UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from _______ to _______ COMMISSION FILE NUMBER 333-3250 FIRST INTERSTATE BANCSYSTEM, INC. (Exact name of registrant as specified in its charter) Montana 81-0331430 (State or other jurisdiction of (IRS Employer incorporation or organization) (Identification No.) PO Box 30918, 401 North 31st Street, Billings, MT 59116-0918 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 406/255-5390 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No ________ The Registrant had 7,863,222 shares of common stock outstanding on October 31, 2001.
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q <TABLE> <CAPTION> Index Page ----- ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets September 30, 2001 and December 31, 2000 (unaudited) 3 Consolidated Statements of Income Three and nine months ended September 30, 2001 and 2000 (unaudited) 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income Three and nine months ended September 30, 2001 and 2000 (unaudited) 5 Consolidated Statements of Cash Flows Nine months ended September 30, 2001 and 2000 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 18 Item 2 - Changes in Securities 18 Item 3 - Defaults on Senior Securities 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 5 - Other Information 18 Item 6 - Exhibits and Reports on Form 8-K 18 SIGNATURES 19 </TABLE> 2
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share data) (Unaudited) <TABLE> <CAPTION> Assets September 30, December 31, 2001 2000 <S> <C> <C> Cash and due from banks $ 167,386 166,964 Federal funds sold 28,545 1,510 Interest bearing deposits in banks 68,337 771 Investment securities: Available-for-sale 589,913 385,163 Held-to-maturity 98,016 228,826 ---------- --------- Total investment securities 687,929 613,989 Loans 2,092,846 1,972,323 Less allowance for loan losses 34,414 32,820 ---------- --------- Net loans 2,058,432 1,939,503 Premises and equipment, net 91,804 91,075 Accrued interest receivable 28,632 28,442 Goodwill and core deposit intangible, net of accumulated amortization of $19,893 at September 30, 2001 and $17,163 at December 31, 2000 39,751 42,481 Other real estate owned, net 1,851 3,028 Deferred tax asset 1,521 7,282 Other assets 43,862 38,217 ---------- --------- Total assets $3,218,050 2,933,262 ========== ========= Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 503,916 441,563 Interest bearing 2,105,722 1,923,662 ---------- --------- Total deposits 2,609,638 2,365,225 Federal funds purchased 3,500 19,535 Securities sold under repurchase agreements 263,439 229,078 Accrued interest payable 18,226 19,026 Accounts payable and accrued expenses 13,055 14,274 Other borrowed funds 11,727 11,138 Long-term debt 38,940 37,000 Mandatorily redeemable preferred securities of subsidiary trust 40,000 40,000 ---------- --------- Total liabilities 2,998,525 2,735,276 Stockholders' equity: Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of September 30, 2001 or December 31, 2000 -- -- Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,838,995 shares as of September 30, 2001 and 7,899,168 shares as of December 31, 2000 4,787 7,101 Retained earnings 207,261 190,410 Accumulated other comprehensive income, net 7,477 475 ---------- --------- Total stockholders' equity 219,525 197,986 ---------- --------- Total liabilities and stockholders' equity $3,218,050 2,933,262 ========== ========= </TABLE> See accompanying notes to unaudited consolidated financial statements. 3
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, ---------------------- --------------------- 2001 2000 2001 2000 ------- ------ -------- ------- <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $47,968 46,587 141,784 130,497 Interest and dividends on investment securities: Taxable 7,802 7,519 22,870 22,811 Exempt from Federal taxes 923 903 2,729 2,679 Interest on deposits in banks 119 34 187 89 Interest on Federal funds sold 984 506 2,383 958 ------- ------ -------- ------- Total interest income 57,796 55,549 169,953 157,034 ------- ------ -------- ------- Interest expense: Interest on deposits 19,596 20,779 63,029 57,470 Interest on Federal funds purchased 16 537 71 1,521 Interest on securities sold under repurchase agreements 1,815 2,861 6,281 7,734 Interest on other borrowed funds 70 1,083 290 2,949 Interest on long-term debt 712 786 2,207 1,709 Interest on mandatorily redeemable preferred securities of subsidiary trust 882 883 2,647 2,647 ------- ------ -------- ------- Total interest expense 23,091 26,929 74,525 74,030 ------- ------ -------- ------- Net interest income 34,705 28,620 95,428 83,004 Provision for loan losses 2,286 1,222 4,817 3,698 ------- ------ -------- ------- Net interest income after provision for loan losses 32,419 27,398 90,611 79,306 Non-interest income: Income from fiduciary activities 1,136 1,298 3,463 3,646 Service charges on deposit accounts 3,637 3,204 10,792 9,131 Technology services 2,681 2,509 7,655 7,585 Other service charges, commissions, and fees 2,819 2,469 7,793 6,877 Investment securities gains, net of losses 16 1 142 45 Other real estate (expense) income, net 17 475 (106) 790 Other income 1,144 791 3,232 2,202 ------- ------ -------- ------- Total non-interest income 11,450 10,747 32,971 30,276 ------- ------ -------- ------- Non-interest expense: Salaries, wages and employee benefits 15,866 13,345 45,785 38,139 Occupancy, net 2,391 2,075 7,010 5,963 Furniture and equipment 3,062 2,667 8,950 8,060 FDIC insurance 112 106 330 329 Goodwill and core deposit intangible amortization 900 917 2,730 2,454 Other expenses 7,611 6,560 22,081 19,256 ------- ------ -------- ------- Total non-interest expense 29,942 25,670 86,886 74,201 ------- ------ -------- ------- Income before income taxes 13,927 12,475 36,696 35,381 Income tax expense 5,075 4,481 13,242 12,682 ------- ------ -------- ------- Net income $ 8,852 7,994 23,454 22,699 ======= ====== ======== ======= Basic earnings per common share $ 1.13 1.01 2.99 2.86 Diluted earnings per common share $ 1.12 1.00 2.95 2.82 </TABLE> See accompanying notes to unaudited consolidated financial statements. 4
