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 March 31, 2005

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.)


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 7,980,086 shares of common stock outstanding on March 31, 2005.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

(Unaudited)


	March 31,			December 31,
	2005			2004
Assets
Cash and due from banks	$	184,559		$	235,251
Federal funds sold		121,890			37,590
Interest bearing deposits in banks		31,158			83,067
Investment securities:
Available-for-sale		728,937			766,669
Held-to-maturity (estimated fair values of $107,773 as of March 31, 2005 and $103,754 as of December 31, 2004)		106,004			100,646

Total investment securities		834,941			867,315

Loans		2,769,056			2,739,509
Less allowance for loan losses		42,660			42,141

Net loans		2,726,396			2,697,368

Premises and equipment, net		119,181			121,928
Accrued interest receivable		22,109			20,569
Company-owned life insurance		61,066			60,645
Mortgage servicing rights, net of accumulated amortization and impairment reserve		18,275			17,624
Goodwill		37,390			37,390
Core deposit intangibles, net of accumulated amortization		1,964			2,217
Net deferred tax asset		6,480			1,911
Other assets		35,802			34,418

Total assets	$	4,201,211		$	4,217,293


Liabilities and Stockholders’ Equity

Deposits:
Noninterest bearing	$	739,105		$	756,687
Interest bearing		2,533,283			2,564,994

Total deposits		3,272,388			3,321,681

Securities sold under repurchase agreements		478,448			449,699
Accrued interest payable		10,581			9,529
Accounts payable and accrued expenses		23,561			16,899
Other borrowed funds		4,001			7,995
Long-term debt		60,043			61,926
Subordinated debenture held by subsidiary trust		41,238			41,238

Total liabilities		3,890,260			3,908,967

Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or outstanding as of March 31, 2005 or December 31, 2004		–			–
Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,980,086 shares as of March 31, 2005 and 7,980,300 shares as of December 31, 2004		36,609			36,803
Retained earnings		283,784			275,172
Unearned compensation – restricted stock		(500	)		(425	)
Accumulated other comprehensive loss, net		(8,942	)		(3,224	)

Total stockholders’ equity		310,951			308,326

Total liabilities and stockholders’ equity	$	4,201,211		$	4,217,293

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
	ended March 31,
	2005			2004
Interest income:
Interest and fees on loans	$	43,412		$	39,023
Interest and dividends on investment securities:
Taxable		6,828			6,408
Exempt from federal taxes		1,073			1,003
Interest on deposits in banks		165			1
Interest on federal funds sold		489			132

Total interest income		51,967			46,567


Interest expense:
Interest on deposits		9,213			8,522
Interest on securities sold under repurchase agreements		2,159			524
Interest on other borrowed funds		18			11
Interest on long-term debt		644			568
Interest on subordinated debenture held by subsidiary trust		600			459

Total interest expense		12,634			10,084

Net interest income		39,333			36,483

Provision for loan losses		1,625			2,418

Net interest income after provision for loan losses		37,708			34,065

Noninterest income:
Other service charges, commissions and fees		5,550			4,516
Service charges on deposit accounts		4,059			4,674
Technology services revenues		3,342			2,896
Income from origination and sale of loans		1,779			1,723
Income from fiduciary activities		1,575			1,378
Investment securities gains (losses), net		(692	)		30
Other income		1,336			1,265

Total noninterest income		16,949			16,482


Noninterest expense:
Salaries, wages and employee benefits		19,678			18,340
Occupancy, net		3,311			2,688
Furniture and equipment		3,987			3,545
Mortgage servicing rights amortization		1,171			851
Professional fees		624			770
Outsourced technology services		431			557
Core deposit intangibles amortization		253			283
Other expenses		6,941			8,535

Total noninterest expense		36,396			35,569

Income before income taxes		18,261			14,978
Income tax expense		6,302			5,260

Net income	$	11,959		$	9,718


Basic earnings per common share	$	1.50		$	1.23


Diluted earnings per common share	$	1.48		$	1.22

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 other			Total
	Common			Retained			compensation -			comprehensive			stockholders’
	stock			earnings			restricted stock			income (loss)			equity
Balance at December 31, 2004	$	36,803			275,172			(425	)		(3,224	)		308,326

