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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, 2007, 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 |
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Billings, Montana
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59116 |
(Address of principal executive offices)
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(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, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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o Large accelerated filer
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o Accelerated filer
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þ Non-accelerated filer (Do not check if a smaller reporting company)
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o Smaller reporting company |
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
o Yes þ No
The registrants common stock is not publicly traded, and there is no established trading market
for its stock. Therefore, the aggregate market 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, was $0.
The number of shares outstanding of the registrants common stock as of February 29, 2008 was
7,885,638.
Documents Incorporated by Reference
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held May 9, 2008. The information required by Part III of this
Form 10-K is incorporated by reference from such Proxy Statement.
TABLE OF CONTENTS
PART I
Item 1. Business
The disclosures set forth in this report are qualified by Item 1A. Risk Factors included
herein and the section captioned Cautionary Note Regarding Forward-Looking Statements and Factors
that Could Affect Future Results included in Part II, Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
The Company
References to we, our, and us in this report, 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 Bank or Banks in this
report, we mean First Interstate Bank, our only bank subsidiary as of December 31, 2007, and
First Western Bank and The First Western Bank Sturgis, bank subsidiaries acquired in January 2008.
When we refer to the South Dakota Banks in this report, we mean First Western Bank and The First
Western Bank Sturgis.
First Interstate BancSystem, Inc. is a financial and bank holding company incorporated in 1971
and headquartered in Billings, Montana. As of February 29, 2008, we had consolidated assets of
$6.2 billion, deposits of $4.8 billion and total stockholders equity of $671 million. Our
wholly-owned bank subsidiaries, First Interstate Bank, First Western Bank and The First Western
Bank Sturgis, have 69 banking offices in 42 Montana, Wyoming and South Dakota communities. Through
the Banks, we deliver a comprehensive range of banking products and services, including demand and
savings deposits; commercial, consumer, agricultural and real estate loans; mortgage loan
servicing; and, trust, employee benefit, investment and insurance services. We serve individuals,
businesses, municipalities and other entities throughout our market areas.
Through i_Tech Corporation and First Western Data, Inc., wholly-owned nonbank subsidiaries,
collectively referred to in this report as i_Tech, we provide data technology support services to
affiliated and non-affiliated customers in Montana, Wyoming, South Dakota and nine additional
states. i_Tech also provides processing support for 2,183 ATM locations in 39 states. We have
various other consolidated nonbank subsidiaries that are not significant to the consolidated
entity.
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. We serve a wide variety of industries including, among others,
agriculture, energy, mining, timber processing, tourism, government services, education, retail,
and professional and medical services.
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.
Strategic Vision
The financial services 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.
Our operating objectives include growing internally and expanding into new and complementary
markets when appropriate opportunities arise. In recent years, our profitability, market share and
asset size have been enhanced principally through organic loan and deposit growth in the market
areas served by our existing banking offices. We recently expanded our markets into western South
Dakota through the acquisition described below.
First Western Acquisition
On January 10, 2008, we completed the acquisition of all of the outstanding stock of The First
Western Bank Sturgis, Sturgis, South Dakota, First Western Bank, Wall, South Dakota, and First
Western Data, Inc., a South Dakota corporation, from Christen Group, Inc., formerly known as First
Western Bancorp, Inc. The acquired entities operate eighteen banking offices in twelve western
South Dakota communities. As of the date of acquisition, the acquired entities had combined total
assets of approximately $908 million, combined total loans of approximately $729 million and
combined total deposits of approximately $810 million. Consideration for the acquisition of $248
million consisted
of cash
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of $198 million and 5,000 shares of newly issued 6.75% Series A noncumulative
redeemable preferred stock, or Series A Preferred Stock, with an aggregate value of $50 million.
The cash portion of the purchase price was funded with available cash of $39 million and debt
financing of $159 million. Debt financing transactions included the sale of $80 million of 30-year
floating rate mandatorily redeemable trust preferred securities, or Trust Preferred Securities,
advances of $59 million on variable rate term and revolving notes pursuant to a syndicated credit
agreement secured by all of the outstanding stock of First Interstate Bank and $20 million of
unsecured subordinated term debt.
For additional information regarding acquisition financing, including the issuance of Series A
Preferred Stock and debt financing transactions, see Market for Registrants Common Equity,
Related Shareholder Matters and Issuer Purchases of Equity Securities Description of Our Capital
Stock Preferred Stock included in Part II, Item 5, Managements Discussion and Analysis
Financial Condition Long-Term Debt included in Part II, Item 7 and Notes to Consolidated
Financial Statements Subsequent Events and Notes to Consolidated Financial Statements
Subordinated Debentures Held by Subsidiary Trusts included in Part IV, Item 15.
Unconsolidated Subsidiaries
Our unconsolidated subsidiaries include First Interstate Statutory Trust or FIST; FI Statutory
Trust I, or Trust I; FI Capital Trust II, or Trust II; FI Statutory Trust III, or Trust III; FI
Capital Trust IV, or Trust IV; FI Statutory Trust V, or Trust V; and, FI Statutory Trust VI, or
Trust VI. These wholly-owned business trusts were created for the exclusive purpose of issuing
trust preferred securities and using the proceeds to purchase junior subordinated debentures issued
by us. Trust I, Trust II, Trust III and Trust IV were formed in 2007, and Trust V and Trust VI
were formed in 2008 to partially fund the First Western acquisition described above.
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 Notes to
Consolidated Financial Statements Segment Reporting 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 Banks, 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 offer short and long-term real estate, consumer, commercial, agricultural and other loans
to individuals and businesses in our market areas. 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 boards of directors. 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.
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Deposit Products
We offer traditional depository products including checking, savings and time deposits.
Deposits at the Banks 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 Banks to our
customers under an agreement to repurchase the investment securities at a specified time or on
demand. The Banks do not, however, physically transfer the investment securities. All outstanding
repurchase agreements are due in one business day.
Wealth Management
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. The
estimated fair value of trust assets held in a fiduciary or agent capacity is in excess of $3
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, Wyoming, South Dakota 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 Banks, 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 Banks and provides item proof and capture services. These technology
services are performed through the use of computer hardware owned by the Banks and leased to i_Tech
and software licensed by i_Tech.
While historically the data 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 February 29, 2008, we employed 1,858 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, or SEC.
First Interstate Bank is subject to supervision and regular examination by its primary banking
regulators, the Federal Reserve and the State of Montana, Department of Administration, Division of
Banking and Financial Institutions, and, with respect to its activities in Wyoming, the State of
Wyoming, Department of Audit. The South Dakota Banks are subject to supervision and regular
examination by their primary banking regulators, the Federal Reserve and the South Dakota
Department of Revenue & Regulation, Division of Banking. Each of the South Dakota Banks became
members of the Federal Reserve System in February 2008. Prior to becoming members, the South
Dakota Banks primary federal regulator was the FDIC.
Each of the Banks deposits are insured by the deposit insurance fund of the FDIC in the
manner and to the extent provided by law. The Banks are 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 Banks limits both the activities in which the Banks may engage
and the conduct of their permitted activities. Further, the laws and regulations impose reporting
and information collection obligations on the Banks. The Banks each incur significant costs
relating to compliance with the various laws and regulations and the collection and retention of
information.
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. The
Federal Reserve 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.
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 Banks. 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.
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Restrictions on Transfers of Funds to Us and the Banks
Dividends from the Banks are the primary source of funds for the payment of our expenses of
operating and for the payment of dividends to our shareholders. The Banks are limited, under both
state and federal law, in the amount of dividends that may be paid from time to time. In general,
the Banks are limited, without the prior consent of their 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. In addition, the South Dakota Banks are
limited under South Dakota law to declaring dividends not more frequently than once each calendar
quarter.
A state or federal banking regulator may impose, by regulatory order or agreement of a Bank,
specific dividend limitations or prohibitions in certain circumstances. The Banks are not
currently subject to a specific regulatory dividend limitation other than generally applicable
limitations. In addition to regulatory dividend limitations, Bank dividends are limited by
covenants in our debt instruments.
In addition, the Banks 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 and
relevant federal statutes, among other things, impose significant additional limitations on
transactions in which the Banks may engage with us, with each other, or with other affiliates.
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, noncumulative
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 Banks, like other depository institutions, are 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.
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 Banks.
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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. Our regulatory capital ratios and those of the Banks are 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, or FIDICIA. 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.
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.
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Deposit Insurance
Deposits in the Banks 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. In 2006, the FDIC amended its risk-based
assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform
Act of 2005, or Reform Act. Under the revised system, insured institutions are assigned to one of
four risk categories based upon risk assessment criteria, including relevant capital levels,
results of bank examinations by state and federal regulators and other information. An
institutions assessment rate depends upon the risk category to which it is assigned. Risk
Category I, which contains the least risky depository institutions, is expected to include more
than 90% of all institutions. Unlike the other risk categories, Risk Category I contains further
risk assessment based on the FDICs analysis of financial ratios, examination component ratios and
certain other information. Assessment rates are determined by the FDIC and currently range from
five to seven basis points of assessable deposits for institutions in Risk Category I to 43 basis
points of assessable deposits for the riskiest institutions (Risk Category IV). The FDIC may
adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed
three basis points. No institution may pay a dividend if in default of the FDIC assessment. The
Banks currently are each 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 Banks are 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. First Interstate Bank received an outstanding rating and the South Dakota Banks
each received a satisfactory rating on their most recent published examinations. Although each
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. 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 each 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 Banks. Accordingly, the earnings and potential growth of the Banks 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, Wyoming and South Dakota 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.
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.
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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
nonperformance and the value of available collateral, monitoring loan performance and diversifying
our credit portfolio. These procedures provide us with the information 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.
Our concentrations of real estate loans could subject us to increased risks in the event real
estate values decline due to an economic downturn, a deterioration in the real estate markets or
other causes.
At February 29, 2008, we had approximately $2.8 billion of commercial, agricultural,
construction, residential and other real estate loans representing approximately 65% of our total
loan portfolio. An economic downturn or a deterioration in the real estate markets could
have an adverse effect on the collateral value for many of our loans and could affect the
repayment ability of many of our borrowers. In addition, these factors could reduce the amount of
loans we make to businesses in the construction and real estate industry, which could negatively
impact our results of operations. A significant decline in real estate values could also lead to
higher charge-offs in the event of defaults in our real estate loan portfolio. Similarly, the
occurrence of a natural or manmade disaster in our market areas could impair the value of the
collateral we hold for real estate secured loans and negatively impact our results of operations.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other
types of loans.
Commercial loans, including commercial real estate loans, are often larger and involve greater
risks than other types of lending. Because payments on such loans are often dependent on the
successful operation of the property or business involved, repayment of such loans is more
sensitive than other types of loans to adverse conditions in the real estate market or the general
economy. Unlike residential mortgage loans, which generally are made on the basis of the borrowers
ability to make repayment from their employment and other income and which are secured by real
property whose value tends to be more easily ascertainable, commercial loans typically are made on
the basis of the borrowers ability to make repayment from the cash flow of the commercial venture.
If the cash flow from business operations is reduced, the borrowers ability to repay the loan may
be impaired. At February 29, 2008, we had approximately $2.0 billion of commercial loans,
including commercial real estate loans, representing approximately 46% of our total loan portfolio.
Our loans and deposits are focused in Montana, Wyoming and South Dakota. 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, Wyoming
and South Dakota. Because of the concentration of loans and deposits in these states, in the event
of adverse economic conditions in Montana, Wyoming or South Dakota, 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 contamination and other
unfavorable conditions and events that affect these states, could
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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.
If we experience loan losses in excess of estimated amounts, our earnings will be adversely
affected.
The risk of credit losses on loans varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a collateralized loan, the value and marketability of the collateral for
the loan. We maintain an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of loan portfolio quality.
Based upon such factors, our management makes various assumptions and judgments about the ultimate
collectibility of our loan portfolio and provides an allowance for loan losses. If managements
assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to
absorb future losses, or if the bank regulatory authorities require us to increase the allowance
for loan losses as a part of their examination process, our results of operations and financial
condition could be significantly and adversely affected.
As of
February 29, 2008, our allowance for loan losses was $68 million which represented 1.57%
of total outstanding loans. Our allowance for loan losses may not be sufficient to cover future
loan losses. Future adjustments to the allowance for loan losses may be necessary if economic
conditions differ substantially from the assumptions used or adverse developments arise with
respect to our non-performing or performing loans. Material additions to our allowance for loan
losses could have a material adverse effect on our results of operations and financial condition.
(2) Market Risks:
Changes in interest rates could negatively impact our net interest income, may weaken demand
for our products and services and harm our results of operations and cash flows.
Our earnings and cash flows are largely dependent upon net interest income, which is the
difference between interest income earned on interest-earning assets such as loans and securities
and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.
Interest rates are highly sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies, particularly the
Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in
interest rates, could influence not only the interest we receive on loans and securities and the
amount of interest we pay on deposits and borrowings, but such changes could also adversely affect
(i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets
and liabilities, including mortgage servicing rights, (iii) our ability to realize gains on the
sale of assets and (iv) the average duration of our mortgage-backed investment securities
portfolio. 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. Any substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on our results of operations, cash flows and financial condition.
(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 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 equity 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.
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Dividends from our subsidiaries account for most of our revenue. The inability of our
subsidiaries to pay dividends due to legal or regulatory limitations could adversely affect our
liquidity and operations and our ability to service debt, redeem stock and pay dividends.
We are a separate and distinct legal entity from our subsidiaries. We receive substantially
all of our revenue from management fees and dividends paid by our subsidiaries. These dividends
are our principal source of funds to pay dividends on our stock and interest and principal on our
debt. Various federal and/or state laws and regulations limit the amount of dividends that our
subsidiary banks and certain nonbank subsidiaries may pay. Limitations on our ability to receive
dividends from our subsidiaries could have a material adverse effect on our liquidity and
operations and our ability to service debt, redeem stock and pay dividends.
The Federal Reserve, the State of Montana, Division of Banking and Financial Institutions, and
the State of South Dakota, Department of Revenue & Regulation, Division of Banking, 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%. In addition, our
right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization
is subject to the prior claims of that subsidiarys creditors.
Failure to meet our debt covenants could result in our debt becoming immediately due and
payable, which could adversely impact our results from operations, cash flows and financial
condition.
In conjunction
with the First Western acquisition, we incurred debt of $159 million payable to
various lenders under various debt agreements. The debt agreements contain covenants that, among
other things, establish minimum capital and financial performance ratios, and place restrictions on
indebtedness, non-performing assets, the allowance for loan losses, the redemption and issuance of
common stock and the amount of dividends payable to shareholders. Failure to comply with the debt
covenants could result in the debt becoming immediately due and payable and the subsequent
liquidation of our assets in satisfaction of the debt.
(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.
We may become liable for environmental remediation and other costs on repossessed properties,
which could adversely impact our results of operations, cash flows and financial condition.
A significant portion of our loan portfolio is secured by real property. During the ordinary
course of business, we may foreclose on and take title to properties securing certain loans. If
hazardous or toxic substances are found on these properties, we may be liable for remediation
costs, as well as for personal injury and property damage. Environmental laws may require us to
incur substantial expenses and may materially reduce the affected propertys
value or limit our ability to use or sell the affected property. In addition, future laws or
more stringent interpretations or enforcement policies with respect to existing laws may increase
our exposure to environmental liability. Although we have policies and procedures to perform an
environmental review before initiating any foreclosure actions on real property, these reviews may
not be sufficient to detect all potential environmental hazards. The remediation costs and any
other financial liabilities associated with an environmental hazard could have a material adverse
effect on our results of operations, cash flows and financial condition.
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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.
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 Banks 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.
We may not effectively implement new technology-driven products and services or be successful
in marketing these products and services to our customers.
The financial services industry is continually undergoing rapid technological change with
frequent introductions of new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better serve customers and to
reduce costs. Our future success depends, in part, upon our ability to use technology to provide
products and services that will satisfy customer demands, as well as to create additional
efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on our business and, in turn, on
our results of operations, cash flows and financial condition.
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 in combining First Western operations with our own
operations, including unanticipated integration problems, business disruptions and dilution of
shareholder value.
The acquisition of First Western exposes us to various risks commonly associated with
acquisitions, including, among other things, (i) potential exposure to unknown or contingent
liabilities of the acquired entity; (ii) exposure to potential asset quality issues of the
acquired entity; (iii) difficulty and expense associated with integration of the operations and
personnel of the acquired entity; (iv) potential disruption of our business; (v) potential
diversion of the
management teams time and attention from the our existing operations; and (vi) the possible loss
of key employees or customers of the acquired entity.
The First Western acquisition involved the payment of a premium over book and market values,
which could result in dilution of our tangible book value and net income per common share.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence and/or other projected benefits from the First Western acquisition,
or the impairment of goodwill recognized in connection with the First Western acquisition, could
have a material adverse effect on our results of operations, cash flows and financial condition.
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We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management skills of
our 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, or Edward Garding, Executive Vice President and Chief Credit Officer, could
harm our ability to operate our business or execute our business strategy.
We may not be able to attract and retain qualified employees to operate our business
effectively and low unemployment rates may increase our labor costs.
There is substantial competition for qualified personnel in our markets. Current low
unemployment rates in Montana, Wyoming, South Dakota and the surrounding region may increase labor
costs and make it difficult to attract and retain qualified employees at all management and
staffing levels. Failure to attract and retain employees and maintain adequate staffing of
qualified personnel could adversely impact our operations and our ability to execute our business
strategy. Furthermore, low unemployment rates may lead to significant increases in salaries, wages
and employee benefits expenses as we compete for qualified, skilled employees.
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.
Indemnification obligations arising from our membership in Visa USA could adversely impact our
results of operations, cash flows and financial condition.
We are a member of Visa USA, Inc. for issuance and processing of its card transactions. As a
member, we have an obligation to indemnify Visa USA under its bylaws and to indemnify Visa, Inc.
under a retrospective responsibility plan, for contingent losses in connection with certain covered
litigation disclosed in Visas public filings with the SEC based on our membership proportion of
0.02448%. We are not a party to the lawsuits brought against Visa USA. Visa USA is currently
undergoing a restructuring and initial public offering, or IPO, that is expected to occur in the
first half of 2008. In connection with the restructuring and IPO, Visa USA members are expected to
receive shares in Visa, Inc. in exchange for their membership interest. A portion of these shares
allocated to Visa USA members is expected to be withheld to cover the costs associated with the
covered litigation described above whereby Visa USA members would not be required to make any cash
payments to settle indemnification obligations. There can be no assurance that the restructuring
or IPO of Visa will be successful or that the shares of Visa allocated to us will have sufficient
value to cover our indemnification obligations. If the restructuring or IPO of Visa is
unsuccessful or if the shares of Visa allocated to us are insufficient to cover our indemnification
obligations, we may be exposed to significant financial liability. Such results could adversely
impact our results of operations, cash flows and financial condition.
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
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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.
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.
The Federal Reserve may require us to commit capital resources to support the Banks.
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.
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Shares of our common stock are subject to contractual transfer restrictions.
With respect
to our outstanding common stock, approximately 91% 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. Since the Savings Plan does not allow distributions
in kind, distributions from participants Savings Plan accounts require First Interstate 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 to repurchase outstanding shares of common stock and we are subject to
limitations on the amount of common stock we may repurchase.
We have no obligation, by contract, policy or otherwise, to purchase restricted or
unrestricted shares of our common stock. Futhermore, our debt covenants limit the repurchase of
common shares, net of proceeds from the sale of capital securities, to a percentage of our
consolidated net worth as of the end of the immediately preceding fiscal year. These covenants,
unless amended or waived, restrict us in the number of shares we may repurchase from existing
shareholders, thereby limiting the future liquidity for such shares.
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.
We are subject to limitations on the amount of dividends we may pay to our shareholders.
Although we have historically paid dividends to our shareholders, we have no obligation to do
so. Our debt covenants, unless amended or waived, limit the payment of dividends to our
shareholders to a percentage of our consolidated net income for the immediately preceding fiscal
year.
Existing shareholders will be diluted by future issuances of common or preferred 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 51% of our outstanding
common stock. Many of these directors and executive officers are members of the Scott family,
which collectively owns approximately 77% 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.
-16-
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 104,065 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 73,274 square feet of office space in Montana,
Colorado, Idaho, Iowa, Nebraska and Oregon for our technology services subsidiary. We provide
banking services at 68 additional locations in Montana, Wyoming and South Dakota, of which 17
properties are leased from independent third parties and 51 properties are owned by us. We believe
each of our facilities is suitable and adequate to meet our current operational needs.
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 2007.
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 7,885,638 shares were outstanding as of February 29, 2008, and 100,000 shares of preferred
stock without par value, of which 5,000 shares have been designated as 6.75% Series A noncumulative
redeemable preferred stock, or Series A Preferred Stock. As of February 29, 2008, all 5,000 shares
of authorized Series A Preferred Stock were outstanding.
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 in control.
In connection with the First Western acquisition in January 2008, our board of directors
authorized the issuance of the Series A Preferred Stock, which ranks senior to our common stock and
to all equity securities issued by us with respect to dividend and liquidation rights. The Series
A Preferred Stock has no voting rights. Holders of the Series A Preferred Stock are entitled to
receive, when and if declared by the board of directors, noncumulative cash dividends at an annual
rate of $675 per share (based on a 360 day year). In the event dividends are not paid for three
consecutive quarters, the Series A Preferred Stock holders are entitled to elect two members to our
board of directors. The Series A Preferred Stock is subject to indemnification obligations and
set-off rights pursuant to the purchase agreement entered into at the time of the First Western
acquisition. We may, at our option, redeem all or any part of the outstanding Series A Preferred
Stock at any time after January 10, 2013, subject to certain conditions, at a price of $10 thousand
per share plus accrued but unpaid dividends at the date fixed for redemption. The Series A
Preferred Stock may be redeemed prior to January 10, 2013 only in the event we are entitled to
exercise our set-off rights pursuant to the First Western purchase agreement. After January 10,
2018, the Series A Preferred Stock may be converted, at the option of the holder, into shares of
our common stock at a ratio of 80 shares of common stock for every one share of Series A Preferred
Stock. Prior to conversion of the Series A Preferred Stock, holders are required to enter into
shareholder agreements
that contain transfer restrictions with respect to the common stock.
-17-
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, if any, of the holders of the
preferred stock. Voting for directors is noncumulative.
