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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2006, or
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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)
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Montana
(State or other jurisdiction of incorporation or organization)
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81-0331430
(IRS Employer Identification No.) |
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401 North 31st Street
Billings, Montana
(Address of principal executive offices)
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59116
(Zip Code) |
(406) 255-5390
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock without par value per
share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes þ No
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. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
o Large accelerated filer o Accelerated filer þ Non-accelerated filer
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
o Yes þ No
Aggregate market value (appraised minority value) of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrants
most recently completed second fiscal quarter, June 30, 2006, was $47,096,814.
The number of shares outstanding of the registrants common stock as of February 28, 2007 was
8,186,709.
Documents Incorporated by Reference
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held May 4, 2007. The information required by Part III of this
Form 10-K is incorporated by reference from such Proxy Statement.
TABLE OF CONTENTS
PART I
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the
Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve
inherent risks and uncertainties. Any statements about our plans, objectives, expectations,
strategies, beliefs, or future performance or events constitute forward-looking statements. Such
statements are identified as those that include words or phrases such as believes, expects,
anticipates, plans, trend, objective, continue or similar expressions or future or
conditional verbs such as will, would, should, could, might, may or similar
expressions. Forward-looking statements involve known and unknown risks, uncertainties,
assumptions, estimates and other important factors that could cause actual results to differ
materially from any results, performance or events expressed or implied by such forward-looking
statements. All forward-looking statements are qualified in their entirety by reference to the
factors discussed in this report including, among others, the following risk factors discussed more
fully in Item 1A hereof: (i) credit risk; (ii) business concentration and economic conditions in
Montana and Wyoming; (iii) declines in real estate values; (iv) changes in interest rates; (v)
inability to meet liquidity requirements; (vi) competition; (vii) failure of technology; (viii)
breach in information system security; (ix) ineffective internal operational controls; (x)
difficulties in execution of business strategy; (xi) disruption of vital infrastructure and other
business interruptions; (xii) litigation pertaining to fiduciary responsibilities; (xiii) changes
in or noncompliance with governmental regulations; (xiv) restrictions on dividends and stock
redemptions; (xv) capital required to support our bank subsidiary; and (xvi) investment risks
affecting holders of common stock. Because the foregoing factors could cause actual results or
outcomes to differ materially from those expressed or implied in any forward-looking statements,
undue reliance should not be placed on any forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement to reflect events or circumstances after the
date on which the statement is made or to reflect the occurrence of future events or developments.
Item 1. Business
Overview
When we refer to we, our, and us in this report, we mean First Interstate BancSystem,
Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the
parent company, First Interstate BancSystem, Inc. When we refer to the Bank in this report, we
mean First Interstate Bank, our only bank subsidiary.
We are a financial and bank holding company that was incorporated in Montana in 1971. We are
headquartered in Billings, Montana. As of December 31, 2006, we had assets of $5.0 billion,
deposits of $3.7 billion and total stockholders equity of $410 million. Our wholly-owned bank
subsidiary, First Interstate Bank, has 49 banking offices in 29 Montana and Wyoming communities.
Through the Bank, we deliver a comprehensive range of banking products and services, including
demand and savings deposits; commercial, consumer, agricultural and real estate loans; mortgage
loan origination and servicing; and, trust, employee benefit, investment and insurance services.
We serve individuals, businesses, municipalities and other entities throughout our market areas.
We are the largest banking organization in Montana and Wyoming.
We also conduct other financial activities through wholly-owned nonbank subsidiaries. Our
principal consolidated nonbank subsidiaries include the following companies:
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i_Tech Corporation, or i_Tech, which provides technology services to the Bank and
other non-affiliated customers in Montana, Wyoming and seven additional states. i_Tech
also provides processing support for 2,337 ATM locations in 32 states. |
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FIBCT, LLC, which provides internet-based products and services to financial
institutions and small to medium-sized businesses, including web page design,
development and hosting; logo design; domain registration; development of
internet-based training, marketing and e-commerce products; and, software development. |
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First Interstate Insurance Agency, Inc., which provides insurance products to
individual and business customers. |
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FI Reinsurance, Ltd., domiciled in Nevis Island, West Indies, which underwrites, as
reinsurer, credit-related life and disability insurance. |
We are the licensee under a perpetual trademark license agreement granting us an exclusive,
nontransferable license to use the First Interstate name and logo in Montana, Wyoming and
surrounding states.
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We derive our income principally from interest charged on loans, and to a lesser extent, from
interest and dividends earned on investments. We also derive income from noninterest sources such
as fees received in connection with various banking and financial related services. Our principal
expenses include interest expense on deposits and borrowings, operating expenses, provisions for
loan losses and income tax expense.
Strategic Vision
The banking industry continues to experience change with respect to regulatory matters,
consolidation, consumer needs and economic and market conditions. We believe we can best address
this changing environment through our Strategic Vision. Our Strategic Vision is to maintain and
enhance our leadership in the financial and social fabrics of the communities we serve through a
commitment to customer satisfaction, innovative management, employee development and community
involvement.
Operating Segments
Our business consists of two reportable operating segments, Community Banking and Technology
Services. Financial information and analysis of our reportable operating segments is included in
Managements Discussion and Analysis of Financial Condition and Results of Operations Results of
Operations Operating Segment Results included in Part II, Item 7 of this report and in Note 24
of the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this report.
Community Banking
Our principal operating segment, Community Banking, encompasses commercial and consumer
banking services provided through our Bank, primarily the acceptance of deposits; extensions of
credit; mortgage loan origination and servicing; and, trust, employee benefit, investment and
insurance services. We believe the communities we serve provide a stable core deposit and funding
base, and are economically diversified across a number of industries, including agriculture,
energy, mining, timber processing, tourism, government services, education, retail, and
professional and medical services. Our community banking philosophy emphasizes providing customers
with commercial and consumer banking products and services locally using a personalized service
approach while strengthening the communities in our market areas through community service
activities. We grant our banking offices significant autonomy in delivering and pricing products
in response to local market considerations and customer needs. This autonomy enables our banking
offices to remain competitive and enhances their relationships with the customers they serve. We
also emphasize accountability, however, by establishing performance and incentive standards that
are tied to net income and other success measures at the individual banking office and market
levels. We believe this combination of autonomy and accountability allows our banking offices to
provide personalized customer service while remaining attentive to financial performance. Our
profitability, market share and asset size have been enhanced in recent years principally through
organic loan and deposit growth in market areas served by our existing banking offices.
Lending Activities
We have comprehensive credit policies establishing company-wide underwriting and documentation
standards to assist management in the lending process and to limit our risk. These credit policies
establish lending guidelines based on the experience and authority levels of the personnel located
in each banking office and market. The policies also establish thresholds at which loan requests
must be recommended by our credit committee and/or approved by the Banks board of directors.
We offer short and long-term real estate, consumer, commercial, agricultural and other loans
to individuals and businesses in our market areas. While each loan must meet minimum underwriting
standards established in our credit policies, lending officers are granted certain levels of
autonomy in approving and pricing loans to assure that the banking offices are responsive to
competitive issues and community needs in each market area.
Additional information about our loan portfolio is included in Managements Discussion and
Analysis of Financial Condition and Results of Operations Financial Condition Loans, included
in Part II, Item 7 of this report.
Deposit Products
We offer traditional depository products including checking, savings and time deposits.
Deposits at the Bank are insured by the Federal Deposit Insurance Corporation, or FDIC, up to
statutory limits. We also offer repurchase
agreements primarily to commercial and municipal depositors. Under repurchase agreements, we
sell investment securities held by the
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Bank to our customers under an agreement to repurchase the
investment securities at a specified time or on demand. The Bank does not, however, physically
transfer the investment securities. As of December 31, 2006, all outstanding repurchase agreements
were due in one business day.
Additional information about our deposits, repurchase agreements and other funding sources is
included in Managements Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition Deposits, Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition Other Borrowed Funds, and Managements Discussion
and Analysis of Financial Condition and Results of Operations Financial Condition Federal Funds
Purchased and Securities Sold Under Repurchase Agreements, included in Part II, Item 7 of this
report.
Financial Services
We provide a wide range of trust, employee benefit, investment management, insurance, agency
and custodial services to individuals, businesses and nonprofit organizations. These services
include the administration of estates and personal trusts; management of investment accounts for
individuals, employee benefit plans and charitable foundations; and, insurance planning. At
December 31, 2006, the estimated fair value of trust assets held in a fiduciary or agent capacity
was $3.1 billion.
Centralized Services
We have centralized certain operational activities to provide consistent service levels to our
customers company-wide, to gain efficiency in management of those activities and to ensure
regulatory compliance. Centralized operational activities generally support our banking offices in
the delivery of products and services to customers and include marketing; credit review; credit
cards; mortgage loan sales and servicing; indirect consumer loan purchasing and processing; loan
collections; and, other operational activities. Additionally, policy and management direction and
specialized staff support services have been centralized to enable the Bank to serve its markets
more effectively. These services include credit administration, finance, accounting, human
resource management, internal audit and other support services.
Competition
Commercial banking is highly competitive. We compete with other financial institutions
located in Montana and Wyoming and adjoining states for deposits, loans and trust, employee
benefit, investment and insurance accounts. We also compete with savings and loan associations,
savings banks and credit unions for deposits and loans. In addition, we compete with large banks
in major financial centers and other financial intermediaries, such as consumer finance companies,
brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds
and certain government agencies as well as major retailers, all actively engaged in providing
various types of loans and other financial services. We generally compete on the basis of customer
service and responsiveness to customer needs, available loan and deposit products, rates of
interest charged on loans, rates of interest paid for deposits and the availability and pricing of
trust, employee benefit, investment and insurance services.
Technology Services
The Technology Services operating segment encompasses services provided by i_Tech to
affiliated and non-affiliated customers, including core application data processing; ATM and debit
card processing; item proof and capture; wide area network services and system support; and,
processing support for a network of ATM locations.
i_Tech, provides centralized technology support services to the Bank, including system support
of the general ledger, investment security, loan, deposit, web banking, document imaging,
management reporting and cash management systems. i_Tech also manages our wide-area network and
the ATM network used by the Bank and provides item proof and capture services. These technology
services are performed through the use of computer hardware owned by the Bank and leased to i_Tech
and software licensed by i_Tech.
While historically the technology services industry has been highly decentralized, there is an
accelerating trend toward consolidation resulting in fewer companies competing over larger
geographic regions. i_Techs competitors vary in size and include national and regional
operations. i_Tech generally competes on the basis of customer service, price, product offering,
reliability and available technology.
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Employees
At December 31, 2006, we employed 1,608 full-time equivalent employees, none of whom are
represented by a collective bargaining agreement. We strive to be the employer of choice in the
markets we serve and consider our employee relations to be good.
Regulation and Supervision
Regulatory Authorities
We are subject to extensive regulation under federal and state laws. A description of the
significant elements of the laws and regulations applicable to us is summarized below. This
summary is not intended to include a summary of all laws applicable to us, and the description is
qualified in its entirety by reference to the full text of the applicable statutes, regulations and
policies. In addition to laws and regulations, state and federal banking regulatory agencies may
issue policy statements, interpretive letters and similar written guidance applicable to us. Those
issuances may affect the conduct of our business or impose additional regulatory obligations.
As a bank and financial holding company, we are subject to regulation under the Bank Holding
Company Act of 1956 and to supervision, regulation and regular examination by the Federal Reserve.
Because we are a public company, we are also subject to the disclosure and regulatory requirements
of the Securities Act of 1933 and the Securities Exchange Act of 1934 as administered by the
Securities and Exchange Commission.
The Bank is subject to supervision and regular examination by its primary banking regulators,
the Federal Reserve and the State of Montana, Division of Banking and Financial Institutions, and,
with respect to its activities in Wyoming, the State of Wyoming, Department of Audit. The Banks
deposits are insured by the deposit insurance fund of the FDIC in the manner and to the extent
provided by law. The Bank is subject to the Federal Deposit Insurance Act, or FDIA, and FDIC
regulations relating to deposit insurance and may also be subject to supervision and examination by
the FDIC.
The extensive regulation of the Bank limits both the activities in which the Bank may engage
and the conduct of its permitted activities. Further, the laws and regulations impose reporting
and information collection obligations on the Bank. The Bank incurs significant costs relating to
compliance with the various laws and regulations and the collection and retention of information.
First Interstate Insurance Agency, a wholly-owned nonbank subsidiary of ours, is subject to
regulation and supervision by the Montana State Auditors Office and laws and regulations affecting
the insurance industry generally.
Financial Holding Company
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source
of financial and managerial strength to its subsidiary banks and to commit resources to support its
subsidiary banks. Under this source of strength doctrine, the Federal Reserve may require a bank
holding company to make capital injections into a troubled subsidiary bank. They may also claim
that the bank holding company is engaging in unsafe and unsound practices if it fails to commit
resources to such a subsidiary bank. A capital injection may be required at times when the bank
holding company does not have the resources to provide it.
We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to
acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after
such acquisition, we would own or control more than 5% of its voting stock.
Under the Gramm-Leach-Bliley Act of 1999, or GLB Act, we may engage in certain business
activities that are determined by the Federal Reserve to be financial in nature or incidental to
financial activities as well as all activities authorized to bank holding companies generally. In
most circumstances, we must notify the Federal Reserve of our financial activities within a
specified time period following our initial engagement in each business or activity. If the type
of proposed business or activity has not been previously determined by the Federal Reserve to be
financially related or incidental to financial activities, we must receive the prior approval of
the Federal Reserve before engaging in the activity.
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We may engage in authorized financial activities, such as providing investment services,
provided that we remain a financial holding company and meet certain regulatory standards of being
well-capitalized and well-managed. If we fail to meet the well-capitalized or well-managed
regulatory standards, we may be required to cease our financial holding company activities or, in
certain circumstances, to divest of the Bank. We do not currently engage in significant financial
holding company businesses or activities not otherwise permitted to bank holding companies
generally. Should we engage in certain financial activities currently authorized to financial
holding companies, we may become subject to additional laws, regulations, supervision and
examination by regulatory agencies.
Restrictions on Transfers of Funds to Us and the Bank
Dividends from the Bank are the primary source of funds for the payment of our expenses of
operating and for the payment of dividends to our shareholders. The Bank is limited, under both
state and federal law, in the amount of dividends that may be paid from time to time. In general,
the Bank is limited, without the prior consent of its primary state and federal banking regulators,
to paying dividends that do not exceed the current year net profits together with retained earnings
from the two preceding calendar years.
A state or federal banking regulator may impose, by regulatory order or agreement of the Bank,
specific dividend limitations or prohibitions in certain circumstances. The Bank is not subject to
a specific regulatory dividend limitation other than generally applicable limitations. In addition
to regulatory dividend limitations, the Bank dividends are, in certain circumstances, limited by
covenants in our debt instruments if the Bank fails to meet specified regulatory capital ratios.
In addition, the Bank may not lend funds to, or otherwise extend credit to or for our benefit
or the benefit of our affiliates, except on specified types and amounts of collateral and other
terms required by state and federal law. The Federal Reserve also has authority to define and
limit the transactions between banks and their affiliates. Federal Reserve Regulation W, among
other things, imposes significant additional limitations on transactions in which the Bank may
engage with us or other affiliates in addition to the limits under the federal statutes.
Capital Standards and Prompt Corrective Action
Banks and bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines and, additionally
for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.
The Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and
leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that
banking organizations have adequate capital given the risk levels of assets and off-balance sheet
financial instruments. Under the guidelines, banking organizations are required to maintain minimum
ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance
sheet items, such as letters of credit). For purposes of calculating the ratios, a banking
organizations assets and some of its specified off-balance sheet commitments and obligations are
assigned to various risk categories. Generally, under the applicable guidelines, a financial
institutions capital is divided into two tiers. These tiers are:
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Core Capital (Tier 1). Tier 1 capital includes common equity, non-cumulative
perpetual preferred stock (excluding auction rate issues), and minority interests in
equity accounts of consolidated subsidiaries, less both goodwill and, with certain
limited exceptions, all other intangible assets. Bank holding companies, however, may
include up to a limit of 25% of cumulative preferred stock in their Tier 1 capital. |
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Supplementary Capital (Tier 2). Tier 2 capital includes, among other things,
cumulative and limited-life preferred stock, hybrid capital instruments, mandatory
convertible securities, qualifying subordinated debt, and the allowance for loan and
lease losses, subject to certain limitations. |
Institutions that must incorporate market risk exposure into their risk-based capital
requirements may also have a third tier of capital in the form of restricted short-term
subordinated debt.
We, like other bank holding companies, currently are required to maintain Tier 1 capital and
total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively,
of our total risk-weighted assets. The Bank, like other depository institutions, is required to
maintain similar capital levels under capital adequacy guidelines. For a depository institution to
be considered well capitalized under the regulatory framework for prompt corrective action, its
Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis,
respectively.
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Bank holding companies and banks are also required to comply with minimum leverage ratio
requirements. The leverage ratio is the ratio of a banking organizations Tier 1 capital to its
total adjusted quarterly average assets (as defined for regulatory purposes). The requirements
necessitate a minimum leverage ratio of 3.0% for financial holding companies and banks that either
have the highest supervisory rating or have implemented the appropriate federal regulatory
authoritys risk-adjusted measure for market risk. All other financial holding companies and banks
are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified
by an appropriate regulatory authority. For a depository institution to be considered well
capitalized under the regulatory framework for prompt corrective action, its leverage ratio must
be at least 5.0%. The Federal Reserve Board has not advised us of any specific minimum leverage
ratio applicable to us or the Bank.
The FDIA requires, among other things, the federal banking agencies to take prompt corrective
action in respect of depository institutions that do not meet minimum capital requirements. The
FDIA sets forth the following five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized. A
depository institutions capital tier will depend upon how its capital levels compare with various
relevant capital measures and certain other factors, as established by regulation. The relevant
capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
Under the regulations adopted by the federal regulatory authorities, a bank will be: (i) well
capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a
specific capital level for any capital measure; (ii) adequately capitalized if the institution
has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0%
or greater, and a leverage ratio of 4.0% or greater (3.0% in certain circumstances ) and is not
well capitalized; (iii) undercapitalized if the institution has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage
ratio of less than 4.0% (3.0% in certain circumstances); (iv) significantly undercapitalized if
the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital
ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) critically
undercapitalized if the institutions tangible equity is equal to or less than 2.0% of average
quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital
category that is lower than indicated by its capital ratios if it is determined to be in an unsafe
or unsound condition or if it receives an unsatisfactory examination rating with respect to certain
matters. Throughout 2006, our regulatory capital ratios and those of the Bank were in excess of the
levels established for well-capitalized institutions. A banks capital category is determined
solely for the purpose of applying prompt corrective action regulations, and the capital category
may not constitute an accurate representation of the banks overall financial condition or
prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions
(including payment of a dividend) or paying any management fee to its parent holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized institutions are
subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institutions capital.
In addition, for a capital restoration plan to be acceptable, the depository institutions parent
holding company must guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser of (i) an amount
equal to 5.0% of the depository institutions total assets at the time it became undercapitalized
and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it
is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. Critically undercapitalized institutions are subject to the appointment
of a receiver or conservator.
Safety and Soundness Standards and Other Enforcement Mechanisms
The federal banking agencies have adopted guidelines establishing standards for safety and
soundness, asset quality and earnings, as required by the Federal Deposit Insurance Corporation
Improvement Act. These standards are designed to identify potential concerns and ensure that
action is taken to address those concerns before they pose a risk to the deposit insurance fund.
If a federal banking agency determines that an institution fails to meet any of these standards,
the agency may require the institution to submit an acceptable plan to achieve compliance with the
standard. If the institution fails to submit an acceptable plan within the time allowed by the
agency or fails in any material respect to implement an accepted plan, the agency must, by order,
require the institution to correct the deficiency.
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Federal banking agencies possess broad enforcement powers to take corrective and other
supervisory action on an insured bank and its holding company. Moreover, federal laws require each
federal banking agency to take prompt corrective action to resolve the problems of insured banks.
Bank holding companies and insured banks are subject to a wide range of potential enforcement
actions by federal regulators for violation of any law, rule, regulation, standard, condition
imposed in writing by the regulator, or term of a written agreement with the regulator.
Deposit Insurance
Deposits in the Bank are insured by the FDIC in accordance with the FDIA. Insurance premiums
are assessed semiannually by the FDIC at a level sufficient to maintain the insurance reserves
required under the FDIA and relevant regulations. The insurance premium charged to a bank is
determined based upon risk assessment criteria, including relevant capital levels, results of bank
examinations by state and federal regulators and other information. The Bank currently is assessed
the most favorable deposit insurance premiums under the risk-based premium system.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured
depository institution, the claims of depositors of the institution, including the claims of the
FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC
as a receiver, will have priority over other general unsecured claims against the institution. If
an insured depository institution fails, insured and uninsured depositors, along with the FDIC,
will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank
holding company, with respect to any extensions of credit they have made to such insured depository
institution.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably
expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution
controlled by the same bank holding company, or for any assistance provided by the FDIC to an
FDIC-insured depository institution controlled by the same bank holding company that is in danger
of default. Default means generally the appointment of a conservator or receiver. In danger of
default means generally the existence of certain conditions indicating that default is likely to
occur in the absence of regulatory assistance.
Customer Privacy and Other Consumer Protections
The GLB Act imposes customer privacy requirements on any company engaged in financial
activities. Under these requirements, a financial holding company is required to protect the
security and confidentiality of customer nonpublic personal information. In addition, for
customers who obtain a financial product such as a loan for personal, family or household purposes,
a financial holding company is required to disclose its privacy policy to the customer at the time
the relationship is established and annually thereafter. The financial holding company must also
disclose its policies concerning the sharing of the customers nonpublic personal information with
affiliates and third parties. Finally, a financial company is prohibited from disclosing an
account number or similar item to a third party for use in telemarketing, direct mail marketing or
marketing through electronic mail.
The Bank is subject to a variety of federal and state laws and reporting obligations aimed at
protecting consumers including the Home Mortgage Disclosure Act, the Real Estate Settlement
Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Credit
Reporting Act and the Community Reinvestment Act, or CRA. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into account when regulating
and supervising our other activities or in authorizing expansion activities.
In connection with its assessment of CRA performance, the appropriate bank regulatory agency
assigns a rating of outstanding, satisfactory, needs to improve or substantial
noncompliance. The Bank received a satisfactory rating on its most recent published
examination. Although the Banks policies and procedures are designed to achieve compliance with
all fair lending and CRA laws, instances of non-compliance are occasionally identified through
normal operational activities. Bank management responds proactively to correct all instances of
non-compliance and implement procedures to prevent further violations from occurring.
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Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 imposed new or revised corporate governance, accounting, and
reporting requirements on us and all other companies having securities registered with the SEC. In
addition to a requirement that chief executive officers and chief financial officers certify
financial statements in writing, the statute imposed requirements affecting, among other matters,
the composition and activities of audit committees, disclosures relating to corporate insiders and
insider transactions, codes of ethics, and the effectiveness of internal controls over financial
reporting.
USA Patriot Act
The USA Patriot Act of 2001 amended the Bank Secrecy Act and adopted additional measures
requiring insured depository institutions, broker-dealers, and certain other financial institutions
to have policies, procedures and controls to detect, prevent and report money laundering and
terrorist financing. These acts and their regulations also provide for information sharing,
subject to conditions, between federal law enforcement agencies and financial institutions, as well
as among financial institutions, for counter-terrorism purposes. Federal banking regulators are
required, when reviewing bank holding company acquisition or merger applications, to take into
account the effectiveness of the anti-money laundering activities of the applicants. The USA
Patriot Improvement and Reauthorization Act of 2005, among other things, made permanent or
otherwise generally extended the effectiveness of provisions applicable to financial institutions.
Effect of Economic Conditions, Government Policies and Legislation
Banking depends on interest rate differentials. In general, the difference between the
interest rate paid by the Bank on deposits and borrowings and the interest rate received by the
Bank on loans extended to customers and on investment securities comprises a major portion of the
Banks earnings. These rates are highly sensitive to many factors that are beyond the control of
the Bank. Accordingly, the earnings and potential growth of the Bank are subject to the influence
of domestic and foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic conditions but is
also influenced by the monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national
monetary policies (with objectives such as curbing inflation and combating recession) by its
open-market operations in United States government securities, by adjusting the required level of
reserves for financial institutions subject to the Federal Reserves reserve requirements and by
varying the discount rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of imposing additional
operating restrictions and increasing the cost of doing business, as has been the case with
relatively recent laws regarding anti-terrorism and consumer privacy. New legislation may also
limit or expand permissible activities or affect the competitive balance between banks and other
financial service providers. Proposals to change the laws and regulations governing the operations
and taxation of banks, bank holding companies and other financial service providers are frequently
made in Congress, in the Montana and Wyoming legislatures and before various bank regulatory and
other professional agencies. The likelihood of major legislative changes and the impact such
changes might have on us are impossible to predict.
Recent Regulatory Developments
The U.S. Congress approved deposit insurance reform at the beginning of February 2006 and the
FDIC adopted amended regulations and new regulations in November 2006 to give effect to the reform.
Under the reform and amended regulations, the FDIC has adopted a risk-based premium system and,
beginning in 2007, may pay dividends to insured depository organizations depending on, among
other factors, the reserve ratio of the deposit insurance fund. The dividend will be considered by
the FDIC board of directors in each calendar year. The reform also adjusts the deposit insurance
coverage levels for certain types of deposit accounts and allows for further future adjustments
depending upon, among other things, inflation.
On September 26, 2006, the federal banking regulators published a notice of proposed
rulemaking to implement regulatory capital requirements commonly referred to as the Basel II
accord. The notice requested public comment within 120 days of the publication date. On the basis
of the published notice, it does not appear that we would meet the asset size criteria to be
included among the U.S. banking organizations affected by Basel II or the proposed new capital
regulations.
- 9 -
On December 28, 2006, the federal banking regulators also published a notice of proposed
rulemaking, referred to as Basel IA, to implement proposed changes to the risked-based capital
rules for banking organizations not affected by Basel II. As proposed in the recently published
notice, all banking organizations not subject to Basel II could elect to be governed by Basel IA or
elect to remain subject to existing risked-based capital rules. If the Basel IA proposed rules
become final, we may be affected by or elect to be subject to different risked-based capital rules
than those currently applicable to us. We have not evaluated the proposed rules nor considered any
election to be subject to any final Basel IA rules.
Website Access to SEC Filings
All of our reports filed electronically with the SEC, including the Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements, as well as
amendments to these reports and statements filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act, are accessible at no cost through our website at
www.firstinterstatebank.com as soon as reasonably practicable after they have been filed
with the SEC. These reports are also accessible on the SECs website at www.sec.gov. The
public may read and copy materials we file with the SEC at the public reference facilities
maintained by the SEC at Room 1580, 100 F Street N.E., Washington, DC 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Our website and the information contained therein or connected thereto is not intended to be
incorporated into this report and should not be considered a part of this report.
Item 1A. Risk Factors
Like other financial and bank holding companies, we are subject to a number of risks, some of
which are outside of our control, including: (1) credit risks; (2) market risks; (3) liquidity
risks; and, (4) operational risks. In addition, investors who purchase shares of our common stock
are subject to (5) investment risks. Readers should consider carefully the following important
factors in evaluating us, our business and an investment in our securities.
(1) Credit Risks:
We extend credit to a variety of customers based on internally set standards and
judgment. We manage the credit risk through a program of underwriting standards, the review of
certain credit decisions, and an on-going process of assessment of the quality of the credit
already extended. Our credit standards, the nature of our loan portfolio and on-going process of
credit management and assessment might not protect us from significant credit losses.
We take credit risk by virtue of making loans and extending loan commitments and letters
of credit. Our exposure to credit risk is managed through the use of consistent underwriting
standards that emphasize in-market lending. Our credit administration function employs
risk management techniques designed to ensure that loans adhere to corporate policy and
problem loans are promptly identified. We have adopted underwriting and credit monitoring
procedures and policies, including the establishment and review of the allowance for loan losses,
which we believe are appropriate to mitigate the risk of loss by assessing the likelihood of
non-performance and the value of available collateral, monitoring loan performance and diversifying
our credit portfolio. These procedures provide us with the information necessary to implement
policy adjustments where necessary and to take proactive corrective actions. Our credit standards,
procedures and policies may not prevent us from incurring substantial credit losses.
As of December 31, 2006, approximately 62% of our loan portfolio consisted of commercial,
construction and commercial real estate loans. These types of loans are generally viewed as having
more risk and are typically larger than residential real estate loans or consumer loans and,
therefore, have a higher risk of loss. Because our loan portfolio contains a significant number of
commercial, construction and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans could cause a significant increase in non-performing
loans. An increase in non-performing loans could result in a loss of earnings from these loans, an
increase in the provision of loan losses and an increase in loan charge-offs.
Our
loans and deposits are focused in Montana and Wyoming. Adverse economic conditions
in these states could adversely impact our results from operations, cash flows, and financial
condition.
Our customers with loan and/or deposit balances are located predominantly in Montana and
Wyoming. Because of the concentration of loans and deposits in these states, in the event of
adverse economic conditions in Montana or Wyoming, we could experience higher rates of loss and
delinquency on our loans than if the loans were more geographically diversified. Adverse economic
conditions, including inflation, recession and unemployment, and other
factors, such as political or business developments, natural disasters, wide-spread disease,
terrorist activity, environmental
- 10 -
contamination and other unfavorable conditions and events that
affect these states, could reduce demand for credit or fee-based products and may delay or prevent
borrowers from repaying their loans. Adverse conditions and other factors identified above could
also negatively affect real estate and other collateral values, interest rate levels, and the
availability of credit to refinance loans at or prior to maturity. These results could adversely
impact our results of operations, cash flows and financial condition.
Declines in real estate values in our markets could adversely impact our business.
Like all banks, we are subject to the effects of any economic downturn. In particular, a
significant decline in real estate property values in our markets could have a negative
effect on results of operations. A significant decline in real estate values could lead to
higher charge-offs in the event of defaults in our real estate loan portfolio. At December 31,
2006, we had $2.1 billion of commercial, agricultural, construction, residential and other real
estate loans representing 63% of our total loan portfolio.
(2) Market Risks:
Changes in interest rates could negatively impact our net interest income.
Our results of operations depend substantially on net interest income, which is the difference
between interest earned on interest-earning assets (such as investments and loans) and interest
paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly
sensitive to many factors, including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession, unemployment, money
supply, and other factors beyond our control may also affect interest rates. In both rising and
declining interest rate environments, our net interest income could be adversely impacted.
Changes in interest rates may weaken demand for our products and services and harm our results
of operations and cash flows.
Changes in interest rates can affect customers demand for our products and services.
Interest rate changes may also impact the value of our loans and other assets, including mortgage
servicing rights, and our ability to realize gains on the sale of assets. A portion of our
earnings result from transactional income. An example of this type of transactional income is gain
on sales of loans and investment securities. This type of income can vary significantly from
quarter-to-quarter and year-to-year based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely affects the ability of borrowers to
pay the principal or interest on loans may lead to an increase in non-performing assets and a
reduction of income recognized, which could harm our results of operations and cash flows. In
contrast, decreasing interest rates have the effect of causing customers to refinance mortgage
loans faster than anticipated. This causes the value of assets related to the servicing rights on
mortgage loans sold to be lower than originally recognized. If this happens, we may need to write
down our mortgage servicing rights asset faster, which would accelerate expense and lower our
earnings.
(3) Liquidity Risks:
We may not be able to meet the cash flow requirements of our depositors and borrowers unless
we obtain sufficient liquidity.
Liquidity is the ability to meet current and future cash flow needs on a timely basis at a
reasonable cost. Our liquidity is used to make loans and to repay deposit liabilities as they
become due or are demanded by customers. We regularly monitor our overall liquidity position to
ensure that various alternative strategies exist to cover unanticipated events that could affect
liquidity. Potential alternative sources of liquidity include Federal funds purchased and
securities sold under repurchase agreements. We maintain a portfolio of investment securities that
may be used as a secondary source of liquidity to the extent the securities are not pledged for
collateral. We believe there are other sources of liquidity available to us should they be needed.
These sources include the drawing of additional funds on our unsecured revolving term loan, the
sale of loans, the ability to acquire national market, non-core deposits, the issuance of
additional collateralized borrowings such as Federal Home Loan Bank, or FHLB, advances, the
issuance of debt securities, and the issuance of preferred or common securities. We may also be
able to borrow through the Federal Reserves discount window. Without sufficient liquidity, we may
not be able to meet the cash flow requirements of our depositors and borrowers.
- 11 -
If our funding sources are inadequate, we may be unable to continue expanding our business,
funding our operations, paying dividends or repurchasing stock.
If we are unable to access adequate funding sources when needed, we may be unable to continue
expansion of our business or fund operations. Inadequate funding sources could also prevent us
from paying dividends and repurchasing stock. Accordingly, it is critical we maintain adequate
liquidity to avoid an adverse impact on our financial condition and level of regulatory-qualifying
capital.
(4) Operational Risks:
We have significant competition in both attracting and retaining deposits and in originating
loans.
Competition is intense in most of our markets. We compete on price, product availability,
customer service and responsiveness to customer needs with other banks and financial services
companies such as brokerage firms, finance companies, mortgage banking companies, insurance
companies and credit unions. Competition could intensify in the future as a result of industry
consolidation, the increasing availability of products and services from larger, multi-state
financial holding companies and their bank and non-bank subsidiaries, greater technological
developments in the industry, and banking reform.
A failure of the technology we use could harm our business.