Comprehensive income:
Net income		—			11,959			—			—			11,959
Unrealized losses on available-for-sale investment securities, net of income tax benefit of $3,982		—			—			—			(6,138	)		(6,138	)
Less reclassification adjustment for losses included in net income, net of income tax benefit of $272		—			—			—			420			420

Other comprehensive income (loss)														(5,718	)

Total comprehensive income														6,241

Common stock transactions:
16,975 shares retired		(1,016	)		—			—			—			(1,016	)
15,761 shares issued		766			—			—			—			766
1,000 shares issued pursuant to restricted stock plan		56			—			(56	)		—			—

Remeasurement and amortization of restricted stock awards		—			—			(19	)		—			(19	)

Cash dividends declared:
Common ($0.48 per share)		—			(3,347	)		—			—			(3,347	)


Balance at March 31, 2005	$	36,609			283,784			(500	)		(8,942	)		310,951


Balance at December 31, 2003	$	33,187			242,105			—			(1,066	)		274,226

Comprehensive income:
Net income		—			9,718			—			—			9,718
Unrealized gains on available-for-sale investment securities, net of income tax expense of $2,275		—			—			—			3,557			3,557
Less reclassification adjustment for gains included in net income, net of income tax expense of $12		—			—			—			(18	)		(18	)

Other comprehensive income														3,539

Total comprehensive income														13,257

Common stock transactions:
21,817 shares retired		(1,106	)		—			—			—			(1,106	)
5,732 shares issued		284			—			—			—			284

Cash dividends declared:
Common ($0.34 per share)		—			(2,690	)		—			—			(2,690	)


Balance at March 31, 2004	$	32,365			249,133			—			2,473			283,971

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 three months
	ended March 31,
	2005			2004
Cash flows from operating activities:
Net income	$	11,959			9,718
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings (distributions in excess of earnings) of joint ventures		(145	)		61
Provision for loan losses		1,625			2,418
Depreciation		3,527			2,940
Amortization of core deposit intangibles		253			283
Amortization of mortgage servicing rights		1,171			851
Net premium amortization on investment securities		438			673
Net loss (gain) on sale of investment securities		692			(30	)
Net gain on sale of loans		(1,779	)		(1,723	)
Net loss (gain) on sale of property and equipment		32			(22	)
Net impairment charges (reversals) on mortgage servicing rights		(463	)		1,029
Net increase in cash surrender value of company-owned life insurance		(421	)		(441	)
Change in unearned compensation-restricted stock		(19	)		–
Deferred income taxes		(854	)		(476	)
Changes in operating assets and liabilities:
Decrease in loans held for sale		5,679			21,448
Decrease (increase) in interest receivable		(1,540	)		299
Increase in other assets		(443	)		(145	)
Increase (decrease) in accrued interest payable		1,052			(192	)
Increase in accounts payable and accrued expenses		6,662			1,167

Net cash provided by operating activities		27,426			37,858

Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity		(5,501	)		(3,746	)
Available-for-sale		(57,525	)		(141,707	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity		101			23
Available-for-sale		39,517			143,195
Proceeds from sales of available-for-sale investment securities		45,057			117
Net decrease (increase) in cash equivalent mutual funds classified as available-for-sale investment securities		162			(123	)
Purchases and originations of mortgage servicing rights		(1,359	)		(1,638	)
Extensions of credit to customers, net of repayments		(35,709	)		(36,203	)
Recoveries of loans charged-off		592			530
Proceeds from sales of other real estate		400			605
Net capital expenditures		(1,454	)		(6,898	)
Acquisitions, net of cash and cash equivalents acquired		–			269

Net cash used in investing activities		(15,719	)		(45,576	)