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Dollars in thousands, except share and per share data) (Unaudited) <TABLE> <CAPTION> Accumulated other Total Common Retained comprehensive stockholders' stock earnings income (loss) equity -------- --------- ------------- ---------- <S> <C> <C> <C> <C> Balance at January 1, 2001 $ 7,101 $ 190,410 $ 475 $ 197,986 Comprehensive income(1): Net income -- 23,454 -- 23,454 Net unrealized gains on available-for-sale investment securities, net of reclassification adjustment -- -- 7,571 7,571 Cumulative effect of adoption of Statement No. 133, transfer of held-to-maturity investment securities to available-for-sale, net of tax benefit -- -- (569) (569) --------- Total comprehensive income 30,456 --------- Common stock transactions: 83,689 shares retired (3,243) -- -- (3,243) 23,516 shares issued 929 -- -- 929 Cash dividends declared: Common ($0.84 per share) -- (6,603) -- (6,603) -------- --------- ------- --------- Balance at September 30, 2001 $ 4,787 $ 207,261 $ 7,477 $ 219,525 ======== ========= ======= ========= Balance at January 1, 2000 $ 10,831 $ 168,837 $(6,030) $ 173,638 Comprehensive income(1): Net income -- 22,699 -- 22,699 Net unrealized gains on available-for-sale investment securities, net of reclassification adjustment -- -- 1,839 1,839 --------- Total comprehensive income 24,538 --------- Common stock transactions: 103,804 shares retired (4,108) -- -- (4,108) 29,586 shares issued 1,133 -- -- 1,133 Cash dividends declared: Common ($0.81 per share) -- (6,433) -- (6,433) -------- --------- ------- --------- Balance at September 30, 2000 $ 7,856 $ 185,103 $(4,191) $ 188,768 ======== ========= ======= ========= </TABLE> (1) Comprehensive income for the three months ended September 30, 2001 and 2000 was $12,385 and $10,642, respectively. See accompanying notes to unaudited consolidated financial statements. 5
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> For the nine months ended September 30, ---------------------------- 2001 2000 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income $ 23,454 $ 22,699 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed losses of joint ventures (66) -- Provision for loan and other real estate losses 4,852 3,698 Depreciation and amortization 10,216 9,072 Net premium amortization (discount accretion) on investment securities (115) 219 Gain on sales of investment securities (142) (45) Loss (gain) on sales of other real estate 27 (410) Gain on sales of loans (1,612) (1,249) Loss (gain) on disposals of premises and equipment 47 (176) Write-down of bank premises 85 -- Deferred income taxes 1,571 (71) Decrease in interest receivable (190) (6,480) Increase in other assets (5,263) (1,865) Increase (decrease) in accrued interest payable (800) 3,923 Decrease in accounts payable and accrued expenses (1,144) (754) --------- --------- Net cash provided by operating activities 30,920 28,561 --------- --------- Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (4,336) (8,924) Available-for-sale (410,188) (35,590) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 31,113 37,466 Available-for-sale 303,273 23,174 Proceeds from sales of investment securities: Held-to-maturity -- 2,001 Available-for-sale 17,647 7,556 Extensions of credit to customers, net of repayments (124,283) (163,041) Recoveries of loans charged-off 1,569 1,908 Proceeds from sales of other real estate 1,870 980 Acquisition of branch banks, net of cash acquired -- (13,288) Capital distributions from (contributions to) joint ventures (200) 100 Capital expenditures, net (8,709) (18,363) --------- --------- Net cash used in investing activities (192,244) (166,021) --------- --------- Cash flows from financing activities: Net increase in deposits 244,413 114,595 Net increase in Federal funds purchased and repurchase agreements 18,326 71,897 Net increase (decrease) in other borrowed funds 589 (30,643) Repayment of long-term borrowings (23,960) (4,242) Proceeds from advances of long-term borrowings 25,900 24,900 Amortization of debt issuance costs 71 70 Proceeds from issuance of common stock 854 1,088 Payments to retire common stock (3,243) (4,108) Dividends paid on common stock (6,603) (6,433) --------- --------- Net cash provided by financing activities 256,347 167,124 --------- --------- Net increase in cash and cash equivalents 95,023 29,664 Cash and cash equivalents at beginning of period 169,245 162,306 --------- --------- Cash and cash equivalents at end of period $ 264,268 $ 191,970 ========= ========= Supplemental disclosure of cash flow information: Cash paid during period for income taxes $ 9,282 $ 11,360 ========= ========= Cash paid during period for interest $ 75,325 $ 70,231 ========= ========= </TABLE> See accompanying notes to unaudited consolidated financial statements. 6
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (1) Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the "Company") contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position at September 30, 2001 and December 31, 2000, and the results of operations and cash flows for each of the periods ended September 30, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. The balance sheet information at December 31, 2000 is derived from audited consolidated financial statements, however, certain reclassifications have been made to conform to the September 30, 2001 presentation, none of which were material. (2) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," addressing a limited number of implementation issues in applying SFAS No. 133. SFAS 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 September 30, 2001, 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. Upon adoption of SFAS No. 133, the Company transferred held-to-maturity investment securities with amortized costs and market values of $104,011 and $103,442, respectively, into the available-for-sale investment category. 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 September 30, 2001 and December 31, 2000, respectively, 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 for impairment. 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. Management expects that adoption of these provisions will not have a material effect on the consolidated financial statements, results of operations or liquidity of the Company and will continue to evaluate the implications of implementation. Goodwill and core deposit intangible amortization expense for the nine months ended September 30, 2001 and 2000 was $2,730 and $2,454, respectively. 7
