<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER: 33-84540
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC.
(Exact name of registrant as specified in charter)
MONTANA 81-0331430
(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
401 NORTH 31ST STREET
BILLINGS, MONTANA 59116
(State or other jurisdiction of (Zip Code)
incorporation or organization)
(406) 255-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, no par value Not applicable
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value (appraised minority value) of the voting stock
held by non-affiliates of the registrant as of March 5, 1997 was $26,997,022.
The number of shares outstanding of the Registrant's only class of common
stock as of March 5, 1997 was 1,974,162.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PART I
ITEM 1. BUSINESS
First Interstate BancSystem of Montana, Inc. ("FIBM" and collectively
with its subsidiaries, the "Company") is a bank and savings and loan
holding company registered as a bank holding company under the Bank
Holding Company Act of 1956 ("Act") and the Home Owners' Loan Act. FIBM
was incorporated on March 15, 1971. FIBM's primary business is that of
managing its wholly owned subsidiaries, First Interstate Bank of
Commerce in Montana ("FIBOC Montana"), First Interstate Bank of Commerce
in Wyoming ("FIBOC Wyoming"), First Interstate Bank of Montana, N.A.
("FIB Montana, NA"), First Interstate Bank of Wyoming, N.A. ("FIB
Wyoming, NA"), Mountain Bank in Whitefish, Montana doing business as
First Interstate Bank ("FIB Whitefish"), First Interstate Bank, fsb in
Hamilton, Montana ("First Interstate, fsb"), and Commerce Financial,
Inc. ("CFI"). FIBOC Montana has thirteen banking offices in eight
Montana communities. FIBOC Wyoming has six banking offices in four
Wyoming communities. FIB Montana, NA was acquired October 1, 1996 and
has three banking offices in three Montana communities. FIB Wyoming, NA
was also acquired on October 1, 1996 and has three banking offices in
three Wyoming communities. FIB Whitefish was acquired on December 18,
1996 and has two banking offices in two Montana communities. First
Interstate, fsb was opened as a de novo savings bank on December 12,
1996 and currently has only one banking office.
In addition to management of its subsidiaries, FIBM has a data processing
division headquartered in Billings, Montana, which performs data processing
services for FIBM's subsidiaries, and 35 non affiliated financial
institutions with 79 locations in Montana, Wyoming and Idaho. The data
processing division also provides ATM support for 138 financial institutions
in Montana, Wyoming, Idaho, Colorado and North Dakota.
In addition to being the sole shareholder, FIBM functions as a service
organization for each of its subsidiaries. FIBM provides advice, counsel and
specialized services to its subsidiaries in connection with a wide range of
banking and operating policies and activities. These services include data
processing, auditing, credit administration, planning coordination,
marketing, human resources management, asset/liability management and
investments.
BUSINESS OF FIBM'S SUBSIDIARIES
FIBOC Montana is a Montana chartered bank originally incorporated in 1916,
having its principal office in Billings, Montana. FIBOC Montana currently
has thirteen banking offices in eight Montana communities - Billings,
Bozeman, Missoula, Hardin, Miles City, Colstrip, Livingston, and Gardiner.
The present structure of FIBOC Montana began December 1, 1992, when FIBM
merged its eight Montana subsidiary banks into FIBOC Montana, which became a
state/federal reserve member bank with eight offices. FIBOC Montana opened an
additional banking office in Billings, Montana in December 1994, and an
additional banking office in Missoula, Montana in January 1995. Acquisitions
in 1995 increased FIBOC Montana's banking offices to the current number of
thirteen.
FIBOC Wyoming is a Wyoming chartered bank originally incorporated in
1893 and currently has six banking offices in four northern Wyoming
communities - Sheridan, Gillette, Greybull and Buffalo. The present
structure of FIBOC Wyoming was created on December 30, 1988, when FIBM
merged its five Wyoming subsidiary banks into FIBOC Wyoming, which
became a state non-federal reserve member bank with six offices.
FIB Montana, NA was acquired on October 1, 1996 and is a nationally chartered
bank. FIB Montana, NA has three banking offices in three Montana communities
- - Kalispell, Great Falls, and Cut Bank.
FIB Wyoming, NA was acquired on October 1, 1996 and is a nationally chartered
bank. FIB Wyoming, NA has three banking offices in three Wyoming communities
- - Casper, Laramie and Riverton.
First Interstate, fsb is a nationally chartered savings bank with its only
office located in Hamilton, Montana. First Interstate, fsb was a de novo
charter, and first opened for business on December 12, 1996.
FIB Whitefish, which was acquired on December 18, 1996, is a Montana
chartered bank having its principal office in Whitefish, Montana. FIB
Whitefish currently has two banking offices in two northwestern Montana
communities - Whitefish and Evergreen.
FIBM's banking subsidiaries are each engaged in general commercial banking
activities, including all types of demand and time deposits, trust services,
and commercial, agricultural, real estate, personal and consumer loans. The
banks also provide such other services as are generally furnished by
commercial banks located in the principal cities and towns of Montana and
Wyoming.
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CFI, FIBM's only nonbank subsidiary, was incorporated in 1978, principally to
originate and broker secured real estate loans. During the past five years,
CFI's principal activity has been the liquidation of assets acquired through
foreclosure actions by FIBM.
SUPERVISION AND REGULATION
Bank holding companies, commercial banks and savings banks are extensively
regulated under both federal and state law. Any change in applicable law or
regulation may have a material effect on the business and prospects of the
Company and the banks.
The FIBM, as a registered bank holding company, is subject to the supervision
of and regulation by the Federal Reserve Board ("FRB") under the Bank Holding
Company Act of 1956. Also, as a registered savings and loan holding company,
the Company is subject to the supervision of and regulation by the Office of
Thrift Supervision ("OTS").
FIB Montana, NA and FIB Wyoming NA are subject to the supervision of, and
regular examination by, the Office of the Comptroller of the Currency
("OCC"). First Interstate, fsb is subject to the supervision of, and regular
examination by, the OTS. FIBOC Wyoming is subject to the supervision of, and
regular examination by, the Federal Deposit Insurance Corporation ("FDIC")
and State of Wyoming. FIBOC Montana is subject to the supervision of, and
regulations by, the FRB and State of Montana. FIB Whitefish is subject to
the supervision of, and regular examination by, the FDIC and State of
Montana. The FDIC insures the deposits of the banks to the current maximum
of $100,000 per depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") passed by Congress and signed into
law on September 29, 1994, significantly changed interstate banking rules.
Pursuant to the Interstate Banking and Branching Act, bank holding companies
are able to acquire banks in states other than its home state effective
September 29, 1995, regardless of applicable state law.
In March 1997, Montana enacted legislation effective July 1, 1997 which
authorizes de novo branching within the state by banks with a charter in
Montana.
The policy of the FRB provides that a bank holding company is expected to act
as a source of financial strength to its subsidiary banks and to commit
resources to support each subsidiary bank in circumstances which it might not
do so absent such policy.