We depend heavily upon data processing, software, communication and information exchange on a
variety of computing platforms and networks and over the internet. Despite instituted safeguards,
we cannot be certain that all of our systems are entirely free from vulnerability to breaches of
security or other technological difficulties or failures. Our wholly-owned subsidiary, i_Tech,
provides technology services to the Bank and other non-affiliated customers. In addition, we rely
on the services of a variety of vendors to meet our data processing and communication needs. If
information security is breached or other technology difficulties or failures occur, information
may be lost or misappropriated, services and operations may be interrupted, and we could be exposed
to claims from customers and related legal actions. Any of these results could harm our business.
Our information systems may experience a breach in security.
We rely heavily on communications and information systems to conduct our business. A breach in
the security of these systems could result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan, investment and other information systems. A breach of the security
of our information systems could damage our reputation, result in a loss of customer business,
subject us to additional regulatory scrutiny and expose us to civil litigation and possible
financial liability.
Our systems of internal operating controls may not be effective.
We establish and maintain systems of internal operational controls that provide us with
critical information used to manage our business. These systems are not foolproof, and are subject
to various inherent limitations, including cost, judgments used in decision-making, assumptions
about the likelihood of future events, the soundness of our systems, the possibility of human
error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions and the risk that the degree of compliance with policies or procedures may deteriorate
over time. Because of these limitations, any system of internal operating controls may not be
successful in preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management. From time to time, losses from operational
malfunctions or fraud may occur. These losses are recorded as noninterest expense. Any future
losses related to internal operating control systems could have an adverse effect on our business.
We may encounter unforeseen difficulties executing our business strategy, including
unanticipated integration problems, business disruption in connection with expansions and loss of
key personnel.
Our financial performance and profitability will depend on our ability to execute our business
strategy and manage our anticipated future growth. We may experience unforeseen problems as we
integrate new banking offices and expand into new markets. In addition, any future acquisitions or
other future growth may present operating and other problems that could negatively affect our
business. Our financial performance will also depend on our ability to maintain profitable
operations through implementation of our Strategic Vision. Decisions to sell or close units or
otherwise change the business mix may adversely impact our financial performance.
- 12 -
Our success depends to a significant extent on the management skills of our existing executive
officers and directors, many of whom have held officer and director positions with us for many
years. The loss or unavailability of key executives, including Lyle R. Knight, President and Chief
Executive Officer, Terrill R. Moore, Executive Vice President and Chief Financial Officer, Robert
A. Jones, Executive Vice President and Chief Administrative Officer, or Edward Garding, Executive
Vice President and Chief Credit Officer, could harm our ability to operate our business or execute
our business strategy.
An extended disruption of vital infrastructure and other business interruptions could
negatively impact our business.
Our operations depend upon vital infrastructure components including, among other things,
transportation systems, power grids and telecommunication systems. A disruption in our operations
resulting from failure of transportation and telecommunication systems, loss of power, interruption
of other utilities, natural disaster, fire, global climate changes, computer hacking or viruses,
failure of technology, terrorist activity or the domestic and foreign response to such activity, or
other events outside of our control could have an adverse impact on the financial services industry
as a whole and/or on our business. Our business recovery plan may not be adequate and may not
prevent significant interruptions of our operations or substantial losses.
We are subject to claims and litigation pertaining to our fiduciary responsibilities.
Some of the services we provide, such as trust and investment services, require us to act as
fiduciaries for our customers and others. From time to time, third parties make claims and take
legal action against us pertaining to the performance of our fiduciary responsibilities. If these
claims and legal actions are not resolved in a manner favorable to us, we may be exposed to
significant financial liability and/or our reputation could be damaged. Either of these results
may adversely impact demand for our products and services or otherwise have a harmful effect on our
business.
New or changes in existing tax, accounting, and regulatory rules and interpretations could
significantly harm our business.
The financial services industry is extensively regulated. Federal and state banking
regulations are designed primarily to protect the deposit insurance funds and consumers, not to
benefit a financial companys shareholders. These regulations may sometimes impose significant
limitations on operations. The significant federal and state banking regulations that affect us
are described in this report under the heading Business Regulation and Supervision above.
These regulations, along with the currently existing tax, accounting, securities, insurance and
monetary laws, and regulations, rules, standards, policies, and interpretations control the methods
by which we conduct business, implement strategic initiatives and tax compliance, and govern
financial reporting and disclosures. These laws, regulations, rules, standards, policies, and
interpretations are constantly evolving and may change significantly over time.
Events that may not have a direct impact on us, such as the bankruptcy of major U.S.
companies, have resulted in legislators, regulators and authoritative bodies, such as the Financial
Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various
taxing authorities responding by adopting and/or proposing substantive revisions to laws,
regulations, rules, standards, policies and interpretations. Further, federal monetary policy as
implemented through the Federal Reserve System can significantly affect credit conditions in our
markets.
The nature, extent, and timing of the adoption of significant new laws and regulations, or
changes in or repeal of existing laws and regulations or specific actions of regulators, may have a
negative impact on our business. It is impossible for us to predict accurately at this time the
extent of any impact from these items.
Non-compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could
result in fines, sanctions and other enforcement actions.
The USA Patriot and Bank Secrecy Acts require us to develop programs to prevent us from being
used for money laundering and terrorist activities. If such activities are detected, we are
obligated to file suspicious activity reports with the U.S. Treasury Departments Office of
Financial Crimes Enforcement Network. These rules require us to establish procedures for
identifying and verifying the identity of customers seeking to open new financial accounts.
Failure to comply with these regulations could result in fines or sanctions.
- 13 -
Federal and state regulators have broad enforcement powers. If we fail to comply with any
laws, regulations, rules, standards, policies or interpretations applicable to us, we could face
enforcement actions, which include the appointment of a conservator or receiver for us; the
issuance of a cease and desist order that can be judicially enforced; the termination of our
deposit insurance; the imposition of civil monetary penalties; the issuance of directives to
increase capital; the issuance of formal and informal agreements; the issuance of removal and
prohibition orders against officers, directors, and other institution-affiliated parties; and the
enforcement of such actions through injunctions or restraining orders.
In 2004, the Federal Reserve required us to adopt a resolution obligating the Bank to develop
and implement a comprehensive action plan designed to enhance our policies, procedures and data
processing systems used in identifying and verifying the identity of our customers and in reporting
suspicious activities in accordance with the USA Patriot and Bank Secrecy Acts. The resolution
required us to submit written progress reports to the Federal Reserve and have the enhanced
policies, procedures and data processing systems fully operational in 2006. As of December 31,
2006, our action plan was completed and our enhanced policies, procedures and data processing
systems were fully operational.
Regulators may impose dividend payment and other restrictions on the Bank which would impact
our ability to pay dividends to shareholders or repurchase stock.
The Federal Reserve and the State of Montana, Division of Banking and Financial Institutions,
are the primary regulatory agencies that examine us and our activities. Under certain
circumstances, including any determination that the activities of the Bank constitute an unsafe and
unsound banking practice, the regulatory agencies have the authority by statute to restrict the
Banks ability to transfer assets and make distributions to us as the holding company.
Under applicable statutes and regulations, dividends may be paid out of current or retained
net profits, but prior approval of the regulatory agencies is required for the payment of a
dividend if the total of all dividends declared by the Bank in any calendar year would exceed the
total of its net profits for the year combined with its undistributed net profits for the two
preceding years.
Payment of dividends could also be subject to regulatory limitations if the Bank became
under-capitalized for purposes of regulatory guidelines. Under-capitalized is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. If the Bank were
unable to pay dividends to us as the parent company, it would impact our ability to pay dividends
to shareholders and repurchase stock.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve, which examines us and our non-bank subsidiaries, has a policy stating
that a bank holding company is expected to act as a source of financial and managerial strength to
a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of
strength doctrine, the Federal Reserve may require a bank holding company to make capital
injections into a troubled subsidiary bank, and may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A
capital injection may be required at times when the holding company may not have the resources to
provide it, and therefore may be required to borrow the funds. Any loans by a holding company to
its subsidiary bank are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding companys bankruptcy, the
bankruptcy trustee will assume any commitment by the holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law
provides that claims based on any such commitment will be entitled to a priority of payment
over the claims of the institutions general unsecured creditors, including the holders of
its note obligations. Thus, any borrowing that must be done by the holding company in order to
make the required capital injection becomes more difficult and expensive and will adversely impact
the holding companys results of operations and cash flows.
(5) Investment Risks:
Our common stock is not publicly traded.
Shares of our common stock are not publicly traded. Our common stock is not listed, quoted or
traded on any securities exchange, market, bulletin board, quotation system or listing service.
Because there is no established market for our common stock, there are limited opportunities for
shareholders to resell their shares. In the event shareholders desire to sell or otherwise dispose
of their shares, they may not be able to do so.
- 14 -
Shares of our common stock are subject to contractual transfer restrictions, and we have no
obligation to repurchase outstanding shares of common stock.
With respect to our outstanding common stock, approximately 90% of the shares are subject to
contractual transfer restrictions set forth in shareholder agreements. Except as described below,
purchasers of our common stock are required to enter into shareholder agreements. We have a right
of first refusal to repurchase the restricted stock at fair market value currently determined as
the minority appraised value per share based upon the most recent quarterly appraisal.
Additionally, restricted stock held by our officers, directors and employees may be called by us
under certain conditions. All stock not subject to such restrictions may be sold at a price per
share that is negotiated between the shareholder and a prospective buyer, which may vary
substantially from our appraised minority value.
Shares of our stock held by participants in the savings and profit sharing plan, or Savings
Plan, established for our employees are not subject to contractual transfer restrictions set forth
in shareholder agreements due to requirements of the Employee Retirement Income Security Act, or
ERISA, and the Internal Revenue Code, or IRC. Since the Savings Plan does not allow distributions
in kind, distributions from participants Savings Plan accounts require the Bank, as trustee for
the Savings Plan, to sell our stock. In the event we do not elect to purchase the unrestricted
stock, the Bank will be obligated to seek alternative purchasers.
We have no obligation, by contract, policy or otherwise, to purchase restricted or
unrestricted shares of our common stock. Any shares we may repurchase are priced at the most
recent minority appraised value at the repurchase date. The appraised minority value of our common
stock represents the estimated fair market valuation of a minority ownership interest, taking into
account adjustments for the lack of marketability of the stock and other factors. This value does
not represent an actual trading price between a willing buyer and seller of our shares in an
informed, arms-length transaction. As such, the appraised minority value is only an estimate as
of a specific date, and such appraisal may not be an indication of the actual value owners may
realize with respect to shares they hold. Moreover, the estimated fair market value of our common
stock may be materially different at any date other than the valuation dates.
Existing shareholders will be diluted by future issuances of common stock, and the valuation
of our common stock could decrease.
Future issuances of stock pursuant to our equity incentive plans or in connection with future
financings or acquisitions could cause dilution to our existing shareholders. This dilution could
cause the valuation of our common stock to decline and also decrease the per share amount of any
cash dividends. Furthermore, a variety of other factors discussed in this report could have a
negative impact on our business, thereby resulting in a decrease in the value of our common stock.
Affiliates of our company own a controlling interest and are able to control the election of
directors and future direction of our business.
The directors and executive officers beneficially own approximately 61% of our outstanding
common stock. Many of these directors and executive officers are members of the Scott family,
which collectively owns approximately 75% of our common stock. By virtue of such ownership, these
affiliates are able to control the election of directors and the determination of our business,
including transactions involving dividends, stock repurchases, and any potential acquisition,
merger or other business combination.
Item 1B. Unresolved Staff Comments
We are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the
Exchange Act, or a well-known seasoned issuer as defined in Rule 405 of the Securities Act. We
have not received any written comments from the SEC staff regarding our periodic or current reports
filed under the Exchange Act.
Item 2. Properties
Our principal executive offices and a banking office are anchor tenants in an eighteen story
commercial building located in Billings, Montana. The building is owned by a joint venture
partnership in which the Bank is one of two partners, owning a 50% interest in the partnership. We
lease approximately 91,997 square feet of office space in the building. We also lease
approximately 24,368 square feet of office space for our operations center, also located in
Billings, Montana, and an aggregate of approximately 68,276 square feet of office space in Montana,
Colorado, Idaho and Oregon for our technology services subsidiary. As of December 31, 2006, we
also provided banking services at 48 additional locations in Montana and Wyoming, of which 9
properties are leased from independent third parties and 39 properties are owned by us. We believe
each of our facilities is suitable and adequate to meet our current operational needs.
- 15 -
Item 3. Legal Proceedings
In the normal course of business, we are named or threatened to be named as a defendant in
various lawsuits. Management, following consultation with legal counsel, does not expect the
ultimate disposition of these matters to have a material adverse effect on our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Description of Our Capital Stock
Our authorized capital stock consists of 20,000,000 shares of common stock without par value,
of which 8,186,709 shares were outstanding as of February 28, 2007, and 100,000 shares of preferred
stock without par value, none of which were outstanding as of February 28, 2007.
Common Stock
Each share of the common stock is entitled to one vote in the election of directors and in all
other matters submitted to a vote of shareholders. Accordingly, holders of a majority of the
shares of common stock entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so, subject to the rights of the holders of the
preferred stock. Voting for directors is noncumulative.
Subject to the preferential rights of any preferred stock that may at the time be outstanding,
each share of common stock has an equal and ratable right to receive dividends when, if and as
declared by the board of directors out of assets legally available. In the event of our
liquidation, dissolution or winding up, the holders of common stock will be entitled to share
equally and ratably in the assets available for distribution after payments to creditors and to the
holders of any preferred stock that may at the time be outstanding. Holders of common stock have
no conversion rights or preemptive or other rights to subscribe for any additional shares of common
stock or for other securities. All outstanding common stock is fully paid and non-assessable.
Our common stock is not actively traded, and there is no established trading market for the
stock. There is only one class of common stock. As of February 28, 2007, 90.4% of our shares of
common stock were subject to contractual transfer restrictions set forth in shareholder agreements
and 9.6% were held by 17 shareholders without such restrictions, including our 401(k) plan, or
Savings Plan, which holds 80.6% of the unrestricted shares. See also Part I, Item 1, Risk Factors
Liquidity Risks.
Minority appraisal values as of each calendar quarter end for the past two years, determined
by an independent valuation expert, follow:
|
|
|
|
|
Valuation Based on |
|
|
|
Appraised |
Financial Data As of |
|
Valuation Effective Date |
|
Minority Value |
December 31, 2004 |
|
February 14, 2005 |
|
$63.00 |
March 31, 2005 |
|
May 19, 2005 |
|
63.50 |
June 30, 2005 |
|
August 12, 2005 |
|
65.50 |
September 30, 2005 |
|
November 10, 2005 |
|
68.00 |
December 31, 2005 |
|
February 23, 2006 |
|
71.00 |
March 31, 2006 |
|
May 19, 2006 |
|
74.50 |
June 30, 2006 |
|
August 9, 2006 |
|
77.25 |
September 30, 2006 |
|
November 14, 2006 |
|
82.50 |
December 31, 2006 |
|
February 15, 2007 |
|
89.00 |
- 16 -
Resale of our stock may be restricted pursuant to the Securities Act of 1933 and applicable
state securities laws. In addition, most shares of our stock are subject to shareholders
agreements:
|
|
|
Members of the Scott family, as majority shareholders, are subject to a
shareholders agreement. Under this agreement, the Scott family has agreed to
limit the transfer of shares owned by members of the Scott family to family
members or charities, or with our approval, to our officers, directors, advisory
directors or to our Savings Plan. |
|
|
|
|
Shareholders who are not Scott family members, with the exception of 17
shareholders who own an aggregate of 786,614 shares of unrestricted stock, are
subject to shareholders agreements. Stock subject to these agreements may not be
sold or transferred without triggering our option to acquire the stock in
accordance with the terms of these agreements. In addition, the agreements grant
us the right to repurchase all or some of the stock under certain conditions. |
Purchases of our common stock made through our Savings Plan are not restricted by shareholder
agreements, due to requirements of the ERISA and the IRC. However, since the Savings Plan does not
allow distributions in kind, any distribution from an employees account in the Savings Plan will
require the Savings Plan administrator to authorize sale of the stock. While we have no obligation
to repurchase the stock, it is likely that we will repurchase our stock sold by the Savings Plan.
As of February 28, 2007, we had 786 record shareholders, including the Financial Services
division of the Bank as trustee for 634,222 shares held on behalf of 1,884 individual participants
in the Savings Plan. Of such participants, 370 individuals also own shares of our stock outside of
the Savings Plan. The Plan Trustee votes the shares based on the instructions of each participant.
In the event the participant does not provide the Plan Trustee with instructions, the Plan Trustee
votes those shares in accordance with voting instructions received from a majority of the
participants in the plan.
Dividends
It is our policy to pay a dividend to all common shareholders quarterly. Dividends are
declared and paid in the month following the calendar quarter. The dividend amount is periodically
reviewed and set by our board of directors. Our board of directors has no current intention to
change its dividend policy, but no assurance can be given that the board may not, in the future,
change or eliminate the payment of dividends.
During January 2007, our board of directors approved and we paid a special dividend of $0.41
per share. This special dividend reflected approximately 30% of the recent after-tax gain on the
sale of our interest in an unconsolidated equity method joint venture in December 2006.
Recent quarterly and special dividends follow:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Total Cash |
Month Declared and Paid |
|
Per Share |
|
Dividend |
January 2005 |
|
$ |
0.42 |
|
|
$ |
3,346,726 |
|
April 2005 |
|
|
0.48 |
|
|
|
3,825,415 |
|
July 2005 |
|
|
0.48 |
|
|
|
3,824,652 |
|
October 2005 |
|
|
0.50 |
|
|
|
4,047,869 |
|
January 2006 |
|
|
0.50 |
|
|
|
4,051,636 |
|
April 2006 |
|
|
0.58 |
|
|
|
4,698,081 |
|
July 2006 |
|
|
0.58 |
|
|
|
4,694,141 |
|
October 2006 |
|
|
0.61 |
|
|
|
4,969,757 |
|
January 2007 |
|
|
0.61 |
|
|
|
5,007,153 |
|
January 2007 special dividend |
|
|
0.41 |
|
|
|
3,363,708 |
|
Dividend Restrictions
For a description of restrictions on the payment of dividends, see Part I, Item 1, Business
Regulation and Supervision Restrictions on Transfers of Funds to Us and the Bank, and
Managements Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity Management and Managements Discussion and Analysis of Financial
Condition and Results of Operations Financial Condition Long-Term Debt included in Item 7
herein.
- 17 -
Preferred Stock
Our authorized capital stock includes 100,000 shares of preferred stock. Our board of
directors is authorized, without approval of the holders of common stock, to provide for the
issuance of preferred stock from time to time in one or more series in such number and with such
designations, preferences, powers and other special rights as may be stated in the resolution or
resolutions providing for such preferred stock. Our board of directors may cause us to issue
preferred stock with voting, conversion and other rights that could adversely affect the holders of
the common stock or make it more difficult to effect a change of control.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information, as of December 31, 2006, regarding our equity
compensation plans.
Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
Number of Securities |
|
|
|
to be Issued Upon |
|
|
Weighted Average |
|
|
Remaining Available |
|
|
|
Exercise of |
|
|
Exercise Price of |
|
|
For Future Issuance |
|
|
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Under Equity |
|
Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Compensation Plans (1) |
|
|
Equity compensation plans
approved by shareholders(2) |
|
840,199 |
|
|
$ 50.00 |
|
|
737,254 |
|
Equity compensation plans not
approved by shareholders |
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
(1) |
|
Excludes number of securities to be issued upon exercise of outstanding
options, warrants and rights. |
|
(2) |
|
Represents stock options issued pursuant to the 2001 Stock Option Plan and 2006
Equity Compensation Plan. See Notes to Consolidated Financial Statements Employee
Benefit Plans included in Part IV, Item 15. |
Sales of Unregistered Securities
We issued no unregistered shares of common stock during the three months ended December 31,
2006.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to purchases made by or on behalf
of us or any affiliated purchasers (as defined in Rule 10b-18(a)(3) under the Exchange Act), of
our common stock during the three months ended December 31, 2006.
Purchases of Equity Securities by Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
of Shares That |
|
of Shares That |
|
|
Total Number |
|
|
|
|
|
May Yet Be |
|
May Yet Be |
|
|
of Shares |
|
Average Price |
|
Purchased Under the |
|
Purchased Under the |
Period |
|
Purchased |
|
Paid Per Share |
|
Plans or Programs (1) |
|
Plans or Programs |
|
October 2006 |
|
|
3,144 |
|
|
$ |
77.25 |
|
|
|
|
|
|
Not Applicable |
November 2006 |
|
|
5,566 |
|
|
|
80.55 |
|
|
|
|
|
|
Not Applicable |
December 2006 |
|
|
17,052 |
|
|
|
82.50 |
|
|
|
|
|
|
Not Applicable |
|
Total |
|
|
25,762 |
|
|
$ |
81.44 |
|
|
|
|
|
|
Not Applicable |
|
|
|
|
(1) |
|
Our common stock is not actively traded, and there is no established
trading market for the stock. There is only one class of common stock. As
of December 31, 2006, 90.3% of our common stock was subject to contractual transfer
restrictions set forth in shareholder agreements. We have a right of first refusal to
repurchase the restricted stock. Additionally, under certain conditions we may call
restricted stock held by our officers, directors and employees. We have no obligation to
purchase restricted or unrestricted stock, but have historically purchased such stock.
All purchases indicated in the table above were effected pursuant to private transactions. |
- 18 -
Performance Graph
The performance graph below compares the cumulative total shareholder return of our common
stock with the Russell 2000 Index and SNL $1B-$5B Bank Index. The Russell 2000 Index is comprised
of U.S. publicly-owned companies with market capitalizations that are comparable to ours. The SNL
$1B-$5B Bank Index is comprised of publicly-owned banks or bank holding companies with total assets
between $1 billion and $5 billion. The graph assumes an investment of $100 on December 31, 2001
and reinvestment of dividends on the date of payment without commissions. The plot points on the
graph were provided by SNL Financial LC, Charlottesville, VA.
Our common stock is not actively traded, and there is no established trading market for our
stock. The cumulative total shareholder return for our common stock is based on the most recent
minority appraised value of the common stock, which represents the estimated fair market valuation
of a minority interest at a specific date, taking into account adjustments for the lack of
marketability and other factors. Valuations are performed on a quarterly basis and are generally
received approximately 45 days after each quarter end. As such, year end valuations used in the
performance graph are based on financial data as of September 30th for each year. The
performance graph represents past performance, which may not be indicative of the future
performance of our common stock.
Five
Year Cumulative Total Return
December 31, 2001 - December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index |
|
|
12/31/01 |
|
|
|
12/31/02 |
|
|
|
12/31/03 |
|
|
|
12/31/04 |
|
|
|
12/31/05 |
|
|
|
12/31/06 |
|
|
|
|
First Interstate BancSystem, Inc. |
|
|
$ |
100.00 |
|
|
|
110.13 |
|
|
|
125.56 |
|
|
|
159.68 |
|
|
|
185.48 |
|
|
|
222.33 |
|
|
|
Russell 2000 |
|
|
|
100.00 |
|
|
|
79.52 |
|
|
|
117.09 |
|
|
|
138.55 |
|
|
|
144.86 |
|
|
|
171.47 |
|
|
|
SNL $1B- $5B Bank Index |
|
|
|
100.00 |
|
|
|
115.44 |
|
|
|
156.98 |
|
|
|
193.74 |
|
|
|
190.43 |
|
|
|
220.36 |
|
|
|
- 19 -
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial
position as of December 31, 2006 and 2005, and the results of our operations for the fiscal years
ended December 31, 2006, 2005 and 2004, has been derived from our audited consolidated financial
statements included in Part IV, Item 15. This data should be read in conjunction with Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and
such consolidated financial statements, including the notes thereto. The selected consolidated
financial data with respect to our consolidated financial position as of December 31,
2004, 2003 and 2002, and the results of our operations for the fiscal years ended December 31, 2003
and 2002, has been derived from our audited consolidated financial statements not included herein.
Five Year Summary
(Dollars in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
293,423 |
|
|
$ |
233,857 |
|
|
$ |
192,840 |
|
|
$ |
189,258 |
|
|
$ |
201,306 |
|
Interest expense |
|
|
105,960 |
|
|
|
63,549 |
|
|
|
42,421 |
|
|
|
48,614 |
|
|
|
65,459 |
|
Net interest income |
|
|
187,463 |
|
|
|
170,308 |
|
|
|
150,419 |
|
|
|
140,644 |
|
|
|
135,847 |
|
Provision for loan losses |
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
|
|
9,852 |
|
|
|
9,191 |
|
Net interest income after
provision for loan losses |
|
|
179,702 |
|
|
|
164,461 |
|
|
|
141,686 |
|
|
|
130,792 |
|
|
|
126,656 |
|
Noninterest income |
|
|
101,548 |
|
|
|
70,290 |
|
|
|
70,644 |
|
|
|
70,152 |
|
|
|
60,901 |
|
Noninterest expense |
|
|
164,142 |
|
|
|
150,726 |
|
|
|
142,980 |
|
|
|
137,925 |
|
|
|
133,816 |
|
|
Income before income taxes |
|
|
117,108 |
|
|
|
84,025 |
|
|
|
69,350 |
|
|
|
63,019 |
|
|
|
53,741 |
|
Income tax expense |
|
|
41,499 |
|
|
|
29,310 |
|
|
|
23,929 |
|
|
|
22,267 |
|
|
|
19,247 |
|
|
Net income |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
$ |
40,752 |
|
|
$ |
34,494 |
|
|
Basic earnings per common share |
|
$ |
9.32 |
|
|
$ |
6.84 |
|
|
$ |
5.74 |
|
|
$ |
5.18 |
|
|
$ |
4.41 |
|
Diluted earnings per common share |
|
|
9.11 |
|
|
|
6.71 |
|
|
|
5.68 |
|
|
|
5.15 |
|
|
|
4.41 |
|
Dividends per common share |
|
|
2.27 |
|
|
|
1.88 |
|
|
|
1.56 |
|
|
|
1.32 |
|
|
|
1.29 |
|
Weighted average common shares
outstanding diluted |
|
|
8,302,056 |
|
|
|
8,149,337 |
|
|
|
7,997,579 |
|
|
|
7,909,947 |
|
|
|
7,830,429 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.60 |
% |
|
|
1.26 |
% |
|
|
1.14 |
% |
|
|
1.09 |
% |
|
|
1.03 |
% |
Return on average common stockholders equity |
|
|
20.38 |
|
|
|
16.79 |
|
|
|
15.75 |
|
|
|
15.79 |
|
|
|
14.86 |
|
Average stockholders equity to average assets |
|
|
7.85 |
|
|
|
7.52 |
|
|
|
7.22 |
|
|
|
6.93 |
|
|
|
6.91 |
|
Net interest margin |
|
|
4.47 |
|
|
|
4.48 |
|
|
|
4.34 |
|
|
|
4.37 |
|
|
|
4.66 |
|
Net interest spread |
|
|
3.89 |
|
|
|
4.13 |
|
|
|
4.12 |
|
|
|
4.14 |
|
|
|
4.33 |
|
Common stock dividend payout ratio (1) |
|
|
24.36 |
|
|
|
27.49 |
|
|
|
27.18 |
|
|
|
25.48 |
|
|
|
29.25 |
|
|
Balance Sheet Data at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,974,134 |
|
|
$ |
4,562,313 |
|
|
$ |
4,217,293 |
|
|
$ |
3,879,744 |
|
|
$ |
3,558,968 |
|
Loans |
|
|
3,310,363 |
|
|
|
3,034,354 |
|
|
|
2,739,509 |
|
|
|
2,554,899 |
|
|
|
2,236,550 |
|
Allowance for loan losses |
|
|
47,452 |
|
|
|
42,450 |
|
|
|
42,141 |
|
|
|
38,940 |
|
|
|
36,309 |
|
Investment securities |
|
|
1,124,598 |
|
|
|
1,019,901 |
|
|
|
867,315 |
|
|
|
799,587 |
|
|
|
799,292 |
|
Deposits |
|
|
3,708,511 |
|
|
|
3,547,590 |
|
|
|
3,321,681 |
|
|
|
3,156,721 |
|
|
|
2,911,847 |
|
Other borrowed funds |
|
|
5,694 |
|
|
|
7,495 |
|
|
|
7,995 |
|
|
|
7,137 |
|
|
|
7,970 |
|
Long-term debt |
|
|
21,601 |
|
|
|
54,654 |
|
|
|
61,926 |
|
|
|
47,590 |
|
|
|
23,645 |
|
Subordinated debenture held by subsidiary
trust/trust preferred securities |
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
|
40,000 |
|
Stockholders equity |
|
|
410,375 |
|
|
|
349,847 |
|
|
|
308,326 |
|
|
|
274,226 |
|
|
|
243,854 |
|
|
- 20 -
Five Year Summary (continued)
(Dollars in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
Asset Quality Ratios at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total loans and
other real estate owned (OREO) (2) |
|
|
0.55 |
% |
|
|
0.67 |
% |
|
|
0.79 |
% |
|
|
1.30 |
% |
|
|
1.51 |
% |
Allowance for loan losses to total loans |
|
|
1.43 |
|
|
|
1.40 |
|
|
|
1.54 |
|
|
|
1.52 |
|
|
|
1.62 |
|
Allowance for loan losses to nonperforming
loans (3) |
|
|
269.72 |
|
|
|
236.17 |
|
|
|
212.04 |
|
|
|
124.53 |
|
|
|
109.23 |
|
Net charge-offs to average loans |
|
|
0.09 |
|
|
|
0.19 |
|
|
|
0.21 |
|
|
|
0.31 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
10.71 |
% |
|
|
10.07 |
% |
|
|
9.67 |
% |
|
|
9.30 |
% |
|
|
9.17 |
% |
Total risk-based capital |
|
|
11.93 |
|
|
|
11.27 |
|
|
|
10.95 |
|
|
|
10.64 |
|
|
|
10.62 |
|
Leverage ratio |
|
|
8.61 |
|
|
|
7.91 |
|
|
|
7.49 |
|
|
|
7.13 |
|
|
|
6.90 |
|
|
|
|
|
(1) |
|
Dividends per common share divided by basic earnings per common share. |
|
(2) |
|
For purposes of computing the ratio of non-performing assets to total loans
and OREO, non-performing assets include nonaccrual loans, loans past due 90 days or more
and still accruing interest, restructured loans and OREO. |
|
|
(3) |
|
For purposes of computing the ratio of allowance for loan losses to
non-performing loans, non-performing loans include nonaccrual loans, loans past due 90 days
or more and still accruing interest and restructured loans. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a financial and bank holding company with 49 banking offices in 29 communities
throughout Montana and Wyoming. Our principal operating segments are Community Banking and
Technology Services. We differentiate ourselves from competitors by providing superior service to
our banking and technology services customers and emphasizing community involvement to improve the
communities we serve.
Our principal business activity is lending to and accepting deposits from individuals,
businesses, municipalities and other entities. We derive our income principally from interest
charged on loans, and to a lesser extent, from interest and dividends earned on investments. We
also derive income from noninterest sources such as fees received in connection with various
lending and deposit services; trust, employee benefit, investment and insurance services; mortgage
loan originations, sales and servicing; merchant and electronic banking services; technology
services; and, from time to time, gains on sales of assets. Our principal expenses include
interest expense on deposits and borrowings, operating expenses, provisions for loan losses and
income tax expense.
Our business strategy in recent years has been to profitably grow our business organically and
through selective acquisitions. During the previous five years, we have used de novo banking
offices to better serve existing customers and to attract new customers in our existing market
areas. In addition, during the previous three years we have focused on improving efficiency
through control of operating expenses, implementation of new technologies, consolidation of like
operational and administrative functions where appropriate, and identification and implementation
of strategies to increase noninterest income. During 2007 and subsequent years, we plan to make
additional investments in technology and personnel to support our core community banking activities
and to enhance our financial services product offerings. Longer-term, we intend to continue
looking for profitable expansion opportunities.
During 2006, our continuing focus on improving operating efficiency and identifying
opportunities to generate additional noninterest income resulted in increased earnings. Net income
increased $20.9 million, or 38.2%, to $75.6 million, or $9.11 per diluted share in 2006, as
compared to $54.7 million, or $6.71 per diluted share in 2005. Included in 2006 net income was a
one-time gain on the sale of our minority interest in an unconsolidated internet bill payment joint
venture of $12.3 million, or $1.48 per diluted share, after income tax. Exclusive of this one-time
gain, net income for 2006 of $63.3 million increased $8.6 million, or 15.7%, from $54.7 million in
2005.
- 21 -
Net interest income, on a fully taxable-equivalent basis, increased 10.1% to $191.3 million in
2006, from $173.7 million in 2005, primarily due to growth in average earning assets. Average
earning assets grew 10.4% and comprised a larger percentage of total assets in 2006, as
compared to 2005. In addition, interest-free funding sources, including noninterest-bearing
deposits, other liabilities and common equity, contributed an additional $112.7 million in 2006, as
compared to 2005, allowing us to be slightly less reliant on higher costing funding sources in
2006.
Net income in 2006 was also positively impacted by reductions in expenses associated with
discontinuation of operations at Wal-Mart in-store banking offices described below; decreases in
net losses on sales of investment securities; increases in fee income from higher debit and credit
card transaction volumes; and, increases in revenues from technology and financial services.
