<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, 1997.
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.
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(Exact name of registrant as specified in its charter)
Montana 81-0331430
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(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
-----------------------------
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 Registrant had 1,991,274 shares of common stock and 20,000 shares of
preferred stock outstanding on July 25, 1997.
1
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FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC.
Quarterly Report on Form 10-Q
<TABLE>
<CAPTION>
Index Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30,1997 and December 31,1996 3
Consolidated Statements of Income
Three months ended June 30, 1997 and 1996, and
Six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2 - Managements' Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of
Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
Assets 1997 December 31,
------ (unaudited) 1996
----------- ------------
<S> <C> <C>
Cash and due from banks $ 130,362 160,962
Federal funds sold 19,275 4,945
Interest bearing deposits in banks 37 6,545
Investment securities:
Available-for-sale 83,479 124,502
Held-to-maturity 313,452 279,069
--------------- ------------
396,931 403,571
Loans, net 1,475,852 1,379,871
Less allowance for loan losses 28,757 27,797
--------------- ------------
Net loans 1,447,095 1,352,074
Premises and equipment, net 58,976 58,183
Accrued interest receivable 21,066 19,573
Excess of purchase price over equity in net assets of subsidiaries
less accumulated amortization of $7,284 at June 30, 1997
(unaudited) and $5,971 at December 31, 1996 34,160 39,010
Other real estate owned, net 1,098 1,546
Deferred tax asset 6,629 4,921
Other assets 15,722 16,899
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$ 2,131,351 2,068,229
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--------------- ------------
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest bearing $ 353,189 385,371
Interest bearing 1,319,846 1,294,053
--------------- ------------
Total deposits 1,673,035 1,679,424
Federal funds purchased 61,900 13,450
Securities sold under repurchase agreements 129,538 129,137
Accounts payable and accrued expenses 19,497 22,419
Other borrowed funds 37,272 13,071
Long-term debt 56,184 64,667
--------------- ------------
Total liabilities 1,977,426 1,922,168
Stockholders' equity:
Non-voting noncumulative 8.53% preferred stock without par value;
authorized 100,000 shares; issued and outstanding 20,000 shares 20,000 20,000
Common stock without par value; authorized 5,000,000 shares;
issued and outstanding 1,972,161 shares at June 30, 1997
(unaudited and 1,978,268 shares at December 31, 1996 8,350 8,941
Retained earnings 125,205 116,613
Unrealized holding gain on investment securities available-for-sale, net 370 507
--------------- ------------
Total stockholders' equity 153,925 146,061
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$ 2,131,351 2,068,229
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Book value per common share $ 67.91 63.72
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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 share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 34,903 22,703 68,233 44,600
Interest and dividends on investment securities:
Taxable 5,419 3,480 10,762 6,931
Exempt from Federal taxes 276 262 527 498
Interest on deposit with banks 12 21 97 225
Interest on Federal funds sold 559 117 71 600
--------- --------- --------- ---------
Total interest income 41,169 26,583 80,330 52,854
--------- --------- --------- ---------
Interest expense:
Interest on deposits 14,083 9,648 27,470 19,456
Interest on Federal funds purchased 767 228 1,085 259
Interest on securities sold under repurchase agreements 1,486 977 2,811 2,106
Interest on other borrowed funds 446 57 519 141
Interest on long-term debt 1,199 267 2,488 589
--------- --------- --------- ---------
Total interest expense 17,981 11,177 34,373 22,551
--------- --------- --------- ---------
Net interest income 23,188 15,406 45,957 30,303
Provision for loan losses 1,058 661 2,281 1,152
--------- --------- --------- ---------
Net interest income after provision for loan losses 22,130 14,745 43,676 29,151
Other operating income:
Income from fiduciary activities 989 661 2,022 1,523
Service charges on deposit accounts 2,531 1,803 4,910 3,518
Data processing 1,826 1,781 3,667 3,822
Other service charges, commissions, and fees 1,047 669 1,939 1,293
Net investment securities gains 15 -- 73 2
Other income 452 281 874 582
--------- --------- --------- ---------
Total other operating income 6,860 5,195 13,485 10,740
--------- --------- --------- ---------
Other operating expenses:
Salaries and wages 7,215 5,000 14,202 9,897
Employee benefits 1,836 1,293 3,832 2,663
Occupancy expense, net 1,481 1,001 3,081 2,040