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (2) New Accounting Pronouncements (continued) 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. SFAS also supersedes the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. 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 expects adoption of the provisions of SFAS No. 144 will not have a material impact on the consolidated financial statements, results of operations or liquidity of the Company. (3) Computation of Earnings per Share Basic earnings per common share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 2001 and 2000. <TABLE> <CAPTION> Three months ended Nine months ended 9/30/01 9/30/00 9/30/01 9/30/00 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income $ 8,852 $ 7,994 $ 23,454 $ 22,699 ========== ========== ========== ========== Average outstanding shares - basic 7,837,872 7,905,605 7,853,869 7,930,220 Add: effect of dilutive stock options 54,091 114,285 86,685 123,157 ---------- ---------- ---------- ---------- Average outstanding shares - diluted 7,891,963 8,019,890 7,940,554 8,053,377 ========== ========== ========== ========== Basis earnings per share $ 1.13 $ 1.01 $ 2.99 $ 2.86 ========== ========== ========== ========== Diluted earnings per share $ 1.12 $ 1.00 $ 2.95 $ 2.82 ========== ========== ========== ========== </TABLE> (4) Cash Dividends On October 15, 2001, the Company declared and paid a cash dividend on third quarter earnings of $0.34 per share to stockholders of record on that date. It has been the Company's practice to pay quarterly dividends based upon earnings. The October 2001 dividend represents 30% of the Company's net income for the quarter ended September 30, 2001 exclusive of compensation expense related to outstanding stock options. (5) Commitments and Contingencies In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity. First Interstate BancSystem, Inc. (the "Parent Company") and the Billings office of First Interstate Bank, Montana ("FIB Montana") are the anchor tenants in a building owned by a partnership in which FIB Montana is one of the two partners, and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. At September 30, 2001 the partnership had full recourse indebtedness of $8.4 million. 8
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (5) Commitments and Contingencies (continued) The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, in varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend for no more than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. (6) Comprehensive Income - Reclassification Adjustments The reconciliation of unrealized holding gains (losses) arising during the period to the net change in unrealized gain follows: <TABLE> <CAPTION> Nine Months Ended September 30, 2001 2000 --------- --------- <S> <C> <C> Disclosure of reclassification amount: Unrealized and realized holding gains arising during the period, net of income tax expense of $4,895 in 2001 and income tax benefit of $1,194 in 2000 $ 7,658 $ 1,866 Cumulative effect of adoption of Statement No. 133, transfer of held-to-maturity securities to available-for-sale, net of income tax benefit of $364 (569) -- Less reclassification adjustment for gains included in net income, net of income tax expense of $55 in 2001 and $18 in 2000 (87) (27) ------- ------- Net change in unrealized gain on available-for-sale investment securities $ 7,002 $ 1,839 ======= ======= </TABLE> (7) Noncash Investing and Financing Activities The Company transferred loans and real property of $580 and $1,425 to other real estate owned during the nine-month periods ended September 30, 2001 and 2000. In conjunction with the exercise of stock options, the Company transferred $75 and $46 from accrued liabilities to common stock during the nine-month periods ended September 30, 2001 and 2000, respectively. 9
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (8) Stock Option Plans During the third quarter 2001, the Company adopted the 2001 Stock Option Plan, a non-qualified stock option plan for certain officers and directors of the Company. Stock option awards are granted at the discretion of the Company's Board of Directors. All options granted have a per share exercise price equal to fair value at the date of grant. Options granted may be subject to a vesting schedule and can be exercised for a period not to exceed ten years from the date of grant. Stock issued in conjunction with the exercise of options is subject to a shareholder agreement. Under the pre-existing stock option plan, the Company allowed option holders to exercise their options and receive a net cash settlement. During the third quarter 2001, option holders exercised 442,059 options. (9) Segment Information The Company has two significant lines of business, community banking and technology services. Support services provided by the Company's holding company, non-bank subsidiaries, operations department and mortgage servicing branch are included in Other Support Services. Expenses for centrally provided services are allocated to the reporting segments based primarily upon estimated usage of services. The Community Banking reporting segment encompasses consumer and commercial banking services offered to individual and business customers. Services provided primarily include the acceptance of deposits, extensions of credit and fee-based trust and brokerage services. The Technology Services reporting segment encompasses technology services provided to affiliated and non-affiliated financial institutions including ATM processing support, item proof and capture services ("IP services"), wide area network services and system support of general ledger, investment security, loan