Increases in net income in 2006 were partially offset by additional impairment charges related to
mortgage servicing rights; inflationary increases in salaries, wages and benefits expenses; and
higher incentive bonus and profit sharing accruals. In addition, on January 1, 2006, we adopted
SFAS No. 123 (revised), Share-Based Payments, which requires all share-based payments to be
recognized in the financial statements based on the fair value of the award at the date of grant.
Adoption of SFAS No. 123 (revised) resulted in the recognition of additional compensation expense
related to stock option and restricted stock awards, net of related income tax benefits, of $543
thousand in 2006.
We not only grew in terms of net income but also in terms of asset size, reaching nearly $5.0
billion in total assets in 2006. The increase in total assets was attributable to organic loan
growth and increases in investment securities, funded by increases in customer deposits and
securities sold under repurchase agreements.
During 2005, we made a strategic decision to discontinue the operation of nine Wal-Mart
in-store banking offices. As of December 31, 2006, operations at eight Wal-Mart in-store banking
offices had been discontinued and customer loan and deposit accounts had been transferred to our
existing banking offices located within the same communities. We recorded expenses directly
related to the discontinuation of operations of $23 thousand in 2006 and $1.1 million in 2005. The
assets and liabilities of our one remaining Wal-Mart in-store banking office were sold during 2006
at a $78 thousand gain.
We act as transfer agent solely for our own common stock. In 2006, we received examination
reports on our transfer agent function from the Federal Reserve Bank and the SEC noting certain
operating deficiencies. All noted deficiencies were corrected prior to December 31, 2006, and we
were informed by the SEC that no further action would be taken regarding the deficiencies.
The following discussion and analysis is intended to provide greater details of the results of
our operations and financial condition. It should be read in conjunction with the information
under Part II, Item 6, Selected Consolidated Financial Data and the consolidated financial
statements, including the notes thereto, and other financial data appearing elsewhere in this
document.
Critical Accounting Estimates and Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States and follow general practices within the industries in which
we operate. Application of these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the consolidated financial statements and
accompanying notes. Our significant accounting policies are summarized in Notes to Consolidated
Financial Statements Summary of Significant Accounting Policies included in Part IV, Item 15.
Our critical accounting estimates are summarized below. Management considers an accounting
estimate to be critical if: (1) the accounting estimate requires management to make particularly
difficult, subjective and/or complex judgments about matters that are inherently uncertain, and (2)
changes in the estimate that are reasonably likely to occur from period to period, or the use of
different estimates that management could have reasonably used in the current period, would have a
material impact on our consolidated financial statements, results of operations or liquidity.
- 22 -
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable credit losses
inherent in the loan portfolio. Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant judgment and the use of
subjective measurements, including managements assessment of the internal risk classifications of
loans, changes in the nature of the loan portfolio, industry concentrations and the impact of
current local, regional and national economic factors on the quality of the loan portfolio.
Changes in these estimates and assumptions are reasonably possible and may have a material impact
on our consolidated financial statements, results of operations or liquidity. The allowance for
loan losses is maintained at an amount we believe is sufficient to provide for estimated losses
inherent in our loan portfolio at each balance sheet date. Management continuously monitors
qualitative and quantitative trends in the loan portfolio, including changes in the levels of past
due, internally classified and non-performing loans. As a result, our historical experience has
provided for an adequate allowance for loan losses. For additional information regarding the
allowance for loan losses, its relation to the provision for loan losses and risk related to asset
quality, see Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations Provision for Loan Losses and Managements Discussion and Analysis of
Financial Condition and Results of Operations Financial Condition Allowance for Loan Losses
below, and Notes to Consolidated Financial Statements Allowance for Loan Losses included in
Part IV, Item 15. See also Part I, Item 1A, Risk Factors Credit Risks.
Valuation of Mortgage Servicing Rights
We recognize as assets the rights to service mortgage loans for others, whether acquired or
internally originated. Mortgage servicing rights are initially recorded at fair value and are
amortized over the period of estimated servicing income. Mortgage servicing rights are carried on
the consolidated balance sheet at the lower of amortized cost or fair value. We utilize the
expertise of a third-party consultant to estimate the fair value of our mortgage servicing rights
quarterly. In evaluating the mortgage servicing rights, the consultant uses discounted cash flow
modeling techniques, which require estimates regarding the amount and timing of expected future
cash flows, including assumptions about loan repayment rates, costs to service, as well as interest
rate assumptions that contemplate the risk involved. Management believes the valuation techniques
and assumptions used by the consultant are reasonable.
Determining the fair value of mortgage servicing rights is considered a critical accounting
estimate because of the assets sensitivity to changes in estimates and assumptions used,
particularly loan prepayment speeds and discount rates. Changes in these estimates and assumptions
are reasonably possible and may have a material impact on our consolidated financial statements,
results of operations or liquidity.
At December 31, 2006, the consultants valuation model indicated that an immediate 25 basis
point decrease in mortgage interest rates would result in a reduction in fair value of mortgage
servicing rights of $3.9 million and an immediate 50 basis point decrease in mortgage interest
rates would result in a reduction in fair value of $8.9 million.
For additional information regarding mortgage servicing rights, see Managements Discussion
and Analysis of Financial Condition and Results of Operations Financial Condition Mortgage
Servicing Rights included below, and Notes to Consolidated Financial Statements Mortgage
Servicing Rights, included in Part IV, Item 15. See also Part I, Item 1A, Risk Factors Market
Risks.
Results of Operations
Net Interest Income
Net interest income, the largest source of our operating income, is derived from interest,
dividends and fees received on interest earning assets, less interest expense incurred on interest
bearing liabilities. Interest earning assets primarily include loans and investment securities.
Interest bearing liabilities include deposits and various forms of indebtedness. Net interest
income is affected by the level of interest rates, changes in interest rates and changes in the
composition of interest earning assets and interest bearing liabilities.
The most significant impact on our net interest income between periods is derived from the
interaction of changes in the volume of and rates earned or paid on interest earning assets and
interest bearing liabilities. The volume of loans, investment securities and other interest
earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with
the interest rate spread, produces changes in the net interest income between periods.
- 23 -
The following table presents, for the periods indicated, condensed average balance sheet
information, together with interest income and yields earned on average interest earning assets and
interest expense and rates paid on average interest bearing liabilities.
Average
Balance Sheets, Yields and Rates
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2) |
|
$ |
3,208,102 |
|
|
$ |
246,861 |
|
|
|
7.69 |
% |
|
$ |
2,874,723 |
|
|
$ |
196,453 |
|
|
|
6.83 |
% |
|
$ |
2,629,474 |
|
|
$ |
162,598 |
|
|
|
6.18 |
% |
U.S. and agency securities |
|
|
915,844 |
|
|
|
40,985 |
|
|
|
4.48 |
|
|
|
779,369 |
|
|
|
30,054 |
|
|
|
3.86 |
|
|
|
715,363 |
|
|
|
25,272 |
|
|
|
3.53 |
|
Federal funds sold |
|
|
43,726 |
|
|
|
2,196 |
|
|
|
5.02 |
|
|
|
83,156 |
|
|
|
2,766 |
|
|
|
3.33 |
|
|
|
69,225 |
|
|
|
1,071 |
|
|
|
1.55 |
|
Other securities |
|
|
1,059 |
|
|
|
6 |
|
|
|
0.57 |
|
|
|
7,599 |
|
|
|
201 |
|
|
|
2.65 |
|
|
|
12,825 |
|
|
|
315 |
|
|
|
2.46 |
|
Tax exempt securities (2) |
|
|
105,209 |
|
|
|
6,832 |
|
|
|
6.49 |
|
|
|
103,364 |
|
|
|
6,744 |
|
|
|
6.53 |
|
|
|
95,376 |
|
|
|
6,489 |
|
|
|
6.80 |
|
Interest bearing deposits in banks |
|
|
8,190 |
|
|
|
360 |
|
|
|
4.40 |
|
|
|
31,325 |
|
|
|
1,021 |
|
|
|
3.26 |
|
|
|
14,411 |
|
|
|
281 |
|
|
|
1.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earnings assets |
|
|
4,282,130 |
|
|
|
297,240 |
|
|
|
6.94 |
|
|
|
3,879,536 |
|
|
|
237,239 |
|
|
|
6.12 |
|
|
|
3,536,674 |
|
|
|
196,026 |
|
|
|
5.54 |
|
Nonearning assets |
|
|
444,702 |
|
|
|
|
|
|
|
|
|
|
|
454,545 |
|
|
|
|
|
|
|
|
|
|
|
460,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,726,832 |
|
|
|
|
|
|
|
|
|
|
$ |
4,334,081 |
|
|
|
|
|
|
|
|
|
|
$ |
3,997,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
850,925 |
|
|
|
15,852 |
|
|
|
1.86 |
% |
|
$ |
667,668 |
|
|
$ |
4,795 |
|
|
|
0.72 |
% |
|
$ |
576,909 |
|
|
$ |
1,618 |
|
|
|
0.28 |
% |
Savings deposits |
|
|
845,967 |
|
|
|
17,424 |
|
|
|
2.06 |
|
|
|
902,749 |
|
|
|
11,151 |
|
|
|
1.24 |
|
|
|
898,631 |
|
|
|
6,664 |
|
|
|
0.74 |
|
Time deposits |
|
|
1,010,820 |
|
|
|
39,991 |
|
|
|
3.96 |
|
|
|
1,013,159 |
|
|
|
29,641 |
|
|
|
2.93 |
|
|
|
1,027,096 |
|
|
|
26,022 |
|
|
|
2.53 |
|
Borrowings (3) |
|
|
683,776 |
|
|
|
27,636 |
|
|
|
4.04 |
|
|
|
507,131 |
|
|
|
12,750 |
|
|
|
2.51 |
|
|
|
387,609 |
|
|
|
3,814 |
|
|
|
0.98 |
|
Long-term debt |
|
|
40,320 |
|
|
|
1,576 |
|
|
|
3.91 |
|
|
|
61,055 |
|
|
|
2,480 |
|
|
|
4.06 |
|
|
|
52,732 |
|
|
|
2,329 |
|
|
|
4.42 |
|
Subordinated debenture held
by subsidiary trust/trust
preferred securities |
|
|
41,238 |
|
|
|
3,481 |
|
|
|
8.44 |
|
|
|
41,238 |
|
|
|
2,732 |
|
|
|
6.62 |
|
|
|
41,238 |
|
|
|
1,974 |
|
|
|
4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
3,473,046 |
|
|
|
105,960 |
|
|
|
3.05 |
|
|
|
3,193,000 |
|
|
|
63,549 |
|
|
|
1.99 |
|
|
|
2,984,215 |
|
|
|
42,421 |
|
|
|
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits |
|
|
837,909 |
|
|
|
|
|
|
|
|
|
|
|
780,427 |
|
|
|
|
|
|
|
|
|
|
|
693,705 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
44,860 |
|
|
|
|
|
|
|
|
|
|
|
34,854 |
|
|
|
|
|
|
|
|
|
|
|
30,655 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
371,017 |
|
|
|
|
|
|
|
|
|
|
|
325,800 |
|
|
|
|
|
|
|
|
|
|
|
288,426 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
4,726,832 |
|
|
|
|
|
|
|
|
|
|
$ |
4,334,081 |
|
|
|
|
|
|
|
|
|
|
$ |
3,997,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest income |
|
|
|
|
|
$ |
191,280 |
|
|
|
|
|
|
|
|
|
|
$ |
173,690 |
|
|
|
|
|
|
|
|
|
|
$ |
153,605 |
|
|
|
|
|
Less FTE adjustments (2) |
|
|
|
|
|
|
(3,817 |
) |
|
|
|
|
|
|
|
|
|
|
(3,382 |
) |
|
|
|
|
|
|
|
|
|
|
(3,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from consolidated statements of income |
|
|
|
|
|
$ |
187,463 |
|
|
|
|
|
|
|
|
|
|
$ |
170,308 |
|
|
|
|
|
|
|
|
|
|
$ |
150,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
4.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest margin (4) |
|
|
|
|
|
|
|
|
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
4.48 |
% |
|
|
|
|
|
|
|
|
|
|
4.34 |
% |
|
|
|
|
(1) |
|
Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of loan fees, which is not material. |
|
(2) |
|
Interest income and average rates for tax exempt loans and securities are
presented on a fully -taxable equivalent basis. |
|
(3) |
|
Includes interest on federal funds purchased, securities sold under repurchase
agreements and other borrowed funds. Excludes long-term debt. |
|
(4) |
|
Net FTE interest margin during the period equals (i) the difference between
interest income on interest earning assets and the interest expense on interest bearing
liabilities, divided by (ii) average interest earning assets for the period. |
Although faced with a continuing yield-rate environment in which short-term interest
rates are higher than long-term interest rates, which typically constrains a banks ability to
maintain its net interest margin, our net interest income, on a fully taxable equivalent, or FTE,
basis, increased $17.6 million, or 10.1% to $191.3 million in 2006 from $173.7 million in 2005, and
$20.1 million, or 13.1%, to $173.7 million in 2005 from $153.6 million in 2004 primarily due to
organic growth in earning assets. Average earning assets grew 10.4% in 2006 as compared to 2005,
and 9.7% in 2005 as compared to 2004.
- 24 -
In addition, interest-free funding sources, including noninterest-bearing deposits, other
liabilities and common equity, contributed more of our funding base in 2006 and 2005, allowing us
to be less reliant on higher costing funding sources such as time deposits, short-term borrowings
and long-term debt. Further contributing to improvements in net FTE interest income in 2006 and
2005 were increases in earning assets as a percentage of total assets.
The net FTE interest margin for 2006 remained stable at 4.47% in 2006, a one basis point
decline from 4.48% in 2005, and increased 14 basis points to 4.48% in 2005, as compared to 4.34% in
2004. The net FTE interest margin for fourth quarter 2006 decreased 11 basis points to 4.38%, as
compared to 4.49% for the same period in 2005, primarily the result of competitive pressure to
raise interest rates paid on deposit accounts and repurchase agreements during the last half of
2006, while yields on interest earning assets increased at a slower pace.
The table below sets forth, for the periods indicated, a summary of the changes in interest
income and interest expense resulting from estimated changes in average asset and liability
balances (volume) and estimated changes in average interest rates (rate). Changes which are not
due solely to volume or rate have been allocated to these categories based on the respective
percent changes in average volume and average rate as they compare to each other.
Analysis
of Interest Changes Due To Volume and Rates
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
Year Ended December 31, 2005 |
|
Year Ended December 31, 2004 |
|
|
compared with |
|
compared with |
|
compared with |
|
|
December 31, 2005 |
|
December 31, 2004 |
|
December 31, 2003 |
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
22,782 |
|
|
$ |
27,626 |
|
|
$ |
50,408 |
|
|
$ |
15,165 |
|
|
$ |
18,690 |
|
|
$ |
33,855 |
|
|
$ |
11,797 |
|
|
$ |
(8,699 |
) |
|
$ |
3,098 |
|
U.S. and agency securities |
|
|
5,263 |
|
|
|
5,668 |
|
|
|
10,931 |
|
|
|
2,261 |
|
|
|
2,521 |
|
|
|
4,782 |
|
|
|
1,355 |
|
|
|
(1,429 |
) |
|
|
(74 |
) |
Federal funds sold |
|
|
(1,312 |
) |
|
|
742 |
|
|
|
(570 |
) |
|
|
216 |
|
|
|
1,479 |
|
|
|
1,695 |
|
|
|
212 |
|
|
|
314 |
|
|
|
526 |
|
Other securities (2) |
|
|
(173 |
) |
|
|
(22 |
) |
|
|
(195 |
) |
|
|
(128 |
) |
|
|
14 |
|
|
|
(114 |
) |
|
|
(179 |
) |
|
|
(46 |
) |
|
|
(225 |
) |
Tax exempt securities (1)(2) |
|
|
120 |
|
|
|
(32 |
) |
|
|
88 |
|
|
|
543 |
|
|
|
(288 |
) |
|
|
255 |
|
|
|
453 |
|
|
|
(201 |
) |
|
|
252 |
|
Interest bearing deposits
in banks |
|
|
(754 |
) |
|
|
93 |
|
|
|
(661 |
) |
|
|
343 |
|
|
|
397 |
|
|
|
740 |
|
|
|
192 |
|
|
|
70 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
25,926 |
|
|
|
34,075 |
|
|
|
60,001 |
|
|
|
18,400 |
|
|
|
22,813 |
|
|
|
41,213 |
|
|
|
13,830 |
|
|
|
(9,991 |
) |
|
|
3,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,316 |
|
|
|
9,741 |
|
|
|
11,057 |
|
|
|
255 |
|
|
|
2,922 |
|
|
|
3,177 |
|
|
|
136 |
|
|
|
(215 |
) |
|
|
(79 |
) |
Savings deposits |
|
|
(701 |
) |
|
|
6,974 |
|
|
|
6,273 |
|
|
|
30 |
|
|
|
4,457 |
|
|
|
4,487 |
|
|
|
618 |
|
|
|
(466 |
) |
|
|
152 |
|
Time deposits |
|
|
(68 |
) |
|
|
10,418 |
|
|
|
10,350 |
|
|
|
(353 |
) |
|
|
3,972 |
|
|
|
3,619 |
|
|
|
(993 |
) |
|
|
(6,164 |
) |
|
|
(7,157 |
) |
Borrowings (3) |
|
|
4,441 |
|
|
|
10,445 |
|
|
|
14,886 |
|
|
|
1,176 |
|
|
|
7,760 |
|
|
|
8,936 |
|
|
|
450 |
|
|
|
1,040 |
|
|
|
1,490 |
|
Long-term debt |
|
|
(842 |
) |
|
|
(62 |
) |
|
|
(904 |
) |
|
|
368 |
|
|
|
(217 |
) |
|
|
151 |
|
|
|
188 |
|
|
|
(233 |
) |
|
|
(45 |
) |
Subordinated debenture held
by subsidiary trust/trust
preferred securities |
|
|
|
|
|
|
749 |
|
|
|
749 |
|
|
|
|
|
|
|
758 |
|
|
|
758 |
|
|
|
(166 |
) |
|
|
(388 |
) |
|
|
(554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
4,146 |
|
|
|
38,265 |
|
|
|
42,411 |
|
|
|
1,476 |
|
|
|
19,652 |
|
|
|
21,128 |
|
|
|
233 |
|
|
|
(6,426 |
) |
|
|
(6,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in FTE
net interest income (1) |
|
$ |
21,780 |
|
|
$ |
(4,190 |
) |
|
$ |
17,590 |
|
|
$ |
16,924 |
|
|
$ |
3,161 |
|
|
$ |
20,085 |
|
|
$ |
13,597 |
|
|
$ |
(3,565 |
) |
|
$ |
10,032 |
|
|
|
|
|
(1) |
|
Interest income and average rates for tax exempt loans and securities are
presented on a FTE basis. |
|
(2) |
|
Held-to-maturity investment securities are presented at amortized cost. |
|
(3) |
|
Includes interest on federal funds purchased, securities sold under
repurchase agreements and other borrowed funds. |
Provision for Loan Losses
The provision for loan losses creates an allowance for loan losses known and inherent in the
loan portfolio at each balance sheet date. We perform a quarterly assessment of the risks inherent
in our loan portfolio, as well as a detailed review of each significant asset with identified
weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the
allowance for loan losses at appropriate levels. In determining the allowance for loan losses, we
estimate losses on specific loans, or groups of loans, where the probable loss can be identified
and reasonably determined. The balance of the allowance for loan losses is based on internally
assigned risk classifications of loans, historical loan loss rates, changes in the nature of the
loan portfolio, overall portfolio quality, industry concentrations,
delinquency trends, current economic factors and the estimated impact of current economic
conditions on certain historical loan loss rates. Fluctuations in the provision for loan losses
result from managements assessment of the adequacy of the allowance for loan losses. Ultimate
loan losses may vary from current estimates. For additional information concerning the provision
for loan losses, see Critical Accounting Estimates and Significant Accounting Policies above.
- 25 -
The provision for loan losses increased 32.7% to $7.8 million in 2006, from $5.8 million in
2005 primarily due to higher levels of internally classified loans in 2006 and refinement of our
process for assessing risk known and inherent in our loan portfolio. The provision for loan losses
decreased 33.0% to $5.8 million in 2005, from $8.7 million in 2004 primarily due to lower levels of
non-performing loans, net charge-offs and internally classified loans in 2005.
Noninterest Income
Principal sources of noninterest income include other service charges, commissions and fees;
service charges on deposit accounts; technology services revenues; income from the origination and
sale of loans; and, revenues from financial services. Noninterest income increased 44.5% to $101.5
million in 2006, from $70.3 million in 2005, and decreased less than 1%, to $70.3 million in 2005,
from $70.6 million in 2004. Fluctuations in noninterest income are a function of changes in each
of the principal categories discussed below.
Other service charges, commissions and fees primarily include debit and credit card
interchange income; mortgage servicing fees; investment services revenues; and, ATM service charge
revenues. Other service charges, commissions and fees increased 13.0% to $21.9 million in 2006,
from $19.4 million in 2005, and 20.3% to $19.4 million in 2005, from $16.1 million in 2004. These
increases are primarily attributable to additional fee income from higher volumes of credit and
debit card transactions and increases in mortgage servicing revenues, the result of increases in
the principal balances of loans serviced.
Technology services revenues increased 19.1% to $15.8 million in 2006, from $13.3 million in
2005, and 5.8% to $13.3 million in 2005, from $12.6 million in 2004, primarily due to increases in
the number of customers using core date processing services and the volume of core data and debit
card transactions processed.
Financial services revenues, comprised principally of fees earned for management of trust
assets and investment services revenues, increased 11.3% to $10.6 million in 2006, from $9.5
million in 2005, and 7.8% to $9.5 million in 2005, from $8.8 million in 2005, primarily due to
higher asset management fees resulting from the improved market performance of underlying trust
account assets and the addition of new trust and investment services customers.
Income from the origination and sale of loans includes origination and processing fees on
residential real estate loans held for sale and gains on residential real estate loans sold to
third parties. Fluctuations in market interest rates have a significant impact on the level of
income generated from the origination and sale of loans. Higher interest rates can substantially
reduce the demand for home loans and loans to refinance existing mortgages. Conversely, lower
interest rates generally stimulate refinancing and home loan origination. Income from the
origination and sale of loans increased 11.5% to $9.6 million in 2006, from $8.6 million in 2005,
and 2.9% to $8.6 million in 2005, from $8.4 million in 2004.
We recorded net losses of $722 thousand on sales of investment securities in 2006, as compared
to $3.7 million in 2005, and $797 thousand in 2004. During 2005 and continuing in 2006, we
partially restructured our investment security portfolio by selling lower yielding U.S. government
agency securities and reinvesting the proceeds in higher yielding mortgage-backed and U.S.
government agency securities.
During fourth quarter 2006, we recorded a one-time gain of $19.8 million on the sale of our
minority interest in an unconsolidated internet bill payment joint venture. Aggregate
consideration for the sale was $21.2, of which $19.9 was received in cash and $1.4 was placed in
escrow to offset purchase price adjustments related to working capital and indemnify potential loss
claims. For additional information concerning this sale and the resulting gain, see Notes to
Consolidated Financial Statements Acquisitions and Dispositions included in Part IV, Item 15.
Other income primarily includes increases in company-owned life insurance revenues, check
printing income and agency stock dividends and gains on sales of assets other than investment
securities. Noninterest income increased 18.7% to $6.9 million in 2006, from $5.8 million in 2005,
primarily due to higher earnings on securities held under deferred compensation plans, higher
earnings of unconsolidated equity method joint ventures and increases in the cash surrender value
of life insurance. Exclusive of a $1.7 million gain on the sale of a banking office recorded
during third quarter 2004, other income increased 17.9% to $5.8 million in 2005, from $4.9 million
in 2004, primarily due to
increases in check printing income, higher earnings on securities held under deferred
compensation plans and gains on the sale of other real estate owned.
Noninterest Expense
Noninterest expense increased 8.9% to $164.1 million in 2006, from $150.7 million in 2005, and
5.4% to $150.7 million in 2005, from $143.0 million in 2004. Significant components of these
increases are discussed below.
- 26 -
During 2005, we recorded expenses of $1.1 million directly related to the discontinuation of
operations of our Wal-Mart in-store banking offices, including lease termination fees and estimated
costs to restore leased facilities to their original condition of $375 thousand; acceleration of
depreciation on leasehold improvements and equipment attached to the premises of $620 thousand;
and, accruals for employment incentive awards of $92 thousand.
Salaries, wages and employee benefits expense increased 11.1% to $88.9 million in 2006, from
$80.0 million in 2005, primarily due to inflationary wage increases, higher incentive compensation
and profit sharing contributions reflective of operating results in 2006 and increases in group
medical insurance costs. In addition, we adopted SFAS No. 123 (revised), Share-Based Payments,
on January 1, 2006. We recognized compensation expense for stock option and restricted stock
awards of $1.3 million in 2006, as compared to $289 thousand in 2005.
Salaries, wages and employee benefits expense increased 8.2% to $80.0 million in 2005, from
$74.0 million in 2004, primarily due to inflationary wage increases; and, higher incentive
compensation and profit sharing contributions reflective of operating results in 2005.
Mortgage servicing rights are amortized in proportion to and over the period of estimated net
servicing income. Changes in estimated servicing period and growth in the serviced loan portfolio
cause amortization expense to vary between periods. Mortgage servicing rights amortization
decreased 12.8% to $4.0 million in 2006, from $4.6 million in 2005, and increased 15.8% to $4.6
million in 2005, from $4.0 million in 2004.
Mortgage servicing rights are evaluated quarterly for impairment by discounting the expected
future cash flows, taking into consideration the estimated level of prepayments based on current
industry expectations and the predominant risk characteristics of the underlying loans. Impairment
adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for
changes in impairment through a charge to current period earnings. We recorded impairment charges
of $1.7 million in 2006 and reversed previously recorded impairment of $2.2 million and $263
thousand in 2005 and 2004, respectively.
Professional fees increased 11.4% to $3.2 million in 2006, from $2.8 million in 2005,
primarily due to consulting fees related to evaluation of software and implementation of a
company-wide data warehousing system. Professional fees decreased 10.5% to $2.8 million in 2005,
from $3.2 million in 2004, primarily due to additional fees incurred in 2004 related to the
implementation of automated overdraft processing and account reconciliation systems.
Outsourced technology services principally include ATM network expense and costs of data
processing consulting and other services provided by third parties. Outsourced technology services
expense increased 37.6% to $3.2 million in 2006, from $2.3 million in 2005, and decreased 2.7% to
$2.3 million in 2005, from $2.4 million in 2004. Increases in 2006 are primarily due to expenses
related to the development of a new internet-based corporate cash management product and the
redesign and customization of our corporate internet banking site.
Other expenses primarily include advertising and public relations costs; office supply,
postage, freight, telephone and travel expenses; donations expense; board of director fees; and,
other losses. Other expenses remained relatively constant at $32.8 in 2006 and 2005. Increases
in travel expense in 2006 were largely offset by decreases in losses on the disposal of fixed
assets. Other expenses increased 3.6% to $32.8 million in 2005, from $31.7 million in 2004,
primarily due to recognition of approximately $430 thousand of expense related to multi-year
donations expensed in 2005; recognition of a $313 thousand loss on the disposal of obsolete
mainframe equipment; and, inflationary increases in other expenses. These increases were partially
offset by lower Federal Reserve service fees resulting from implementation of electronic item
submission to accelerate item clearing and lower required compensating balances.
Income Tax Expense
Our effective federal tax rate was 31.6% for the year ended December 31, 2006;
31.0% for the year ended December 31, 2005; and, 30.6% for the year ended December 31, 2004.
Increases in federal income tax rates
during 2006 and 2005 are primarily due to decreases in tax exempt interest income as a
percentage of total income. State income tax applies primarily to pretax earnings generated within
Montana, Colorado, Idaho and Oregon. Our effective state tax rate was 3.8% for the years ended
December 31, 2006 and 2005, and 3.9% for year ended December 31, 2004.
- 27 -
Operating Segment Results
The following table summarizes net income (loss) for each of our operating segments for the
years indicated.
Operating
Segment Results
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Community Banking |
|
$ |
66,691 |
|
|
$ |
57,144 |
|
|
$ |
47,579 |
|
Technology Services |
|
|
3,761 |
|
|
|
4,193 |
|
|
|
3,962 |
|
Other |
|
|
5,157 |
|
|
|
(6,622 |
) |
|
|
(6,120 |
) |
|
Consolidated |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
Our principal operating segment is Community Banking, which encompasses commercial and
consumer banking services offered to individuals, businesses, municipalities and other entities.
The Community Banking segment represented over 88% of our combined revenues and income during 2006,
2005 and 2004, and our consolidated assets as of December 31, 2006 and 2005. Components of the
changes in Community Banking net income in 2006 as compared to 2005, and in 2005 as compared to
2004, are discussed above.
The Technology Services operating segment encompasses services provided through i_Tech to
affiliated and non-affiliated customers including core application data processing, ATM and debit
card processing, item proof and capture, wide area network services and system support. Technology
Services net income decreased 10.3% to $3.8 million in 2006, from $4.2 million in 2005. Higher
revenues from increases in the number of customers using core date processing services and the
volume of core data and debit card transactions processed in 2006 were offset primarily by
increases in salary and benefits expenses due to higher staffing levels and increases in equipment
maintenance and repair expense.
Included in Other is the net funding cost and other expenses of the parent holding company,
compensation expense or benefit related to equity-based employee compensation, the operational
results of consolidated nonbank subsidiaries (except i_Tech) and intercompany eliminations. During
2006, the parent holding company recorded a one-time after tax gain of $12.3 million on the sale of
its equity interest in an unconsolidated joint venture. This gain was partially offset by
additional after tax compensation expense for stock options and restricted stock awards of $621
thousand resulting from the adoption of SFAS No. 123 (revised) on January 1, 2006.
For
additional information regarding the our operating segments, see
Business Operating Segments included in Part I, Item 1,
and Notes to Consolidated Financial Statements Segment Reporting
included in Part IV, Item 15.
- 28 -
Summary of Quarterly Results
The following table presents unaudited quarterly results of operations for the fiscal years
ended December 31, 2006 and 2005.
Quarterly Results
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
Year Ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
66,969 |
|
|
$ |
71,558 |
|
|
$ |
76,416 |
|
|
$ |
78,480 |
|
|
$ |
293,423 |
|
Interest expense |
|
|
21,354 |
|
|
|
25,594 |
|
|
|
28,614 |
|
|
|
30,398 |
|
|
|
105,960 |
|
Net interest income |
|
|
45,615 |
|
|
|
45,964 |
|
|
|
47,802 |
|
|
|
48,082 |
|
|
|
187,463 |
|
Provision for loan losses |
|
|
1,753 |
|
|
|
2,578 |
|
|
|
2,029 |
|
|
|
1,401 |
|
|
|
7,761 |
|
Net interest income after
provision for loan losses |
|
|
43,862 |
|
|
|
43,386 |
|
|
|
45,773 |
|
|
|
46,681 |
|
|
|
179,702 |
|
Noninterest income |
|
|
19,120 |
|
|
|
20,059 |
|
|
|
21,378 |
|
|
|
40,991 |
|
|
|
101,548 |
|
Noninterest expense |
|
|
38,194 |
|
|
|
38,717 |
|
|
|
41,300 |
|
|
|
45,931 |
|
|
|
164,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
24,788 |
|
|
|
24,728 |
|
|
|
25,851 |
|
|
|
41,741 |
|
|
|
117,108 |
|
Income tax expense |
|
|
8,654 |
|
|
|
8,591 |
|
|
|
9,105 |
|
|
|
15,149 |
|
|
|
41,499 |
|
|
Net income |
|
$ |
16,134 |
|
|
$ |
16,137 |
|
|
$ |
16,746 |
|
|
$ |
26,592 |
|
|
$ |
75,609 |
|
|
Basic earnings per common share |
|
$ |
1.99 |
|
|
$ |
1.99 |
|
|
$ |
2.07 |
|
|
$ |
3.27 |
|
|
$ |
9.32 |
|
Diluted earnings per common share |
|
|
1.95 |
|
|
|
1.95 |
|
|
|
2.02 |
|
|
|
3.18 |
|
|
|
9.11 |
|
Dividends per common share |
|
|
0.50 |
|
|
|
0.58 |
|
|
|
0.58 |
|
|
|
0.61 |
|
|
|
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
51,967 |
|
|
$ |
55,544 |
|
|
$ |
61,423 |
|
|
$ |
64,923 |
|
|
$ |
233,857 |
|
Interest expense |
|
|
12,634 |
|
|
|
14,672 |
|
|
|
16,806 |
|
|
|
19,437 |
|
|
|
63,549 |
|
Net interest income |
|
|
39,333 |
|
|
|
40,872 |
|
|
|
44,617 |
|
|
|
45,486 |
|
|
|
170,308 |
|
Provision for loan losses |
|
|
1,625 |
|
|
|
1,365 |
|
|
|
1,375 |
|
|
|
1,482 |
|
|
|
5,847 |
|
Net interest income after
provision for loan losses |
|
|
37,708 |
|
|
|
39,507 |
|
|
|
43,242 |
|
|
|
44,004 |
|
|
|
164,461 |
|
Noninterest income |
|
|
16,949 |
|
|
|
17,739 |
|
|
|
17,563 |
|
|
|
18,039 |
|
|
|
70,290 |
|
Noninterest expense |
|
|
36,396 |
|
|
|
37,542 |
|
|
|
37,243 |
|
|
|
39,545 |
|
|
|
150,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
18,261 |
|
|
|
19,704 |
|
|
|
23,562 |
|
|
|
22,498 |
|
|
|
84,025 |
|
Income tax expense |
|
|
6,302 |
|
|
|
6,824 |
|
|
|
8,288 |
|
|
|
7,896 |
|
|
|
29,310 |
|
|
Net income |
|
$ |
11,959 |
|
|
$ |
12,880 |
|
|
$ |
15,274 |
|
|
$ |
14,602 |
|
|
$ |
54,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
1.50 |
|
|
$ |
1.62 |
|
|
$ |
1.91 |
|
|
$ |
1.78 |
|
|
$ |
6.84 |
|
Diluted earnings per common share |
|
|
1.48 |
|
|
|
1.59 |
|
|
|
1.88 |
|
|
|
1.77 |
|
|
|
6.71 |
|
Dividends per common share |
|
|
0.42 |
|
|
|
0.48 |
|
|
|
0.48 |
|
|
|
0.50 |
|
|
|
1.88 |
|
|
Financial Condition
Total assets increased 9.0% to $4,974 million as of December 31, 2006, from
$4,562 million as of December 31, 2005, primarily due to organic loan growth and increases in
available-for-sale investment securities. Asset growth was primarily funded by increases in
customer deposits and securities sold under repurchase agreements.