Furniture and equipment expense 1,935 1,461 3,754 2,751
Other real estate expense (income), net 19 (70) (115) (159)
Other expenses 5,798 3,090 11,233 6,015
--------- --------- --------- ---------
Total other operating expenses 18,284 11,775 35,987 23,207
--------- --------- --------- ---------
Income before income taxes 10,706 8,165 21,174 16,684
Income tax expense 4,074 3,131 8,080 6,414
--------- --------- --------- ---------
Net income $ 6,632 5,034 13,094 10,270
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share $ 3.13 2.58 6.17 5.26
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends per common share .98 .81 1.85 1.52
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding 1,984,562 1,948,672 1,984,177 1,950,723
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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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,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,094 $ 10,270
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and other real estate losses 2,277 1,152
Depreciation and amortization 4,153 2,239
Net premium amortization on investment securities 289 614
Gain on sales of investments (73) (2)
Gain on sales of other real estate owned (190) (218)
(Gain) loss on sales of property and equipment (14) 1
Provision for deferred income taxes (1,655) (1,476)
Increase in interest receivable (1,493) (1,344)
Decrease in other assets 1,177 250
Increase (decrease) in accounts payable and accrued expenses 615 (501)
--------------- ---------------
Net cash provided by operating activities 18,180 10,985
--------------- ---------------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (333,219) (40,994)
Available-for-sale (237) (11,509)
--------------- ---------------
(333,456) (52,503)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 298,953 53,773
Available-for-sale 9,579 8,754
--------------- ---------------
308,532 62,527
Proceeds from sales of available-for-sale investment securities 31,158 -
Decrease in interest bearing deposits in banks 6,508 22,007
Extensions of credit to customers, net of repayments (99,191) (71,642)
Recoveries of loans charged-off 1,652 649
Proceeds from sales of other real estate 879 482
Capital expenditures, net (3,619) (3,013)
--------------- ---------------
Net cash used in investing activities (87,537) (41,493)
--------------- ---------------
Cash flows from financing activities:
Net decrease in deposits (6,389) (16,582)
Net increase in Federal funds and repurchase agreements 48,851 11,984
Net increase in other borrowed funds 24,201 3,814
Proceeds from long-term borrowings 1,750 424
Repayment of long-term borrowings (10,233) (6,057)
Proceeds from issuance of common stock 139 277
Payments to retire common stock (730) (931)
Dividends paid on common stock (3,656) (2,957)
Dividends paid on preferred stock (846) -
--------------- ---------------
Net cash provided by (used in) by financing activities 53,087 (10,028)
--------------- ---------------
Net decrease in cash and cash equivalents (16,270) (40,536)
Cash and cash equivalents at beginning of period 165,907 143,042
--------------- ---------------
Cash and cash equivalents at end of period 149,637 102,506
--------------- ---------------
--------------- ---------------
</TABLE>
Noncash Investing and Financing Activities:
The Company transferred loans of $237 and $197 to other real estate owned
during the six months ended June 30, 1997 and 1996, respectively.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands)
(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, 1997 and December 31, 1996, and the results of
consolidated operations and cash flows for each of the six month periods
ended June 30, 1997 and 1996 in conformity with generally accepted
accounting principles. The balance sheet information at December 31, 1996
is derived from audited consolidated financial statements, however, certain
reclassifications have been made to conform to the June 30, 1997
presentation.
In June 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 Extinguishments of
Liabilities." SFAS No. 125 requires the Company to 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, with impairment losses 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. The
Company adopted the provisions of SFAS No. 125 as of January 1, 1997. The
adoption did not have a material effect on the financial position or
results of operations of the Company.
(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 less
preferred stock dividends 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.
6 (continued)
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FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands)
(4) CASH DIVIDENDS
On July 21, 1997, the Company paid a cash dividend on second quarter
earnings of $1.00 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 1997 dividend represents 30% of the Company's net income for the
quarter ended June 30, 1997.
