.3 6.41 Maturing in five to ten years 24,655 3.6 6.45 Maturing after ten years 49,314 7.1 6.41 - --------------------------------------------------------------------------------------------------------- Mark-to-market adjustments on securities available-for-sale 2,091 - --------------------------------------------------------------------------------------------------------- Total 354,310 51.1 6.40 - --------------------------------------------------------------------------------------------------------- Other securities Maturing after ten years 175 0.0 0.00 Mark-to-market adjustments on securities available-for-sale -- - --------------------------------------------------------------------------------------------------------- Total 175 0.0 0.00 - --------------------------------------------------------------------------------------------------------- Mutual funds with no stated maturity 46,130 6.7 1.82 Mark-to-market adjustments on securities available-for-sale -- - --------------------------------------------------------------------------------------------------------- Total 46,130 6.7 1.82 - --------------------------------------------------------------------------------------------------------- Total $693,178 100.0% 6.43% ========================================================================================================= </TABLE> (1) Average yields have been calculated on a fully-taxable basis. The maturities noted above reflect $89,045 of investment securities at their final maturities although they have call provisions within the next year. Mortgage backed securities, and to a limited extent, other securities have uncertain cash flow characteristics that present additional risk to the Company in the form of prepayment or extension risk primarily caused by changes in market interest rates. This additional risk is generally rewarded in the form of higher yields. Mortgage backed securities presented above are based on current prepayment assumptions. As of December 31, 2000, 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 $66,377, $240,972, $78,640, $41,970, $185,549 and $200, respectively. 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. For additional information concerning investment securities, see "Notes to Consolidated Financial Statements - Investment Securities" included in Part IV, Item 14. 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 noninterest bearing demand and 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 14.5% to $2,709 million as of December 31, 2001 from $2,365 million as of December 31, 2000 due to internal growth. The most significant growth occurred in noninterest bearing demand and savings deposits. 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. 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. -23-
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 27.3% to $8 million as of December 31, 2001 from $11 million as of December 31, 2000 primarily due to timing of tax deposits made by customers and the subsequent withdrawal of funds by the Federal government. Other borrowed funds decreased 73.8% to $11 million as of December 31, 2000 from $42 million as of December 31, 1999 primarily due to a $30 million, 90 day note payable to the Federal Home Loan Bank of Seattle obtained in 1999 and repaid in 2000. For additional information on other borrowed funds as of December 31, 2001 and 2000, 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: FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS <TABLE> <CAPTION> As of and for the years ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> Federal funds purchased: Balance at period end $ 625 19,535 900 Average balance 2,116 25,735 32,405 Maximum amount outstanding at any month-end 13,765 48,110 69,260 Average interest rate: During the year 3.78% 6.24% 5.06% At period end 1.42% 5.35% 4.74% Securities sold under repurchase agreements: Balance at period end $271,952 229,078 188,024 Average balance 240,069 206,595 163,974 Maximum amount outstanding at any month-end 271,952 240,751 209,464 Average interest rate: During the year 3.15% 5.24% 4.29% At period end 1.41% 5.17% 4.80% </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 decreased 7.2% to $34 million as of December 31, 2001 from $37 million as of December 31, 2000 primarily due to paydowns. Long-term debt increased 60.9% to $37 million as of December 31, 2000 from $23 million as of December 31, 1999. Additional borrowings in 2000 were used to fund acquisitions. For additional information on long-term debt as of December 31, 2001 and 2000, see "Notes to Consolidated Financial Statements - Long-Term Debt and Other Borrowed Funds" included in Part IV, Item 14. Trust Preferred Securities The Company had trust preferred securities of $40 million at December 31, 2001 and 2000. For additional information on trust preferred securities, see "Notes to Consolidated Financial Statements - Trust Preferred Securities" included in Part IV, Item 14. -24-
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 $1,688,000, $1,943,000 and $1,424,000, $1,062,000 and $763,000 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, 2001, 2000, 1999, 1998 and 1997, 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 initially records OREO at the lower of carrying value or fair value less estimated costs to sell by a charge against the allowance for loan losses, if necessary. 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: NON-PERFORMING ASSETS <TABLE> <CAPTION> As of December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Non-performing loans: Nonaccrual loans $18,273 19,619 22,854 10,699 9,681 Accruing loans past due 90 days or more 7,200 5,158 4,695 4,039 4,883 Restructured loans 921 2,635 3,660 3,306 928 - -------------------------------------------------------------------------------------------------------------------- Total non-performing loans 26,394 27,412 31,209 18,044 15,492 OREO 414 3,028 1,445 1,113 1,362 - -------------------------------------------------------------------------------------------------------------------- Total non-performing assets $26,808 30,440 32,654 19,157 16,854 ==================================================================================================================== Non-performing assets to total loans and OREO 1.24% 1.54% 1.89% 1.29% 1.15% ==================================================================================================================== </TABLE> Non-performing assets decreased 11.9% to $27 million as of December 31, 2001 compared to $30 million as of December 31, 2000 primarily due to decreases in nonaccrual loans and sales of OREO. Loans past due 90 days or more and still accruing interest as of December 31, 2001 includes one matured commercial loan of $2 million in the process of being renewed. Non-performing assets decreased 6.8% to $30 million as of December 31, 2000, compared to $33 million as of December 31, 1999 primarily due to loan paydowns by one commercial borrower. In addition to the non-performing loans included in the table above, management has identified certain 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. There can be no assurance that the Company has identified all of its potential non-performing 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 known and inherent risk in its loan portfolio. See "Provision for Loan Losses" herein. The allowance for loan losses 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. -25-
The allowance for loan losses is maintained at an amount to sufficiently provide for estimated losses based on management's evaluation of known and inherent risks in its loan portfolio at each balance sheet date. The allowance for loan losses is determined by applying estimated loss factors to the credit exposures from outstanding loans. For commercial, agriculture and real estate loans, loss factors are applied based on internal risk classifications of these loans. For certain consumer loans, loss factors are applied on a portfolio basis. Loss factors are based on peer and industry loss data which are comparable to the Company's historical loss experience, and are reviewed on a quarterly basis, along with other factors affecting the collectibility of the loan portfolio such as changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions and detailed analyses of individual loans for which full collectibility may not be assured. Specific allowances are established for loans where management has determined that the probability of a loss exists and will exceed the historical loss factors specifically identified based on the internal risk classification of the loans. The unallocated component of the allowance for loan losses recognizes estimates of losses inherent in the portfolio that are not fully captured in the specific allowances that may result from model imprecision, changes in the nature and volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic factors and the estimated impact of current economic conditions on historical loss rates used in the allocated model. Management has assessed, and will continue to assess on an on-going basis, the impact of slowing national, regional and local economies on credit risk in the loan portfolio. As of December 31, 2001, delinquency trends and classified loan levels relative to prior periods do not indicate any material deterioration in the loan portfolio. Management continues to closely monitor credit quality and to focus on identifying potential non-performing loans and loss exposure in a timely manner. The following table sets forth information concerning the Company's allowance for loan losses as of the dates and for the years indicated. ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> As of and for the years ended December 31, 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Balance at the beginning of period $ 32,820 29,599 28,803 28,180 27,797 Allowance of acquired banking offices -- 1,019 1,574 -- -- Charge-offs: Real estate 204 81 278 370 141 Consumer 5,661 4,369 4,192 3,988 5,607 Commercial 2,502 1,192 2,753 1,920 1,132 Agricultural 195 164 386 349 71 - --------------------------------------------------------------------------------------------------------------------------- Total charge-offs 8,562 5,806 7,609 6,627 6,951 Recoveries: Real estate 32 20 51 213 246 Consumer 1,452 1,485 1,429 1,500 1,816 Commercial 462 1,138 1,464 1,315 732 Agricultural 44 85 324 52 300 - --------------------------------------------------------------------------------------------------------------------------- Total recoveries 1,990 2,728 3,268 3,080 3,094 - --------------------------------------------------------------------------------------------------------------------------- Net charge-offs 6,572 3,078 4,341 3,547 3,857 Provision for loan losses 7,843 5,280 3,563 4,170 4,240 - --------------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 34,091 32,820 29,599 28,803 28,180 =========================================================================================================================== Period end loans $2,157,968 1,972,323 1,722,961 1,484,459 1,470,414 Average loans 2,056,179 1,865,125 1,598,594 1,469,741 1,441,800 Net charge-offs to average loans 0.32% 0.17% 0.27% 0.24% 0.27% Allowance to period end loans 1.58% 1.66% 1.72% 1.94% 1.92% =========================================================================================================================== </TABLE> -26-
The allowance for loan losses was $34 million, or 1.58% of average loans, at December 31, 2001 as compared to $33 million, or 1.66% of average loans, at December 31, 2000 and $30 million, or 1.72% of average loans, at December 31, 1999. Net charge-offs of $6.6 million in 2001 increased from $3.1 million in 2000 and $4.3 million in 1999. The current year increase occurred primarily in consumer and commercial loans. Increases in net charge-offs of consumer loans are primarily due to a slight deterioration in the portfolio, while increases in net charge-offs of commercial loans are largely related to six borrowers. Although management believes that it has established its allowance for loan losses in accordance with accounting principles generally accepted in the United States and that the allowance for loan losses is adequate to provide for known and inherent losses in the portfolio at each balance sheet date, future provisions will be subject to on-going evaluations of the risk in the portfolio. If the economy declines or asset quality deteriorates, material additional provisions could be required. The allowance for loan losses is allocated to loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. Management has reviewed the allocations and believes the allowance for loan losses was adequate at all times during the five-year period ended December 31, 2001. 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 (Dollars in thousands) <TABLE> <CAPTION> As of December 31, 2001 2000 1999 1998 1997(1) - ------------------------------------------------------------------------------------------------------------------------------------ % 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 $11,490 52.8% $11,645 48.5% $ 8,268 46.8% $ 4,443 45.9% $ 1,579 46.5% Consumer 5,108 22.4 4,632 25.1 4,460 26.9 3,874 25.5 4,409 28.0 Commercial 7,018 20.1 5,360 21.3 5,655 20.0 4,748 21.0 5,047 17.8 Agricultural 2,678 4.4 2,194 4.8 2,214 6.2 1,942 7.2 2,515 7.3 Other loans 37 0.3 29 0.3 10 0.1 29 0.4 29 0.4 Unallocated 7,760 NA 8,960 NA 8,992 NA 13,767 NA 14,601 NA - ------------------------------------------------------------------------------------------------------------------------------------ Totals $34,091 100.0% $32,820 100.0% $29,599 100.0% $28,803 100.0% $28,180 100.0% ==================================================================================================================================== </TABLE> (1) 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. The allocated reserve for consumer loans increased 10.3% to $5.1 million in 2001 from $4.6 million in 2000 primarily due to improved tracking and monitoring of credit card losses. Prior to 2001, credit card reserves were included in the unallocated reserve. The allocated reserve for commercial loans increased 30.9% to $7.0 million in 2001 from $5.4 million in 2000. Approximately 80% of this increase is the result of five large commercial loans downgraded in 2001. The unallocated reserve decreased 13.4% to $7.8 million in 2001 from $9.0 million in 2000 primarily due to the allocation of credit card reserves to consumer loans and additional amounts allocated to loan categories resulting from application of loss factors to the portfolio. The allocated reserve for real estate loans increased 40.8% to $11.6 million as of December 31, 2000 from $8.3 million as of December 31, 1999 primarily due to increases in the allocation amount for certain loans. 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 -27-