Loans
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and
other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are
directly related to the economies of the communities we serve. While each loan originated
generally must meet minimum underwriting standards established in our credit policies, lending
officers are granted certain levels of autonomy in approving and pricing loans to assure that the
banking offices are responsive to competitive issues and community needs in each market area.
- 29 -
Real Estate Loans. We provide interim construction and permanent financing for both
single-family and multi-unit properties, medium-term loans for commercial, agricultural and
industrial property and/or buildings and equity lines of credit secured by real estate.
Residential real estate loans are typically sold in the secondary market. Those residential real
estate loans not sold are typically secured by first liens on the financed property and generally
mature in less than 10 years. Commercial, agricultural and industrial loans are generally secured
by first liens on income-producing real estate and generally mature in less than five years.
Consumer Loans. Our consumer loans include direct personal loans, credit card loans and lines
of credit; and, indirect loans created when we purchase consumer loan contracts advanced for the
purchase of automobiles, boats and other consumer goods from consumer product dealers. Personal
loans and indirect dealer loans are generally secured by automobiles, boats and other types of
personal property and are made on an installment basis. Credit cards are offered to individual and
business customers in our market areas. Lines of credit are generally floating rate loans that are
unsecured or secured by personal property. Approximately 61% of our consumer loans as of December
31, 2006, are indirect dealer loans.
Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The loans are
typically made to small and medium-sized manufacturing, wholesale, retail and service businesses
for working capital needs and business expansions. Commercial loans generally include lines of
credit and loans with maturities of five years or less. The loans are generally made with
business operations as the primary source of repayment, but also include collateralization by
inventory, accounts receivable, equipment and/or personal guarantees.
Agricultural Loans. Our agricultural loans generally consist of short and medium-term loans
and lines of credit that are primarily used for crops, livestock, equipment and general operations.
Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid
from the operations of the farm or ranch. Agricultural loans generally have maturities of five
years or less, with operating lines for one production season.
Total loans increased 9.1% to $3,310 million as of December 31, 2006, from $3,034 million as
of December 31, 2005, and 10.8% to $3,034 million as of December 31, 2005, from $2,740 as of
December 31, 2004, due to organic growth within our market areas.
The following table presents the composition of our loan portfolio as of the dates indicated:
Loans
Outstanding
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
Percent |
|
|
2005 |
|
|
Percent |
|
|
2004 |
|
|
Percent |
|
|
2003 |
|
|
Percent |
|
|
2002 |
|
|
Percent |
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
919,912 |
|
|
|
27.8 |
% |
|
$ |
907,041 |
|
|
|
29.8 |
% |
|
$ |
838,858 |
|
|
|
30.6 |
% |
|
$ |
753,551 |
|
|
|
29.4 |
% |
|
$ |
652,606 |
|
|
|
29.1 |
% |
Residential |
|
|
420,251 |
|
|
|
12.7 |
|
|
|
427,808 |
|
|
|
14.1 |
|
|
|
379,998 |
|
|
|
13.9 |
|
|
|
348,901 |
|
|
|
13.7 |
|
|
|
287,996 |
|
|
|
12.9 |
|
Construction |
|
|
579,603 |
|
|
|
17.5 |
|
|
|
403,751 |
|
|
|
13.3 |
|
|
|
296,773 |
|
|
|
10.8 |
|
|
|
244,784 |
|
|
|
9.6 |
|
|
|
127,102 |
|
|
|
5.7 |
|
Other |
|
|
163,019 |
|
|
|
4.9 |
|
|
|
135,469 |
|
|
|
4.5 |
|
|
|
129,600 |
|
|
|
4.7 |
|
|
|
149,963 |
|
|
|
5.9 |
|
|
|
147,026 |
|
|
|
6.6 |
|
Consumer |
|
|
605,858 |
|
|
|
18.3 |
|
|
|
587,895 |
|
|
|
19.4 |
|
|
|
514,045 |
|
|
|
18.8 |
|
|
|
491,938 |
|
|
|
19.3 |
|
|
|
470,668 |
|
|
|
21.0 |
|
Commercial |
|
|
542,325 |
|
|
|
16.4 |
|
|
|
494,848 |
|
|
|
16.3 |
|
|
|
500,611 |
|
|
|
18.3 |
|
|
|
480,725 |
|
|
|
18.8 |
|
|
|
460,536 |
|
|
|
20.6 |
|
Agricultural |
|
|
76,644 |
|
|
|
2.3 |
|
|
|
74,561 |
|
|
|
2.5 |
|
|
|
74,303 |
|
|
|
2.7 |
|
|
|
82,634 |
|
|
|
3.2 |
|
|
|
87,144 |
|
|
|
3.9 |
|
Other loans |
|
|
2,751 |
|
|
|
0.1 |
|
|
|
2,981 |
|
|
|
0.1 |
|
|
|
5,321 |
|
|
|
0.2 |
|
|
|
2,403 |
|
|
|
0.1 |
|
|
|
3,472 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
3,310,363 |
|
|
|
100.0 |
% |
|
|
3,034,354 |
|
|
|
100.0 |
% |
|
|
2,739,509 |
|
|
|
100.0 |
% |
|
|
2,554,899 |
|
|
|
100.0 |
% |
|
|
2,236,550 |
|
|
|
100.0 |
% |
Less allowance for
loan losses |
|
|
47,452 |
|
|
|
|
|
|
|
42,450 |
|
|
|
|
|
|
|
42,141 |
|
|
|
|
|
|
|
38,940 |
|
|
|
|
|
|
|
36,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
3,262,911 |
|
|
|
|
|
|
$ |
2,991,904 |
|
|
|
|
|
|
$ |
2,697,368 |
|
|
|
|
|
|
$ |
2,515,959 |
|
|
|
|
|
|
$ |
2,200,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance
to total loans |
|
|
1.43 |
% |
|
|
|
|
|
|
|
|
|
|
1.40 |
% |
|
|
|
|
|
|
1.54 |
% |
|
|
|
|
|
|
1.52 |
% |
|
|
|
|
|
|
1.62 |
% |
|
Construction loans increased 43.6% to $580 million as of December 31, 2006, from $404
million as of December 31, 2005, and 36.0% to $404 million as of December 31, 2005, from $297
million as of December 31, 2004. Construction loans are primarily to commercial builders for the
construction of single-family residences and commercial real estate properties. Construction loans
are generally underwritten pursuant to the same guidelines used for originating permanent
commercial and residential mortgage loans. Terms and rates typically match those of permanent
commercial and
residential mortgage loans, except that during the construction phase the borrower pays
interest only. Growth in construction loans in 2006 and 2005 was primarily the result of strong
demand for housing in our market areas.
- 30 -
Other real estate loans are comprised primarily of agricultural real estate loans. Other real
estate loans increased 20.3% to $163 million as of December 31, 2006, from $135 million as of
December 31, 2005, primarily due to the addition of one new loan and the reclassification of one
existing loan from commercial real estate to agricultural real estate in 2006.
Consumer loans increased 3.1% to $606 million as of December 31, 2006, from $588 million as of
December 31, 2005, and 14.4% to $588 million a of December 31, 2005, from $514 million as of
December 31, 2004, primarily due to increases in indirect consumer loans, the result of a strategic
management decision to implement a centralized approach to indirect lending decisions and product
pricing in 2005.
Commercial loans increased 9.6% to $542 million as of December 31, 2006, from $495 million as
of December 31, 2005, due to a favorable economy and growth in our existing market areas and an
increase in overall borrowing activity.
Residential real estate loans decreased 1.8% to $420 million as of December 31, 2005, from
$428 million as of December 31, 2005. During 2006, we retained fewer of the residential real
estate loans we originated to take advantage of generally favorable pricing for loans on the
secondary market.
The following table presents the maturity distribution of our loan portfolio and the
sensitivity of the loans to changes in interest rates as of December 31, 2006:
Maturities
and Interest Rate Sensitivities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
One Year to |
|
After |
|
|
|
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
Real estate |
|
$ |
1,002,905 |
|
|
$ |
719,071 |
|
|
$ |
360,809 |
|
|
$ |
2,082,785 |
|
Consumer |
|
|
319,040 |
|
|
|
269,263 |
|
|
|
17,555 |
|
|
|
605,858 |
|
Commercial |
|
|
430,845 |
|
|
|
104,210 |
|
|
|
7,270 |
|
|
|
542,325 |
|
Agricultural |
|
|
68,526 |
|
|
|
8,042 |
|
|
|
76 |
|
|
|
76,644 |
|
Other loans |
|
|
2,751 |
|
|
|
|
|
|
|
|
|
|
|
2,751 |
|
|
Total loans |
|
$ |
1,824,067 |
|
|
$ |
1,100,586 |
|
|
$ |
385,710 |
|
|
$ |
3,310,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at fixed interest rates |
|
$ |
702,426 |
|
|
$ |
920,732 |
|
|
$ |
159,528 |
|
|
$ |
1,782,686 |
|
Loans at variable interest rates |
|
|
1,106,877 |
|
|
|
179,854 |
|
|
|
226,182 |
|
|
|
1,512,913 |
|
Nonaccrual loans |
|
|
14,764 |
|
|
|
|
|
|
|
|
|
|
|
14,764 |
|
|
Total loans |
|
$ |
1,824,067 |
|
|
$ |
1,100,586 |
|
|
$ |
385,710 |
|
|
$ |
3,310,363 |
|
|
Investment Securities
We manage our investment portfolio to obtain the highest yield possible, while meeting our
risk tolerance and liquidity guidelines and satisfying the pledging requirements for deposits of
state and political subdivisions and securities sold under repurchase agreements. The portfolio is
comprised of mortgage-backed securities, U.S. government agency
securities, tax exempt securities, corporate securities and mutual funds. Federal funds sold
are additional investments that are classified as cash equivalents rather than as investment
securities. Investment securities classified as available-for-sale are recorded at fair value,
while investment securities classified as held-to-maturity are recorded at amortized cost.
Unrealized gains or losses, net of the deferred tax effect, on available-for-sale securities are
reported as increases or decreases in accumulated other comprehensive income or loss, a component
of stockholders equity.
Investment securities increased 10.3% to $1,125 million as of December 31, 2006, from $1,020
million as of December 31, 2005, and 17.6% to $1,020 million as of December 31, 2005, from $867
million as of December 31, 2004. During 2006 and 2005, we purchased short-term available-for-sale
investment securities to provide the collateral necessary to support growth in securities sold
under repurchase agreements. As of December 31, 2006, investment securities with amortized costs
and fair values of $1,040 million and $1,029 million, respectively, were pledged to secure public
deposits and securities sold under repurchase agreements, as compared to $916 million and $903
million,
respectively, as of December 31, 2005. The weighted average yield on investment securities
increased 52 basis points to 4.68% in 2006, from 4.16% in 2005, and 27 basis points to 4.16% in
2005, from 3.89% in 2004. Proceeds from maturities and sales of lower yielding available-for-sale
U.S. agency investment securities during 2006 and 2005 were reinvested in higher-yielding
mortgage-backed and U.S. agency investment securities. For additional information concerning
securities sold under repurchase agreements, see Federal Funds Purchased and Securities Sold Under
Repurchase Agreements included herein.
- 31 -
The following table sets forth the book value, percentage of total investment securities and
average yield on investment securities as of December 31, 2006:
Securities
Maturities and Yield
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
Weighted |
|
|
Book |
|
Investment |
|
Average |
|
|
Value |
|
Securities |
|
Yield
(1) |
|
U.S. Government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
$ |
304,630 |
|
|
|
27.1 |
% |
|
|
5.01 |
% |
Maturing in one to five years |
|
|
262,388 |
|
|
|
23.3 |
|
|
|
4.56 |
|
|
Mark-to-market adjustments on securities available-for-sale |
|
|
(2,862 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
564,156 |
|
|
|
50.2 |
|
|
|
4.81 |
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
96,050 |
|
|
|
8.5 |
|
|
|
4.62 |
|
Maturing in one to five years |
|
|
228,692 |
|
|
|
20.3 |
|
|
|
4.47 |
|
Maturing in five to ten years |
|
|
64,033 |
|
|
|
5.7 |
|
|
|
4.71 |
|
Maturing after ten years |
|
|
68,607 |
|
|
|
6.1 |
|
|
|
5.11 |
|
|
Mark-to-market adjustments on securities available-for-sale |
|
|
(8,920 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
448,462 |
|
|
|
39.9 |
|
|
|
4.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
12,040 |
|
|
|
1.1 |
|
|
|
6.53 |
|
Maturing in one to five years |
|
|
47,111 |
|
|
|
4.2 |
|
|
|
6.66 |
|
Maturing in five to ten years |
|
|
19,781 |
|
|
|
1.8 |
|
|
|
6.52 |
|
Maturing after ten years |
|
|
32,090 |
|
|
|
2.8 |
|
|
|
6.20 |
|
|
Total |
|
|
111,022 |
|
|
|
9.9 |
|
|
|
6.49 |
|
|
|
Other securities (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing in one to five years |
|
|
396 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing in five to ten years |
|
|
432 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing after ten years |
|
|
90 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
Total |
|
|
918 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds with no stated maturity |
|
|
40 |
|
|
|
0.0 |
|
|
|
4.77 |
|
|
Total |
|
|
40 |
|
|
|
0.0 |
|
|
|
4.77 |
|
|
Total |
|
$ |
1,124,598 |
|
|
|
100.0 |
% |
|
|
4.68 |
% |
|
|
|
|
(1) |
|
Average yields have been calculated on a FTE basis. |
|
(2) |
|
Investment in community development entities. Investment income is in the form
of credits that reduce income tax expense. |
The maturities noted above reflect $105 million of investment securities at their final
maturities although they have call provisions within the next year. Mortgage-backed securities,
and to a limited extent other securities, have uncertain cash flow characteristics that present
additional interest rate risk in the form of prepayment or extension risk primarily caused by
changes in market interest rates. This additional risk is generally rewarded in the form of higher
yields. Maturities of mortgage-backed securities presented above are based on prepayment
assumptions at December 31, 2006.
There were no significant concentrations of investments at December 31, 2006, (greater than
10% of stockholders equity) in any individual security issuer, except for U.S. Government or
agency-backed securities.
- 32 -
As of December 31, 2005, we had U.S. Government agency securities with carrying values of $507
million and a weighted average yield of 4.15%; mortgage-backed securities with carrying values of
$409 million and a weighted average yield of 4.41%; tax exempt securities with carrying values of
$102 million and a weighted average yield of 6.53%; other securities with carrying values of $1
million and a weighted average yield of 0.00%; and, mutual funds with carrying values of $9
thousand and a weighted average yield of 3.56%.
As of December 31, 2004, we had U.S. Government agency securities with carrying values of $356
million and a weighted average yield of 3.13%; mortgage-backed securities with carrying values of
$101 million and a weighted average yield of 4.31%; tax exempt securities with carrying values of
$100 million and a weighted average yield of 6.58%; corporate securities with carrying values of
$11 million and a weighted average yield of 2.78%; and, mutual funds with carrying values of $183
thousand and a weighted average yield of 1.58%.
We evaluate our investment portfolio quarterly for other-than-temporary declines in the market
value of individual investment securities. This evaluation includes monitoring credit ratings;
market, industry and corporate news; volatility in market prices; and, determining whether the
market value of a security has been below its cost for an extended period of time.
As of December 31, 2006, we had investment securities with fair values of $547 million that had
been in a continuous loss position more than twelve months. Gross unrealized losses on these
securities totaled $12 million as of December 31, 2006, and were primarily attributable to changes
in interest rates. We recorded no impairment losses during 2006, 2005 or 2004.
For additional information concerning investment securities, see Notes to Consolidated
Financial Statements Investment Securities included in Part IV, Item 15.
Mortgage Servicing Rights
We recognize the rights to service mortgage loans for others whether acquired or internally
originated. Net mortgage servicing rights increased 2.4% to $23 million as of December 31, 2006,
from $22 million as of December 31, 2005, and 25.5% to $22 million as of December 31, 2005, from
$18 million as of December 31, 2004, primarily due to internal loan origination. Impairment
reserves for mortgage servicing rights were $4 million as of December 31, 2006, $2 million as of
December 31, 2005, and $5 million as of December 31, 2004. For additional information regarding
the mortgage servicing rights, see Notes to Consolidated Financial Statements Mortgage Servicing
Rights included in Part IV, Item 15.
Deposits
We emphasize developing total client relationships with our customers in order to increase our
core deposit base, which is our primary funding source. Our deposits consist of
noninterest-bearing and interest-bearing demand, savings, individual retirement and time deposit
accounts.
Deposits increased 4.5% to $3,709 million as of December 31, 2006, from $3,548 million as of
December 31, 2005, primarily due to organic growth. All deposit categories demonstrated growth
during 2006 with the exception of savings deposits and other time deposits, which decreased 9.2%
and 1.7%, respectively, in 2006, as compared to 2005. As of December 31, 2006, noninterest bearing
demand deposits, interest bearing demand deposits, savings deposits and time deposits comprised
24.0%, 26.0%, 21.5% and 28.5%, respectively, of total deposits, as compared to 24.4%, 22.3%, 24.8%
and 28.5%, respectively, as of December 31, 2005. Deposits increased 6.8% to $3,548 million as of
December 31, 2005, from $3,322 as of December 31, 2004, despite the sale of a banking office with
$33 million of deposits in 2004. This increase was due to organic growth, primarily in
noninterest-bearing demand, interest-bearing demand and savings deposits.
For additional information concerning customer deposits, including the use of repurchase
agreements, see Part I, Item 1, Business Deposit Products and Notes to Consolidated Financial
Statements Deposits included in Part IV, Item 15.
Other Borrowed Funds
Other borrowed funds decreased 24.0% to $6 million as of December 31, 2006, from $7
million as of December 31, 2005, and 6.3% to $7 million as of December 31, 2005, from $8
million as of December 31, 2004. Fluctuations in other borrowed funds are generally due to
timing of tax deposits made by customers and the subsequent withdrawal of funds by the federal
government. For additional information on other borrowed funds as of December 31, 2006 and 2005,
see Notes to Consolidated Financial Statements Long-Term Debt and Other Borrowed Funds included
in Part IV, Item 15.
- 33 -
Federal Funds Purchased and Securities Sold Under Repurchase Agreements
The following table sets forth certain information regarding federal funds purchased and
repurchase agreements as of the dates indicated:
Federal
Funds Purchased and Securities Sold Under Repurchase
Agreements
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Federal funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
|
|
|
$ |
1,500 |
|
|
$ |
|
|
Average balance |
|
|
31,579 |
|
|
|
836 |
|
|
|
3,437 |
|
Maximum amount outstanding at any month-end |
|
|
87,810 |
|
|
|
1,500 |
|
|
|
42,885 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
5.22 |
% |
|
|
3.11 |
% |
|
|
1.00 |
% |
At period end |
|
|
|
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
731,548 |
|
|
$ |
518,718 |
|
|
$ |
449,699 |
|
Average balance |
|
|
638,686 |
|
|
|
502,177 |
|
|
|
378,839 |
|
Maximum amount outstanding at any month-end |
|
|
731,548 |
|
|
|
539,838 |
|
|
|
453,651 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
3.96 |
% |
|
|
2.51 |
% |
|
|
0.98 |
% |
At period end |
|
|
4.15 |
|
|
|
3.46 |
|
|
|
1.68 |
|
|
Long-Term Debt
Our long-term debt is comprised principally of fixed rate notes with the FHLB, an unsecured
revolving term loan, unsecured subordinated notes and obligations under capital leases. Notes
payable to the FHLB are secured by a blanket assignment of our qualifying residential and
commercial real estate loans. As of December 31, 2006, FHLB loans totaled $19.7 million.
Long-term debt decreased 60.5% to $22 million as of December 31, 2006, from $55 million as of
December 31, 2005, primarily due to scheduled debt repayments and the repayment of a $25 million
fixed rate FHLB advance subject to immediate payment because the three-month London Interbank
Offered Rate (LIBOR) equaled or exceeded 5.00% in 2006. Long-term debt decreased 11.7% to $55
million as of December 31, 2005, from $62 million as of December 31, 2004, primarily due to
scheduled debt repayments in 2005. For additional information on long-term debt as of December 31,
2006 and 2005, see Notes to Consolidated Financial Statements Long-Term Debt and Other Borrowed
Funds included in Part IV, Item 15.
Our long-term debt agreements contain various covenants that, among other things, establish
minimum capital and financial performance ratios; and, place certain restrictions on capital
expenditures, indebtedness, the sale and issuance of common stock, and the amount of dividends
payable to shareholders. We were in compliance with all such covenants as of December 31, 2006.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased 29.2% to $36 million as of December 31, 2006,
from $28 million as of December 31, 2005, and 66.2% to $28 million as of December 31, 2005, from
$17 million as of December 31, 2004, primarily due to timing of corporate income tax payments and
higher accruals for incentive bonuses and profit sharing contributions to reflect 2006 and 2005
operating results. Additionally, during 2005, we accrued accumulated post-retirement benefit
obligations of $1 million.
Non-Performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest,
nonaccrual loans, loans renegotiated in troubled debt restructurings and OREO. We generally place
loans on nonaccrual when they become 90 days past due, unless they are well secured and in the
process of collection. When a loan is placed on nonaccrual status, any interest previously accrued
but not collected is reversed from income. Approximately $1.2 million, $1.2 million,
$1.4 million, $1.7 million and $1.7 million of gross interest income would have been accrued
if all loans on nonaccrual had been current in accordance with their original terms for the years
ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively.
- 34 -
Restructured loans are loans on which we have granted a concession on the interest rate
or original repayment terms due to financial difficulties of the borrower.
OREO consists of real property acquired through foreclosure on the collateral underlying
defaulted loans. We initially record OREO at the lower of carrying value or fair value less
estimated costs to sell by a charge against the allowance for loan losses, if necessary. Estimated
losses that result from the ongoing periodic valuation of these properties are charged to earnings
in the period in which they are identified.
The following table sets forth information regarding non-performing assets as of the dates
indicated:
Non-Performing Assets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
14,764 |
|
|
$ |
17,142 |
|
|
$ |
17,585 |
|
|
$ |
24,298 |
|
|
$ |
28,616 |
|
Accruing loans past due 90 days or more |
|
|
1,769 |
|
|
|
1,001 |
|
|
|
905 |
|
|
|
5,558 |
|
|
|
4,625 |
|
Restructured loans |
|
|
1,060 |
|
|
|
1,089 |
|
|
|
1,384 |
|
|
|
1,414 |
|
|
|
|
|
|
Total non-performing loans |
|
|
17,593 |
|
|
|
19,232 |
|
|
|
19,874 |
|
|
|
31,270 |
|
|
|
33,241 |
|
OREO |
|
|
529 |
|
|
|
1,091 |
|
|
|
1,828 |
|
|
|
1,999 |
|
|
|
458 |
|
|
Total non-performing assets |
|
$ |
18,122 |
|
|
$ |
20,323 |
|
|
$ |
21,702 |
|
|
$ |
33,269 |
|
|
$ |
33,699 |
|
|
Non-performing assets to total loans and
OREO |
|
|
0.55 |
% |
|
|
0.67 |
% |
|
|
0.79 |
% |
|
|
1.30 |
% |
|
|
1.51 |
% |
|
Non-performing assets decreased 10.8% to $18 million as of December 31, 2006, from $20 million
as of December 31, 2005, primarily due to the pay-off of the nonaccrual loans of one commercial
borrower and the sale of OREO properties in 2006. Non-performing assets decreased 6.4% to $20
million as of December 31, 2005, from $22 million as of December 31, 2004, primarily due to the
sale of two OREO properties in 2005.
In addition to the non-performing loans included in the table above, we have serious doubts as
to the ability of certain borrowers to comply with the present repayment terms on performing loans,
which may result in future non-performing loans. There can be no assurance that we have identified
all of our potential non-performing loans. Furthermore, we cannot predict the extent to which
economic conditions in our market areas may worsen or the full impact such conditions may have on
our loan portfolio. Accordingly, there can be no assurances that other loans will not become 90
days or more past due, be placed on nonaccrual, be renegotiated or become OREO in the future.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses based on our
evaluation of known and inherent risk in our loan portfolio at each balance sheet date. See the
discussion under Provision for Loan Losses above. The allowance for loan losses is increased by
provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off
when we determine that collection has become unlikely. Consumer loans are generally charged off
when they become 120 days past due. Other loans, or portions thereof, are charged off when they
become 180 days past due unless they are well-secured and in the process of collection. Recoveries
are recorded only when cash payments are received.
The allowance for loan losses consists of three elements: (i) historical valuation allowances
based on loan loss experience for similar loans with similar characteristics and trends; (ii)
specific valuation allowances based on probable losses on specific loans; and, (iii) general
valuation allowances determined based on general economic conditions and other qualitative risk
factors both internal and external to us. Historical valuation allowances are determined by
applying percentage loss factors to the credit exposures from outstanding loans. For commercial,
agricultural and real estate loans, loss factors are applied based on the internal risk
classifications of these loans. For consumer loans, loss factors are applied on a portfolio basis.
Loss factor percentages are based on a migration analysis of our historical loss experience over a
seven year period, designed to account for credit deterioration. Specific allowances are
established for loans where we have determined that probability of a loss exists and will exceed
the historical loss factors applied based on internal risk
classification of the loans. General valuation allowances are determined by evaluating, on a
quarterly basis, changes in the nature and volume of the loan portfolio, overall portfolio quality,
industry concentrations, current economic, political and regulatory factors and the estimated
impact of current economic, political, environmental and regulatory conditions on historical loss
rates.
- 35 -
The following table sets forth information concerning our allowance for loan losses as of the
dates and for the years indicated.
Allowance for Loan Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
Balance at the beginning of period |
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
$ |
38,940 |
|
|
$ |
36,309 |
|
|
$ |
34,091 |
|
Allowance of acquired banking offices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
86 |
|
|
|
382 |
|
|
|
475 |
|
|
|
856 |
|
|
|
1,233 |
|
Consumer |
|
|
4,030 |
|
|
|
4,133 |
|
|
|
5,304 |
|
|
|
5,265 |
|
|
|
5,609 |
|
Commercial |
|
|
1,014 |
|
|
|
2,803 |
|
|
|
1,583 |
|
|
|
2,668 |
|
|
|
2,076 |
|
Agricultural |
|
|
80 |
|
|
|
133 |
|
|
|
438 |
|
|
|
1,297 |
|
|
|
577 |
|
|
Total charge-offs |
|
|
5,210 |
|
|
|
7,451 |
|
|
|
7,800 |
|
|
|
10,086 |
|
|
|
9,495 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
63 |
|
|
|
13 |
|
|
|
182 |
|
|
|
373 |
|
|
|
160 |
|
Consumer |
|
|
1,568 |
|
|
|
1,297 |
|
|
|
1,424 |
|
|
|
1,571 |
|
|
|
1,752 |
|
Commercial |
|
|
699 |
|
|
|
596 |
|
|
|
511 |
|
|
|
400 |
|
|
|
519 |
|
Agricultural |
|
|
121 |
|
|
|
7 |
|
|
|
151 |
|
|
|
136 |
|
|
|
91 |
|
|
Total recoveries |
|
|
2,451 |
|
|
|
1,913 |
|
|
|
2,268 |
|
|
|
2,480 |
|
|
|
2,522 |
|
|
Net charge-offs |
|
|
2,759 |
|
|
|
5,538 |
|
|
|
5,532 |
|
|
|
7,606 |
|
|
|
6,973 |
|
Provision for loan losses |
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
|
|
9,852 |
|
|
|
9,191 |
|
|
Balance at end of period |
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
$ |
38,940 |
|
|
$ |
36,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end loans |
|
$ |
3,310,363 |
|
|
$ |
3,034,354 |
|
|
$ |
2,739,509 |
|
|
$ |
2,554,899 |
|
|
$ |
2,236,550 |
|
Average loans |
|
|
3,208,102 |
|
|
|
2,874,723 |
|
|
|
2,629,474 |
|
|
|
2,448,386 |
|
|
|
2,186,905 |
|
Net charge-offs to average loans |
|
|
0.09 |
% |
|
|
0.19 |
% |
|
|
0.21 |
% |
|
|
0.31 |
% |
|
|
0.32 |
% |
Allowance to period end loans |
|
|
1.43 |
% |
|
|
1.40 |
% |
|
|
1.54 |
% |
|
|
1.52 |
% |
|
|
1.62 |
% |
|
The allowance for loan losses was $47 million, or 1.43% of period end loans, at December 31,
2006, as compared to $42 million, or 1.40% of period end loans, at December 31, 2005, and $42
million, or 1.54% of period end loans, at December 31, 2004. Net charge-offs of $2.8 million in
2006, decreased from $5.5 million in 2005 and 2004.
Although we believe that we have established our allowance for loan losses in accordance with
accounting principles generally accepted in the United States and that the allowance for loan
losses was adequate to provide for known and inherent losses in the portfolio at all times during
the five-year period ended December 31, 2006, future provisions will be subject to on-going
evaluations of the risks in the loan portfolio. If the economy declines or asset quality
deteriorates, material additional provisions could be required.
- 36 -
The allowance for loan losses is allocated to loan categories based on the relative risk
characteristics, asset classifications and actual loss experience of the loan portfolio. The
following table provides a summary of the allocation of the allowance for loan losses for specific
loan categories as of the dates indicated. The allocations presented should not be interpreted as
an indication that charges to the allowance for loan losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan category represents the
total amount available for future losses that may occur within these categories. The unallocated
portion of the allowance for loan losses and the total allowance are applicable to the entire loan
portfolio.
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
|
Category |
|
|
|
|
|
Category |
|
|
|
|
|
Category |
|
|
|
|
|
Category |
|
|
|
|
|
Category |
|
|
Allocated |
|
to Total |
|
Allocated |
|
to Total |
|
Allocated |
|
to Total |
|
Allocated |
|
to Total |
|
Allocated |
|
to Total |
|
|
Reserves |
|
Loans |
|
Reserves |
|
Loans |
|
Reserves |
|
Loans |
|
Reserves |
|
Loans |
|
Reserves |
|
Loans |
|
Real estate |
|
$ |
33,532 |
|
|
|
62.9 |
% |
|
$ |
22,622 |
|
|
|
61.7 |
% |
|
$ |
19,469 |
|
|
|
60.0 |
% |
|
$ |
17,911 |
|
|
|
58.6 |
% |
|
$ |
10,879 |
|
|
|
54.3 |
% |
Consumer |
|
|
5,794 |
|
|
|
18.3 |
|
|
|
7,544 |
|
|
|
19.4 |
|
|
|
7,492 |
|
|
|
18.8 |
|
|
|
7,153 |
|
|
|
19.3 |
|
|
|
5,893 |
|
|
|
21.0 |
|
Commercial |
|
|
6,746 |
|
|
|
16.4 |
|
|
|
7,607 |
|
|
|
16.3 |
|
|
|
8,952 |
|
|
|
18.3 |
|
|
|
8,657 |
|
|
|
18.8 |
|
|
|
7,986 |
|
|
|
20.6 |
|
Agricultural |
|
|
908 |
|
|
|
2.3 |
|
|
|
1,147 |
|
|
|
2.5 |
|
|
|
2,200 |
|
|
|
2.7 |
|
|
|
3,147 |
|
|
|
3.2 |
|
|
|
3,336 |
|
|
|
3.9 |
|
Other loans |
|
|
14 |
|
|
|
0.1 |
|
|
|
15 |
|
|
|
0.1 |
|
|
|
27 |
|
|
|
0.2 |
|
|
|
12 |
|
|
|
0.1 |
|
|
|
17 |
|
|
|
0.2 |
|
Unallocated (1)(2) |
|
|
458 |
|
|
|
N/A |
|
|
|
3,515 |
|
|
|
N/A |
|
|
|
4,001 |
|
|
|
N/A |
|
|
|
2,060 |
|
|
|
N/A |
|
|
|
8,198 |
|
|
|
N/A |
|
|
Totals |
|
$ |
47,452 |
|
|
|
100.0 |
% |
|
$ |
42,450 |
|
|
|
100.0 |
% |
|
$ |
42,141 |
|
|
|
100.0 |
% |
|
$ |
38,940 |
|
|
|
100.0 |
% |
|
$ |
36,309 |
|
|
|
100.0 |
% |
|
|
|
|
|
(1) |
|
During 2006, we refined the methodology for determining the allocated components
of the allowance for loan losses. This refinement included improved evaluation of
qualitative risk factors internal and external to us and use of a migration analysis of
historical loan losses. This refinement resulted in a reallocation among specific loan
categories and the allocation of previously unallocated allowance amounts to specific loan
categories. As a result, allocation of the allowance for loan losses in periods prior to
2006 is not directly comparable to the 2006 presentation. |
|
(2) |
|
During 2003, we enhanced our methodologies for determining the allocated
components of the allowance for loan losses to include a more in-depth consideration of the
effect of current economic factors on historical loan losses; the effects of rapid loan
growth in specific banking offices, particularly in commercial real estate; risk related to
unfunded commitments on criticized loans; and, industry concentrations. This enhancement in
allocation methodology resulted in the allocation of previously unallocated allowance
amounts to specific loan categories. As a result, allocation of the allowance for loan
losses for 2002 is not directly comparable to the 2003, 2004, 2005 and 2006 presentation. |
The allocated reserve for loan losses on real estate loans increased $10.9 million, or
48.2%, to $33.5 million as of December 31, 2006, from $22.6 million as of December 31, 2005,
primarily due to housing slowdowns in certain of our market areas and higher levels of internally
classified residential and commercial loans. The allocated reserve for loan losses on real estate
loans increased $3.2 million, or 16.2%, to $22.6 million as of December 31, 2005, from $19.5
million as of December 31, 2004, primarily due to concerns that housing demand in our market areas
may be slowing and the application of historical loss factors to loan portfolio gradings.