and deposit systems. Other Support Services include operational, financial, administrative and treasury services provided to affiliates and mortgage servicing to affiliated and non-affiliated financial institutions. On January 1, 2001, the Company transferred IP services from Other Support Services to the Technology Services reporting segment. Because expenses associated with IP services provided prior to 2001 cannot be distinguished from the expenses of other support services provided, the 2000 amounts reported below have not been reclassified to reflect the transfer. Increases in Technology Services revenues from other operating segments and non-interest expenses for the three and nine-month periods ended September 30, 2001 as compared to the same period in the prior year are primarily due to the transfer of IP services. Selected segment information for the three and nine month periods ended September 30, 2001 and 2000 follows: <TABLE> <CAPTION> Three Months Ended September 30, 2001 ------------------------------------------------------------------------ Other Community Technology Support Elimination Consolidated Banking Services Services Entries Total ------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Net interest income (expense) $36,576 $ 27 $(1,898) $ -- $34,705 Provision for loan losses 1,946 -- 340 -- 2,286 ------- ------ ------- -------- ------- Net interest income (expense) after provision for loan losses 34,630 27 (2,238) -- 32,419 Non-interest income: External sources 6,796 2,683 1,971 11,450 Other operating segments -- 3,013 947 (3,960) -- Non-interest expense 23,761 4,459 5,682 (3,960) 29,942 ------- ------ ------- -------- ------- Income (loss) before income taxes 17,665 1,264 (5,002) -- 13,927 Income tax expense (benefit) 6,220 502 (1,647) -- 5,075 ------- ------ ------- -------- ------- Net income (loss) $11,445 $ 762 $(3,355) $ -- $ 8,852 ======= ====== ======= ======== ======= Depreciation and amortization expense $ 1,235 $ 4 $ 2,190 $ -- $ 3,429 ======= ====== ======= ======== ======= </TABLE> 10
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except share and per share data) (9) Segment Information (continued) <TABLE> <CAPTION> Nine Months Ended September 30, 2001 ------------------------------------------------------------------------------------ Other Community Technology Support Elimination Consolidated Banking Services Services Entries Total ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Net interest income (expense) $100,467 $ 94 $ (5,133) $ -- $95,428 Provision for loan losses 4,417 -- 400 -- 4,817 -------- ------- -------- -------- ------- Net interest income (expense) after provision for loan losses 96,050 94 (5,533) -- 90,611 Non-interest income: External sources 20,091 7,661 5,219 -- 32,971 Other operating segments -- 8,700 2,840 (11,540) -- Non-interest expense 69,372 12,627 16,427 (11,540) 86,886 -------- ------- -------- -------- ------- Income (loss) before income taxes 46,769 3,828 (13,901) -- 36,696 Income tax expense (benefit) 16,270 1,520 (4,548) -- 13,242 -------- ------- -------- -------- ------- Net income (loss) $ 30,499 $ 2,308 $ (9,353) $ -- $23,454 ======== ======= ======== ======== ======= Depreciation and amortization expense $ 3,638 $ 11 $ 6,567 $ -- $10,216 ======== ======= ======== ======== ======= </TABLE> <TABLE> <CAPTION> Three Months Ended September 30, 2000 ------------------------------------------------------------------------------------ Other Community Technology Support Elimination Consolidated Banking Services Services Entries Total ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Net interest income (expense) $30,305 $ 39 $(1,724) $ -- $28,620 Provision for loan losses 1,222 -- -- -- 1,222 ------- ------ ------- -------- ------- Net interest income (expense) after Provision for loan losses 29,083 39 (1,724) -- 27,398 Non-interest income: External sources 6,044 2,182 2,521 10,747 Other operating segments -- 1,691 897 (2,588) -- Non-interest expense 20,785 2,633 4,840 (2,588) 25,670 ------- ------ ------- -------- ------- Income (loss) before income taxes 14,342 1,279 (3,146) -- 12,475 Income tax expense (benefit) 4,984 507 (1,010) -- 4,481 ------- ------ ------- -------- ------- Net income (loss) $ 9,358 $ 772 $(2,136) $ -- $ 7,994 ======= ====== ======= ======== ======= Depreciation and amortization expense $ 1,062 $ 1 $ 2,103 $ -- $ 3,166 ======= ====== ======= ======== ======= </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, 2000 ------------------------------------------------------------------------------------ Other Community Technology Support Elimination Consolidated Banking Services Services Entries Total ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Net interest income (expense) $87,444 $ 67 $ (4,507) $ -- $83,004 Provision for loan losses 3,698 -- -- -- 3,698 ------- ------ -------- -------- ------- Net interest income (expense) after Provision for loan losses 83,746 67 (4,507) -- 79,306 Non-interest income: External sources 17,496 6,401 6,379 30,276 Other operating segments -- 5,132 2,692 (7,824) -- Non-interest expense 60,618 7,959 13,448 (7,824) 74,201 ------- ------ -------- -------- ------- Income (loss) before income taxes 40,624 3,641 (8,884) -- 35,381 Income tax expense (benefit) 14,195 1,445 (2,958) -- 12,682 ------- ------ -------- -------- ------- Net income (loss) $26,429 $2,196 $ (5,926) $ -- $22,699 ======= ====== ======== ======== ======= Depreciation and amortization expense $ 3,104 $ 3 $ 5,965 $ -- $ 9,072 ======= ====== ======== ======== ======= </TABLE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion focuses on significant factors affecting the financial condition and results of operations of the Company during the three and nine-month periods ended September 30, 2001, with comparisons to 2000 as applicable. All earnings per share figures are presented on a diluted basis. FORWARD LOOKING STATEMENTS Certain statements contained in this review are "forward looking statements" that involve risk and uncertainties. The Company wishes to caution readers that the following factors, among others, may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include general economic and business conditions in those areas in which the Company operates, credit quality, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans and changes in governmental regulations. ASSET LIABILITY MANAGEMENT Interest Rate Sensitivity. The primary objective of the Company's asset liability management process is to optimize net interest income while prudently managing balance sheet risks by understanding the levels of risk accompanying its decisions and monitoring and managing these risks. The ability to optimize net interest margin is largely dependent on the achievement of an interest rate spread that can be managed during 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. Management monitors the sensitivity of net interest margin by utilizing income simulation models and traditional interest rate gap analysis. Liquidity. The objective of liquidity management is to maintain the Company's ability to meet the day-to-day cash flow requirements of its customers who either wish to withdraw funds or require funds to meet their credit needs. The Company manages its liquidity position to meet the needs of its customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of its stockholders. The Company monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position, principally through deposit receipts and check payments; loan originations, extensions, and repayments; and management of investment securities. The Company's current liquidity position is also supported by the management of its investment portfolio, which provides a structured flow of maturing and reinvestable funds that could be converted to cash, should the need arise. Maturing balances in the Company's loan portfolio also provide options for cash flow management. The ability to redeploy these funds is an important source of immediate to long-term liquidity. Additional sources of liquidity include customer deposits, Federal funds lines, borrowings and access to capital markets. As a holding company, the Parent Company is a corporation separate and apart from its subsidiaries, and therefore, provides for its own liquidity. A large portion of the Parent Company's revenues are dividends received from its banking subsidiaries. In general, each banking subsidiary is limited, without the prior consent of its state and federal regulators, to paying dividends that do not exceed the current year net profits together with retained earnings from the two preceding calendar years. In addition, state or federal regulators may impose regulatory dividend limitations or prohibitions in certain circumstances. The banking subsidiaries are not subject to dividend limitations other than general limitations. Capital Adequacy. The objective of capital adequacy is to provide adequate capitalization to assure depositor, investor and regulatory confidence. The intent is to provide sufficient capital funds to support growth and to absorb fluctuations in income so that operations can continue in periods of uncertainty while at the same time ensuring investable funds are available to foster expansion. As of September 30, 2001 and December 31, 2000, respectively, each of the Company's banking subsidiaries were considered well-capitalized under regulatory capital guidelines. 12
OVERVIEW The Company reported net income of $8.9 million, or $1.12 per share, during the third quarter 2001, as compared to $8.0 million, or $1.00 per share, recorded for the same period in 2000. Net income for the nine months ended September 30, 2001 of $23.5 million, or $2.95 per share, increased from $22.7 million, or $2.82 per share, for the same period in 2000. These increases are primarily due to increases in net interest margin resulting from effective management of funding costs combined with increases in loan fees driven by high real estate loan volumes and a $988 thousand non-credit loss recorded during the second quarter 2000 EARNING ASSETS Earning assets of $2,878 million at September 30, 2001 increased $289 million, or 11.2%, from $2,589 million at December 31, 2000. Loans. Total loans increased $121 million, or 6.1%, to $2,093 million as of September 30, 2001 from $1,972 million as of December 31, 2000. This increase was achieved through internal growth. All major categories of loans increased from December 31, 2000 with the most significant growth occurring in loans secured by real estate. 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. Investment securities increased $75 million, or 12.0%, to $688 million as of September 30, 2001 from $614 million as of December 31, 2000. This increase was primarily funded by deposit growth. Cash and Cash Equivalents. 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. Cash and cash equivalents increased $95 million, or 56.1%, to $264 million as of September 30, 2001 from $169 million as of December 31, 2000. Excess funds generated primarily by deposit growth were temporarily invested in short-term cash equivalent investments. Income from Earning Assets. Interest income increased $2.3 million, or 4.0%, to $57.8 million for the three months ended September 30, 2001 from $55.5 million for the same period in 2000. Year-to-date interest income through September 30, 2001 of $170.0 million increased $13.0 million, or 8.2%, from $157.0 million for the same period in 2000. Third quarter and year-to-date increases in interest income are attributable to increases in earning assets resulting from internal growth and acquisitions, partially offset by lowering yields. On a fully taxable equivalent basis, average earning assets for the nine-month period ended September 30, 2001 of $2,692 million yielded 8.55% while average earning assets of $2,424 million for the nine months ended September 30, 2000 yielded 8.77%. New branches opened or acquired since September 2000 contributed $7.0 million of interest income during the first nine months of 2001 on average earning assets of $112.3 million. FUNDING SOURCES The Company utilizes traditional funding sources to support its earning asset portfolio including deposits, borrowings, Federal funds purchased and repurchase agreements. The Company's funding requirements were met primarily through deposit growth. Deposits. Total deposits increased $245 million, or 10.3%, to $2,610 million as of September 30, 2001 from $2,365 million as of December 31, 2000 as a result of internal growth. Increases in deposits were used to fund growth in loans, investment securities and cash equivalents. Other Funding Sources. In addition to deposits, the Company also uses short-term borrowings from the Federal Home Loan Bank of Seattle, repurchase agreements with commercial depositors, long-term borrowings and, on a seasonal basis, Federal funds purchased. Other funding sources increased $21 million, or 7.0%, to $318 million as of September 30, 2001 from $297 million as of December 31, 2000. 13