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. The Company does not rely on off-balance sheet arrangements to provide financing, liquidity or market or credit risk support nor does it engage in derivatives and related hedging activities. Net cash provided by operating activities, primarily net income, totaled $48 million for 2001, $47 million for 2000 and $39 million in 1999. Net cash used for investing activities totaled $274 million in 2001, $236 million in 2000 and $129 million in 1999. 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 $350 million in 2001, $195 million in 2000 and $49 million in 1999. For additional information concerning cash flows, see the "Consolidated Statements of Cash Flows" included in Part IV, Item 14. As a holding company, FIBS is a corporation separate and apart from the Bank, and therefore, provides for its own liquidity. Substantially all of FIBS's revenues are obtained from management fees and dividends declared and paid by the Bank. As of December 31, 2001, the Bank had approximately $40.2 million available to be paid as dividends to FIBS. There are statutory and regulatory provisions that could limit the ability of the Bank 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. 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 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. For additional information concerning the trust preferred securities see "Notes to Consolidated Financial Statements - Trust Preferred Securities" included in Part IV, Item 14. Capital Resources Stockholders' equity increased 12.2% to $222 million as of December 31, 2001 from $198 million as of December 31, 2000 and 13.8% to $198 million as of December 31, 2000 from $174 million as of December 31, 1999 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, 2001, 2000 and 1999, the Company paid aggregate cash dividends to stockholders of approximately $9 million during each year. 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, 2001, the Bank had a capital level that 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. -28-
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. The ability to optimize the net interest margin is largely dependent upon the achievement of an interest rate spread that 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, 2001: INTEREST RATE SENSITIVITY GAPS <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) $ 997,471 343,818 769,415 28,991 2,139,695 Investment securities(2) 142,443 186,025 239,634 125,076 693,178 Interest bearing deposits in banks 58,242 -- -- -- 58,242 Federal funds sold 82,185 -- -- -- 82,185 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets $1,280,341 529,843 1,009,049 154,067 2,973,300 ==================================================================================================================================== Interest bearing liabilities and trust preferred securities: Interest bearing demand accounts(3) $ 34,080 102,239 318,075 -- 454,394 Savings deposits(3) 553,150 34,211 106,433 -- 693,794 Time deposits, $100 or more(4) 101,896 156,544 54,103 -- 312,543 Other time deposits 156,523 315,703 203,703 65 675,994 Federal funds purchased 625 -- -- -- 625 Securities sold under repurchase agreements 271,952 -- -- -- 271,952 Other borrowed funds 8,095 -- -- -- 8,095 Long-term debt 10,358 4,023 18,884 1,066 34,331 Trust preferred securities -- -- -- 40,000 40,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities and trust preferred securities $1,136,679 612,720 701,198 41,131 2,491,728 ==================================================================================================================================== Rate gap $ 143,662 (82,877) 307,851 112,936 481,572 Cumulative rate gap 143,662 60,785 368,636 481,572 Cumulative rate gap as a percentage of total interest earning assets 4.83% 2.04% 12.40% 16.20% ==================================================================================================================================== </TABLE> Assumptions used: (1) Does not include nonaccrual loans of $18,273. (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 $77,204 maturing in three to six months. -29-
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 $417 million, a negative cumulative one year gap of $364 million and a positive cumulative one to five year gap of $369 million. 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, 2001, the Company's one year cumulative asset sensitive gap totaled $61 million representing 2.04% of total interest earning assets. This position gradually changed from year end 2000 when the Company's gap position was liability sensitive by $439 million or 17.02% of total interest earning assets primarily due to investment of excess liquidity in short term investments and increases in real estate loans held for resale included on the 0-3 month category. 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. Critical Accounting Policies The Company's financial statements are based upon the selection and application of critical accounting policies requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Company considers one of its more critical accounting policies to be the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of allowance for loan losses is maintained at the amount management believes will be adequate to absorb known and inherent losses in the loan portfolio. The appropriate balance of allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on subjective measurements including management's assessment of the internal risk classifications of loans, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company's consolidated financial statements, results of operations or liquidity. For additional information regarding the allowance for loan losses, its relation to the provision for loan losses and risk related to asset quality, see "Business - Risk Factors - Asset Quality" included in Part 1, Item 1; "Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Loan Losses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses" included in Part II, Item 7; and, "Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies - Allowance for Loan Losses" included in Part IV, Item 14. On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142, goodwill is no longer amortized but rather is reviewed for impairment at least annually, or more frequently if impairment indicators arise. Goodwill is assigned to the Company's business units based on the expected benefits from the synergies of the combination. The evaluation of goodwill for potential impairment involves comparing the implied fair value of the goodwill of a business unit with the carrying amount of that goodwill. In the absence of quoted market prices, fair value may be estimated based on the best information available, including prices of similar assets and liabilities, the use of present value valuation techniques, multiples of earnings or revenues or other performance measurement techniques. Changes in any of the subjective factors used in determining implied fair value or in management's assessment of the synergies of the combination could result in the impairment of goodwill and may have a material impact on the Company's consolidated financial statements, results of operations or liquidity. -30-
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, 2001 and 2000. 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. MARKET SENSITIVE FINANCIAL INSTRUMENTS MATURITIES <TABLE> <CAPTION> December 31, 2001 Expected Maturity/Principal Repayment ---------------------------------------------------------------------------------- (Dollars in thousands) 2002 2003 2004 2005 2006 Thereafter Total - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Interest-sensitive assets: Cash and short-term investments $ 293,036 -- -- -- -- -- 293,036 Net loans 1,150,216 378,799 283,889 168,907 140,368 128,823 2,251,002 Securities available-for-sale 307,812 82,873 60,258 43,598 23,281 75,282 593,104 Securities held-to-maturity 20,934 3,209 6,845 8,731 11,193 49,971 100,883 Loan servicing rights 1,020 1,026 897 731 596 2,749 7,019 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive assets $1,773,018 465,907 351,889 221,967 175,438 256,825 3,245,044 ================================================================================================================================= Interest-sensitive liabilities and trust preferred securities: Total deposits excluding time deposits 895,246 176,749 176,749 471,332 -- -- 1,720,076 Time deposits 743,052 173,422 37,330 24,959 11,938 52 990,753 Federal funds purchased 625 -- -- -- -- -- 625 Securities sold under repurchase agreements 271,952 -- -- -- -- -- 271,952 Other borrowed funds 8,095 -- -- -- -- -- 8,095 Long-term debt 5,574 5,415 5,243 15,025 4,258 879 36,394 Trust preferred securities -- -- -- -- -- 40,000 40,000 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive liabilities and trust preferred securities $1,924,544 355,586 219,322 511,316 16,196 40,931 3,067,895 ================================================================================================================================= </TABLE> <TABLE> <CAPTION> December 31, 2001 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 959,896 338,884 217,052 158,056 102,638 147,547 1,924,073 Securities available-for-sale 47,827 76,149 68,552 99,747 28,669 63,938 384,882 Securities held-to-maturity 74,198 37,299 16,335 17,285 6,723 76,400 228,240 Loan servicing rights 698 735 673 597 529 3,453 6,685 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive assets $1,251,864 453,067 302,612 275,685 138,559 291,338 2,713,125 ================================================================================================================================= </TABLE> -31-
MARKET SENSITIVE FINANCIAL INSTRUMENTS MATURITIES, CONTINUED <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 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> 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]: Report of Ernst & Young LLP, Independent Auditors Report of KPMG LLP, Independent Auditors Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Income - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During 2001, the Company did not reappoint KPMG LLP and appointed Ernst & Young LLP as the Company's principal accountants. The Company's Board of Directors approved the action upon recommendation of the Company's Audit Committee. KPMG LLP's reports on the Company's consolidated financial statements as of and for the audit years ended December 31, 2000 and 1999 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audits of the Company's consolidated financial statement for the two years ended December 31, 2000, there were no disagreements with KPMG LLP on any matters of accounting principles or practices, financial statement disclosure, or audit scope or procedures which, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the matter in their report. The Company had no consultations or communications, written or oral, with Ernst & Young LLP regarding the application of accounting principles to specified transactions, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements during the two years ended December 31, 2000 or in the period subsequent to their appointment as the Company's principal accountants on July 17, 2001. There have been no disagreements with Ernst & Young LLP regarding accounting principles or practices, financial statement disclosures, or audit scope or procedures. -32-
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following table sets forth information concerning each of the directors and executive officers of the Company: DIRECTORS AND EXECUTIVE OFFICERS <TABLE> <CAPTION> Name Age Position -------------------------------------------------------------------------------- <S> <C> <C> Homer A. Scott, Jr. 67 Chairman of the Board James R. Scott 52 Vice Chairman of the Board Thomas W. Scott 58 Chief Executive Officer and Director Lyle R. Knight 56 President, Chief Operating Officer and Director Terrill R. Moore 49 Senior Vice President and Chief Financial Officer Edward Garding 52 Senior Vice President and Chief Credit Officer Gary E. Crum 42 Senior Vice President and Branch Administration Officer Robert A. Jones 55 Senior Vice President and Director of Human Asset Management Group Neil W. Klusmann 50 Senior Vice President and Director of Marketing Richard D. Smith 52 Senior Vice President and Chief Information Officer Elouise C. Cobell 56 Director David H. Crum 57 Director Richard A. Dorn 49 Director William B. Ebzery 51 Director James W. Haugh 64 Director John M. Heyneman, Jr. 34 Director C. Gary Jennings 63 Director Joel T. Long 61 Director Robert L. Nance 65 Director Terry W. Payne 60 Director Dan S. Scott 70 Director Larry F. Suchor 57 Director Sandra A. Scott Suzor 42 Director Robert H. Waller 73 Director(1) </TABLE> (1) Term expires May 17, 2002. Not a nominee for reelection. BUSINESS BIOGRAPHIES Homer A. Scott, Jr. has been a director of FIBS since 1971 and the Chairman of the FIBS Board since 1988. Mr. Scott has served as a director of Montana-Dakota Utilities Resources Group, Inc. since 1983. Mr. Scott is the majority owner and developer of Powder Horn Golf Course and real estate development. Mr. Scott is the brother of James R. Scott, Thomas W. Scott and Dan S. Scott, the uncle of John M. Heyneman, Jr., and the father of Sandra A. Scott Suzor. James R. Scott has been a director of FIBS since 1972 and the Vice Chairman of the Board since 1990. Currently, Mr. Scott is Chairman of First Interstate BancSystem Foundation and Padlock Ranch Co. Mr. Scott is the brother of Homer A. Scott, Jr., Thomas W. Scott and Dan S. Scott, and the uncle of John M. Heyneman, Jr. and Sandra A. Scott Suzor. Thomas W. Scott has been a director of FIBS since 1971, has served as Chief Executive Officer of FIBS since 1978 and has been Chairman of the Board of First Interstate Bank "(FIB") since January, 2002. Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott and Dan S. Scott, and the uncle of John M. Heyneman, Jr. and Sandra A. Scott Suzor. -33-