- 37 -
Contractual Obligations
Contractual obligations as of December 31, 2006 are summarized in the following table.
Contractual Obligations
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due |
|
|
Within |
|
One Year to |
|
Three Years |
|
After |
|
|
|
|
One Year |
|
Three Years |
|
to Five Years |
|
Five Years |
|
Total |
|
Deposits without a stated maturity |
|
$ |
2,651,503 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,651,503 |
|
Time deposits |
|
|
852,761 |
|
|
|
153,573 |
|
|
|
50,585 |
|
|
|
89 |
|
|
|
1,057,008 |
|
Securities sold under repurchase agreements |
|
|
731,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,548 |
|
Long-term debt obligations (1) |
|
|
16,429 |
|
|
|
2,857 |
|
|
|
380 |
|
|
|
|
|
|
|
19,666 |
|
Capital lease obligations |
|
|
27 |
|
|
|
61 |
|
|
|
72 |
|
|
|
1,775 |
|
|
|
1,935 |
|
Operating lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations (2) |
|
|
2,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,084 |
|
Other long-term liabilities (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,238 |
|
|
|
41,238 |
|
|
Total contractual obligations |
|
$ |
18,540 |
|
|
$ |
2,918 |
|
|
$ |
452 |
|
|
$ |
43,013 |
|
|
$ |
64,923 |
|
|
|
|
|
|
(1) |
|
Included in long-term debt are notes payable to FHLB with various maturities
and a weighted average interest rate of 2.97%. For additional information concerning
long-term debt, see Notes to Consolidated Financial Statements Long Term Debt and Other
Borrowed Funds included in Part IV, Item 15. |
|
(2) |
|
Purchase obligations relate solely to obligations under construction
contracts to build or renovate banking offices. |
|
(3) |
|
Other long-term liabilities include a subordinated debenture held by a
wholly-owned subsidiary trust. The subordinated debenture is unsecured, bears a cumulative
floating interest rate equal to the three-month LIBOR plus 3.15% and matures on March 26,
2033. Interest distributions are payable quarterly; however, we may defer interest
payments at any time for a period not exceeding 20 consecutive quarters. For additional
information concerning the subordinated debenture, see Notes to Consolidated Financial
Statements Subordinated Debenture held by Subsidiary Trust included in Part IV, Item
15. |
We also have obligations under a postretirement healthcare benefit plan. These
obligations represent actuarially determined future benefit payments to eligible plan participants.
See Notes to Consolidated Financial Statements-Employee Benefit Plans included in Part IV, Item
15.
Off-Balance Sheet Arrangements
We have entered into various arrangements not reflected on the consolidated balance sheet that
have or are reasonably likely to have a current or future effect on our financial condition,
results of operations or liquidity. These include guarantees, commitments to extend credit and
standby letters of credit.
We guarantee the distributions and payments for redemption or liquidation of capital trust
preferred securities issued by a wholly-owned subsidiary trust to the extent of funds held by the
trust. Although the guarantee is not separately recorded, the obligation underlying the guarantee
is fully reflected on our consolidated balance sheets as subordinated debenture held by subsidiary
trust. The subordinated debenture currently qualifies as Tier 1 capital under the Federal Reserve
capital adequacy guidelines. For additional information regarding the subordinated debenture, see
Notes to Consolidated Financial Statements Subordinated Debenture Held by Subsidiary Trust
included in Part IV, Item 15.
We are a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. For additional information regarding
our off-balance sheet arrangements, see Notes to Consolidated Financial Statements Financial
Instruments with Off-Balance Sheet Risk included in Part IV, Item 15.
Capital Resources and Liquidity Management
Capital Resources
Stockholders equity is influenced primarily by earnings, dividends and, to a lesser extent,
sales and redemptions of common stock and changes in the unrealized holding gains or losses, net of
taxes, on available-for-sale investment securities.
Stockholders equity increased 17.3% to $410 million as of December 31, 2006, from $350
million as of December 31,2005, and 13.5% to $350 million as of December 31, 2005, from $308
million as of December 31, 2004, primarily due to retention of earnings. We paid aggregate cash
dividends to stockholders of $18.4 million in 2006, $15.0 million in 2005 and $12.4 million in
2004.
- 38 -
Pursuant to FIDICIA, the Federal Reserve and FDIC have adopted regulations setting forth a
five-tier system for measuring the capital adequacy of the financial institutions they supervise.
At December 31, 2006, the Bank had capital levels that, in all cases, exceeded the well-capitalized
guidelines. For additional information concerning our capital levels, see Notes to Consolidated
Financial Statements Regulatory Capital contained in Part IV, Item 15.
Liquidity
Liquidity is our ability to meet current and future cash flow needs on a timely basis and at a
reasonable cost. We manage our liquidity position to meet the daily cash flow needs of customers,
while maintaining an appropriate balance between assets and liabilities to meet the return on
investment objectives of our shareholders. Our liquidity position is supported by management of
liquid assets and liabilities. Liquid assets include cash, interest bearing deposits in banks,
federal funds sold, available-for-sale investment securities and maturing or prepaying balances in
our held-to-maturity investment and loan portfolios. Liquid liabilities include core deposits,
federal funds purchased, securities sold under repurchase agreements and borrowings. We do not
engage in derivatives or hedging activities to support our liquidity position.
Our short-term and long-term liquidity requirements are primarily to fund on-going operations,
including payment of interest on deposits and debt, extensions of credit, capital expenditures and
shareholder dividends. These liquidity requirements are met primarily through cash flow from
operations, redeployment of prepaying and maturing balances in our loan and investment portfolios,
debt obligations and increases in customer deposits. For additional information regarding our
operating, investing and financing cash flows, see Consolidated Financial Statements
Consolidated Statements of Cash Flows, included in Part IV, Item 15.
Other sources of liquidity are available should they be needed. These sources include the
drawing of additional funds on our unsecured revolving term loan, the sale of loans, the ability to
acquire additional national market, non-core deposits, the issuance of additional collateralized
borrowings such as FHLB advances, the issuance of debt securities and the issuance of preferred or
common securities. The Bank also can borrow through the Federal Reserves discount window.
As a holding company, we are a corporation separate and apart from our subsidiary Bank and,
therefore, we provide for our own liquidity. A significant amount of our revenues are obtained
from management fees and dividends declared and paid by the Bank and other non-bank subsidiaries.
There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends
to us. Our debt instruments also include dividend limitations. Management believes that such
limitations will not have an impact on our ability to meet our ongoing short-term cash obligations.
For additional information regarding dividend restrictions, see Long-Term Debt included herein
and Business Regulation and Supervision included in Part I, Item 1.
Asset Liability Management
The goal of asset liability management is the prudent control of market risk, liquidity and
capital. Asset liability management is governed by policies, goals and objectives adopted and
reviewed by the Banks board of directors. The board delegates its responsibility for development
of asset liability management strategies to achieve these goals and objectives to the Asset
Liability Committee, or ALCO, which is comprised of members of senior management.
Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or long-term value due to changes in
interest rates. Our primary source of earnings is the net interest margin, which is affected by
changes in interest rates, the relationship between rates on interest bearing assets and
liabilities, the impact of interest rate fluctuations on asset prepayments and the mix of interest
bearing assets and liabilities.
The ability to optimize the net interest margin is largely dependent upon the achievement of
an interest rate spread that can be managed during periods of fluctuating interest rates. Interest
sensitivity is a measure of the extent to which net interest income will be affected by market
interest rates over a period of time. Interest rate sensitivity is related to the difference
between amounts of interest earning assets and interest bearing liabilities which either reprice or
mature within a given period of time. The difference is known as interest rate sensitivity gap.
- 39 -
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio
for different intervals as of December 31, 2006. The information presented in the table is based
on our mix of interest earning assets and interest bearing liabilities and historical experience
regarding their interest rate sensitivity.
Interest Rate Sensitivity Gaps
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Maturity or Repricing |
|
|
Three |
|
Three |
|
One |
|
|
|
|
|
|
Months |
|
Months to |
|
Year to |
|
After |
|
|
|
|
or Less |
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
1,386,448 |
|
|
$ |
564,563 |
|
|
$ |
1,161,239 |
|
|
$ |
183,349 |
|
|
$ |
3,295,599 |
|
Investment securities (2) |
|
|
309,494 |
|
|
|
101,073 |
|
|
|
531,584 |
|
|
|
182,447 |
|
|
|
1,124,598 |
|
Interest bearing deposits in banks |
|
|
12,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,809 |
|
Federal funds sold |
|
|
55,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,427 |
|
|
Total interest earning assets |
|
$ |
1,764,178 |
|
|
$ |
665,636 |
|
|
$ |
1,692,823 |
|
|
$ |
365,796 |
|
|
$ |
4,488,433 |
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts(3) |
|
$ |
72,323 |
|
|
$ |
216,970 |
|
|
$ |
675,019 |
|
|
$ |
|
|
|
$ |
964,312 |
|
Savings deposits (3) |
|
|
606,784 |
|
|
|
46,633 |
|
|
|
145,080 |
|
|
|
|
|
|
|
798,497 |
|
Time deposits, $100 or more (4) |
|
|
103,412 |
|
|
|
245,232 |
|
|
|
60,169 |
|
|
|
|
|
|
|
408,813 |
|
Other time deposits |
|
|
148,754 |
|
|
|
355,363 |
|
|
|
143,989 |
|
|
|
89 |
|
|
|
648,195 |
|
Securities sold under repurchase
agreements |
|
|
731,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,548 |
|
Other borrowed funds |
|
|
5,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,694 |
|
Long-term debt |
|
|
10,364 |
|
|
|
6,092 |
|
|
|
3,370 |
|
|
|
1,775 |
|
|
|
21,601 |
|
Subordinated debenture held by
subsidiary trust |
|
|
41,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,238 |
|
|
Total interest earning assets |
|
$ |
1,720,117 |
|
|
$ |
870,290 |
|
|
$ |
1,027,627 |
|
|
$ |
1,864 |
|
|
$ |
3,619,898 |
|
|
Rate gap |
|
$ |
44,061 |
|
|
$ |
(204,654 |
) |
|
$ |
665,196 |
|
|
$ |
363,932 |
|
|
$ |
868,535 |
|
Cumulative rate gap |
|
|
44,061 |
|
|
|
(160,593 |
) |
|
|
504,603 |
|
|
|
868,535 |
|
|
|
|
|
Cumulative rate gap as a percentage
of total interest earning assets |
|
|
0.98 |
% |
|
|
-3.58 |
% |
|
|
11.24 |
% |
|
|
19.35 |
% |
|
|
0.98 |
% |
|
|
|
|
|
(1) |
|
Does not include nonaccrual loans of $14,764. |
|
(2) |
|
Adjusted to reflect: (a) expected shorter maturities based upon our
historical experience of early prepayments of principal, and (b) the redemption of
callable securities on their next call date. |
|
(3) |
|
Includes savings deposits paying interest at market rates in the
three month or less category. All other deposit categories, while technically subject
to immediate withdrawal, actually display sensitivity characteristics that generally
fall within one to five years. Their allocation is presented based on that historical
analysis. If these deposits were included in the three month or less category, the
above table would reflect a negative three month gap of $1,040 million, a negative
cumulative one year gap of $981 million and a positive cumulative one to five year gap
of $505 million. |
|
(4) |
|
Included in the three month to one year category are deposits of $95 million
maturing in three to six months. |
Net Interest Income Sensitivity
The view presented in the preceding interest rate sensitivity gap table does not illustrate
the effect on our net interest margin of changing interest rate scenarios. We believe net interest
income sensitivity provides the best perspective of how day-to-day decisions affect our interest
rate risk profile. We monitor net interest margin sensitivity by utilizing an income simulation
model to subject twelve month net interest income to various rate movements. Simulations modeled
quarterly include scenarios where market rates change suddenly up or down in a parallel manner and
scenarios where market rates gradually change up or down at nonparallel rates resulting in a change
in the slope of the yield curve. Estimates produced by our income simulation model are based on
numerous assumptions including, but not limited to, the nature and timing of changes in interest
rates, prepayments of loans and investment securities, volume of loans originated, level and
composition of deposits, ability of borrowers to repay adjustable or variable rate loans and
reinvestment opportunities for cash flows. Given these various assumptions, the actual effect of
interest rate changes on our net interest margin may be materially different than estimated.
- 40 -
We target a mix of interest earning assets and interest bearing liabilities such that no more
than 5% of the net interest margin will be at risk over a one-year period should short-term
interest rates shift gradually up or down 2%. As of December 31, 2006, our income simulation model
predicted net interest income would decrease $3.6 million, or 1.8%, assuming a gradual 2% increase
in short-term market interest rates and gradual 1.0% increase in long-term interest rates. As of
December 31, 2006, our income simulation model also predicted net interest income would increase
$663 thousand, or 0.3%, assuming a gradual 2% decrease in short-term market interest rates and
gradual 1.0% decrease in long-term interest rates. Both scenarios predict that our funding sources
will reprice faster than our interest earning assets. The preceding interest rate sensitivity
analysis does not represent a forecast and should not be relied upon as being indicative of
expected operating results.
Recent Accounting Pronouncements
New accounting policies adopted by us during 2006, and the expected impact of accounting
standards recently issued but not yet adopted are discussed in Notes to Consolidated Financial
Statements Summary of Significant Accounting Policies included in Part IV, Item 15.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk. Our business and the composition of
our balance sheet consists of investments in interest earning assets (principally loans and
investment securities) which are primarily funded by interest bearing liabilities (deposits and
indebtedness). Such financial instruments have varying levels of sensitivity to changes in market
interest rates. Interest rate risk results when, due to different maturity dates and repricing
intervals, interest rate indices for interest earning assets decrease relative to interest bearing
liabilities, thereby creating a risk of decreased net earnings and cash flow.
Although we characterize some of our interest-sensitive assets as securities
available-for-sale, such securities are not purchased with a view to sell in the near term.
Rather, such securities may be sold in response to or in anticipation of changes in interest rates
and resulting prepayment risk. See Notes to Consolidated Financial Statements Summary of
Significant Accounting Policies included in Part IV, Item 15.
- 41 -
The following table provides information about our market sensitive financial instruments,
categorized by expected maturity, principal repayment or repricing and fair value at December 31,
2006. The table constitutes a forward-looking statement. For a description of our policies for
managing risks associated with changing interest rates, see Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations Asset Liability
Management Interest Rate Risk.
Market Sensitive Financial Instruments Maturities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 Expected Maturity, Principal Repayment or Repricing |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
Interest-sensitive assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term
investments |
|
$ |
255,791 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
255,791 |
|
Net loans |
|
|
1,901,652 |
|
|
|
453,781 |
|
|
|
301,427 |
|
|
|
203,016 |
|
|
|
133,750 |
|
|
|
227,665 |
|
|
|
3,221,291 |
|
Securities available for sale |
|
|
398,528 |
|
|
|
170,515 |
|
|
|
119,464 |
|
|
|
127,583 |
|
|
|
66,514 |
|
|
|
130,054 |
|
|
|
1,012,658 |
|
Securities held to maturity |
|
|
12,538 |
|
|
|
11,653 |
|
|
|
15,188 |
|
|
|
11,911 |
|
|
|
9,105 |
|
|
|
51,996 |
|
|
|
112,391 |
|
Accrued interest receivable |
|
|
30,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,913 |
|
Mortgage servicing rights |
|
|
3,072 |
|
|
|
3,158 |
|
|
|
2,855 |
|
|
|
2,419 |
|
|
|
2,015 |
|
|
|
9,859 |
|
|
|
23,378 |
|
|
Total interest-sensitive assets |
|
$ |
2,602,494 |
|
|
$ |
639,107 |
|
|
$ |
438,934 |
|
|
$ |
344,929 |
|
|
$ |
211,384 |
|
|
$ |
419,574 |
|
|
$ |
4,656,422 |
|
|
Interest sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits, excluding time |
|
$ |
1,209,319 |
|
|
$ |
309,039 |
|
|
$ |
309,039 |
|
|
$ |
824,106 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,651,503 |
|
Time deposits |
|
|
859,800 |
|
|
|
113,003 |
|
|
|
36,303 |
|
|
|
29,491 |
|
|
|
13,591 |
|
|
|
68 |
|
|
|
1,052,256 |
|
Repurchase agreements |
|
|
731,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,548 |
|
Accrued interest payable |
|
|
18,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,872 |
|
Other borrowed funds |
|
|
5,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,694 |
|
Long-term debt |
|
|
17,194 |
|
|
|
1,612 |
|
|
|
1,486 |
|
|
|
476 |
|
|
|
132 |
|
|
|
1,277 |
|
|
|
22,177 |
|
Subordinated debenture
held by subsidiary trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,238 |
|
|
|
41,238 |
|
|
Total interest-sensitive liabilities |
|
$ |
2,842,427 |
|
|
$ |
423,654 |
|
|
$ |
346,828 |
|
|
$ |
854,073 |
|
|
$ |
13,723 |
|
|
$ |
42,583 |
|
|
$ |
4,523,288 |
|
|
The prepayment projections for net loans are based upon experience and do not take into
account any allowance for loan losses. The expected maturities of securities are based upon
contractual maturities adjusted for projected prepayments of principal, assuming no reinvestment of
proceeds. Actual maturities of these instruments could vary substantially if future prepayments
differ from our historical experience. All other financial instruments are stated at contractual
maturities.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of FIBS and subsidiaries are contained
elsewhere herein [see Item 15(a)1]:
|
Report of McGladrey & Pullen LLP, Independent Registered Public Accounting Firm |
Consolidated Balance Sheets December 31, 2006 and 2005 |
Consolidated Statements of Income Years Ended December 31, 2006, 2005 and 2004 |
Consolidated Statements of Stockholders Equity and Comprehensive Income Years Ended
December 31, 2006, 2005 and 2004 |
Consolidated Statements of Cash Flows Years Ended December 31, 2006, 2005 and 2004 |
Notes to Consolidated Financial Statements |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on accounting and financial disclosure.
- 42 -
Item 9A. Controls and Procedures
Our management is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As
of December 31, 2006, an evaluation was performed, under the supervision and with the participation
of management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of December 31, 2006, were effective in ensuring that information
required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized,
and reported within the time period required by the SECs rules and forms.
There were no changes in our internal controls over financial reporting for the
quarter ended December 31, 2006, that have materially affected, or are reasonably likely to
materially affect, such controls.
The effectiveness of our disclosure controls and procedures and our internal control over
financial reporting is subject to various inherent limitations, including cost limitations,
judgments used in decision-making, assumptions about the likelihood of future events, the soundness
of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions and the risk that the degree of compliance with
policies or procedures may deteriorate over time. Because of these limitations, any system of
disclosure controls and procedures or internal control over financial reporting may not be
successful in preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management.
Item 9B. Other Information
There were no items required to be disclosed in a report on Form 8-K during the fourth quarter
of 2006 that were not reported.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information concerning Directors, Executive Officers and Corporate Governance is set forth
under the heading Directors and Executive Officers in our Proxy Statement and is herein
incorporated by reference.
Information concerning Compliance With Section 16(a) of the Securities Exchange Act of 1934
is set forth under the heading Section 16(a) Beneficial Ownership Reporting Compliance in our
Proxy Statement and is herein incorporated by reference.
Item 11. Executive Compensation
Information concerning Executive Compensation is set forth under the headings Compensation
of Executive Officers Compensation Discussion and Analysis and Compensation of Executive Officers
and Directors in our Proxy Statement and is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters is set forth under the heading Security Ownership of Certain
Beneficial Owners and Management in our Proxy Statement and is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information concerning Certain Relationships and Related Transactions and Director
Independence is set forth under the headings Directors and Executive Officers and Certain
Relationships and Related Transactions in our Proxy Statement and is herein incorporated by
reference. In addition, see Notes to Consolidated Financial Statements Related Party
Transactions included in Part IV, Item 15.
Item 14. Principal Accountant Fees and Services
Information concerning Principal Accountant Fees and Services is set forth under the heading
Directors and Executive Officers Principal Accounting Fees and Services in our Proxy Statement
and is herein incorporated by reference.
- 43 -
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) |
|
1. Our audited consolidated financial statements follow. |
- 44 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
Billings, Montana
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc.
and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of
income, stockholders equity and comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Interstate BancSystem, Inc. and subsidiaries as
of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As described in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for stock-based compensation in 2006.
/s/ MCGLADREY & PULLEN LLP
Des Moines, Iowa
March 12, 2007
- 45 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
187,555 |
|
|
$ |
207,877 |
|
Federal funds sold |
|
|
55,427 |
|
|
|
27,607 |
|
Interest bearing deposits in banks |
|
|
12,809 |
|
|
|
5,493 |
|
|
Total cash and cash equivalents |
|
|
255,791 |
|
|
|
240,977 |
|
|
Investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
1,012,658 |
|
|
|
916,450 |
|
Held-to-maturity (estimated fair values of $112,391 and
$104,305 at December 31, 2006 and 2005, respectively) |
|
|
111,940 |
|
|
|
103,451 |
|
|
Total investment securities |
|
|
1,124,598 |
|
|
|
1,019,901 |
|
|
Loans |
|
|
3,310,363 |
|
|
|
3,034,354 |
|
Less allowance for loan losses |
|
|
47,452 |
|
|
|
42,450 |
|
|
Net loans |
|
|
3,262,911 |
|
|
|
2,991,904 |
|
|
Premises and equipment, net |
|
|
120,280 |
|
|
|
120,438 |
|
Accrued interest receivable |
|
|
30,913 |
|
|
|
26,104 |
|
Company-owned life insurance |
|
|
64,705 |
|
|
|
62,547 |
|
Mortgage servicing rights, net of accumulated amortization and impairment reserve |
|
|
22,644 |
|
|
|
22,116 |
|
Goodwill |
|
|
37,380 |
|
|
|
37,390 |
|
Core deposit intangible, net of accumulated amortization |
|
|
432 |
|
|
|
1,204 |
|
Net deferred tax asset |
|
|
8,297 |
|
|
|
3,285 |
|
Other assets |
|
|
46,183 |
|
|
|
36,447 |
|
|
Total assets |
|
$ |
4,974,134 |
|
|
$ |
4,562,313 |
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest bearing |
|
$ |
888,694 |
|
|
$ |
864,128 |
|
Interest bearing |
|
|
2,819,817 |
|
|
|
2,683,462 |
|
|
Total deposits |
|
|
3,708,511 |
|
|
|
3,547,590 |
|
|
Federal funds purchased |
|
|
|
|
|
|
1,500 |
|
Securities sold under repurchase agreements |
|
|
731,548 |
|
|
|
518,718 |
|
Accrued interest payable |
|
|
18,872 |
|
|
|
13,185 |
|
Accounts payable and accrued expenses |
|
|
36,295 |
|
|
|
28,086 |
|
Other borrowed funds |
|
|
5,694 |
|
|
|
7,495 |
|
Long-term debt |
|
|
21,601 |
|
|
|
54,654 |
|
Subordinated debenture held by subsidiary trust |
|
|
41,238 |
|
|
|
41,238 |
|
|
Total liabilities |
|
|
4,563,759 |
|
|
|
4,212,466 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Nonvoting noncumulative preferred stock without par value;
authorized 100,000 shares, no shares issued or outstanding
as of December 31, 2006 and 2005 |
|
|
|
|
|
|
|
|
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 8,144,788 shares and 8,098,933 shares
as of December 31, 2006 and 2005, respectively |
|
|
45,477 |
|
|
|
43,569 |
|
Retained earnings |
|
|
372,039 |
|
|
|
314,843 |
|
Unearned compensation restricted stock |
|
|
|
|
|
|
(330 |
) |
Accumulated other comprehensive loss, net |
|
|
(7,141 |
) |
|
|
(8,235 |
) |
|
Total stockholders equity |
|
|
410,375 |
|
|
|
349,847 |
|
|
Total liabilities and stockholders equity |
|
$ |
4,974,134 |
|
|
$ |
4,562,313 |
|
|
See accompanying notes to consolidated financial statements.
- 46 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
245,435 |
|
|
$ |
195,431 |
|
|
$ |
161,787 |
|
Interest and dividends on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
40,991 |
|
|
|
30,255 |
|
|
|
25,587 |
|
Exempt from federal taxes |
|
|
4,441 |
|
|
|
4,384 |
|
|
|
4,114 |
|
Interest on deposits in banks |
|
|
360 |
|
|
|
1,021 |
|
|
|
281 |
|
Interest on federal funds sold |
|
|
2,196 |
|
|
|
2,766 |
|
|
|
1,071 |
|
|
Total interest income |
|
|
293,423 |
|
|
|
233,857 |
|
|
|
192,840 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
73,267 |
|
|
|
45,587 |
|
|
|
34,304 |
|
Interest on federal funds purchased |
|
|
1,649 |
|
|
|
26 |
|
|
|
34 |
|
Interest on securities sold under repurchase agreements |
|
|
25,278 |
|
|
|
12,602 |
|
|
|
3,720 |
|
Interest on other borrowed funds |
|
|
709 |
|
|
|
122 |
|
|
|
60 |
|
Interest on long-term debt |
|
|
1,576 |
|
|
|
2,480 |
|
|
|
2,329 |
|
Interest on subordinated debenture held by subsidiary trust |
|
|
3,481 |
|
|
|
2,732 |
|
|
|
1,974 |
|
|
Total interest expense |
|
|
105,960 |
|
|
|
63,549 |
|
|
|
42,421 |
|
|
Net interest income |
|
|
187,463 |
|
|
|
170,308 |
|
|
|
150,419 |
|
Provision for loan losses |
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
|
Net interest income after provision for loan losses |
|
|
179,702 |
|
|
|
164,461 |
|
|
|
141,686 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges, commissions and fees |
|
|
21,906 |
|
|
|
19,392 |
|
|
|
16,115 |
|
Service charges on deposit accounts |
|
|
17,581 |
|
|
|
17,294 |
|
|
|
18,899 |
|
Technology services revenues |
|
|
15,845 |
|
|
|
13,304 |
|
|
|
12,573 |
|
Financial services revenues |
|
|
10,605 |
|
|
|
9,529 |
|
|
|
8,839 |
|
Income from the origination and sale of loans |
|
|
9,611 |
|
|
|
8,619 |
|
|
|
8,379 |
|
Investment securities losses, net |
|
|
(722 |
) |
|
|
(3,677 |
) |
|
|
(797 |
) |
Gain on sale of equity method investee |
|
|
19,801 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
6,921 |
|
|
|
5,829 |
|
|
|
6,636 |
|
|
Total noninterest income |
|
|
101,548 |
|
|
|
70,290 |
|
|
|
70,644 |
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
|
|
88,889 |
|
|
|
80,029 |
|
|
|
73,972 |
|
Furniture and equipment |
|
|
16,333 |
|
|
|
15,912 |
|
|
|
15,052 |
|
Occupancy, net |
|
|
13,300 |
|
|
|
13,412 |
|
|
|
11,931 |
|
Mortgage servicing rights amortization |
|
|
4,024 |
|
|
|
4,614 |
|
|
|
3,986 |
|
Mortgage servicing rights impairment expense (recovery) |
|
|
1,694 |
|
|
|
(2,187 |
) |
|
|
(263 |
) |
Professional fees |
|
|
3,167 |
|
|
|
2,844 |
|
|
|
3,179 |
|
Outsourced technology services |
|
|
3,151 |
|
|
|
2,290 |
|
|
|
2,354 |
|
Core deposit intangible amortization |
|
|
772 |
|
|
|
1,013 |
|
|
|
1,112 |
|
Other expenses |
|
|
32,812 |
|
|
|
32,799 |
|
|
|
31,657 |
|
|
Total noninterest expense |
|
|
164,142 |
|
|
|
150,726 |
|
|
|
142,980 |
|
|
Income before income tax expense |
|
|
117,108 |
|
|
|
84,025 |
|
|
|
69,350 |
|
|
Income tax expense |
|
|
41,499 |
|
|
|
29,310 |
|
|
|
23,929 |
|
|
Net income |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
9.32 |
|
|
$ |
6.84 |
|
|
$ |
5.74 |
|
Diluted earnings per share |
|
|
9.11 |
|
|
|
6.71 |
|
|
|
5.68 |
|
|
See accompanying notes to consolidated financial statements.
- 47 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity and Comprehensive Income
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Compensation - |
|
|
Other |
|
|
Total |
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Restricted |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Stock |
|
|
Income (Loss) |
|
|
Equity |
|
|
Balance at December 31, 2003 |
|
|
7,912,699 |
|
|
$ |
33,187 |
|
|
$ |
242,105 |
|
|
$ |
|
|
|
$ |
(1,066 |
) |
|
$ |
274,226 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
45,421 |
|
|
|
|
|
|
|
|
|
|
|
45,421 |
|
Unrealized losses on available-for-sale
investment securities, net of income
tax benefit of $1,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,641 |
) |
|
|
(2,641 |
) |
Less reclassification adjustment for losses
included in net income, net of income
tax benefit of $314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares retired |
|
|
(63,266 |
) |
|
|
(3,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,329 |
) |
Common shares issued |
|
|
109,417 |
|
|
|
5,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,935 |
|
Restricted shares issued |
|
|
10,000 |
|
|
|
512 |
|
|
|
|
|
|
|
(512 |
) |
|
|
|
|
|
|
|
|
Stock options exercised, net of 14,139 shares
tendered in payment of option price and
income tax withholding amounts |
|
|
11,450 |
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354 |
|
Tax benefit of stock options |
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
Amortization of restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
|
|
|
|
130 |
|
Remeasurement of restricted stock awards |
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($1.56 per share) |
|
|
|
|
|
|
|
|
|
|
(12,354 |
) |
|
|
|
|
|
|
|
|
|
|
(12,354 |
) |
|
Balance at December 31, 2004 |
|
|
7,980,300 |
|
|
|
36,803 |
|
|
|
275,172 |
|
|
|
(425 |
) |
|
|
(3,224 |
) |
|
|
308,326 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
54,715 |
|
|
|
|
|
|
|
|
|
|
|
54,715 |
|
Unrealized losses on available-for-sale
investment securities, net of income
tax benefit of $4,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,241 |
) |
|
|
(7,241 |
) |
Less reclassification adjustment for losses
included in net income, net of income
tax benefit of $1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,230 |
|
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares retired |
|
|
(52,021 |
) |
|
|
(3,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,296 |
) |
Common shares issued |
|
|
99,638 |
|
|
|
6,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,468 |
|
Restricted shares issued |
|
|
1,500 |
|
|
|
87 |
|
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
|
|
Restricted shares cancelled |
|
|
(1,000 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
Stock options exercised, net of 11,311 shares
tendered in payment of option price and
income tax withholding amounts |
|
|
70,516 |
|
|
|
2,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,770 |
|
Tax benefit of stock options |
|
|
|
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677 |
|
Amortization of restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
|
|
|
|
|
242 |
|
Remeasurement of restricted stock awards |
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($1.88 per share) |
|
|
|
|
|
|
|
|
|
|
(15,044 |
) |
|
|
|
|
|
|
|
|
|
|
(15,044 |
) |
|
- 48 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity and Comprehensive Income (Continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Compensation - |
|
|
Other |
|
|
Total |
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Restricted |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Stock |
|
|
Income (Loss) |
|
|
Equity |
|
|
Balance at December 31, 2005 |
|
|
8,098,933 |
|
|
$ |
43,569 |
|
|
$ |
314,843 |
|
|
$ |
(330 |
) |
|
$ |
(8,235 |
) |
|
$ |
349,847 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
75,609 |
|
|
|
|
|
|
|
|
|
|
|
75,609 |
|
Unrealized gains on available-for-sale
investment securities, net of income
tax expense of $421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648 |
|
|
|
648 |
|
Less reclassification adjustment for losses
included in net income, net of income
tax benefit of $290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446 |
|
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares retired |
|
|
(128,305 |
) |
|
|
(9,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,593 |
) |
Common shares issued |
|
|
76,140 |
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,829 |
|
Restricted shares issued |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised, net of 32,467 shares
tendered in payment of option price and
income tax withholding amounts |
|
|
97,020 |
|
|
|
3,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,306 |
|
Tax benefit of stock options |
|
|
|
|
|
|
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,368 |
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
1,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,328 |
|
Reclassification of unearned compensation upon
adoption of SFAS No. 123(revised) |
|
|
|
|
|
|
(330 |
) |
|
|
|
|
|
|
330 |
|
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($2.27 per share) |
|
|
|
|
|
|
|
|
|
|
(18,413 |
) |
|
|
|
|
|
|
|
|
|
|
(18,413 |
) |
|
Balance at December 31, 2006 |
|
|
8,144,788 |
|
|
$ |
45,477 |
|
|
$ |
372,039 |
|
|
$ |
|
|
|
$ |
(7,141 |
) |
|
$ |
410,375 |
|
|
See accompanying notes to consolidated financial statements.
