FIRST INTERSTATE BANCSYSTEM INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004


o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

COMMISSION FILE NUMBER 000-49733

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)


Montana		81-0331430

(State or other jurisdiction of incorporation or organization)		(IRS Employer 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 7,990,030 shares of common stock outstanding on September 30, 2004.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
(Unaudited)


	September 30,			December 31,
	2004			2003
Assets
Cash and due from banks	$	233,071		$	214,529
Federal funds sold		56,415			66,455
Interest bearing deposits in banks		6,816			458
Trading assets		2,385			1,722
Investment securities:
Available-for-sale		743,826			707,444
Held-to-maturity		97,203			92,143

Total investment securities		841,029			799,587
Loans		2,674,963			2,554,899
Less allowance for loan losses		42,396			38,940

Net loans		2,632,567			2,515,959
Premises and equipment, net		120,015			112,441
Accrued interest receivable		22,015			19,411
Goodwill		37,390			37,626
Core deposit intangible, net of accumulated amortization		2,488			3,438
Mortgage servicing assets, net of accumulated amortization and impairment reserve		16,871			14,405
Other real estate owned, net		1,647			1,999
Deferred tax asset, net		3,458			3,438
Other assets		86,995			88,276

Total assets	$	4,063,162		$	3,879,744

Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing	$	726,097		$	688,712
Interest bearing		2,510,421			2,468,009

Total deposits		3,236,518			3,156,721
Securities sold under repurchase agreements		401,078			323,406
Accrued interest payable		9,925			10,206
Accounts payable and accrued expenses		21,518			19,220
Other borrowed funds		8,051			7,137
Long-term debt		42,535			47,590
Subordinated debenture held by deconsolidated subsidiary trust		41,238			41,238

Total liabilities		3,760,863			3,605,518
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of September 30, 2004 or December 31, 2003		—			—
Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,990,030 shares as of September 30, 2004 and 7,912,699 shares as of December 31, 2003		37,342			33,187
Unearned compensation — restricted stock		(462	)		—
Retained earnings		266,478			242,105
Accumulated other comprehensive income, net		(1,059	)		(1,066	)

Total stockholders’ equity		302,299			274,226

Total liabilities and stockholders’ equity	$	4,063,162		$	3,879,744

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)


	For the three months						For the nine months
	ended September 30,						ended September 30,
	2004			2003			2004			2003
Interest income:
Interest and fees on loans	$	40,586		$	39,976		$	119,171		$	118,864
Interest and dividends on investment securities and trading assets:
Taxable		6,221			5,765			18,991			19,518
Exempt from Federal taxes		1,031			992			3,063			2,951
Interest on deposits in banks		26			1			33			19
Interest on Federal funds sold		279			105			498			346

Total interest income		48,143			46,839			141,756			141,698

Interest expense:
Interest on deposits		8,513			9,809			25,361			32,144
Interest on Federal funds purchased		—			6			33			47
Interest on securities sold under repurchase agreements		1,018			502			2,143			1,727
Interest on other borrowed funds		6			10			37			41
Interest on long-term debt		539			633			1,668			1,799
Interest on subordinated debenture held by deconsolidated subsidiary trust		513			—			1,424			—
Interest on trust preferred securities		—			429			—			2,034

Total interest expense		10,589			11,389			30,666			37,792

Net interest income		37,554			35,450			111,090			103,906
Provision for loan losses		2,387			2,422			7,346			7,422

Net interest income after provision for loan losses		35,167			33,028			103,744			96,484
Noninterest income:
Income from fiduciary activities		1,434			1,271			4,251			3,760
Service charges on deposit accounts		4,838			4,776			14,498			12,926
Technology services		3,497			3,006			9,736			8,611
Other service charges, commissions and fees		7,215			8,543			20,762			24,839
Investment securities gains (losses), net		(52	)		(1,594	)		(762	)		(86	)
Other real estate income (expense)		(23	)		(10	)		4			(64	)
Other income		2,813			1,315			5,129			3,558

Total noninterest income		19,722			17,307			53,618			53,544

Noninterest expense:
Salaries, wages and employee benefits		19,124			17,831			55,124			51,924
Occupancy, net		2,979			2,521			8,580			8,037
Furniture and equipment		3,848			3,316			11,121			9,756
FDIC insurance		114			116			351			355
Core deposit intangible amortization expense		275			305			841			915
Other expenses		11,521			7,681			29,860			30,839

Total noninterest expense		37,861			31,770			105,877			101,826

Income before income taxes		17,028			18,565			51,485			48,202
Income tax expense		5,942			6,735			18,109			17,300