FIBM is a legal entity separate and distinct from its subsidiaries. FIBM's
revenues (on a parent company basis) result in part from dividends of its
banking subsidiaries. Under Montana banking law, neither FIBOC Montana nor
FIB Whitefish may declare dividends in any one calendar year in excess of its
net profits of the preceding two years without the approval of the Montana
Commissioner of Financial Institutions. Under Wyoming banking law, FIBOC
Wyoming may not, without the approval of the Wyoming State Examiner, declare
dividends in any one calendar year in excess of its net profits in the
current year combined with retained net profits of the preceding two years,
less any required transfers to surplus. Under national banking laws, neither
FIB Montana, NA nor FIB Wyoming, NA may declare dividends in any one calendar
year in excess of its net profits of the preceding two years without the
approval of the OCC. FIBM's loan agreement with its primary lender prohibits
declaration or payment of dividends to shareholders in excess of 33% of
FIBM's net income for the immediately preceding year. FIBM has also agreed
with its primary lender to maintain capital levels in its banking
subsidiaries that the FDIC would categorize as "Adequately Capitalized".
In addition, federal regulatory agencies (e.g., the FDIC, OCC, OTS and FRB)
have authority to prohibit a bank under their supervision from engaging in
practices which, in the opinion of the federal regulatory agency, are unsafe
or unsound or constitute violations of applicable law. Each federal
regulatory agency has established guidelines for the maintenance of
appropriate levels of capital for a bank under its supervision. Compliance
with the standards set forth in such guidelines could limit the amount of
dividends which a bank could pay.
RECENT DEVELOPMENTS
On October 1, 1996, FIBM purchased all of the outstanding capital stock of
FIB Wyoming, NA and FIB Montana, NA from Wells Fargo and Company. On October
1, 1996, these two banks had total assets of $324.2 million and $276.4
million, respectively. The transaction was accounted for using the purchase
method of accounting.
In conjunction with the acquisition of FIB Wyoming, NA and FIB Montana,
NA, FIBM issued $20 million of non-voting, non-cumulative preferred
stock, and $20 million of subordinated debt and refinanced its existing term
indebtedness, adding an additional $32 million.
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On December 12, 1996, FIBM opened First Interstate, fsb, a national savings
bank with its only office in Hamilton, Montana with initial capitalization of
$2 million.
On December 18, 1996, FIBM acquired all the outstanding capital stock of FIB
Whitefish with offices in Whitefish and Evergreen, Montana. On December 18,
1996, FIB Whitefish had total assets of $70.9 million. The transaction was
accounted for using the purchase method of accounting. The transaction cost
of $7.9 million was funded with cash reserves and advances on FIBM's
outstanding term loan.
In the first quarter of 1997, FIBM has made application with appropriate
regulatory agencies to merge FIB Wyoming, NA into FIBOC Wyoming and to merge
both FIB Montana, NA and FIB Whitefish into FIBOC Montana. Consummation of
these banking subsidiary mergers is expected to be completed in the second
quarter of 1997.
See also "Notes to Consolidated Financial Statements - Acquisitions and
Expansion" of the financial statements included herewith in Exhibit 14.
In September 1983, FIBM entered into a franchise agreement ("Franchise
Agreement") with First Interstate Bancorp ("First Interstate"), a Los Angeles
based bank holding company which was acquired by Wells Fargo and Company
April 1, 1996. Under the Franchise Agreement, FIBM was First Interstate's
exclusive licensee in the states of Montana and Wyoming. On May 24, 1996,
FIBM 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 FIBM and Wells Fargo and Company was terminated.
ITEM 2. PROPERTIES
FIBM's executive offices are located in the same building in which the home
office of FIBOC Montana is located. The Billings office, which subleases
space to FIBM as part of a master lease, is the anchor tenant in an eighteen
story building. FIBOC Montana owns a 50% undivided interest in the building.
In addition, FIBOC Montana leases the buildings in which the West Billings,
South Missoula and Gardiner branches are located.
FIBM's subsidiaries own twenty-four buildings in fourteen communities which
are used, in whole or in part, in its banking operations.
See also "Notes to Consolidated Financial Statements - Premises and
Equipment" and "Notes to Consolidated Financial Statements - Commitments
and Contingencies" of the financial statements included herewith in
exhibit 14.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of their business, the Company's bank subsidiaries
are named or threatened to be named as defendants in various lawsuits.
With respect to each of these suits, it is the opinion of management,
following consultation with legal counsel, that 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
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of FIBM is not actively traded, and there is no established
public trading market for the stock. There is only one class of common stock
with 93.7% of the shares restricted by agreement and 6.3% held by 13
shareholders are unrestricted. FIBM has the right of first refusal to
purchase the restricted stock at the most recent quarterly appraised minority
value, less dividends paid since the appraisal date. All unrestricted stock
is purchased and sold at a price per share that is acceptable to the
shareholder. Quarter-end minority appraisal values for the past two years
follows:
APPRAISED
VALUATION DATE(1) MINORITY VALUE(2)(3)
----------------- --------------------
December 31, 1994 $ 66.25
March 31, 1995 67.50
June 30, 1995 69.50
September 30, 1995 72.00
December 31, 1995 75.00
March 31, 1996 77.50
June 30, 1996 79.50
September 30, 1996 81.00
December 31, 1996 86.00
(1) Sales of stock between valuation dates are adjusted for cash
dividends paid.
(2) Prior to dividends.
(3) Based upon appraisal by Alex Sheshunoff & Co. Investment Banking.
As of March 5, 1997, options for 31,667 shares of the FIBM's common stock
were outstanding at various contractual exercise prices, ranging from $18.97
to $80.21. The aggregate cash proceeds to be received by FIBM upon exercise
of all options outstanding at March 5, 1997 would be $1.6 million, or a
weighted average exercise price of $50.54 per share.
The book value per share of FIBM's Common Stock as of February 28, 1997 was
$64.77. The appraised minority value, adjusted for dividends paid in January
1997, was $85.13 at February 28, 1997.
Resale of FIBM stock may be restricted pursuant to the Securities Act of 1933
and applicable state securities laws. In addition, most shares of FIBM stock
are subject to one of two shareholder's agreements. Members of the Scott
family, as majority shareholders of FIBM, are subject to a Shareholder's
Agreement ("Scott Agreement"). The Scott Family, under the Scott Agreement,
has agreed to limit the transfer of shares owned by members of the Scott
Family to family members or charities, or with FIBM's approval, to the
Company's officers, directors, advisory directors, or to the Savings Plan.
Shareholders of the Company who are not Scott Family members, with the
exception of 13 shareholders who own 124,092 shares of unrestricted
stock, are subject to a Shareholder's Agreement ("Shareholder's
Agreement"). The Shareholder's Agreement grants FIBM the option to
purchase the stock at the minority appraised value per share (less
dividends paid since the date of the last appraisal) in any of the
following events: 1) the shareholder's intention to sell the stock, 2)
the shareholder's death, 3) transfer of the stock by operation of law,
4) termination of the shareholder's status as a director, officer or
employee of the Company, and 5) total disability of the shareholder.