- 49 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of joint ventures |
|
|
176 |
|
|
|
(492 |
) |
|
|
(468 |
) |
Provisions for loan losses |
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
Depreciation |
|
|
13,327 |
|
|
|
13,716 |
|
|
|
12,737 |
|
Amortization of core deposit intangibles |
|
|
772 |
|
|
|
1,013 |
|
|
|
1,112 |
|
Amortization of mortgage servicing rights |
|
|
4,024 |
|
|
|
4,614 |
|
|
|
3,986 |
|
Net premium amortization (discount accretion) on investment securities |
|
|
(7,825 |
) |
|
|
(541 |
) |
|
|
2,258 |
|
Net loss on sale of investment securities |
|
|
722 |
|
|
|
3,677 |
|
|
|
797 |
|
Gain on sale of other real estate owned |
|
|
(12 |
) |
|
|
(276 |
) |
|
|
(67 |
) |
Gain on sale of investment in unconsolidated equity method joint venture |
|
|
(19,801 |
) |
|
|
|
|
|
|
|
|
Loss on disposal of premises and equipment |
|
|
19 |
|
|
|
326 |
|
|
|
32 |
|
Write-down of other real estate pending sale/disposal |
|
|
72 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation reserve for mortgage servicing rights |
|
|
1,694 |
|
|
|
(2,187 |
) |
|
|
(263 |
) |
Deferred income taxes |
|
|
(5,723 |
) |
|
|
1,882 |
|
|
|
2,927 |
|
Increase in cash surrender value of company-owned life insurance |
|
|
(2,158 |
) |
|
|
(1,902 |
) |
|
|
(1,941 |
) |
Stock-based compensation expense |
|
|
1,328 |
|
|
|
280 |
|
|
|
132 |
|
Excess tax benefits from stock-based compensation |
|
|
(1,344 |
) |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in loans held for sale |
|
|
(6,293 |
) |
|
|
2,188 |
|
|
|
12,650 |
|
Increase in accrued interest receivable |
|
|
(4,811 |
) |
|
|
(5,535 |
) |
|
|
(1,381 |
) |
Increase in other assets |
|
|
(10,634 |
) |
|
|
(2,618 |
) |
|
|
(1,131 |
) |
Increase (decrease) in accrued interest payable |
|
|
5,699 |
|
|
|
3,656 |
|
|
|
(534 |
) |
Increase (decrease) in accounts payable and accrued expenses |
|
|
8,198 |
|
|
|
11,171 |
|
|
|
(2,310 |
) |
|
Net cash provided by operating activities |
|
|
60,800 |
|
|
|
89,534 |
|
|
|
82,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
(19,589 |
) |
|
|
(9,301 |
) |
|
|
(15,868 |
) |
Available-for-sale |
|
|
(4,644,632 |
) |
|
|
(1,973,342 |
) |
|
|
(427,381 |
) |
Proceeds from maturities and paydowns of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
10,899 |
|
|
|
6,317 |
|
|
|
7,181 |
|
Available-for-sale |
|
|
4,507,790 |
|
|
|
1,641,837 |
|
|
|
336,347 |
|
Proceeds from sales of available-for-sale investment securities |
|
|
49,774 |
|
|
|
170,325 |
|
|
|
25,463 |
|
Net decrease (increase) in cash equivalent mutual funds classified
as available-for-sale investment securities |
|
|
(31 |
) |
|
|
175 |
|
|
|
(83 |
) |
Purchases and originations of mortgage servicing rights |
|
|
(6,246 |
) |
|
|
(6,919 |
) |
|
|
(6,942 |
) |
Extensions of credit to customers, net of repayments |
|
|
(275,801 |
) |
|
|
(305,768 |
) |
|
|
(220,054 |
) |
Recoveries of loans charged-off |
|
|
2,451 |
|
|
|
1,913 |
|
|
|
2,268 |
|
Proceeds from sales of other real estate owned |
|
|
850 |
|
|
|
2,987 |
|
|
|
2,045 |
|
Disposition of banking offices, net of cash and cash equivalents |
|
|
(2,540 |
) |
|
|
|
|
|
|
(19,536 |
) |
Proceeds from sale of unconsolidated equity method joint venture |
|
|
19,853 |
|
|
|
|
|
|
|
|
|
Capital expenditures, net of sales |
|
|
(13,109 |
) |
|
|
(10,123 |
) |
|
|
(22,719 |
) |
Capital contributions to joint ventures |
|
|
|
|
|
|
(2,800 |
) |
|
|
|
|
|
Net cash used in investing activities |
|
|
(370,331 |
) |
|
|
(484,699 |
) |
|
|
(339,279 |
) |
|
- 50 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
$ |
163,991 |
|
|
$ |
225,909 |
|
|
$ |
197,646 |
|
Net increase in federal funds purchased and repurchase agreements |
|
|
211,330 |
|
|
|
70,519 |
|
|
|
127,470 |
|
Net (decrease) increase in other borrowed funds |
|
|
(1,801 |
) |
|
|
(500 |
) |
|
|
858 |
|
Borrowings of long-term debt |
|
|
4,100 |
|
|
|
15,000 |
|
|
|
53,575 |
|
Repayment of long-term debt |
|
|
(37,153 |
) |
|
|
(22,272 |
) |
|
|
(39,239 |
) |
Net decrease in debt issuance costs |
|
|
37 |
|
|
|
41 |
|
|
|
44 |
|
Proceeds from issuance of common stock |
|
|
10,503 |
|
|
|
9,877 |
|
|
|
6,384 |
|
Excess tax benefits from stock-based compensation |
|
|
1,344 |
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock |
|
|
(9,593 |
) |
|
|
(3,296 |
) |
|
|
(3,329 |
) |
Dividends paid to stockholders |
|
|
(18,413 |
) |
|
|
(15,044 |
) |
|
|
(12,354 |
) |
|
Net cash provided by financing activities |
|
|
324,345 |
|
|
|
280,234 |
|
|
|
331,055 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
14,814 |
|
|
|
(114,931 |
) |
|
|
74,466 |
|
|
Cash and cash equivalents at beginning of year |
|
|
240,977 |
|
|
|
355,908 |
|
|
|
281,442 |
|
|
Cash and cash equivalents at end of year |
|
$ |
255,791 |
|
|
$ |
240,977 |
|
|
$ |
355,908 |
|
|
See accompanying notes to consolidated financial statements.
- 51 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(1) |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Business. First Interstate BancSystem, Inc. (the Parent Company and collectively with its
subsidiaries, the Company) is a financial and bank holding company that, through the branch
offices of its bank subsidiary, provides a full range of banking services to individuals,
businesses, municipalities and other entities throughout the states of Montana and Wyoming.
In addition to its primary emphasis on commercial and consumer banking services, the Company
also offers trust, employee benefit, investment and insurance services through its bank
subsidiary and technology services through a nonbank subsidiary. The Company is subject to
competition from other financial institutions, nonbank financial companies and technology
service providers, and is also subject to the regulations of various government agencies and
undergoes periodic examinations by those regulatory authorities. |
|
|
|
Basis of Presentation. The Companys consolidated financial statements include the accounts
of the Parent Company and its operating subsidiaries: First Interstate Bank (FIB); i_Tech
Corporation (i_Tech); FI Reinsurance Ltd.; First Interstate Insurance Agency, Inc.; Commerce
Financial, Inc.; FIB, LLC; and, FIBCT, LLC. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications have been made
in the consolidated financial statements for 2005 and 2004 to conform to the 2006
presentation. |
|
|
|
Equity Method Investments. The Company has investments in joint ventures that are not
consolidated because the Company does not own a majority voting interest, control the
operations or receive a majority of the losses or earnings of the joint venture. These joint
ventures are accounted for using the equity method of accounting whereby the Company initially
records its investments at cost and then subsequently adjusts the cost for the Companys
proportionate share of distributions and earnings or losses of the joint ventures. |
|
|
|
Variable Interest Entity. The Companys wholly-owned subsidiary, First Interstate Statutory
Trust (FIST), is a variable interest entity for which the Company is not a primary
beneficiary. Accordingly, the accounts of FIST are not included in the accompanying
consolidated financial statements. |
|
|
|
Assets Held in Fiduciary or Agency Capacity. The Company holds certain trust assets in a
fiduciary or agency capacity. The Company also purchases and sells federal funds as an agent.
These and other assets held in an agency or fiduciary capacity are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial statements. |
|
|
|
Use of Estimates. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial
statements and income and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to change relate
to the determination of the allowance for loan losses and the valuation of mortgage servicing
rights. |
|
|
|
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold for one day periods and
interest bearing deposits in banks with original maturities of less than three months. |
|
|
|
The Company maintained compensating balances of approximately $30,000 and $50,000 with the
Federal Reserve Bank to reduce service charges for check clearing services at December 31,
2006 and 2005, respectively. |
|
|
|
Investment Securities. Investments in debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity and carried at
amortized cost. Investments in debt securities that may be sold in response to or in
anticipation of changes in interest rates and resulting prepayment risk, or other factors, and
marketable equity securities are classified as available-for-sale and carried at fair value.
The unrealized gains and losses on these securities are reported, net of applicable income
taxes, as a separate component of stockholders equity and comprehensive income. Management
determines the appropriate |
- 52 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
classification of securities at the time of purchase and at each
reporting date management reassesses the appropriateness of the classification. |
|
|
|
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is
adjusted for accretion of discounts to maturity and amortization of premiums over the
estimated average life of the security, or in the case of callable securities, through the
first call date, using the effective yield method. Such amortization and accretion is
included in interest income. Realized gains and losses, and declines in value judged to be
other-than-temporary, are included in investment securities gains (losses). The cost of
securities sold is based on the specific identification method. |
|
|
|
The Company invests in securities on behalf of certain executive officers and directors of the
Company who have elected to participate in the Companys deferred compensation plans. These
securities are included in other assets and are carried at their fair value based on quoted
market prices. Net realized and unrealized holding gains and losses are included in other
noninterest income. |
|
|
|
Loans. Loans are reported at the principal amount outstanding. Interest is calculated using
the simple interest method on the daily balance of the principal amount outstanding. |
|
|
|
Loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to
the full, timely collection of interest or principal or when a loan becomes contractually past
due by ninety days or more with respect to interest or principal, unless such past due loan is
well secured and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period interest
income. Interest accruals are resumed on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest. Loans renegotiated in
troubled debt restructurings are those loans on which concessions in terms have been granted
because of a borrowers financial difficulty. |
|
|
|
Loan origination fees, prepaid interest and certain direct origination costs are deferred, and
the net amount is amortized as an adjustment of the related loans yield using a level yield
method over the expected lives of the related loans. The amortization of deferred loan fees
and costs and the accretion of unearned discounts on non-performing loans is discontinued
during periods of non-performance. |
|
|
|
Included in loans are certain residential mortgage loans originated for sale. These loans are
carried at the lower of aggregate cost or estimated market value. Market value is estimated
based on outstanding investor commitments or, in the absence of such commitments, current
investor yield requirements. Residential mortgages held for sale were $25,360 and $19,067 as
of December 31, 2006 and 2005, respectively. |
|
|
|
Gains and losses on sales of mortgage loans are determined using the specific identification
method and are included in income from the origination and sale of loans. These gains and
losses are adjusted to recognize the present value of future servicing fee income over the
estimated lives of the related loans. |
|
|
|
Allowance for Loan Losses. The allowance for loan losses is established through a provision
for loan losses which is charged to expense. Loans, or portions thereof, are charged against
the allowance for loan losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance balance is an amount that management believes
will be adequate to absorb known and inherent losses in the loan portfolio based upon
quarterly analyses of the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans and actual loss experience, industry concentrations,
current economic, political and regulatory factors and the estimated impact of current
economic, political, regulatory and environmental conditions on historical loss rates. |
|
|
|
A loan is considered impaired when, based upon current information and events, it is probable
that the Company will be unable to collect, on a timely basis, all amounts due according to
the contractual terms of the loans |
- 53 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
original agreement. The amount of the impairment is
measured using cash flows discounted at the loans effective interest rate, except when it is
determined that the primary source of repayment for the loan is the operation or liquidation
of the underlying collateral. In such cases, the current value of the collateral, reduced by
anticipated selling costs, is used to measure impairment. The Company considers impaired
loans to be those non-consumer loans which are nonaccrual or have been renegotiated in a
troubled debt restructuring. Interest income is recognized on impaired loans only to the
extent that cash payments received exceed the principal balance outstanding. |
|
|
|
Goodwill. The excess purchase price over the fair value of net assets from acquisitions
(goodwill) is evaluated for impairment at the reporting unit level at least annually, or on
an interim basis if an event or circumstance
indicates that it is more likely than not that an impairment loss has occurred. As of
December 31, 2006 and 2005, all goodwill is attributable to the Community Banking operating
segment. No impairment losses were recognized during 2006, 2005 or 2004. |
|
|
|
Core Deposit Intangibles. Core deposit intangibles represent the intangible value of
depositor relationships resulting from deposit liabilities assumed and are amortized using an
accelerated method based on the estimated useful lives of the related deposits of 10 years.
Accumulated core deposit intangibles amortization was $11,561 as of December 31, 2006, and
$10,789 as of December 31, 2005. Core deposit intangibles amortization expense is expected to
total $174, $126, $83, $34 and $10 in 2007, 2008, 2009, 2010 and 2011, respectively. |
|
|
|
Mortgage Servicing Rights. The Company recognizes the rights to service mortgage loans for
others, whether acquired or internally originated. Mortgage servicing rights are initially
recorded at fair value based on comparable market quotes and are amortized in proportion to
and over the period of estimated net servicing income. Mortgage servicing rights are
evaluated quarterly for impairment by discounting the expected future cash flows, taking into
consideration the estimated level of prepayments based on current industry expectations and
the predominant risk characteristics of the underlying loans including loan type, note rate
and loan term. Impairment adjustments, if any, are recorded through a valuation allowance. |
|
|
|
Premises and Equipment. Buildings, furniture and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed using straight-line methods over
estimated useful lives of 5 to 50 years for buildings and improvements and 2.5 to 15 years for
furniture and equipment. Leasehold improvements and assets acquired under capital lease are
amortized over the shorter of their estimated useful lives or the terms of the related leases. |
|
|
|
Company Owned Life Insurance. Company owned life insurance policies (COLI) are recorded at
their cash surrender value. Increases in cash surrender value of the policies, as well as
insurance proceeds received, are recorded as other noninterest income, and are not subject to
income taxes. |
|
|
|
Impairment of Long-Lived Assets. Long-lived assets, including premises and equipment and
certain identifiable intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. The amount of
the impairment loss, if any, is based on the assets fair value. No impairment losses were
recognized during 2006, 2005 or 2004. |
|
|
|
Other Real Estate Owned. Real estate acquired in satisfaction of loans (OREO) is carried at
the lower of the recorded investment in the property at the date of foreclosure or its current
fair value less selling costs. OREO of $529 and $1,091 as of December 31, 2006 and 2005,
respectively, is included in other assets. |
|
|
|
Restricted Equity Securities. Restricted equity securities of the Federal Reserve Bank and
the Federal Home Loan Bank (FHLB) of $12,746 as of December 31, 2006 and 2005, are included
in other assets at par value. |
|
|
|
Income from Fiduciary Activities. Consistent with industry practice, income for trust
services is recognized on the basis of cash received. However, use of this method in lieu of
accrual basis accounting does not materially affect reported earnings. |
|
|
|
Income Taxes. The Parent Company and its subsidiaries, other than FI Reinsurance Ltd., have
elected to be included in a consolidated federal income tax return. For state income tax
purposes, the combined taxable income of the Parent Company and its subsidiaries is
apportioned among the states in which operations take |
- 54 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
place. Federal and state income taxes
attributable to the subsidiaries, computed on a separate return basis, are paid to or received
from the Parent Company. |
|
|
The Company accounts for income taxes using the liability method. Under the liability method,
deferred tax assets and liabilities are determined based on enacted income tax rates which
will be in effect when the differences between the financial statement carrying values and tax
bases of existing assets and liabilities are expected to be reported in taxable income. |
|
|
|
Earnings Per Share. Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income by the weighted average number of common shares and
potential common shares outstanding during the period. |
|
|
|
Comprehensive Income. Comprehensive income includes net income, as well as other changes in
stockholders equity that result from transactions and economic events other than those with
stockholders. The Companys only element of other comprehensive income is unrealized gains
and losses on available-for-sale investment securities. |
|
|
|
Segment Reporting. An operating segment is defined as a component of a business for which
separate financial information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and evaluate performance. The Company
has two operating segments, Community Banking and Technology Services. Community Banking
encompasses commercial and consumer banking services offered to individuals, businesses,
municipalities and other entities. Technology Services encompasses services provided through
i_Tech to affiliated and non-affiliated customers including core application data processing,
ATM and debit card processing, item proof and capture, wide area network services and system
support. |
|
|
|
Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was
$2,728, $2,675 and $2,415 in 2006, 2005 and 2004, respectively. |
|
|
|
Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company; the transferee obtains the
right, free of conditions that constrain it from taking advantage of that right, to pledge or
exchange the transferred assets; and, the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity. |
|
|
|
Technology Services Revenue Recognition. Revenues from technology services are
transaction-based and are recognized as transactions are processed or services are rendered. |
|
|
|
Stock-Based Compensation. Effective January 1, 2006, the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard
(SFAS) No. 123 (revised), Share-Based Payment, using the modified prospective method of
transition. Under the modified prospective method of transition, compensation expense is
recognized for all unvested stock options granted prior to January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of SFAS No. 123
and for all share-based payments awarded after January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123 (revised). Stock-based
compensation expense of $1,328, $289 and $138 for the years ended December 31, 2006, 2005 and
2004, respectively, is included in salaries, wages and benefits expense in the Companys
consolidated statements of income. Related income tax benefits recognized for the years
ended December 31, 2006, 2005 and 2004 were $508, $111 and $53, respectively. In accordance
with the modified prospective transition method, prior periods have not been restated to
reflect the impact of adopting SFAS No. 123 (revised). Therefore, the results for fiscal 2006
are not directly comparable to prior years. |
- 55 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The provisions of SFAS No. 123 (revised) also require that tax benefits resulting from tax
deductions in excess of compensation costs recognized for stock options exercised (excess
tax benefits) be classified as financing cash flows. Prior to the adoption of SFAS No. 123
(revised), these excess tax benefits were classified as operating cash flows. |
|
|
|
Prior to the adoption of SFAS 123 (revised), the Company accounted for share-based payments
to employees using the intrinsic value method under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees(APB 25). Under the provisions of APB 25,
restricted stock awards were accounted for using variable plan accounting whereby
compensation expense or benefit was recorded each period from the date of grant to the
measurement date based on the fair value of the Companys common stock at the end of each
period. Stock option awards were accounted for using fixed plan accounting whereby the
Company recognized no compensation expense for stock option awards because the exercise price
of options granted was equal to the fair value of the common stock at the date of grant. |
|
|
|
As a result of adopting the provisions of SFAS No. 123 (revised) on January 1, 2006, the
Company recognized additional share-based compensation expense of $879, or $543 net of income
tax benefit. This increase in share-based compensation expense resulted in a $0.07 decrease
in both basic and diluted earnings per share in 2006. |
|
|
|
The following table sets forth pro forma net income and earnings per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123 to awards granted under the
Companys share-based compensation plans prior to the adoption of this standard. |
|
|
|
|
|
|
|
|
|
December 31, |
|
2005 |
|
2004 |
|
Net income as reported |
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
|
|
|
|
|
|
|
|
Deduct: total share-based employee compensation expense
determined under a fair value method for all
awards, net of taxes |
|
|
439 |
|
|
|
378 |
|
|
Pro forma net income |
|
$ |
54,276 |
|
|
$ |
45,043 |
|
|
Basic earnings per share |
|
$ |
6.84 |
|
|
$ |
5.74 |
|
Pro forma basic earnings per share |
|
$ |
6.78 |
|
|
$ |
5.69 |
|
|
Diluted earnings per share |
|
$ |
6.71 |
|
|
$ |
5.68 |
|
Pro forma diluted earnings per share |
|
$ |
6.66 |
|
|
$ |
5.63 |
|
|
|
|
Recent Accounting Pronouncements. In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and SFAS No.
3. Under the provisions of SFAS No. 154, voluntary changes in accounting principles are
applied retrospectively to prior periods financial statements unless it would be
impractical. SFAS No. 154 supersedes APB Opinion No. 20, which required that most voluntary
changes in accounting principles be recognized by including in the current periods net
income the cumulative effect of the change. SFAS No. 154 also makes a distinction between
retrospective application of a change in accounting principle and the restatement of
financial statements to reflect the correction of an error. Adoption of the provisions of
SFAS No. 154 on January 1, 2006, did not impact the consolidated financial statements,
results of operations or liquidity of the Company. |
- 56 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
In November 2005, the FASB issued Staff Position No. 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1).
FSP 115-1 provides guidance for determining when an investment is considered impaired, whether
impairment is other than temporary and measurement of an impairment loss. FSP 115-1 clarifies
that an investor should recognize an impairment loss no later than when impairment is deemed
other-than-temporary, even if a decision to sell has not been made. FSP 115-1 also requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in FSP 115-1 amends SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock; nullifies certain requirements of
Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary
Impairments and its Application to Certain Investments; and, supersedes EITF Topic No. D-44,
Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost
Exceeds Fair Value. Adoption of FSP 115-1 on January 1, 2006, did not have a significant
impact on the consolidated financial statements, results of operations or liquidity of the
Company. |
|
|
|
During February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 requires entities to evaluate and identify whether interests in
securitized financial assets are freestanding derivatives, hybrid financial instruments that
contain an embedded derivative requiring bifurcation, or hybrid financial instruments that
contain embedded derivatives that do not require bifurcation. SFAS 155 also permits fair
value measurement for any hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation. SFAS No. 155 is effective for the Company on
January 1, 2007, and is not expected to have a material impact on the consolidated financial
statements, results of operations or liquidity of the Company. |
|
|
|
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140. SFAS No. 156 requires entities to separately recognize
a servicing asset or liability whenever it undertakes an obligation to service financial
assets and also requires all separately recognized servicing assets or liabilities to be
initially measured at fair value. Additionally, this standard permits entities to choose among
two alternatives, the amortization method or fair value measurement method, for the subsequent
measurement of each class of separately recognized servicing assets and liabilities. Under the
amortization method, an entity shall amortize the value of servicing assets or liabilities in
proportion to and over the period of estimated net servicing income or net servicing loss and
assess servicing assets or liabilities for impairment or increased obligation based on fair
value at each reporting date. Under the fair value measurement method, an entity shall measure
servicing assets or liabilities at fair value at each reporting date and report changes in
fair value in earnings in the period in which the changes occur. SFAS No. 156 is effective
for the Company on January 1, 2007, and has elected to continue to follow the amortization
method. The Company does not expect adoption to have a significant impact on its consolidated
financial statements, results of operations or liquidity. |
|
|
|
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (an interpretation of SFAS No. 109) (FIN 48). FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, tax positions shall
initially be recognized in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax authorities. Such tax positions shall
initially and subsequently be measured as the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement with the tax authority assuming
full knowledge of the position and all relevant facts. FIN 48 also revises disclosure
requirements to include an annual tabular rollforward of unrecognized tax benefits. The
provisions of FIN 48 are effective for the Company on January 1, 2007. The Company will be
required to apply the provisions of FIN 48 to all tax positions upon initial adoption with any
cumulative effect adjustment to be recognized as an adjustment to retained earnings. The
result of adoption will be limited to a reclassification between deferred and current income
tax liabilities, with no significant effect on retained earnings. |
- 57 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value measurements, but
applies under other existing accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement and, therefore, should be determined based on the assumptions that
market participants would use in pricing that asset or liability. SFAS No. 157 also
establishes a fair value hierarchy that distinguishes between market participant assumptions developed based
on market data obtained from independent sources and the Companys own assumptions about
market participant assumptions based on the best information available. SFAS No. 157 is
effective for the Company on January 1, 2008 with earlier adoption permitted. The Company
does not expect adoption to have a significant impact on its consolidated financial
statements, results of operations or liquidity. |
|
|
|
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and
132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of
defined benefit postretirement plans, other than multiemployer plans, as assets or liabilities
on the balance sheet and to recognize changes in the funded status in the year in which the
changes occur through comprehensive income. The recognition and disclosure provisions of SFAS
No. 158 are effective for the Company as of December 31, 2007, with earlier adoption
encouraged. The Company does not expect adoption of the recognition and disclosure provisions
of SFAS No. 158 on December 31, 2007 to have a significant impact on the consolidated
financial statements, results of operations or liquidity of the Company. SFAS No. 158 also
requires measurement of defined benefit plan assets and obligations as of the date of the
employers fiscal year end statement of financial position beginning for fiscal years ending
after December 15, 2008. The Company currently measures defined benefit plan assets and
obligations as of its fiscal year end. |
|
|
|
In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue
No. 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires
employers to recognize a liability for future benefits provided through endorsement
split-dollar life insurance arrangements that extend into postretirement periods in accordance
with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions or
APB Opinion No. 12, Omnibus Opinion 1967. The provisions of EITF 06-4 are effective for
the Company on January 1, 2007 and are to be applied as a change in accounting principle
either through a cumulative-effect adjustment to retained earnings or other components of
equity or net assets in the statement of financial position as of the beginning of the year of
adoption; or through retrospective application to all prior periods. The Company does not
expect adoption of EITF 06-4 to have a significant impact on its consolidated financial
statements, results of operations or liquidity. |
|
|
|
In September 2006, the EITF reached a final consensus on Issue No. 06-5 (EITF 06-5),
Accounting for Purchase of Life InsuranceDetermining the Amount That Could be Realized in
Accordance with FASB Technical Bulletin No. 85-4. EITF 06-5 requires that the cash
surrender value and any amounts provided by the contractual terms of an insurance policy that
are realizable at the balance sheet date be considered in determining the amount that could be
realized under Technical Bulletin No. 85-4. The provisions of EITF 06-5 require (1)
consideration of the effect of contractual restrictions that limit amounts that could be
realized, (2) exclusion from the amount that could be realized of amounts recoverable at the
discretion of the insurance company, (3) amounts that are recoverable by the policyholder in
periods beyond one year from the surrender of the policy be discounted, and (4) an assumption
that policies will be surrendered on an individual lifebyindividual life basis. The
provisions of EITF 06-5 are effective for the Company on January 1, 2007 and are to be applied
as a change in accounting principle through a cumulative-effect adjustment to retained
earnings as of the beginning of the year of adoption. The Company does not expect adoption of
EITF 06-5 to have a significant impact on its consolidated financial statements, results of
operations or liquidity. |
- 58 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108) providing guidance for considering the effects of prior year misstatements
when quantifying misstatements in current year financial statements. Under the provisions of
SAB 108, a company is required to quantify the impact of correcting all misstatements,
including both the carryover and reversing effects of prior year misstatements, using both a
rollover and iron curtain approach. The rollover approach quantifies a misstatement based
on the amount of the error originating in the current year income statement, ignoring the
effects of correcting the portion of the current year balance sheet misstatement that
originated in prior years. The iron curtain approach quantifies a misstatement based on the
effects of correcting the misstatement existing in the balance sheet at the end of the current
year, irrespective of the misstatements year of origination. If either method results in
quantifying a misstatement that is material, after considering all relevant quantitative and
qualitative factors, the financial statements must be adjusted. SAB 108 is effective for
financial statements for fiscal years ending after November 15, 2006 with earlier application
encouraged. Adoption of SAB 108 as of December 31, 2006, did not have an impact on the
consolidated financial statements, results of operations or liquidity of the Company. |
|
|
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Liabilitiesincluding an amendment of FASB Statement No. 115. SFAS No. 159 permits
entities to choose to measure certain financial instruments and certain other items at fair
value to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently. Unrealized gains and losses on instruments measured at fair value
are recognized in earnings at each reporting date. SFAS No. 159 is effective for the Company
on January 1, 2008. The Company may elect early adoption of SFAS No. 159 as of January 1,
2007, provided it also elects to apply the provisions of SFAS No. 157, Fair Value
Measurements. The Company is currently assessing the impact of adoption of SFAS No. 159. |
|
(2) |
|
REGULATORY CAPITAL |
|
|
|
The Company is subject to the regulatory capital requirements administered by federal banking
regulators and the Federal Reserve. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures of the
Companys assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Parent Company, like all bank holding companies, is not
subject to the prompt corrective action provisions. Capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings and
other factors. |
|
|
|
Quantitative measures established by regulation to ensure capital adequacy require the Company
to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average assets, as defined in the regulations. As of December 31,
2006, the Company exceeded all capital adequacy requirements to which it is subject. |
- 59 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The Companys actual capital amounts and ratios and selected minimum regulatory thresholds as
of December 31, 2006 and 2005 are presented in the following table: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Adequately Capitalized |
|
Well Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
464,821 |
|
|
|
11.9 |
% |
|
$ |
311,732 |
|
|
|
8.0 |
% |
|
NA |
|
NA |
FIB |
|
|
433,298 |
|
|
|
11.2 |
% |
|
|
307,914 |
|
|
|
8.0 |
|
|
$ |
387,393 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
417,369 |
|
|
|
10.7 |
|
|
|
155,866 |
|
|
|
4.0 |
|
|
NA |
|
NA |
FIB |
|
|
385,846 |
|
|
|
10.0 |
|
|
|
154,957 |
|
|
|
4.0 |
|
|
$ |
232,436 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
417,369 |
|
|
|
8.6 |
|
|
|
155,866 |
|
|
|
4.0 |
|
|
NA |
|
NA |
FIB |
|
|
385,846 |
|
|
|
8.0 |
|
|
|
154,957 |
|
|
|
4.0 |
|
|
$ |
232,436 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Adequately Capitalized |
|
Well Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
399,565 |
|
|
|
11.3 |
% |
|
$ |
283,740 |
|
|
|
8.0 |
% |
|
NA |
|
NA |
FIB |
|
|
386,784 |
|
|
|
11.0 |
|
|
|
282,096 |
|
|
|
8.0 |
|
|
$ |
352,620 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
357,114 |
|
|
|
10.1 |
|
|
|
141,870 |
|
|
|
4.0 |
|
|
NA |
|
NA |
FIB |
|
|
344,334 |
|
|
|
9.8 |
|
|
|
141,048 |
|
|
|
4.0 |
|
|
$ |
211,572 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
357,114 |
|
|
|
7.9 |
|
|
|
180,488 |
|
|
|
4.0 |
|
|
NA |
|
NA |
FIB |
|
|
344,334 |
|
|
|
7.7 |
|
|
|
179,847 |
|
|
|
4.0 |
|
|
$ |
224,808 |
|
|
|
5.0 |
% |
|
- 60 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(3) |
|
INVESTMENT SECURITIES |
|
|
|
The amortized cost and approximate fair values of investment securities are summarized as
follows: |
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2006 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government agencies |
|
$ |
567,018 |
|
|
$ |
14 |
|
|
$ |
(2,876 |
) |
|
$ |
564,156 |
|
Other mortgage-backed securities |
|
|
457,382 |
|
|
|
363 |
|
|
|
(9,283 |
) |
|
|
448,462 |
|
Mutual funds |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
Total |
|
$ |
1,024,440 |
|
|
$ |
377 |
|
|
$ |
(12,159 |
) |
|
$ |
1,012,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2006 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
111,022 |
|
|
$ |
852 |
|
|
$ |
(401 |
) |
|
$ |
111,473 |
|
Other securities |
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
918 |
|
|
Total |
|
$ |
111,940 |
|
|
$ |
852 |
|
|
$ |
(401 |
) |
|
$ |
112,391 |
|
|
|
|
Gross gains of $28 and gross losses of $750 were realized on the sale of available-for-sale securities in 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2005 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government agencies |
|
$ |
511,869 |
|
|
$ |
2 |
|
|
$ |
(4,662 |
) |
|
$ |
507,209 |
|
Other mortgage-backed securities |
|
|
418,159 |
|
|
|
425 |
|
|
|
(9,352 |
) |
|
|
409,232 |
|
Mutual funds |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
Total |
|
$ |
930,037 |
|
|
$ |
427 |
|
|
$ |
(14,014 |
) |
|
$ |
916,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2005 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
102,425 |
|
|
$ |
1,399 |
|
|
$ |
(545 |
) |
|
$ |
103,279 |
|
Other securities |
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
1,026 |
|
|
Total |
|
$ |
103,451 |
|
|
$ |
1,399 |
|
|
$ |
(545 |
) |
|
$ |
104,305 |
|
|
|
|
Gross gains of $10 and gross losses of $3,687 were realized on the sale of available-for-sale securities in 2005. |
- 61 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The following table shows the gross unrealized losses and fair values of investment
securities, aggregated by investment category, and the length of time individual investment
securities have been in a continuous unrealized loss position, as of December 31, 2006 and
2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2006 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Obligations of U.S.