Lyle R. Knight has been a director of FIBS and has served as President and Chief Operating Officer of FIBS since 1998. Mr. Knight has also been the President and Chief Operating Officer of FIB since January 2002. Prior to FIBS, Mr. Knight has 28 years of bank management experience with multi-branch banks in Arizona and Nevada, most recently as President of a large Arizona-based bank. From 1995 to 1997 Mr. Knight was a bank consultant responsible for business and community development, strategic planning and other special projects for a large Arizona-based bank. Terrill R. Moore has been a Senior Vice President and Chief Financial Officer of FIBS since 1989. Prior to joining the FIBS management team, Mr. Moore served in various finance and accounting positions within the Company since 1979. Edward Garding has been a Senior Vice President of FIBS since 1996 and Chief Credit Officer since 1999. In addition, Mr. Garding served as President of FIB from 1998 to 2001 and President of the Sheridan branch of FIB from 1988 to 1996. Prior to joining the FIBS management team in 1996, Mr. Garding served in various management positions within the Company since 1971. Gary E. Crum has been a Senior Vice President of FIBS since 2000 and Branch Administration Officer since 1999. Prior to his appointment as Branch Administration Officer, Mr. Crum served as President of the Laramie branch of FIB from 1996 to 1998. Robert A. Jones has been a Senior Vice President and Director of the Human Asset Management Group of FIBS since 1996. Prior to this appointment, Mr. Jones was the General Auditor of FIBS since 1980. Neil W. Klusmann has been a Senior Vice President of FIBS since 2001 and the Director of Marketing since 1983. Prior to joining the FIBS management team in 1983, Mr. Klusmann served in various marketing positions within the Company since 1977. Richard D. Smith has been a Senior Vice President since 1997 and Chief Information Officer of FIBS since 2000. In addition, Mr. Smith has been the President of i_Tech Corporation, the Company's technology subsidiary since 1997. Prior to FIBS, Mr. Smith has 27 years of operation and information system management with a bank headquartered in Iowa. Elouise C. Cobell has been a director of the Company since 2001. Ms. Cobell has been the Director of the Blackfeet Reservation Development Fund, Inc. since 1991 and the Project Director of the Individual Monies Trust Correction and Recovery Project since 1996. In addition, Ms. Cobell has served as Chairman of the Board of Directors of Blackfeet National Bank since 1987. David H. Crum has been a director of the Company since 2000. Mr. Crum founded Crum Electric Supply, a distributor of electrical equipment, in 1976 and has acted as President and Chief Executive Officer of that company since its inception. Richard A. Dorn has been a director of the Company since 2001. Mr. Dorn has owned and operated Richard A. Dorn Farms since 1973. In addition, Mr. Dorn formed Dorn Property X-change, a real estate holding, investment, construction and rental management company, in 1978 and has been President of Murdock Realty, P.C. since 1981. Mr. Dorn is a licensed real estate broker. William B. Ebzery has been a director of the Company since 2001. Mr. Ebzery is a certified public accountant and has been a partner in the certified public accounting firm of Pradere, Ebzery, Mohatt & Rinaldo since 1975. Mr. Ebzery is also a registered investment advisor and stockbroker. James W. Haugh has been a director of the Company since 1997. Mr. Haugh formed American Capital LLC, a financial consulting firm, in 1994 and has operated this firm since its inception. Prior to forming American Capital LLC, Mr. Haugh was a partner in KPMG LLP, a certified public accounting firm. -34-
John M. Heyneman, Jr. has been a director of the Company since 1998. Mr. Heyneman has been the Assistant Manager for Padlock Ranch Co. since 1999. Prior to his employment with Padlock Ranch Co., Mr. Heyneman attended Montana State University from 1995 through 1998 when he graduated with a masters of science degree. Mr. Heyneman is the nephew of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott and Dan S. Scott, and the cousin of Sandra A. Scott Suzor. C. Gary Jennings has been a director of the Company since 2001. Mr. Jennings has served as President of Jennings Farms, Inc., a farming and ranching operation located in Wyoming, since 1970. Joel T. Long has been a director of FIBS since 1996. Mr. Long has been the majority owner and Chairman of the Board of JTL Group, Inc., a construction firm doing business in Montana and Wyoming, since 1990. In 1999, Mr. Long sold his interest in JTL Group, Inc. but continues as President of that company. Robert L. Nance has been a director of the Company since 2001. Mr. Nance has been the owner and President of Nance Petroleum Corporation, an oil and gas exploration and production company, since 1969. In 1999, Mr. Nance sold his interest in Nance Petroleum Corporation but continues as President and Chief Executive Officer of the Company. Terry W. Payne has been a director of the Company since 2000. Mr. Payne has served as President and Chief Executive Officer of Terry Payne & Co., Inc., an insurance agency, since its inception in 1972. Mr. Payne has also been part-owner and Chairman of the Board of Directors of Payne Financial Group, Inc. since 1993. Dan S. Scott has been a director of the Company since 1971. Mr. Scott has served as President and General Manager of Padlock Ranch Co. since 1970. Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott and Thomas W. Scott, and the uncle of John M. Heyneman, Jr. and Sandra A. Scott Suzor. Larry F. Suchor has been a director of the Company since 2001. Mr. Suchor has been the owner and President of Larry's, Inc., a road construction and earth moving firm based in Wyoming, since 1976. Sandra A. Scott Suzor has been a director of the Company since 2000. Ms. Suzor has been a partner and the Director of Sales and Marketing for Powder Horn Ranch and Golf Course since 1995. Ms. Suzor is the daughter of Homer A. Scott, Jr., the niece of James R. Scott, Thomas W. Scott and Dan S. Scott, and the cousin John M. Heyneman, Jr. 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. In addition, see "Notes to Consolidated Financial Statements - Related Party Transactions" included in Part IV, Item 14. -35-
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. -36-
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- The Board of Directors and Stockholders First Interstate BancSystem, Inc. We have audited the accompanying consolidated balance sheet of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of First Interstate BancSystem, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2000 and for each of the years in the two-year period ended December 31, 2000 were audited by other auditors whose report dated January 26, 2001, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Interstate BancSystem, Inc. and subsidiaries at December 31, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Salt Lake City, Utah February 4, 2002 -37-
KPMG LLP Independent Auditors' Report The Board of Directors and Stockholders First Interstate BancSystem, Inc.: We have audited the accompanying consolidated balance sheet of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-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 the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Billings, Montana January 26, 2001 - 38 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> Assets Cash and due from banks $ 152,609 166,964 Federal funds sold 82,185 1,510 Interest bearing deposits in banks 58,242 771 Investment securities: Available-for-sale 593,104 384,882 Held-to-maturity (estimated fair values of $100,883 and $228,240 at December 31, 2001 and 2000, respectively) 100,074 228,826 - --------------------------------------------------------------------------------------------------------------- Total investment securities 693,178 613,708 - --------------------------------------------------------------------------------------------------------------- Loans 2,157,968 1,972,323 Less allowance for loan losses 34,091 32,820 - --------------------------------------------------------------------------------------------------------------- Net loans 2,123,877 1,939,503 - --------------------------------------------------------------------------------------------------------------- Premises and equipment, net 91,346 91,075 Accrued interest receivable 24,804 28,442 Goodwill, net of accumulated amortization 33,171 35,366 Core deposit intangibles, net of accumulated amortization 5,679 7,115 Other real estate owned, net 414 3,028 Net deferred tax asset 2,751 7,282 Loan servicing rights, net of accumulated amortization and impairment reserve 6,322 4,964 Other assets 40,138 33,534 - --------------------------------------------------------------------------------------------------------------- Total assets $3,314,716 2,933,262 =============================================================================================================== Liabilities and Stockholders' Equity Deposits: Noninterest bearing $ 571,888 441,563 Interest bearing 2,136,725 1,923,662 - --------------------------------------------------------------------------------------------------------------- Total deposits 2,708,613 2,365,225 - --------------------------------------------------------------------------------------------------------------- Federal funds purchased 625 19,535 Securities sold under repurchase agreements 271,952 229,078 Accrued interest payable 16,209 19,026 Accounts payable and accrued expenses 12,822 14,274 Other borrowed funds 8,095 11,138 Long-term debt 34,331 37,000 Trust preferred securities 40,000 40,000 - --------------------------------------------------------------------------------------------------------------- Total liabilities 3,092,647 2,735,276 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity: Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares, no shares issued or outstanding as of December 31, 2001 and 2000 -- -- Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,848,704 shares and 7,899,168 shares as of December 31, 2001 and 2000, respectively 5,184 7,101 Retained earnings 212,314 190,410 Accumulated other comprehensive income, net 4,571 475 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 222,069 197,986 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,314,716 2,933,262 =============================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -39-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest income: Interest and fees on loans $ 180,865 175,964 144,886 Interest and dividends on investment securities: Taxable 31,417 30,730 33,464 Exempt from Federal taxes 3,669 3,591 3,355 Interest on deposits in banks 466 112 353 Interest on Federal funds sold 2,709 1,400 1,304 - ------------------------------------------------------------------------------------------------------- Total interest income 219,126 211,797 183,362 - ------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 79,642 80,205 67,525 Interest on Federal funds purchased 80 1,605 1,639 Interest on securities sold under repurchase agreements 7,556 10,836 7,035 Interest on other borrowed funds 333 3,084 1,324 Interest on long-term debt 2,844 2,530 1,963 Interest on trust preferred securities 3,529 3,529 3,529 - ------------------------------------------------------------------------------------------------------- Total interest expense 93,984 101,789 83,015 - ------------------------------------------------------------------------------------------------------- Net interest income 125,142 110,008 100,347 Provision for loan losses 7,843 5,280 3,563 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 117,299 104,728 96,784 Noninterest income: Income from fiduciary activities 4,702 4,910 4,495 Service charges on deposit accounts 14,631 12,590 11,373 Technology services 10,249 10,171 8,274 Other service charges, commissions and fees 16,718 11,620 10,646 Investment securities gains, net 145 133 19 Other real estate income (expense), net (130) 689 366 Other income 5,719 4,038 2,503 - ------------------------------------------------------------------------------------------------------- Total noninterest income 52,034 44,151 37,676 - ------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries, wages and employee benefits 61,617 51,814 48,034 Occupancy, net 9,561 8,063 7,085 Furniture and equipment 12,266 10,692 10,218 FDIC insurance 442 438 233 Goodwill amortization expense 2,195 2,013 1,678 Core deposit intangible amortization expense 1,436 1,436 1,086 Other expenses 32,732 26,867 23,169 - ------------------------------------------------------------------------------------------------------- Total noninterest expense 120,249 101,323 91,503 - ------------------------------------------------------------------------------------------------------- Income before income taxes 49,084 47,556 42,957 Income tax expense 17,901 17,176 15,229 - ------------------------------------------------------------------------------------------------------- Net income $ 31,183 30,380 27,728 ======================================================================================================= Basic earnings per share $ 3.97 3.83 3.48 Diluted earnings per share 3.94 3.78 3.42 ======================================================================================================= </TABLE> See accompanying notes to consolidated financial statements. -40-
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, 1998 $ 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 income tax benefit of $4,933 -- -- (8,186) (8,186) Less reclassification adjustment for gains included in net income, net of income tax expense of $7 -- -- (12) (12) -------- Other comprehensive income (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 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 income tax expense of $3,910 -- -- 6,586 6,586 Less reclassification adjustment for gains included in net income, net of income tax expense of $52 -- -- (81) (81) -------- Other comprehensive income 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 Comprehensive income: Net income -- 31,183 -- 31,183 Unrealized gains on available-for-sale investment securities, net of income tax expense of $3,040 -- -- 4,753 4,753 Less reclassification adjustment for gains included in net income, net of income tax expense of $57 -- -- (88) (88) Cumulative effect of adoption of SFAS No. 133, transfer of held-to-maturity securities to available-for-sale, net of income tax benefit of $364 -- -- (569) (569) -------- Other comprehensive income 4,096 -------- Total comprehensive income 35,279 -------- Common stock transactions: 107,230 shares retired (4,200) -- -- (4,200) 56,766 shares issued 2,283 -- -- 2,283 Cash dividends declared: Common ($1.18 per share) -- (9,279) -- (9,279) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 5,184 212,314 4,571 222,069 ================================================================================================================================= </TABLE> See accompanying notes to consolidated financial statements. -41-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 31,183 30,380 27,728 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of joint ventures (23) (737) -- Provisions for loan and other real estate losses 7,843 5,280 3,583 Depreciation 10,032 8,983 8,261 Amortization 3,631 3,449 2,764 Donation of land -- -- 359 Net premium amortization on investment securities 9 113 453 Net gain on sale of investments (145) (133) (19) Gain on sale of other real estate owned (26) (758) (446) Gain on sale of loans (2,182) (1,711) (1,496) Write down of bank premises 85 -- -- Loss (gain) on sale of premises and equipment 101 (194) 15 Deferred income taxes 1,826 286 (594) Changes in operating assets and liabilities: Increase (decrease) in accrued interest receivable 3,638 (3,152) (2,068) Increase in other assets (4,157) (703) (356) Increase (decrease) in accrued interest payable (2,817) 5,461 (62) Increase (decrease) in accounts payable and accrued expenses (1,377) 422 584 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 47,621 46,986 38,706 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (8,343) (60,472) (72,390) Available-for-sale (479,970) (105,624) (38,747) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 36,205 78,948 129,667 Available-for-sale 361,924 50,042 64,838 Proceeds from sales of available-for-sale investment securities 17,651 28,458 2,483 Purchases and originations of mortgage servicing rights (3,586) (2,181) (2,546) Extensions of credit to customers, net of repayments (192,510) (190,889) (209,403) Recoveries on loans charged-off 1,990 2,728 3,268 Proceeds from sale of other real estate owned 3,300 1,535 1,708 Acquisitions of banking offices, net of cash and cash equivalents acquired -- (15,288) 9,424 Capital distribution from (contribution to) joint ventures (350) 300 325 - ------------------------------------------------------------------------------------------------------------------------------- Capital expenditures, net of sales (10,605) (22,606) (17,782) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (274,294) (235,049) (129,155) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 343,388 166,960 15,670 Net increase in federal funds purchased and repurchase agreements 23,964 59,689 13,656 Net increase (decrease) in other borrowed funds (3,043) (32,737) 32,047 Borrowings of long-term debt 81,600 29,000 5,527 Repayment of long-term debt (84,269) (15,394) (9,720) Net decrease in debt issuance costs 95 95 95 Proceeds from issuance of common stock 2,208 1,100 3,262 Purchase and retirement of common stock (4,200) (4,904) (3,271) Dividends paid to stockholders (9,279) (8,807) (8,530) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 350,464 195,002 48,736 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 123,791 6,939 (41,713) Cash and cash equivalents at beginning of year 169,245 162,306 204,019 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 293,036 169,245 162,306 =============================================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 96,801 96,494 83,211 Cash paid during the year for taxes 17,604 15,666 15,761 =============================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -42-
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. First Interstate BancSystem, Inc. (the "Parent Company" and collectively with its subsidiaries, the "Company") is a financial holding company that, through the branch offices of its bank subsidiary, provides a full range of banking services to individual and corporate customers throughout the states of Montana and Wyoming. In addition to its primary emphasis on commercial and consumer banking services, the Company also offers trust and brokerage services and, through its technology subsidiary, technology services. The Company is subject to competition from other financial institutions, nonbank financial and technology service providers, and is also subject to the regulations of various government agencies and undergoes periodic examinations by those regulatory authorities. In November 2001, the Company merged its two bank subsidiaries, First Interstate Bank in Montana and First Interstate Bank in Wyoming. First Interstate Bank in Montana is the surviving charter. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Parent Company and its operating subsidiaries: First Interstate Bank ("FIB"), Commerce Financial, Inc., FIB Capital Trust, FI Reinsurance, Ltd., and i_Tech Corporation. All material intercompany transactions have been eliminated in consolidation. The Company has investments in joint ventures that are not consolidated because the Company does not own a majority voting interest or control the operations of the joint venture. These joint ventures are accounted for using the equity method of accounting. Under the equity method of accounting, the Company initially records its investments in joint ventures at cost. The carrying amounts of the joint ventures are adjusted to record the Company's proportionate share of distributions and earnings or losses of the joint ventures. BASIS OF PRESENTATION. Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus, actual results could differ from the amounts reported and discussed herein. 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 loan losses and real estate owned are adequate for known and inherent losses at December 31, 2001. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for loan losses 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. -43-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) At December 31, 2001, the Company was required to have aggregate reserves, exclusive of cash on hand, with the Federal Reserve Bank of approximately $2,758. Also, approximately $50,000 of additional compensating balance was maintained with the Federal Reserve Bank to mitigate the payment of service charges for check clearing services. 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 accumulated other comprehensive income or loss, a separate component of stockholders' equity. The Company did not carry any trading account assets during 2001, 2000 or 1999. 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 and amortization of premiums over the estimated average life of the security, or in the case of callable securities, through the first call date, using the effective yield method. 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 to interest income. Origination fees on loans sold to the secondary market are recognized as other income when the loan is originated. 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, or portions thereof, 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 known and inherent losses in the loan portfolio. The Company's methodology for determining the allowance for loan losses establishes both an allocated and an unallocated component. The allocated component of the allowance for consumer loans is based principally on loan payment status and historical loss rates adjusted to reflect current conditions. The allocated component for all other loan categories is based principally on current loan grades and historical loan loss rates adjusted to -44-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) reflect current conditions, as well as analyses of other factors that may have affected the collectibility of loans in the portfolio. The unallocated component of the allowance for loan losses represents the results of analyses that estimate probable losses inherent in the portfolio that are not fully captured in the allocated allowance analyses. These analyses include changes in the nature and volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic factors, model imprecision and the estimated impact of current economic conditions on certain on historical loss rates used in the allocated model. 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 amounts due 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. The Company considers impaired loans to be 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 INTANGIBLES. 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 intangibles"). Goodwill is amortized using the straight-line method over periods of primarily 15 to 25 years. Accumulated goodwill amortization was $14,633 as of December 31, 2001 and $12,438 as of December 31, 2000. Core deposit intangibles are amortized using an accelerated method based on the estimated useful lives of the related deposits of 10 years. Accumulated core deposit intangibles amortization was $6,161 as of December 31, 2001 and $4,725 as of December 31, 2000. PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using straight-line methods over estimated useful lives of 5 to 50 years for buildings and improvements and 2.5 to 15 years for furniture and equipment using straight-line methods. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the terms of the related leases. 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 2001, 2000, or 1999. 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. LOAN SERVICING RIGHTS. The Company recognizes the rights to service mortgage loans for others, whether acquired or internally originated. Loan servicing rights are initially recorded at fair value based on comparable market quotes and are amortized as other expense in proportion to and over the period of estimated net servicing income. Loan servicing rights are evaluated quarterly for impairment by discounting the expected -45-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 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. Impairment adjustments, if any, are recorded through a valuation allowance. RESTRICTED EQUITY SECURITIES. Restricted equity securities of the Federal Reserve Bank and the Federal Home Loan Bank are included in other assets at amortized cost. 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. The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on enacted income tax rates which will be in effect when the differences between the financial statements carrying value and tax basis of existing assets and liabilities are expected to be reported in the Parent Company income tax return. PER SHARE DATA. Basic earnings per 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 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 accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, the Company measures compensation cost for stock-based employee compensation plans based on the intrinsic value of the award at the date of grant. Intrinsic value is the excess of the fair value of the underlying stock over the amount an employee must pay to acquire the stock. The Company provides fair value disclosures as required by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". 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. BUSINESS LINES. The Company has two significant lines of business, Community Banking and Technology Services. The Community Banking line of business encompasses commercial and consumer banking services offered to individual customers, businesses and municipalities. Services provided primarily include the acceptance of deposits, extensions of credit and fee-based services including trust, brokerage and mortgage servicing. The Technology Services line of business encompasses technology services provided through i_Tech to affiliated and non-affiliated financial institutions including system support of general ledger, investment security, loan, deposit, web banking, imaging, management reporting, cash management and e-mail systems, wide-area and ATM network management and item proof and capture services. Other is comprised of the Parent Company, non-bank subsidiaries except i_Tech and intercompany eliminations. Expenses for centrally provided services are allocated to the business lines based primarily upon estimated usage of services. -46-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) ADVERTISING COSTS. Advertising costs are expensed as incurred. Advertising expense was $1,783, $1,652 and $1,209 in 2001, 2000 and 1999, respectively. RECLASSIFICATIONS. Certain reclassifications have been made to the 2000 and 1999 amounts to conform to the 2001 presentation. The effects of the reclassifications are not considered to be significant. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board (the "FASB") issued 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 FSAB Statement No. 133," addressing a limited number of implementation issues in applying SFAS No. 133. SFAS No. 133, as amended by SFAS No. 138 ("SFAS No. 133") is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on January 1, 2001 did not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. As of December 31, 2001 and 2000, the Company was not engaged in hedging activities nor did it hold any derivative instruments which required adjustments to carrying values under SFAS No. 133. As permitted by the provisions of SFAS No. 133, the Company transferred held-to-maturity investment securities with amortized costs and fair values of $104,011 and $103,442, respectively, to available-for-sale investment securities on January 1, 2001. Net unrealized holding losses of $569, net of tax, on the transferred securities are reported as a cumulative effect of change in accounting principle within accumulated other comprehensive income. 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 and for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Adoption of the provisions of SFAS No. 140 on April 1, 2001 did not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company. Securities sold under repurchase agreements as of December 31, 2001 and 2000, did not require physical transfer of securities nor did the counterparty have the right to sell or repledge any security used as collateral; therefore, no reclassification was required. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," addressing financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually using a fair value approach for impairment, or more frequently if impairment indicators arise. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. SFAS No. 142 requires disclosure of changes in the carrying amount of goodwill from period to period, the carrying amount of intangible assets by major intangible asset class and the estimated intangible asset amortization expense for the next five years. The provisions of SFAS No. 142 are effective for fiscal years beginning after December 15, 2001 and are required to be applied to all goodwill and other intangible assets recognized in the financial statements at the date of adoption, with the exception of goodwill and intangible assets acquired after June 30, 2001, which will be subject immediately to the provisions of SFAS No. 142. Impairment losses for goodwill and indefinite-lived intangible assets arising due to the initial application of SFAS No. 142 are to be reported as resulting from a change in accounting principle. SFAS No. 142 became effective on January 1, 2002. The adoption of SFAS No. 142 is expected to reduce the Company's amortization expense by approximately $2,000 annually beginning in 2002 due to the discontinuation of goodwill amortization. No impairment losses were recorded upon the initial adoption of the provisions of SFAS No. 142. -47-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," addressing accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of;" however, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within. Management does not expect adoption of the provisions of SFAS No. 144 to have a material impact on the consolidated financial statements, results of operations or liquidity of the Company. (2) REGULATORY CAPITAL 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, 2001, the Company exceeded all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the Company and the Bank 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 following 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, 2001 and 2000 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, 2001: Total risk-based capital: Consolidated $258,585 10.3% $200,334 8.0% $250,418 10.0% FIB 272,934 11.0 199,256 8.0 249,070 10.0 Tier 1 risk-based capital: Consolidated 218,648 8.7 100,167 4.0 150,251 6.0 FIB 241,769 9.7 99,628 4.0 149,442 6.0 Leverage capital ratio: Consolidated 218,648 6.8 129,099 4.0 161,374 5.0 FIB 241,769 7.5 128,715 4.0 160,894 5.0 --------------------------------------------------------------------------------------------- </TABLE> -48-
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, 2000: Total risk-based capital: Consolidated $235,731 10.4% $182,019 8.0% $227,524 10.0% FIB 158,209 11.1 181,266 8.0 226,582 10.0 Tier 1 risk-based capital: Consolidated 194,533 8.6 91,009 4.0 136,514 6.0 FIB 140,347 9.8 90,633 4.0 135,949 6.0 Leverage capital ratio: Consolidated 194,533 6.8 114,736 4.0 143,420 5.0 FIB 140,347 7.8 114,279 4.0 142,848 5.0 ============================================================================================= </TABLE> (3) INVESTMENT SECURITIES The amortized cost and approximate fair values of investment securities are summarized as follows: <TABLE> <CAPTION> Available-for-Sale Gross Gross Estimated Amortized unrealized unrealized fair December 31, 2001 cost gains losses value --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 22,016 548 -- 22,564 Obligations of U.S. Government agencies 165,027 4,898 -- 169,925 Other mortgage-backed securities 352,219 2,849 (758) 354,310 Mutual funds 46,130 -- -- 46,130 Other securities 175 -- -- 175 --------------------------------------------------------------------------------------------------- Total $585,567 8,295 (758) 593,104 =================================================================================================== </TABLE> <TABLE> <CAPTION> Held-to-Maturity Gross Gross Estimated Amortized unrealized unrealized fair December 31, 2001 cost gains losses value --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> States, county and municipal securities $ 83,327 968 (393) 83,902 Corporate securities 16,747 234 -- 16,981 --------------------------------------------------------------------------------------------------- Total $100,074 1,202 (393) 100,883 =================================================================================================== </TABLE> Gross gains of $145 and gross losses of $0 were realized on the sale of available-for-sale securities in 2001. <TABLE> <CAPTION> Available-for-Sale Gross Gross Estimated Amortized unrealized unrealized fair 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 200 -- -- 200 --------------------------------------------------------------------------------------------------- Total $384,371 2,247 (1,736) 384,882 =================================================================================================== </TABLE> -49-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Held-to-Maturity Gross Gross Estimated Amortized unrealized unrealized fair December 31, 2001 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. Maturities of investment securities at December 31, 2001 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, 2001 Available-for-Sale Held-to-Maturity -------------------------------------------------------------------------------------------------- Amortized Estimated Amortized Estimated cost fair value cost fair value -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Within one year $171,731 173,547 18,982 19,240 After one but within five years 293,045 298,146 18,575 18,926 After five years but within ten years 24,656 24,801 53,797 54,118 After ten years 50,005 50,480 8,720 8,599 -------------------------------------------------------------------------------------------------- Total $539,437 546,974 100,074 100,883 ================================================================================================== Mutual funds with no stated maturity 46,130 46,130 -- -- -------------------------------------------------------------------------------------------------- Total $585,567 593,104 100,074 100,883 ================================================================================================== </TABLE> At December 31, 2001, the Company had investment securities callable within one year with amortized costs and estimated fair values of $89,045 and $89,854, respectively. These investment securities are classified as available-for-sale and are primarily included in the after one but within five years category in the table above. Maturities of securities do not reflect rate repricing opportunities present in adjustable rate mortgage-backed and corporate securities. At December 31, 2001 and 2000, the Company had variable rate securities with amortized costs of $2,800 and $4,120, respectively. There are no significant concentrations of investments at December 31, 2001 (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 $525,379 and $466,946 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and securities sold under repurchase agreements. The approximate fair value of securities pledged at December 31, 2001 and 2000 was $532,318 and $466,413, respectively. All securities sold under repurchase agreements are with customers and mature on the next banking day. The Company retains possession of the underlying securities sold under repurchase agreements. -50-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (4) LOANS Major categories and balances of loans included in the loan portfolios are as follows: <TABLE> <CAPTION> December 31, 2001 2000 ---------------------------------------------------------------------- <S> <C> <C> Real estate (1) $1,137,160 954,933 Consumer (2) 483,636 495,445 Commercial 434,330 420,706 Agricultural 95,513 95,387 Other loans, including overdrafts 7,329 5,852 ---------------------------------------------------------------------- Total loans $2,157,968 1,972,323 ====================================================================== </TABLE> (1) Includes residential, agricultural, commercial and construction loans and loans held for resale secured by real estate of $263,318, $94,697, $595,034, $93,209, and $91,002, respectively, as of December 31, 2001 and $253,910, $96,019, $529,035, $66,010, and $9,959, respectively, as of December 31, 2000. (2) Includes indirect loans of $281,242 and $319,224 at December 31, 2001 and 2000, respectively. At December 31, 2001, the Company had no concentrations of loans which exceeded 10% of total loans other than the categories disclosed above. Nonaccrual loans amounted to $18,273 and $19,619 at December 31, 2001 and 2000, respectively. If interest on nonaccrual loans had been accrued, such income would have approximated $1,688 and $1,943 during the years ended December 31, 2001 and 2000, respectively. Loans contractually past due ninety days or more aggregating $7,200 on December 31, 2001 and $5,158 on December 31, 2000 were on accrual status. Such loans are deemed adequately secured and in the process of collection. Impaired loans at December 31, 2001 and 2000 are $18,272 and $20,675, respectively. Included in impaired loans at December 31, 2001 and 2000 are $3,382 and $2,249, respectively, of loans which have an impairment allowance of $1,641 and $1,092, respectively, included in the Company's allowance for loan losses. The average recorded investment in impaired loans for the years ended December 31, 2001, 2000 and 1999 was approximately $18,524, $22,324, and $17,494, respectively. If interest on impaired loans had been accrued, the amount of interest income on impaired loans during 2001, 2000 and 1999 would have been approximately $1,565, $2,043, and $1,536, respectively. Also included in impaired loans at December 31, 2001 and 2000 are loans with a carrying value of $921 and $2,635, respectively, the terms of which have been modified in troubled debt restructurings. Restructured debt includes nonaccrual loans of $921 and $650 at December 31, 2001 and 2000, respectively. The interest income recognized on restructured loans approximated $90, $176, and $192 during the years ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001, 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. -51-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (5) ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows: <TABLE> <CAPTION> Years ended December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 32,820 29,599 28,803 Allowance of acquired banking offices -- 1,019 1,574 Provision charged to operating expense 7,843 5,280 3,563 Less loans charged-off (8,562) (5,806) (7,609) Add back recoveries of loans previously charged-off 1,990 2,728 3,268 ----------------------------------------------------------------------------------------------------- Balance at end of year $ 34,091 32,820 29,599 ===================================================================================================== </TABLE> (6) PREMISES AND EQUIPMENT Premises and equipment and related accumulated depreciation are as follows: <TABLE> <CAPTION> December 31, 2001 2000 ----------------------------------------------------------------------------------------------------- <S> <C> <C> Land $ 11,265 12,606 Buildings and improvements 78,512 74,811 Furniture and equipment 47,585 40,713 ----------------------------------------------------------------------------------------------------- 137,362 128,130 Less accumulated depreciation (46,016) (37,055) ----------------------------------------------------------------------------------------------------- Premises and equipment, net $ 91,346 91,075 ===================================================================================================== </TABLE> The Parent Company and a branch office lease premises from an affiliated partnership (see note 24). (7) OTHER REAL ESTATE OWNED Other real estate owned (OREO) consists of the following: <TABLE> <CAPTION> December 31, 2001 2000 ----------------------------------------------------------------------------------------------------- <S> <C> <C> OREO $ 414 3,038 Less allowance for OREO losses -- (10) ----------------------------------------------------------------------------------------------------- $ 414 3,028 ===================================================================================================== </TABLE> A summary of changes in the allowance for OREO losses follows: <TABLE> <CAPTION> Years ended December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 10 20 477 Provision during the year -- -- 20 Property write downs (10) (10) (477) ----------------------------------------------------------------------------------------------------- Balance at end of year $ -- 10 20 ===================================================================================================== </TABLE> -52-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (8) LOAN SERVICING RIGHTS The Company is a servicer of residential mortgage loans and is compensated for loan administrative services performed in conjunction with mortgage servicing rights purchased in the secondary market and originated by the Company's bank subsidiary, FIB. Information with respect to the Company's loan servicing rights follows: <TABLE> <CAPTION> Years ended December 31, 2001 2000 1999 ----------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 4,964 3,673 1,787 Purchase of loan servicing rights 247 1,143 981 Origination of loan servicing rights 3,340 1,038 1,565 Amortization expense (1,086) (890) (660) Reserve for impairment (1,143) -- -- ----------------------------------------------------------------------------------- Balance at end of year $ 6,322 4,964 3,673 =================================================================================== </TABLE> At December 31, 2001, the estimated fair value of the Company's servicing assets was $7,019. The fair value of servicing assets was determined using discount rates ranging from 9.0% to 17.0% and monthly prepayment speeds ranging from 0.6% to 3.4% depending upon the risk characteristics of the underlying loans. Impairment losses of $1,143 were recognized as other expense in 2001. No impairment losses were recorded in 2000 or 1999. 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 $807,939 and $619,538 at December 31, 2001 and 2000, respectively. (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, 2001 and 2000. 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, 2001 and 2000 are $2,871 and $2,811, respectively. The net cash surrender value of key-executive insurance policies included in other assets is $716 and $626 at December 31, 2001 and 2000, respectively. The Company has also obtained life insurance policies covering selected other key officers. The net cash surrender value of these policies is $2,777 and $2,460 at December 31, 2001 and 2000, respectively, and is included in other assets. Under these policies, the Company receives the net cash surrender value if the policy is terminated, or receives all benefits payable upon death of the insured. An endorsement split dollar agreement has been executed with each of the selected key officers whereby a portion of the policy death benefit is payable to their designated beneficiary. The endorsement split dollar agreement will provide post retirement coverage for those selected key officers meeting specified retirement qualifications. The Company accrues the earned portion of the post-employment benefit through the specified vesting date. -53-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (10) OTHER ASSETS At December 31, 2001 and 2000, other assets consisted of the following: <TABLE> <CAPTION> 2001 2000 ---------------------------------------------------------------------------------------- <S> <C> <C> Restricted equity securities of government agencies $ 15,766 13,099 Cash surrender value of life insurance, net 3,493 3,086 Other 20,879 17,349 ---------------------------------------------------------------------------------------- $ 40,138 33,534 ======================================================================================== </TABLE> (11) DEPOSITS Deposits are summarized as follows: <TABLE> <CAPTION> December 31, 2001 2000 ---------------------------------------------------------------------------------------- <S> <C> <C> Noninterest bearing demand $ 571,888 441,563 Interest bearing: Demand 454,394 384,070 Savings 693,794 575,768 Time, $100 and over 312,543 283,599 Time, other 675,994 680,225 ---------------------------------------------------------------------------------------- Total interest bearing 2,136,725 1,923,662 ---------------------------------------------------------------------------------------- $2,708,613 2,365,225 ======================================================================================== </TABLE> Maturities of time deposits at December 31, 2001 are as follows: <TABLE> <CAPTION> Time, $100 and Over Total Time ---------------------------------------------------------------------------------------- <S> <C> <C> 2002 $ 258,440 730,666 2003 39,458 177,297 2004 7,868 38,380 2005 3,225 27,714 2006 3,552 14,415 Thereafter -- 65 ---------------------------------------------------------------------------------------- $ 312,543 988,537 ======================================================================================== </TABLE> Interest expense on time deposits of $100 or more was $17,047, $13,889, and $11,087 for the years ended December 31, 2001, 2000 and 1999, respectively. (12) INCOME TAXES Income tax expense (benefit) consists of the following: <TABLE> <CAPTION> Year ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------- <S> <C> <C> <C> Current: Federal $13,490 14,668 13,873 State 2,585 2,222 1,950 ---------------------------------------------------------------------------------------- $16,075 16,890 15,823 ======================================================================================== </TABLE> -54-
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, 2001 2000 1999 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Deferred: Federal $ 1,557 226 (440) State 269 60 (154) ------------------------------------------------------------------------------------------------- 1,826 286 (594) ------------------------------------------------------------------------------------------------- $17,901 17,176 15,229 ================================================================================================= </TABLE> Total income tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 2001, 2000 and 1999 to income before income taxes as a result of the following: <TABLE> <CAPTION> Year ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Tax expense at the statutory tax rate $17,179 16,645 15,035 Increase (decrease) in tax resulting from: Tax-exempt income (1,902) (1,749) (1,212) State income tax, net of Federal income tax benefit 1,853 1,483 1,167 Amortization of nondeductible goodwill 436 452 310 Other, net 335 345 (71) ------------------------------------------------------------------------------------------------- $17,901 17,176 15,229 ================================================================================================= </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, 2001 2000 ------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred tax assets: Loans, principally due to allowance for loan losses $ 11,980 11,378 Other real estate owned, principally due to differences in bases 32 83 Employee benefits 1,211 2,779 Other 403 619 ------------------------------------------------------------------------------------------------- Deferred tax assets 13,626 14,859 ------------------------------------------------------------------------------------------------- Deferred tax liabilities: Fixed assets, principally differences in bases and depreciation (1,446) (923) Investment in joint venture partnership, principally due to differences in depreciation of partnership assets (1,024) (823) Prepaid amounts (647) (665) Government agency stock dividends (1,516) (1,258) Investment securities, unrealized gains (2,971) (266) Goodwill and core deposit intangibles (2,165) (2,598) Mortgage servicing rights (833) (698) Other (273) (346) ------------------------------------------------------------------------------------------------- Deferred tax liabilities (10,875) (7,577) ------------------------------------------------------------------------------------------------- Net deferred tax asset $ 2,751 7,282 ================================================================================================= </TABLE> -55-
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, 2001 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 $1,610 and $174 at December 31, 2001 and 2000, respectively. (13) LONG-TERM DEBT AND OTHER BORROWED FUNDS A summary of long-term debt follows: <TABLE> <CAPTION> December 31, 2001 2000 --------------------------------------------------------------------------------------------------- <S> <C> <C> Parent Company: Unsecured revolving term loan due June 30, 2005, interest payable quarterly at variable interest rates (3.84% weighted average rate at December 31, 2001) $10,150 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 (4.09% rate at December 31, 2001) 2,032 2,572 Various unsecured notes paid in 2001payable to former stockholders -- 157 Subsidiaries: Various notes payable to FHLB, interest due monthly at various rates and maturities (weighted average rate of 6.36% at December 31, 2001) 2,149 2,381 10% note payable on repossessed property paid in 2001 -- 340 --------------------------------------------------------------------------------------------------- $34,331 37,000 =================================================================================================== </TABLE> Maturities of long-term debt at December 31, 2001 are as follows: <TABLE> <S> <C> <C> 2002 $ 4,155 2003 4,460 2004 4,785 2005 15,058 2006 4,807 Thereafter 1,066 --------------------------------------------------------------------------------------------------- $34,331 =================================================================================================== </TABLE> 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, 2001, $10,150 was advanced on the loan. The revolving facility requires an annual commitment fee of -56-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 0.10% on the unadvanced amount and an annual commitment fee of 0.05% on the total amount of the commitment. At various dates, the Company may elect 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, 2001 2000 -------------------------------------------------------------------------------------------------- <S> <C> <C> Interest bearing demand notes issued to the United States Treasury, secured by investment securities (1.41% weighted average rate at December 31, 2001) $ 8,095 11,138 -------------------------------------------------------------------------------------------------- $ 8,095 11,138 ================================================================================================== </TABLE> The Company has Federal funds lines of credit with third parties amounting to $90,000, subject to funds availability. These lines are subject to cancellation without notice. The Company has available lines of credit with the FHLB of approximately $222,000. (14) TRUST PREFERRED SECURITIES 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 at par. 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. -57-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 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. (15) EMPLOYEE BENEFIT PLANS PROFIT SHARING PLAN. The Company has a noncontributory profit sharing plan. All non-temporary employees working 20 hours or more per week are eligible to participate in the profit sharing plan. 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. Vesting in contributions occurs pro rata over a three-year period. Company contributions to this plan of $1,267, $1,186 and $1,150 were expensed in 2001, 2000 and 1999, 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 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 $1,868, $1,490, and $1,321 were expensed in 2001, 2000 and 1999, respectively. STOCK OPTION PLANS. The Company has two nonqualified stock option plans, the 2001 Stock Option Plan ("New Stock Option Plan") and the Stock Option and Stock Appreciation Rights Plan ("Old Option Plan"). Stock options and stock appreciation rights ("SARs") awards were granted to certain officers and directors of the Company at the discretion of the Company's Board of Directors. Subsequent to May 2001, the Company discontinued stock option awards under the Old Option Plan. During 2001, the Company adopted the New Stock Option Plan. All options granted under the New Stock Option Plan have an exercise price equal to fair value at the date of grant. Options granted under the New Stock Option Plan may be subject to vesting as determined by the Compensation Committee of the Company's Board of Directors ("Compensation Committee") and can be exercised for periods of up to ten years from the date of grant. Options granted in 2001 vest over a three-year period. Stock issued upon exercise of options is subject to a shareholder agreement granting the Company the right to repurchase all or some of the stock at any time. During 2001, the Company awarded 2,450 options under the New Stock Option Plan with a weighted average exercise price of $41.35 and a weighted average remaining life of 9.85 years at December 31, 2001. The Company accounts for the New Stock Option Plan as a fixed plan in accordance with APB No. 25. APB No. 25 does not require a company to recognize compensation expense, under fixed plan accounting, if the exercise price of the option is equal to the fair value of the common stock at the date of grant. If compensation expense had been determined based on an estimate of fair value of the option at the date of grant, consistent with SFAS No. 123, fair value method of accounting for stock options, the Company's pro forma net income for 2001 would have been $31,174. Pro forma basic and diluted earnings per share would not be different from that reported. The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model, which requires the input of subjective assumptions. Because the Company's common stock and stock options have characteristics significantly different from listed securities and traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The weighted average fair values of options granted during 2001 was $5.84. Weighted average assumptions used in the valuation model include risk-free interest rate of 4.93%, dividend yield of 2.86% and an expected life of options of 10 years. The effect of stock price volatility was not considered in the valuation model as there is no active market for the Company's common stock. Under the Old Option Plan, 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 -58-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 1993 and thereafter have a per share exercise price equal to fair value at the date of grant. Each option granted under the Old Option Plan was subject to vesting as determined by the Compensation Committee and can be exercised for a period of up to ten years from the date of grant. Options outstanding under the Old Option Plan were 100% vested as of December 31, 2001. Stock issued upon exercise of options is subject to a shareholder agreement granting the Company a right of first refusal to repurchase the stock. During 2001, the Company offered all option holders under the Old Stock Plan an opportunity to exercise outstanding options with the intention of issuing, after six months, a similar number of options with similar terms under the New Stock Option Plan. As a result, 344,053 options granted under the Old Option Plan were exercised and 98,006 options were cancelled in 2001. 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 under the Old Option Plan. The Company accounts for the Old Option Plan as a variable plan, in accordance with APB No. 25, with compensation cost or benefit recorded 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 expense (benefit) related to this plan was $503, ($593) and $2,505 in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, the Company had liabilities related to obligations under this plan of $444 and $4,129, respectively. Information with respect to stock options and SARs granted under the Old Option Plan follows: <TABLE> <CAPTION> 2001 2000 1999 --------------------- --------------------- ----------------------- Year ended December 31, Options SARs Options SARs Options SARs -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding, beginning of year 386,256 4,400 322,300 6,000 169,280 115,140 Granted 112,173 -- 101,456 -- 90,700 -- Exercised (378,003) (1,400) (35,000) (1,600) (43,980) (2,840) Cancelled (98,706) -- (2,500) -- -- -- Conversion of SARs to options -- -- -- -- 106,300 (106,300) -------------------------------------------------------------------------------------------------------------- Outstanding, end of year 21,720 3,000 386,256 4,400 322,300 6,000 ============================================================================================================== </TABLE> Information with respect to the weighted-average stock option exercise prices for options granted under the Old Option Plan follows: <TABLE> <CAPTION> Year ended December 31, 2001 2000 1999 ----------------------------------------------------------------------- <S> <C> <C> <C> Granted during year $ 38.10 $ 39.95 $ 33.14 Exercised during year 27.87 14.54 12.01 Cancelled during year 39.98 38.60 -- SARs converted during year -- -- 17.16 Outstanding, end of year 24.73 27.82 22.64 ======================================================================= </TABLE> -59-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Stratification and additional detail regarding the exercisable options outstanding under the Old Option Plan at December 31, 2001 follows: <TABLE> <CAPTION> Exercise Number Weighted-average Weighted-average price range outstanding remaining life exercise price ------------------------------------------------------------------------------------- <S> <C> <C> <C> $7.61 - $15.80 8,550 0.92 years $ 9.75 $17.85 - $20.05 3,000 4.57 years 19.02 $39.00 - $39.00 10,170 9.38 years 39.00 ===================================================================================== </TABLE> (16) 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 of the Company. The Company had commitments to sell loans of $91,002 and $9,959 as of December 31, 2001 and 2000, respectively. The Company leases certain premises and equipment from third parties under operating leases. Total rental expense to third parties was $2,737 in 2001, $2,119 in 2000 and $1,691 in 1999. 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, 2001 are as follows: <TABLE> <CAPTION> Related Third Partnership parties (See Note 24) Total ------------------------------------------------------------------------------------- <S> <C> <C> <C> For the year ending December 31: 2002 $ 2,220 988 3,208 2003 2,230 980 3,210 2004 2,042 958 3,000 2005 1,883 718 2,601 2006 1,609 -- 1,609 Thereafter 6,352 -- 6,352 ------------------------------------------------------------------------------------- $16,336 3,644 19,980 ===================================================================================== </TABLE> (17) 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 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. -60-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 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, 2001 and 2000, stand-by letters of credit in the amount of $36,915 and $34,506 respectively, were outstanding. Commitments to extend credit to existing and new borrowers approximated $482,632 at December 31, 2001, which includes $84,499 on unused credit card lines and $79,905 with commitment maturities beyond one year. Commitments to extend credit to existing and new borrowers 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. (18) CAPITAL STOCK At December 31, 2001, 91.73% of the common stock held by stockholders are subject to shareholder's agreements (Agreements). Under the Agreements, the Company has a right of first refusal to repurchase shares from the stockholder at fair value in the event of a proposed sale or transfer of shares to a third party. Additionally, shares purchased by officers, directors and employees are subject to repurchase at the Company's discretion. (19) 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, 2001 2000 -------------------------------------------------------------------------- <S> <C> <C> Condensed balance sheets: Cash and cash equivalents $ 246 254 Investment in subsidiaries, at equity: Bank subsidiary 283,868 265,913 Non-bank subsidiaries 8,286 6,569 -------------------------------------------------------------------------- Total investment in subsidiaries 292,154 272,482 Goodwill, net of accumulated amortization 1,322 1,467 Property and equipment 3,785 4,204 Other assets 7,828 7,575 -------------------------------------------------------------------------- Total assets $305,335 285,982 ========================================================================== Other liabilities $ 8,149 10,559 Long-term debt 33,880 36,200 Subordinated debentures - FIB Capital Trust 41,237 41,237 -------------------------------------------------------------------------- Total liabilities 83,266 87,996 Stockholders' equity 222,069 197,986 -------------------------------------------------------------------------- Total liabilities and stockholders' equity $305,335 285,982 ========================================================================== </TABLE> -61-
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, 2001 2000 1999 -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Condensed statements of income: Dividends from subsidiary banks $ 26,207 22,107 23,857 Other interest income 35 98 172 Other income, primarily management fees from subsidiaries 3,993 4,235 3,436 -------------------------------------------------------------------------------------------------- Total income 30,235 26,440 27,465 -------------------------------------------------------------------------------------------------- Salaries and benefits 6,993 4,958 6,967 Interest expense 6,465 6,209 5,447 Other operating expenses, net 5,800 4,421 4,049 -------------------------------------------------------------------------------------------------- Total expenses 19,258 15,588 16,463 -------------------------------------------------------------------------------------------------- Technology services income, net of direct operating expenses -- -- 3,317 -------------------------------------------------------------------------------------------------- Earnings before income tax benefit 10,977 10,852 14,319 Income tax benefit 5,475 3,992 3,461 -------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiaries 16,452 14,844 17,780 Undistributed earnings of subsidiaries 14,731 15,536 9,948 -------------------------------------------------------------------------------------------------- Net income $ 31,183 30,380 27,728 ================================================================================================== </TABLE> <TABLE> <CAPTION> Year ended December 31, 2001 2000 1999 -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Condensed statements of cash flows: Cash flows from operating activities: Net income $ 31,183 30,380 27,728 Adjustments to reconcile net income to cash provided by operating activities: Undistributed earnings of subsidiaries (14,731) (15,536) (9,948) Net loss (gain) on sale of equipment 35 (200) -- Depreciation and amortization 303 414 297 Provision for deferred income taxes (13) 334 (485) Other, net (2,793) (97) 899 -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,984 15,295 18,491 -------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net increase in advances to non-bank subsidiary 124 625 475 Capital expenditures, net of sales 226 (2,282) (380) Capitalization of subsidiaries (846) (1,000) -- Acquisitions of banking offices, net of cash acquired -- (20,152) (11,455) -------------------------------------------------------------------------------------------------- Net cash used in investing activities (496) (22,809) (11,360) -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Borrowings of long-term debt 81,600 30,921 5,527 Repayments of long-term debt (83,920) (15,616) (5,853) Debt issuance costs 95 95 95 Dividends paid on common stock (9,279) (8,807) (8,530) Payments to retire common stock (4,200) (4,904) (3,271) Issuance of common stock 2,208 1,100 3,262 -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (13,496) 2,789 (8,770) -------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (8) (4,725) (1,639) Cash and cash equivalents, beginning of year 254 4,979 6,618 -------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 246 254 4,979 ================================================================================================== </TABLE> Noncash Investing and Financing Activities - In conjunction with the exercise of stock options, the Company transferred $75, $74, and $324 in 2001, 2000, and 1999, respectively, from accrued liabilities to common stock. -62-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (20) 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. The fair value of loan servicing rights is based on a pricing model using prevailing financial market information. FINANCIAL LIABILITIES AND TRUST PREFERRED 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> 2001 2000 ---------------------------------------------------------------------------------------------------------------- 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 $ 293,036 293,036 169,245 169,245 Securities available-for-sale 593,104 593,104 384,882 384,882 Securities held-to-maturity 100,074 100,883 228,826 228,240 Net loans 2,123,877 2,251,002 1,939,503 1,924,073 Loan servicing rights, net 6,322 7,019 4,964 6,685 ---------------------------------------------------------------------------------------------------------------- Total financial assets $3,116,413 3,245,044 2,727,420 2,713,125 ================================================================================================================ </TABLE> -63-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> 2001 2000 ---------------------------------------------------------------------------------------------------------------- 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 $1,720,076 1,720,076 1,401,401 1,401,401 Time deposits 988,537 990,753 963,824 962,042 Federal funds purchased 625 625 19,535 19,535 Securities sold under repurchase agreements 271,952 271,952 229,078 229,078 Other borrowed funds 8,095 8,095 11,138 11,138 Long-term debt 34,331 36,394 37,000 38,059 Trust Preferred Securities 40,000 40,000 40,000 37,200 ---------------------------------------------------------------------------------------------------------------- Total financial liabilities and trust preferred securities $3,063,616 3,067,895 2,701,976 2,698,453 ================================================================================================================ </TABLE> (21) 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, 2001 2000 1999 --------------------------------------------------------------------------------- <S> <C> <C> <C> Net income basic and diluted $ 31,183 30,380 27,728 ================================================================================= Average outstanding shares - basic 7,854,576 7,924,589 7,967,953 Add: effect of dilutive stock options 67,118 119,942 143,363 --------------------------------------------------------------------------------- Average outstanding shares - diluted 7,921,694 8,044,531 8,111,316 ================================================================================= Basic earnings per share $ 3.97 3.83 3.48 ================================================================================= Diluted earnings per share $ 3.94 3.78 3.42 ================================================================================= </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 have been antidilutive. There were no antidilutive stock options outstanding for the year ended December 31, 2001. (22) ACQUISITIONS 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 $20,301 was funded through available cash on hand and a $19,000 advance on the Company's revolving term note. At the purchase date, EBSI had gross loans of approximately $64,000 and deposits of approximately $80,000. 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. The premium paid and estimated fair value adjustments have been pushed down to FIB. The premium paid over the fair value of the assets and liabilities acquired amounted to $13,295 which was allocated to core deposit intangibles of $1,867 and goodwill of $11,428. Core deposit intangibles are being amortized using an accelerated method over 10 years. Goodwill is being amortized using the straight-line method over 20 years. -64-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (23) NONCASH INVESTING AND FINANCING ACTIVITIES The Company transferred loans of $485 and property of $175 to other real estate owned in 2001. The Company transferred loans of $1,841 and $524 to other real estate owned in 2000 and 1999, respectively. In conjunction with the adoption of SFAS No. 133, the Company transferred investment securities of $3,165 from the available-for-sale category to the held-to-maturity category during 2001. In conjunction with the exercise of stock options, the Company transferred $75, $74, and $324 in 2001, 2000 and 1999, 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. (24) RELATED PARTY TRANSACTIONS The Company has banking transactions in the ordinary course of business with related parties, including business with directors, officers, stockholders and their associates, on the same terms as those prevailing at the same time for comparable transactions with unrelated persons and that did not involve more than a normal risk of collectibility or present other unfavorable features. 