Stock subject to the Shareholder's Agreement may not be sold or
transferred by the shareholder without triggering FIBM's option to
acquire the stock in accordance with the terms of the Shareholder's
Agreement. In addition, the Shareholder's Agreement allows FIBM to
repurchase any of the FIBM stock acquired by the shareholder after
January 1, 1994 if FIBM determines that the number of shares owned by
the shareholder is excessive in view of a number of factors including
but not limited to (a) the relative contribution of the shareholder to
the economic performance of the Company, (b) the effort being put forth
by the shareholder, and (c) the level of responsibility of the
shareholder.
Purchases of FIBM common stock made through FIBM's Savings Plan are not
restricted by the Shareholder's Agreement, due to requirements of ERISA and
the Internal Revenue Code. However, since the Savings Plan does not allow
distributions "in kind," any distributions from an employee's account in the
Savings Plan will allow, and may require, the Savings Plan trustee to sell
the FIBM stock. While FIBM has no obligation to repurchase the stock, it is
possible that FIBM will repurchase FIBM stock sold out of the Savings Plan.
Any such repurchases would be upon terms set by the Savings Plan trustee and
accepted by FIBM.
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There are 298 shareholders of FIBM as of March 5, 1997, including the
Company's Savings Plan as trustee for shares held on behalf of 467 individual
participants in the plan. 155 individuals in the Savings Plan also own
shares of FIBM stock outside of the Plan. The Plan is administered by the
Trust department of FIBOC Montana, which votes the shares based on the
instructions of each participant. In the event the participant does not
provide the Trustee with instructions, the Trustee will vote those shares in
accordance with voting instructions received from a majority of the
participants in the Plan.
It is the policy of FIBM to pay a dividend to all common shareholders
quarterly. Dividends are paid in the month following the calendar quarter
and the amount has been determined based upon a percentage of net income for
the calendar quarter immediately preceding the dividend payment date.
Dividends for second and third quarters of 1995 were calculated at the rate
of 25% of net income. Prior to July 1995, 20% of net income was paid
quarterly as a dividend. Effective with the dividend for the fourth quarter
of 1995 paid in January 1996, the dividend was increased to 30% of quarterly
net income. The Board of Directors of FIBM has no current intention to
change its dividend policy, but no assurance can be given that the Board may
not, in the future, limit or eliminate the payment of dividends.
Historical quarterly dividends for 1995 and 1996 were as follows:
AMOUNT TOTAL CASH
QUARTER MONTH PAID PER SHARE DIVIDEND
------- ---------- --------- ----------
4th quarter 1994 January 1995 $ .38 $ 744,482
1st quarter 1995 April 1995 $ .39 $ 763,700
2nd quarter 1995 July 1995 $ .56 $ 1,093,372
3rd quarter 1995 October 1995 $ .58 $ 1,131,304
4th quarter 1995 January 1996 $ .71 $ 1,384,775
1st quarter 1996 April 1996 $ .81 $ 1,572,131
2nd quarter 1996 July 1996 $ .76 $ 1,505,941
3rd quarter 1996 October 1996 $ .79 $ 1,564,878
4th quarter 1996 January 1997 $ .87 $ 1,721,584
Federal laws and regulations contain restrictions on the ability of FIBM and
its subsidiaries to pay dividends. For information regarding restrictions on
dividends, see Part I, Item 1, "Supervision and Regulation."
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
5-Year
Compound
1996/95 Percent
1996 1995 1994 1993 1992 % Change Change
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<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Data:
Earnings per share $ 10.57 8.84 8.02 7.83 6.94 19.5 18.9
Dividends paid per share 3.07 1.91 1.58 1.35 1.12 60.7 29.3
Book value at December 31 63.72 56.15 48.62 42.73 36.28 13.5 15.9
Appraised minority value
at December 31 86.00 75.00 66.25 50.00 42.00 14.7 NM
Dividend payout 29.1% 21.6% 19.7% 17.2% 16.1% 34.5 8.8
Common shares outstanding:
December 31 1,978 1,948 1,959 1,970 1,981 1.6 (0.7)
Weighted average 1,970 1,961 1,963 1,973 1,996 0.5 (0.7)
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Income:
Net interest income $ 67,906 57,024 51,779 50,076 46,718 19.1 11.5
Provision for loan losses 3,844 1,629 1,344 1,345 1,630 136.0 8.6
Noninterest income 23,927 18,764 16,387 15,724 14,936 27.5 11.6
Noninterest expense 53,395 45,978 41,227 39,686 37,985 16.1 7.5
Income taxes 13,351 10,844 9,861 9,321 8,179 23.1 24.4
Net income 21,243 17,337 15,734 15,448 13,860 22.5 18.5
Net income applicable to
common stock 20,818 17,337 15,734 15,448 13,860 20.1 18.0
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Average Balance Sheet:
Investment securities $ 285,282 230,501 239,284 234,244 228,263 23.8 5.4
Loans, net of unearned
income 1,014,901 837,288 705,690 641,411 595,026 21.2 12.0
Allowance for loan losses 18,150 14,927 13,736 13,330 12,852 21.6 8.2
Total interest earning
assets 1,332,200 1,109,587 975,809 915,080 865,310 20.0 10.0
Total assets 1,506,088 1,244,499 1,094,415 1,028,204 971,814 21.0 10.0
Interest-bearing deposits 969,068 816,248 734,903 722,213 707,131 18.7 7.3
Short-term borrowings 126,135 97,799 72,367 46,453 34,502 29.0 25.0
Long-term debt 23,760 13,147 6,195 6,614 5,883 80.7 25.0
Total interest-bearing
liabilities 1,125,763 927,194 813,465 775,280 747,516 21.4 9.0
Total deposits 1,211,185 1,019,506 916,788 888,178 854,447 18.8 8.3
Stockholders' equity 121,721 102,086 89,210 77,351 67,833 19.2 15.3
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End of Period Balance Sheet:
Investment securities $ 403,571 258,737 251,745 249,754 226,821 56.0 10.8
Loans, net of unearned
income 1,375,479 870,378 751,518 667,385 607,125 58.0 18.7
Allowance for loan losses 27,797 15,171 13,726 13,373 12,965 83.2 17.8
Total interest earning
assets 1,790,540 1,196,575 1,011,531 984,265 911,971 49.6 15.5
Total assets 2,063,837 1,351,215 1,134,105 1,097,469 1,022,392 52.7 16.0
Interest-bearing deposits 1,294,053 868,933 742,557 747,560 726,240 48.9 12.7
Short-term borrowings 155,658 113,517 84,111 60,251 35,040 37.1 32.3
Long-term debt 64,667 15,867 5,449 6,853 5,254 307.6 55.9
Total interest-bearing
liabilities 1,514,378 998,317 832,117 814,664 766,534 51.7 14.9
Total deposits 1,679,424 1,099,069 939,857 936,793 900,465 52.8 14.3
Stockholders' equity 146,061 109,366 95,272 84,163 71,852 33.6 18.6
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Selected Ratios:
Return on average assets 1.41% 1.39 1.44 1.50 1.43
Return on average common
stockholders' equity 17.84% 16.98 17.64 19.97 20.43
Net interest margin, FTE 5.16% 5.19 5.34 5.51 5.45
Net interest spread, FTE 4.47% 4.45 4.76 4.98 4.87
Efficiency ratio 56.78% 60.46 60.78 60.73 62.87
Equity to assets,
December 31 7.08% 8.09 8.40 7.67 7.03
Equity to assets, average 8.08% 8.20 8.15 7.52 6.98
Average loans to average
deposits 83.56% 82.13 76.97 72.22 69.64
Average loans to average
assets 67.39% 67.28 64.48 62.38 61.23
Allowance for loan losses
to loans at December 31 2.02% 1.74 1.83 2.00 2.14
Net loans charged off to
average loans 0.17% 0.13 0.14 0.15 0.15
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</TABLE>
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NM - Not Meaningful
FTE - Fully taxable equivalent
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The profitability of FIBM is primarily dependent on the net interest income
of its subsidiary banks. Net interest income is the difference between the
bank's interest and dividend income on interest-earning assets (principally
loans and investment securities) and interest expense on interest-bearing
liabilities and borrowings. Net income is also affected by the quality of
its loan portfolio and related provisions for loan losses, as well as the
amount of non-interest income, including loan fees, service charges and other
fees, and non-interest expenses. Operating results of FIBM's banking
operations are also affected, to a lesser extent, by the type of lending,
fixed rate versus adjustable or short-term, each of which has a different
rate and fee structure. Operating expenses of FIBM's banking operations
principally consist of employee compensation, occupancy expenses, furniture
and equipment expenses and other general and administrative expenses.