Cost of Funding Sources. Interest expense for the three months ended September 30, 2001 of $23.1 million decreased $3.8 million, or 14.3%, from $26.9 million for the same period in 2000 due primarily to decreases interest rates. Year-to-date interest expense through September 30, 2001 of $74.5 million increased $495 thousand, or less than 1.0%, from $74.0 million for the same period in the prior year. Increases resulting from higher volumes of interest-bearing liabilities and shifts in the mix of interest-bearing liabilities toward higher yielding time deposits were largely offset by decreases in interest rates. Average interest-bearing liabilities and trust preferred securities of $2,326 million during the nine months ended September 30, 2001 cost 4.28% while average interest-bearing liabilities and trust preferred securities of $2,123 million during the nine months ended September 30, 2000 cost 4.66%. New branches opened or acquired since June 2000 recorded interest expense of $3.4 million during the first nine months of 2001 on average interest-bearing liabilities of $102.9 million. NET INTEREST INCOME The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. Net interest income on a fully-taxable equivalent ("FTE") basis of $97.7 million for the nine months ended September 30, 2001 increased $12.7 million, or 14.9%, from $85.0 million for the same period in the prior year. The net interest margin ratio increased 16 basis points to 4.85% for the nine months ended September 30, 2001 as compared to 4.69% for the same period in 2000 primarily due to increases in loan yields resulting from high real estate loan volumes combined with effective management of funding costs and a steepening yield curve. PROVISION FOR LOAN LOSS Provision for Loan Losses. The provision for loan losses creates an allowance for loan losses inherent within the portfolio. The loan loss provision each period is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of underlying collateral on problem loans and general economic conditions in the Company's markets. The Company performs a quarterly assessment of risks inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Company makes a provision for loan losses. Fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses. Ultimate loan losses may vary from current estimates. The provision for loan losses increased $1.1 million, or 87.1%, to $2.3 million for the three months ended September 30, 2001 as compared to $1.2 million for the same period in the prior year. Year-to-date through September 30, 2001, the provision for loan losses increased $1.1 million, or 30.3%, to $4.8 million from $3.7 million for the same period in the prior year. Increases in the provision for loan losses result primarily from softening economic conditions in the Company's market areas, particularly in agriculture, transportation and hotel/motel market sectors; and, the slowing regional and national economies. Non-Performing Loans. Non-performing loans include loans past due 90 days or more and still accruing interest, non-accrual loans and restructured loans. Non-performing loans decreased $4 million, or 11.7%, to $29 million as of September 30, 2001 as compared to $33 million as of September 30, 2000. The ratio of non-performing loans to total loans as of September 30, 2001 was 1.37% as compared to 1.39% as of December 31, 2000 and 1.67% as of September 20, 2000. NON-INTEREST INCOME The Company's principal sources of non-interest 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. Non-interest income increased $703 thousand, or 6.5%, to $11.4 million for the three months ended September 30, 2001 from $10.7 million for the same period in 2000. During the nine-month period ended September 30, 2001, non-interest income of $33.0 million increased $2.7 million, or 8.9%, from $30.3 million for the same period in the prior year. Significant components of the increases are discussed below. 14
Service Charges on Deposit Accounts. Service charges on deposit accounts increased $433 thousand, or 13.5%, to $3.6 million for the quarter ended September 30, 2001 from $3.2 million for the same period in 2000. For the nine months ended September 30, 2001 service charges on deposit accounts of $10.8 million increased $1.7 million, or 18.2%, from $9.1 million for the same period in the prior year. New branches opened or acquired since June 2000 contributed approximately 46% of the third quarter increase and 35% of the year-to-date increase. The remaining increases occurred primarily in overdraft fees. Technology Services Revenues. Technology services revenues increased $172 thousand, or 6.9%, to $2.7 million for the quarter ended September 30, 2001 from $2.5 million for the same period in the prior year. Year-to-date through September 30, 2001, technology services revenues of $7.7 million increased $70 thousand, or 0.9%, from $7.6 million for the same period in the prior year. Increases in core data processing revenues were largely offset by decreases in IP service revenues. Other Service Charges, Commissions and Fees. Other service charges, commissions and fees increased $350 thousand, or 14.2%, to $2.8 million for the quarter ended September 30, 2001 as compared to $2.5 million for the same period in the prior year. For the nine months ended September 30, 2001, other