(5) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the three month and six
month periods ended June 30, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
----------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $28,393 15,242 27,797 15,171
Provision charged to operating expense 1,058 661 2,281 1,152
Less loans charged-off (1,612) (903) (2,973) (1,566)
Add back recoveries of loans previously
charged-off 918 406 1,652 649
------- ------- ------ ------
Balance at end of period $28,757 15,406 28,757 15,406
------- ------- ------ ------
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</TABLE>
(6) OTHER REAL ESTATE OWNED (OREO)
Other real estate owned consists of the following:
<TABLE>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Other real estate $1,560 2,057
Less allowance for OREO losses 462 511
------ -----
$1,098 1,546
------ -----
------ -----
</TABLE>
7 (Continued)
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands)
A summary of transactions in the allowance for OREO losses follows:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 466 548 511 554
Provision (reversal)during the period (4) - (4) -
Loss on dispositions - - (45) (6)
------ ------ ------ ------
Balance at end of period 462 548 462 548
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Changes in the balance of other real estate owned for the six months ended
June 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of period $2,057 1,903
Add transfers from loans 237 197
Less writedowns charged to reserves (45) -
Cash proceeds from sales 879 482
Less gains on sales 190 218
--- ---
Net basis of OREO sold (689) (264)
------ ------
Balances, end of period $1,560 $1,836
------ ------
------ ------
</TABLE>
(7) ACQUISITIONS
On February 5, 1997, First Interstate Bank of Montana, N.A. purchased the
assets of Mountain Financial, a loan production office located in Eureka,
Montana. The total cash purchase price of the assets acquired aggregated
$1,726, of which $166 was for premises and equipment and the remaining
$1,560 was for loans acquired.
During June 1997, the Company finalized its allocation of purchase price
related to the 1996 acquisitions of First Interstate Bank of Montana, N.A.,
First Interstate Bank of Wyoming, N.A. and Mountain Bank of Whitefish.
Changes in preliminary estimates of the fair value of loans, other assets
and other liabilities resulted in a $3.5 million decrease in goodwill.
8 (Continued)
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands)
(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.
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 owns a 50% undivided interest in the property.
Indebtedness of the partnership in the amount of $10,617 at June 30, 1997
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 (Continued)
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands)
(9) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
simplifies the standards for computing earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS
on the face of the income statement for all entities with complex capital
structures. SFAS No. 128 also requires a reconciliation of the numerator
and the denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or resulted in the issuance of common stock that then shared
in the earnings of the entity.
This statement is effective for financial statements issued for periods
ending after December 15, 1997. Earlier application is not permitted.
Once effective, this statement requires restatement of all prior period EPS
data. Pro forma basic and diluted net income per share as determined under
this statement will not differ from amounts currently reported by the
Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which lists required disclosures about capital
structure that had been included in a number of previously existing
separate statements and opinions. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format
for that financial statement but requires that an entity display an amount
representing comprehensive income for the period in that financial
statement.
This statement requires that an entity (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the equity section
of a statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
The following discussion focuses on significant factors affecting the
financial condition and results of operations of First Interstate BancSystem
of Montana, Inc. ("the Company") during the three and six month periods ended
June 30, 1997, with comparisons to 1996 as applicable.
ACQUISITION ACTIVITY
On October 1, 1996, the Company purchased all of the outstanding capital
stock of First Interstate Bank of Wyoming, N.A. and First Interstate Bank of
Montana, N.A.; and, on December 18, 1996 , acquired all of the outstanding
capital stock of Mountain Bank of Whitefish (collectively, "the acquired
banks"). The transactions were accounted for under purchase accounting
rules. Goodwill, representing the excess of cost over net assets acquired,
is being amortized using the straight-line method over periods of 15 to 25
years.
