<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 June 30, 1996.
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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COMMISSION FILE NUMBER 333-3250
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 406/255-5300
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N/A
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(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
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The number of shares of Registrant's common stock outstanding on July 15, 1996,
was 1,981,501. No preferred shares are issued or outstanding.
1
(Total of 19 Pages)
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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
June 30, 1996, and December 31, 1995 3
Consolidated Statements of Income
Three months ended June 30, 1996 and 1995, and
Six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
Six months ended June 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 12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 18
Item 3 - Defaults upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------ ---- ----
(Unaudited)
---------
<S> <C> <C>
Cash and due from banks $ 89,546 98,622
Interest bearing deposits in banks 1,033 23,040
Federal funds sold 12,960 44,420
Investment securities:
Available for sale 67,771 65,790
Held-to-maturity 179,546 192,947
----------- -----------
247,317 258,737
Loans, net 940,248 870,378
Less allowance for loan losses (note 5) 15,406 15,171
----------- -----------
Net loans 924,842 855,207
Premises and equipment, net 33,722 32,540
Accrued interest receivable 15,688 14,344
Excess of purchase price over equity in net assets of
subsidiaries less accumulated amortization of
$5,034 at June 30, 1996 (unaudited) and $4,630
at December 31, 1995 9,817 10,221
Other real estate owned, net (note 6) 1,288 1,349
Deferred tax asset 6,212 4,432
Other assets 8,053 8,303
----------- -----------
$ 1,350,478 1,351,215
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing 212,433 230,136
Interest bearing 870,054 868,933
----------- -----------
Total deposits 1,082,487 1,099,069
Federal funds purchased 28,500 3,125
Securities sold under repurchase agreements 91,507 104,898
Accounts payable and accrued expenses 12,895 13,396
Other borrowed funds 9,308 5,494
Long-term debt 10,234 15,867
----------- -----------
Total liabilities 1,234,931 1,241,849
Commitments and contingencies (note 8)
Stockholders' equity (note 4):
Common stock without par value; authorized 5,000,000
shares; issued 1,940,328 shares at June 30, 1995
(unaudited) and 1,947,760 shares at
December 31, 1995 6,038 6,692
Retained earnings 109,594 102,281
Unrealized holding gain (loss) on investment securities
held for sale (85) 393
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Total stockholders' equity 115,547 109,366
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$ 1,350,478 1,351,215
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----------- -----------
Book value per common share $ 59.55 56.15
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</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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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 six months
ended June 30, ended June 19,
----------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $22,703 20,879 44,600 39,934
Interest and dividends on investment securities:
Taxable 3,480 3,085 6,931 6,307
Exempt from Federal taxes 262 183 498 326
Interest on deposit with banks 21 51 225 71
Interest on Federal funds sold 117 369 600 574
------- ------ ------ ------
Total interest income 26,583 24,567 52,854 47,212
------- ------ ------ ------
Interest expense:
Interest on deposits 9,648 8,801 19,456 16,474
Interest on Federal funds purchased 228 567 259 1,010
Interest on securities sold under repurchase agreements 977 760 2,106 1,449
Interest on other borrowed funds 57 115 141 251
Interest on long-term debt 267 215 589 331
------- ------ ------ ------
Total interest expense 11,177 10,458 22,551 19,515
------- ------ ------ ------
Net interest income 15,406 14,109 30,303 27,697
Provision for loan losses (note 5) 661 398 1,152 780
------- ------ ------ ------
Net interest income after provision for
loan losses 14,745 13,711 29,151 26,917
Other operating income:
Income from fiduciary activities 661 651 1,523 1,303
Service charges on deposit accounts 1,803 1,636 3,518 3,145
Data processing 1,781 1,485 3,822 2,890
Other service charges, commissions, and fees 669 681 1,293 1,323
Net investment securities gains (losses) -- (1) 2 (10)
Other income 281 212 582 436
------- ------ ------ ------
Total other operating income 5,195 4,664 10,740 9,087
------- ------ ------ ------
Other operating expenses:
Salaries and wages 5,000 4,693 9,897 9,081
Employee benefits 1,293 1,188 2,663 2,479
Occupancy expense, net 1,001 934 2,040 1,886