service charges, commissions and fees of $7.8 million increased $916 thousand, or 13.3%, from $6.9 million for the same period in the prior year. These increases are primarily due to loan servicing income resulting from internal growth and the acquisition of loan servicing rights in late December 2000, and increases in debit card interchange fees resulting from increases in transaction volumes. Other Real Estate Income/Expense. Variations in net other real estate (OREO) income/expense during the periods resulted principally from fluctuations in gains and losses on sales of OREO. The Company incurred net OREO expense of $106 thousand during the nine-month period ended September 30, 2001 as compared to net OREO income of $790 thousand during the same period in 2000. Other Income. Other income primarily includes check printing income, agency stock dividends and gains on the sale of fixed assets. Other income increased $353 thousand, or 44.6%, to $1.1 million for the three months ended September 30, 2001 from $791 thousand for the same period in the prior year primarily due to non-recurring revenue of $209 resulting from the demutualization of a life insurance company and a $75 partial recovery of previously recorded non-credit losses. Other income for the nine months ended September 30, 2001 of $3.2 million increased $1.0 million, or 46.8%, from $2.2 million for the same period in the prior year primarily due to the partial recovery of three previously recorded non-credit losses aggregating $271 thousand, non-recurring revenue of $209 thousand resulting from the demutualization of a life insurance company and increases in the earnings of unconsolidated joint ventures of $313 thousand. OTHER NON-INTEREST EXPENSE Other operating expenses increased $4.2 million, or 16.6%, to $29.9 million for the quarter ended September 30, 2001 from $25.7 million for the same period in 2000. Other operating expenses of $86.9 million for the nine months ended September 30, 2001 increased $12.7 million, or 17.1%, from $74.2 million for the same period in 2000. Significant components of this increase are discussed below: Salaries, Wages and Employee Benefits Expenses. Salaries, wages and employee benefits expenses increased $2.6 million, or 18.9%, to $15.9 million for the three months ended September 30, 2001 as compared to $13.3 million for the same period in the prior year. Salaries, wages and employee benefits expenses of $45.8 million for the nine months ended September 30, 2001 increased $7.7 million, or 20.0%, from $38.1 million for the same period in the prior year. Approximately 26% of the third quarter increase and 30% of the year-to-date increase are attributable to new branch openings or acquisitions since June 2000. In addition, approximately $327 thousand of the third quarter increase and $1.0 million of the year-to-date increase is the result of compensation expense related to outstanding stock options. The remaining increases are primarily due to increases in administrative staffing levels to support the Company's expanding number of branches, increases in group health insurance premiums and inflationary wage increases. Occupancy. Occupancy expense increased $316 thousand, or 15.2%, to $2.4 million for the three months ended September 30, 2001 compared to $2.1 million for the same period in 2000. For the nine months ended September 30, 2001, occupancy expense of $7.0 million increased $1.0 million, or 17.6% from $6.0 million for 15
the same period in the prior year. Approximately 59% of the third quarter increase and 51% of the year-to-date increase are attributable to new branches openings or acquisitions since June 2000. The remaining increases are primarily due to increased depreciation and maintenance costs associated with remodels and upgrades to existing facilities. Furniture and Equipment. Furniture and equipment expenses increased $395 thousand, or 14.8%, to $3.1 million for the three months ended September 30, 2001 from $2.7 million for the same period in 2000. Furniture and equipment expenses of $9.0 million for the nine months ended September 30, 2001 increased $890 thousand, or 11.0%, from $8.1 million for the same period in 2000. Approximately 27% of the third quarter increase and 34% of the year-to-date increase are attributable to new branch openings or acquisitions since June 2000. The remaining increases are largely due to depreciation expense associated with the Company's continuing investment in technology and other costs of upgrading computer hardware and software, principally associated with check-imaging technology. Goodwill and Core Deposit Intangible Amortization Expense. Goodwill and core deposit amortization expense for the nine months ended September 30, 2001 of $2.7 million increased $276 thousand, or 11.2%, from $2.5 million for the same period in the prior year. These increases are due to the acquisition of two banking offices during the third quarter of 2000. Other Expenses. Other expenses include advertising and public relation costs, legal, audit and other professional fees; office supply, postage, freight, telephone and travel expenses; other losses; and mortgage servicing intangible amortization. Other expenses increased $1.0 million, or 16.0%, to $7.6 million for the quarter ended September 30, 2001 from $6.6 million for the same period in 2000. Other expenses increased $2.8 million, or 14.7%, to $22.1 million for the nine months ended September 30, 2001 from $19.3 million for the same period in the prior year. Approximately 24% of the third quarter increase and 39% of the year-to-date increase are directly attributable to new branch openings or acquisitions since September 2000. In addition, during the first nine months of 2001, the Company recognized increases in: losses on disposals of fixed assets of $191 thousand; its share of losses incurred by unconsolidated joint ventures of $247 thousand; losses on charged-off checking accounts of $127 thousand; impairment charges on its capitalized mortgage servicing rights of $387 thousand; unrealized holding losses of $98 thousand on insurance company demutualization