Government agencies |
|
$ |
315,208 |
|
|
$ |
(149 |
) |
|
$ |
208,937 |
|
|
$ |
(2,727 |
) |
|
$ |
524,145 |
|
|
$ |
(2,876 |
) |
Other mortgage-backed securities |
|
|
67,486 |
|
|
|
(600 |
) |
|
|
319,137 |
|
|
|
(8,683 |
) |
|
|
386,623 |
|
|
|
(9,283 |
) |
|
Total |
|
$ |
382,694 |
|
|
$ |
(749 |
) |
|
$ |
528,074 |
|
|
$ |
(11,410 |
) |
|
$ |
910,768 |
|
|
$ |
(12,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2006 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
State, county and municipal
securities |
|
$ |
18,867 |
|
|
$ |
(183 |
) |
|
$ |
10,374 |
|
|
$ |
(218 |
) |
|
$ |
29,241 |
|
|
$ |
(401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2005 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Obligations of U.S.
Government agencies |
|
$ |
377,272 |
|
|
$ |
(2,059 |
) |
|
$ |
114,938 |
|
|
$ |
(2,603 |
) |
|
$ |
492,210 |
|
|
$ |
(4,662 |
) |
Other mortgage-backed securities |
|
|
186,539 |
|
|
|
(2,732 |
) |
|
|
199,607 |
|
|
|
(6,620 |
) |
|
|
386,146 |
|
|
|
(9,352 |
) |
|
Total |
|
$ |
563,811 |
|
|
$ |
(4,791 |
) |
|
$ |
314,545 |
|
|
$ |
(9,223 |
) |
|
$ |
878,356 |
|
|
$ |
(14,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2005 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
State, county and municipal
securities |
|
$ |
18,086 |
|
|
$ |
(313 |
) |
|
$ |
8,049 |
|
|
$ |
(232 |
) |
|
$ |
26,135 |
|
|
$ |
(545 |
) |
|
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The investment portfolio is evaluated quarterly for other-than-temporary declines in the
market value of each individual investment security. Consideration is given to the length of
time and the extent to which the fair value has been less than cost; the financial condition
and near term prospects of the issuer; and, the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. Unrealized losses as of December 31, 2006 and 2005 related primarily
to fluctuations in the current interest rates. As of December 31, 2006, the Company had the
intent and ability to hold these investments securities for a period of time sufficient to
allow for an anticipated recovery. No impairment losses were recorded during 2006, 2005 or
2004. |
|
|
|
Maturities of investment securities at December 31, 2006 are shown below. Maturities of
mortgage-backed securities have been adjusted to reflect shorter maturities based upon
estimated prepayments of principal. All other investment securities maturities are shown at
contractual maturity dates. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
Held-to-Maturity |
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
December 31, 2006 |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Within one year |
|
$ |
400,680 |
|
|
$ |
398,487 |
|
|
$ |
12,040 |
|
|
$ |
12,067 |
|
After one but within five years |
|
|
491,080 |
|
|
|
484,077 |
|
|
|
47,507 |
|
|
|
47,918 |
|
After five years but within ten years |
|
|
64,033 |
|
|
|
62,785 |
|
|
|
20,213 |
|
|
|
20,426 |
|
After ten years |
|
|
68,607 |
|
|
|
67,269 |
|
|
|
32,180 |
|
|
|
31,980 |
|
|
Total |
|
|
1,024,400 |
|
|
|
1,012,618 |
|
|
|
111,940 |
|
|
|
112,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds with no stated maturity |
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,024,440 |
|
|
$ |
1,012,658 |
|
|
$ |
111,940 |
|
|
$ |
112,391 |
|
|
|
|
At December 31, 2006, the Company had investment securities callable within one year with
amortized costs and estimated fair values of $105,230 and $104,613, respectively. These
investment securities are primarily classified as available-for-sale and included in the after
one but within five years category in the table above. |
|
|
|
Maturities of securities do not reflect rate repricing opportunities present in adjustable
rate mortgage-backed securities. At December 31, 2006 and 2005, the Company had variable rate
securities with amortized costs of $603 and $830, respectively. |
|
|
|
There are no significant concentrations of investments at December 31, 2006, (greater than 10
percent of stockholders equity) in any individual security issuer, except for U.S. Government
or agency-backed securities. |
|
|
|
Investment securities with amortized cost of $1,040,274 and $915,876 at December 31, 2006 and
2005, respectively, were pledged to secure public deposits and securities sold under
repurchase agreements. The approximate fair value of securities pledged at December 31, 2006
and 2005 was $1,028,738 and $903,055, respectively. All securities sold under repurchase
agreements are with customers and mature on the next banking day. The Company retains
possession of the underlying securities sold under repurchase agreements. |
- 63 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Major categories and balances of loans included in the loan portfolios are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Residential |
|
$ |
420,251 |
|
|
$ |
427,808 |
|
Agricultural |
|
|
137,659 |
|
|
|
116,402 |
|
Commercial |
|
|
919,912 |
|
|
|
907,041 |
|
Construction |
|
|
579,603 |
|
|
|
403,751 |
|
Mortgage loans originated for sale |
|
|
25,360 |
|
|
|
19,067 |
|
|
Total real estate loans |
|
|
2,082,785 |
|
|
|
1,874,069 |
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
370,016 |
|
|
|
347,375 |
|
Credit card loans |
|
|
60,569 |
|
|
|
51,523 |
|
Other consumer loans |
|
|
175,273 |
|
|
|
188,997 |
|
|
Total consumer loans |
|
|
605,858 |
|
|
|
587,895 |
|
|
Commercial |
|
|
542,325 |
|
|
|
494,848 |
|
Agricultural |
|
|
76,644 |
|
|
|
74,561 |
|
Other loans, including overdrafts |
|
|
2,751 |
|
|
|
2,981 |
|
|
Total loans |
|
$ |
3,310,363 |
|
|
$ |
3,034,354 |
|
|
At December 31, 2006, the Company had no concentrations of loans which exceeded 10% of total
loans other than the categories disclosed above.
Nonaccrual loans were $14,764 and $17,142 at December 31, 2006 and 2005, respectively. If
interest on nonaccrual loans had been accrued, such income would have approximated $1,135,
$1,179 and $1,388 during the years ended December 31, 2006, 2005 and 2004, respectively.
Loans contractually past due ninety days or more aggregating $1,769 on December 31, 2006 and
$1,001 on December 31, 2005 were on accrual status. These loans are deemed adequately secured
and in the process of collection.
Impaired loans include non-consumer loans placed on nonaccrual or renegotiated in a troubled
debt restructuring. The following table sets forth information on impaired loans at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
|
Recorded |
|
Specific |
|
Recorded |
|
Specific |
|
|
Loan |
|
Loan Loss |
|
Loan |
|
Loan Loss |
|
|
Balance |
|
Reserves |
|
Balance |
|
Balance |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific loan loss reserves assigned |
|
$ |
3,782 |
|
|
$ |
1,855 |
|
|
$ |
3,963 |
|
|
$ |
1,934 |
|
With no specific loan loss reserves assigned |
|
|
11,002 |
|
|
|
|
|
|
|
13,373 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
14,784 |
|
|
$ |
1,855 |
|
|
$ |
17,336 |
|
|
$ |
1,934 |
|
|
The average recorded investment in impaired loans for the years ended December 31, 2006, 2005
and 2004 was approximately $15,335, $17,841 and $22,970, respectively. If interest on
impaired loans had been accrued, interest income on impaired loans during 2006, 2005 and 2004
would have been approximately $1,162, $1,197 and $1,390, respectively. At December 31, 2006,
there were no material commitments to lend additional funds to borrowers whose existing loans
have been renegotiated or are classified as nonaccrual.
- 64 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Most of the Companys business activity is with customers within the states of Montana and
Wyoming. Loans where the customers or related collateral are out of the Companys trade area
are not significant. |
|
(5) |
|
ALLOWANCE FOR LOAN LOSSES |
|
|
|
A summary of changes in the allowance for loan losses follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Balance at beginning of year |
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
$ |
38,940 |
|
Provision charged to operating expense |
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
Less loans charged-off |
|
|
(5,210 |
) |
|
|
(7,451 |
) |
|
|
(7,800 |
) |
Add back recoveries of loans previously charged-off |
|
|
2,451 |
|
|
|
1,913 |
|
|
|
2,268 |
|
|
Balance at end of year |
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
(6) |
|
PREMISES AND EQUIPMENT |
|
|
|
Premises and equipment and related accumulated depreciation are as follows: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Land |
|
$ |
18,277 |
|
|
$ |
16,985 |
|
Buildings and improvements |
|
|
114,776 |
|
|
|
112,267 |
|
Furniture and equipment |
|
|
68,874 |
|
|
|
61,002 |
|
|
|
|
|
201,927 |
|
|
|
190,254 |
|
Less accumulated depreciation |
|
|
(81,647 |
) |
|
|
(69,816 |
) |
|
Premises and equipment, net |
|
$ |
120,280 |
|
|
$ |
120,438 |
|
|
|
|
The Parent Company and a FIB branch office lease premises from an affiliated partnership (see
Note 22). |
|
(7) |
|
MORTGAGE SERVICING RIGHTS |
|
|
|
Information with respect to the Companys mortgage servicing rights follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Balance at beginning of year |
|
$ |
24,581 |
|
|
$ |
22,292 |
|
|
$ |
19,336 |
|
Purchases of mortgage servicing rights |
|
|
1,660 |
|
|
|
1,578 |
|
|
|
1,581 |
|
Originations of mortgage servicing rights |
|
|
4,586 |
|
|
|
5,341 |
|
|
|
5,361 |
|
Amortization expense |
|
|
(4,024 |
) |
|
|
(4,614 |
) |
|
|
(3,986 |
) |
Write-off of permanent impairment |
|
|
(15 |
) |
|
|
(16 |
) |
|
|
|
|
|
Balance at end of year |
|
|
26,788 |
|
|
|
24,581 |
|
|
|
22,292 |
|
Less valuation reserve |
|
|
(4,144 |
) |
|
|
(2,465 |
) |
|
|
(4,668 |
) |
|
Balance at end of year |
|
$ |
22,644 |
|
|
$ |
22,116 |
|
|
$ |
17,624 |
|
|
At December 31, 2006, the estimated fair value and weighted average life of the Companys
mortgage servicing rights were $23,378 and 5.6 years, respectively. The fair value of
mortgage servicing rights was determined using discount rates ranging from 8.75% to 14.25% and
monthly prepayment speeds ranging from 0.6% to 2.5% depending upon the risk characteristics of
the underlying loans. The Company recorded as other expense impairment charges of $1,694 in
2006 and impairment reversals of $2,187 and $263 in 2005 and 2004, respectively. Permanent
impairment of $15 and $16 was charged against the carrying value of mortgage servicing rights
in 2006 and 2005, respectively. No permanent impairment was recorded in 2004.
- 65 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Principal balances of mortgage loans underlying mortgage servicing rights of approximately
$2,045,437 and $1,910,252 at December 31, 2006 and 2005, respectively, are not included in the
accompanying consolidated financial statements. |
|
(8) |
|
COMPANY OWNED LIFE INSURANCE |
|
|
|
Company owned life insurance consists of the following: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Key executive, principal shareholder |
|
$ |
4,124 |
|
|
$ |
4,007 |
|
Key executive split dollar |
|
|
3,856 |
|
|
|
3,747 |
|
Group life |
|
|
56,725 |
|
|
|
54,793 |
|
|
Total |
|
$ |
64,705 |
|
|
$ |
62,547 |
|
|
|
|
The Company maintains key-executive life insurance policies on certain principal shareholders.
Under these policies, the Company receives benefits payable upon the death of the insured.
The net cash surrender value of key-executive, principal shareholder insurance policies was
$4,124 and $4,007 at December 31, 2006 and 2005, respectively. |
|
|
|
The Company also has obtained life insurance policies covering selected other key officers.
The net cash surrender value of these policies was $3,856 and $3,747 at December 31, 2006 and
2005, respectively. Under these policies, the Company receives benefits payable upon death of
the insured. An endorsement split dollar agreement has been executed with the selected key
officers whereby a portion of the policy death benefit is payable to their designated
beneficiaries. The endorsement split dollar agreement will provide post-retirement coverage
for those selected key officers meeting specified retirement qualifications. The Company
expenses the earned portion of the post-employment benefit through the vesting period. |
|
|
|
The Company has obtained a group life insurance policy covering selected officers of FIB. The
net cash surrender value of the policy was $56,725 and $54,793 at December 31, 2006 and 2005,
respectively. Under the
policy, the Company receives benefits payable upon death of the insured. An endorsement split
dollar agreement has been executed with the insured officers whereby a portion of the policy
death benefit is payable to their designated beneficiaries if they are employed by the Company
at the time of death. The marginal income produced by the policy is used to offset the cost
of employee benefit plans of FIB. |
|
(9) |
|
DEPOSITS |
|
|
|
Deposits are summarized as follows: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Noninterest bearing demand |
|
$ |
888,694 |
|
|
$ |
864,128 |
|
|
Interest bearing: |
|
|
|
|
|
|
|
|
Demand |
|
|
964,312 |
|
|
|
792,263 |
|
Savings |
|
|
798,497 |
|
|
|
879,586 |
|
Time, $100 and over |
|
|
408,813 |
|
|
|
352,324 |
|
Time, other |
|
|
648,195 |
|
|
|
659,289 |
|
|
Total interest bearing |
|
|
2,819,817 |
|
|
|
2,683,462 |
|
|
Total deposits |
|
$ |
3,708,511 |
|
|
$ |
3,547,590 |
|
|
- 66 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Maturities of time deposits at December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Time, $100 |
|
|
|
|
and Over |
|
Total Time |
|
2007 |
|
$ |
348,644 |
|
|
$ |
852,761 |
|
2008 |
|
|
35,737 |
|
|
|
115,445 |
|
2009 |
|
|
10,263 |
|
|
|
38,128 |
|
2010 |
|
|
9,069 |
|
|
|
33,786 |
|
2011 |
|
|
5,100 |
|
|
|
16,799 |
|
Thereafter |
|
|
|
|
|
|
89 |
|
|
Total |
|
$ |
408,813 |
|
|
$ |
1,057,008 |
|
|
Interest expense on time deposits of $100 or more was $15,291, $10,694 and $8,982 for the
years ended December 31, 2006, 2005 and 2004, respectively.
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
42,014 |
|
|
$ |
24,385 |
|
|
$ |
18,692 |
|
State |
|
|
5,208 |
|
|
|
3,043 |
|
|
|
2,310 |
|
|
Total current |
|
|
47,222 |
|
|
|
27,428 |
|
|
|
21,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(5,005 |
) |
|
|
1,698 |
|
|
|
2,526 |
|
State |
|
|
(718 |
) |
|
|
184 |
|
|
|
401 |
|
|
Total deferred |
|
|
(5,723 |
) |
|
|
1,882 |
|
|
|
2,927 |
|
|
Balance at end of year |
|
$ |
41,499 |
|
|
$ |
29,310 |
|
|
$ |
23,929 |
|
|
Total income tax expense differs from the amount computed by applying the statutory federal
income tax rate of 35 percent in 2006, 2005 and 2004 to income before income taxes as a result
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Tax expense at the statutory tax rate |
|
$ |
40,988 |
|
|
$ |
29,409 |
|
|
$ |
24,273 |
|
Increase (decrease) in tax resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income |
|
|
(2,915 |
) |
|
|
(2,651 |
) |
|
|
(2,507 |
) |
State income tax, net of federal income tax benefit |
|
|
2,919 |
|
|
|
2,098 |
|
|
|
1,763 |
|
Amortization of nondeductible intangibles |
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
Other, net |
|
|
479 |
|
|
|
426 |
|
|
|
372 |
|
|
Tax expense at effective tax rate |
|
$ |
41,499 |
|
|
$ |
29,310 |
|
|
$ |
23,929 |
|
|
- 67 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The tax effects of temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of the net deferred
tax asset relate to the following:
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loans, principally due to allowance for loan losses |
|
$ |
16,938 |
|
|
$ |
13,831 |
|
Employee benefits |
|
|
3,126 |
|
|
|
2,401 |
|
Investment securities, unrealized losses |
|
|
4,640 |
|
|
|
5,351 |
|
Other |
|
|
556 |
|
|
|
860 |
|
|
Deferred tax assets |
|
|
25,260 |
|
|
|
22,443 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets, principally differences in bases and depreciation |
|
|
(4,718 |
) |
|
|
(5,845 |
) |
Investment in joint venture partnership, principally due to
differences in depreciation of partnership assets |
|
|
(969 |
) |
|
|
(1,041 |
) |
Prepaid amounts |
|
|
(958 |
) |
|
|
(1,175 |
) |
Government agency stock dividends |
|
|
(2,046 |
) |
|
|
(2,130 |
) |
Goodwill and core deposit intangibles |
|
|
(2,780 |
) |
|
|
(2,686 |
) |
Mortgage servicing rights |
|
|
(5,000 |
) |
|
|
(5,711 |
) |
Other |
|
|
(492 |
) |
|
|
(570 |
) |
|
Deferred tax liabilities |
|
|
(16,963 |
) |
|
|
(19,158 |
) |
|
Net deferred tax assets |
|
$ |
8,297 |
|
|
$ |
3,285 |
|
|
The Company believes a valuation allowance is not needed to reduce the net deferred tax assets
as it is more likely than not that the net deferred tax assets will be realized through
recovery of taxes previously paid and/or future taxable income.
The Company had current income taxes payable of $6,679 and $2,441 at December 31, 2006 and
2005, respectively, which are included in other liabilities.
- 68 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(11) |
|
LONG-TERM DEBT AND OTHER BORROWED FUNDS |
A summary of long-term debt follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
|
Parent Company: |
|
|
|
|
|
|
|
|
7.50% subordinated notes, unsecured, interest payable
semi-annually, due in increasing annual principal payments
beginning October 1, 2002 with final maturity on
October 1, 2006 |
|
$ |
|
|
|
$ |
4,600 |
|
|
|
|
|
|
|
|
|
|
Subsidiaries: |
|
|
|
|
|
|
|
|
Various notes payable to FHLB, interest due monthly at
various rates and maturities (weighted average rate of 2.97%
at December 31, 2006) |
|
|
19,666 |
|
|
|
48,094 |
|
8.00% capital lease obligation with term ending
October 25, 2029 |
|
|
1,935 |
|
|
|
1,960 |
|
|
Total long-term debt |
|
$ |
21,601 |
|
|
$ |
54,654 |
|
|
Maturities of long-term debt at December 31, 2006 are as follows:
|
|
|
|
|
2007 |
|
$ |
16,456 |
|
2008 |
|
|
1,458 |
|
2009 |
|
|
1,460 |
|
2010 |
|
|
415 |
|
2011 |
|
|
37 |
|
Thereafter |
|
|
1,775 |
|
|
Total |
|
$ |
21,601 |
|
|
The Companys long-term debt agreements contain various covenants that, among other things,
establish minimum capital and financial performance ratios; and, place certain restrictions
on capital expenditures, indebtedness, the sale and issuance of common stock, and the amount
of dividends payable to shareholders. The Company was in compliance with all such covenants
as of December 31, 2006.
The Company has a $25,000 unsecured revolving term loan with its primary lender. As of
December 31, 2006 and 2005, there were no advances on the loan. The revolving facility
expires June 30, 2008, and requires payment of an annual commitment fee of 0.10% of the
average daily unadvanced amount. Interest is payable monthly either at a fluctuating rate
equal to prime or at a fixed rate equal to the London Interbank Offered Rate (LIBOR) plus
1.25%, as elected by the Company at the date of each advance. Prime rate advances may be
prepaid without penalty. LIBOR advances are subject to prepayment penalties equal to the
unpaid interest due under the original terms of the advance less interest recomputed using
LIBOR in effect at the date of prepayment.
The notes payable to FHLB are secured by a blanket assignment of the Companys qualifying
residential and commercial real estate loans. The Company has available lines of credit with
the FHLB of approximately $166,014 subject to collateral availability. As of December 31,
2006 and 2005, FHLB advances totaled $19,666 and $48,094, respectively.
During 2004, the Company incurred a capital lease obligation of $2,000 in connection with the
lease of a banking office. The balance of the obligation was $1,935 and $1,960 as of December
31, 2006 and 2005, respectively. Assets acquired under capital lease, consisting solely of a
building and leasehold improvements, are included in premises and equipment and are subject to
depreciation.
- 69 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The following is a summary of other borrowed funds, all of which mature within one year:
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Interest bearing demand notes issued to the United
States Treasury, secured by investment securities (5.1%
interest rate at December 31, 2006) |
|
$ |
5,694 |
|
|
$ |
7,495 |
|
|
|
|
The Company has federal funds lines of credit with third parties amounting to $131,750,
subject to funds availability. These lines are subject to cancellation without notice. |
|
(12) |
|
SUBORDINATED DEBENTURE HELD BY SUBSIDIARY TRUST |
|
|
|
In March 2003, the Company established a wholly-owned statutory business trust (FIST) for
the exclusive purpose of issuing $40,000 of 30-year floating rate mandatorily redeemable
capital trust preferred securities (Trust Preferred Securities). Proceeds from the issuance
and other assets of the trust of $41,238 were used to purchase a junior subordinated debenture
(Subordinated Debenture) issued by the Parent Company. |
|
|
|
The Subordinated Debenture is unsecured and bears a cumulative floating interest rate equal to
LIBOR plus 3.15% per annum. As of December 31, 2006, the interest rate on the Subordinated
Debenture was 8.52%. Interest distributions are made quarterly. The Company may defer the
payment of interest at any time provided that the deferral period does not extend past the
stated maturity. During any such deferral period, distributions on the Trust Preferred
Securities will also be deferred and the Companys ability to pay dividends on its common
shares is restricted. The Subordinated Debenture matures March 26, 2033, but may be redeemed,
subject to approval by the Federal Reserve Bank, at the Companys option on or after March 26,
2008, or at any time in the event of unfavorable changes in laws or regulations. The
Subordinated Debenture qualifies as Tier 1 capital under the Federal Reserve capital
adequacy guidelines. Debt issuance costs consisting primarily of underwriting discounts and
professional fees were capitalized and are being amortized through maturity to interest
expense using the straight-line method. |
|
|
|
The terms of the Trust Preferred Securities are identical to those of the Subordinated
Debenture. The Trust Preferred Securities are subject to mandatory redemption upon repayment
of the Subordinated Debenture at its stated maturity date or earlier redemption in an amount
equal to their liquidation amount plus accumulated and unpaid distributions to the date of
redemption. The Company guarantees the payment of distributions and payments for redemption
or liquidation of the Trust Preferred Securities to the extent of funds held by the FIST. |
|
(13) |
|
STOCK-BASED COMPENSATION |
|
|
|
The Company has equity awards outstanding under three stock-based compensation plans; the 2006
Equity Compensation Plan (the 2006 Plan), the 2001 Stock Option Plan and the 2004 Restricted
Stock Benefit Plan. These plans were primarily established to enhance the Companys ability
to attract, retain and motivate employees. The Companys Board of Directors or, upon
delegation, the Compensation Committee of the Board of Directors (Compensation Committee)
has exclusive authority to select employees, advisors and others, including directors, to
receive awards and to establish the terms and conditions of each award made pursuant to the
Companys stock-based compensation plans. |
- 70 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The 2006 Plan, approved by the Companys shareholders in May 2006, was established to
consolidate into one plan the benefits available under the 2001 Stock Option Plan and the 2004
Restricted Stock Award Plan (collectively, the Previous Plans). The Previous Plans continue
with respect to awards made prior to May 2006. All shares of common stock available for
future grant under the Previous Plans were transferred into the 2006 Plan. At December 31,
2006, there were 737,254 common shares available for future grant under the 2006 Plan.
Stock Options. All options granted have an exercise price equal to the minority appraised
value of the Companys common stock at the date of grant, may be subject to vesting as
determined by the Companys Board of Directors or Compensation Committee 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 agreement prohibiting transfer of the stock for a period of six
months following the exercise. In addition, the shareholder agreement grants the Company a
right of first refusal to repurchase the stock at the then current minority appraised value
and provides the Company a right to call some or all of the stock under certain conditions.
Compensation expense related to stock option awards of $935, $47 and $8 was included in
salaries, wages and benefits expense on the Companys consolidated income statements for the
years ended December 31, 2006, 2005 and 2004, respectively.
The weighted average grant date fair value of options granted was $5.95, $6.03 and $4.75
during the years ended December 31, 2006, 2005 and 2004, respectively. The fair value of
each option award is estimated on the date of grant using the Black-Scholes option pricing
model. The following table presents the weighted-average assumptions used in the option
pricing model for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Expected volatility |
|
|
5.87 |
% |
|
|
8.40 |
% |
|
|
7.80 |
% |
Expected dividend yield |
|
|
3.01 |
% |
|
|
3.05 |
% |
|
|
3.21 |
% |
Risk-free interest rate |
|
|
4.51 |
% |
|
|
4.19 |
% |
|
|
4.18 |
% |
Expected life of options (in years) |
|
|
6.2 |
|
|
|
8.5 |
|
|
|
8.5 |
|
|
Expected dividend yield is based on the Companys annualized expected dividends per share
divided by the average common stock price. Risk-free interest rate is based on the U.S.
treasury constant maturity yield for treasury securities with maturities approximating the
expected life of the options granted on the date of grant. The Company has elected to use
the simplified method to estimate expected life until its analysis of historical exercise
and post-vesting employment termination behaviors is refined. Expected volatility is based
on the historical volatility of the Companys common stock calculated using the quarterly
appraised value of a minority interest over the expected life of options in 2006 and the
contractual option term in 2005 and 2004.
- 71 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The following table summarizes stock option activity under the Companys active stock option
plans
for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of |
|
Weighted-Average |
|
Remaining |
|
|
Shares |
|
Exercise Price |
|
Contract Life |
|
Outstanding options, beginning of year |
|
|
837,145 |
|
|
$ |
45.95 |
|
|
|
|
|
Granted |
|
|
142,901 |
|
|
$ |
68.37 |
|
|
|
|
|
Exercised |
|
|
(129,487 |
) |
|
$ |
43.34 |
|
|
|
|
|
Forfeited |
|
|
(10,360 |
) |
|
$ |
59.48 |
|
|
|
|
|
|
Outstanding options, end of year |
|
|
840,199 |
|
|
$ |
50.00 |
|
|
5.91 years |
|
Outstanding options exercisable, end of year |
|
|
659,800 |
|
|
$ |
46.89 |
|
|
5.21 years |
|
The total intrinsic value of fully-vested stock options outstanding as of December 31, 2006
was $23,497. The total intrinsic value of options exercised was $3,630, $1,752 and $259
during the years ended December 31, 2006, 2005 and 2004, respectively. The actual tax
benefit realized for the tax deduction from option exercises totaled $1,368, $677 and $101
for the years ended December 31, 2006, 2005 and 2004, respectively. Cash received from stock
option exercises during the years ended December 31, 2006, 2005 and 2004 was $3,306, $2,770
and $354, respectively.
Information with respect to the Companys nonvested stock options as of and for the year
ended December 31, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted-Average |
|
|
Shares |
|
Grant Date Fair Value |
|
Nonvested stock options, beginning of year |
|
|
186,141 |
|
|
$ |
5.50 |
|
Granted |
|
|
99,229 |
|
|
|
5.85 |
|
Vested |
|
|
(94,611 |
) |
|
|
5.39 |
|
Forfeited |
|
|
(10,360 |
) |
|
|
5.63 |
|
|
Nonvested stock options, end of year |
|
|
180,399 |
|
|
$ |
5.76 |
|
|
As of December 31, 2006, there was $709 of unrecognized compensation cost related to
nonvested stock options granted under the Companys active stock option plans. That cost is
expected to be recognized over a weighted-average period of 0.7 years. The total fair value
of shares vested during 2006 was $510.
Restricted Stock Awards. Common stock issued under the Companys restricted stock plans
may not be sold or otherwise transferred until restrictions have lapsed or performance
objectives have been obtained. During the vesting period, participants have voting rights
and receive dividends on the restricted shares. Upon termination of employment, common
shares upon which restrictions have not lapsed must be returned to the Company. Common stock
issued under the Restricted Stock Plan is also subject to a shareholders agreement granting
the Company the right of first refusal to repurchase vested shares at the then current
minority appraised value and providing the Company a right to call some or all of the vested
shares under certain circumstances.
The fair value of restricted stock awards, based on the most recent quarterly minority
appraised value of the Companys common stock at the date of grant, is being amortized as
compensation expense on a straight-line basis over the period restrictions lapse.
Compensation expense related to restricted share awards of $393, $242 and $130 was included in
salaries, wages and benefits expense on the Companys consolidated statements of income for
the years ended December 31, 2006, 2005 and 2004, respectively.
- 72 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
As of December 31 2006, the Company had 11,500 shares of restricted stock outstanding
comprised of 9,500 shares of performance-based restricted stock and 2,000 shares of
service-based restricted stock.
The following table presents information regarding the Companys restricted stock as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of |
|
Measurement Date |
|
|
Shares |
|
Fair Value |
|
Restricted stock, beginning of year |
|
|
10,500 |
|
|
$ |
68.00 |
|
Granted |
|
|
1,000 |
|
|
|
74.50 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
Restricted stock, end of year |
|
|
11,500 |
|
|
$ |
68.57 |
|
|
|
|
The performance-based restricted stock becomes fully vested if the Company achieves defined
performance goals for the year ended December 31, 2006, and the recipient is employed by the
Company on April 1, 2007. In November 2006, the Companys Board of Directors declared that
the restricted stock performance criteria had been met and accelerated the vesting of the
restricted stock with respect to the performance criteria only. This modification resulted
in additional compensation expense of $119 in 2006. Unearned share-based compensation of
$149 as of December 31, 2006, is expected to be recognized as compensation expense over a
weighted-average period of 0.8 years. |
|
(14) |
|
EMPLOYEE BENEFIT PLANS |
|
|
|
Profit Sharing Plan. The Company has a noncontributory profit sharing plan. All employees,
other than temporary employees, working 20 hours or more per week are eligible to participate
in the profit sharing plan. Quarterly contributions are determined by the Companys Board of
Directors, but are not to exceed, on an individual basis, the lesser of 100% of compensation
or $40 annually. Participants become 100% vested upon the completion of three years of
vesting service. The Company accrued contribution expense for this plan of $3,097, $2,048 and
$1,553 in 2006, 2005 and 2004, respectively. |
|
|
|
Savings Plan. In addition, the Company has a contributory employee savings plan. Eligibility
requirements for this plan are the same as those for the profit sharing plan discussed in the
preceding paragraph. Employee participation in the plan is at the option of the employee.
The Company contributes $1.25 for each $1.00 of employee contributions up to 4% of the
participating employees compensation. The Company accrued contribution expense for this plan
of $2,947, $2,736 and $2,693 in 2006, 2005 and 2004, respectively. |
|
|
|
Postretirement Healthcare Plan. The Company sponsors a contributory defined benefit
healthcare plan (the Plan) for active employees and employees and directors retiring from
the Company at the age of at least 55 years and with at least 15 years of continuous service.
Retired Plan participants contribute the full cost of benefits based on the average per capita
cost of benefit coverage for both active employees and retired Plan participants. Prior to
May 2005, contributions by retired Plan participants were based solely on the average per
capita cost of benefit coverage for retired participants only. As such, no postretirement
benefit obligation existed prior to 2005. |
- 73 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
A summary of changes in and the funded status of the Companys postretirement benefit
obligation follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Accumulated post-retirement obligation, beginning of plan year |
|
$ |
1,025 |
|
|
$ |
916 |
|
Changes due to : |
|
|
|
|
|
|
|
|
Service costs |
|
|
60 |
|
|
|
54 |
|
Interest costs |
|
|
59 |
|
|
|
55 |
|
Benefits paid |
|
|
17 |
|
|
|
|
|
Actuarial gain |
|
|
(325 |
) |
|
|
|
|
|
Accumulated post-retirement obligation, end of year |
|
$ |
836 |
|
|
$ |
1,025 |
|
|
Funded status of Plan |
|
$ |
(836 |
) |
|
$ |
(1,025 |
) |
Unrecognized actuarial gain |
|
|
(325 |
) |
|
|
|
|
Unrecognized prior service cost |
|
|
|
|
|
|
|
|
Unrecognized transition asset |
|
|
805 |
|
|
|
860 |
|
|
Accrued benefit cost |
|
$ |
(356 |
) |
|
$ |
(165 |
) |
|
|
|
The transition asset is amortized as a component of net periodic postretirement benefits cost
on a straight line basis over the estimated average remaining service period of active Plan
participants of 16.3 years. Net periodic benefits costs of $174 were included in salaries,
wages and employee benefits expense for the year ended December 31, 2006, comprised of
services cost of $60; interest costs of $59; and, amortization of transition asset of $55.
Net periodic benefits costs of $165 were included in salaries, wages and employee benefits
expense for the year ended December 31, 2005, comprised of services cost of $54; interest
costs of $55; and, amortization of transition asset of $56. |
|
|
|
Weighted average actuarial assumptions used to determine the post retirement benefit
obligation at December 31, 2006 and 2005, and the net periodic benefit costs for the years
then ended, included a discount rate of 5.8% and a 6.0% annual increase in the per capita cost
of covered health care benefits. The assumed health-care cost trend rate has a significant
effect on the amounts reported. A one percent increase in the assumed health-care cost trend
rate would increase service and interest costs and the post-retirement benefit obligation by
$13 and $82, respectively. |
|
(15) |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
In the normal course of business, the Company is involved in various claims and litigation.
In the opinion of management, following consultation with legal counsel, the ultimate
liability or disposition thereof will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company. |
|
|
|
The Company had commitments to purchase investment securities of $817 as of December 31, 2005. |
|
|
|
The Company had commitments under construction contracts of $2,084 and $1,793 as of December
31, 2006 and 2005, respectively. |
|
|
|
The Company leases certain premises and equipment from third parties under operating
leases. Total rental expense to third parties was $3,166 in 2006, $3,358 in 2005 and
$3,492 in 2004. |
- 74 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The total future minimum rental commitments, exclusive of maintenance and operating costs,
required under operating leases that have initial or remaining noncancelable lease terms in
excess of one year at December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related |
|
|
|
|
Third |
|
Partnership |
|
|
|
|
Parties |
|
(See Note 22) |
|
Total |
|
For the year ending December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
1,470 |
|
|
$ |
1,818 |
|
|
$ |
3,288 |
|
2008 |
|
|
1,436 |
|
|
|
1,802 |
|
|
|
3,238 |
|
2009 |
|
|
1,339 |
|
|
|
1,677 |
|
|
|
3,016 |
|
2010 |
|
|
1,325 |
|
|
|
1,502 |
|
|
|
2,827 |
|
2011 |
|
|
1,171 |
|
|
|
1,447 |
|
|
|
2,618 |
|
Thereafter |
|
|
5,073 |
|
|
|
5,279 |
|
|
|
10,352 |
|
|
Total |
|
$ |
11,814 |
|
|
$ |
13,525 |
|
|
$ |
25,339 |
|
|
(16) |
|
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK |
|
|
|
The Company is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of amounts
recorded in the consolidated balance sheet. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained is based on
managements credit evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, premises and equipment, and income-producing commercial
properties. |
|
|
|
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.
Generally, commitments to extend credit are subject to annual renewal. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Commitments to extend credit to existing
and new borrowers approximated $1,027,710 at December 31, 2006, which included $297,481 on
unused credit card lines and $270,624 with commitment maturities beyond one year.
Commitments to extend credit to existing and new borrowers approximated $852,834 at December
31, 2005, which included $168,706 on unused credit card lines and $233,836 with commitment
maturities beyond one year. |
|
|
|
Standby letters of credit 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 and are generally subject to annual renewal. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. At December 31, 2006 and 2005, the Company had outstanding
stand-by letters of credit of $93,046 and $79,641, respectively. The estimated fair value
of the obligation undertaken by the Company in issuing standby letters of credit is included
in other liabilities in the Companys consolidated balance sheets. |
- 75 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(17) |
|
CAPITAL STOCK AND DIVIDEND RESTRICTIONS |
|
|
|
At December 31, 2006, 90.3% of common shares held by shareholders are subject to shareholders
agreements (Agreements). Under the Agreements, shares may not be sold or transferred,
except in limited circumstances, without triggering the Companys right of first refusal to
repurchase shares from the shareholder at fair value. Additionally, shares held by officers,
directors and employees are subject to repurchase under certain conditions. |
|
|
|
The payment of dividends by subsidiary banks is subject to various federal and state
regulatory limitations. In general, a bank is limited, without the prior consent of its
regulators, to paying dividends that do not exceed current year net profits together with
retained earnings from the two preceding calendar years. The Companys debt instruments also
include limitations on the payment of dividends. |
|
(18) |
|
EARNINGS PER SHARE |
|
|
|
The following table sets forth the computation of basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Net income basic and diluted |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares basic |
|
|
8,112,610 |
|
|
|
8,001,682 |
|
|
|
7,916,137 |
|
Add effect of dilutive stock options |
|
|
189,446 |
|
|
|
147,655 |
|
|
|
81,442 |
|
|
Average outstanding shares diluted |
|
|
8,302,056 |
|
|
|
8,149,337 |
|
|
|
7,997,579 |
|
|
Basic earnings per share |
|
$ |
9.32 |
|
|
$ |
6.84 |
|
|
$ |
5.74 |
|
|
Diluted earnings per share |
|
$ |
9.11 |
|
|
$ |
6.71 |
|
|
$ |
5.68 |
|
|
|
|
There were no antidilutive stock options outstanding for the years ended December 31, 2006,
2005 or 2004. |
|
(19) |
|
ACQUISITIONS AND DISPOSITIONS |
|
|
|
On July 9, 2004, the Company completed the sale of the net assets of a branch banking office.
Included in the sale were loans of approximately $13,182, premises and equipment with a net
book value of approximately $716 and deposits of approximately $32,686. In conjunction with
the sale, the Company wrote-off goodwill and core deposit intangibles of $235 and $109,
respectively. A gain of $1,690 was recognized on the sale. |
|
|
|
On January 27, 2006, the Company completed the sale of the net assets of a branch banking
office. Included in the sale were loans of approximately $527 and deposits of approximately
$3,070. In conjunction with the sale, the Company wrote-off goodwill of $10. A gain of $78
was recognized on the sale. |
|
|
|
On December 7, 2006, the Company sold its equity interest in an unconsolidated joint venture.
Aggregate consideration for the sale was $21,242, of which $19,853 was received in cash and
$1,389 was placed in escrow to offset purchase price adjustments related to working capital
(Working Capital Escrow) and indemnify potential loss claims (Indemnity Escrow) pursuant to
the terms of the purchase agreement. At the date of sale, the Companys equity investment was
$192. A net gain of $19,801 was recognized on the sale and a receivable of $151 was recorded
for the Working Capital Escrow funds. Indemnity Escrow funds in excess of claims will be
recognized as income when the Company becomes entitled to them, with final distribution of
remaining Indemnity Escrow funds to occur no later than March 7, 2008. |
- 76 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(20) |
|
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) |
|
|
|
Following is condensed financial information of First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
2005 |
|
Condensed balance sheets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
29,305 |
|
|
$ |
6,991 |
|
Investment in subsidiaries, at equity: |
|
|
|
|
|
|
|
|
Bank subsidiary |
|
|
417,528 |
|
|
|
375,743 |
|
Nonbank subsidiaries |
|
|
7,779 |
|
|
|
7,289 |
|
|
Total investment in subsidiaries |
|
|
425,307 |
|
|
|
383,032 |
|
Premises and equipment |
|
|
1,991 |
|
|
|
2,228 |
|
Other assets |
|
|
18,423 |
|
|
|
19,050 |
|
|
Total assets |
|
$ |
475,026 |
|
|
$ |
411,301 |
|
|
Other liabilities |
|
$ |
17,256 |
|
|
$ |
11,678 |
|
Advances from nonbank subsidiaries, net |
|
|
6,157 |
|
|
|
3,938 |
|
Long-term debt |
|
|
|
|
|
|
4,600 |
|
Subordinated debenture held by subsidiary trust |
|
|
41,238 |
|
|
|
41,238 |
|
|
Total liabilities |
|
|
64,651 |
|
|
|
61,454 |
|
Stockholders equity |
|
|
410,375 |
|
|
|
349,847 |
|
|
Total liabilities and stockholders equity |
|
$ |
475,026 |
|
|
$ |
411,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Condensed statements of income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
28,866 |
|
|
$ |
27,550 |
|
|
$ |
27,600 |
|
Other interest income |
|
|
172 |
|
|
|
35 |
|
|
|
2 |
|
Other income, primarily management fees from subsidiaries |
|
|
8,155 |
|
|
|
6,380 |
|
|
|
5,793 |
|
Gain on sale of unconsolidated equity method joint venture |
|
|
19,801 |
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
56,994 |
|
|
|
33,965 |
|
|
|
33,395 |
|
|
Salaries and benefits |
|
|
10,052 |
|
|
|
7,580 |
|
|
|
6,578 |
|
Interest expense |
|
|
4,031 |
|
|
|
3,673 |
|
|
|
3,266 |
|
Other operating expenses, net |
|
|
6,399 |
|
|
|
6,134 |
|
|
|
5,790 |
|
|
Total expenses |
|
|
20,482 |
|
|
|
17,387 |
|
|
|
15,634 |
|
|
Earnings before income tax benefit |
|
|
36,512 |
|
|
|
16,578 |
|
|
|
17,761 |
|
Income tax expense (benefit) |
|
|
2,522 |
|
|
|
(4,192 |
) |
|
|
(3,891 |
) |
|
Income before undistributed earnings of subsidiaries |
|
|
33,990 |
|
|
|
20,770 |
|
|
|
21,652 |
|
Undistributed earnings of subsidiaries |
|
|
41,619 |
|
|
|
33,945 |
|
|
|
23,769 |
|
|
Net income |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
- 77 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2006 |
|
2005 |
|
2004 |
|
Condensed statements of cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
Adjustments to reconcile net income to cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of subsidiaries |
|
|
(41,619 |
) |
|
|
(33,945 |
) |
|
|
(23,769 |
) |
Depreciation and amortization |
|
|
245 |
|
|
|
242 |
|
|
|
205 |
|
Provision for deferred income taxes |
|
|
(59 |
) |
|
|
220 |
|
|
|
551 |
|
Stock-based compensation expense |
|
|
1,239 |
|
|
|
234 |
|
|
|
130 |
|
Gain on sale of unconsolidated equity method joint venture |
|
|
(19,801 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
5,758 |
|
|
|
(1,212 |
) |
|
|
(2,801 |
) |
|
Net cash provided by operating activities |
|
|
21,372 |
|
|
|
20,254 |
|
|
|
19,737 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of sales |
|
|
(8 |
) |
|
|
|
|
|
|
(67 |
) |
Capitalization of subsidiaries |
|
|
(400 |
) |
|
|
(180 |
) |
|
|
(489 |
) |
Disposition of unconsolidated equity method joint venture |
|
|
19,853 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
19,445 |
|
|
|
(180 |
) |
|
|
(556 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in advances
from nonbank subsidiaries |
|
|
2,219 |
|
|
|
(312 |
) |
|
|
199 |
|
Borrowings of long-term debt |
|
|
4,100 |
|
|
|
11,500 |
|
|
|
26,575 |
|
Repayments of long-term debt |
|
|
(8,700 |
) |
|
|
(17,320 |
) |
|
|
(36,095 |
) |
Debt issuance costs, net |
|
|
37 |
|
|
|
41 |
|
|
|
44 |
|
Excess tax benefits from stock-based compensation |
|
|
1,344 |
|
|
|
|
|
|
|
|
|
Dividends paid on common stock |
|
|
(18,413 |
) |
|
|
(15,044 |
) |
|
|
(12,354 |
) |
Payments to retire common stock |
|
|
(9,593 |
) |
|
|
(3,296 |
) |
|
|
(3,329 |
) |
Issuance of common stock |
|
|
10,503 |
|
|
|
9,877 |
|
|
|
6,384 |
|
|
Net cash used in financing activities |
|
|
(18,503 |
) |
|
|
(14,554 |
) |
|
|
(18,576 |
) |
|
Net change in cash and cash equivalents |
|
|
22,314 |
|
|
|
5,520 |
|
|
|
605 |
|
Cash and cash equivalents, beginning of year |
|
|
6,991 |
|
|
|
1,471 |
|
|
|
866 |
|
|
Cash and cash equivalents, end of year |
|
$ |
29,305 |
|
|
$ |
6,991 |
|
|
$ |
1,471 |
|
|
|
|
Noncash Investing and Financing Activities In conjunction with the exercise of stock
options, the Company transferred $9 and $6 in 2005 and 2004, respectively, from accrued
liabilities to common stock. There were no noncash investing or financing activities in
2006. |
|
(21) |
|
SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
The Company paid cash of $42,984, $23,079 and $22,261 for income taxes during 2006, 2005 and
2004, respectively. The Company paid cash of $100,273, $59,893 and $43,098 for interest
during 2006, 2005 and 2004, respectively. |
|
|
|
The Company transferred loans of $348, $1,284 and $1,812 to other real estate owned in 2006,
2005 and 2004, respectively. |
- 78 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
In conjunction with the sale of the net assets of a branch banking office in 2006, the Company
divested assets and liabilities with book values of $542 and $3,082, respectively. In
conjunction with the sale of the net assets of a branch banking office in 2004, the Company
divested assets and liabilities with book values of $14,477 and $34,013, respectively. |
|
|
|
The Company transferred accrued liabilities of $9 and $6 in 2005 and 2004, respectively, to
common stock in conjunction with the exercise of stock options. No transfers were made from
accrued liabilities to common stock in 2006. |
|
(22) |
|
RELATED PARTY TRANSACTIONS |
|
|
|
The Company conducts banking transactions in the ordinary course of business with related
parties, including directors, executive officers, shareholders and their associates, on the
same terms as those prevailing at the same time for comparable transactions with unrelated
persons and that do not involve more than a normal risk of collectibility or present other
unfavorable features. |
|
|
|
Certain executive officers and directors of the Company and certain corporations and
individuals related to such persons, incurred indebtedness in the form of loans, as customers,
of $22,183 at December 31, 2006 and $13,028 at December 31, 2005. During 2006, new loans and
advances on existing loans of $48,775, were funded and loan repayments totaled $44,453. These
loans were made on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable loans and are allowable under the Sarbanes Oxley
Act of 2002. Additionally, during 2006, loans of $4,833 were added due to changes in related
parties from the prior year. |
|
|
|
The Parent Company and the Billings office of FIB are the anchor tenants in a building owned
by a partnership in which FIB is one of two partners, and has a 50% partnership interest.
Total rent, including common area maintenance, paid to the partnership was $1,829 in 2006,
$1,776 in 2005 and $1,563 in 2004. |
|
|
|
The Company purchases property, casualty and other insurance through an agency in which a
director of the Company has a majority ownership interest. The Company paid insurance
premiums to the agency of $357, 349, and $339 in 2006, 2005 and 2004, respectively. |
|
|
|
The Company leases aircraft from an entity wholly-owned by the chairman of the
Companys Board of Directors. Under the terms of the lease, the Company pays all of the
third party operating expenses of the aircraft, which totaled approximately $246, $228
and $283 in 2006, 2005 and 2004, respectively. In addition to paying the third party
operating expenses, the Company paid $68, $36 and $45 for use of the aircraft and
received reimbursement of $77, $32 and $79 from the chairman for his personal use of the
aircraft during 2006, 2005 and 2004, respectively. |
|
|
|
The Company purchases professional services from a company in which six directors of the
Company, including the chairman and vice chairman of the Board of Directors, have an aggregate
ownership interest of 14.3%. The Company paid professional fees and reimbursed out-of-pocket
costs of $336, $365 and $315 in 2006, 2005 and 2004, respectively. Professional services
provided include majority shareholder education and communication, corporate governance
consultation and administrative and professional support for the vice chairman of the
Companys Board of Directors. |
- 79 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(23) |
|
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS |
|
|
|
Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the entire
holdings of a particular instrument. Because no quoted market exists for a significant
portion of the financial instruments, fair value estimates are based on judgments regarding
comparable market interest rates, future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. |
|
|
|
For financial instruments bearing a variable interest rate where no credit risk exists, it is
presumed that recorded book values are reasonable estimates of fair value. The methods and
significant assumptions used to estimate fair values for the various other financial
instruments are set forth below. |
|
|
|
Financial Assets. Carrying values of cash, cash equivalents an accrued interest receivable
approximate fair values due to the liquid and/or short-term nature of these instruments.
Fair values of available-for-sale and held-to-maturity investment securities are based on
quoted market prices or dealer quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities. Fair values of fixed
rate loans are calculated by discounting scheduled cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources, if available, or based on
estimated market discount rates that reflect the credit and interest rate risk inherent in
the loan category. Fair values of adjustable rate loans approximate the carrying values of
these instruments due to frequent repricing, provided there have been no changes in credit
quality since origination. Fair values of mortgage servicing rights are based on a
discounted cash flow pricing model using prevailing financial market information. |
|
|
|
|
Financial Liabilities. The fair values of demand deposits, savings accounts, federal funds
purchased, securities sold under repurchase agreements and accrued interest payable are the
amount payable on demand at the reporting date. The fair values of fixed-maturity
certificates of deposit are estimated using external market rates currently offered for
deposits with similar remaining maturities. The carrying values of the interest bearing
demand notes to the United States Treasury are deemed an approximation of fair values due
to the frequent repayment and repricing at market rates. The revolving term loan,
subordinated debenture, and unsecured demand notes bear interest at floating market rates
and, as such, carrying amounts are deemed to reflect fair values. The fair values of
subordinated notes and notes payable to the FHLB are estimated by discounting future cash
flows using current rates for advances with similar characteristics. |
|
|
|
|
Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments
to extend credit and standby letters of credit, based on fees currently charged to enter
into similar agreements, is not significant. |
- 80 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
A summary of the estimated fair values of financial instruments follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
As of December 31, |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
255,791 |
|
|
$ |
255,791 |
|
|
$ |
240,977 |
|
|
$ |
240,977 |
|
Investment securities available-for-sale |
|
|
1,012,658 |
|
|
|
1,012,658 |
|
|
|
916,450 |
|
|
|
916,450 |
|
Investment securities held-to-maturity |
|
|
111,940 |
|
|
|
112,391 |
|
|
|
103,451 |
|
|
|
104,305 |
|
Net loans |
|
|
3,262,911 |
|
|
|
3,221,291 |
|
|
|
2,991,904 |
|
|
|
2,984,873 |
|
Accrued interest receivable |
|
|
30,913 |
|
|
|
30,913 |
|
|
|
26,104 |
|
|
|
26,104 |
|
Mortgage servicing rights, net |
|
|
22,644 |
|
|
|
23,378 |
|
|
|
22,116 |
|
|
|
23,730 |
|
|
Total financial assets |
|
$ |
4,696,857 |
|
|
$ |
4,656,422 |
|
|
$ |
4,301,002 |
|
|
$ |
4,296,439 |
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits, excluding time deposits |
|
$ |
2,651,503 |
|
|
$ |
2,651,503 |
|
|
$ |
2,535,977 |
|
|
$ |
2,535,977 |
|
Time deposits |
|
|
1,057,008 |
|
|
|
1,052,256 |
|
|
|
1,011,613 |
|
|
|
1,007,863 |
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
Securities sold under repurchase
agreements |
|
|
731,548 |
|
|
|
731,548 |
|
|
|
518,718 |
|
|
|
518,718 |
|
Accrued interest payable |
|
|
18,872 |
|
|
|
18,872 |
|
|
|
13,185 |
|
|
|
13,185 |
|
Other borrowed funds |
|
|
5,694 |
|
|
|
5,694 |
|
|
|
7,495 |
|
|
|
7,495 |
|
Long-term debt |
|
|
21,601 |
|
|
|
22,177 |
|
|
|
54,654 |
|
|
|
54,631 |
|
Subordinated debenture held by
subsidiary trust |
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
Total financial liabilities |
|
$ |
4,527,464 |
|
|
$ |
4,523,288 |
|
|
$ |
4,184,380 |
|
|
$ |
4,180,607 |
|
|
- 81 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(24) |
|
SEGMENT REPORTING |
|
|
|
Selected operating segment information as of and for the years ended December 31, 2006, 2005
and 2004 follows. |
|
|
|
The Other category includes the net funding cost and other expenses of the Parent Company,
compensation expense or benefit related to stock-based employee compensation, the operational
results of consolidated nonbank subsidiaries (except Technology Services) and intercompany
eliminations. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
Technology |
|
|
|
|
For the year ended December 31, 2006 |
|
Banking |
|
Services |
|
Other |
|
Total |
|
Net interest income (expense) |
|
$ |
191,073 |
|
|
$ |
162 |
|
|
$ |
(3,772 |
) |
|
$ |
187,463 |
|
Provision for loan losses |
|
|
7,761 |
|
|
|
|
|
|
|
|
|
|
|
7,761 |
|
|
Net interest income after provision |
|
|
183,312 |
|
|
|
162 |
|
|
|
(3,772 |
) |
|
|
179,702 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sources |
|
|
64,770 |
|
|
|
15,845 |
|
|
|
20,933 |
|
|
|
101,548 |
|
Internal sources |
|
|
1 |
|
|
|
13,535 |
|
|
|
(13,536 |
) |
|
|
|
|
|
Total noninterest income |
|
|
64,771 |
|
|
|
29,380 |
|
|
|
7,397 |
|
|
|
101,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
144,933 |
|
|
|
23,317 |
|
|
|
(4,108 |
) |
|
|
164,142 |
|
|
Income (loss) before taxes |
|
|
103,150 |
|
|
|
6,225 |
|
|
|
7,733 |
|
|
|
117,108 |
|
Income tax expense (benefit) |
|
|
36,459 |
|
|
|
2,464 |
|
|
|
2,576 |
|
|
|
41,499 |
|
|
Net income (loss) |
|
$ |
66,691 |
|
|
$ |
3,761 |
|
|
$ |
5,157 |
|
|
$ |
75,609 |
|
|
Depreciation and core deposit intangibles
amortization (1) |
|
$ |
13,853 |
|
|
$ |
|
|
|
$ |
246 |
|
|
$ |
14,099 |
|
|
Total assets as of December 31, 2006 |
|
$ |
4,949,955 |
|
|
$ |
7,141 |
|
|
$ |
17,038 |
|
|
$ |
4,974,134 |
|
|
Investment in equity method investees
as of December 31, 2006 |
|
$ |
5,439 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,439 |
|
|
- 82 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
Technology |
|
|
|
|
For the year ended December 31, 2005 |
|
Banking |
|
Services |
|
Other |
|
Total |
|
Net interest income (expense) |
|
$ |
173,777 |
|
|
$ |
101 |
|
|
$ |
(3,570 |
) |
|
$ |
170,308 |
|
Provision for loan losses |
|
|
5,847 |
|
|
|
|
|
|
|
|
|
|
|
5,847 |
|
|
Net interest income after provision |
|
|
167,930 |
|
|
|
101 |
|
|
|
(3,570 |
) |
|
|
164,461 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sources |
|
|
55,658 |
|
|
|
13,910 |
|
|
|
722 |
|
|
|
70,290 |
|
Internal sources |
|
|
2 |
|
|
|
13,304 |
|
|
|
(13,306 |
) |
|
|
|
|
|
Total noninterest income |
|
|
55,660 |
|
|
|
27,214 |
|
|
|
(12,584 |
) |
|
|
70,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
135,720 |
|
|
|
20,371 |
|
|
|
(5,365 |
) |
|
|
150,726 |
|
|
Income (loss) before taxes |
|
|
87,870 |
|
|
|
6,944 |
|
|
|
(10,789 |
) |
|
|
84,025 |
|
Income tax expense (benefit) |
|
|
30,726 |
|
|
|
2,751 |
|
|
|
(4,167 |
) |
|
|
29,310 |
|
|
Net income (loss) |
|
$ |
57,144 |
|
|
$ |
4,193 |
|
|
$ |
(6,622 |
) |
|
$ |
54,715 |
|
|
Depreciation and core deposit intangibles
amortization (1) |
|
$ |
14,487 |
|
|
$ |
|
|
|
$ |
242 |
|
|
$ |
14,729 |
|
|
Total assets as of December 31, 2005 |
|
$ |
4,540,307 |
|
|
$ |
5,293 |
|
|
$ |
16,713 |
|
|
$ |
4,562,313 |
|
|
Investment in equity method investees
as of December 31, 2005 |
|
$ |
5,457 |
|
|
$ |
|
|
|
$ |
500 |
|
|
$ |
5,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
Technology |
|
|
|
|
For the year ended December 31, 2004 |
|
Banking |
|
Services |
|
Other |
|
Total |
|
Net interest income (expense) |
|
$ |
153,622 |
|
|
$ |
28 |
|
|
$ |
(3,231 |
) |
|
$ |
150,419 |
|
Provision for loan losses |
|
|
8,733 |
|
|
|
|
|
|
|
|
|
|
|
8,733 |
|
|
Net interest income after provision |
|
|
144,889 |
|
|
|
28 |
|
|
|
(3,231 |
) |
|
|
141,686 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sources |
|
|
56,933 |
|
|
|
13,185 |
|
|
|
526 |
|
|
|
70,644 |
|
Internal sources |
|
|
4 |
|
|
|
13,572 |
|
|
|
(13,576 |
) |
|
|
|
|
|
Total noninterest income |
|
|
56,937 |
|
|
|
26,757 |
|
|
|
(13,050 |
) |
|
|
70,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
129,065 |
|
|
|
20,212 |
|
|
|
(6,297 |
) |
|
|
142,980 |
|
|
Income (loss) before taxes |
|
|
72,761 |
|
|
|
6,573 |
|
|
|
(9,984 |
) |
|
|
69,350 |
|
Income tax expense (benefit) |
|
|
25,182 |
|
|
|
2,611 |
|
|
|
(3,864 |
) |
|
|
23,929 |
|
|
Net income (loss) |
|
$ |
47,579 |
|
|
$ |
3,962 |
|
|
$ |
(6,120 |
) |
|
$ |
45,421 |
|
|
Depreciation and core deposit intangibles
amortization (1) |
|
$ |
13,644 |
|
|
$ |
|
|
|
$ |
205 |
|
|
$ |
13,849 |
|
|
Total assets as of December 31, 2004 |
|
$ |
4,196,864 |
|
|
$ |
5,992 |
|
|
$ |
14,437 |
|
|
$ |
4,217,293 |
|
|
Investment in equity method investees
as of December 31, 2004 |
|
$ |
2,312 |
|
|
$ |
|
|
|
$ |
352 |
|
|
$ |
2,664 |
|
|
|
|
|
(1) |
|
The Technology Services line of business does not record depreciation
or amortization expense as it leases all equipment from the Community Banking line of
business. |
- 83 -
|
|
|
|
|
|
|
(a) |
|
2. |
|
Financial statement schedules |
|
|
|
|
|
|
|
|
|
|
|
All other schedules to the consolidated financial statements of the Registrant are omitted since the required
information is either not applicable, deemed immaterial, or is shown in the respective financial statements
or in notes thereto. |
|
|
|
|
|
|
|
(a) |
|
3. |
|
Exhibits |
|
|
|
|
|
|
|
|
|
|
|
3.1(1) |
|
Restated Articles of Incorporation dated February 27, 1986 |
|
|
|
|
|
|
|
|
|
|
|
3.2(2) |
|
Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 |
|
|
|
|
|
|
|
|
|
|
|
3.3(2) |
|
Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 |
|
|
|
|
|
|
|
|
|
|
|
3.4(6) |
|
Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 |
|
|
|
|
|
|
|
|
|
|
|
3.5(18) |
|
Restated Bylaws of First Interstate BancSystem, Inc. dated July 29, 2004 |
|
|
|
|
|
|
|
|
|
|
|
4.1(4) |
|
Specimen of common stock certificate of First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
4.2(1) |
|
Shareholders Agreement for non-Scott family members |
|
|
|
|
|
|
|
|
|
|
|
4.3(12) |
|
Shareholders Agreement for non-Scott family members dated August 24, 2001 |
|
|
|
|
|
|
|
|
|
|
|
4.4(14) |
|
Shareholders Agreement for non-Scott family members dated August 19, 2002 |
|
|
|
|
|
|
|
|
|
|
|
4.5(9) |
|
First Interstate Stockholders Agreements with Scott family members dated January 11, 1999 |
|
|
|
|
|
|
|
|
|
|
|
4.6(9) |
|
Specimen of Charity Shareholders Agreement with Charitable Shareholders |
|
|
|
|
|
|
|
|
|
|
|
4.7(15) |
|
Junior Subordinated Indenture dated March 26, 2003 entered into between First Interstate and U.S. Bank National Association, as Debenture Trustee |
|
|
|
|
|
|
|
|
|
|
|
4.8(15) |
|
Certificate of Trust of First Interstate Statutory Trust dated as March 11, 2003
|
|
|
|
|
|
|
|
|
|
|
|
4.10(15) |
|
Amended and Restated Trust Declaration of First Interstate Statutory Trust |
|
|
|
|
|
|
|
|
|
|
|
4.11(15) |
|
Form of Capital Security Certificate of First Interstate Statutory Trust (included as an exhibit to Exhibit 4.10) |
|
|
|
|
|
|
|
|
|
|
|
4.12(15) |
|
Form of Common Security Certificate of First Interstate Statutory Trust (included as an exhibit to Exhibit 4.10) |
|
|
|
|
|
|
|
|
|
|
|
4.13(15) |
|
Guarantee Agreement between First Interstate BancSystem, Inc. and U.S. Bank National Association |
|
|
|
|
|
|
|
|
|
|
|
10.1(19) |
|
Credit Agreement dated June 30, 2005, between First Interstate BancSystem, Inc., as borrower, and Wells Fargo Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
10.2(19) |
|
Revolving Line of Credit Note dated June 30, 2005 between First Interstate BancSystem, Inc. and Wells Fargo Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
10.4(2) |
|
Note Purchase Agreement dated August 30, 1996, between First Interstate BancSystem, Inc. and the Montana Board of Investments |
|
|
|
|
|
|
|
|
|
|
|
10.5(1) |
|
Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank Montana and addendum thereto |
|
|
|
|
|
|
|
|
|
|
|
10.7(1) |
|
Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended |
|
|
|
|
|
|
|
|
|
|
|
10.8(8) |
|
2001 Stock Option Plan |
|
|
|
|
|
|
|
|
|
|
|
10.9(16) |
|
Employee Stock Purchase Plan of First Interstate BancSystem, Inc., as amended and restated effective April 30, 2003 |
|
|
|
|
|
|
|
|
|
|
|
10.10(3) |
|
Trademark License Agreements between Wells Fargo & Company and First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
10.12(10) |
|
Employment Agreement between First Interstate BancSystem, Inc. and Lyle R. Knight |
|
|
|
|
|
|
|
|
|
|
|
10.13 (10) |
|
First Interstate BancSystem, Inc. Executive Non-Qualified Deferred Compensation Plan dated November 20, 1998 |
|
|
|
|
|
|
|
|
|
|
|
10.14(7) |
|
First Interstate BancSystems Deferred Compensation Plan dated December 6, 2000 |
|
|
|
|
|
|
|
|
|
|
|
10.15(12) |
|
First Interstate BancSystem, Inc. 2004 Restricted Stock Award Plan |
|
|
|
|
|
|
|
|
|
|
|
10.16(17) |
|
Form of First Interstate BancSystem, Inc. Restricted Stock Award Agreement |
|
|
|
|
|
|
|
|
|
|
|
10.17(17) |
|
Form of First Interstate BancSystem, Inc. Restricted Stock Award Notice of Restricted Stock Award |
|
|
|
|
|
|
|
|
|
|
|
10.18(21) |
|
First Interstate BancSystem, Inc. 2006 Equity Compensation Plan |
|
|
|
|
|
|
|
|
|
|
|
12.1 |
|
Statement Regarding Computation of Ratio of Earnings to Fixed Charges |
|
|
|
|
|
|
|
|
|
|
|
14.1(20) |
|
Code of Ethics for Chief Executive Officer and Senior Finance Officers of First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
21.1 |
|
Subsidiaries of First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
23.1 |
|
Consent of McGladrey & Pullen, Independent Registered Public Accounting Firm |
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
Certification of Annual Report on Form 10-K pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
Certification of Annual Report on Form 10-K pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Certification of Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 1, No. 33-84540. |
|
(2) |
|
Incorporated by reference to the Registrants Form 8-K dated
October 1, 1996. |
|
(3) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 1, No. 333-25633. |
|
(4) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 1, No. 333-3250. |
|
(5) |
|
Incorporated by reference to the Post-Effective Amendment No. 2
to the Registrants Registration Statement on Form S-1, No. 33-84540. |
|
(6) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 1, No. 333-37847. |
|
(7) |
|
Incorporated by reference to the Registrants Form 10-K for the fiscal year ended
December 31, 2002. |
|
(8) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 8, No. 333-106495. |
|
(9) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 8, No. 333-76825. |
|
(10) |
|
Incorporated by reference to the Registrants Form 10-K for the fiscal year
ended
December 31, 1999. |
|
(11) |
|
Incorporated by reference to the Registrants Registration
Statement on Form S 8, No. 333-69490. |
|
(12) |
|
Incorporated by reference to the Registrants Post-Effective
Amendment No. 1 to Registration Statement on Form S-8, No. 333-76825. |
|
(13) |
|
Incorporated by reference to the Registrants Form 10 -K for the
fiscal year ended December 31, 2000. |
|
(14) |
|
Incorporated by reference to the Registrants Post-Effective
Amendment No. 2 to Registration Statement on Form S-8, No. 333-76825. |
|
(15) |
|
Incorporated by reference to the Registrants Quarterly Report on
Form 10 Q for the quarter ended
June 30, 2003. |
|
(16) |
|
Incorporated by reference to the Registrants Post-Effective
Amendment No. 3 to Registration Statement on Form S-8, No. 333-76825. |
|
(17) |
|
Incorporated by reference to Registrants Quarterly Report on
Form 10 Q for the quarter ended
March 31, 2004. |
|
(18) |
|
Incorporated by reference to Registrants Post-Effective
Amendment No. 4 to Registration Statement of Form S-8, No. 333-76825. |
|
(19) |
|
Incorporated by reference to Registrants Form 8 -K dated June 30, 2005. |
|
(20) |
|
Incorporated by reference to the Registrants Form 10-K for the
fiscal year ended December 31, 2004. |
|
(21) |
|
Incorporated by reference to the Registrants Proxy Statement on
Schedule 14A related to the Registrants Annual Meeting of Shareholders to be
held May 5, 2006. |
(b) |
|
Exhibits |
|
|
|
See Item 15(a)3 above. |
|
(c) |
|
Financial Statements Schedules |
|
|
|
See Item 15(a)2 above. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
First Interstate BancSystem, Inc. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ LYLE R. KNIGHT
|
|
March 12, 2007 |
|