FIBM generates its income from (1) dividends received from its bank
subsidiaries, (2) undistributed earnings of subsidiaries, (3) management fees
charged to subsidiaries, (4) net data processing income, and (5) other
income, principally federal income tax benefits. In 1996, 69%, 14%, 6%, 7%
and 4% of FIBM's income was generated by each of the above five sources,
respectively.
FIBM's net income is also effected by the profitability of its data
processing division. Income of the data division includes data service fees
for item processing, ATM services, and bank data processing services,
including general ledger, investment securities, loans, deposits and
asset/liability management. Expenses of the data division are primarily
employee compensation, equipment maintenance and depreciation, leased
telephone lines and supplies.
To a lesser extent, FIBM's net income is also effected by the profitability
of its trust operations. Income of FIBM's trust operations are the result of
trust administration fees charged to trust customers. Expenses of FIBM's
trust operations are principally employee compensation and related benefits,
and other general administrative expenses.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NET INCOME. 1996 was another excellent year for the Company. For the
eighth consecutive year, the Company exceeded all of its prior earnings
records, recording net income of $21,243 in 1996, which topped 1995 net
income of $17,337 by $3,906 or 22.5%. Net income in 1995 was up $1,603
or 10.2% from 1994 earnings of $15,734. The increases in 1996 and 1995
were due in large part to the acquisitions of FIB Montana, NA and FIB
Wyoming, NA at the beginning of the fourth quarter of 1996 and the
acquisition of Citizens BancShares, Inc. ("CBI") and First Park County
BancShares, Inc. ("FPCBI") which occurred effective January 3, 1995 and
May 19, 1995, respectively. The additional consolidated earnings as a
direct result of the acquisitions in both years were partially offset by
lower short-term investment income and higher interest expense at the
Parent Company as a result of funding of the acquisitions.
NET INTEREST INCOME. Net interest income is the largest source of the
Company's operating income. Net interest income increased to $67,906 in
1996, up $10,882 or 19.1% from 1995 net interest income of $57,024. 1995 net
interest income was $5,245 higher than 1994 net interest income of $51,779,
an increase of 10.1%.
Substantially all of the $10,882 increase in net interest income in 1996 was
the result of increases in volume which were due in large part to the
acquisitions of FIB Montana, NA and FIB Wyoming, NA at the beginning of the
fourth quarter. The acquisition of FIB Whitefish in mid-December, to a much
lesser degree, also contributed to the increase in net interest income in
1996. The net interest income of banks acquired in 1996 aggregated
approximately $6,660, but was partially offset by approximately $1,130 of
interest expense of the Parent Company in the fourth quarter from increased
senior indebtedness and new subordinated notes to fund the acquisitions.
In 1995, approximately $4,000 of the increase in consolidated net interest
income was net interest income resulting from the acquisitions of CBI and
FPCBI. Additional interest expense at the Parent Company resulting from
increased indebtedness to fund these acquisitions partially offset the
increased net interest margin in 1995 by approximately $800.
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The effect on FIBM's interest income and interest expense due to the changes
in volume and rate for the periods indicated are shown below (in thousands):
<TABLE>
<CAPTION>
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES
- -------------------------------------------------------------------------------------------------------
YEAR 1996 Year 1995
OVER YEAR 1995 Over Year 1994
CHANGES DUE TO NET Changes Due to Net
VOLUME RATE CHANGE Volume Rate Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing deposits $ 17 (13) 4 128 95 223
U.S. and agencies 2,518 155 2,673 (993) 418 (575)
Tax exempt securities 266 (67) 199 486 (34) 452
Other securities 495 33 528 96 (158) (62)
Federal funds sold (640) (113) (753) 369 533 902
Loans 17,761 (1,457) 16,304 12,291 5,509 17,800
- -------------------------------------------------------------------------------------------------------
Total 20,417 (1,462) 18,955 12,377 6,363 18,740
- -------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing demand 944 (703) 241 184 577 761
Savings 216 (221) (5) (113) 332 219
Savings - market 1,253 140 1,393 90 1,537 1,627
CD's over $100,000 987 (54) 933 617 1,116 1,733
CD's under $100,000 3,010 10 3,020 2,339 3,223 5,562
IRA's 650 (8) 642 364 386 750
Federal funds purchased and securities
sold under repurchase agreements 394 (359) 35 52 316 368
Borrowed money 2,030 (216) 1,814 1,441 1,034 2,475
- -------------------------------------------------------------------------------------------------------
Total 9,484 (1,411) 8,073 4,974 8,521 13,495
- -------------------------------------------------------------------------------------------------------
Net interest income $ 10,933 (51) 10,882 7,403 (2,158) 5,245
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
Note: Because of the numerous simultaneous volume and rate changes during the
period analyzed, it is not possible to precisely allocate the changes between
volumes and rates. For purposes of this table, changes which are not due
solely to volume changes or to rate changes have been allocated to these
categories based on the respective percent changes in average volume and
average rate as they compare to each other.