Net income	$	11,086		$	11,830		$	33,376		$	30,902

Basic earnings per common share	$	1.41		$	1.51		$	4.23		$	3.93

Diluted earnings per common share	$	1.39		$	1.50		$	4.19		$	3.92

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(Dollars in thousands, except share and per share data)
(Unaudited)


							Unearned			Accumulated
							compensation			other			Total
	Common			Retained			on restricted			comprehensive			stockholders'
	stock			earnings			stock			income			equity
Balance at December 31, 2003	$	33,187		$	242,105		$	—		$	(1,066	)	$	274,226
Comprehensive income:
Net income		—			33,376			—			—			33,376
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $293		—			—			—			(458	)		(458	)
Less reclassification adjustment for losses included in net income, net of income tax benefit of $297		—			—			—			465			465

Other comprehensive income														7

Total comprehensive income														33,383

Common stock transactions:
84,237 shares retired		(4,463	)		—			—			—			(4,463	)
151,568 shares issued		8,106			—			—			—			8,106
10,000 shares issued pursuant to restricted stock plan		512			—			(512	)		—			—
Remeasurement and amortization of restricted stock awards		—			—			50			—			50
Cash dividends declared:
Common ($1.14 per share)		—			(9,003	)		—			—			(9,003	)

Balance at September 30, 2004	$	37,342		$	266,478		$	(462	)	$	(1,059	)	$	302,299

Balance at December 31, 2002	$	3,085		$	236,724		$	—		$	4,045		$	243,854
Comprehensive income:
Net income		—			30,902			—			—			30,902
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $3,683		—			—			—			(5,759	)		(5,759	)
Less reclassification adjustment for losses included in net income, net of income tax expense of $34		—			—			—			52			52

Other comprehensive income														(5,707	)

Total comprehensive income														25,195

Common stock transactions:
48,326 shares retired		(2,219	)		—			—			—			(2,219	)
157,789 shares issued		7,233			—			—			—			7,233
Recapitalization of common stock from retained earnings		25,000			(25,000	)		—			—			—
Cash dividends declared:
Common ($0.98 per share)		—			(7,681	)		—			—			(7,681	)

Balance at September 30, 2003	$	33,099		$	234,945		$	—		$	(1,662	)	$	266,382

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)


	For the nine months
	ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	33,376		$	30,902
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of joint ventures		(485	)		(264	)
Provision for loan losses		7,346			7,422
Depreciation and core deposit amortization		10,034			8,895
Amortization and remeasurement of unearned compensation on restricted stock		50			—
Net premium amortization on investment securities		1,681			3,428
Net loss on sale of investment securities		762			86
Net gain on sale of loans		(3,556	)		(6,958	)
Net gain on sale of other real estate owned		(74	)		(43	)
Net loss on sale of property and equipment		18			29
Increase in valuation reserve for mortgage servicing assets		104			131
Write-down of property and equipment pending disposition		—			507
Deferred income taxes		(28	)		815
Changes in operating assets and liabilities:
Increase in trading investment securities		(663	)		(741	)
Increase in interest receivable		(2,827	)		(644	)
Decrease in other assets		3,931			578
Decrease in accrued interest payable		(138	)		(2,385	)
Increase in accounts payable and accrued expenses		2,305			3,483

Net cash provided by operating activities		51,836			45,241

Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity		(10,219	)		(11,351	)
Available-for-sale		(350,224	)		(719,384	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity		5,074			5,234
Available-for-sale		286,115			619,565
Proceeds from sales of available-for-sale investment securities		25,384			88,228
Net decrease in cash equivalent mutual funds classified as available-for-sale investment securities		—			40,081
Purchases and originations of mortgage servicing assets		(5,104	)		(8,459	)
Extensions of credit to customers, net of repayments		(136,225	)		(296,776	)
Recoveries of loans charged-off		1,536			1,791
Proceeds from sales of other real estate		1,535			952
Net capital expenditures		(17,428	)		(21,642	)
Acquisition (disposition) of banking office, net of cash and cash equivalents		(19,537	)		2,842
Capital distributions from joint ventures		251			200

Net cash used in investing activities		(218,842	)		(298,719	)

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)