Subject to the preferential rights of the Series A Preferred Stock and any other 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 the Series A Preferred Stock and any other 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 29, 2008, 90.7% of our shares of
common stock were subject to contractual transfer restrictions set forth in shareholder agreements
and 9.3% were held by 17 shareholders without such restrictions, including our 401(k) plan, or
Savings Plan, which holds 79.2% 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, 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 |
|
March 31, 2007
|
|
May 10, 2007
|
|
|
89.00 |
|
June 30, 2007
|
|
August 13, 2007
|
|
|
86.75 |
|
September 30, 2007
|
|
November 13, 2007
|
|
|
87.75 |
|
December 31, 2007
|
|
February 15, 2008
|
|
|
83.50 |
|
Resale of our stock may be restricted pursuant to the Securities Act 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 733,244 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. 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 29, 2008, we had 719 record shareholders, including the Wealth Management
division of First Interstate Bank as trustee for 597,448 shares held on behalf of 1,214 individual participants
in the Savings Plan. Of such participants, 337 individuals also own shares of our stock outside of
the Savings Plan. The Savings Plan Trustee votes the shares based on the instructions of each participant.
In the event the participant does not provide the Savings Plan Trustee with instructions, the Savings Plan Trustee
votes those shares in accordance with voting instructions received from a majority of the
participants in the plan.
-18-
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.
Recent quarterly and special dividends follow:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Total Cash |
Month Declared and Paid |
|
Per Share |
|
Dividend |
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 |
|
April 2007 |
|
|
0.65 |
|
|
|
5,319,599 |
|
July 2007 |
|
|
0.65 |
|
|
|
5,299,394 |
|
October 2007 |
|
|
0.65 |
|
|
|
5,265,375 |
|
January 2008 |
|
|
0.65 |
|
|
|
5,207,192 |
|
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.
Sales of Unregistered Securities
There were no issuances of unregistered securities during the fourth quarter of 2007.
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, 2007.
Purchases of Equity Securities by Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
of Shares That |
|
|
Total Number |
|
|
|
|
|
as Part of Publicly |
|
May Yet Be |
|
|
of Shares |
|
Average Price |
|
Announced |
|
Purchased Under the |
Period |
|
Purchased (1) |
|
Paid Per Share |
|
Plans or Programs |
|
Plans or Programs |
|
October 2007 |
|
|
51,165 |
|
|
$ |
86.75 |
|
|
Not Applicable |
|
Not Applicable |
November 2007 |
|
|
44,776 |
|
|
|
87.59 |
|
|
Not Applicable |
|
Not Applicable |
December 2007 |
|
|
10,767 |
|
|
|
87.75 |
|
|
Not Applicable |
|
Not Applicable |
|
Total |
|
|
106,708 |
|
|
$ |
87.20 |
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
(1) |
|
Our common stock is not publicly traded, and there is no established
trading market for the stock. There is only one class of common stock. As of December
31, 2007, approximately 91% 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. |
-19-
Performance Graph
The performance graph below compares the cumulative total shareholder return of our common
stock with the cumulative total return on equity securities of companies included in the Nasdaq
Composite Index and the Nasdaq Bank Index. The graph also presents the cumulative total return on
equity securities of companies included in the Russell 2000 Index and SNL $1B $5B Bank Index,
which were used as comparative indices in 2006. The SNL $1B $5B Bank Index is comprised of
publicly-owned banks or bank holding companies with total assets between $1 billon and $5 billion.
During 2007, we exceeded $5 billion in total assets. As such, we selected the Nasdaq Bank Index as
a comparative peer index in 2007. In coordination with our change in peer index to the Nasdaq Bank
Index, we also selected the Nasdaq Composite Index as a comparative broad market index in 2007.
The graph assumes an investment of $100 on December 31, 2002 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 publicly 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
|
|
Index |
|
|
12/31/02 |
|
|
12/31/03 |
|
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
First Interstate BancSystem, Inc. |
|
|
$ |
100.00 |
|
|
|
|
114.01 |
|
|
|
|
144.99 |
|
|
|
|
168.42 |
|
|
|
|
201.88 |
|
|
|
|
220.62 |
|
|
|
Nasdaq Composite |
|
|
|
100.00 |
|
|
|
|
150.01 |
|
|
|
|
162.89 |
|
|
|
|
165.13 |
|
|
|
|
180.85 |
|
|
|
|
198.60 |
|
|
|
Nasdaq Bank |
|
|
|
100.00 |
|
|
|
|
129.93 |
|
|
|
|
144.21 |
|
|
|
|
137.97 |
|
|
|
|
153.15 |
|
|
|
|
119.35 |
|
|
|
Russell 2000 |
|
|
|
100.00 |
|
|
|
|
147.25 |
|
|
|
|
174.24 |
|
|
|
|
182.18 |
|
|
|
|
215.64 |
|
|
|
|
212.26 |
|
|
|
SNL $1B $5B Bank |
|
|
|
100.00 |
|
|
|
|
135.99 |
|
|
|
|
167.83 |
|
|
|
|
164.97 |
|
|
|
|
190.90 |
|
|
|
|
139.06 |
|
|
|
-20-
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial
position as of December 31, 2007 and 2006, and the results of our operations for the fiscal years
ended December 31, 2007, 2006 and 2005, 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,
2005, 2004 and 2003, and the results of our operations for the fiscal years ended December 31, 2004
and 2003, 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, |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
325,557 |
|
|
$ |
293,423 |
|
|
$ |
233,857 |
|
|
$ |
192,840 |
|
|
$ |
189,258 |
|
Interest expense |
|
|
125,954 |
|
|
|
105,960 |
|
|
|
63,549 |
|
|
|
42,421 |
|
|
|
48,614 |
|
Net interest income |
|
|
199,603 |
|
|
|
187,463 |
|
|
|
170,308 |
|
|
|
150,419 |
|
|
|
140,644 |
|
Provision for loan losses |
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
|
|
9,852 |
|
Net interest income after
provision for loan losses |
|
|
191,853 |
|
|
|
179,702 |
|
|
|
164,461 |
|
|
|
141,686 |
|
|
|
130,792 |
|
Noninterest income |
|
|
92,448 |
|
|
|
102,119 |
|
|
|
70,882 |
|
|
|
70,644 |
|
|
|
70,152 |
|
Noninterest expense |
|
|
178,867 |
|
|
|
164,713 |
|
|
|
151,318 |
|
|
|
142,980 |
|
|
|
137,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
105,434 |
|
|
|
117,108 |
|
|
|
84,025 |
|
|
|
69,350 |
|
|
|
63,019 |
|
Income tax expense |
|
|
36,793 |
|
|
|
41,499 |
|
|
|
29,310 |
|
|
|
23,929 |
|
|
|
22,267 |
|
|
Net income |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
$ |
45,421 |
|
|
$ |
40,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
8.45 |
|
|
$ |
9.32 |
|
|
$ |
6.84 |
|
|
$ |
5.74 |
|
|
$ |
5.18 |
|
Diluted earnings per common share |
|
|
8.25 |
|
|
|
9.11 |
|
|
|
6.71 |
|
|
|
5.68 |
|
|
|
5.15 |
|
Dividends per common share |
|
|
2.97 |
|
|
|
2.27 |
|
|
|
1.88 |
|
|
|
1.56 |
|
|
|
1.32 |
|
Weighted average common shares
outstanding diluted |
|
|
8,322,480 |
|
|
|
8,303,990 |
|
|
|
8,149,337 |
|
|
|
7,997,579 |
|
|
|
7,909,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.37 |
% |
|
|
1.60 |
% |
|
|
1.26 |
% |
|
|
1.14 |
% |
|
|
1.09 |
% |
Return on average common stockholders equity |
|
|
16.14 |
|
|
|
20.38 |
|
|
|
16.79 |
|
|
|
15.75 |
|
|
|
15.79 |
|
Average stockholders equity to average assets |
|
|
8.52 |
|
|
|
7.85 |
|
|
|
7.52 |
|
|
|
7.22 |
|
|
|
6.93 |
|
Net interest margin |
|
|
4.46 |
|
|
|
4.47 |
|
|
|
4.48 |
|
|
|
4.34 |
|
|
|
4.37 |
|
Net interest spread |
|
|
3.78 |
|
|
|
3.89 |
|
|
|
4.13 |
|
|
|
4.12 |
|
|
|
4.14 |
|
Common stock dividend payout ratio (1) |
|
|
35.15 |
|
|
|
24.36 |
|
|
|
27.49 |
|
|
|
27.18 |
|
|
|
25.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,216,797 |
|
|
$ |
4,974,134 |
|
|
$ |
4,562,313 |
|
|
$ |
4,217,293 |
|
|
$ |
3,879,744 |
|
Loans |
|
|
3,558,980 |
|
|
|
3,310,363 |
|
|
|
3,034,354 |
|
|
|
2,739,509 |
|
|
|
2,554,899 |
|
Allowance for loan losses |
|
|
52,355 |
|
|
|
47,452 |
|
|
|
42,450 |
|
|
|
42,141 |
|
|
|
38,940 |
|
Investment securities |
|
|
1,128,657 |
|
|
|
1,124,598 |
|
|
|
1,019,901 |
|
|
|
867,315 |
|
|
|
799,587 |
|
Deposits |
|
|
3,999,401 |
|
|
|
3,708,511 |
|
|
|
3,547,590 |
|
|
|
3,321,681 |
|
|
|
3,156,721 |
|
Other borrowed funds |
|
|
8,730 |
|
|
|
5,694 |
|
|
|
7,495 |
|
|
|
7,995 |
|
|
|
7,137 |
|
Long-term debt |
|
|
5,145 |
|
|
|
21,601 |
|
|
|
54,654 |
|
|
|
61,926 |
|
|
|
47,590 |
|
Subordinated debentures held by subsidiary
trusts |
|
|
103,095 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
|
41,238 |
|
Stockholders equity |
|
|
444,443 |
|
|
|
410,375 |
|
|
|
349,847 |
|
|
|
308,326 |
|
|
|
274,226 |
|
|
-21-
Five Year Summary (continued)
(Dollars in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Asset Quality Ratios at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total loans and
other real estate owned (OREO) (2) |
|
|
1.00 |
% |
|
|
0.55 |
% |
|
|
0.67 |
% |
|
|
0.79 |
% |
|
|
1.30 |
% |
Allowance for loan losses to total loans |
|
|
1.47 |
|
|
|
1.43 |
|
|
|
1.40 |
|
|
|
1.54 |
|
|
|
1.52 |
|
Allowance for loan losses to nonperforming
loans (3) |
|
|
150.66 |
|
|
|
269.72 |
|
|
|
236.17 |
|
|
|
212.04 |
|
|
|
124.53 |
|
Net charge-offs to average loans |
|
|
0.08 |
|
|
|
0.09 |
|
|
|
0.19 |
|
|
|
0.21 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios at Year End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
12.39 |
% |
|
|
10.71 |
% |
|
|
10.07 |
% |
|
|
9.67 |
% |
|
|
9.30 |
% |
Total risk-based capital |
|
|
13.64 |
|
|
|
11.93 |
|
|
|
11.27 |
|
|
|
10.95 |
|
|
|
10.64 |
|
Leverage ratio |
|
|
9.92 |
|
|
|
8.61 |
|
|
|
7.91 |
|
|
|
7.49 |
|
|
|
7.13 |
|
|
|
|
|
(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
Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results
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:
|
|
|
credit risk |
|
|
|
|
concentrations of real estate loans |
|
|
|
|
commercial loan risk |
|
|
|
|
economic conditions in Montana, Wyoming and South Dakota |
|
|
|
|
adequacy of the allowance for loan losses |
|
|
|
|
changes in interest rates |
|
|
|
|
inability to meet liquidity requirements |
|
|
|
|
inability of our subsidiaries to pay dividends |
|
|
|
|
failure to meet debt covenants |
|
|
|
|
competition |
|
|
|
|
environmental remediation and other costs |
|
|
|
|
breach in information system security |
|
|
|
|
failure of technology |
|
|
|
|
failure to effectively implement technology-driven products and services |
|
|
|
|
ineffective internal operational controls |
|
|
|
|
difficulties in integrating operations of First Western |
-22-
|
|
|
dependence on our management team |
|
|
|
|
the ability to attract and retain qualified employees |
|
|
|
|
disruption of vital infrastructure and other business interruptions |
|
|
|
|
Visa indemnification obligations |
|
|
|
|
litigation pertaining to fiduciary responsibilities |
|
|
|
|
changes in or noncompliance with governmental regulations |
|
|
|
|
capital required to support our bank subsidiaries |
|
|
|
|
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.
Executive Overview
We are a financial and bank holding company with 69 banking offices in 42 communities
throughout Montana, Wyoming and South Dakota. Our principal operating segment is community
banking. We also provide data technology support services and ATM processing support to affiliated
and non-affiliated customers through our technology services operating segment. 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 is to profitably grow our business organically and through expansion
into new and complementary markets through selective acquisitions. In January 2008, we completed
the First Western acquisition by purchasing two banks and a data center located in western South
Dakota. The acquired entities operate eighteen banking offices in twelve South Dakota communities
and had combined total assets as of the acquisition date of approximately $908 million. In recent
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. In the near-term, we plan to make investments to support our core community banking
activities and enhance our financial services product offerings. Longer-term, we intend to
continue looking for profitable expansion opportunities.
Our success is highly dependent on economic conditions and market interest rates. Because we
operate in Montana, Wyoming, and now, South Dakota, the local economic conditions in each of these
areas are particularly important. Our local economies remained strong in 2007 and the overall
economic outlook for Montana, Wyoming and South Dakota remains favorable for 2008. During 2007,
subprime lending and poor investment decisions, among other challenges, resulted in large losses
and falling stock prices at many financial institutions across the country. We did not experience
the financial instability that challenged many other banks. A conservative single borrower lending
limit and sound underwriting discipline, which did not include subprime loans, kept our credit
quality high in 2007, even after a slight deterioration from 2006. Although the overall impact of
the national economic and real estate downturn, subprime mortgage crisis and credit market turmoil
is uncertain, these factors affect our business and could have a harmful effect on our results of
operations, cash flows and financial condition.
During 2007, we reported net income of $68.6 million, or $8.25 per diluted share, as compared
to $75.6 million, or $9.11 per diluted share, in 2006. During fourth quarter 2006, we recorded a
one-time, after-tax gain of $12.3 million, or $1.48 per diluted share, from the sale of a minority
interest in iPay Technologies, LLC, an unconsolidated internet bill payment joint venture.
Exclusive of this one-time gain, net income for 2007 increased 8.4%, or $0.62 per diluted share,
from 2006. We not only grew in terms of net income but also in terms of asset size, exceeding $5
billion in total assets in 2007. The increase in total assets is attributable to organic loan
growth funded by increases in interest-bearing customer deposits.
-23-
Net interest income, on a fully taxable-equivalent, or FTE, basis, increased 6.5% to $203.7
million in 2007, from $191.3 million in 2006, primarily due to growth in average earning assets.
Average earning assets grew 6.7% and comprised a larger percentage of total assets in 2007, as
compared to 2006. During 2007, migration of customer deposits from traditional repurchase
agreements, which are secured by pledged investment securities, into a new money market sweep
deposit product increased funds available to support growth in earning assets, primarily loans.
Our net FTE interest margin remained stable at 4.46% in 2007, as compared to 4.47% in 2006.
During 2007, we recognized a non-recurring contract termination fee of $2.0 million and
recorded one-time gains of $986 thousand on the sale of mortgage servicing rights and $737 thousand
on the conversion and sale of MasterCard stock. In addition, net income in 2007 was positively
impacted by increases of $1.8 million in fee income from higher debit and credit card transaction
volumes and $1.6 million in revenues from the origination and sale of loans. Increases in income
were partially offset by a $9.2 million increase in salaries, wages and employee benefits expense
resulting from inflation, higher staffing levels, higher incentive compensation accruals and
increases in group medical insurance costs; a $1.4 million increase in occupancy expense resulting
from increases in rental expense and higher depreciation due to a change in the useful lives of two
buildings and related leasehold improvements; and, loss contingency accruals aggregating $1.5
million related to an indemnification agreement with Visa USA and two operational losses incurred
in the ordinary course of business.
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.
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.
-24-
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, 2007, 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 $4.3 million and an immediate 50 basis point decrease in mortgage interest
rates would result in a reduction in fair value of $9.0 million.
For additional
information regarding mortgage servicing rights, see Notes to Consolidated Financial Statements Mortgage
Servicing Rights, included in Part IV, Item 15. See also Part I, Item 1A,
Risk Factors Market
Risks.
Goodwill
The excess purchase price over the fair value of net assets from acquisitions, or 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 likely an impairment has occurred. In testing for
impairment, the fair value of each reporting unit is estimated based on an analysis of market-based
trading and transaction multiples of selected banks in the western and central regions of the
United States; and, if required, the estimated fair value is allocated to the assets and
liabilities of each reporting unit. Determining the fair value of goodwill is considered a
critical accounting estimate because of its sensitivity to market-based trading and transaction
multiples. In addition, any allocation of the fair value of goodwill to assets and liabilities
requires significant management judgment and the use of subjective measurements. Variability in
the market and changes in assumptions or subjective measurements used to allocated fair value are
reasonably possible and may have a material impact on our consolidated financial statements,
results of operations or liquidity. For additional information regarding goodwill, see Notes to
Consolidated Financial Statements Summary of Significant Accounting Policies, included in Part
IV, Item 15. See also Part I, Item 1A, Risk Factors Operational 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.
-25-
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, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2) |
|
$ |
3,449,809 |
|
|
$ |
274,020 |
|
|
|
7.94 |
% |
|
$ |
3,208,102 |
|
|
$ |
246,861 |
|
|
|
7.69 |
% |
|
$ |
2,874,723 |
|
|
$ |
196,453 |
|
|
|
6.83 |
% |
U.S. government agency securities |
|
|
892,850 |
|
|
|
42,650 |
|
|
|
4.78 |
|
|
|
915,844 |
|
|
|
40,985 |
|
|
|
4.48 |
|
|
|
779,369 |
|
|
|
30,054 |
|
|
|
3.86 |
|
Federal funds sold |
|
|
87,460 |
|
|
|
4,422 |
|
|
|
5.06 |
|
|
|
43,726 |
|
|
|
2,196 |
|
|
|
5.02 |
|
|
|
83,156 |
|
|
|
2,766 |
|
|
|
3.33 |
|
Other securities |
|
|
857 |
|
|
|
3 |
|
|
|
0.35 |
|
|
|
1,059 |
|
|
|
6 |
|
|
|
0.57 |
|
|
|
7,599 |
|
|
|
201 |
|
|
|
2.65 |
|
Tax exempt securities (2) |
|
|
111,732 |
|
|
|
7,216 |
|
|
|
6.46 |
|
|
|
105,209 |
|
|
|
6,832 |
|
|
|
6.49 |
|
|
|
103,364 |
|
|
|
6,744 |
|
|
|
6.53 |
|
Interest bearing deposits in banks |
|
|
26,165 |
|
|
|
1,307 |
|
|
|
5.00 |
|
|
|
8,190 |
|
|
|
360 |
|
|
|
4.40 |
|
|
|
31,325 |
|
|
|
1,021 |
|
|
|
3.26 |
|
|
Total interest earnings assets |
|
|
4,568,873 |
|
|
|
329,618 |
|
|
|
7.21 |
|
|
|
4,282,130 |
|
|
|
297,240 |
|
|
|
6.94 |
|
|
|
3,879,536 |
|
|
|
237,239 |
|
|
|
6.12 |
|
Nonearning assets |
|
|
423,893 |
|
|
|
|
|
|
|
|
|
|
|
444,702 |
|
|
|
|
|
|
|
|
|
|
|
454,545 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,992,766 |
|
|
|
|
|
|
|
|
|
|
$ |
4,726,832 |
|
|
|
|
|
|
|
|
|
|
$ |
4,334,081 |
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
1,004,019 |
|
|
|
23,631 |
|
|
|
2.35 |
% |
|
|
850,925 |
|
|
|
15,852 |
|
|
|
1.86 |
% |
|
$ |
667,668 |
|
|
$ |
4,795 |
|
|
|
0.72 |
% |
Savings deposits |
|
|
940,521 |
|
|
|
24,103 |
|
|
|
2.56 |
|
|
|
845,967 |
|
|
|
17,424 |
|
|
|
2.06 |
|
|
|
902,749 |
|
|
|
11,151 |
|
|
|
1.24 |
|
Time deposits |
|
|
1,105,959 |
|
|
|
51,815 |
|
|
|
4.69 |
|
|
|
1,010,820 |
|
|
|
39,991 |
|
|
|
3.96 |
|
|
|
1,013,159 |
|
|
|
29,641 |
|
|
|
2.93 |
|
Borrowings (3) |
|
|
566,984 |
|
|
|
21,640 |
|
|
|
3.82 |
|
|
|
683,776 |
|
|
|
27,636 |
|
|
|
4.04 |
|
|
|
507,131 |
|
|
|
12,750 |
|
|
|
2.51 |
|
Long-term debt |
|
|
9,230 |
|
|
|
467 |
|
|
|
5.06 |
|
|
|
40,320 |
|
|
|
1,576 |
|
|
|
3.91 |
|
|
|
61,055 |
|
|
|
2,480 |
|
|
|
4.06 |
|
Subordinated debentures held
by subsidiary trusts |
|
|
47,099 |
|
|
|
4,298 |
|
|
|
9.13 |
|
|
|
41,238 |
|
|
|
3,481 |
|
|
|
8.44 |
|
|
|
41,238 |
|
|
|
2,732 |
|
|
|
6.62 |
|
|
Total interest bearing liabilities |
|
|
3,673,812 |
|
|
|
125,954 |
|
|
|
3.43 |
|
|
|
3,473,046 |
|
|
|
105,960 |
|
|
|
3.05 |
|
|
|
3,193,000 |
|
|
|
63,549 |
|
|
|
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits |
|
|
842,239 |
|
|
|
|
|
|
|
|
|
|
|
837,909 |
|
|
|
|
|
|
|
|
|
|
|
780,427 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
51,529 |
|
|
|
|
|
|
|
|
|
|
|
44,860 |
|
|
|
|
|
|
|
|
|
|
|
34,854 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
425,186 |
|
|
|
|
|
|
|
|
|
|
|
371,017 |
|
|
|
|
|
|
|
|
|
|
|
325,800 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
4,992,766 |
|
|
|
|
|
|
|
|
|
|
$ |
4,726,832 |
|
|
|
|
|
|
|
|
|
|
$ |
4,334,081 |
|
|
|
|
|
|
|
|
|
|
Net FTE interest income |
|
|
|
|
|
$ |
203,664 |
|
|
|
|
|
|
|
|
|
|
$ |
191,280 |
|
|
|
|
|
|
|
|
|
|
$ |
173,690 |
|
|
|
|
|
Less FTE adjustments (2) |
|
|
|
|
|
|
(4,061 |
) |
|
|
|
|
|
|
|
|
|
|
(3,817 |
) |
|
|
|
|
|
|
|
|
|
|
(3,382 |
) |
|
|
|
|
|
Net interest income from consolidated statements of income |
|
|
|
|
|
$ |
199,603 |
|
|
|
|
|
|
|
|
|
|
$ |
187,463 |
|
|
|
|
|
|
|
|
|
|
$ |
170,308 |
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
Net FTE interest margin (4) |
|
|
|
|
|
|
|
|
|
|
4.46 |
% |
|
|
|
|
|
|
|
|
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
4.48 |
% |
|
|
|
|
(1) |
|
Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of deferred loan fees net of deferred loan costs. |
|
(2) |
|
Interest income and average rates for tax exempt loans and securities are
presented on a FTE 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. |
-26-
Net
FTE interest income increased $12.4 million, or 6.5%, to $203.7 million in 2007 from $191.3
million in 2006, and $17.6 million, or 10.1%, to $191.3 million in 2006 from $173.7 million in 2005
primarily due to organic growth in earning assets, primarily loans. Average earning assets grew
6.7% in 2007 as compared to 2006, and 10.4% in 2006 as compared to 2005. During 2007, migration
of customer deposits from traditional repurchase agreements, which are secured by pledged
investment securities, into a new money market sweep deposit product increased funds available to
support growth in earning assets. Further contributing to improvements in net FTE interest income
in 2007 and 2006 were increases in earning assets as a percentage of total assets. The net FTE
interest margin remained stable at 4.46% in 2007, as compared to 4.47% in 2006 and 4.48%
in 2005.
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, 2007 |
|
Year Ended December 31, 2006 |
|
Year Ended December 31, 2005 |
|
|
compared with |
|
compared with |
|
compared with |
|
|
December 31, 2006 |
|
December 31, 2005 |
|
December 31, 2004 |
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
18,599 |
|
|
$ |
8,560 |
|
|
$ |
27,159 |
|
|
$ |
22,782 |
|
|
$ |
27,626 |
|
|
$ |
50,408 |
|
|
$ |
15,165 |
|
|
$ |
18,690 |
|
|
$ |
33,855 |
|
U.S. government agency
securities |
|
|
(1,029 |
) |
|
|
2,694 |
|
|
|
1,665 |
|
|
|
5,263 |
|
|
|
5,668 |
|
|
|
10,931 |
|
|
|
2,261 |
|
|
|
2,521 |
|
|
|
4,782 |
|
Federal funds sold |
|
|
2,196 |
|
|
|
30 |
|
|
|
2,226 |
|
|
|
(1,312 |
) |
|
|
742 |
|
|
|
(570 |
) |
|
|
216 |
|
|
|
1,479 |
|
|
|
1,695 |
|
Other securities (2) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(173 |
) |
|
|
(22 |
) |
|
|
(195 |
) |
|
|
(128 |
) |
|
|
14 |
|
|
|
(114 |
) |
Tax exempt securities (1)(2) |
|
|
424 |
|
|
|
(40 |
) |
|
|
384 |
|
|
|
120 |
|
|
|
(32 |
) |
|
|
88 |
|
|
|
543 |
|
|
|
(288 |
) |
|
|
255 |
|
Interest bearing deposits
in banks |
|
|
790 |
|
|
|
157 |
|
|
|
947 |
|
|
|
(754 |
) |
|
|
93 |
|
|
|
(661 |
) |
|
|
343 |
|
|
|
397 |
|
|
|
740 |
|
|
Total change |
|
|
20,979 |
|
|
|
11,399 |
|
|
|
32,378 |
|
|
|
25,926 |
|
|
|
34,075 |
|
|
|
60,001 |
|
|
|
18,400 |
|
|
|
22,813 |
|
|
|
41,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
2,852 |
|
|
|
4,927 |
|
|
|
7,779 |
|
|
|
1,316 |
|
|
|
9,741 |
|
|
|
11,057 |
|
|
|
255 |
|
|
|
2,922 |
|
|
|
3,177 |
|
Savings deposits |
|
|
1,947 |
|
|
|
4,732 |
|
|
|
6,679 |
|
|
|
(701 |
) |
|
|
6,974 |
|
|
|
6,273 |
|
|
|
30 |
|
|
|
4,457 |
|
|
|
4,487 |
|
Time deposits |
|
|
3,764 |
|
|
|
8,060 |
|
|
|
11,824 |
|
|
|
(68 |
) |
|
|
10,418 |
|
|
|
10,350 |
|
|
|
(353 |
) |
|
|
3,972 |
|
|
|
3,619 |
|
Borrowings (3) |
|
|
(4,720 |
) |
|
|
(1,276 |
) |
|
|
(5,996 |
) |
|
|
4,441 |
|
|
|
10,445 |
|
|
|
14,886 |
|
|
|
1,176 |
|
|
|
7,760 |
|
|
|
8,936 |
|
Long-term debt |
|
|
(1,215 |
) |
|
|
106 |
|
|
|
(1,109 |
) |
|
|
(842 |
) |
|
|
(62 |
) |
|
|
(904 |
) |
|
|
368 |
|
|
|
(217 |
) |
|
|
151 |
|
Subordinated debentures held
by subsidiary trusts |
|
|
495 |
|
|
|
322 |
|
|
|
817 |
|
|
|
|
|
|
|
749 |
|
|
|
749 |
|
|
|
|
|
|
|
758 |
|
|
|
758 |
|
|
Total change |
|
|
3,123 |
|
|
|
16,871 |
|
|
|
19,994 |
|
|
|
4,146 |
|
|
|
38,265 |
|
|
|
42,411 |
|
|
|
1,476 |
|
|
|
19,652 |
|
|
|
21,128 |
|
|
Increase (decrease) in FTE
net interest income (1) |
|
$ |
17,856 |
|
|
$ |
(5,472 |
) |
|
$ |
12,384 |
|
|
$ |
21,780 |
|
|
$ |
(4,190 |
) |
|
$ |
17,590 |
|
|
$ |
16,924 |
|
|
$ |
3,161 |
|
|
$ |
20,085 |
|
|
|
|
|
(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.
-27-
The provision for loan losses decreased less than 1% to $7.8 million in 2007, as compared to
2006; however, during fourth quarter 2007, the provision for loan losses increased $724 thousand,
or 51.7%, to $2.1 million, as compared to $1.4 million for the same period in 2006. The fourth
quarter 2007 increase was primarily due to higher levels of non-performing loans. 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.
Noninterest Income
Principal sources of noninterest income include other service charges, commissions and fees;
technology services revenues; service charges on deposit accounts; wealth management revenues; and,
income from the origination and sale of loans. Noninterest income decreased $9.7 million, or 9.5%,
to $92.4 million in 2007, from $102.1 million in 2006, and increased 44.1% to $102.1 million in
2006, from $70.9 million in 2005. 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 10.6% to $24.2 million in 2007,
from $21.9 million in 2006, primarily due to additional fee income from higher volumes of credit
and debit card transactions and increases in insurance commissions. Other service charges,
commissions and fees increased 13.0% to $21.9 million in 2006, from $19.4 million in 2005,
primarily due 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 20.4% to $19.1 million in 2007, from $15.8 million in
2006, primarily due to a $2.0 million nonrecurring contract termination fee recorded during third
quarter 2007 and increase in the volume of core data and debit card transactions processed.
Technology services revenues increased 19.1% to $15.8 million in 2006, from $13.3 million in 2005,
primarily due to increases in the number of customers using core data processing services and the
volume of core data and debit card transactions processed.
Wealth management revenues, comprised principally of fees earned for management of trust
assets and investment services revenues, increased 5.0% to $11.7 million in 2007, from $11.2
million in 2006, and 10.4% to $11.2 million in 2006, from $10.1 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 17.0% to $11.2 million in 2007, from $9.6 million in 2006
and 11.5% to $9.6 million in 2006, from $8.6 million in 2005.
We recorded net gains of $59 thousand on the disposition of investment securities in 2007, as
compared to net losses of $722 thousand in 2006, and net losses of $3.7 million in 2005. 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 million, of which $19.9 million was received in cash and $1.4
million 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 company-owned life insurance revenues, check printing income, agency stock dividends and gains on sales of assets other than investment securities. Other
income increased 20.2% to $8.3 million in 2007, from $6.9 million in 2006, primarily due to
nonrecurring gains of $737 thousand from the conversion and subsequent sale of MasterCard stock
recorded during third quarter 2007 and $986 thousand on the sale of mortgage servicing rights
recorded during first quarter 2007. Other 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.
-28-
Noninterest Expense
Noninterest expense increased 8.6% to $178.9 million in 2007, from $164.7 million in 2006, and
8.9% to $164.7 million in 2006, from $151.3 million in 2005. Significant components of these
increases are discussed below.
Salaries, wages and employee benefits expense increased 10.4% to $98.1 million in 2007, from
$88.9 million in 2006, primarily due to the combined effects of inflationary wage increases, higher
staffing levels, higher incentive compensation accruals and increased group medical insurance costs. 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 $1.1 million in 2007, $1.3 million in 2006, and $289 thousand in 2005.
Occupancy expense increased 10.8% to $14.7 million in 2007, from $13.3 million in 2006,
primarily due to increases in rental expense and higher depreciation expense resulting from
adjustment of the useful lives of two buildings and related leasehold improvements. Occupancy
expense decreased less than 1% to $13.3 million in 2006, from $13.4 million 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
increased 10.4% to $4.4 million in 2007, from $4.0 million in 2006, and decreased 12.8% to $4.0
million in 2006, from $4.6 million in 2005.
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 each of 2007 and 2006 and reversed previously recorded impairment of $2.2
million in 2005.
Professional fees increased 5.4% to $3.3 million in 2007, from $3.2 million in 2006 and 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 the potential implementation of a company-wide data warehousing system.
Outsourced technology services principally include ATM network expense, credit card processing
fees, technology consulting fees and other expenses related to technology services provided by
third parties. Outsourced technology services expense decreased 1.1% to $3.1 million in 2007, from
$3.2 million in 2006, and increased 37.6% to $3.2 million in 2006, from $2.3 million in 2005. The
2006 increase was 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 increased 10.8% to $37.0 million in 2007, from $33.4 million in
2006, and remained constant at $33.4 million in 2006 and 2005. The increase in other expense in
2007, as compared to 2006, was primarily due to fourth quarter 2007 loss contingency accruals of
$1.5 million related to an indemnification agreement with Visa USA and two potential operational
losses incurred in the ordinary course of business.
Income Tax Expense
Our effective federal tax rate was 31.0% for the year ended December 31, 2007;
31.6% for the year ended December 31, 2006; and, 31.0% for the year ended December 31,
2005. Fluctuations in federal income tax rates are primarily due to fluctuations 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
3.9% for the year ended December 31, 2007 and 3.8% for the years ended December 31, 2006 and 2005.
-29-
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, |
|
2007 |
|
2006 |
|
2005 |
|
Community Banking |
|
$ |
71,244 |
|
|
$ |
66,691 |
|
|
$ |
57,750 |
|
Technology Services |
|
|
3,706 |
|
|
|
3,761 |
|
|
|
4,193 |
|
Other |
|
|
(6,309 |
) |
|
|
5,157 |
|
|
|
(7,228 |
) |
|
Consolidated |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
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 87% of our combined revenues and income during 2007,
2006 and 2005, and over 97% of our consolidated assets as of December 31, 2007 and 2006.
Components of the changes in community banking net income in 2007 as compared to 2006, and in 2006
as compared to 2005, 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, capture and imaging; wide area network services; and, system support.
Technology services net income decreased 1.5% to $3.7 million in 2007, from $3.8 million in 2006,
and 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 data processing services and the volume of core data and debit
card transactions processed in 2007 and 2006 were offset primarily by increases in salary and
benefits expenses due to higher staffing levels and increases in equipment maintenance and repair
expense.
Other includes the net funding cost and other expenses of the parent holding company, the
operational results of consolidated nonbank subsidiaries (except i_Tech) and intercompany
eliminations. During fourth quarter 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.
Exclusive of this one-time gain, other net losses decreased 11.4% to $6.3 million in 2007, from
$7.1 million in 2006. This decrease in net losses in 2007, as compared to 2006, was principally
due to income from the investment of proceeds received from the sale of the unconsolidated joint
venture in 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.
-30-
Summary of Quarterly Results
The following table presents unaudited quarterly results of operations for the fiscal years
ended December 31, 2007 and 2006.
Quarterly Results
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
Year Ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
78,636 |
|
|
$ |
80,834 |
|
|
$ |
83,314 |
|
|
$ |
82,773 |
|
|
$ |
325,557 |
|
Interest expense |
|
|
30,492 |
|
|
|
31,656 |
|
|
|
32,471 |
|
|
|
31,335 |
|
|
|
125,954 |
|
Net interest income |
|
|
48,144 |
|
|
|
49,178 |
|
|
|
50,843 |
|
|
|
51,438 |
|
|
|
199,603 |
|
Provision for loan losses |
|
|
1,875 |
|
|
|
1,875 |
|
|
|
1,875 |
|
|
|
2,125 |
|
|
|
7,750 |
|
Net interest income after
provision for loan losses |
|
|
46,269 |
|
|
|
47,303 |
|
|
|
48,968 |
|
|
|
49,313 |
|
|
|
191,853 |
|
Noninterest income |
|
|
21,697 |
|
|
|
22,306 |
|
|
|
25,390 |
|
|
|
23,055 |
|
|
|
92,448 |
|
Noninterest expense |
|
|
42,770 |
|
|
|
42,586 |
|
|
|
44,581 |
|
|
|
48,930 |
|
|
|
178,867 |
|
|
Income before income taxes |
|
|
25,196 |
|
|
|
27,023 |
|
|
|
29,777 |
|
|
|
23,438 |
|
|
|
105,434 |
|
Income tax expense |
|
|
8,700 |
|
|
|
9,398 |
|
|
|
10,528 |
|
|
|
8,167 |
|
|
|
36,793 |
|
|
Net income |
|
$ |
16,496 |
|
|
$ |
17,625 |
|
|
$ |
19,249 |
|
|
$ |
15,271 |
|
|
$ |
68,641 |
|
|
Basic earnings per common share |
|
$ |
2.01 |
|
|
$ |
2.16 |
|
|
$ |
2.37 |
|
|
$ |
1.91 |
|
|
$ |
8.45 |
|
Diluted earnings per common share |
|
|
1.97 |
|
|
|
2.11 |
|
|
|
2.32 |
|
|
|
1.86 |
|
|
|
8.25 |
|
Dividends per common share |
|
|
1.02 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
19,293 |
|
|
|
20,643 |
|
|
|
21,776 |
|
|
|
40,407 |
|
|
|
102,119 |
|
Noninterest expense |
|
|
38,367 |
|
|
|
39,301 |
|
|
|
41,698 |
|
|
|
45,347 |
|
|
|
164,713 |
|
|
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 |
|
|
Financial Condition
Total assets increased 4.9% to $5,217 million as of December 31, 2007, from
$4,974 million as of December 31, 2006, primarily due to organic loan growth. Asset growth was
primarily funded by increases in customer deposits.
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.
-31-
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, 2007, 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 7.5% to $3,559 million as of December 31, 2007, from $3,310 as of
December 31, 2006, and 9.1% to $3,310 million as of December 31, 2006, from $3,034 million as of
December 31, 2005, 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, |
|
|
2007 |
|
Percent |
|
2006 |
|
Percent |
|
2005 |
|
Percent |
|
2004 |
|
Percent |
|
2003 |
|
Percent |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,018,831 |
|
|
|
28.6 |
% |
|
$ |
937,695 |
|
|
|
28.3 |
% |
|
$ |
926,190 |
|
|
|
30.5 |
% |
|
$ |
855,711 |
|
|
|
31.2 |
% |
|
$ |
763,599 |
|
|
|
29.8 |
% |
Construction |
|
|
664,272 |
|
|
|
18.7 |
|
|
|
579,603 |
|
|
|
17.5 |
|
|
|
403,751 |
|
|
|
13.3 |
|
|
|
296,773 |
|
|
|
10.8 |
|
|
|
244,784 |
|
|
|
9.6 |
|
Residential |
|
|
419,001 |
|
|
|
11.8 |
|
|
|
402,468 |
|
|
|
12.2 |
|
|
|
408,659 |
|
|
|
13.4 |
|
|
|
363,145 |
|
|
|
13.3 |
|
|
|
338,853 |
|
|
|
13.3 |
|
Agricultural |
|
|
142,256 |
|
|
|
4.0 |
|
|
|
137,659 |
|
|
|
4.1 |
|
|
|
116,402 |
|
|
|
3.9 |
|
|
|
108,345 |
|
|
|
4.0 |
|
|
|
107,680 |
|
|
|
4.2 |
|
Other |
|
|
26,080 |
|
|
|
0.7 |
|
|
|
25,360 |
|
|
|
0.8 |
|
|
|
19,067 |
|
|
|
0.6 |
|
|
|
21,255 |
|
|
|
0.7 |
|
|
|
42,283 |
|
|
|
1.7 |
|
Consumer |
|
|
608,002 |
|
|
|
17.1 |
|
|
|
605,858 |
|
|
|
18.3 |
|
|
|
587,895 |
|
|
|
19.4 |
|
|
|
514,045 |
|
|
|
18.8 |
|
|
|
491,938 |
|
|
|
19.3 |
|
Commercial |
|
|
593,669 |
|
|
|
16.7 |
|
|
|
542,325 |
|
|
|
16.4 |
|
|
|
494,848 |
|
|
|
16.3 |
|
|
|
500,611 |
|
|
|
18.3 |
|
|
|
480,725 |
|
|
|
18.8 |
|
Agricultural |
|
|
81,890 |
|
|
|
2.3 |
|
|
|
76,644 |
|
|
|
2.3 |
|
|
|
74,561 |
|
|
|
2.5 |
|
|
|
74,303 |
|
|
|
2.7 |
|
|
|
82,634 |
|
|
|
3.2 |
|
Other loans |
|
|
4,979 |
|
|
|
0.1 |
|
|
|
2,751 |
|
|
|
0.1 |
|
|
|
2,981 |
|
|
|
0.1 |
|
|
|
5,321 |
|
|
|
0.2 |
|
|
|
2,403 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
3,558,980 |
|
|
|
100.0 |
% |
|
|
3,310,363 |
|
|
|
100.0 |
% |
|
|
3,034,354 |
|
|
|
100.0 |
% |
|
|
2,739,509 |
|
|
|
100.0 |
% |
|
|
2,554,899 |
|
|
|
100.0 |
% |
Less allowance for
loan losses |
|
|
52,355 |
|
|
|
|
|
|
|
47,452 |
|
|
|
|
|
|
|
42,450 |
|
|
|
|
|
|
|
42,141 |
|
|
|
|
|
|
|
38,940 |
|
|
|
|
|
|
Net loans |
|
$ |
3,506,625 |
|
|
|
|
|
|
$ |
3,262,911 |
|
|
|
|
|
|
$ |
2,991,904 |
|
|
|
|
|
|
$ |
2,697,368 |
|
|
|
|
|
|
$ |
2,515,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance
to total loans |
|
|
1.47 |
% |
|
|
|
|
|
|
1.43 |
% |
|
|
|
|
|
|
1.40 |
% |
|
|
|
|
|
|
1.54 |
% |
|
|
|
|
|
|
1.52 |
% |
|
|
|
|
|
Commercial real estate loans increased 8.7% to $1,019 million as of December 31, 2007, from
$938 million as of December 31, 2006, and 1.2% from $938 million as of December 31, 2007, from $926
million as of December 31, 2005. The increase in commercial real estate loans in 2007 is primarily
due to strong demand for housing and overall growth in our market areas.
-32-
Construction loans increased 14.6% to $664 million as of December 31, 2007, from $580 million
as of December 31, 2006, and 43.6% to $580 million as of December 31, 2006, from $404 million as of
December 31, 2005. Construction loans are primarily to commercial builders for residential lot
development and 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 2007 and 2006 was primarily the
result of strong demand for housing and overall growth in our market areas.
Commercial loans increased 9.5% to $594 million as of December 31, 2007, from $542 million as
of December 31, 2006, and 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.
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, 2007:
Maturities and Interest Rate Sensitivities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
One Year to |
|
After |
|
|
|
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
Real estate |
|
$ |
1,553,966 |
|
|
$ |
577,733 |
|
|
$ |
138,741 |
|
|
$ |
2,270,440 |
|
Consumer |
|
|
328,634 |
|
|
|
262,992 |
|
|
|
16,376 |
|
|
|
608,002 |
|
Commercial |
|
|
467,686 |
|
|
|
116,597 |
|
|
|
9,386 |
|
|
|
593,669 |
|
Agricultural |
|
|
73,350 |
|
|
|
8,418 |
|
|
|
122 |
|
|
|
81,890 |
|
Other loans |
|
|
4,979 |
|
|
|
|
|
|
|
|
|
|
|
4,979 |
|
|
Total loans |
|
$ |
2,428,615 |
|
|
$ |
965,740 |
|
|
$ |
164,625 |
|
|
$ |
3,558,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at fixed interest rates |
|
$ |
773,538 |
|
|
$ |
952,682 |
|
|
$ |
151,108 |
|
|
$ |
1,877,328 |
|
Loans at variable interest rates |
|
|
1,623,525 |
|
|
|
13,058 |
|
|
|
13,517 |
|
|
|
1,650,100 |
|
Nonaccrual loans |
|
|
31,552 |
|
|
|
|
|
|
|
|
|
|
|
31,552 |
|
|
Total loans |
|
$ |
2,428,615 |
|
|
$ |
965,740 |
|
|
$ |
164,625 |
|
|
$ |
3,558,980 |
|
|
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 less than 1.0% to $1,129 million as of December 31, 2007, from
$1,125 million as of December 31, 2006, and 10.3% to $1,125 million as of December 31, 2006, from
$1,020 million as of December 31, 2005. As of December 31, 2007, investment securities with
amortized costs and fair values of $909 million and $907 million, respectively, were pledged to
secure public deposits and securities sold under repurchase agreements, as compared to $1,040
million and $1,029 million, respectively, as of December 31, 2006. During first quarter 2007, we
introduced a money market sweep deposit product that does not require the pledging of investment
securities as collateral. The migration of customers from traditional repurchase agreements, which
typically require the pledging of investment securities as collateral, to the new money market
sweep deposit product allowed us to deploy available funds into earning assets other than
short-term investment securities. During 2006, we purchased short-term available-for-sale
investment securities to provide the collateral necessary to support growth in securities sold
under repurchase agreements. The weighted average yield on investment securities increased 28
basis points to 4.96% in 2007, from 4.68% in 2006, and 52 basis points to 4.68% in 2006, from 4.16%
in 2005. For additional information concerning securities sold under repurchase agreements, see
Federal Funds Purchased and Securities Sold Under Repurchase Agreements included herein.
-33-
The following table sets forth the book value, percentage of total investment securities and
average yield on investment securities as of December 31, 2007:
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 |
|
$ |
208,586 |
|
|
|
18.5 |
% |
|
|
4.08 |
% |
Maturing in one to five years |
|
|
192,507 |
|
|
|
17.1 |
|
|
|
4.88 |
|
Maturing in five to ten years |
|
|
49,986 |
|
|
|
4.4 |
|
|
|
5.13 |
|
|
Mark-to-market adjustments on securities available-for-sale |
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
452,620 |
|
|
|
40.1 |
|
|
|
4.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
73,526 |
|
|
|
6.6 |
|
|
|
4.85 |
|
Maturing in one to five years |
|
|
288,448 |
|
|
|
25.5 |
|
|
|
4.70 |
|
Maturing in five to ten years |
|
|
107,461 |
|
|
|
9.6 |
|
|
|
4.92 |
|
Maturing after ten years |
|
|
96,149 |
|
|
|
8.5 |
|
|
|
5.32 |
|
|
Mark-to-market adjustments on securities available-for-sale |
|
|
(3,927 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
561,657 |
|
|
|
49.8 |
|
|
|
4.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
11,489 |
|
|
|
1.0 |
|
|
|
6.77 |
|
Maturing in one to five years |
|
|
39,523 |
|
|
|
3.5 |
|
|
|
6.66 |
|
Maturing in five to ten years |
|
|
18,409 |
|
|
|
1.6 |
|
|
|
6.23 |
|
Maturing after ten years |
|
|
44,189 |
|
|
|
3.9 |
|
|
|
6.23 |
|
|
Total |
|
|
113,610 |
|
|
|
10.1 |
|
|
|
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
|
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing in one to five years |
|
|
260 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing in five to ten years |
|
|
351 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Maturing after ten years |
|
|
156 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
Total |
|
|
767 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
Mutual funds with no stated maturity |
|
|
3 |
|
|
|
0.0 |
|
|
|
3.62 |
|
|
Total |
|
|
3 |
|
|
|
0.0 |
|
|
|
3.62 |
|
|
Total |
|
$ |
1,128,657 |
|
|
|
100.0 |
% |
|
|
4.96 |
% |
|
|
|
|
(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 $170 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, 2007.
There were no significant concentrations of investments at December 31, 2007 (greater than 10%
of stockholders equity) in any individual security issuer, except for U.S. Government or
agency-backed securities.
-34-
As of December 31, 2006, we had U.S. Government agency securities with carrying values of $564
million and a weighted average yield of 4.81%; mortgage-backed securities with carrying values of
$448 million and a weighted average yield of 4.63%; tax exempt securities with carrying values of
$111 million and a weighted average yield of 6.49%; other securities with carrying values of $918
thousand and a weighted average yield of 0.00%; and, mutual funds with carrying values of $40
thousand and a weighted average yield of 4.77%.
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%.
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, 2007, we had investment securities with fair values of $376 million that had
been in a continuous loss position more than twelve months. Gross unrealized losses on these
securities totaled $6 million as of December 31, 2007, and were primarily attributable to changes
in interest rates. We recorded no impairment losses during 2007, 2006 or 2005.
For additional information concerning investment securities, see Notes to Consolidated
Financial Statements Investment Securities 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.
The following table summarizes our deposits as of the dates indicated:
Deposits
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2007 |
|
Percent |
|
2006 |
|
Percent |
|
2005 |
|
Percent |
|
2004 |
|
Percent |
|
2003 |
|
Percent |
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
$ |
836,753 |
|
|
|
20.9 |
% |
|
$ |
888,694 |
|
|
|
24.0 |
% |
|
$ |
864,128 |
|
|
|
24.4 |
% |
|
$ |
756,687 |
|
|
|
22.8 |
% |
|
$ |
688,712 |
|
|
|
21.8 |
% |
Interest bearing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
|
1,019,208 |
|
|
|
25.5 |
|
|
|
964,312 |
|
|
|
26.0 |
|
|
|
792,263 |
|
|
|
22.3 |
|
|
|
623,082 |
|
|
|
18.8 |
|
|
|
567,669 |
|
|
|
18.0 |
|
Savings |
|
|
992,571 |
|
|
|
24.8 |
|
|
|
798,497 |
|
|
|
21.5 |
|
|
|
879,586 |
|
|
|
24.8 |
|
|
|
921,176 |
|
|
|
27.7 |
|
|
|
851,052 |
|
|
|
27.0 |
|
Time, $100 and over |
|
|
464,560 |
|
|
|
11.6 |
|
|
|
408,813 |
|
|
|
11.0 |
|
|
|
352,324 |
|
|
|
9.9 |
|
|
|
364,744 |
|
|
|
11.0 |
|
|
|
375,528 |
|
|
|
11.9 |
|
Time, other |
|
|
686,309 |
|
|
|
17.2 |
|
|
|
648,195 |
|
|
|
17.5 |
|
|
|
659,289 |
|
|
|
18.6 |
|
|
|
655,992 |
|
|
|
19.7 |
|
|
|
673,760 |
|
|
|
21.3 |
|
|
Total interest bearing |
|
|
3,162,648 |
|
|
|
79.1 |
|
|
|
2,819,817 |
|
|
|
76.0 |
|
|
|
2,683,462 |
|
|
|
75.6 |
|
|
|
2,564,994 |
|
|
|
77.2 |
|
|
|
2,468,009 |
|
|
|
78.2 |
|
|
Total deposits |
|
$ |
3,999,401 |
|
|
|
100.0 |
% |
|
$ |
3,708,511 |
|
|
|
100.0 |
% |
|
$ |
3,547,590 |
|
|
|
100.0 |
% |
|
$ |
3,321,681 |
|
|
|
100.0 |
% |
|
$ |
3,156,721 |
|
|
|
100.0 |
% |
|
Total deposits increased 7.8% to $3,999 million as of December 31, 2007, from $3,709 million
as of December 31, 2006. All deposit categories demonstrated growth with the exception of
noninterest bearing demand deposits, which decreased 5.8% in 2007, as compared to 2006. In
addition, there was a shift in the mix of deposits, with noninterest bearing demand deposits
decreasing to 20.9% of total deposits in 2007, as compared to 24.0% in 2006, and savings deposits
increasing to 24.8% of total deposits in 2007, as compared to 21.5% in 2006. Approximately half of
the increase in total deposits and the shift from noninterest bearing demand deposits to savings
deposits was due to the first quarter 2007 introduction of a new money market cash sweep deposit
product as an alternative to traditional repurchase agreements. The money market cash sweep
product allows commercial customers to invest on a daily basis excess noninterest bearing and
interest bearing demand deposit funds into a higher-yielding money market savings account held by
First Interstate Bank. The remaining increase in total deposits in 2007, as compared to 2006, was due to
organic growth. Total 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
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.
-35-
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, |
|
2007 |
|
2006 |
|
2005 |
|
Federal funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,500 |
|
Average balance |
|
|
5,172 |
|
|
|
31,579 |
|
|
|
836 |
|
Maximum amount outstanding at any month-end |
|
|
29,470 |
|
|
|
87,810 |
|
|
|
1,500 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
5.17 |
% |
|
|
5.22 |
% |
|
|
3.11 |
% |
At period end |
|
|
|
|
|
|
|
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
604,762 |
|
|
$ |
731,548 |
|
|
$ |
518,718 |
|
Average balance |
|
|
558,469 |
|
|
|
638,686 |
|
|
|
502,177 |
|
Maximum amount outstanding at any month-end |
|
|
679,247 |
|
|
|
731,548 |
|
|
|
539,838 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
3.80 |
% |
|
|
3.96 |
% |
|
|
2.51 |
% |
At period end |
|
|
3.09 |
|
|
|
4.15 |
|
|
|
3.46 |
|
|
Other Borrowed Funds
Other borrowed funds increased 53.3% to $9 million as of December 31, 2007, from
$6 million as of December 31, 2006, and decreased 24.0% to $6 million as of December 31, 2006,
from $7 million as of December 31, 2005. 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, 2007 and 2006,
see Notes to Consolidated Financial Statements Long-Term Debt and Other Borrowed Funds included
in Part IV, Item 15.
Long-Term Debt
As of December 31, 2007, our long-term debt was comprised principally of a fixed rate note
with the FHLB, an unsecured revolving term loan, and a capital lease obligation. The note payable
to the FHLB is secured by a blanket assignment of our qualifying residential and commercial real
estate loans. Long-term debt decreased 76.2% to $5 million as of December 31, 2007, from $22
million as of December 31, 2006, due to scheduled debt repayments. 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, or LIBOR, equaled or
exceeded 5.00% in 2006. For additional information on long-term debt as of December 31, 2007 and
2006, see Notes to Consolidated Financial Statements Long-Term Debt and Other Borrowed Funds
included in Part IV, Item 15.
In conjunction with the First Western acquisition, on January 10, 2008 we entered into a
credit agreement with four syndicated banks. The credit agreement is secured by all of the
outstanding stock of First Interstate Bank. Under the terms of the credit agreement, we borrowed
$50 million on variable rate term notes maturing January 10, 2013. The term notes are payable in
equal quarterly principal installments of $1.8 million beginning March 31, 2008, with one final installment
of $14.3 million due at maturity. Interest on the term notes is payable quarterly at an initial
rate of 7.25%. Under the terms of the credit agreement, we also borrowed $9 million on a $25
million revolving credit facility maturing January 10, 2011 with interest payable quarterly at an
initial rate of 7.25%.
Also in conjunction with the First Western acquisition, on January 10, 2008 we entered into a
subordinated credit agreement and borrowed $20 million on a 6.81% unsecured subordinated term loan
maturing January 9, 2018. Interest on the subordinated term loan is payable quarterly and
principal is due at maturity. For additional information regarding acquisition financing, see
Notes to Consolidated Financial Statements Subsequent Events, included in Part IV, Item 15.
Our long-term debt agreements, including the syndicated credit agreement and unsecured
subordinated credit agreement entered into in January 2008, contain various covenants that, among
other things, establish minimum capital and
-36-
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 applicable debt
covenants as of December 31, 2007.
Subordinated Debentures Held by Subsidiary Trusts
Subordinated debentures held by subsidiary trusts increased 150.0% to $103 million as of
December 31, 2007, from $41 million as of December 31, 2006. During fourth quarter 2007, we
completed a series of four financings involving the sale of Trust Preferred Securities to
third-party investors and the issuance of 30-year junior subordinated deferrable interest
debentures, or Subordinated Debentures, in the aggregate amount of $62 million to wholly-owned
business trusts. During January 2008, we completed two additional financings involving the sale of
Trust Preferred Securities to third-party investors and the issuance of Subordinated Debentures in
the aggregate amount of $21 million to wholly-owned business trusts. All of the Subordinated
Debentures are unsecured with interest payable quarterly at various interest rates and may be
redeemed, subject to approval of the Federal Reserve Bank, at our option on or after five years
from the date of issue, or at any time in the event of unfavorable changes in laws or regulations.
Proceeds from these issuances, together with the financing obtained under the syndicated credit
agreement and unsecured subordinated term loan agreement described above, were used to fund the
First Western acquisition. For additional information regarding the Subordinated Debentures, see
Notes to Consolidated Financial Statements Subordinated Debentures Held by Subsidiary Trusts
included in Part IV, Item 15. For additional information regarding the First Western acquisition
see Part I, Item 1, Business First Western Acquisition and Notes to Consolidated Financial
Statements Subsequent Events included in Part IV, Item 15.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses decreased 17.0% to $30 million as of December 31, 2007,
from $36 million as of December 31, 2006, and increased 29.2% to $36 million as of December 31,
2006, from $28 million as of December 31, 2005, primarily due to timing of corporate income tax
payments. Also contributing to the increase in 2006, as compared to 2005, were higher accruals for
incentive bonuses and profit sharing contributions to reflect 2006 operating results.
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. 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.
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 $1.7 million, $1.1
million, $1.2 million, $1.4 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, 2007, 2006, 2005, 2004 and 2003, respectively.
-37-
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, |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
31,552 |
|
|
$ |
14,764 |
|
|
$ |
17,142 |
|
|
$ |
17,585 |
|
|
$ |
24,298 |
|
Accruing loans past due 90 days or more |
|
|
2,171 |
|
|
|
1,769 |
|
|
|
1,001 |
|
|
|
905 |
|
|
|
5,558 |
|
Restructured loans |
|
|
1,027 |
|
|
|
1,060 |
|
|
|
1,089 |
|
|
|
1,384 |
|
|
|
1,414 |
|
|
Total non-performing loans |
|
|
34,750 |
|
|
|
17,593 |
|
|
|
19,232 |
|
|
|
19,874 |
|
|
|
31,270 |
|
OREO |
|
|
928 |
|
|
|
529 |
|
|
|
1,091 |
|
|
|
1,828 |
|
|
|
1,999 |
|
|
Total non-performing assets |
|
$ |
35,678 |
|
|
$ |
18,122 |
|
|
$ |
20,323 |
|
|
$ |
21,702 |
|
|
$ |
33,269 |
|
|
Non-performing assets to total loans and OREO |
|
|
1.00 |
% |
|
|
0.55 |
% |
|
|
0.67 |
% |
|
|
0.79 |
% |
|
|
1.30 |
% |
|
Non-performing assets increased 96.9% to $36 million as of December 31, 2007, from $18 million
as of December 31, 2006, primarily due to the loans of four commercial real estate borrowers
placed on nonaccrual during third and fourth quarters of 2007, all of which are believed to be
adequately collateralized. 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.
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.
-38-
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, |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Balance at the beginning of period |
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
$ |
38,940 |
|
|
$ |
36,309 |
|
Allowance of acquired banking offices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
671 |
|
|
|
86 |
|
|
|
382 |
|
|
|
475 |
|
|
|
856 |
|
Consumer |
|
|
3,778 |
|
|
|
4,030 |
|
|
|
4,133 |
|
|
|
5,304 |
|
|
|
5,265 |
|
Commercial |
|
|
643 |
|
|
|
1,014 |
|
|
|
2,803 |
|
|
|
1,583 |
|
|
|
2,668 |
|
Agricultural |
|
|
116 |
|
|
|
80 |
|
|
|
133 |
|
|
|
438 |
|
|
|
1,297 |
|
|
Total charge-offs |
|
|
5,208 |
|
|
|
5,210 |
|
|
|
7,451 |
|
|
|
7,800 |
|
|
|
10,086 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
87 |
|
|
|
63 |
|
|
|
13 |
|
|
|
182 |
|
|
|
373 |
|
Consumer |
|
|
1,390 |
|
|
|
1,568 |
|
|
|
1,297 |
|
|
|
1,424 |
|
|
|
1,571 |
|
Commercial |
|
|
854 |
|
|
|
699 |
|
|
|
596 |
|
|
|
511 |
|
|
|
400 |
|
Agricultural |
|
|
30 |
|
|
|
121 |
|
|
|
7 |
|
|
|
151 |
|
|
|
136 |
|
|
Total recoveries |
|
|
2,361 |
|
|
|
2,451 |
|
|
|
1,913 |
|
|
|
2,268 |
|
|
|
2,480 |
|
|
Net charge-offs |
|
|
2,847 |
|
|
|
2,759 |
|
|
|
5,538 |
|
|
|
5,532 |
|
|
|
7,606 |
|
Provision for loan losses |
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
|
|
8,733 |
|
|
|
9,852 |
|
|
Balance at end of period |
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
|
$ |
38,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end loans |
|
$ |
3,558,980 |
|
|
$ |
3,310,363 |
|
|
$ |
3,034,354 |
|
|
$ |
2,739,509 |
|
|
$ |
2,554,899 |
|
Average loans |
|
|
3,449,809 |
|
|
|
3,208,102 |
|
|
|
2,874,723 |
|
|
|
2,629,474 |
|
|
|
2,448,386 |
|
Net charge-offs to average loans |
|
|
0.08 |
% |
|
|
0.09 |
% |
|
|
0.19 |
% |
|
|
0.21 |
% |
|
|
0.31 |
% |
Allowance to period end loans |
|
|
1.47 |
% |
|
|
1.43 |
% |
|
|
1.40 |
% |
|
|
1.54 |
% |
|
|
1.52 |
% |
|
The allowance for loan losses was $52 million, or 1.47% of period end loans, at December 31
2007, as compared to $47 million, or 1.43% of period end loans, at December 31, 2006, and $42
million, or 1.40% of period end loans, at December 31, 2005.
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, 2007, 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.
-39-
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, |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
% 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 |
|
$ |
39,420 |
|
|
|
63.8 |
% |
|
$ |
33,532 |
|
|
|
62.9 |
% |
|
$ |
22,622 |
|
|
|
61.7 |
% |
|
$ |
19,469 |
|
|
|
60.0 |
% |
|
$ |
17,911 |
|
|
|
58.6 |
% |
Consumer |
|
|
4,838 |
|
|
|
17.1 |
|
|
|
5,794 |
|
|
|
18.3 |
|
|
|
7,544 |
|
|
|
19.4 |
|
|
|
7,492 |
|
|
|
18.8 |
|
|
|
7,153 |
|
|
|
19.3 |
|
Commercial |
|
|
7,170 |
|
|
|
16.7 |
|
|
|
6,746 |
|
|
|
16.4 |
|
|
|
7,607 |
|
|
|
16.3 |
|
|
|
8,952 |
|
|
|
18.3 |
|
|
|
8,657 |
|
|
|
18.8 |
|
Agricultural |
|
|
779 |
|
|
|
2.3 |
|
|
|
908 |
|
|
|
2.3 |
|
|
|
1,147 |
|
|
|
2.5 |
|
|
|
2,200 |
|
|
|
2.7 |
|
|
|
3,147 |
|
|
|
3.2 |
|
Other loans |
|
|
|
|
|
|
0.1 |
|
|
|
14 |
|
|
|
0.1 |
|
|
|
15 |
|
|
|
0.1 |
|
|
|
27 |
|
|
|
0.2 |
|
|
|
12 |
|
|
|
0.1 |
|
Unallocated (1) |
|
|
148 |
|
|
|
N/A |
|
|
|
458 |
|
|
|
N/A |
|
|
|
3,515 |
|
|
|
N/A |
|
|
|
4,001 |
|
|
|
N/A |
|
|
|
2,060 |
|
|
|
N/A |
|
|
Totals |
|
$ |
52,355 |
|
|
|
100.0 |
% |
|
$ |
47,452 |
|
|
|
100.0 |
% |
|
$ |
42,450 |
|
|
|
100.0 |
% |
|
$ |
42,141 |
|
|
|
100.0 |
% |
|
$ |
38,940 |
|
|
|
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. |
The allocated reserve for loan losses on real estate loans increased 17.6% to $39 million as
of December 31, 2007, from $34 million as of December 31, 2006, primarily due to a weakened demand
for residential lots in four of the communities we serve. The allocated reserve for loan losses on
real estate loans increased 48.2% to $34 million as of December 31, 2006, from $23 million as of
December 31, 2005, primarily due to housing slowdowns in certain of our market areas and higher
levels of internally classified commercial real estate loans.
-40-
Contractual Obligations
Contractual obligations as of December 31, 2007 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 |
|
$ |
2,848,532 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,848,532 |
|
Time deposits |
|
|
934,690 |
|
|
|
164,689 |
|
|
|
51,487 |
|
|
|
3 |
|
|
|
1,150,869 |
|
Securities sold under repurchase agreements |
|
|
604,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604,762 |
|
Other borrowed funds(1) |
|
|
8,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,730 |
|
Long-term debt obligations (2) |
|
|
1,429 |
|
|
|
1,808 |
|
|
|
|
|
|
|
|
|
|
|
3,237 |
|
Capital lease obligations |
|
|
29 |
|
|
|
67 |
|
|
|
77 |
|
|
|
1,735 |
|
|
|
1,908 |
|
Operating lease obligations |
|
|
2,115 |
|
|
|
3,905 |
|
|
|
2,905 |
|
|
|
7,825 |
|
|
|
16,750 |
|
Purchase obligations (3) |
|
|
1,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,713 |
|
Subordinated debentures held by subsidiary trusts (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,095 |
|
|
|
103,095 |
|
|
Total contractual obligations |
|
$ |
4,402,000 |
|
|
$ |
170,469 |
|
|
$ |
54,469 |
|
|
$ |
112,658 |
|
|
$ |
4,739,596 |
|
|
|
|
|
(1) |
|
Included in other borrowed funds are tax deposits made by customers pending
subsequent withdrawal by the federal government. For additional information concerning
other borrowed funds, see Notes to Consolidated Financial Statements Long Term Debt and
Other Borrowed Funds included in Part IV, Item 15. |
|
(2) |
|
Long-term debt consists of a note payable to FHLB maturing March 5, 2010 and
bearing interest at a fixed rate of 3.01%. 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. |
|
(3) |
|
Purchase obligations relate solely to obligations under construction
contracts to build or renovate banking offices. |
|
(4) |
|
The subordinated debentures are unsecured, with various interest rates and
maturities from March 26, 2033 through April 1, 2038. 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
debentures, see Notes to Consolidated Financial Statements Subordinated Debentures held
by Subsidiary Trusts 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 our wholly-owned subsidiary business trusts to the extent of funds
held by the trusts. Although the guarantees are not separately recorded, the obligations
underlying the guarantees are fully reflected on our consolidated balance sheets as subordinated
debentures held by subsidiary trusts. The subordinated debentures currently qualify as tier 1
capital under the Federal Reserve capital adequacy guidelines. For additional information
regarding the subordinated debentures, see Notes to Consolidated Financial Statements
Subordinated Debentures Held by Subsidiary Trusts 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.
-41-
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 8.3% to $444
million as of December 31, 2007, from $410 million as of December 31, 2006, and 17.3% to $410
million as of December 31, 2006, from $350 million as of December 31, 2005, primarily due to
retention of earnings. We paid aggregate cash dividends to stockholders of $24.3 million in 2007,
$18.4 million in 2006 and $15.0 million in 2005.
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, 2007, 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.
Approximately 91% of our common shares are subject to shareholder agreements that give us a
right of first refusal to repurchase the restricted stock. While we have no obligation, by
contract, policy or otherwise to purchase stock from any shareholder, historically it has been our
practice to repurchase common stock to maintain a shareholder base with restrictions on sale or
transfer of the stock. We purchased 257,827 shares of common stock from restricted shareholders
with an aggregate value of $23 million in 2007, as compared to 107,074 shares with an aggregate
value of $8 million in 2006 and 37,206 shares with an aggregate value of $2 million in 2005. Our
ability to repurchase common shares is limited by our liquidity and capital resources and by our
debt covenants.
In conjunction with the
First Western acquisition in January 2008, we borrowed $59 million
pursuant to a syndicated credit agreement and $20 million pursuant to a subordinated credit
agreement. These agreements contain various covenants and restrictions as described in Long-Term
Debt above.
In January 2008, we issued 5,000 shares of Series A Preferred Stock with an aggregate value of
$50 million to partially fund the First Western acquisition. We also issued an aggregate of $20
million of Trust Preferred Securities to third parties and used to proceeds to purchase $21 million
of Subordinated Debentures issued by us. For more information regarding the Series A Preferred
Stock, see Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities Description of Our Capital Stock, included in Part II, Item 5, and Notes
to Consolidated Financial Statements Subsequent Events, included in Part IV, Item 15. For
additional information regarding the Subordinated Debentures and Trust Preferred Securities, see
Subordinated Debentures Held by Subsidiary Trusts included herein and Notes to Consolidated
Financial Statements Subsequent Events, included in Part IV, Item 15.
Liquidity
Liquidity measures 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 and access to alternative sources of funds. 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. Other sources of liquidity include the drawing of
additional funds on our 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 Banks also can borrow through the Federal Reserves discount window. 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 to borrowers, 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 financing 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.
-42-
As a holding company, we are a corporation separate and apart from our subsidiary Banks and,
therefore, we provide for our own liquidity. Our main sources of funding include management fees
and dividends declared and paid by our subsidiaries and access to capital markets. There are
statutory, regulatory and debt covenant limitations that affect the ability of our Bank
subsidiaries to pay dividends to us. Management believes that such limitations will not impact our
ability to meet our ongoing short-term cash obligations. For additional information regarding
dividend restrictions, see Long-Term Debt and Capital Resources 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 each 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.
-43-
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio
for different intervals as of December 31, 2007. 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) |
|
$ |
1,516,389 |
|
|
$ |
630,553 |
|
|
$ |
1,215,263 |
|
|
$ |
165,223 |
|
|
$ |
3,527,428 |
|
Investment securities (2) |
|
|
205,410 |
|
|
|
256,394 |
|
|
|
413,624 |
|
|
|
253,229 |
|
|
|
1,128,657 |
|
Interest bearing deposits in banks |
|
|
6,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,868 |
|
Federal funds sold |
|
|
60,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,635 |
|
|
Total interest earning assets |
|
$ |
1,789,302 |
|
|
$ |
886,947 |
|
|
$ |
1,628,887 |
|
|
$ |
418,452 |
|
|
$ |
4,723,588 |
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts (3) |
|
$ |
76,441 |
|
|
$ |
229,322 |
|
|
$ |
713,445 |
|
|
$ |
|
|
|
$ |
1,019,208 |
|
Savings deposits (3) |
|
|
830,528 |
|
|
|
39,416 |
|
|
|
122,627 |
|
|
|
|
|
|
|
992,571 |
|
Time deposits, $100 or more (4) |
|
|
140,107 |
|
|
|
267,309 |
|
|
|
57,144 |
|
|
|
|
|
|
|
464,560 |
|
Other time deposits |
|
|
165,610 |
|
|
|
361,664 |
|
|
|
159,032 |
|
|
|
3 |
|
|
|
686,309 |
|
Securities sold under repurchase agreements |
|
|
604,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604,762 |
|
Other borrowed funds |
|
|
8,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,730 |
|
Long-term debt |
|
|
364 |
|
|
|
1,094 |
|
|
|
1,952 |
|
|
|
1,735 |
|
|
|
5,145 |
|
Subordinated debentures held by subsidiary trusts |
|
|
67,012 |
|
|
|
|
|
|
|
36,083 |
|
|
|
|
|
|
|
103,095 |
|
|
Total interest bearing liabilities |
|
$ |
1,893,554 |
|
|
$ |
898,805 |
|
|
$ |
1,090,283 |
|
|
$ |
1,738 |
|
|
$ |
3,884,380 |
|
|
Rate gap |
|
$ |
(104,252 |
) |
|
$ |
(11,858 |
) |
|
$ |
538,604 |
|
|
$ |
416,714 |
|
|
$ |
839,208 |
|
Cumulative rate gap |
|
|
(104,252 |
) |
|
|
(116,110 |
) |
|
|
422,494 |
|
|
|
839,208 |
|
|
|
|
|
Cumulative rate gap as a percentage of total
interest earning assets |
|
|
-2.21 |
% |
|
|
-2.46 |
% |
|
|
8.94 |
% |
|
|
17.77 |
% |
|
|
17.77 |
% |
|
|
|
|
(1) |
|
Does not include nonaccrual loans of $31,552. |
|
(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 $1,209 million, a negative
cumulative one year gap of $952 million and a positive cumulative one to five year gap
of $422 million. |
|
(4) |
|
Included in the three month to one year category are deposits of $123 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.
-44-
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 up or down 2%. As of December 31, 2007, our income simulation model predicted
net interest income would decrease $343 thousand, or 0.2%, assuming a 2% increase in short-term
market interest rates and 1.0% increase in long-term interest rates. As of December 31, 2007, our
income simulation model also predicted net interest income would decrease $1.1 million, or 0.5%,
assuming a 2% decrease in short-term market interest rates and 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
The expected impact of accounting standards recently issued but not yet adopted are discussed
in Notes to Consolidated Financial Statements Recent Accounting Pronouncements 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.
-45-
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,
2007. 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, 2007 Expected Maturity, Principal Repayment or Repricing |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Interest-sensitive assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
249,246 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
249,246 |
|
Net loans |
|
|
2,481,777 |
|
|
|
391,939 |
|
|
|
265,962 |
|
|
|
154,731 |
|
|
|
113,584 |
|
|
|
81,206 |
|
|
|
3,489,199 |
|
Securities available for sale |
|
|
282,849 |
|
|
|
107,593 |
|
|
|
37,158 |
|
|
|
86,019 |
|
|
|
70,053 |
|
|
|
430,608 |
|
|
|
1,014,280 |
|
Securities held to maturity |
|
|
11,555 |
|
|
|
14,106 |
|
|
|
11,470 |
|
|
|
8,619 |
|
|
|
5,956 |
|
|
|
62,907 |
|
|
|
114,613 |
|
Accrued interest receivable |
|
|
32,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,215 |
|
Mortgage servicing rights |
|
|
3,176 |
|
|
|
3,217 |
|
|
|
2,872 |
|
|
|
2,391 |
|
|
|
1,977 |
|
|
|
9,905 |
|
|
|
23,538 |
|
|
Total interest-sensitive assets |
|
$ |
3,060,818 |
|
|
$ |
516,855 |
|
|
$ |
317,462 |
|
|
$ |
251,760 |
|
|
$ |
191,570 |
|
|
$ |
584,626 |
|
|
$ |
4,923,091 |
|
|
Interest sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits, excluding time |
|
$ |
1,426,732 |
|
|
$ |
304,671 |
|
|
$ |
304,671 |
|
|
$ |
812,458 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,848,532 |
|
Time deposits |
|
|
944,998 |
|
|
|
121,310 |
|
|
|
40,615 |
|
|
|
16,749 |
|
|
|
27,897 |
|
|
|
3 |
|
|
|
1,151,572 |
|
Repurchase agreements |
|
|
604,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604,762 |
|
Accrued interest payable |
|
|
21,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,104 |
|
Other borrowed funds |
|
|
8,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,730 |
|
Long-term debt |
|
|
1,708 |
|
|
|
1,604 |
|
|
|
524 |
|
|
|
147 |
|
|
|
137 |
|
|
|
1,350 |
|
|
|
5,470 |
|
Subordinated debentures held by
subsidiary trusts |
|
|
2,580 |
|
|
|
2,417 |
|
|
|
2,264 |
|
|
|
2,121 |
|
|
|
1,987 |
|
|
|
93,041 |
|
|
|
104,410 |
|
|
Total interest-sensitive liabilities |
|
$ |
3,010,614 |
|
|
$ |
430,002 |
|
|
$ |
348,074 |
|
|
$ |
831,475 |
|
|
$ |
30,021 |
|
|
$ |
94,394 |
|
|
$ |
4,744,580 |
|
|
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, 2007 and 2006
Consolidated Statements of Income Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders Equity and Comprehensive Income Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows Years Ended December 31, 2007, 2006 and 2005
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.
-46-
Item 9A(T). Controls and Procedures
Disclosure 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, 2007, 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, 2007, were effective in ensuring that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods required by the SECs rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our system of internal control over financial reporting within the meaning of
Rules 13a-15(f) and 15d-15(f) of the Exchange Act is designed to provide reasonable assurance to
our management and board of directors regarding the preparation and fair presentation of our
published financial statements in accordance with U.S. generally accepted accounting principles.
Our management, including the Chief Executive Officer and the Chief Financial Officer, assessed the
effectiveness of our system of internal control over financial reporting as of December 31, 2007.
In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2007, our system of internal control over financial
reporting was effective to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our system of internal control over financial reporting for the
quarter ended December 31, 2007 that have materially affected, or are reasonably likely to
materially affect, such system of control.
Limitations on Controls and Procedures
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 2007 that were not reported.
-47-
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 and Securities Authorized for Issuance under Equity Compensation
Plans 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.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Our audited consolidated financial statements follow.
-48-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc.
and subsidiaries as of December 31, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
We were not engaged to examine managements assertion about the effectiveness of First Interstate
BancSystems internal control over financial reporting as of December 31, 2007 included in
Managements Report on Internal Control Over Financial Reporting and, accordingly, we do not
express an opinion thereon.
/s/ MCGLADREY & PULLEN LLP
Des Moines, Iowa
March 14, 2008
-49-
First Interstate Bancsystem, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
181,743 |
|
|
$ |
187,555 |
|
Federal funds sold |
|
|
60,635 |
|
|
|
55,427 |
|
Interest bearing deposits in banks |
|
|
6,868 |
|
|
|
12,809 |
|
|
Total cash and cash equivalents |
|
|
249,246 |
|
|
|
255,791 |
|
|
Investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
1,014,280 |
|
|
|
1,012,658 |
|
Held-to-maturity (estimated fair values of $114,613 and $112,391 at December
31, 2007 and 2006, respectively) |
|
|
114,377 |
|
|
|
111,940 |
|
|
Total investment securities |
|
|
1,128,657 |
|
|
|
1,124,598 |
|
|
Loans |
|
|
3,558,980 |
|
|
|
3,310,363 |
|
Less allowance for loan losses |
|
|
52,355 |
|
|
|
47,452 |
|
|
Net loans |
|
|
3,506,625 |
|
|
|
3,262,911 |
|
|
Premises and equipment, net |
|
|
124,041 |
|
|
|
120,280 |
|
Accrued interest receivable |
|
|
32,215 |
|
|
|
30,913 |
|
Company owned life insurance |
|
|
67,076 |
|
|
|
64,705 |
|
Mortgage servicing rights, net of accumulated amortization and impairment reserve |
|
|
21,715 |
|
|
|
22,644 |
|
Goodwill |
|
|
37,380 |
|
|
|
37,380 |
|
Core deposit intangible, net of accumulated amortization |
|
|
257 |
|
|
|
432 |
|
Net deferred tax asset |
|
|
6,741 |
|
|
|
8,297 |
|
Other assets |
|
|
42,844 |
|
|
|
46,183 |
|
|
Total assets |
|
$ |
5,216,797 |
|
|
$ |
4,974,134 |
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest bearing |
|
$ |
836,753 |
|
|
$ |
888,694 |
|
Interest bearing |
|
|
3,162,648 |
|
|
|
2,819,817 |
|
|
Total deposits |
|
|
3,999,401 |
|
|
|
3,708,511 |
|
|
Securities sold under repurchase agreements |
|
|
604,762 |
|
|
|
731,548 |
|
Accrued interest payable |
|
|
21,104 |
|
|
|
18,872 |
|
Accounts payable and accrued expenses |
|
|
30,117 |
|
|
|
36,295 |
|
Other borrowed funds |
|
|
8,730 |
|
|
|
5,694 |
|
Long-term debt |
|
|
5,145 |
|
|
|
21,601 |
|
Subordinated debentures held by subsidiary trusts |
|
|
103,095 |
|
|
|
41,238 |
|
|
Total liabilities |
|
|
4,772,354 |
|
|
|
4,563,759 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Nonvoting noncumulative preferred stock without par value; authorized 100,000
shares, no shares issued or outstanding as of December 31, 2007 and 2006 |
|
|
|
|
|
|
|
|
Common stock without par value; authorized 20,000,000 shares; issued and
outstanding 8,006,041 shares and 8,144,788 shares as of December 31, 2007 and
2006, respectively |
|
|
29,773 |
|
|
|
45,477 |
|
Retained earnings |
|
|
416,425 |
|
|
|
372,039 |
|
Accumulated other comprehensive loss, net |
|
|
(1,755 |
) |
|
|
(7,141 |
) |
|
Total stockholders equity |
|
|
444,443 |
|
|
|
410,375 |
|
|
Total liabilities and stockholders equity |
|
$ |
5,216,797 |
|
|
$ |
4,974,134 |
|
|
See accompanying notes to consolidated financial statements.
-50-
First Interstate Bancsystem, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
272,482 |
|
|
$ |
245,435 |
|
|
$ |
195,431 |
|
Interest and dividends on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
42,660 |
|
|
|
40,991 |
|
|
|
30,255 |
|
Exempt from federal taxes |
|
|
4,686 |
|
|
|
4,441 |
|
|
|
4,384 |
|
Interest on deposits in banks |
|
|
1,307 |
|
|
|
360 |
|
|
|
1,021 |
|
Interest on federal funds sold |
|
|
4,422 |
|
|
|
2,196 |
|
|
|
2,766 |
|
|
Total interest income |
|
|
325,557 |
|
|
|
293,423 |
|
|
|
233,857 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
99,549 |
|
|
|
73,267 |
|
|
|
45,587 |
|
Interest on federal funds purchased |
|
|
267 |
|
|
|
1,649 |
|
|
|
26 |
|
Interest on securities sold under repurchase agreements |
|
|
21,212 |
|
|
|
25,278 |
|
|
|
12,602 |
|
Interest on other borrowed funds |
|
|
161 |
|
|
|
709 |
|
|
|
122 |
|
Interest on long-term debt |
|
|
467 |
|
|
|
1,576 |
|
|
|
2,480 |
|
Interest on subordinated debentures held by subsidiary trusts |
|
|
4,298 |
|
|
|
3,481 |
|
|
|
2,732 |
|
|
Total interest expense |
|
|
125,954 |
|
|
|
105,960 |
|
|
|
63,549 |
|
|
Net interest income |
|
|
199,603 |
|
|
|
187,463 |
|
|
|
170,308 |
|
Provision for loan losses |
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
|
Net interest income after provision for loan losses |
|
|
191,853 |
|
|
|
179,702 |
|
|
|
164,461 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges, commissions and fees |
|
|
24,221 |
|
|
|
21,906 |
|
|
|
19,392 |
|
Technology services revenues |
|
|
19,080 |
|
|
|
15,845 |
|
|
|
13,304 |
|
Service charges on deposit accounts |
|
|
17,787 |
|
|
|
17,581 |
|
|
|
17,294 |
|
Wealth managment revenues |
|
|
11,734 |
|
|
|
11,176 |
|
|
|
10,121 |
|
Income from the origination and sale of loans |
|
|
11,245 |
|
|
|
9,611 |
|
|
|
8,619 |
|
Investment securities gains (losses), net |
|
|
59 |
|
|
|
(722 |
) |
|
|
(3,677 |
) |
Gain on sale of equity method investee |
|
|
|
|
|
|
19,801 |
|
|
|
|
|
Other income |
|
|
8,322 |
|
|
|
6,921 |
|
|
|
5,829 |
|
|
Total noninterest income |
|
|
92,448 |
|
|
|
102,119 |
|
|
|
70,882 |
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
|
|
98,134 |
|
|
|
88,889 |
|
|
|
80,029 |
|
Furniture and equipment |
|
|
16,229 |
|
|
|
16,333 |
|
|
|
15,912 |
|
Occupancy, net |
|
|
14,741 |
|
|
|
13,300 |
|
|
|
13,412 |
|
Mortgage servicing rights amortization |
|
|
4,441 |
|
|
|
4,024 |
|
|
|
4,614 |
|
Mortgage servicing rights impairment expense (recovery) |
|
|
1,702 |
|
|
|
1,694 |
|
|
|
(2,187 |
) |
Professional fees |
|
|
3,338 |
|
|
|
3,167 |
|
|
|
2,844 |
|
Outsourced technology services |
|
|
3,116 |
|
|
|
3,151 |
|
|
|
2,290 |
|
Core deposit intangible amortization |
|
|
174 |
|
|
|
772 |
|
|
|
1,013 |
|
Other expenses |
|
|
36,992 |
|
|
|
33,383 |
|
|
|
33,391 |
|
|
Total noninterest expense |
|
|
178,867 |
|
|
|
164,713 |
|
|
|
151,318 |
|
|
Income before income tax expense |
|
|
105,434 |
|
|
|
117,108 |
|
|
|
84,025 |
|
|
Income tax expense |
|
|
36,793 |
|
|
|
41,499 |
|
|
|
29,310 |
|
|
Net income |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
Basic earnings per share |
|
$ |
8.45 |
|
|
$ |
9.32 |
|
|
$ |
6.84 |
|
Diluted earnings per share |
|
|
8.25 |
|
|
|
9.11 |
|
|
|
6.71 |
|
|
See accompanying notes to consolidated financial statements.
-51-
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, 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 |
) |
|
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 |
|
|
|
|
|
|
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 |
) |
|
-52-
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, 2006 |
|
|
8,144,788 |
|
|
$ |
45,477 |
|
|
$ |
372,039 |
|
|
$ |
|
|
|
$ |
(7,141 |
) |
|
$ |
410,375 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
68,641 |
|
|
|
|
|
|
|
|
|
|
|
68,641 |
|
Unrealized gains on available-for-sale
investment securities, net of income
tax expense of $3,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,696 |
|
|
|
5,696 |
|
Less reclassification adjustment for
gains, included in net income, net of
income tax expense of $23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
(36 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,660 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,301 |
|
Adjustment to initially apply SFAS No.
158, net of income tax benefit of $164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274 |
) |
|
|
(274 |
) |
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares retired |
|
|
(294,760 |
) |
|
|
(25,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,887 |
) |
Common shares issued |
|
|
17,248 |
|
|
|
1,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,497 |
|
Stock options exercised, net of 21,309
shares tendered in payment of option
price and income tax withholding
amounts |
|
|
138,765 |
|
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
Tax benefit of stock-based compensation |
|
|
|
|
|
|
2,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,519 |
|
Stock-based compensation expense |
|
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,093 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($2.97 per share) |
|
|
|
|
|
|
|
|
|
|
(24,255 |
) |
|
|
|
|
|
|
|
|
|
|
(24,255 |
) |
|
Balance at December 31, 2007 |
|
|
8,006,041 |
|
|
$ |
29,773 |
|
|
$ |
416,425 |
|
|
$ |
|
|
|
$ |
(1,755 |
) |
|
$ |
444,443 |
|
|
See accompanying notes to consolidated financial statements.
-53-
First
Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of joint ventures |
|
|
(243 |
) |
|
|
176 |
|
|
|
(492 |
) |
Provisions for loan losses |
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
Depreciation |
|
|
14,145 |
|
|
|
13,327 |
|
|
|
13,716 |
|
Amortization of core deposit intangibles |
|
|
174 |
|
|
|
772 |
|
|
|
1,013 |
|
Amortization of mortgage servicing rights |
|
|
4,441 |
|
|
|
4,024 |
|
|
|
4,614 |
|
Net discount accretion on investment securities |
|
|
(2,393 |
) |
|
|
(7,825 |
) |
|
|
(541 |
) |
Net loss (gain) on sale of investment securities |
|
|
(59 |
) |
|
|
722 |
|
|
|
3,677 |
|
Gain on sale of other real estate owned |
|
|
(133 |
) |
|
|
(12 |
) |
|
|
(276 |
) |
Gain on sale of mortgage servicing rights |
|
|
(996 |
) |
|
|
|
|
|
|
|
|
Gain on sale of investment in unconsolidated equity method joint venture |
|
|
|
|
|
|
(19,801 |
) |
|
|
|
|
Loss on disposal of premises and equipment |
|
|
286 |
|
|
|
19 |
|
|
|
326 |
|
Write-down of other real estate pending sale/disposal |
|
|
164 |
|
|
|
72 |
|
|
|
|
|
Increase (decrease) in valuation reserve for mortgage servicing rights |
|
|
1,702 |
|
|
|
1,694 |
|
|
|
(2,187 |
) |
Deferred income taxes |
|
|
(2,180 |
) |
|
|
(5,723 |
) |
|
|
1,882 |
|
Increase in cash surrender value of company-owned life insurance |
|
|
(2,371 |
) |
|
|
(2,158 |
) |
|
|
(1,902 |
) |
Stock-based compensation expense |
|
|
1,093 |
|
|
|
1,328 |
|
|
|
280 |
|
Excess tax benefits from stock-based compensation |
|
|
(2,508 |
) |
|
|
(1,344 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in loans held for sale |
|
|
(720 |
) |
|
|
(6,293 |
) |
|
|
2,188 |
|
Increase in accrued interest receivable |
|
|
(1,302 |
) |
|
|
(4,811 |
) |
|
|
(5,535 |
) |
Decrease (increase) in other assets |
|
|
4,758 |
|
|
|
(10,634 |
) |
|
|
(2,618 |
) |
Increase in accrued interest payable |
|
|
2,232 |
|
|
|
5,699 |
|
|
|
3,656 |
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
(3,185 |
) |
|
|
9,566 |
|
|
|
11,171 |
|
|
Net cash provided by operating activities |
|
|
89,296 |
|
|
|
62,168 |
|
|
|
89,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
(17,995 |
) |
|
|
(19,589 |
) |
|
|
(9,301 |
) |
Available-for-sale |
|
|
(1,936,961 |
) |
|
|
(4,644,632 |
) |
|
|
(1,973,342 |
) |
Proceeds from maturities, paydowns and calls of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
15,300 |
|
|
|
10,899 |
|
|
|
6,317 |
|
Available-for-sale |
|
|
1,947,408 |
|
|
|
4,507,790 |
|
|
|
1,641,837 |
|
Proceeds from sales of available-for-sale investment securities |
|
|
|
|
|
|
49,774 |
|
|
|
170,325 |
|
Net decrease (increase) in cash equivalent mutual funds classified
as available-for-sale investment securities |
|
|
37 |
|
|
|
(31 |
) |
|
|
175 |
|
Purchases and originations of mortgage servicing rights |
|
|
(6,821 |
) |
|
|
(6,246 |
) |
|
|
(6,919 |
) |
Proceeds from sale of mortgage servicing rights |
|
|
2,603 |
|
|
|
|
|
|
|
|
|
Extensions of credit to customers, net of repayments |
|
|
(254,240 |
) |
|
|
(275,801 |
) |
|
|
(305,768 |
) |
Recoveries of loans charged-off |
|
|
2,361 |
|
|
|
2,451 |
|
|
|
1,913 |
|
Proceeds from sales of other real estate owned |
|
|
705 |
|
|
|
850 |
|
|
|
2,987 |
|
Disposition of banking offices, net of cash and cash equivalents |
|
|
|
|
|
|
(2,540 |
) |
|
|
|
|
Proceeds from sale of unconsolidated equity method joint venture |
|
|
|
|
|
|
19,853 |
|
|
|
|
|
Capital expenditures, net of sales |
|
|
(17,957 |
) |
|
|
(13,109 |
) |
|
|
(10,123 |
) |
Capital contributions to unconsolidated subsidiaries and joint ventures |
|
|
(1,857 |
) |
|
|
|
|
|
|
(2,800 |
) |
|
Net cash used in investing activities |
|
|
(267,417 |
) |
|
|
(370,331 |
) |
|
|
(484,699 |
) |
|
-54-
First
Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
$ |
290,890 |
|
|
$ |
163,991 |
|
|
$ |
225,909 |
|
Net increase (decrease) in federal funds purchased and repurchase agreements |
|
|
(126,786 |
) |
|
|
211,330 |
|
|
|
70,519 |
|
Net increase (decrease) in other borrowed funds |
|
|
3,036 |
|
|
|
(1,801 |
) |
|
|
(500 |
) |
Borrowings of long-term debt |
|
|
|
|
|
|
4,100 |
|
|
|
15,000 |
|
Repayment of long-term debt |
|
|
(16,456 |
) |
|
|
(37,153 |
) |
|
|
(22,272 |
) |
Net decrease in debt issuance costs |
|
|
98 |
|
|
|
37 |
|
|
|
41 |
|
Proceeds from issuance subordinated debentures held by subsidiary trusts |
|
|
61,857 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
6,571 |
|
|
|
9,135 |
|
|
|
9,877 |
|
Excess tax benefits from stock-based compensation |
|
|
2,508 |
|
|
|
1,344 |
|
|
|
|
|
Purchase and retirement of common stock |
|
|
(25,887 |
) |
|
|
(9,593 |
) |
|
|
(3,296 |
) |
Dividends paid to stockholders |
|
|
(24,255 |
) |
|
|
(18,413 |
) |
|
|
(15,044 |
) |
|
Net cash provided by financing activities |
|
|
171,576 |
|
|
|
322,977 |
|
|
|
280,234 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(6,545 |
) |
|
|
14,814 |
|
|
|
(114,931 |
) |
Cash and cash equivalents at beginning of year |
|
|
255,791 |
|
|
|
240,977 |
|
|
|
355,908 |
|
|
Cash and cash equivalents at end of year |
|
$ |
249,246 |
|
|
$ |
255,791 |
|
|
$ |
240,977 |
|
|
See
accompanying notes to consolidated financial statements.
-55-
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 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.
As described in Note 25-Subsequent Events, the Company completed the acquisition of two banks
and a related data services company on January 10, 2008. The acquired entities provide a full
range of banking services to individuals, businesses, municipalities and other entities in
western South Dakota.
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 2006 and 2005 to conform to the 2007
presentation.
Equity Method Investments. The Company has an investment in a joint venture that is 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. This joint
venture is accounted for using the equity method of accounting whereby the Company initially
records its investment at cost and then subsequently adjusts the cost for the Companys
proportionate share of distributions and earnings or losses of the joint venture.
Variable Interest Entities. The Companys wholly-owned business trusts, First Interstate
Statutory Trust (FIST), FI Statutory Trust I (Trust I), FI Capital Trust II (Trust II),
FI Statutory Trust III (Trust III) and FI Capital Trust IV (Trust IV), are variable
interest entities for which the Company is not a primary beneficiary. Accordingly, the
accounts of FIST, Trust I, Trust II, Trust III and Trust IV are not included in the
accompanying consolidated financial statements, and are instead accounted for using the equity
method of accounting.
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, the valuation of goodwill and mortgage
servicing rights and the fair values of other financial instruments.
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 with the Federal Reserve
Bank to reduce service charges for check clearing services at December 31, 2007 and 2006.
-56-
First
Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 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 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 nonperformance.
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 $26,080 and $25,360 as
of December 31, 2007 and 2006, 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
-57-
First
Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 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, 2007 and 2006, all goodwill is attributable
to the Companys community banking operating segment. No impairment losses were recognized
during 2007, 2006 or 2005.
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 $11,735 as of December 31, 2007 and
$11,561 as of December 31, 2006. Amortization expense related to core deposit intangibles
recorded as of December 31, 2007 is expected to total $126, $83, $34, $10 and $5 in 2008,
2009, 2010, 2011 and 2012, 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.
Land is recorded at cost.
Company Owned Life Insurance. Company owned life insurance policies 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 2007, 2006 or 2005.
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 $928 and $529 as of December 31, 2007 and 2006,
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, 2007 and 2006, are included
in other assets at par value.
-58-
First
Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 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.
Positions taken in the Companys tax returns may be subject to challenge by the taxing
authorities upon examination. Uncertain tax positions are initially 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 are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement with the tax authority, assuming full knowledge of the position and
all relevant facts. The Company provides for interest and, in some cases, penalties on tax
positions that may be challenged by the taxing authorities. Interest expense is recognized
beginning in the first period that such interest would begin accruing. Penalties are
recognized in the period that the Company claims the position in the tax return. Interest and
penalties on income tax uncertainties are classified within income tax expense in the income
statement. With few exceptions, the Company is no longer subject to U.S. federal and state
examinations by tax authorities for years before 2004.
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. In addition to net income, the Companys comprehensive income includes the
after tax effect of changes in unrealized gains and losses on available-for-sale investment
securities and pension liability adjustments.
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
$2,892, $2,728 and $2,675 in 2007, 2006 and 2005, 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.
-59-
First
Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 $1,093, $1,328 and $289 for the years ended December 31, 2007, 2006
and 2005, 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, 2007, 2006 and 2005 were $418, $508 and $111, 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 2005
are not directly comparable to 2006 and 2007.
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, in 2006. 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 for the year ended
December 31, 2005, as if the Company had applied the fair value recognition provisions of
SFAS No. 123 (revised) to awards granted under the Companys share-based compensation plans
prior to the adoption of this standard.
|
|
|
|
|
December 31, |
|
2005 |
|
Net income as reported |
|
$ |
54,715 |
|
Deduct: total share-based employee compensation expense
determined under a fair value method for all awards, net of taxes |
|
|
439 |
|
|
Pro forma net income |
|
$ |
54,276 |
|
|
Basic earnings per share, as reported |
|
$ |
6.84 |
|
Pro forma basic earnings per share |
|
$ |
6.78 |
|
|
Diluted earnings per share, as reported |
|
$ |
6.71 |
|
Pro forma diluted earnings per share |
|
$ |
6.66 |
|
|
-60-
First
Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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,
2007, the Company exceeded all capital adequacy requirements to which it is subject.
The Companys actual capital amounts and ratios and selected minimum regulatory thresholds as
of December 31, 2007 and 2006 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Adequately Capitalized |
|
Well Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
557,278 |
|
|
|
13.6 |
% |
|
$ |
326,755 |
|
|
|
8.0 |
% |
|
Not Applicable
|
FIB |
|
|
437,440 |
|
|
|
10.8 |
|
|
|
323,173 |
|
|
|
8.0 |
|
|
$ |
403,966 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based
capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
506,207 |
|
|
|
12.4 |
|
|
|
163,377 |
|
|
|
4.0 |
|
|
Not Applicable
|
FIB |
|
|
389,921 |
|
|
|
9.6 |
|
|
|
161,586 |
|
|
|
4.0 |
|
|
$ |
242,380 |
|
|
|
6.0 |
% |
Leverage capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
506,207 |
|
|
|
9.9 |
|
|
|
163,377 |
|
|
|
4.0 |
|
|
Not Applicable
|
FIB |
|
|
389,921 |
|
|
|
7.6 |
|
|
|
161,586 |
|
|
|
4.0 |
|
|
$ |
242,380 |
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
Not Applicable
|
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 |
|
|
Not Applicable
|
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 |
|
|
Not Applicable
|
FIB |
|
|
385,846 |
|
|
|
8.0 |
|
|
|
154,957 |
|
|
|
4.0 |
|
|
$ |
232,436 |
|
|
|
5.0 |
% |
|
-61-
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, 2007 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government agencies |
|
$ |
451,079 |
|
|
$ |
1,714 |
|
|
$ |
(173 |
) |
|
$ |
452,620 |
|
Other mortgage-backed securities |
|
|
565,584 |
|
|
|
1,863 |
|
|
|
(5,790 |
) |
|
|
561,657 |
|
Mutual funds |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Total |
|
$ |
1,016,666 |
|
|
$ |
3,577 |
|
|
$ |
(5,963 |
) |
|
$ |
1,014,280 |
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2007 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
113,610 |
|
|
$ |
710 |
|
|
$ |
(474 |
) |
|
$ |
113,846 |
|
Other securities |
|
|
767 |
|
|
|
|
|
|
|
|
|
|
|
767 |
|
|
Total |
|
$ |
114,377 |
|
|
$ |
710 |
|
|
$ |
(474 |
) |
|
$ |
114,613 |
|
|
Gross gains of $59 were realized on the sale of available-for-sale securities in 2007. No gross losses were realized on
the sale of available-for-sale investment securities in 2007.
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 |
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
-62-
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, 2007 and
2006.
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2007 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Obligations of U.S.
Government agencies |
|
$ |
14,995 |
|
|
$ |
(1 |
) |
|
$ |
100,510 |
|
|
$ |
(172 |
) |
|
$ |
115,505 |
|
|
$ |
(173 |
) |
Other
mortgage-backed
securities |
|
|
50,956 |
|
|
|
(251 |
) |
|
|
254,225 |
|
|
|
(5,539 |
) |
|
|
305,181 |
|
|
|
(5,790 |
) |
|
Total |
|
$ |
65,951 |
|
|
$ |
(252 |
) |
|
$ |
354,735 |
|
|
$ |
(5,711 |
) |
|
$ |
420,686 |
|
|
$ |
(5,963 |
) |
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2007 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
State, county and
municipal
securities |
|
$ |
19,206 |
|
|
$ |
(187 |
) |
|
$ |
21,065 |
|
|
$ |
(287 |
) |
|
$ |
40,271 |
|
|
$ |
(474 |
) |
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
-63-
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, 2007 and 2006 related primarily
to fluctuations in the current interest rates. As of December 31, 2007, the Company had the
intent and ability to hold these investment securities for a period of time sufficient to
allow for an anticipated recovery. No impairment losses were recorded during 2007, 2006 or
2005.
Maturities of investment securities at December 31, 2007 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, 2007 |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Within one year |
|
$ |
282,112 |
|
|
$ |
281,497 |
|
|
$ |
11,489 |
|
|
$ |
11,555 |
|
After one but within five years |
|
|
480,955 |
|
|
|
480,492 |
|
|
|
39,783 |
|
|
|
40,150 |
|
After five years but within ten years |
|
|
157,447 |
|
|
|
156,806 |
|
|
|
18,760 |
|
|
|
18,849 |
|
After ten years |
|
|
96,149 |
|
|
|
95,482 |
|
|
|
44,345 |
|
|
|
44,059 |
|
|
Total |
|
|
1,016,663 |
|
|
|
1,014,277 |
|
|
|
114,377 |
|
|
|
114,613 |
|
Mutual funds with no stated maturity |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,016,666 |
|
|
$ |
1,014,280 |
|
|
$ |
114,377 |
|
|
$ |
114,613 |
|
|
At December 31, 2007, the Company had investment securities callable within one year with
amortized costs and estimated fair values of $169,743 and $170,418, 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, 2007 and 2006, the Company had variable rate
securities with amortized costs of $466 and $603, respectively.
There are no significant concentrations of investments at December 31, 2007, (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 $909,241 and $1,040,274 at December 31, 2007 and
2006, respectively, were pledged to secure public deposits and securities sold under
repurchase agreements. The approximate fair value of securities pledged at December 31, 2007
and 2006 was $907,007 and $1,028,738, 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.
-64-
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, |
|
2007 |
|
2006 |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Residential |
|
$ |
419,001 |
|
|
$ |
402,468 |
|
Agricultural |
|
|
142,256 |
|
|
|
137,659 |
|
Commercial |
|
|
1,018,831 |
|
|
|
937,695 |
|
Construction |
|
|
664,272 |
|
|
|
579,603 |
|
Mortgage loans originated for sale |
|
|
26,080 |
|
|
|
25,360 |
|
|
Total real estate loans |
|
|
2,270,440 |
|
|
|
2,082,785 |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
373,457 |
|
|
|
370,016 |
|
Credit card loans |
|
|
68,136 |
|
|
|
60,569 |
|
Other consumer loans |
|
|
166,409 |
|
|
|
175,273 |
|
|
Total consumer loans |
|
|
608,002 |
|
|
|
605,858 |
|
|
|
Commercial |
|
|
593,669 |
|
|
|
542,325 |
|
Agricultural |
|
|
81,890 |
|
|
|
76,644 |
|
Other loans, including overdrafts |
|
|
4,979 |
|
|
|
2,751 |
|
|
Total loans |
|
$ |
3,558,980 |
|
|
$ |
3,310,363 |
|
|
At December 31, 2007, the Company had no concentrations of loans which exceeded 10% of total
loans other than the categories disclosed above.
Nonaccrual loans were $31,552 and $14,764 at December 31, 2007 and 2006, respectively. If
interest on nonaccrual loans had been accrued, such income would have approximated $1,712,
$1,135 and $1,179 during the years ended December 31, 2007, 2006 and 2005, respectively.
Loans contractually past due ninety days or more aggregating $2,171 on December 31, 2007 and
$1,769 on December 31, 2006 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, |
|
2007 |
|
2006 |
|
|
Recorded |
|
Specific |
|
Recorded |
|
Specific |
|
|
Loan |
|
Loan Loss |
|
Loan |
|
Loan Loss |
|
|
Balance |
|
Reserves |
|
Balance |
|
Reserves |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific loan loss reserves assigned |
|
$ |
7,492 |
|
|
$ |
2,831 |
|
|
$ |
3,782 |
|
|
$ |
1,855 |
|
With no specific loan loss reserves assigned |
|
|
24,471 |
|
|
|
|
|
|
|
11,002 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
31,963 |
|
|
$ |
2,831 |
|
|
$ |
14,784 |
|
|
$ |
1,855 |
|
|
-65-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The average recorded investment in impaired loans for the years ended December 31, 2007, 2006
and 2005 was approximately $22,065, $15,335 and $17,841, respectively. If interest on
impaired loans had been accrued, interest income on impaired loans during 2007, 2006 and 2005
would have been approximately $1,728, $1,162 and $1,197, respectively. At December 31, 2007,
there were no material commitments to lend additional funds to borrowers whose existing loans
have been renegotiated or are classified as nonaccrual.
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, |
|
2007 |
|
2006 |
|
2005 |
|
Balance at beginning of year |
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
Provision charged to operating expense |
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
Less loans charged-off |
|
|
(5,208 |
) |
|
|
(5,210 |
) |
|
|
(7,451 |
) |
Add back recoveries of loans previously charged-off |
|
|
2,361 |
|
|
|
2,451 |
|
|
|
1,913 |
|
|
Balance at end of year |
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
(6) |
|
PREMISES AND EQUIPMENT |
Premises and equipment and related accumulated depreciation are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
2006 |
|
Land |
|
$ |
18,279 |
|
|
$ |
18,277 |
|
Buildings and improvements |
|
|
122,853 |
|
|
|
114,776 |
|
Furniture and equipment |
|
|
73,352 |
|
|
|
68,874 |
|
|
|
|
|
214,484 |
|
|
|
201,927 |
|
Less accumulated depreciation |
|
|
(90,443 |
) |
|
|
(81,647 |
) |
|
Premises and equipment, net |
|
$ |
124,041 |
|
|
$ |
120,280 |
|
|
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, |
|
2007 |
|
2006 |
|
2005 |
|
Balance at beginning of year |
|
$ |
26,788 |
|
|
$ |
24,581 |
|
|
$ |
22,292 |
|
Sales of mortgage servicing rights |
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
Purchases of mortgage servicing rights |
|
|
311 |
|
|
|
1,660 |
|
|
|
1,578 |
|
Originations of mortgage servicing rights |
|
|
6,510 |
|
|
|
4,586 |
|
|
|
5,341 |
|
Amortization expense |
|
|
(4,441 |
) |
|
|
(4,024 |
) |
|
|
(4,614 |
) |
Write-off of permanent impairment |
|
|
|
|
|
|
(15 |
) |
|
|
(16 |
) |
|
Balance at end of year |
|
|
27,561 |
|
|
|
26,788 |
|
|
|
24,581 |
|
Less valuation reserve |
|
|
(5,846 |
) |
|
|
(4,144 |
) |
|
|
(2,465 |
) |
|
Balance at end of year |
|
$ |
21,715 |
|
|
$ |
22,644 |
|
|
$ |
22,116 |
|
|
-66-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
At December 31, 2007, the estimated fair value and weighted average life of the Companys
mortgage servicing rights were $23,538 and 5.6 years, respectively. The fair value of
mortgage servicing rights was determined using discount rates ranging from 9.00% to 21.00% and
monthly prepayment speeds ranging from 0.7% to 2.9% depending upon the risk characteristics of
the underlying loans. The Company recorded as other expense impairment charges of $1,702 and
$1,694 in 2007 and 2006, respectively, and impairment reversals of $2,187 in 2005. 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 2007.
Principal balances of mortgage loans underlying mortgage servicing rights of approximately
$1,938,180 and $2,045,437 at December 31, 2007 and 2006, 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, |
|
2007 |
|
2006 |
|
Key executive, principal shareholder |
|
$ |
4,224 |
|
|
$ |
4,124 |
|
Key executive split dollar |
|
|
3,968 |
|
|
|
3,856 |
|
Group life |
|
|
58,884 |
|
|
|
56,725 |
|
|
|
Total |
|
$ |
67,076 |
|
|
$ |
64,705 |
|
|
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
$4,224 and $4,124 at December 31, 2007 and 2006, respectively.
The Company also has life insurance policies covering selected other key officers. The net
cash surrender value of these policies was $3,968 and $3,856 at December 31, 2007 and 2006,
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 postretirement 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 a group life insurance policy covering selected officers of FIB. The net cash
surrender value of the policy was $58,884 and $56,725 at December 31, 2007 and 2006,
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.
-67-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2007 |
|
2006 |
|
Noninterest bearing demand |
|
$ |
836,753 |
|
|
$ |
888,694 |
|
|
Interest bearing: |
|
|
|
|
|
|
|
|
Demand |
|
|
1,019,208 |
|
|
|
964,312 |
|
Savings |
|
|
992,571 |
|
|
|
798,497 |
|
Time, $100 and over |
|
|
464,560 |
|
|
|
408,813 |
|
Time, other |
|
|
686,309 |
|
|
|
648,195 |
|
|
Total interest bearing |
|
|
3,162,648 |
|
|
|
2,819,817 |
|
|
Total deposits |
|
$ |
3,999,401 |
|
|
$ |
3,708,511 |
|
|
Maturities of time deposits at December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Time, $100 |
|
|
|
|
and Over |
|
Total Time |
|
2008
|
|
$ |
407,417 |
|
|
$ |
934,690 |
|
2009
|
|
|
34,433 |
|
|
|
122,570 |
|
2010
|
|
|
10,136 |
|
|
|
42,119 |
|
2011
|
|
|
4,776 |
|
|
|
17,668 |
|
2012
|
|
|
7,798 |
|
|
|
33,819 |
|
Thereafter
|
|
|
|
|
|
|
3 |
|
|
Total
|
|
$ |
464,560 |
|
|
$ |
1,150,869 |
|
|
Interest expense on time deposits of $100 or more was $21,634, $15,291 and $10,694 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
34,669 |
|
|
$ |
42,014 |
|
|
$ |
24,385 |
|
State |
|
|
4,304 |
|
|
|
5,208 |
|
|
|
3,043 |
|
|
Total current |
|
|
38,973 |
|
|
|
47,222 |
|
|
|
27,428 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,031 |
) |
|
|
(5,005 |
) |
|
|
1,698 |
|
State |
|
|
(149 |
) |
|
|
(718 |
) |
|
|
184 |
|
|
Total deferred |
|
|
(2,180 |
) |
|
|
(5,723 |
) |
|
|
1,882 |
|
|
Balance at end of year |
|
$ |
36,793 |
|
|
$ |
41,499 |
|
|
$ |
29,310 |
|
|
-68-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Total income tax expense differs from the amount computed by applying the statutory federal
income tax rate of 35 percent in 2007, 2006 and 2005 to income before income taxes as a result
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Tax expense at the statutory tax rate |
|
$ |
36,902 |
|
|
$ |
40,988 |
|
|
$ |
29,409 |
|
Increase (decrease) in tax resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income |
|
|
(3,434 |
) |
|
|
(2,915 |
) |
|
|
(2,651 |
) |
State income tax, net of federal income tax benefit |
|
|
2,632 |
|
|
|
2,919 |
|
|
|
2,098 |
|
Amortization of nondeductible intangibles |
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
Other, net |
|
|
665 |
|
|
|
479 |
|
|
|
426 |
|
|
Tax expense at effective tax rate |
|
$ |
36,793 |
|
|
$ |
41,499 |
|
|
$ |
29,310 |
|
|
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, |
|
2007 |
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loans, principally due to allowance for loan losses |
|
$ |
18,182 |
|
|
$ |
16,938 |
|
Employee benefits |
|
|
3,693 |
|
|
|
3,126 |
|
Investment securities, unrealized losses |
|
|
904 |
|
|
|
4,640 |
|
Other |
|
|
329 |
|
|
|
556 |
|
|
Deferred tax assets |
|
|
23,108 |
|
|
|
25,260 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets, principally differences in bases and depreciation |
|
|
(3,127 |
) |
|
|
(4,718 |
) |
Investment in joint venture partnership, principally due to
differences in depreciation of partnership assets |
|
|
(902 |
) |
|
|
(969 |
) |
Prepaid amounts |
|
|
(1,333 |
) |
|
|
(958 |
) |
Government agency stock dividends |
|
|
(2,051 |
) |
|
|
(2,046 |
) |
Goodwill and core deposit intangibles |
|
|
(3,214 |
) |
|
|
(2,780 |
) |
Mortgage servicing rights |
|
|
(5,156 |
) |
|
|
(5,000 |
) |
Other |
|
|
(584 |
) |
|
|
(492 |
) |
|
Deferred tax liabilities |
|
|
(16,367 |
) |
|
|
(16,963 |
) |
|
Net deferred tax assets |
|
$ |
6,741 |
|
|
$ |
8,297 |
|
|
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 receivable of $1,711 at December 31, 2007 and income
taxes payable of $6,679 at December 31, 2006, which are included in accrued expenses.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109, (FIN 48) effective January 1,
2007. Adoption of FIN 48 did not have a significant impact on the Companys financial
statements.
-69-
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, |
|
2007 |
|
2006 |
|
Subsidiaries: |
|
|
|
|
|
|
|
|
3.01% note payable to FHLB, principal and interest due monthly
through March 5, 2010 |
|
|
3,237 |
|
|
|
4,666 |
|
Various notes payable to FHLB, principal and interest due monthly at
various rates and maturities (weighted average rate of 2.96%
at December 31, 2006) |
|
|
|
|
|
|
15,000 |
|
8.00% capital lease obligation with term ending October 25, 2029 |
|
|
1,908 |
|
|
|
1,935 |
|
|
Total long-term debt |
|
$ |
5,145 |
|
|
$ |
21,601 |
|
|
Maturities of long-term debt at December 31, 2007 are as follows:
|
|
|
|
|
2008 |
|
$ |
1,458 |
|
2009 |
|
|
1,460 |
|
2010 |
|
|
415 |
|
2011 |
|
|
37 |
|
2012 |
|
|
40 |
|
Thereafter |
|
|
1,735 |
|
|
Total |
|
$ |
5,145 |
|
|
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, 2007.
The Company has a $25,000 unsecured revolving term loan with its primary lender. As of
December 31, 2007 and 2006, there were no advances on the loan. The revolving facility was
terminated on January 10, 2008. See Note 25-Subsequent Events for additional information.
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,
2007 and 2006, FHLB advances totaled $3,237 and $19,666, respectively.
The Company has a capital lease obligation on a banking office. The balance of the obligation
was $1,908 and $1,935 as of December 31, 2007 and 2006, 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.
-70-
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, |
|
2007 |
|
2006 |
|
Interest bearing demand notes issued to the United
States Treasury, secured by investment securities (3.6%
interest rate at December 31, 2007) |
|
$ |
8,730 |
|
|
$ |
5,694 |
|
|
The Company has federal funds lines of credit with third parties amounting to $181,750,
subject to funds availability. These lines are subject to cancellation without notice.
(12) |
|
SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS |
The Company sponsors five wholly-owned business trusts, FIST, Trust I, Trust II, Trust
III and Trust IV (collectively, the Trusts). The Trusts were formed for the exclusive
purpose of issuing an aggregate of $100,000 of 30-year floating rate mandatorily
redeemable capital trust preferred securities (Trust Preferred Securities) to
third-party investors. The Trusts also issued, in aggregate, $3,095 of common equity
securities to the Parent Company. Proceeds from the issuance of the Trust Preferred
Securities and common equity securities were invested in 30-year junior subordinated
deferrable interest debentures (Subordinated Debentures) issued by the Parent Company.
A summary of Subordinated Debenture issuances follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount Outstanding |
|
|
|
|
|
|
as of December 31, |
Issuance |
|
Maturity Date |
|
2007 |
|
2006 |
|
March 2003 |
|
March 26, 2033 |
|
$ |
41,238 |
|
|
$ |
41,238 |
|
October 2007 |
|
January 1, 2038 |
|
|
10,310 |
|
|
|
|
|
November 2007 |
|
December 15, 2037 |
|
|
15,464 |
|
|
|
|
|
December 2007 |
|
December 15, 2037 |
|
|
20,619 |
|
|
|
|
|
December 2007 |
|
April 1, 2038 |
|
|
15,464 |
|
|
|
|
|
|
Total subordianted debentures held by subsidiary trusts |
|
$ |
103,095 |
|
|
$ |
41,238 |
|
|
In March 2003, the Company issued $41,238 of Subordinated Debentures to FIST. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 3.15% per
annum. As of December 31, 2007 and 2006, interest rate on the Subordinated Debentures was
8.01% and 8.52%, respectively.
In October 2007, the Company issued $10,310 of Subordinated Debentures to Trust II. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.25% per
annum. As of December 31, 2007, the interest rate on the Subordinated Debentures was 7.21%.
In November 2007, the Company issued $15,464 of Subordinated Debentures to Trust I. The
Subordinated Debentures bear interest at a fixed rate of 7.50% for five years after issuance,
and thereafter at a variable rate equal to LIBOR plus 2.75% per annum.
In December 2007, the Company issued $20,619 of Subordinated Debentures to Trust III. The
Subordinated Debentures bear interest at a fixed rate of 6.88% for five years after issuance,
and thereafter at a variable rate equal to LIBOR plus 2.40% per annum.
In December 2007, the Company issued $15,464 of Subordinated Debentures to Trust IV. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.70% per
annum. As of December 31, 2007, the interest rate on the Subordinated Debentures was 7.64%.
-71-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The Subordinated Debentures are unsecured with interest distributions payable 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 Debentures may be redeemed, subject to
approval by the Federal Reserve Bank, at the Companys option on or after five years from the
date of issue, or at any time in the event of unfavorable changes in laws or regulations.
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
Debentures. The Trust Preferred Securities are subject to mandatory redemption upon repayment
of the Subordinated Debentures at their stated maturity dates 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
Trusts. The Trust Preferred Securities qualify as tier 1 capital of the Parent Company under the
Federal Reserve Boards capital adequacy guidelines.
In January 2008, the Company formed two additional business trusts for the exclusive purpose
of issuing Trust Preferred Securities and using the proceeds to purchase Subordinated
Debentures issued by the Parent Company. See Note 25 Subsequent Events for additional
information.
(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.
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,
2007, there were 585,524 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 generally 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 $996, $935 and $47 was included in
salaries, wages and benefits expense on the Companys consolidated income statements for the
years ended December 31, 2007, 2006 and 2005, respectively.
-72-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The weighted average grant date fair value of options granted was $7.89, $5.95 and $6.03
during the years ended December 31, 2007, 2006 and 2005, 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, |
|
2007 |
|
2006 |
|
2005 |
|
Expected volatility |
|
|
5.23 |
% |
|
|
5.87 |
% |
|
|
8.40 |
% |
Expected dividend yield |
|
|
2.95 |
% |
|
|
3.01 |
% |
|
|
3.05 |
% |
Risk-free interest rate |
|
|
4.80 |
% |
|
|
4.51 |
% |
|
|
4.19 |
% |
Expected life of options (in years) |
|
|
6.2 |
|
|
|
6.2 |
|
|
|
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 2007 and 2006 and
the contractual option term in 2005.
The following table summarizes stock option activity under the Companys active stock option
plans for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of |
|
Weighted-Average |
|
Remaining |
|
|
Shares |
|
Exercise Price |
|
Contract Life |
|
Outstanding options, beginning of year |
|
|
840,199 |
|
|
$ |
50.00 |
|
|
|
|
|
Granted |
|
|
153,343 |
|
|
|
83.16 |
|
|
|
|
|
Exercised |
|
|
(160,074 |
) |
|
|
43.31 |
|
|
|
|
|
Forfeited |
|
|
(3,412 |
) |
|
|
72.52 |
|
|
|
|
|
Expired |
|
|
(187 |
) |
|
|
76.68 |
|
|
|
|
|
|
Outstanding options, end of year |
|
|
829,869 |
|
|
$ |
57.33 |
|
|
5.98 years |
|
Outstanding options exercisable, end of year |
|
|
633,326 |
|
|
$ |
52.10 |
|
|
5.21 years |
|
The total intrinsic value of fully-vested stock options outstanding as of December 31, 2007
was $22,594. The total intrinsic value of options exercised was $6,631, $3,630 and $1,752
during the years ended December 31, 2007, 2006 and 2005, respectively. The actual tax
benefit realized for the tax deduction from option exercises totaled $2,536, $1,368 and $677
for the years ended December 31, 2007, 2006 and 2005, respectively. Cash received from stock
option exercises during the years ended December 31, 2007, 2006 and 2005 was $5,074, $3,306
and $2,770, respectively.
-73-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Information with respect to the Companys nonvested stock options as of and for the year
ended December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted-Average |
|
|
Shares |
|
Grant Date Fair Value |
|
Nonvested stock options, beginning of year |
|
|
180,399 |
|
|
$ |
5.76 |
|
Granted |
|
|
107,281 |
|
|
|
7.89 |
|
Vested |
|
|
(87,725 |
) |
|
|
6.40 |
|
Forfeited |
|
|
(3,412 |
) |
|
|
6.87 |
|
|
Nonvested stock options, end of year |
|
|
196,543 |
|
|
$ |
6.97 |
|
|
As of December 31, 2007, there was $796 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 0.8 years. The total fair value
of shares vested during 2007 was $854.
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 Companys restricted stock plans 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 $97, $393 and $242 was included in
salaries, wages and benefits expense on the Companys consolidated statements of income for
the years ended December 31, 2007, 2006 and 2005, respectively.
The following table presents information regarding the Companys restricted stock as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of |
|
Measurement Date |
|
|
Shares |
|
Fair Value |
|
Restricted stock, beginning of year |
|
|
11,500 |
|
|
$ |
68.57 |
|
Vested |
|
|
(9,500 |
) |
|
|
82.50 |
|
|
Restricted stock, end of year |
|
|
2,000 |
|
|
$ |
65.00 |
|
|
As of December 31, 2007, there was $52 of unrecognized compensation cost related to nonvested
restricted stock awards expected to be recognized over a weighted-average period of 1.7
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 $2,816, $3,097 and
$2,048 in 2007, 2006 and 2005, respectively.
|
-74-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 $3,243, $2,947 and $2,736 in 2007, 2006 and 2005, 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.
As of December 31, 2007, the Company adopted the recognition provisions of SFAS No. 158,
Employers Accounting for Defined Benefits Pension and Other Postretirement Plans-and
amendment of FASB Statements No. 87, 88, 106 and 132(R). The effect of the adoption of SFAS
No. 158 on individual consolidated balance sheet line items at December 31, 2007 was not
significant. The Plans unfunded benefit obligation of $926 and $836 at December 31, 2007 and
2006, respectively, is included in accounts payable and accrued expenses in the Companys
consolidated balance sheets. Net periodic benefit costs of $130 and $174 for the years ended
December 31, 2007 and 2006, respectively, are included in salaries, wages and employee
benefits expense in the Companys consolidated statements of income.
Weighted average actuarial assumptions used to determine the postretirement benefit obligation
at December 31, 2007 and 2006, 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
healthcare benefits. The estimated effect of a one percent increase or a one percent decrease
in the assumed healthcare cost trend rate did not significantly impact the service and
interest cost components of the net periodic benefit cost or the accumulated postretirement
benefit obligation. Future benefit payments are expected to be $91, $94, $102, $97, $85 and
$366 for 2008, 2009, 2010, 2011, 2012, and 2013 through 2017, respectively.
At December 31, 2007, the Company had accumulated other comprehensive loss related to the
adoption of SFAS No. 158 of $439, or $274 net of related income tax benefit, comprised of net
actuarial gains of $309 and unamortized transition asset of $748. The Company estimates $40
will be amortized from accumulated other comprehensive loss into net period benefit costs in
2008.
(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 under construction contracts of $1,713 and $2,084 as of December
31, 2007 and 2006, respectively. |
|
|
|
The Company leases certain premises and equipment from third parties under operating
leases. Total rental expense to third parties was $3,224 in 2007, $3,166 in 2006 and
$3,358 in 2005. |
-75-
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, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related |
|
|
|
|
Third |
|
Partnership |
|
|
|
|
Parties |
|
(See Note 22) |
|
Total |
|
For the year ending December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
2,115 |
|
|
$ |
1,989 |
|
|
$ |
4,104 |
|
2009 |
|
|
2,118 |
|
|
|
1,906 |
|
|
|
4,024 |
|
2010 |
|
|
1,787 |
|
|
|
1,726 |
|
|
|
3,513 |
|
2011 |
|
|
1,629 |
|
|
|
1,649 |
|
|
|
3,278 |
|
2012 |
|
|
1,276 |
|
|
|
1,538 |
|
|
|
2,814 |
|
Thereafter |
|
|
7,825 |
|
|
|
3,997 |
|
|
|
11,822 |
|
|
Total |
|
$ |
16,750 |
|
|
$ |
12,805 |
|
|
$ |
29,555 |
|
|
(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 $1,112,651 at December 31, 2007, which included $313,621 on
unused credit card lines and $302,489 with commitment maturities beyond one year.
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. |
|
|
|
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, 2007 and 2006, the Company had outstanding stand-by letters of
credit of $105,667 and $93,046, 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. |
|
(17) |
|
CAPITAL STOCK AND DIVIDEND RESTRICTIONS |
|
|
|
At December 31, 2007, 90.6% 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.
|
-76-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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, |
|
2007 |
|
2006 |
|
2005 |
|
Net income basic and diluted |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
|
Average outstanding shares basic |
|
|
8,126,804 |
|
|
|
8,112,610 |
|
|
|
8,001,682 |
|
Add effect of dilutive stock options |
|
|
195,676 |
|
|
|
191,380 |
|
|
|
147,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding shares diluted |
|
|
8,322,480 |
|
|
|
8,303,990 |
|
|
|
8,149,337 |
|
|
|
Basic earnings per share |
|
$ |
8.45 |
|
|
$ |
9.32 |
|
|
$ |
6.84 |
|
|
|
Diluted earnings per share |
|
$ |
8.25 |
|
|
$ |
9.11 |
|
|
$ |
6.71 |
|
|
The Company had 137,092 and 10,732 stock options outstanding that were antidilutive as of
December 31, 2007 and 2006, respectively. There were no outstanding stock options that were
antidilutive for the year ended December 31, 2005.
(19) |
|
ACQUISITIONS AND DISPOSITIONS |
|
|
|
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. As of
December 31, 2007, no loss claims had been received. |
|
|
|
On September 18, 2007, the Company entered into an agreement to purchase all of the
outstanding stock of two banks and a related data services company. The acquisition was
completed in January 2008. See Note 25 Subsequent Events for additional information. |
-77-
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, |
|
2007 |
|
2006 |
|
Condensed balance sheets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,443 |
|
|
$ |
29,305 |
|
Investment securities available-for-sale |
|
|
99,977 |
|
|
|
|
|
Investment in subsidiaries, at equity: |
|
|
|
|
|
|
|
|
Bank subsidiary |
|
|
424,108 |
|
|
|
417,528 |
|
Nonbank subsidiaries |
|
|
8,454 |
|
|
|
7,779 |
|
|
Total investment in subsidiaries |
|
|
432,562 |
|
|
|
425,307 |
|
|
Premises and equipment |
|
|
1,765 |
|
|
|
1,991 |
|
Other assets |
|
|
20,400 |
|
|
|
18,423 |
|
|
Total assets |
|
$ |
563,147 |
|
|
$ |
475,026 |
|
|
Other liabilities |
|
$ |
8,923 |
|
|
$ |
17,256 |
|
Advances from nonbank subsidiaries, net |
|
|
6,686 |
|
|
|
6,157 |
|
Long-term debt |
|
|
|
|
|
|
|
|
Subordinated debentures held by subsidiary trusts |
|
|
103,095 |
|
|
|
41,238 |
|
|
Total liabilities |
|
|
118,704 |
|
|
|
64,651 |
|
Stockholders equity |
|
|
444,443 |
|
|
|
410,375 |
|
|
Total liabilities and stockholders equity |
|
$ |
563,147 |
|
|
$ |
475,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Condensed statements of income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
74,548 |
|
|
$ |
28,866 |
|
|
$ |
27,550 |
|
Other interest income |
|
|
71 |
|
|
|
172 |
|
|
|
35 |
|
Other income, primarily management fees from subsidiaries |
|
|
9,625 |
|
|
|
8,155 |
|
|
|
6,380 |
|
Gain on sale of unconsolidated equity method joint venture |
|
|
|
|
|
|
19,801 |
|
|
|
|
|
|
Total income |
|
|
84,244 |
|
|
|
56,994 |
|
|
|
33,965 |
|
|
Salaries and benefits |
|
|
10,687 |
|
|
|
10,052 |
|
|
|
7,580 |
|
Interest expense |
|
|
4,588 |
|
|
|
4,031 |
|
|
|
3,673 |
|
Other operating expenses, net |
|
|
6,475 |
|
|
|
6,399 |
|
|
|
6,134 |
|
|
Total expenses |
|
|
21,750 |
|
|
|
20,482 |
|
|
|
17,387 |
|
|
Earnings before income tax benefit |
|
|
62,494 |
|
|
|
36,512 |
|
|
|
16,578 |
|
Income tax expense (benefit) |
|
|
(4,812 |
) |
|
|
2,522 |
|
|
|
(4,192 |
) |
|
Income before undistributed earnings of subsidiaries |
|
|
67,306 |
|
|
|
33,990 |
|
|
|
20,770 |
|
Undistributed earnings of subsidiaries |
|
|
1,335 |
|
|
|
41,619 |
|
|
|
33,945 |
|
|
Net income |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
-78-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2007 |
|
2006 |
|
2005 |
|
Condensed statements of cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
Adjustments to reconcile net income to cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of subsidiaries |
|
|
(1,335 |
) |
|
|
(41,619 |
) |
|
|
(33,945 |
) |
Depreciation and amortization |
|
|
227 |
|
|
|
245 |
|
|
|
242 |
|
Provision for deferred income taxes |
|
|
(539 |
) |
|
|
(59 |
) |
|
|
220 |
|
Stock-based compensation expense |
|
|
1,093 |
|
|
|
1,239 |
|
|
|
234 |
|
Excess tax benefits from stock-based compensation |
|
|
(2,485 |
) |
|
|
(1,344 |
) |
|
|
|
|
Gain on sale of unconsolidated equity method joint venture |
|
|
|
|
|
|
(19,801 |
) |
|
|
|
|
Other, net |
|
|
(8,286 |
) |
|
|
7,102 |
|
|
|
(1,212 |
) |
|
Net cash provided by operating activities |
|
|
57,316 |
|
|
|
21,372 |
|
|
|
20,254 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale investment securities |
|
|
(99,931 |
) |
|
|
|
|
|
|
|
|
Capital expenditures, net of sales |
|
|
(47 |
) |
|
|
(8 |
) |
|
|
|
|
Capitalization of subsidiaries |
|
|
(2,117 |
) |
|
|
(400 |
) |
|
|
(180 |
) |
Disposition of unconsolidated equity method joint venture |
|
|
|
|
|
|
19,853 |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(102,095 |
) |
|
|
19,445 |
|
|
|
(180 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in advances
from nonbank subsidiaries |
|
|
529 |
|
|
|
2,219 |
|
|
|
(312 |
) |
Borrowings of long-term debt |
|
|
|
|
|
|
4,100 |
|
|
|
11,500 |
|
Repayments of long-term debt |
|
|
|
|
|
|
(8,700 |
) |
|
|
(17,320 |
) |
Proceeds from issuance subordinated debentures |
|
|
61,857 |
|
|
|
|
|
|
|
|
|
Debt issuance costs, net |
|
|
98 |
|
|
|
37 |
|
|
|
41 |
|
Excess tax benefits from stock-based compensation |
|
|
2,485 |
|
|
|
1,344 |
|
|
|
|
|
Dividends paid on common stock |
|
|
(24,255 |
) |
|
|
(18,413 |
) |
|
|
(15,044 |
) |
Payments to retire common stock |
|
|
(25,887 |
) |
|
|
(9,593 |
) |
|
|
(3,296 |
) |
Proceeds from issuance of common stock |
|
|
9,090 |
|
|
|
10,503 |
|
|
|
9,877 |
|
|
Net cash provided by (used in) financing activities |
|
|
23,917 |
|
|
|
(18,503 |
) |
|
|
(14,554 |
) |
|
Net change in cash and cash equivalents |
|
|
(20,862 |
) |
|
|
22,314 |
|
|
|
5,520 |
|
Cash and cash equivalents, beginning of year |
|
|
29,305 |
|
|
|
6,991 |
|
|
|
1,471 |
|
|
Cash and cash equivalents, end of year |
|
$ |
8,443 |
|
|
$ |
29,305 |
|
|
$ |
6,991 |
|
|
Noncash Investing and Financing Activities During 2005, the Company transferred $9 from
accrued liabilities to common stock in conjunction with exercise of stock options. There were
no noncash investing or financing activities in 2007 or 2006.
(21) |
|
SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
The Company paid cash of $45,233, $42,984 and $23,079 for income taxes during 2007, 2006 and
2005, respectively. The Company paid cash of $123,722, $100,273 and $59,893 for interest
during 2007, 2006 and 2005, respectively. |
|
|
|
The Company transferred loans of $1,135, $348 and $1,284 to other real estate owned in 2007,
2006 and 2005, respectively.
|
-79-
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.
During 2005, the Company transferred accrued liabilities of $9 to common stock in conjunction
with the exercise of stock options. No transfers were made from accrued liabilities to common
stock during 2007 or 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 $24,974 at December 31, 2007 and $22,183 at December 31, 2006. During 2007, new loans and
advances on existing loans of $28,204, were funded and loan repayments totaled $25,713. 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 2007, loans of $300 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 $1,911 in 2007,
$1,829 in 2006 and $1,776 in 2005. |
|
|
|
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 $340, $357, and $349 in 2007, 2006 and 2005, 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 $325, $246
and $228 in 2007, 2006 and 2005, respectively. In addition to paying the third-party
operating expenses, the Company paid $168, $68 and $36 for use of the aircraft and
received reimbursement of $161, $77 and $32 from the chairman for his personal use of the
aircraft during 2007, 2006 and 2005, respectively. |
|
|
|
The Company purchases services from a company in which seven directors of the Company,
including the chairman and vice chairman of the Board of Directors, have an aggregate
ownership interest of 17.1%. The Company paid fees and reimbursed out-of-pocket costs of
$384, $336 and $365 in 2007, 2006 and 2005, respectively. Services provided for the Companys
benefit include majority shareholder education and communication, strategic enterprise
planning and corporate governance consultation. |
-80-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(23) |
|
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, 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, floating rate
subordinated debentures, 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
notes payable to the FHLB, fixed rate subordinated debentures and capital lease
obligations 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.
-81-
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
As of December 31, |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
249,246 |
|
|
$ |
249,246 |
|
|
$ |
255,791 |
|
|
$ |
255,791 |
|
Investment securities available-for-sale |
|
|
1,014,280 |
|
|
|
1,014,280 |
|
|
|
1,012,658 |
|
|
|
1,012,658 |
|
Investment securities held-to-maturity |
|
|
114,377 |
|
|
|
114,613 |
|
|
|
111,940 |
|
|
|
112,391 |
|
Net loans |
|
|
3,506,625 |
|
|
|
3,489,199 |
|
|
|
3,262,911 |
|
|
|
3,221,291 |
|
Accrued interest receivable |
|
|
32,215 |
|
|
|
32,215 |
|
|
|
30,913 |
|
|
|
30,913 |
|
Mortgage servicing rights, net |
|
|
21,715 |
|
|
|
23,538 |
|
|
|
22,644 |
|
|
|
23,378 |
|
|
Total financial assets |
|
$ |
4,938,458 |
|
|
$ |
4,923,091 |
|
|
$ |
4,696,857 |
|
|
$ |
4,656,422 |
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits, excluding time deposits |
|
$ |
2,848,532 |
|
|
$ |
2,848,532 |
|
|
$ |
2,651,503 |
|
|
$ |
2,651,503 |
|
Time deposits |
|
|
1,150,869 |
|
|
|
1,151,572 |
|
|
|
1,057,008 |
|
|
|
1,052,256 |
|
Securities sold under repurchase
agreements |
|
|
604,762 |
|
|
|
604,762 |
|
|
|
731,548 |
|
|
|
731,548 |
|
Accrued interest payable |
|
|
21,104 |
|
|
|
21,104 |
|
|
|
18,872 |
|
|
|
18,872 |
|
Other borrowed funds |
|
|
8,730 |
|
|
|
8,730 |
|
|
|
5,694 |
|
|
|
5,694 |
|
Long-term debt |
|
|
5,145 |
|
|
|
5,470 |
|
|
|
21,601 |
|
|
|
22,177 |
|
Subordinated debentures held by
subsidiary trusts |
|
|
104,410 |
|
|
|
103,095 |
|
|
|
41,238 |
|
|
|
41,238 |
|
|
Total financial liabilities |
|
$ |
4,743,552 |
|
|
$ |
4,743,265 |
|
|
$ |
4,527,464 |
|
|
$ |
4,523,288 |
|
|
-82-
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, 2007, 2006
and 2005 follows. |
|
|
|
The Other category includes the net funding cost and other expenses of the Parent Company, the
operational results of consolidated nonbank subsidiaries (except Technology Services) and
intercompany eliminations. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
Technology |
|
|
|
|
For the year ended December 31, 2007 |
|
Banking |
|
Services |
|
Other |
|
Total |
|
Net interest income (expense) |
|
$ |
202,653 |
|
|
$ |
190 |
|
|
$ |
(3,240 |
) |
|
$ |
199,603 |
|
Provision for loan losses |
|
|
7,750 |
|
|
|
|
|
|
|
|
|
|
|
7,750 |
|
|
Net interest income after provision |
|
|
194,903 |
|
|
|
190 |
|
|
|
(3,240 |
) |
|
|
191,853 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sources |
|
|
72,681 |
|
|
|
19,080 |
|
|
|
687 |
|
|
|
92,448 |
|
Internal sources |
|
|
1 |
|
|
|
12,675 |
|
|
|
(12,676 |
) |
|
|
|
|
|
Total noninterest income |
|
|
72,682 |
|
|
|
31,755 |
|
|
|
(11,989 |
) |
|
|
92,448 |
|
|
Noninterest expense |
|
|
157,199 |
|
|
|
25,805 |
|
|
|
(4,137 |
) |
|
|
178,867 |
|
|
Income (loss) before taxes |
|
|
110,386 |
|
|
|
6,140 |
|
|
|
(11,092 |
) |
|
|
105,434 |
|
Income tax expense (benefit) |
|
|
39,142 |
|
|
|
2,434 |
|
|
|
(4,783 |
) |
|
|
36,793 |
|
|
Net income (loss) |
|
$ |
71,244 |
|
|
$ |
3,706 |
|
|
$ |
(6,309 |
) |
|
$ |
68,641 |
|
|
Depreciation and core deposit intangibles
amortization (1) |
|
$ |
14,092 |
|
|
$ |
|
|
|
$ |
227 |
|
|
$ |
14,319 |
|
|
Total assets as of December 31, 2007 |
|
$ |
5,091,252 |
|
|
$ |
7,120 |
|
|
$ |
118,425 |
|
|
$ |
5,216,797 |
|
|
Investment in equity method investees
as of December 31, 2007 |
|
$ |
5,772 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,772 |
|
|
-83-
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, 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 |
|
|
65,341 |
|
|
|
15,845 |
|
|
|
20,933 |
|
|
|
102,119 |
|
Internal sources |
|
|
1 |
|
|
|
13,535 |
|
|
|
(13,536 |
) |
|
|
|
|
|
Total noninterest income |
|
|
65,342 |
|
|
|
29,380 |
|
|
|
7,397 |
|
|
|
102,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
145,504 |
|
|
|
23,317 |
|
|
|
(4,108 |
) |
|
|
164,713 |
|
|
Income before taxes |
|
|
103,150 |
|
|
|
6,225 |
|
|
|
7,733 |
|
|
|
117,108 |
|
Income tax expense |
|
|
36,459 |
|
|
|
2,464 |
|
|
|
2,576 |
|
|
|
41,499 |
|
|
Net income |
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
56,856 |
|
|
|
13,304 |
|
|
|
722 |
|
|
|
70,882 |
|
Internal sources |
|
|
2 |
|
|
|
13,910 |
|
|
|
(13,912 |
) |
|
|
|
|
|
Total noninterest income |
|
|
56,858 |
|
|
|
27,214 |
|
|
|
(13,190 |
) |
|
|
70,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
136,312 |
|
|
|
20,371 |
|
|
|
(5,365 |
) |
|
|
151,318 |
|
|
Income (loss) before taxes |
|
|
88,476 |
|
|
|
6,944 |
|
|
|
(11,395 |
) |
|
|
84,025 |
|
Income tax expense (benefit) |
|
|
30,726 |
|
|
|
2,751 |
|
|
|
(4,167 |
) |
|
|
29,310 |
|
|
Net income (loss) |
|
$ |
57,750 |
|
|
$ |
4,193 |
|
|
$ |
(7,228 |
) |
|
$ |
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 |
|
|
|
|
|
(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. |
-84-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(25) |
|
SUBSEQUENT EVENTS |
|
|
|
On January 10, 2008, the Company completed the acquisition of all of the outstanding stock of
The First Western Bank Sturgis, Sturgis, South Dakota, First Western Bank, Wall, South Dakota,
and First Western Data, Inc., a South Dakota corporation, from Christen Group, Inc., formerly
known as First Western Bancorp, Inc. As of the acquisition date, the historical carrying
values of total assets, total loans and total deposits acquired were $908,241, $728,777 and
$809,990, respectively. Consideration for the acquisition of $248,081, consisted of cash of
$198,081 and 5,000 shares of newly issued 6.75% Series A noncumulative redeemable preferred
stock (Series A Preferred Stock) with an aggregate value of $50,000. |
|
|
|
The Series A Preferred Stock was sold to the Christen Group, Inc., an accredited investor, in
a private placement transaction made in reliance upon exemptions from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. The Series A Preferred Stock ranks senior to the Companys common stock with
respect to dividend and liquidation rights and has no voting rights. Holders of the Series A
Preferred Stock are entitled to receive, if and when declared, noncumulative dividends at an
annual rate of $675 per share. The Company may redeem all or part of the Series A Preferred
Stock at any time after the fifth anniversary of the date issued at a redemption price of
$10,000 per share plus all accrued and unpaid dividends. Following the tenth anniversary of
the date issued, the Series A Preferred Stock may be converted, at the option of the holder,
into shares of the Companys common stock at a ratio of 80 shares of common stock for every
one share of Series A Preferred Stock. |
|
|
|
Funding of the cash portion of the purchase price was partially accomplished through debt
financing as follows: |
|
|
|
On January 10, 2008, the Company entered into a credit agreement (Credit Agreement)
with four syndicated banks. The Credit Agreement supersedes the Companys unsecured
revolving term loan with its primary lender and is secured by all of the outstanding
stock of FIB. Under the terms of the Credit Agreement, the Company borrowed $50,000 on
variable rate term notes (Term Notes). The Term Notes mature January 10, 2013 and are
payable in equal quarterly principal installments of $1,786 beginning March 31, 2008,
with one final installment of $14,286 due at maturity. Interest on the Term Notes is
payable quarterly at an initial rate of 7.25%. Under the terms of the Credit Agreement,
the Company also borrowed $9,000 on a $25,000 revolving credit facility maturing on
January 10, 2011 with interest payable quarterly at an initial rate of 7.25%. |
|
|
|
|
The Credit Agreement contains various covenants that, among other things, establish
minimum capital and financial performance ratios; and, place certain restrictions on
indebtedness, non-performing assets, the allowance for loan losses, the redemption and
issuance of common stock and the amounts of dividends payable to shareholders. |
|
|
|
|
On January 10, 2008, the Company borrowed $20,000 on a 6.81% unsecured subordinated
term loan maturing January 9, 2018, with interest payable quarterly and principal due at
maturity. The unsecured subordinated term loan qualifies as tier 2 capital under
regulatory capital adequacy guidelines. |
|
|
|
|
On January 8, 2008, the Company issued an aggregate of $20,000 of Trust Preferred
Securities through two wholly-owned, deconsolidated business trusts, FI Statutory Trust V
(Trust V) and FI Statutory Trust VI (Trust VI). Trust V and Trust VI were formed for
the exclusive purpose of issuing Trust Preferred Securities to third-party investors and
using the proceeds to purchase Subordinated Debentures issued by the
Parent Company. The Company issued to Trust V $10,310 of Subordinated Debentures bearing
interest at a fixed rate of 6.78% for five years after issuance and thereafter at a
variable rate equal to LIBOR plus 2.75% per annum. The Company issued to Trust VI $10,310
of Subordinated Debentures bearing a variable interest rate equal to LIBOR plus 2.75% per
annum, or 7.40% on the date of issue. The Subordinated Debentures mature April 1, 2038,
but may be redeemed, subject to approval by the Federal Reserve Bank, at the Companys
option on or after April 1, 2013, or at any time in the event of unfavorable changes in
laws or regulations. |
-85-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
The terms of the Trust Preferred Securities are identical to those of the Subordinated
Debentures. The Trust Preferred Securities are subject to mandatory redemption upon
repayment of the Subordinated Debentures at their stated maturity dates 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 Trusts. |
|
|
|
|
During 2007, the Company completed a series of four financings involving the sale of
Trust Preferred Securities to third party investors and the issuance of Subordinated
Debentures to wholly-owned business trusts. Proceeds from these transactions were used
to fund a portion of the acquisition price. See Note 12 Subordinated Debentures Held
by Subsidiary Trusts for information regarding these issuances. |
(26) |
|
RECENT ACCOUNTING PRONOUNCEMENTS |
|
|
|
Statements of Financial Accounting Standards. In December 2007, FASB issued SFAS No. 141
(revised 2007) (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS 141, Business
Combinations, and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141(R) requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent
consideration is required to be recognized and measured at fair value on the date of
acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation
process required under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair value. SFAS
141(R) requires acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was previously the
case under SFAS 141. Under SFAS 141(R), the requirements of SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized
at fair value, unless it is a non-contractual contingency that is not likely to materialize,
in which case, nothing should be recognized in purchase accounting and, instead, that
contingency would be subject to the probable and estimable recognition criteria of SFAS 5,
Accounting for Contingencies. SFAS 141(R) is expected to have a significant impact on the
Companys accounting for business combinations closing on or after January 1, 2009. |
|
|
|
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140, requiring 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. Adoption of SFAS No. 155 on January 1, 2007, did not impact 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, requiring the separate recognition of servicing assets
or liabilities. Under SFAS No. 156, all separately recognized servicing assets or liabilities
are initially measured at fair value with subsequent measurements of each class of separately
recognized servicing assets and liabilities using either the amortization method or a fair
value measurement method. The Company elected to continue to follow the amortization method
for subsequent measurement of servicing assets. Adoption of SFAS No. 156 on January 1, 2007,
did not impact the consolidated financial statements, results of operations or liquidity of
the Company. |
|
|
|
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 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. |
-86-
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. 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 benefit plans as an asset or a liability in the statement of
financial position. The funded status is measured as the difference between plan assets at
fair value and the benefit obligation (the projected benefit obligation for pension plans or
the accumulated benefit obligation for other postretirement benefit plans). An employer is
also required to measure the funded status of a plan as of the date of its year-end statement
of financial position with changes in the funded status recognized through comprehensive
income. SFAS 158 also requires certain disclosures regarding the effects on net periodic
benefit cost for the next fiscal year that arise from delayed recognition of gains or losses,
prior service costs or credits, and the transition asset or obligation. Adoption of the
recognition provisions of SFAS No. 158 in December 31, 2007 did not have a significant impact
on the Companys consolidated financial statements, results of operations or liquidity. See
Note 14 Employee Benefit Plans for additional information regarding the Companys defined
benefit postretirement benefit plan. The requirement to measure plan assets and benefit
obligations as of the date of the year-end statement of financial position is effective for
the Companys financial statements beginning December 31, 2009. The Company currently
measures its defined benefit postretirement benefit plan assets and obligations as of its
fiscal year end. |
|
|
|
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, permitting 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 adoption of SFAS No. 159 will not have a significant impact on the Companys
consolidated financial statements, results of operations or liquidity. |
|
|
|
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51, establishing accounting and reporting
standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is
sometimes referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated financial
statements. Among other requirements, SFAS 160 requires consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income statement, of
the amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS No. 160 is effective for the Company on January 1, 2009, with earlier adoption
prohibited. The Company does not expect adoption of SFAS No. 160 to have a significant impact
on its consolidated financial statements, results of operations or liquidity. |
|
|
|
Financial Accounting Standards Board Staff Positions and Interpretations. In June 2006, the
FASB issued FIN 48. Under FIN 48, tax positions are initially 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. The adoption of FIN 48 on January 1, 2007 did not significantly impact
the Companys consolidated financial statements, results of operations or liquidity. |
|
|
|
In May, 2007, the FASB issued FASB Staff Position No. 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP 48-1). FSP 48-1 provides guidance on how to determine whether a
tax position is effectively settled for the purpose of recognizing previously unrecognized tax
benefits. FSP 48-1 was effective retroactively to January 1, 2007 and did not significantly
impact the Companys consolidated financial statements, results of operations or liquidity. |
|
|
|
Emerging Issues Task Force. 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 the recognition of a |
-87-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
liability and related compensation
expense for endorsement split-dollar life insurance policies that provide a benefit to an
employee that extends to postretirement periods. Under EITF 06-4, life insurance policies
purchased for the purpose of providing such benefits do not effectively settle an entitys
obligation to the
employee. Accordingly, the entity must recognize a liability and related compensation expense
during the employees active service period based on the future cost of insurance to be
incurred during the employees retirement. If the entity has agreed to provide the employee
with a death benefit, then the liability for the future death benefit should be recognized by
following the guidance in SFAS 106, Employers Accounting for Postretirement Benefits Other
Than Pensions. The provisions of EITF 06-4 are effective for the Company on January 1, 2008,
and will be applied as a change in accounting principle through a cumulative-effect adjustment
to retained earnings. The amount of the cumulative-effect adjustment to retained earnings is
not expected to be significant. |
|
|
|
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, requiring 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 adoption of EITF 06-5 on January 1, 2007 did not impact the
Companys consolidated financial statements, results of operations or liquidity. |
|
|
|
In March 2007, the EITF reached a final consensus on Issue No. 06-10 (EITF 06-10),
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements. EITF 06-10 requires employers to
recognize a liability for the post-retirement benefit related to collateral assignment
split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No.
12. EITF 06-10 also requires employers to recognize and measure an asset based on
the nature and substance of the collateral assignment split-dollar life insurance
arrangement. The provisions of EITF 06-10 are effective for the Company on January 1, 2008,
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 as a change in
accounting principle through retrospective application to all prior periods. Adoption of EITF
06-10 on January 1, 2008, will not impact the Companys consolidated financial statements,
results of operations or liquidity. |
|
|
|
In June 2007, the EITF reached a final consensus on Issue No. 06-11 (EITF 06-11),
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11
requires realized income tax benefits from dividends paid to employees for equity classified
nonvested equity shares to be recognized as an increase in additional paid in capital and be
included in the pool of excess tax benefits available to absorb potential future tax
deficiencies on share-based payment awards. The provisions of EITF 06-11 are to be applied
prospectively to the income tax benefits resulting from dividends declared in fiscal years
beginning after December 15, 2007. The Company does not expect adoption of EITF 06-11 to
have a significant impact on its consolidated financial statements, results of operations or
liquidity. |
|
|
|
SEC Staff Accounting Bulletins. In November 2007, the SEC issued Staff Accounting Bulletin
No. 109 (SAB 109), Written Loan Commitments Recorded at Fair Value Through Earnings. SAB
109 supersedes SAB 105, Application of Accounting Principles to Loan Commitments, and
indicates that the expected net future cash flows related to the associated servicing of the
loan should be included in the measurement of all written loan commitments that are accounted
for at fair value through earnings. The guidance in SAB 109 is applied on a prospective basis
to derivative loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. SAB 109 is not expected to have a significant impact on the Companys consolidated
financial statements, results of operations or liquidity. |
-88-
|
|
|
|
|
|
|
(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 |
|
|
|
2.1(1) |
|
Stock Purchase Agreement dated as of September 18, 2007, by and between First
Interstate BancSystem, Inc. and First Western Bancorp., Inc. |
|
|
|
2.2(2) |
|
First Amendment to Stock Purchase Agreement dated as of January 10, 2008, between
First Interstate BancSystem, Inc. and Christen Group, Inc. formerly known as First
Western Bancorp., Inc. |
|
|
|
3.1(3) |
|
Restated Articles of Incorporation dated February 27, 1986 |
|
|
|
3.2(4) |
|
Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 |
|
|
|
3.3(4) |
|
Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 |
|
|
|
3.4(5) |
|
Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 |
|
|
|
3.5 |
|
Articles of Amendment to Restated Articles of Incorporation dated January 9, 2008. |
|
|
|
3.6(6) |
|
Restated Bylaws of First Interstate BancSystem, Inc. dated July 29, 2004 |
|
|
|
4.1(7) |
|
Specimen of common stock certificate of First Interstate BancSystem, Inc. |
|
|
|
4.2 |
|
Specimen of Series A preferred stock certificate of First Interstate BancSystem, Inc. |
|
|
|
4.3(3) |
|
Shareholders Agreement for non-Scott family members |
|
|
|
4.4(8) |
|
Shareholders Agreement for non-Scott family members dated August 24, 2001 |
|
|
|
4.5(9) |
|
Shareholders Agreement for non-Scott family members dated August 19, 2002 |
|
|
|
4.6(10) |
|
First Interstate Stockholders Agreements with Scott family members dated
January 11, 1999 |
|
|
|
4.7(10) |
|
Specimen of Charity Shareholders Agreement with Charitable Shareholders |
|
|
|
10.1(2) |
|
Credit Agreement dated as of January 10, 2008, among First Interstate
BancSystem, Inc., as Borrower; Various Lenders; and Wells Fargo Bank, National
Association, as Administrative Agent. |
|
|
|
10.2(2) |
|
Security Agreement dated as of January 10, 2008, between First Interstate
BancSystem, Inc. and Wells Fargo Bank, National Association, as Administrative
Agent. |
|
|
|
10.3(2) |
|
Credit Agreement Re: Subordinated Term Note dated as of January 10, 2008,
between First Interstate BancSystem, Inc. and First Midwest Bank. |
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10.4(3) |
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Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank
Montana and addendum thereto |
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10.5(3) |
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Stock Option and Stock Appreciation Rights Plan of First Interstate
BancSystem, Inc., as amended |
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10.6(11) |
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2001 Stock Option Plan |
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10.7(12) |
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Employee Stock Purchase Plan of First Interstate BancSystem, Inc., as amended
and restated effective April 30, 2003 |
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10.8(13) |
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Trademark License Agreements between Wells Fargo & Company and First Interstate
BancSystem, Inc. |
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10.9(14) |
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Employment Agreement between First Interstate BancSystem, Inc. and Lyle R.
Knight |
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10.10 (14) |
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First Interstate BancSystem, Inc. Executive Non-Qualified
Deferred Compensation Plan dated November 20, 1998 |
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10.11(15) |
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First Interstate BancSystems Deferred Compensation Plan dated December 6,
2000 |
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10.12(8) |
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First Interstate BancSystem, Inc. 2004 Restricted Stock Award Plan
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10.13(16) |
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Form of First Interstate BancSystem, Inc. Restricted Stock Award Agreement |
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10.14(16) |
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Form of First Interstate BancSystem, Inc. Restricted Stock Award Notice of
Restricted Stock Award |
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10.15(17) |
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First Interstate BancSystem, Inc. 2006 Equity Compensation Plan
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-89-
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12.1 |
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Statement Regarding Computation of Ratio of Earnings to Fixed Charges |
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14.1(18) |
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Code of Ethics for Chief Executive Officer and Senior Finance Officers of First
Interstate BancSystem, Inc. |
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21.1 |
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Subsidiaries of First Interstate BancSystem, Inc. |
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23.1 |
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Consent of McGladrey & Pullen LLP, Independent Registered Public
Accounting Firm |
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31.1 |
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Certification of Annual Report on Form 10-K pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 by Chief Executive Officer |
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31.2 |
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Certification of Annual Report on Form 10-K pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 by Chief Financial Officer |
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32 |
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Certification of Annual Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
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Management contract or compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to the Registrants Form 8-K dated
September 18, 2007. |
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(2) |
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Incorporated by reference to the Registrants Form 8-K dated
January 10, 2008. |
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(3) |
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Incorporated by reference to the Registrants Registration Statement on Form S 1, No. 33-84540. |
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(4) |
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Incorporated by reference to the Registrants Form 8-K dated October 1, 1996. |
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(5) |
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Incorporated by reference to the Registrants Registration Statement on Form S 1, No. 333-37847. |
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(6) |
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Incorporated by reference to Registrants Post-Effective
Amendment No. 4 to Registration Statement of Form S-8, No. 333-76825. |
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(7) |
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Incorporated by reference to the Registrants Registration
Statement on Form S 1, No. 333-3250. |
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(8) |
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