The primary component of the year-to-year increases in net interest income is
the growth in the volume of earning assets. As shown in the above table, net
interest income was significantly impacted by the increases in earning assets
associated with banking acquisitions in 1996 and 1995, coupled with steady
growth in average earning assets. Net interest income in 1995 was also
affected by changes in interest rates, while rate changes in 1996 resulted in
little change in net interest income. The net interest margin for 1995 of
5.16% is only 3 basis points lower than 1995's margin of 5.19%. The net
interest margin for 1995 is 15 basis points lower than 1994's margin of
5.34%. The effect of these changes in percentage margin on net interest
income is shown in the above table as the change due to rate.
-9-
<PAGE>
AVERAGE BALANCE SHEETS, YIELDS AND RATES
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ---------------------------------------------
AVERAGE AVERAGE Average Average
BALANCE INTEREST RATE Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in banks $ 6,555 376 5.74% $ 6,276 372 5.93%
U.S. and agencies 244,314 13,951 5.71 199,750 11,278 5.65
Tax exempt securities(1) 19,100 1,575 8.25 15,704 1,230 7.83
Other securities 21,868 1,392 6.37 13,904 864 6.21
Federal funds sold 25,462 1,342 5.27 36,665 2,095 5.71
Loans(1)(2)(3) 1,014,901 100,039 9.86 837,288 83,735 10.00
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing assets 1,332,200 118,675 8.91 1,109,587 99,574 8.97
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 104,293 81,031
Premises and equipment, net 38,664 29,477
Accrued interest receivable 15,549 13,993
Excess purchase price of subsidiaries 16,492 9,813
Other real estate owned 1,428 1,436
Allowance for loan losses (18,150) (14,927)
Other assets 15,612 14,089
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,506,088 $ 1,244,499
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand 210,153 4,489 2.14% 171,933 4,248 2.47
Savings 112,225 3,216 2.87 105,182 3,221 3.06
Savings - market 188,778 8,089 4.28 159,016 6,696 4.21
CD's over $100 98,683 5,514 5.59 81,191 4,581 5.64
CD's under $100 319,444 18,064 5.65 263,325 15,044 5.71
IRA's 46,585 2,750 5.90 35,601 2,108 5.92
Federal funds purchased 18,687 1,043 5.58 16,596 1,008 6.07
Securities sold under repurchase
agreements 101,046 4,508 4.46 75,252 3,560 4.73
Other borrowed funds and long-term
debt 30,162 2,346 7.78 19,098 1,480 7.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,125,763 50,019 4.44 927,194 41,946 4.52
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 242,117 203,258
Accounts payable and accrued expenses 16,487 11,961
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,384,367 1,142,413
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 121,721 102,086
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 1,506,088 $ 1,244,499
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets 8.91 8.97
Interest expense/earning assets 3.75 3.78
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income/earning assets 68,656 5.16 57,628 5.19
Less FTE adjustments 750 604
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $ 67,906 $ 57,024
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
-10-
<PAGE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
1994 1993
------------------------------------------ ---------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in banks $ 3,381 149 4.41% $ 9,507 $ 352 3.70%
U.S. and agencies 218,012 11,853 5.44 206,902 12,913 6.24
Tax exempt securities(1) 8,133 522 6.42 6,345 502 7.92
Other securities 12,599 926 7.35 20,737 1,270 6.12
Federal funds sold 27,994 1,193 4.26 30,178 873 2.89
Loans(1)(2)(3) 705,690 65,936 9.34 641,411 61,619 9.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing assets 975,809 80,579 8.26 915,080 77,529 8.47
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 75,410 69,371
Premises and equipment, net 26,475 27,029
Accrued interest receivable 11,262 10,985
Excess purchase price of subsidiaries 3,378 3,654
Other real estate owned 2,225 4,079
Allowance for loan losses (13,736) (13,330)
Other assets 13,592 11,336
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,094,415 $ 1,028,204
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand 163,318 3,487 2.14 159,321 3,551 2.23
Savings 109,279 3,002 2.75 106,916 3,135 2.93
Savings - market 156,242 5,069 3.24 155,068 4,895 3.16
CD's over $100 66,751 2,848 4.27 63,002 2,558 4.06
CD's under $100 211,238 9,482 4.49 208,791 9,547 4.57
IRA's 28,075 1,358 4.84 29,115 1,512 5.19
Federal funds purchased 15,358 690 4.49 1,299 39 3.00
Securities sold under repurchase
agreements 52,157 1,814 3.48 37,839 1,045 2.76
Other borrowed funds and long-term 11,047 701 6.35 13,929 796 5.71
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 813,465 28,451 3.50 775,280 27,078 3.49
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 181,885 165,965
Accounts payable and accrued expenses 9,855 9,608
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,005,205 950,853
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 89,210 77,351
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 1,094,415 $ 1,028,204
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets 8.26 8.47
Interest expense/earning assets 2.92 2.96
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income/earning assets 52,128 5.34 50,451 5.51
Less FTE adjustments 349 375
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $ 51,779 $ 50,076
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31,
---------------------------------------------
1992
------------------------------------------
Average Average
Balance Interest Rate
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in banks $ 301 $ 14 4.65%
U.S. and agencies 190,568 14,351 7.53
Tax exempt securities(1) 6,669 640 9.59
Other securities 30,725 1,831 5.96
Federal funds sold 42,021 1,396 3.32
Loans(1)(2)(3) 595,026 60,923 10.24
- ------------------------------------------------------------------------------------
Total interest-bearing assets 865,310 79,155 9.15
- ------------------------------------------------------------------------------------
Cash and due from banks 65,517
Premises and equipment, net 23,688
Accrued interest receivable 11,294
Excess purchase price of subsidiaries 3,930
Other real estate owned 5,379
Allowance for loan losses (12,852)
Other assets 9,548
- ------------------------------------------------------------------------------------
Total assets $971,814
- ------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand 152,768 4,614 3.02
Savings 101,765 3,692 3.63
Savings - market 153,145 5,826 3.80
CD's over $100 54,818 2,717 4.96
CD's under $100 214,672 11,520 5.37
IRA's 29,963 1,761 5.88
Federal funds purchased 991 45 4.54
Securities sold under repurchase
agreements 21,586 714 3.31
Other borrowed funds and long-term
debt 17,808 1,100 6.18
- ------------------------------------------------------------------------------------
Total interest-bearing liabilities 747,516 31,989 4.28
- ------------------------------------------------------------------------------------
Noninterest-bearing deposits 147,316
Accounts payable and accrued expenses 9,149
- ------------------------------------------------------------------------------------
Total liabilities 903,981
- ------------------------------------------------------------------------------------
Stockholders' equity 67,833
- ------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 971,814
- ------------------------------------------------------------------------------------
Interest income/earning assets 9.15
Interest expense/earning assets 3.70
- ------------------------------------------------------------------------------------
Net interest income/earning assets 47,166 5.45
Less FTE adjustments 448
- ------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $ 46,718
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
(1) Interest income and average rates for certain loans and
securities exempt from federal income taxes are presented on
a fully-taxable equivalent basis.
(2) Average loan balances include nonaccrual loans.