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 $22,478 at December 31, 2001 and $28,629 at December 31, 2000. During 2001, new loans and advances on existing loans of $57,576 were funded and repayments totaled $63,727. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable risk loans. The Parent Company and the Billings office of FIB are the anchor tenants in a building owned by a partnership in which FIB is one of the two partners, and has a 50% partnership interest. The other 50% is owned by a company in which a director of the Company owns beneficially an equity interest of approximately 33%. At December 31, 2001, the partnership has indebtedness of $8,280 which is full recourse to the partners. Total rents, including maintenance, paid to the partnership were $1,493 in 2001, $1,503 in 2000 and $1,445 in 1999. The Company purchases property and casualty insurance from an agency owned by a director of the Company. The Company paid insurance premiums to the agency of $279, $194 and $0 in 2001, 2000 and 1999, respectively. (25) BUSINESS LINE REPORTING During the fourth quarter 2001, management reassessed the Company's business lines and made the determination that certain operational and mortgage servicing activities previously reported as Other more closely aligned with the objectives of Community Banking. Accordingly, these activities are included in the Community Banking line of business consistent with the Company's internal management structure. The presentation of prior year amounts conforms to current year except as noted below. -65-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) On January 1, 2001, the Company transferred IP services from FIB, its banking subsidiary, to i_Tech, its technology services subsidiary. Because expenses associated with IP services prior to 2001 cannot be separately distinguished from other operational expenses, the 2000 and 1999 amounts reported have not been reclassified to reflect the transfer. Increases in the revenues and non-interest expenses of the Technology Services business line during 2001 as compared to 2000 and 1999 are primarily due to the transfer of IP services. Selected business line information for the years ended December 31, 2001, 2000 and 1999 follows: <TABLE> <CAPTION> Community Technology For the Year Ended December 31, 2001 Banking Services Other Total --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income (expense) $ 131,311 106 (6,275) 125,142 Provision for loan losses 7,443 -- 400 7,843 --------------------------------------------------------------------------------------------------- Net interest income after provision 123,868 106 (6,675) 117,299 Non-interest income External sources 40,065 10,255 1,714 52,034 Internal sources -- 11,874 (11,874) -- --------------------------------------------------------------------------------------------------- Total non-interest income 40,065 22,129 (10,160) 52,034 Non-interest expenses 104,947 17,183 (1,881) 120,249 --------------------------------------------------------------------------------------------------- Income (loss) before taxes 58,986 5,052 (14,954) 49,084 Income tax expense (benefit) 21,313 2,002 (5,414) 17,901 --------------------------------------------------------------------------------------------------- Net income (loss) $ 37,673 3,050 (9,540) 31,183 =================================================================================================== Depreciation & amortization $ 13,346 15 302 13,663 =================================================================================================== Total assets $3,299,812 5,508 9,396 3,314,716 =================================================================================================== Investment in equity method investees $ 1,621 -- 314 1,935 =================================================================================================== </TABLE> <TABLE> <CAPTION> Community Technology For the Year Ended December 31, 2000 Banking Services Other Total --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income (expense) $ 115,803 119 (5,914) 110,008 Provision for loan losses 5,280 -- -- 5,280 --------------------------------------------------------------------------------------------------- Net interest income after provision 110,523 119 (5,914) 104,728 Non-interest income External sources 33,887 8,927 1,337 44,151 Internal sources -- 6,615 (6,615) -- --------------------------------------------------------------------------------------------------- Total non-interest income 33,887 15,542 (5,278) 44,151 Non-interest expenses 91,361 10,761 (799) 101,323 --------------------------------------------------------------------------------------------------- Income (loss) before taxes 53,049 4,900 (10,393) 47,556 Income tax expense (benefit) 18,924 1,946 (3,694) 17,176 --------------------------------------------------------------------------------------------------- Net income (loss) $ 34,125 2,954 (6,699) 30,380 =================================================================================================== Depreciation & amortization $ 12,014 4 414 12,432 =================================================================================================== Total assets $2,919,064 4,373 9,825 2,933,262 =================================================================================================== Investment in equity method investees $ 1,562 -- -- 1,562 =================================================================================================== </TABLE> -66-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) <TABLE> <CAPTION> Community Technology For the Year Ended December 31, 1999 Banking Services Other Total --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income (expense) $ 105,462 -- (5,115) 100,347 Provision for loan losses 3,563 -- -- 3,563 --------------------------------------------------------------------------------------------------- Net interest income after provision 101,899 -- (5,115) 96,784 Non-interest income External sources 29,832 7,289 555 37,676 Internal sources -- 5,359 (5,359) -- --------------------------------------------------------------------------------------------------- Total non-interest income 29,832 12,648 (4,804) 37,676 Non-interest expenses 79,677 9,332 2,494 91,503 --------------------------------------------------------------------------------------------------- Income (loss) before taxes 52,054 3,316 (12,413) 42,957 Income tax expense (benefit) 18,757 1,317 (4,845) 15,229 --------------------------------------------------------------------------------------------------- Net income (loss) $ 33,297 1,999 (7,568) 27,728 =================================================================================================== Depreciation & amortization $ 10,726 1 298 11,025 =================================================================================================== Total assets $2,596,758 -- 15,905 2,612,663 =================================================================================================== Investment in equity method investees $ 1,125 -- -- 1,125 =================================================================================================== </TABLE> -67-
(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 3.7(11) Amendment to Bylaws of First Interstate BancSystem, Inc. dated May 18, 2001 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(12) Shareholder's Agreement for non-Scott family members dated August 24, 2001 4.4(9) First Interstate Stockholders' Agreements with Scott family members dated January 11, 1999 4.5(9) Specimen of Charity Shareholder's Agreement with Charitable Shareholders 4.6(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.7(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.8(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.9(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.10(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.11(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.12(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.13(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(13) 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(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.7(1)+ Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.8(12) 2001 Stock Option Plan of the Registrant 10.9(8)+ Employee Stock Purchase Plan of First Interstate BancSystem, Inc. dated May 1, 1998 10.10(9) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members dated January 11, 1999 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 Ernst & Young LLP, Independent Auditors 23.2 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. (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. (11) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-69490. (12) Incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, No. 333-76825. (13) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2000, No. 033-64304. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2001. (c) Exhibits See Item 14(a)3 above. (d) Financial Statements Schedules See Item 14(a)2 above.
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description <S> <C> 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 3.7(11) Amendment to Bylaws of First Interstate BancSystem, Inc. dated May 18, 2001 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(12) Shareholder's Agreement for non-Scott family members dated August 24, 2001 4.4(9) First Interstate Stockholders' Agreements with Scott family members dated January 11, 1999 4.5(9) Specimen of Charity Shareholder's Agreement with Charitable Shareholders 4.6(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.7(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.8(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.9(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.10(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.11(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.12(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.13(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(13) 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(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.7(1)+ Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.8(12) 2001 Stock Option Plan of the Registrant 10.9(8)+ Employee Stock Purchase Plan of First Interstate BancSystem, Inc. dated May 1, 1998 10.10(9) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members dated January 11, 1999 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 Ernst & Young LLP, Independent Auditors </TABLE>
<TABLE> <S> <C> 23.2 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. (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. (11) Incorporated by reference to the Registrant's Registration Statement on Form S-8, No. 333-69490. (12) Incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, No. 333-76825. (13) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2000, No. 033-64304. </TABLE>
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 MARCH 25, 2002 ------------------------------------- -------------- 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. By: /s/ HOMER A. SCOTT, JR. MARCH 25, 2002 --------------------------------------------- -------------- Homer A. Scott, Jr. Date Chairman By: /s/ DAN S. SCOTT MARCH 25, 2002 --------------------------------------------- -------------- Dan S. Scott, Director Date By: /s/ JAMES R. SCOTT MARCH 25, 2002 --------------------------------------------- -------------- James R. Scott, Vice Chairman of the Board Date By: /s/ SANDRA A. SCOTT SUZOR MARCH 25, 2002 --------------------------------------------- -------------- Sandra A. Scott Suzor, Director Date By: /s/ JOHN M. HEYNEMAN, JR. MARCH 25, 2002 --------------------------------------------- -------------- John M. Heyneman, Jr., Director Date By: /s/ JOEL T. LONG MARCH 25, 2002 --------------------------------------------- -------------- Joel T. Long, Director Date By: /s/ JAMES W. HAUGH MARCH 25, 2002 --------------------------------------------- -------------- James W. Haugh, Director Date By: /s/ DAVID H. CRUM MARCH 25, 2002 --------------------------------------------- -------------- David H. Crum, Director Date By: /s/ TERRY W. PAYNE MARCH 25, 2002 --------------------------------------------- -------------- Terry W. Payne, Director Date By: /s/ C. GARY JENNINGS MARCH 25, 2002 --------------------------------------------- -------------- C. Gary Jennings, Director Date By: /s/ ROBERT L. NANCE MARCH 25, 2002 --------------------------------------------- -------------- Robert L. Nance, Director Date By: /s/ ROBERT H. WALLER MARCH 25, 2002 --------------------------------------------- -------------- Robert H. Waller, Director Date By: --------------------------------------------- -------------- Elouise C. Cobell, Director Date
By: /s/ RICHARD A. DORN MARCH 25, 2002 --------------------------------------------- -------------- Richard A. Dorn, Director Date By: /s/ LARRY F. SUCHOR MARCH 25, 2002 --------------------------------------------- -------------- Larry F. Suchor, Director Date By: /s/ WILLIAM B. EBZERY MARCH 25, 2002 --------------------------------------------- -------------- William B. Ebzery, Director Date By: /s/ THOMAS W. SCOTT MARCH 25, 2002 --------------------------------------------- -------------- Thomas W. Scott Date Chief Executive Officer and Director (Principal executive officer) By: /s/ LYLE R. KNIGHT MARCH 25, 2002 --------------------------------------------- -------------- Lyle R. Knight Date President, Chief Operating Officer and Director By: /s/ TERRILL R. MOORE MARCH 25, 2002 --------------------------------------------- -------------- Terrill R. Moore Date Senior Vice President and Chief Financial Officer (Principal financial and accounting officer) 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 2001 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 2002 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.