Furniture and equipment expenses 1,461 1,260 2,751 2,563
Other real estate expense (income), net (70) (399) (159) (395)
FDIC insurance 1 555 3 1,086
Other expenses 3,089 3,005 6,012 5,940
------- ------ ------ ------
Total other operating expenses 11,775 11,236 23,207 22,640
------- ------ ------ ------
Income before income taxes 8,165 7,139 16,684 13,364
Income tax expense 3,131 2,751 6,414 5,163
------- ------ ------ ------
Net income $ 5,034 4,388 10,270 8,201
------- ------ ------ ------
------- ------ ------ ------
Income per common share $2.58 2.24 5.26 4.18
----- ----- ----- -----
----- ----- ----- -----
Dividends per common share $ .81 .39 1.52 .77
----- ----- ----- -----
----- ----- ----- -----
Weighted average common shares outstanding 1,948,672 1,962,175 1,950,723 1,964,115
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 49,560 43,839
Service charges, commissions and fees received, and other income 11,197 9,346
Interest paid (23,460) (18,520)
Cash paid to suppliers and employees (22,252) (18,197)
Federal and state income taxes paid (6,165) (4,745)
Other operating cash receipts 2,105 1,739
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Net cash provided by operating activities 10,985 13,462
----------- -----------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (40,994) (12,436)
Available-for-sale (11,509) -
----------- -----------
(52,503) (12,436)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 53,773 63,593
Available-for-sale 8,754 3,309
----------- -----------
62,527 66,902
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 22,007 (194)
Extensions of credit to customers, net of repayments (71,642) (67,800)
Recoveries on loans charged-off 649 536
Proceeds from sale of other real estate owned 482 1,086
Capital expenditures, net (3,013) (1,994)
----------- -----------
Net cash used by investing activities (41,493) (24,647)
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Cash flows from financing activities:
Net increase (decrease) in deposits (16,582) 7,053
Net increase (decrease) in federal funds and repurchase agreements 11,984 (3,591)
Net increase in other borrowed funds 3,814 1,233
Proceeds from long-term borrowings 424 13,369
Repayment of long-term debt (6,057) (816)
Proceeds from issuance of common stock 277 322
Payments to retire common stock (931) (794)
Dividends paid on common stock (2,957) (1,508)
----------- -----------
Net cash provided (used) by financing activities (10,028) 15,268
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Net increase (decrease) in cash and cash equivalents (40,536) 4,083
Cash and cash equivalents at beginning of period 143,042 84,657
----------- -----------
Cash and cash equivalents at end of period $ 102,506 88,740
----------- -----------
----------- -----------
(Continued)
5
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands, except per share data)
(Unaudited)
For the six months
ended June 30,
-------------------------------
1996 1995
----------- -----------
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 10,270 8,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and other real estate losses 1,152 740
Depreciation and amortization 2,239 2,062
Net premium amortization on investment securities 614 880
Losses (gains) on sale of investments (2) 10
Gain on sale of other real estate owned (218) (418)
Loss (gains) on sales of property and equipment 1 5
Provision for deferred income taxes (1,476) 243
Increase in interest receivable (1,344) (1,570)
Decrease in other assets 250 2,065
Increase (decrease) in accounts payable and accrued expenses (501) 1,244
-------- --------
Net cash provided by operating activities $ 10,985 $ 13,462
-------- --------
-------- --------
</TABLE>
Noncash Investing and Financing Activities:
The Company transferred loans of $197 and $164 to other real estate owned during
the six months ended June 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 June 30, 1996 and December 31, 1995, and the results of
consolidated operations and cash flows for each of the six month periods
ended June 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.
Earnings per share for the three month and six month periods ending June
30, 1996 were $2.58 and $5.26, respectively, based on the weighted average
shares of common equivalent shares outstanding during the respective
periods of 1,948,672 and 1,950,723. Earnings per share for the three and
six month periods ending June 30, 1995 were $2.24 and $4.18, respectively,
based on the weighted average number of common equivalent shares
outstanding during the respective periods of 1,962,175 and 1,964,115.
(4) CASH DIVIDENDS
On July 15, 1996, the Company paid a cash dividend on second quarter
earnings of $.76 per share to stockholders of record on that date. It has
been the Company's practice to pay quarterly dividends based upon earnings.
The July 1996 dividend represents 30% of the Company's net income for the
quarter ended June 30, 1996.
(Continued)
7
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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
for each of the three month and six month periods ended June 30, 1996 and
1995:
For the three months For the six months
ended June 30, ended June 30,
---------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- --------
Balance at beginning of period $15,242 14,457 15,171 13,726
Beginning allowance of acquired
banks - 382 - 917
Provision during the period 661 398 1,152 780
------- ------ ------ ------
15,903 15,237 16,323 15,423
Deduct:
Loans charged off 903 369 1,566 835
Recoveries of loans previously
charged off (406) (256) (649) (536)
------- ------ ------ ------
Net chargeoffs 497 113 917 299
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Balance at end of period $15,406 15,124 15,406 15,124
------- ------ ------ ------
------- ------ ------ ------
(6) OTHER REAL ESTATE OWNED (OREO)
Other real estate consists of the following:
June 30, December 31,
1996 1995
---- ----
Other real estate $1,836 1,903
Less allowance for OREO losses 548 554
------ -----
$1,288 1,349
------ -----
------ -----
(Continued)
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 Six months ended
June 30, June 30,
---------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- --------
Balance at beginning of period $548 1,028 554 1,048
Provision during the period - (33) - (40)
Property writedowns - (421) - (421)
Losses on disposition - (3) (6) (16)
---- --- --- ---
Balance at end of period $548 571 548 571
---- --- --- ---
---- --- --- ---
The changes in the balance of other real estate for the six months ended June
30, 1996 and 1995 can be summarized as follows:
Six months ended June 30,
--------------------------------------------
1996 1995
---- ----
Balance at beginning of period $1,903 2,892
Add transfers from loans 197 164
Add cash improvements - -
Cash proceeds from sales 482 1,144
Less gains on sales 218 418
------ -----
Net basis of OREO sold (264) (726)
Write-offs - (421)
------ -----
Balances, end of period $1,836 1,909
------ -----
------ -----
(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 thrift is currently expected to occur in the first
quarter of 1997.
(Continued)
9
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)
On May 24, 1996, the Company signed an agreement with Wells Fargo & Company
to purchase all of the stock of the First Interstate Bank of Montana, N.A.,
with offices in Kalispell, Great Falls and Cut Bank, as well as all of the
stock of First Interstate Bank of Wyoming, N.A., with offices in Casper,
Riverton, and Laramie. The total purchase price is $72 million, subject to
certain adjustments. Completion of the acquisition is subject to various
regulatory approvals and other conditions which must be satisified by each
of the parties to the agreement.
The Company intends to fund the acquisitions through a combination of debt
and the issuance of preferred stock. A total of $40 million is expected to
be provided through the issuance of Company preferred stock ($20 million)
and unsecured debt ($20 million), with the remaining $32 million to be
funded by a term loan secured by stock of FIBM subsidiaries.
Subject to satisfaction of conditions, closing of the acquisitions is
scheduled to occur on October 1, 1996, but no later than December 2, 1996.
With the acquisitions, consolidated assets of the Company will total
approximately $1.9 billion, as compared to consolidated assets at June 30,
1996 of $1.35 billion.
In connection with the proposed acquisitions, the Company and Wells Fargo &
Company have 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 the states of Montana, Wyoming,
North Dakota, South Dakota and Nebraska. By mutual agreement of the
parties, the franchise agreement between the Company and Wells Fargo &
Company has been terminated.
(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).
(Continued)
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 purchasing certain land and building
with an aggregate cost of approximately $20,000. The Company is a tenant
in the building and currently owns 50% interest in the property. During
1995, the partnership refinanced the unpaid balance of its original debt.
The new term debt of the partnership of $11,211 at December 31, 1995 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.
11
<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 JUNE 30, 1996 AND DECEMBER 31, 1995.
GENERAL. During the six month period ending June 30, 1996, total assets
decreased slightly from $1,351,215 at December 31, 1995 to $1,350,478 at
June 30, 1996. The decrease in assets is primarily due to seasonal
declines of customer deposits, including securities sold under repurchase
agreements, during the period. As compared to the same date in 1995, total
assets at June 30, 1996 have increased $105,367 or 8.5%, principally as a
result of internal growth.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents at June 30, 1996,
consisting of cash on hand, amounts due from banks and federal funds sold
for one day periods, decreased $40,536 or 28.3% from December 31, 1995. In
part, this decrease is associated with the seasonal declines in customer
demand deposits at the Company's banking subsidiaries. Federal funds sold
balances decreased $31,460 or 70.8% 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 $1,033 at June 30, 1996 as
funds previously on deposit with the FHLB were withdrawn to provide
additional liquidity to fund increases in other earning assets, principally
loans.
INVESTMENT SECURITIES. Investment securities decreased $11,420 or 4.4%
from $258,737 at December 31, 1995 to $247,317 at June 30, 1996 as some of
the proceeds from maturities and scheduled paydowns 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 during the first half of 1996
resulted in lower market values of securities classified as available for
sale. Net unrealized losses on investments held for sale, net of related
deferred tax expense, were $85 at June 30, 1996, a net valuation decline of
$478 from net unrealized gains of $393 at December 31, 1995, a net
valuation decline in total securities held for sale of approximately .7%.
LOANS. Net loans increased $69,635 or 8.1% during the first six months of
1996 from consolidated net loans of $855,207 at December 31, 1995 to
$924,842 at June 30, 1996. In the first half of 1995, loans increased
$65,309 or 8.9% excluding the increases in loans as the result of
acquisitions during the period. The Company experienced increased loan
volumes in all major categories of loans during the first six months of
both 1996 and 1995.Increases in loan demand are attributed to continued
strong economic conditions in the communities served by FIBM's bank
subsidiaries, as well as some seasonal increases, particularly in
agricultural lending, following traditional paydowns in the fourth quarter.
12
<PAGE>
DEPOSITS. Total deposits decreased $16,582 or 1.5% from $1,099,069 at
December 31, 1995 to $1,082,487 at June 30, 1996. Noninterest bearing
deposits declined from December 31, 1995 (down $17,703 or 7.7% at June 30,
1996), however, interest bearing deposits experienced modest growth,
increasing $1,121 or .1% to $870,054 at June 30, 1996. The decrease in
total deposits is principally related to an expected seasonal slowdown in
overall deposit growth that has historically occurred during the first half
of the year. Compared to the same date in 1995, total deposits at June 30,
1996 have increased $52,752 or 5.1%, over 90% of which has been in interest
bearing categories.
LONG TERM DEBT AND OTHER BORROWED FUNDS. During the first six months of
1996, the Company's long term indebtedness was reduced $5,633 of 35.5% from
$15,867 at December 31, 1995 to $10,234 at June 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. Other borrowed funds of $7,826 at June 30, 1995 were up
$2,590 or 49.5% from December 31, 1994.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS. COMPARISON OF THE SIX MONTHS
ENDED JUNE 30, 1996 AND JUNE 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 six months ended June 30,
1995 only include revenues and expenses for the Livingston and Gardiner
branches for 42 days as compared to inclusion for the entire six 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 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 six months ended June 30, 1996 and 1995 was
$10,270 and $8,201, respectively, an increase of $2,069 or 25.2% 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 six months ended June 30,
1996 and 1995 was $30,303 and $27,697, respectively, an increase in 1996 of
$2,606 or 9.4%. 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 $897,833 for the first six months of 1996, up $89,788 or 11.1%
from $808,045 for the comparable period in 1995. Of the increase in
average loans, approximately $29,500 is the result of the additions of the
Livingston and Gardiner branches which occurred on May 19, 1995. This
higher level of loans will continue to provide support for the net interest
margin. Management anticipates, however, there will be downward pressures
on the Company's interest margin in the remainder of 1996 due to increasing
competition.
13
<PAGE>
Customer loan fees, included in interest income for financial reporting
purposes, were $2,564 for the six months ended June 30, 1996, up $578 or
29.1% from $1,986 in the first six 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 $1,088 in 1996 as compared to $690 in
1995 ($398 or 57.7%). 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 into 1996 as real estate loan activity
rebounded in the markets served by FIBM. Increases in loan volumes in
other categories of loans also contributed to the increase in customer loan
fees between periods.
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 $1,152 and
$780 for the six months ended June 30, 1996 and 1995, respectively, an
increase of $372 or 47.7%.This increase in loan loss provision is
principally associated with the increased volumes of loans outstanding, but
is also 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 $1,653 or 18.2%
from $9,087 to $10,740 for the six months ended June 30, 1995 and 1996,
respectively. Of this increase, approximately $209 is associated with
addition of the Livingston and Gardiner branches in May 1995. Income from
data processing services increased $932 or 32.2% from $2,890 to $3,822 for
the first six 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 half of 1996, up $220 or 16.9% from $1,303
to $1,523 for the six month periods ending June 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 ATM network, which increased 59% during all of 1995. Through the first
half of 1996, transaction volumes related to the Company's ATM network are
up 19.8% from ATM transaction levels for the first six months of 1995.
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 ATM network have continued through
the first six months of 1996, however, 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 of the data processing
division of the Parent Company. On a pretax basis, data processing
division revenues, net of its operating expenses for the first six months
of 1996 have increased $577 or 50.5% over the comparable period of 1995.
14
<PAGE>
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 $567
(2.5%) from $22,640 for the six months ended June 30, 1995 to $23,207 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.
Other real estate expenses, net of gains on sales of properties held that
are included with expenses for reporting purposes, netted to revenue of
$395 for the first half of 1995 as compared to net revenue of $159 for the
first six months of 1996, a net increase in expense of $236 in 1996 as the
result of greater gains on sales of foreclosed properties in the first half
of 1995.
FDIC insurance premiums were only $3 for the first six months of 1996
compared to $1,086 for the first half of 1995 as the result of the
substantial reductions in rates assessed on deposits by the FDIC in the
latter half of 1995. FDIC insurance costs for the full twelve months of
1995 were $1,127.
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 JUNE 30, 1996 AND JUNE 30, 1995.
GENERAL. Similar to the comparison of the results of operations for the
six months ended June 30, 1996 and 1995, comparatives for the three months
ended June 30, 1995 only include revenues and expenses for the Livingston
and Gardiner branches for 42 days as compared to inclusion for the entire
second quarter 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 for all of the second
quarter 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 three months ended June 30, 1996 and 1995
was $5,034 and $4,388, respectively, an increase of $646 or 14.7% in 1996.
The increase was principally due to increases in net interest income and
noninterest income. In addition, the substantial reduction of FDIC
premiums contributed to the increase in second quarter earnings.
NET INTEREST INCOME. Net interest income for the three months ended June
30, 1996 and 1995 was $15,406 and $14,109, respectively, an increase of
$1,297 or 9.2% in 1996. The increase is the result of an increase in total
interest income of $2,016, offset by an increase in total interest expenses
of $719.
15
<PAGE>
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. Total loans outstanding as of June
30, 1996 are up $71,885 or 8.3% from total loans outstanding at June 30,
1995. This significantly higher level of loans continues to provide
support for the net interest margin, upon which management anticipates
downward pressures for the remainder of 1996 due to increasing competition,
slowing loan growth, and a flattened yield curve.
Customer loan fees, which are included in interest income for financial
reporting purposes, were $1,262 for the three months ended June 30, 1996,
$137 greater than loan fees recorded in the second quarter of 1995, but
slightly less than the $1,302 in the first quarter of 1996. Although
partially the result of the acquisition of the Livingston and Gardiner
branches which occurred in May, 1995, the increase in loan fees is largely
the result of an increase in real estate loan fees which increased $110
between periods. Real estate loan fees were $552 for the three months
ended June 30, 1996 as compared to $536 in the first quarter of 1996 and
$442 in the second quarter of 1995. Demand for new real estate loans and
refinancing of existing loans began to increase in the third quarter of
1995 after a decline in the first half of the 1995. Increases in loan
volumes in other categories of loans also contributed to the increase in
customer loan fees between periods.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses for the
three months ended June 30, 1996 was $661, up from the second quarter
provision of $398 in 1995 and $170 more than recorded in the first quarter
of 1996. 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.
NON-INTEREST INCOME. Total non-interest income increased $531 or 11.4% from
$4,664 to $5,195 for the three months ended June 30, 1995 and 1996,
respectively.
Income from data processing services increased $296 or 19.9% from $1,485 in
the second quarter of 1995 to $1,781 for the three months ended June 30,
1996, however, were down $260 from the first 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, particularily as related to unaffiliated ATM locations served by
the Company's ATM network. The decrease in revenues between the first and
second quarters of 1996 is due, in large part, to additional processing
loads in the first quarter related to year-end reporting.
Other income increased $59 or 27.8% from $212 for the three months ended
June 30, 1995 to $281 for the second 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.
16
<PAGE>
NON-INTEREST EXPENSES. Non-interest expenses increased $539 or 4.8% from
$11,236 for the quarter ended June 30, 1995 to $11,775 for the same period
of 1996. Inflationary increases in expenses, as well as increased expenses
associated with the acquisitions of the Livingston and Gardiner branches in
May 1995, were partially offset by the substantial reduction of FDIC
premiums between periods.
Salaries and benefits were $6,293 and $5,881 for the three month periods
ended June 30, 1996 and 1995, respectively, an increase of $412 or 7.0% in
1996. While partially due to overall inflationary increases, salaries and
benefits also increased as the result of the addition of the Livingston and
Gardiner branches in May 1995.
Furniture and equipment expenses increased $201 or 16.0% from $1,260 for
the three months ended June 30, 1995 to $1,461 for the three months ended
June 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.
Other real estate expense, recorded net of gains on sales for financial
reporting purposes, represented an increase in expense of $329 as the
Company recorded income of $70 in the second quarter of 1996 as compared to
income of $399 in the second quarter of 1995. The Company recorded net
other real estate income of $89 in the first quarter of 1996. Additional
sales of OREO properties at prices in excess of the carrying values have
resulted in sales gains. Additionally, earnings are favorably impacted as
properties are sold from the elimination of carrying costs of the
properties such as insurance and taxes as well as the reinvestment of sales
proceeds in earning assets. As inventories of these properties have been
significantly reduced in the last four years from historically high levels,
sales gains are expected to continue to decline.
FDIC insurance premiums were only $1 for the three months ended June 30,
1996 compared to $555 for the second quarter of 1995 as the result of the
substantial rate reductions assessed on deposits in the latter half of
1995. FDIC insurance premiums were $2 for the three months ended March 31,
1996.
Included in non-interest expenses is amortization expense related to the
purchase price of subsidiaries in excess of their equity in net assets.
Amortization expense recorded in the second quarter of 1996 was $198, up
$27 from $171 in the second quarter of 1995. The increase related to the
acquistion of FPCBI midway through the second quarter of 1995.
Other variances in non-interest expenses for the second quarter of 1996 as
compared to the second quarter of 1995 and the first quarter of 1996, as
adjusted for the seven less weeks of expenses in the Livingston and
Gardiner offices in the second quarter of 1995, 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
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
Not applicable or not required
ITEM 6 EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits - None
(b) A report on Form 8-K dated June 13, 1996 was filed for the press
release by the Company describing the proposed acquisitions of
two banking subsidiaries of Wells Fargo & Company, termination of
the Company's franchise agreement with First Interstate Bancorp,
and signing of a trademark license agreement for the continued
use of the First Interstate name.
18
<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 August 6, 1996 WILLIAM H. RUEGAMER
---------------------- -------------------------------------------
William H. Ruegamer
Director, Executive Vice President
and Chief Operating Officer
Date August 6, 1996 TERRILL R. MOORE
---------------------- -------------------------------------------
Terrill R. Moore
Senior Vice President and
Chief Financial Officer
19
<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 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 89,546
<INT-BEARING-DEPOSITS> 1,033
<FED-FUNDS-SOLD> 12,960
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,771
<INVESTMENTS-CARRYING> 179,546
<INVESTMENTS-MARKET> 177,317
<LOANS> 940,248
<ALLOWANCE> 15,406
<TOTAL-ASSETS> 1,350,478
<DEPOSITS> 1,082,487
<SHORT-TERM> 129,315
<LIABILITIES-OTHER> 12,895
<LONG-TERM> 10,234
0
0
<COMMON> 6,038
<OTHER-SE> 109,509
<TOTAL-LIABILITIES-AND-EQUITY> 1,350,478
<INTEREST-LOAN> 44,600
<INTEREST-INVEST> 7,429
<INTEREST-OTHER> 825
<INTEREST-TOTAL> 52,854
<INTEREST-DEPOSIT> 19,456
<INTEREST-EXPENSE> 22,551
<INTEREST-INCOME-NET> 30,303
<LOAN-LOSSES> 1,152
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 23,207
<INCOME-PRETAX> 16,684
<INCOME-PRE-EXTRAORDINARY> 10,270
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,270
<EPS-PRIMARY> 5.26
<EPS-DILUTED> 5.26
<YIELD-ACTUAL> 5.10
<LOANS-NON> 3,775
<LOANS-PAST> 2,595
<LOANS-TROUBLED> 1,689
<LOANS-PROBLEM> 8,861
<ALLOWANCE-OPEN> 15,171
<CHARGE-OFFS> 1,566
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<ALLOWANCE-CLOSE> 15,406
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,094
</TABLE>