ASSET LIABILITY MANAGEMENT
The primary objective of the company's asset liability management process is
to optimize net interest income while prudently managing balance sheet risks
by understanding the levels of risk accompanying its decisions and monitoring
and managing these risks. The ability to optimize net interest income is
largely dependent on the Company's ability to manage the sensitivity of net
interest income to actual or potential changes in interest rates. The
Company uses interest sensitivity "gap" analysis, income simulation models,
and, to a limited extent, duration analysis (including estimation of borrower
prepayment options) to evaluate the potential effects of changing interest
rates on its interest margin.
EARNING ASSETS
Earning assets of $1.9 billion at June 30, 1997 were $96.2 million, or 5%,
higher compared to December 31, 1996 primarily due to growth in loan volume.
The mix of earning assets changed little from December 31, 1996 with net
loans comprising approximately 77%, held-to-maturity investment securities
comprising approximately 17% and interest bearing deposits,
available-for-sale investment securities and federal funds sold comprising
the remaining 6%.
LOANS. All major categories of loans showed increases in volumes from
December 31, 1996 due to continued strong economic conditions in the
communities served by the Company's banking subsidiaries and some seasonal
increases, particularly in agricultural lending, following traditional
paydowns during the fourth quarter. Growth in net loans of 7% during the
first six months of 1997 is slightly lower than the 8.1% growth rate
experienced during the same period of 1996 indicating a slight slowing in the
economy that has been attributed to a slowing of consumer borrowing as
consumer debt rises.
INVESTMENT SECURITIES. The Company manages its investment portfolio within
established policies which provide for the management of interest rate
sensitivity risks, to meet earning objectives, to provide ample liquidity and
to provide adequate collateral to support deposit and repurchase agreement
activities. Cash proceeds from maturities, sales and principal payments
during the first six months of 1997 were generally reinvested in
held-to-maturity investment securities or used to provide additional
liquidity to fund increases in other earning assets.
11
<PAGE>
FEDERAL FUNDS SOLD. Federal funds sold balances increased approximately $14
million from December 31, 1996 as the Company's banking subsidiaries funded
the cash requirements of correspondent banks. Average federal funds sold
balances during the first half of 1997 of $25,753 and during 1996 of $25,462
showed only slight variance.
INCOME FROM EARNING ASSETS. Income from earning assets was $41.2 million for
the three month period ended June 30, 1997, as compared to $26.6 million for
the same period in 1996. The increase of $14.6 million or 55% resulted from
increases in earning assets through internal growth and the bank acquisitions
discussed previously. Exclusive of income from the acquired banks, interest
income for the three months ended June 30, 1997 increased approximately 13%
from the same period in 1996. Yields on average total earning assets during
the second quarter of 1997 and 1996 were 8.81% and 8.90%, respectively.
For the six month periods ended June 30, 1997 and 1996, income from earning
assets was $80.3 million and $52.9 million, respectively. Approximately 84%
of the increase is due to interest income of the acquired banks. The yield
on average total earning assets for the first six months of 1997 was 8.78%
compared to 8.85% during 1996.
FUNDING SOURCES
The Company utilizes various traditional funding sources to support its
earning asset portfolio including deposits, borrowings, federal funds
purchased and repurchase agreements.
DEPOSITS. Overall, total deposits decreased slightly from December 31, 1996
to June 30, 1997. Decreases in non-interest bearing deposits of $32.0
million during the first six months of 1997, were partially offset by
increases in interest-bearing deposits of $25.8 million during the same
period. The Company historically has experienced similar seasonal cycles in
overall deposit growth during the first half of the year.
FEDERAL FUNDS PURCHASED AND OTHER BORROWED FUNDS. Federal funds purchased
for one day periods and other borrowed funds consisting primarily of
short-term borrowings from the Federal Home Loan Bank increased $72.7 million
from December 31, 1996 to June 30, 1997. The increased borrowings were the
result of funding requirements related to increases in loans and Federal
funds sold during the first half of 1997.
LONG TERM DEBT. During the first half of 1997, the Company reduced its
long-term indebtedness by $8.5 million or 14%. Payments of approximately
$8.4 million on the Company's revolving term debt were funded by earnings of
the Company's banking subsidiaries.
EXPENSE OF INTEREST BEARING LIABILITIES. The Company's interest expense for
the three months ended June 30, 1997 was $18.0 million, a $ 6.8 million or
61% increase over the same period in 1996. Interest expense of the acquired
banks and additional interest costs to fund the acquisitions aggregated
approximately $6 million during the second quarter and $10.6 million
year-to-date. The remaining increase was caused by higher levels of interest
bearing liabilities, particularly federal funds purchased for one day periods
and other borrowed funds. The cost of total average interest bearing
liabilities during the first six months of 1997 of 4.4% did not change from
the same period in 1996.
PROVISION FOR LOAN LOSSES. The balance of the provision for loan losses is
maintained at a level that is, in management's judgment, adequate to absorb
losses inherent in the loan portfolio given past, present and expected
conditions. The provision for loan losses increased $397 and $1,129 for the
three and six month periods ended June 30, 1997, respectively, from the same
periods in 1996. A
12
<PAGE>
significant portion of these increases relate directly to the acquired banks,
$353 for the three month period and $919 for the six month period. The
remaining increases are associated with growth in loan volumes and slight
deteriorations in the agricultural and consumer loan portfolios. Although
non-performing and problem assets have shown some increases, the fundamental
economies within the Company's markets remain strong.
LIQUIDITY
The Company actively manages its liquidity position through established
policies and procedures. Management has also developed contingency plans to
address potential liquidity needs. The Company's current liquidity position
is supported largely through core deposits and from its investment portfolio.
The current investment portfolio contains a mix of maturities which provide a
structured flow of maturing and reinvestable funds that can be converted to
cash, should the need arise. Maturing balances in the loan portfolio also
provide options for managing cash flows and provide an important source of
intermediate and long-term liquidity.
Alternate sources of liquidity are provided by Federal funds lines carried
with upstream and downstream correspondent banks. Additional liquidity could
also be generated through borrowings from the Federal Reserve Bank of
Minneapolis and the Federal Home Loan Bank of Seattle. At June 30, 1997, the
Company had $8.8 million available on its revolving term loan.
OTHER OPERATING INCOME AND EXPENSE
OTHER OPERATING INCOME
Exclusive of income attributable to the acquired banks, other operating
income increased $261 or 5% during the second quarter of 1997 and decreased
less than 1% during the six months ended June 30, 1997 compared to the same
periods in the prior year. Trust and data division revenues contributed to
the increase in other operating income during the second quarter,
contributing an additional $121 of income primarily due to increases in
number of customers and transaction volumes. Year-to-date trust and data
revenues, however, show declines from the same period last year due to
non-recurring accrual adjustments made during January 1996. Service charges
on deposit accounts also contributed to the overall increase in other income,
up 5% for the quarter and year-to-date.
OTHER OPERATING EXPENSES
Overall, quarter-to-date and year-to-date other operating expense increased
approximately 55% from the same periods in the prior year. Expenses incurred
directly by the acquired banks aggregated approximately $3.6 million for the
three months ended June 30, 1997 and $8.1 million for the six months ended
June 30, 1997. In addition to the direct other operating expenses incurred
by the acquired banks, other operating expenses of the holding company and
other banking subsidiaries increased, particularly in the operations and data
divisions, due to the additional costs associated with providing support
services to the acquired banks.
SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense of $18 million
for the six months ended June 30, 1997 increased 55% over the same period in
1996. Salaries and benefits expenses for the three month period ended June
30, 1997 showed a similar increase over the same period in 1996. A
significant portion of the quarter-to-date and year-to-date increases are
attributable to the acquisitions and increased staffing levels necessary to
provide operational and other support functions to the acquired banks. The
remaining increases are primarily inflationary in nature.
FURNITURE, EQUIPMENT AND OCCUPANCY EXPENSE. Exclusive of increases directly
related to the acquired banks, occupancy, furniture and equipment expenses
increased approximately $255 or 10% during the
13
<PAGE>
three month period ended June 30, 1997 and $654 or 14% for the six
month period ended June 30, 1997. Increases are principally due to increased
depreciation on data processing equipment upgrades occurring during the
second half of 1996 and the first half of 1997 and the continuing upgrades
and expansion of the Company's micro-computer and ATM networks.
OTHER EXPENSES. Other expenses increased $2.6 million for the three months
ended June 30, 1997 compared to the same period in the prior year and $5.1
million for the six months ended June 30, 1997 compared to the same period in
the prior year. Of these increases, $1.2 million and $2.9 million for the
three and six month periods, respectively, relate directly to the acquired
banks. The remaining quarter-to-date and year-to-date increases from the
previous year are principally due to increases in advertising and public
relations costs, additional legal and professional costs, and increases in
postage, supply and telephone expenses.
Exclusive of expenses directly related to the acquired branches, advertising
and public relation expenses for the three and six month periods ending June
30, 1997 were approximately $229 higher than the same periods in 1996. These
increases are attributable to budgeted increases in advertising expense of
approximately $109 for the first half of 1997 combined with fluctuations in
the timing of public relation events in the current year compared to 1996.
Legal and professional expenses increased $367 during the three months ended
June 30, 1997 compared to the same period in the previous year and $634
during the first half of 1997 compared to the first half of 1996. Increases
of $300 and $484, not directly related to the acquired banks, are due
principally to consulting fees associated with revision of the Company's
employee job evaluation system and accruals for financial planning activities.
Office supply, postage and telephone expenses increased $273 during the
second quarter and $588 year-to-date compared to the same periods in 1996,
exclusive of expenses incurred by the acquired banks. These additional
expenses are primarily due to increased costs resulting from growth in the
Company's customer deposit base.
The above increases in other expense were offset by decreases in royalty fees
of $151 during the first half of 1997 due to the termination of a franchise
agreement with First Interstate Bancorp during May 1996.
Other quarter-to-date and year-to-date variances in other expenses from the
previous year are not considered individually significant.
14
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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.
27. Financial Data Schedule.
(b) No reports of Form 8-K were filed for the quarter ended
June 30, 1997.
</TABLE>
15
<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 7, 1997 /s/ William H. Ruegamer
-------------- --------------------------------------------
William H. Ruegamer
Director, Executive Vice President
and Chief Operating Officer
Date August 7, 1997 /s/ Terrill R. Moore
-------------- --------------------------------------------
Terrill R. Moore
Senior Vice President
and Chief Financial Officer
16
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 130,362
<INT-BEARING-DEPOSITS> 37
<FED-FUNDS-SOLD> 19,275
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,479
<INVESTMENTS-CARRYING> 313,452
<INVESTMENTS-MARKET> 312,081
<LOANS> 1,475,852
<ALLOWANCE> 28,757
<TOTAL-ASSETS> 2,131,351
<DEPOSITS> 1,673,035
<SHORT-TERM> 228,710
<LIABILITIES-OTHER> 19,497
<LONG-TERM> 56,184
0
20,000
<COMMON> 8,350
<OTHER-SE> 125,575
<TOTAL-LIABILITIES-AND-EQUITY> 2,131,351
<INTEREST-LOAN> 68,233
<INTEREST-INVEST> 11,289
<INTEREST-OTHER> 808
<INTEREST-TOTAL> 80,330
<INTEREST-DEPOSIT> 27,470
<INTEREST-EXPENSE> 34,373
<INTEREST-INCOME-NET> 45,957
<LOAN-LOSSES> 2,281
<SECURITIES-GAINS> 73
<EXPENSE-OTHER> 35,987
<INCOME-PRETAX> 21,174
<INCOME-PRE-EXTRAORDINARY> 13,094
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,094
<EPS-PRIMARY> 6.17
<EPS-DILUTED> 6.17
<YIELD-ACTUAL> 5.07
<LOANS-NON> 7,750
<LOANS-PAST> 3,769
<LOANS-TROUBLED> 1,352
<LOANS-PROBLEM> 69,421
<ALLOWANCE-OPEN> 27,797
<CHARGE-OFFS> 2,973
<RECOVERIES> 1,652
<ALLOWANCE-CLOSE> 28,757
<ALLOWANCE-DOMESTIC> 3,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,583
</TABLE>