Cash flows from financing activities:
Net decrease in deposits		(49,293	)		(19,385	)
Net increase in repurchase agreements		28,749			12,637
Net increase (decrease) in other borrowed funds		(3,994	)		262
Borrowings of long-term debt		3,500			7,025
Repayments of long-term debt		(5,383	)		(7,756	)
Net decrease in debt issuance costs		10			11
Proceeds from issuance of common stock		766			284
Payments to retire common stock		(1,016	)		(1,106	)
Dividends paid on common stock		(3,347	)		(2,690	)

Net cash used in financing activities		(30,008	)		(10,718	)

Net decrease in cash and cash equivalents		(18,301	)		(18,436	)
Cash and cash equivalents at beginning of period		355,908			281,442

Cash and cash equivalents at end of period	$	337,607		$	263,006

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. (the “Parent Company” or “FIBS”) 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 March 31, 2005 and December 31, 2004 and the results of operations and cash flows for each of the three month periods ended March 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2004 is derived from audited consolidated financial statements, however, certain reclassifications, none of which were material, have been made to conform to the March 31, 2005 presentation.

    These consolidated financial 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, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

(2)   Stock-Based Compensation

    The Company has two stock-based employee compensation plans, the 2004 Restricted Stock Award Plan and the 2001 Stock Option Plan. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Compensation cost related to restricted stock awards 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. Stock options granted pursuant to the 2001 Stock Option Plan have an exercise price equal to the fair value of the Company’s common stock at date of grant. Accordingly, the Company does not recognize compensation expense for stock option awards. The following table illustrates the effect on net income and earnings per share if compensation expense had been determined for stock option awards based on an estimate of fair value of the option at the date of grant consistent with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended.


	Three months ended March 31,
	2005			2004
Net income as reported	$	11,959		$	9,718
Deduct: total stock-based employee compensation expense determined under a fair value based method for stock option awards, net of tax effect		(103	)		(85	)


Pro forma net income	$	11,856		$	9,633


Basic earnings per share	$	1.50		$	1.23
Pro forma basic earnings per share		1.49			1.22


Diluted earnings per share	$	1.48


	Index		Page
Part I.	Financial Information

	Item 1 –	Financial Statements (unaudited)

		Consolidated Balance Sheets March 31, 2005 and December 31, 2004		3

		Consolidated Statements of Income Three months ended March 31, 2005 and 2004		4

		Consolidated Statements of Stockholders’ Equity and Comprehensive Income Three months ended March 31, 2005 and 2004		5

		Consolidated Statements of Cash Flows Three months ended March 31, 2005 and 2004		6

		Notes to Unaudited Consolidated Financial Statements		7

	Item 2 –	Management’s Discussion and Analysis of Financial Condition And Results of Operations		11

	Item 3 –	Quantitative and Qualitative Disclosures about Market Risk		18

	Item 4 –	Controls and Procedures		18

Part II.	Other Information

	Item 1 –	Legal Proceedings		19

	Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds		19

	Item 3 –	Defaults Upon Senior Securities		19

	Item 4 –	Submission of Matters to a Vote of Security Holders		19

	Item 5 –	Other Information		19

	Item 6 –	Exhibits		19

Signatures				22
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to Section 906

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

(1)	Basis of Presentation

	In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. (the “Parent Company” or “FIBS”) 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 March 31, 2005 and December 31, 2004 and the results of operations and cash flows for each of the three month periods ended March 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2004 is derived from audited consolidated financial statements, however, certain reclassifications, none of which were material, have been made to conform to the March 31, 2005 presentation.

	These consolidated financial 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, 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

(2)	Stock-Based Compensation

	The Company has two stock-based employee compensation plans, the 2004 Restricted Stock Award Plan and the 2001 Stock Option Plan. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Compensation cost related to restricted stock awards 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. Stock options granted pursuant to the 2001 Stock Option Plan have an exercise price equal to the fair value of the Company’s common stock at date of grant. Accordingly, the Company does not recognize compensation expense for stock option awards. The following table illustrates the effect on net income and earnings per share if compensation expense had been determined for stock option awards based on an estimate of fair value of the option at the date of grant consistent with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended.