<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _______ to _______
COMMISSION FILE NUMBER 333-3250
First Interstate BancSystem of Montana, Inc.
---------------------------------------------
(Exact name of registrant as specified in its charter)
Montana 81-0331430
------------------------------- ---------------------
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
PO Box 30918, 401 North 31st Street, Billings, MT 59116-0918
------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 406/255-5300
------------
N/A
-----------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days Yes /X/ No / /
The number of shares of Registrant's common stock outstanding on October 15,
1996, was 1,980,858. The number of shares of Registrant's noncumulative
preferred stock with a stated value of $1,000 per share issued on October 1,
1996 and outstanding on October 15, 1996 was 20,000.
1
(Total of 20 Pages)
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC.
Quarterly Report on Form 10-Q
INDEX PAGE
----- ----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, 1996, and December 31, 1995 3
Consolidated Statements of Income
Three months ended September 30, 1996
and 1995, and Nine months ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996
and 1995 5
Notes to Unaudited Consolidated Financial
Statements 7
Item 2 - Managements' Discussion and Analysis of
Financial Condition and Results of
Operations 13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 18
Item 3 - Defaults upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of
Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 91,620 98,622
Interest bearing deposits in banks 6,035 23,040
Federal funds sold 22,555 44,420
Investment securities:
Available-for-sale 64,583 65,790
Held-to-maturity 171,407 192,947
---------- ---------
235,990 258,737
Loans, net 948,091 870,378
Less allowance for loan losses (note 5) 15,916 15,171
---------- ---------
Net loans 932,175 855,207
Premises and equipment, net 33,937 32,540
Accrued interest receivable 16,146 14,344
Excess of purchase price over equity in net assets of
subsidiaries less accumulated amortization of $5,240
at September 30, 1996 (unaudited) and $4,630
at December 31, 1995 9,615 10,221
Other real estate owned, net (note 6) 1,394 1,349
Deferred tax asset 5,921 4,432
Other assets 8,664 8,303
---------- ---------
$1,364,052 1,351,215
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing 217,196 230,136
Interest bearing 889,611 868,933
---------- ---------
Total deposits 1,106,807 1,099,069
Federal funds purchased -- 3,125
Securities sold under repurchase agreements 99,774 104,898
Accounts payable and accrued expenses 13,919 13,396
Other borrowed funds 10,790 5,494
Long-term debt 10,234 15,867
---------- ---------
Total liabilities 1,241,524 1,241,849
Commitments and contingencies (note 8)
Stockholders' equity (note 4):
Preferred stock without voting rights; authorized
100,000 shares; none issued at September 30, 1996
(unaudited) and December 31, 1995 -- --
Common stock without par value; authorized 5,000,000
shares; issued 1,981,191 shares at September 30, 1996
(unaudited) and 1,947,760 shares at December 31, 1995 9,172 6,692
Retained earnings 113,300 102,281
Unrealized gain on investment securities
available-for-sale 56 393
---------- ---------
Total stockholders' equity 122,528 109,366
---------- ---------
$1,364,052 1,351,215
---------- ---------
---------- ---------
Book value per common share $61.85 56.15
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
Ended September 30, Ended September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 23,509 21,836 68,109 61,770
Interest and dividends on investment securities:
Taxable 3,187 2,843 10,118 9,150
Exempt from Federal taxes 243 225 741 551
Interest on deposit with banks 43 18 268 52
Interest on Federal funds sold 239 585 839 1,196
---------- --------- --------- ---------
Total interest income 27,221 25,507 80,075 72,719
---------- --------- --------- ---------
Interest expense:
Interest on deposits 9,794 9,536 29,250 26,010
Interest on Federal funds purchased 178 11 437 984
Interest on securities sold under repurchase agreements 1,049 931 3,155 2,418
Interest on other borrowed funds 88 89 229 223
Interest on long-term debt 246 376 835 823
---------- --------- --------- ---------
Total interest expense 11,355 10,943 33,906 30,458
---------- --------- --------- ---------
Net interest income 15,866 14,564 46,169 42,261
Provision for loan losses (note 5) 700 490 1,852 1,270
---------- --------- --------- ---------
Net interest income after provision for
loan losses 15,166 14,074 44,317 40,991
Other operating income:
Income from fiduciary activities 659 661 2,182 1,964
Service charges on deposit accounts 1,851 1,699 5,369 4,844
Data processing 1,781 1,650 5,603 4,540
Other service charges, commissions, and fees 732 788 2,025 2,111
Net investment securities gains (losses) -- 4 2 (6)
Other income 318 210 900 646
---------- --------- --------- ---------
Total other operating income 5,341 5,012 16,081 14,099
---------- --------- --------- ---------
Other operating expenses:
Salaries and wages 5,089 4,967 14,986 14,048
Employee benefits 1,272 1,078 3,935 3,557
Occupancy expense, net 1,019 1,007 3,059 2,893
Furniture and equipment expenses 1,532 1,347 4,283 3,910
Other real estate expense (income), net (3) (82) (162) (477)
FDIC insurance 1 (40) 4 1,046
Other expenses 3,148 3,448 9,160 9,388
---------- --------- --------- ---------
Total other operating expenses 12,058 11,725 35,265 34,365
---------- --------- --------- ---------
Income before income taxes 8,449 7,361 25,133 20,725
Income tax expense 3,237 2,835 9,651 7,998
---------- --------- --------- ---------
Net income $ 5,212 4,526 15,482 12,727
---------- --------- --------- ---------
---------- --------- --------- ---------
Income per common share $2.63 2.30 7.89 6.48
---------- --------- --------- ---------
---------- --------- --------- ---------
Dividends paid per common share $ .76 .56 2.28 1.33
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average common shares outstanding 1,988,085 1,959,714 1,970,445 1,962,632
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
Ended September 30,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 75,349 66,633
Service charges, commissions and fees received, and other income 16,764 14,550
Interest paid (34,546) (28,688)
Cash paid to suppliers and employees (33,257) (29,558)
Federal and state income taxes paid (8,913) (7,357)
Other operating cash receipts 3,082 2,610
-------- -------
Net cash provided by operating activities 18,479 18,190
-------- -------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (50,164) (34,360)
Available-for-sale (11,509) --
-------- -------
(61,673) (34,360)
Proceeds from maturities and pay downs of investment securities:
Held-to-maturity 70,673 74,445
Available-for-sale 12,352 6,270
-------- -------
83,025 80,715
Sales of investment securities:
Held-to-maturity -- --
Available-for-sale -- --
-------- -------
-- --
Acquisitions of subsidiaries, excluding cash and cash equivalents -- (10,747)
Decrease (increase) in interest bearing deposits in banks 17,005 10
Extensions of credit to customers, net of repayments (80,325) (46,305)
Recoveries on loans charged-off 909 794
Proceeds from sale of other real estate owned 796 1,253
Capital expenditures, net (4,252) (4,415)
-------- -------
Net cash used by investing activities (44,515) (13,055)
-------- -------
Cash flows from financing activities:
Net increase in deposits 7,738 35,494
Net increase (decrease) in federal funds and repurchase agreements (8,249) 6,778
Net increase in other borrowed funds 5,296 4,423
Proceeds from long-term borrowings 424 13,369
Repayment of long-term debt (6,057) (1,566)
Proceeds from issuance of common stock 3,478 322
Payments to retire common stock (998) (930)
Dividends paid on common stock (4,463) (2,602)
-------- -------
Net cash provided (used) by financing activities (2,831) 55,288
-------- -------
Net increase (decrease) in cash and cash equivalents (28,867) 60,423
Cash and cash equivalents at beginning of period 143,042 84,657
-------- -------
Cash and cash equivalents at end of period $114,175 145,080
-------- -------
-------- -------
</TABLE>
(Continued)
5
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
Ended September 30,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 15,482 12,727
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and other real estate losses 1,831 1,229
Depreciation and amortization 3,464 3,196
Net premium amortization on investment securities 843 1,282
Losses (gains) on sale of investments (2) 6
Gain on sale of other real estate owned (229) (527)
Loss (gains) on sales of property and equipment 4 (1)
Provision for deferred income taxes (1,274) 372
Increase in interest receivable (1,802) (4,313)
(Increase) decrease in other assets (361) 386
Increase in accounts payable and accrued expenses 523 3,833
-------- -------
Net cash provided by operating activities $ 18,479 $18,190
-------- -------
-------- -------
</TABLE>
Noncash Investing and Financing Activities:
The Company transferred loans of $569 and $232 to other real estate owned
during the nine months ended September 30, 1996 and 1995 (unaudited),
respectively.
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (all of which are of a normal
recurring nature) necessary to present fairly the consolidated financial
position at September 30, 1996, and the results of consolidated operations
for each of the three and nine month periods and cash flows for each of the
nine month periods ended September 30, 1996 and 1995 in conformity with
generally accepted accounting principles. The balance sheet information at
December 31, 1995 is derived from audited consolidated financial
statements.
The 1995 consolidated financial statements have been reclassified to
conform to the 1996 consolidated financial statement presentations.
(2) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold for
one-day-periods.
(3) COMPUTATION OF EARNING PER SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period presented. Stock options outstanding are considered common stock
equivalents, and are included in computations of weighted average shares
outstanding.
(4) CASH DIVIDENDS
On October 15, 1996, the Company declared and paid a cash dividend on
third quarter earnings of $.79 per share to stockholders of record on that
date. It has been the Company's practice to pay quarterly dividends based
upon earnings. The October 1996 dividend represents 30% of the Company's
net income for the quarter ended September 30, 1996.
7
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized
below:
<TABLE>
<CAPTION>
For the three months For the nine months
Ended September 30, Ended September 30,
------------------------ --------------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Balance at beginning of period $15,406 15,124 15,171 13,726
Beginning allowance of acquired
banks -- -- -- 917
Provision during the period 700 490 1,852 1,270
------- ------ ------ ------
16,106 15,614 17,023 15,913
Deduct:
Loans charged off 451 630 2,017 1,465
Recoveries of loans previously
charged off (261) (258) (910) (794)
------- ------ ------ ------
Net chargeoffs 190 372 1,107 671
------- ------ ------ ------
Balance at end of period $15,916 15,242 15,916 15,242
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
(6) OTHER REAL ESTATE OWNED (OREO)
Other real estate consists of the following:
September 30, December 31,
1996 1995
------------- ------------
Other real estate $1,905 1,903
Less allowance for OREO losses 511 554
------ -----
$1,394 1,349
------ -----
------ -----
8
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
Transactions in the allowance for OREO losses were as follows:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Balance at beginning of period $548 571 554 1,048
Provision (reversal) during the period (21) (1) (21) (41)
Property writedowns -- (28) -- (449)
Losses on disposition (16) -- (22) (16)
---- --- --- ---
Balance at end of period $511 542 511 542
---- --- --- ---
---- --- --- ---
The changes in the balance of other real estate for the nine months ended
September 30, 1996 and 1995 can be summarized as follows:
Nine Months Ended September 30,
1996 1995
------ ------
Balance at beginning of period $1,903 2,851
Add transfers from loans 569 232
Add cash improvements -- --
Cash proceeds from sales 796 1,253
Less gains on sales 229 527
------ -----
Net basis of OREO sold (567) (726)
Write-offs -- (449)
------ -----
Balances, end of period $1,905 1,908
------ -----
------ -----
(7) ACQUISITIONS
In November 1995, the Company filed an application with the Office of
Thrift Supervision for permission to form a de novo savings bank in
Hamilton, Montana. The Company has received regulatory approval, and
intends to initially capitalize the new institution at $2,000 from
existing cash. Opening of the savings bank is currently expected to
occur in the fourth quarter of 1996.
9
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
On October 1, 1996, the Company completed the purchase of all of the
outstanding stock of First Interstate Bank of Montana, N.A., which has
offices in the Montana communities of Kalispell, Great Falls, and Cut Bank,
and all of the outstanding stock of First Interstate Bank of Wyoming, N.A.,
which has offices in the Wyoming communities of Casper, Riverton, and
Laramie. Total assets of the banks acquired were approximately $550,000.
The banks were purchased from Wells Fargo & Company for a total cash
purchase price of $72,000, subject to adjustment, up or down, to the extent
the historical net book value of the banks acquired at closing, excluding
net income tax assets and seller's "push down" purchase accounting
adjustments are greater or less than $35,832. Such purchase price
adjustment is to be computed and settled between the parties in the fourth
quarter, 1996, and is expected to be less than $1,000.
For accounting purposes, the acquisition will be accounted for as a
purchase. Adjustments to the fair value of the net assets acquired will be
"pushed down" to the respective banks acquired. Although the acquisition
will be accomplished through the purchase of stock, the transaction will be
treated as a purchase of assets and assumption of liabilities for income
tax purposes.
The purchase was funded through a combination of $20 million perpetual
preferred stock, $20 million subordinated debentures and $31 million
additional senior term debt. Additional financing and acquisition costs of
approximately $2,129 were funded from working capital.
(8) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is named or threatened
to be named as defendant in various lawsuits, some of which involve claims
for substantial amounts of actual and/or punitive damages. With respect to
each of these suits it is the opinion of management, following consultation
with legal counsel, the suits are without merit or in the event the
plaintiff prevails, the ultimate liability or disposition thereof will not
have a material adverse effect on the consolidated financial condition or
the results of operations.
The Parent Company and each of its subsidiary banks have been
franchisees of First Interstate Bancorp pursuant to a master franchise
agreement that was initiated in 1983 for a thirty year primary term which
required the payment of certain royalties. Wells Fargo & Company ("Wells")
acquired First Interstate Bancorp, the Company's franchisor, effective
April 1, 1996. Further, the names of First Interstate Bancorp's banking
subsidiaries are being changed to Wells Fargo. On May 24, 1996, the
Company and Wells entered into a trademark license agreement granting the
Company and its subsidiaries an exclusive, nontransferable license to use
the "First Interstate" name and logo in certain states, and the franchise
agreement was terminated (see Note 7).
10
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
During 1985, the Company entered into a partnership agreement with two
outside parties for the purpose of acquiring certain land and constructing
a building with an aggregate cost of approximately $20,000. The Company is
a tenant in the building and owns a 50% undivided interest in the property.
The remaining term debt of the partnership of $10,925 at September 30, 1996
is guaranteed by each of the partners.
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, in
varying degrees, elements of credit and interest rate risk in excess of
amounts recorded in the consolidated balance sheet.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. Most commitments extend for no more than
two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds various collateral supporting those
commitments for which collateral is deemed necessary.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
(9) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities", which provides guidance on accounting for transfers and
servicing of financial assets, recognition and measurement of servicing
assets and liabilities, financial assets subject to prepayment, secured
borrowings and collateral, and extinguishment of liabilities.
11
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
SFAS No. 125 generally requires that the Company recognize as separate
assets the rights to service mortgage loans for others, whether the
servicing rights are acquired through purchases or loan originations.
Servicing rights are initially recorded at fair value based upon the
present value of estimated future cash flows. Subsequently, the servicing
rights are assessed for impairment, which is recognized in the statement of
income in the period the impairment occurs. For purposes of performing the
impairment evaluation, the related portfolio must be stratified on the
basis of certain risk characteristics including loan type and note rate.
SFAS No. 125 also specifies that financial assets subject to prepayment,
including loans that can be contractually prepaid or otherwise settled in
such a way that the holder would not recover substantially all of its
recorded investment, be measured like debt securities available-for-sale or
trading securities under SFAS No. 115, as amended by SFAS No. 125. The
provisions of SFAS No. 125 apply to transactions occurring after December
31, 1996. The Company intends to adopt the provisions of SFAS No. 125 on
January 1, 1997, and management expects adoption will not have a material
effect on the financial position or results of operations of the Company.
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
(1) MATERIAL CHANGES IN FINANCIAL CONDITION. COMPARISON OF BALANCE SHEET ITEMS
AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995.
GENERAL. During the nine month period ending September 30, 1996, total
assets increased slightly from $1,351,215 at December 31, 1995 to $1,364,052
at September 30, 1996. As compared to the same date in 1995, total assets at
September 30, 1996 have increased $73,541 or 5.7%, principally as a result
of internal growth.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at September 30, 1996,
consisting of cash on hand, amounts due from banks and federal funds sold for
one day periods, decreased $28,867 or 20.2% from December 31, 1995. In part,
this decrease is associated with the seasonal fluctuations in customer demand
deposits at the Company's banking subsidiaries. Federal funds sold balances
decreased $21,865 or 49.2% from December 31, 1995 as excess funds were
invested in higher yielding loans.
INTEREST BEARING DEPOSITS IN BANKS. Interest bearing deposits in banks, of
which $22,007 were deposits with the Federal Home Loan Bank of Seattle
("FHLB") at December 31, 1995, decreased to $6,035 at September 30, 1996 as
funds previously on deposit with the FHLB have been withdrawn to provide
additional liquidity to fund increases in other earning assets, principally
loans.
INVESTMENT SECURITIES. Investment securities decreased $22,747 or 8.8% from
$258,737 at December 31, 1995 to $235,990 at September 30, 1996 as some of
the proceeds from maturities and scheduled pay downs of investment securities
were used to fund increases in loans. There were no trading securities held
during the period, and no sales of investments held as available-for-sale.
A slight increase in market interest rates in 1996 has resulted in lower
market values of securities classified as available-for-sale. Net unrealized
gains on investments available-for-sale, net of related deferred tax expense,
were $56 at September 30, 1996, a net valuation decline of $337 from net
unrealized gains of $393 at December 31, 1995. As a percentage of total
securities available-for-sale at December 31, 1995, the net valuation
decline is .5%.
LOANS. Net loans increased $76,968 or 9.0% during the first nine months of
1996 from consolidated net loans of $855,207 at December 31, 1995 to $932,175
at September 30, 1996. The Company experienced increased loan volumes in all
major categories of loans during the period, with the most significant
increases in commercial and consumer which were up $42,124 and $22,100,
respectively. Increases in loan demand are attributed to continued strong
economic conditions in the communities served by the Company, as well as some
seasonal increases, particularly in agricultural lending, following
traditional pay downs in the fourth quarter.
13
<PAGE>
LONG TERM DEBT AND OTHER BORROWED FUNDS. During the first nine months of
1996, the Company's long term indebtedness was reduced $5,633 or 35.5% from
$15,867 at December 31, 1995 to $10,234 at September 30, 1996, $5,000 of
which was the prepayment of a FHLB note due June 2, 1997 by the Company's
Wyoming banking subsidiary. During the same period, other borrowed funds
increased $3,814 or 69.4% from $5,494 to $9,308. The increase in other
borrowed funds, principally interest bearing demand notes issued to the
United States Treasury, is seasonal in nature and unrelated to the repayment
of the FHLB note.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS. COMPARISON OF THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.
GENERAL. On May 19, 1995, the Company acquired all of the outstanding
ownership of First Park County Bancshares, Inc. ("FPCBI") and its bank
subsidiary First National Park Bank ("FNPB") with its two branch locations in
Livingston and Gardiner, Montana. FPCBI was subsequently dissolved and FNPB
was merged into the Company's existing Montana banking subsidiary.
Accordingly, the results of operations for the nine months ended September
30, 1995 only include revenues and expenses for the Livingston and Gardiner
branches for roughly half the 1995 period compared to inclusion for the
entire nine month period in 1996. While comparisons of individual revenue
sources and expenses may be affected by the acquisition, the additional net
income related to the inclusion of Livingston and Gardiner branches for all
of 1996 is largely offset by increased interest expense and reduced
investment income at the Parent Company as the result of borrowings and the
liquidation of short term investments to fund the acquisition, as well as the
increased expense related to the amortization of goodwill.
NET INCOME. Net income for the nine months ended September 30, 1996 and 1995
was $15,482 and $12,727, respectively, an increase of $2,755 or 21.6% in
1996. The increase was principally due to increases in net interest income
and noninterest income, and the substantial reduction of FDIC premiums in
1996.
NET INTEREST INCOME. Net interest income for the nine months ended September
30, 1996 and 1995 was $46,169 and $42,261, respectively, an increase in 1996
of $3,908 or 9.2%. The primary components of the increase in net interest
income are growth in the overall volume of earning assets and a shift in the
mix of earning assets towards higher yielding loans with related loan fee
income.
Average loans outstanding, the largest single component of average earning
assets, were $913,482 for the first nine months of 1996, up $85,963 or 10.4%
from average loans of $827,519 for the comparable period in 1995. While
average loans increased, in part due to the additions of the Livingston and
Gardiner branches in May 1995, the increase in average loans is primarily the
result of internal growth. This higher level of loans will continue to
provide support for the net interest margin.
Customer loan fees, included in interest income for financial reporting
purposes, were $3,768 for the nine months ended September 30, 1996, up $701
or 22.9% from $3,067 in the first nine months of 1995. Although partially
the result of the acquisition of the Livingston and Gardiner branches in May
1995, the increase in loan fees is primarily the result of an increase in
real estate loan fees which were $1,614 in 1996 as compared to $1,207 in
1995 (up $407 or 33.7%). New real estate loans and refinancing of existing
loans declined in the first half of the 1995, but began to rise again in the
third quarter of 1995 and through the first half of 1996 as real estate loan
activity rebounded in the markets served by the Company. While increases in
real estate loan fees leveled off in the third quarter of 1996, increases in
loan volumes in other categories of loans also contributed to the increase in
customer loan fees between periods.
14
<PAGE>
Maintaining steady growth in net interest income is one of the Company's
primary objectives and is monitored through the Company's asset/liability
management process. The Company has historically achieved this objective, in
part as a result of having systems, procedures, and products in place to
manage and promote balance sheet growth, maintain a strong net interest
margin and remain competitively priced. Management believes the Company, as
in the past, is well positioned to maintain its solid growth in net interest
income.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1,852 and
$1,270 for the nine months ended September 30, 1996 and 1995, respectively,
an increase of $582 or 45.8%. This increase in loan loss provision is
associated with the increased volumes of loans outstanding, as well as the
increase in net chargeoffs that has occurred in 1996 which is an indicator of
a slight deterioration in loan quality, principally consumer loans. Loan
loss provisions are reflective of management's evaluation of the risks
inherent in the loan portfolio and current economic conditions. While
management has made modest increases in loan loss provisions as related to
current levels of problem and classified credits in 1996, a significant shift
in economic trends and/or increased volumes of problem credits or charge-offs
would likely require increased loan loss provisions in the future.
NON-INTEREST INCOME. Total non-interest income increased $1,982 or 14.1%
from $14,099 to $16,081 for the nine months ended September 30, 1995 and
1996, respectively. Of this increase, approximately $200 is associated with
addition of the Livingston and Gardiner branches in May 1995. Income from
data processing services increased $1,063 or 23.4% from $4,540 to $5,603 for
the first nine months of 1995 and 1996, respectively. Revenues from the
Company's Trust division also contributed to the overall increase in
noninterest income in the first nine months of 1996, up $218 or 11.1% from
$1,964 to $2,182 for the nine month periods ending September 30, 1995 and
1996, respectively.
The primary increase in data processing income was the result of increases in
data processing customers and the resulting increase in transaction volumes.
The Company's data processing division has continued to expand its serviced
ATM network, which increased 59% during all of 1995, and has increased an
additional 10% in the first nine months of 1996. Although it has not grown
as rapidly as the ATM network, the customer base and related transaction
volumes for regular data processing services have also increased from prior
year levels. Expansion of both regular data processing services and the
Company's serviced ATM network have continued through the first nine months
of 1996, however, has begun to level off and future growth in data processing
revenues is not assured. Increases in data processing revenues as the result
of expansion of the data division's customer base have been partially offset
by increases in operating expenses. On a pretax basis, data processing
division revenues, net of its direct operating expenses for the first nine
months of 1996 have increased $466 or 25.3% over the comparable period of
1995.
Increases in revenues from fiduciary activities were the result of growth in
the value of existing trust accounts upon which fees for services are based,
growth in the Trust division's customer base and an increase in the Trust
division's fee schedule.
NON-INTEREST EXPENSES. Overall, non-interest expenses increased $900 (2.6%)
from $34,365 for the nine months ended September 30, 1995 to $35,265 for the
comparable period of 1996. Inflationary increases in expenses, as well as
the increases in expenses associated with the additions of the Livingston
and Gardiner branches, were largely offset by a substantial reduction of FDIC
premiums between periods.
15
<PAGE>
Other real estate expenses, net of gains on sales of properties held that are
included with expenses for reporting purposes, netted to revenue of $477 for
the first nine months of 1995 as compared to net revenue of $162 for the
first nine months of 1996, a net increase in expense of $315 in 1996 due to
diminished sales activity in 1996 as numbers of other real estate properties
held have declined.
FDIC insurance premiums were only $4 for the first nine months of 1996
compared to $1,046 for the first nine months of 1995 as the result of the
substantial reductions in rates assessed on deposits by the FDIC in the last
half of 1995. FDIC insurance costs for the full twelve months of 1995 were
$1,127. The FDIC has announced increased rates which will increase annual
costs, including costs of the two new banking subsidiaries acquired October
1, 1996, to approximately $250.
Other changes in non-interest expenses, adjusted for the increases associated
with the additions of the branches in Livingston and Gardiner, were
principally the result of inflationary increases in costs and were not
individually significant.
MATERIAL CHANGES IN RESULTS OF OPERATIONS. COMPARISON OF THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.
NET INCOME. Net income for the three months ended September 30, 1996 and
1995 was $5,212 and $4,526, respectively, an increase of $686 or 15.2% in
1996. The increase was principally due to increases in net interest income
and noninterest income.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 1996 and 1995 was $15,866 and $14,564, respectively, an
increase of $1,302 or 8.9% in 1996. The increase is the result of an
increase in total interest income of $1,714, offset by an increase in total
interest expense of $412.
The primary components of the increase in interest income between periods are
growth in the overall volume of earning assets and a shift in the mix of
earning assets as funds from maturing investment securities have been
reinvested in higher yielding loans. Average loans outstanding of $944,439
for the quarter ended September 30, 1996 were up $78,607 or 9.1% from average
loans of $865,832 for the quarter ended September 30, 1995, and up $24,880 or
2.7% from average loans in the second quarter of 1996. This significantly
higher level of loans continues to provide support for the net interest
margin.
Customer loan fees, which are included in interest income for financial
reporting purposes, were $1,204 for the three months ended September 30,
1996, $123 or 11.4% greater than loan fees of $1,081 recorded in the third
quarter of 1995, but slightly less than the $1,262 in the second quarter of
1996. The increase in loan fees is principally due to increases in consumer
and commercial loan fees which increased $75 (20.5%) and $40 (24.5%),
respectively. Real estate loan fees were down slightly for the three months
ended September 30, 1996 as compared to both the second quarter of 1996 and
the third quarter of 1995 as the demand for new real estate loans and
refinancing of existing loans has leveled off.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses for the
three months ended September 30, 1996 was $700, up from last quarter's
provision of $661 and $210 more than recorded in the third quarter of 1995.
The increased loan loss provision is reflective of management's decision to
increase the allowance for possible loan losses in response to the large
increase in outstanding loan volumes, current economic conditions and
management's evaluation of the risks inherent in the loan portfolio.
16
<PAGE>
NON-INTEREST INCOME. Total non-interest income increased $329 or 6.6% from
$5,012 to $5,341 for the three months ended September 30, 1995 and 1996,
respectively, and was up $146 or 2.8% from last quarter.
Income from data processing services increased $131 or 7.9% from $1,650 in
the third quarter of 1995 to $1,781 for the three months ended September 30,
1996, but were unchanged from the second quarter of 1996. The increase in
data processing income between years is the result of an increase in data
processing customers and the resulting increase in transaction volumes,
particularly as related to unaffiliated ATM locations served by the Company's
ATM network.
Other income increased $108 or 51.4% from $210 for the three months ended
September 30, 1995 to $318 for the third quarter of 1996. The increase in
other income between periods is consistent with the year-to-date increase,
and is primarily due to increased check printing income.
NON-INTEREST EXPENSES. Non-interest expenses increased $333 or 2.8% from
$11,725 for the quarter ended September 30, 1995 to $12,058 for the same
period in 1996.
Salaries and benefits were $6,361 and $6,045 for the three month periods
ended September 30, 1996 and 1995, respectively, an increase of $316 or 5.2%
in 1996. Salaries and benefits in the third quarter were up 1.1% from the
previous quarter. Although principally inflationary in nature, notable
increases between the third quarter periods were an increase of $37 or 22.6%
in Company contributions to the employee savings and profit sharing plan and
an increase of $45 or 10.0% in group insurance costs.
Furniture and equipment expenses increased $187 or 13.7% from $1,347 for the
three months ended September 30, 1995 to $1,532 for the three months ended
September 30, 1996. The increase in furniture and equipment expenses was
primarily the result of additional depreciation and maintenance expenses
associated with data processing equipment upgrades in the Company's Data
division that were placed in service during the second quarter of 1996.
Total costs associated with the upgrade, most of which were capitalized,
aggregated in excess of $3,000. Increased furniture and equipment expenses
are also reflective of upgrades of micro computers and ATM machines
throughout the Company in response to technological advances.
Other real estate expense, recorded net of gains on sales for financial
reporting purposes, represented an increase in expense of $79 as the Company
recorded income of $3 in the third quarter of 1996 as compared to income of
$82 in the third quarter of 1995. The Company recorded net other real estate
income of $70 in the second quarter of 1996. As inventories of properties
held in other real estate have been significantly reduced in the last four
years from historically high levels, sales gains have diminished.
Other variances in non-interest expenses for the third quarter of 1996 as
compared to the third quarter of 1995 and the second quarter of 1996 were
principally the result of inflationary increases in costs, and were not
individually significant.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
On October 1, 1996 the Company issued 20,000 shares of no par
noncumulative 8.53% preferred stock with a stated value of $1,000 per
share. In addition to preferences as to dividends and liquidation
rights, the preferred stock purchase agreement provides that the
Company cannot, without two thirds consent of the holders of the then
outstanding preferred stock, issue any stock senior to this preferred
issuance. Additionally, should the Company fail to pay six full
quarterly dividends to holders of the preferred stock, the preferred
shareholders shall be entitled to elect two directors to the Company's
board of directors to serve thereon until such time as the Company has
paid full dividends to preferred shareholders for four consecutive
quarters.
On October 1, 1996 the Company entered into a new senior debt
agreement with its primary lender. The agreement provides for certain
restrictive financial covenants including requirements that the
Company, on a consolidated basis and measured quarterly, maintain a
total risk based capital ratio of not less than 8.0%, a tier one risk
based capital ratio of not less than 6.0%, a leverage ratio of not
less than 4.5% and a non-performing loan ratio to tangible net worth
of 25% or less. Also, the Company is required to maintain, on a
consolidated basis and at all times, a ratio of net income plus
depreciation expense and amortization expense related to acquisitions
to current maturities of funded debt plus dividends (common and
preferred) of not less than 1.5 to 1. The senior debt agreement also
restricts the payment of common dividends by the Company to
shareholders of no more than 33% of net income in any fiscal year so
long as no events of default, as defined by the agreement, exist. No
dividends shall be paid by the Company if there exists default, as
defined by the agreement.
In addition, each banking subsidiary is required to maintain a return
on average assets of at least .75% and a non-performing loan to total
loans plus other real estate owned of no more than 3.0%, each measured
quarterly. The agreement also limits dividends of subsidiaries to no
more than 100% of the net earnings of the respective subsidiary in a
fiscal year, and requires the lender's consent prior to any subsidiary
stock dividend, stock split or stock redemption.
The senior debt agreement also prohibits the Company, without the
Lender's consent, from entering into any transaction or series of
transactions (including without limitation a sale, tender offer,
merger or consolidation) the result of which being that the Company's
principals and their related parties following such transaction would
own less than 60% of the issued and outstanding shares of stock of the
Company.
18
<PAGE>
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 19, 1996, a special meeting of the Company's shareholders
was held for the purpose of amending its Restated Articles of
Incorporation to allow for the issuance of noncumulative preferred
stock. 1,502,538 shares or 75.8% of the then outstanding 1,981,489
shares were represented at the meeting in person or by proxy.
1,502,522 shares were voted in favor of the amendment and 16 shares
were voted as opposed to the amendment.
ITEM 5 OTHER INFORMATION
Not applicable or not required
ITEM 6 EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits.
3.1.1 Articles of Amendment to Restated Articles of Incorporation
dated September 19, 1996. (Incorporated by reference to
Company's Form 8-K dated October 1, 1996)
4.4 Preferred Stock Purchase Agreement dated September 26, 1996
between First Interstate BancSystem of Montana, Inc. and
First Security Corporation. (Incorporated by reference to
Company's Form 8-K dated October 1, 1996)
10.3 Loan Agreement dated October 1, 1996 between First
Interstate BancSystem of Montana, Inc., as borrower, and
First Security Bank, NA, Colorado National Bank, NA and
Wells Fargo Bank, NA. (Incorporated by reference to
Company's Form 8-K dated October 1, 1996)
10.13 Note Purchase Agreement dated August 30, 1996 between First
Interstate BancSystem of Montana, Inc. and The Montana Board
of Investments. (Incorporated by reference to Company's
Form 8-K dated October 1, 1996)
(b) A report on Form 8-K dated October 1, 1996 was filed by the
Company describing the acquisitions of two banking subsidiaries
of Wells Fargo & Company.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC.
Date November 5, 1996 /s/ WILLIAM H. RUEGAMER
-----------------------------------
William H. Ruegamer
Director, Executive Vice President
and Chief Operating Officer
Date November 5, 1996 /s/ TERRILL R. MOORE
------------------------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES
3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 91,620
<INT-BEARING-DEPOSITS> 6,035
<FED-FUNDS-SOLD> 22,555
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,583
<INVESTMENTS-CARRYING> 171,407
<INVESTMENTS-MARKET> 169,820
<LOANS> 948,091
<ALLOWANCE> 15,916
<TOTAL-ASSETS> 1,364,052
<DEPOSITS> 1,106,807
<SHORT-TERM> 110,564
<LIABILITIES-OTHER> 13,919
<LONG-TERM> 10,234
0
0
<COMMON> 9,172
<OTHER-SE> 113,356
<TOTAL-LIABILITIES-AND-EQUITY> 1,364,052
<INTEREST-LOAN> 68,109
<INTEREST-INVEST> 10,859
<INTEREST-OTHER> 1,107
<INTEREST-TOTAL> 80,075
<INTEREST-DEPOSIT> 29,250
<INTEREST-EXPENSE> 33,906
<INTEREST-INCOME-NET> 46,169
<LOAN-LOSSES> 1,852
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 35,265
<INCOME-PRETAX> 25,133
<INCOME-PRE-EXTRAORDINARY> 15,482
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,482
<EPS-PRIMARY> 7.89
<EPS-DILUTED> 7.89
<YIELD-ACTUAL> 5.15
<LOANS-NON> 4,596
<LOANS-PAST> 3,473
<LOANS-TROUBLED> 1,643
<LOANS-PROBLEM> 16,990
<ALLOWANCE-OPEN> 15,171
<CHARGE-OFFS> 2,017
<RECOVERIES> 910
<ALLOWANCE-CLOSE> 15,916
<ALLOWANCE-DOMESTIC> 2,224
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,692
</TABLE>