	For the nine months
	ended September 30,
	2004			2003
Cash flows from financing activities:
Net increase in deposits	$	112,483		$	170,728
Net increase in repurchase agreements		78,849			34,778
Net increase in other borrowed funds		914			1,220
Borrowings of long-term debt		24,975			59,600
Repayments of long-term debt		(30,030	)		(38,844	)
Net decrease in debt issuance costs		35			949
Proceeds from issuance of subordinated debenture held by deconsolidated subsidiary trust		—			40,000
Redemption of capital trust preferred securities		—			(40,000	)
Proceeds from issuance of common stock		8,106			3,404
Payments to retire common stock		(4,463	)		(2,219	)
Dividends paid on common stock		(9,003	)		(7,681	)

Net cash provided by financing activities		181,866			221,935

Net increase (decrease) in cash and cash equivalents		14,860			(31,543	)
Cash and cash equivalents at beginning of period		281,442			310,892

Cash and cash equivalents at end of period	$	296,302		$	279,349

Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	30,947		$	40,008

Cash paid during the year for taxes	$	16,133		$	15,498

See accompanying notes to unaudited consolidated financial statements.

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 of the Company at September 30, 2004, the results of operations for each of the three and nine-month periods ended September 30, 2004 and 2003 and cash flows for each of the nine-month periods ended September 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America. The balance sheet information at December 31, 2003 is derived from audited consolidated financial statements, however, certain reclassifications, none of which were material, have been made to conform to the September 30, 2004 presentation.

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

(2) Stock-Based Compensation

Restricted Stock Award Plan. On March 25, 2004, the Company’s Board of Directors approved the 2004 Restricted Stock Award Plan (the “Restricted Stock Plan”). Under the Restricted Stock Plan, Company common stock may be issued at the discretion of the Company’s Board of Directors to certain officers and directors of the Company for no consideration as compensation for services. Shares issued under the Restricted Stock Plan are subject to terms and conditions determined by the Board at the date of issuance. During 2004, the Company issued 10,000 shares of nonvested restricted stock (“Restricted Shares”). The Restricted Shares become fully vested if the Company achieves defined performance goals for the year ending December 31, 2006 and the recipient is employed by the Company on April 1, 2007. During the vesting period, the participants have voting rights and receive dividends.

Stock issued under the Restricted Stock Plan is subject to a shareholder’s agreement granting the Company the right of first refusal to repurchase vested shares and providing the Company a right to call some or all of the vested shares under certain circumstances. As of September 30, 2004, the Company had 15,000 additional shares available for issuance under the Restricted Stock Plan.

Stock Option Plans. The Company has two nonqualified stock option plans, the 2001 Stock Option Plan (the “New Stock Option Plan”) and the Stock Option and Stock Appreciation Rights Plan (the “Old Option Plan”). Stock options and stock appreciation rights (“SARs”) awards are granted to certain officers and directors of the Company at the discretion of the Company’s Board of Directors. During 2004, all awards outstanding under the Old Option Plan were exercised or cancelled.

Under the New Stock Option Plan, all options granted have an exercise price equal to fair value at the date of grant, may be subject to vesting as determined by the Compensation Committee of the Company’s Board of Directors and can be exercised for periods of up to ten years from the date of grant. Stock issued upon exercise of options is subject to a shareholder’s agreement prohibiting transfer of the stock for a period of six months following the exercise. In addition, the shareholder’s agreement grants the Company a right of first refusal to repurchase the stock and provides the Company the right to call some or all of the stock under certain conditions.

Accounting for Stock-Based Compensation Plans. The Company accounts for its stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees.” Under APB No. 25, 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. Options awarded prior to September 2001 and all restricted stock awards are accounted for under variable plan accounting whereby compensation expense or benefit is 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. Option awards subsequent to August 2001 are accounted for under fixed plan accounting. Under fixed plan accounting, the Company does not recognize compensation expense if the exercise price of the option is equal to the fair value of the common stock at date of grant.


Index			Page
Part I. Financial Information
	Item 1 —	Financial Statements (unaudited)
		Consolidated Balance Sheets September 30, 2004 and December 31, 2003		3
		Consolidated Statements of Income Three and nine months ended September 30, 2004 and 2003		4
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income Nine months ended September 30, 2004 and 2003		5
		Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2003		6
		Notes to Unaudited Consolidated Financial Statements		8
	Item 2 —	Management’s Discussion and Analysis of Financial Condition And Results of Operations		14
	Item 3 —	Quantitative and Qualitative Disclosures about Market Risk		19
	Item 4 —	Controls and Procedures		19
Part II. Other Information
	Item 1 —	Legal Proceedings		20
	Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds		20
	Item 3 —	Defaults Upon Senior Securities		20
	Item 4 —	Submission of Matters to a Vote of Security Holders		20
	Item 5 —	Other Information		21
	Item 6 —	Exhibits		21
Signatures				22