stocks; and write downs of the value of bank premises of $85 thousand. The remaining year-to-date increase is primarily due to increases in employee education and other employee expense associated with sales training initiatives; increases in professional fees related to regulatory reporting and sales training; and, increases in postage, express mail, office supplies and telephone expenses. SEGMENT RESULTS The following paragraphs contain a discussion of the financial performance of each of the Company's reportable segments for the three and nine-month periods ended September 30, 2001 and 2000. Community Banking. Community banking encompasses consumer and commercial banking services offered to individual and business customers. The Community Banking reporting segment's net income increased $2.0 million, or 22.3%, to $11.4 million for the three-month period ended September 30, 2001 as compared to $9.4 million for the same period in the prior year. Year-to-date net income through September 30, 2001 of $30.5 million increased $4.1 million, or 15.4%, from $26.4 for the same period in the prior year. Year-to-date and third quarter increases are primarily due to increases in net interest income and loan and overdraft fees; the partial recovery of three previously recorded non-credit losses; and increases in the earnings of an unconsolidated joint venture. These increases were partially offset by net losses incurred by new branches opened or acquired since June 2000; inflationary wage and benefits increases; and, losses incurred on charged-off checking accounts and sales of fixed assets. Technology Services. The Technology Services reporting segment encompasses technology services provided to the Company's banking subsidiaries and to non-affiliated financial institutions. Technology services' net income was flat at $762 thousand for the three-month period ended September 30, 2001 as compared to $772 thousand for the same period in the prior year. Net income for the nine-month period ended September 30, 2001 increased $112 thousand, or 5.1%, to $2.3 million as compared to $2.2 million for the same period in 2000 primarily due to increases in core data processing revenues from other operating segments. On January 1, 2001, the Company transferred IP services from Other Support Services to the Technology Services reporting segment. 16
Because expenses associated with IP services prior to 2001 cannot be distinguished from the expenses of other support services provided, the 2000 amounts reported have not been reclassified to reflect the transfer. Increases in Technology Services revenues from other operating segments and external sources and increases in non-interest expenses during the three and nine-month periods ended September 30, 2001 as compared to the same period in the prior year are primarily due to revenues and expenses associated with IP services. Other Support Services. Other Support Services consist primarily of the Company's operational, financial, administrative, treasury and mortgage servicing centers. Net losses generated by the Other Support Services reporting segment of $3.4 million for the three months ended September 30, 2001 increased $1.3 million, or 57.1%, from $2.1 million for the same period in the prior year. Net losses for the nine-month period ended September 30, 2001 increased $3.4 million, or 57.8%, to $9.4 million as compared to $5.9 million for the same period in the prior year. These increases in net losses are primarily due to provisions for loan losses, impairment of mortgage servicing rights and losses incurred by unconsolidated joint ventures recorded during the second and third quarters of 2001; compensation expense related to outstanding stock options; professional fees associated with regulatory reporting and sales training initiatives; higher interest expense and goodwill and core deposit intangible amortization expense resulting from an acquisition in third quarter of 2000; and, increases in postage expense. Theses expenses were partially offset by increases in loan servicing income and debit card interchange fees and non-recurring revenues resulting from the receipt of insurance company demutualization stocks. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 30, 2001, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in the Company's December 31, 2000 Form 10-K. 17
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes in legal proceedings from December 31, 2000. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR INDEBTEDNESS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote of security holders at the Annual Meeting of Shareholders of First Interstate BancSystem, Inc. on May 18, 2001: <TABLE> <CAPTION> Matter For Against Not Voted --------------------------------------------------------------------------------------------- <S> <C> <C> <C> Amendment of Bylaws 6,371,004 5,158 1,498,593 Election of Directors Nominees: C. Gary Jennings 6,380,302 81 1,494,372 Robert L. Nance 6,380,302 81 1,494,372 Robert H. Waller 6,378,761 1,622 1,494,372 Elouise C. Cobell 6,380,302 81 1,494,372 Richard A. Dorn 6,378,761 1,622 1,494,372 Larry F. Suchor 6,380,302 81 1,494,372 William B. Ebzery 6,379,035 1,348 1,494,372 Directors Continuing in Office: Homer A. Scott, Jr. 6,380,302 81 1,494,372 John M. Heyneman, Jr. 6,380,302 81 1,494,372 Joel T. Long 6,378,761 1,622 1,494,372 Terry W. Payne 6,378,761 1,622 1,494,372 David H. Crum 6,378,761 1,622 1,494,372 </TABLE> ITEM 5. OTHER INFORMATION Not applicable or required. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) A report on Form 8-K dated July 17, 2001 was filed by the Company providing notification of engagement of Ernst & Young LLP as principal accountants. 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: FIRST INTERSTATE BANCSYSTEM, INC. Date November 9, 2001 /s/ THOMAS W. SCOTT ---------------------- ----------------------------------- Thomas W. Scott Chief Executive Officer Date November 9, 2001 /s/ TERRILL R. MOORE ---------------------- ----------------------------------- Terrill R. Moore Senior Vice President and Chief Financial Officer 19