(3) Loan fees included in interest income for financial reporting
purposes were $5,028, $4,070, $4,213, $4,847 and $4,055 for
the years ended December 31, 1996, 1995, 1994, 1993, and
1992, respectively.
-11-
<PAGE>
Customer loan fees, included in interest income for financial reporting
purposes, were $5,028 in 1996, up $958 or 23.5% from $4,070 in 1995. Loan
fees in 1995 were down $143 or 3.4% from $4,213 in 1994. Customer loan fees
included in 1996 and 1995 income associated with banking acquisitions were
$136 and $131, respectively. The decline in customer loan fees in 1995 was
principally the result of reduced real estate loan processing in the first
half of 1995, However, new real estate loans and refinancing of existing
loans rebounded in the last half of 1995 and continued through 1996,
resulting in an increase in real estate loan fees of $402 in 1996 of which
only $31 was the result of acquisitions. Loan fees for other categories of
loans also increased in 1996 from 1995. Agricultural loan fees increased $33
of which $10 was acquisition-related. But the most significant increases
were in commercial and consumer loan fees which contributed over half the
overall increase in loan fees.
Maintaining steady growth in net interest income is one of the Company's
primary objectives and is monitored by management through its asset/liability
management process. The Company has historically achieved this objective, in
part, as a result of having the necessary 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 $3,844 and
$1,629 for the years ended December 31, 1996 and 1995, respectively, as
compared to $1,344 in 1994. Of the $2,215 increase in the 1996 loan loss
provision, $500 is related to acquired banking locations. The remaining
increase of $1,715 from 1995 is principally associated with overall increases
in loan volumes and a slight deterioration in agricultural and consumer
lending loans. Net chargeoffs as a percentage of average loans was .17% in
1996, up slightly from .13% in 1995, and .14% of in 1994. The allowance for
loan losses as a percentage of loans increased to 2.02% at December 31, 1996
from 1.74% and 1.83% at December 31, 1995 and 1994, respectively, in large
part due to reserve balances of banks acquired. Loan loss provisions and
reserve levels are reflective of the levels of problem and classified loans.
Total classified loans increased $7,892 or 47.3% to $24,579 at December 31,
1996 from $16,687 at December 31, 1995. Total problem loans increased
$22,448 or 82.8% from $27,097 at December 31, 1995 to $49,545 at December 31,
1996. Total nonaccrual loans increased $3,190 or 87.8% between years to
$6,822 at December 31, 1996. These increases in levels of problem,
classified, and nonaccrual loans are due to bank acquisitions in 1995 and
1996, increases in outstanding loans, and the slight deterioration in the
agricultural and consumer sector. Further discussion on loan quality and the
allowance for loan losses is included later in this review in the PROBLEM AND
CLASSIFIED LOANS section.
Management actively monitors local industry for strengths and diversity and
unemployment levels, and evaluates its banking markets for their effects on
its loan portfolio. Although nonperforming and problem assets increased in
1996, the fundamental economies within the Company's markets have remained
strong. The loan loss provisions and current levels of loan loss reserves
reflect management's evaluation of the risks inherent in the loan portfolio
and local economic conditions. Should a significant shift in economic trends
and/or increased volumes of problem credits or charge-offs occur, such events
would likely require increased loan loss provisions in the future.
NON-INTEREST INCOME. Total noninterest income increased $5,163 to $23,927
from $18,764 for the years ended December 31, 1996 and 1995, respectively.
Of this increase, approximately $1,450 is attributed to acquisitions in 1996.
In 1995, total noninterest income was up $2,377 from $16,387 in 1994, of
which approximately $719 is attributed to the CBI and FPCBI acquisitions in
1995.
Revenue from fiduciary activities increased $542 to $3,161 in 1996 from $2,619
in 1995, due in part to $243 of additional revenues of the banks acquired in
1996, but also the result of fee increases that took effect at the end of
1994, more aggressive marketing of its fiduciary services in 1995 and 1996,
and increased market values of the trusts under management.
Revenues from data processing services increased $1,128 or 18.2% to $7,324 in
1996 from $6,196 in 1995, which were up $1,450 or 30.6% from revenues of
$4,746 in 1994. The increase in data processing revenue is the result of
increases in data processing customers and the resulting increase in
transaction volumes. During 1996 and 1995, the Company's data processing
division expanded its ATM network from 216 total ATM locations at the
beginning of 1995 to 343 at December 31, 1995 and to 477 at December 31,
1996. Although future growth in data processing revenues is not assured,
continued expansion of the Company's ATM network and, to a lesser degree,
regular data processing services are expected to continue into 1997, although
not at the rates experienced in 1996 and 1995. Increases in data processing
revenues as the result of expansion of the Data Division's customer base have
been offset by similar increases in operating expenses of the Data Division.
On a pretax basis, data processing division revenues, net of its direct
operating expenses for 1996, increased $324 or 19.4% from 1995, which was up
$359 or 27.5% from 1994. There were no increases in basic charges for data
processing services in 1996 or 1995.
-12-
<PAGE>
Service charges on deposit accounts increased $1,220 or 18.7% to $7,752 from
$6,532 in 1995. Of this amount, approximately $650 is attributable to
banking acquisitions. The remaining increase is primarily the result of
increases in overdraft fees. Other service charges, commissions and fees
increased $322 in 1996, primarily the result of banking acquisitions during
the year.
Other income more than doubled in 1996, increasing $1,927 from $888 in 1995
to $2,815 in 1996. Banks acquired in 1996 generated other income aggregating
$135 in the last quarter of the year, however, the most significant component
was from the sale of merchant credit card processing at a gain of $1,359 in
December 1996. The sale included alignment with a specialized merchant
processing provider that enhances the Company's ability to compete in this
highly specialized area.
NON-INTEREST EXPENSES. Total non-interest expenses increased $7,417 to
$53,395 for the year ended December 31, 1996 from $45,978 for the year ended
December 31, 1995. Approximately $6,375 of the increase relates to banking
locations added as a result of the acquisitions. The remaining increase of
approximately $1,040 or 2.3%, is principally inflationary increases. Total
non-interest expenses increased $4,751 from $41,227 for the year ended
December 31, 1994. Approximately $3,320 of the increase relates to banking
locations added as a result of the CBI and FPCBI acquisitions, while an
additional $651 relates to the addition of two new banking offices opened in
Billings (December 1994) and Missoula (January 1995). The remaining increase
of $780 or 1.9% of 1994 expense is principally inflationary increases. The
following table lists significant operating expenses:
<TABLE>
<CAPTION>
Year ended December 31, 1996 CHANGE 1995 Change 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 27,531 16.2% $ 23,694 1.9% $21,179
Occupancy, furniture and equipment 10,754 17.4 9,160 13.0 8,104
FDIC insurance 5 (99.6) 1,127 (43.9) 2,008
Postage and freight 1,405 (8.4) 1,534 33.0 1,153
Stationary and supplies 1,742 22.1 1,427 30.1 1,097
Legal, audit and other professional fees 1,441 41.7 1,017 37.2 741
Telecommunications 974 23.9 786 21.1 649
Amortization of intangible assets 1,383 87.9 736 150.3 294
Advertising 662 4.4 634 34.0 473
Public relations, business meals
and entertainment 704 17.7 598 9.5 546
Contributions 610 3.4 590 17.1 504
Travel 640 47.5 434 14.5 379
Dues, subscriptions and publications 526 34.2 392 10.1 356
Other real estate expense (income) (214) (63.5) (586) (28.2) (457)
Other 5,232 18.0 4,435 5.6 4,201
- -----------------------------------------------------------------------------------------------------
Total non-interest expenses $ 53,395 16.1% $ 45,978 11.5% $41,227
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Data division expenses, which are included throughout the various categories
above, increased in both years, principally related to increases in data
processing volumes and expansion of the ATM network, and additional
depreciation associated with upgrades of data processing equipment. Total
data processing expenses increased $1,133 or 16.9% to $7,487 in 1996 from
$6,714 in 1995, and $1,224 or 22.3% from $5,490 in 1994. FIBM acquired a
small data service center in Helena, Montana during 1994. FIBM has expanded
the customer base of the new facility, and continues to process certain
correspondent activity at the Helena location. Increases in data division
expenses in 1996 and 1995 were offset by increases in data division income.
Salaries and benefits were $27,531 and $23,694 for the years ended December
31, 1996 and 1995, respectively, an increase of $3,837 in 1996.
Approximately $1,850 of the increase in salaries and benefits directly
relates to banks acquired, while a portion of the remaining increase relates
to personnel increases indirectly the result of acquisitions, particularly in
the banks' operation centers and the data division. Other increases in
salaries and benefits are primarily inflationary in nature.
In 1995, salaries and benefits increased $2,515 from $21,179 for the year
ended December 31, 1994. Approximately two-thirds of the 1995 increase in
salaries and benefits ($1,689) related to the acquisitions of CBI and FPCBI,
and the two new facilities opened in Billings and Missoula. The remaining
increase in salaries and benefits ($826 or 3.9%) was principally the result
of inflationary increases and additional staffing of the data division in
1995, including the purchase of the data processing facility in Helena in
mid-1994.
-13-
<PAGE>
Aggregate occupancy furniture and equipment costs increased $1,594 or 17.4%
to $10,754 in 1996 from $9,160 in 1995. Added facilities included the six
new banking locations in Montana (Kalispell, Great Falls, Cut Bank,
Whitefish, Evergreen and Hamilton) as well as the three new banking locations
in Wyoming (Casper, Laramie and Riverton). 1996 expenses directly related to
these locations aggregated $671. In addition, higher depreciation,
maintenance and other costs associated with the major hardware and software
upgrades in the data division that began in early 1996 were the primary
reasons for additional increases in occupancy, furniture and equipment
expenses aggregating $679. The remaining increase in these expenses was less
than $250 and only 2.7% of 1995 expense totals.
Occupancy expenses increased $370 or 10.4% to $3,916 in 1995 from $3,546 in
1994, principally due to added facilities in Bozeman, Livingston, Gardiner,
Billings, Missoula and Helena. Similarly, furniture and equipment expenses
increased $686 or 15.1% in 1995 as compared to 1994 due, in part, to the
additional facilities in 1995, however, increased furniture and equipment
expenses were also the result of higher maintenance and other costs
associated with the significant growth in the ATM network supported by the
Company's Data Processing Division.
Other real estate ("OREO") expense, including provisions for OREO are
included in non-interest expenses, net of gains on sales of OREO. In 1996,
FIBM recorded net OREO income of $214 compared to net OREO income of $586 and
$457 in 1995 and 1994, respectively, or an increase in non-interest expenses
of $372 in 1996 and a reduction in noninterest expenses of $129 in 1995.
These net variances in expense were primarily the result of fluctuations in
gains on sales of OREO. OREO sales gains were $335, $527 and $578 in 1996,
1995 and 1994, respectively. Negative provisions for OREO of ($21) and ($28)
were recorded in 1996 and 1995, respectively, compared to a provision of $10
in 1994. Decreased provisions and the reversals recorded in 1996 and 1995 are
reflective of dispositions of properties at gains and reduced loss exposure
on remaining unsold properties. Although expected to continue through
liquidation of remaining OREO properties, gains on disposition of OREO
properties are expected to decline as the numbers and value of properties
held in OREO continue to decrease. Continued decreases in properties held,
reductions in loss provisions and gains on disposition of properties,
however, are not assured should a shift in economic trends occur.
FDIC deposit insurance premiums decreased $1,122 to only $5 in 1996 as
compared to a decrease of $881 or 43.9% in 1995. The reduced insurance costs
in 1996 and 1995 were the result of an FDIC rate reduction of over 80% that
took effect in June 1995, followed by an additional decrease during 1996 due
to reductions in rates assessed by the FDIC that virtually eliminated FDIC
insurance premiums in 1996. These cost reductions are also reflective of the
Company subsidiaries' "well-capitalized" rating by the FDIC. So long as
FIBM's bank subsidiaries in Montana and Wyoming continue to fall into the
"well-capitalized" category, they will be assessed the lowest premium rate.
Other expenses increased $2,736 to $15,319 in 1996 from $12,583 in 1995.
This increase is due to higher subsidiary expenses resulting from the
acquisitions in 1996, aggregating approximately $2,921 including additional
goodwill amortization of $569. The Parent Company also incurred additional
other expenses in 1996 which were directly related to the acquisitions.
These increases were partially offset by a decrease in First Interstate
royalty fees, which were discontinued in May 1996 after the Franchise
Agreement was terminated.
In 1995, other expenses increased $2,190 to $12,583 from $10,393 in 1994.
Approximately $1,727 of this increase is higher subsidiary expenses resulting
from the acquisitions of CBI and FPCBI, including additional goodwill
amortization of $422, and the additions of new facilities in Billings and
Missoula. Further, the Parent Company incurred more than $200 in additional
other expenses in 1995 which were directly related to the acquisitions of CBI
and FPCBI. Net of these items, the increase in other expense was $463 or
4.5% of expense in 1994.
INCOME TAX EXPENSE. Total income tax expense increased $2,507 from $10,844
for the year ended December 31, 1995 to $13,351 for the year ended December
31, 1996. Federal income tax expense of $11,516 in 1996 represented an
effective tax rate of 33.3% compared to Federal income tax expense of $9,328
in 1995 which was an effective rate of 33.1%. State income tax expense of
$1,835 in 1996 and $1,516 in 1995, applied only to pretax earnings of
entities operating within the state of Montana, represent effective tax rates
of 5.3% in 1996 and 5.4% in 1995.
By comparison, total income tax expense for 1995 increased $983 from $9,861
for the year ended December 31, 1994. Federal income tax expense of $8,532
for the year ended December 31, 1994 represented an effective tax rate of
33.3%. 1994 Montana income tax expense was $1,329 or an effective tax rate
of 5.2%.
FINANCIAL CONDITION AT DECEMBER 31, 1996
FIBM's earning assets include a mix of 76.8% in loans and 22.5% in investment
securities, with the balance in short term Federal funds and an
interest-bearing deposit in another bank.
GENERAL. During 1996, total assets increased $712,622 or 52.7% from
$1,351,215 at December 31, 1995 to $2,063,837 at December 31, 1996.
-14-
<PAGE>
The increase in consolidated assets was largely the direct result of
acquisitions which occurred in the last quarter of 1996. FIB Montana, NA and
FIB Wyoming, NA with consolidated assets of approximately $276,000 and
$324,000, respectively, at the transaction date were acquired on October 1,
1996. FIB Whitefish with total assets of approximately $71,000 at the
transaction date was acquired effective December 18, 1996. Exclusive of
acquired assets, total assets at December 31, 1996 increased approximately
$45,000 or 3.3% from December 31, 1995.
INVESTMENT SECURITIES. FIBM manages its investment portfolio within
established policies which provide for the management of interest rate
sensitivity risks, to meet earnings objectives, to provide ample liquidity
and to provide adequate collateral to support deposit and repurchase
agreement activities. There are no significant concentrations of investments
as of December 31, 1996 (greater than 10% of stockholders' equity) in any
individual security issuer, except for the U.S. Government and U.S.
Government-sponsored agencies.
Increases in investment securities associated with the acquisitions of FIB
Montana, NA, FIB Wyoming, NA and FIB Whitefish in 1996 aggregated
approximately $100,000. The investment policy does not permit the use of
portfolio securities for speculative purposes, including, but not limited to,
gains trading (selling investment assets prior to maturity in order to
recognize market appreciation, while continuing to hold securities which have
unrealized market losses). Management has, however, identified certain
investment securities as available-for-sale which, in the event of changing
market conditions, may be sold prior to their stated maturities.
<TABLE>
<CAPTION>
Security Maturities And Yield
- -----------------------------------------------------------------------------------------------------
1996 1995
AVERAGE Average
As of December 31, YIELD (1) 1996 Yield (1) 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY SECURITIES
Maturing within one year 5.26% $ 49,368 5.21% $42,043
Maturing in one to five years 5.75% 165,100 5.23% 79,043
- -----------------------------------------------------------------------------------------------------
214,468 121,086
Mark-to-market adjustments on
securities available-for-sale 153 -
- -----------------------------------------------------------------------------------------------------
Total 5.63% 214,621 5.22% 121,086
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES
Maturing within one year 5.51% 50,639 5.88% 34,641
Maturing in one to five years 6.27% 55,447 5.93% 37,771
Maturing in five to ten years 6.79% 9,916 6.30% 9,424
Maturing after ten years 6.67% 28,517 6.67% 18,051
- -----------------------------------------------------------------------------------------------------
144,519 99,887
Mark-to-market adjustments on
securities available-for-sale 226 413
- -----------------------------------------------------------------------------------------------------
Total 6.11% 144,745 6.06% 100,300
- -----------------------------------------------------------------------------------------------------
TAX EXEMPT SECURITIES
Maturing within one year 6.67% 1,927 7.22% 3,805
Maturing in one to five years 8.43% 8,698 8.17% 8,887
Maturing in five to ten years 8.87% 7,977 8.70% 5,086
Maturing after ten years 10.02% 908 10.00% 716
- -----------------------------------------------------------------------------------------------------
19,510 18,494
Mark-to-market adjustments on
securities available-for-sale 293 236
- -----------------------------------------------------------------------------------------------------
Total 8.38% 19,803 8.09% 18,730
- -----------------------------------------------------------------------------------------------------
CORPORATE SECURITIES
Maturing within one year 5.65% 1,591 5.94% 2,272
Maturing in one to five years 5.80% 9,373 5.68% 7,388
Maturing after 10 years - - 7.82% 308
- -----------------------------------------------------------------------------------------------------
10,964 9,968
Mark-to-market adjustments on
securities available-for-sale 2 (3)
- -----------------------------------------------------------------------------------------------------
Total 5.78% 10,966 5.81% 9,965
- -----------------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
AVERAGE Average
As of December 31, YIELD (1) 1996 Yield (1) 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER MORTGAGE-BACKED SECURITIES
Maturing in one to five years 5.48% 1,652 5.90% 1,201
Maturing in five to ten years - - 6.44% 91
Maturing after ten years 7.15% 2,051 7.37% 1,914
- -----------------------------------------------------------------------------------------------------
3,703 3,206
Mark-to-market adjustments on
securities available-for-sale 6 2
- -----------------------------------------------------------------------------------------------------
Total 6.40% 3,709 6.79% 3,208
- -----------------------------------------------------------------------------------------------------
Other equity securities with no
stated maturity - 9,727 5,448
- -----------------------------------------------------------------------------------------------------
Total 5.81% 403,571 5.81% $258,737
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Average yields have been calculated on a fully-taxable equivalent
basis.
The investment portfolio, representing 22.5% of earning assets, is well
diversified. Approximately 95.5% of the investment portfolio is at fixed
rates of interest, with the remaining portion at variable rates, of which
most are issues of agencies of the U.S. government. U.S. treasury securities
comprise 53.2% of the investment portfolio, with 30% maturing within one
year. No U.S. Treasury securities held at December 31, 1996 have maturities
beyond five years. An additional 35.9% of the investment portfolio is
comprised of obligations of U.S. government agencies. 35% of the agency
securities mature within one year, an additional 38% within five years, an
additional 7% within ten years, and the remaining 20% in over ten years.
Maturities of securities do not reflect rate repricing opportunities present
in many adjustable rate mortgage-backed and corporate securities, nor do they
reflect expected shorter maturities based upon early prepayments of
principal. Tax exempt investments in issues of state, county and municipal
entities represent 4.9% of the investment portfolio, and are all at fixed
rates with slightly over two-thirds of the securities maturing within five
years. The remaining 6.0% of the investment portfolio is principally
comprised of a mix of corporate, mortgage backed, and other securities with
varying maturities. It is currently management's intent to hold most
investment securities to maturity.
LOANS. The loan portfolio is well diversified, including a mix of
commercial, consumer, agricultural and real estate loans as well as a mix of
fixed and variable rate loans. Approximately 67% of total loans are at fixed
rates. 34.3% of the Company's loan portfolio is comprised of commercial
loans, of which 54% are at adjustable rates and 46% are at fixed rates.
35.4% of the loan portfolio is direct and indirect consumer loans and credit
card loans, over 90% of which are at fixed rates. Approximately 94% of fixed
rate consumer loans are for terms of less than five years. Agricultural loans
comprise 10.4% of the portfolio, of which 59% are at adjustable rates. 20.0%
of the loan portfolio is comprised of real estate loans, 77% of which are at
fixed rates. Two-thirds of fixed rate real estate loans mature within five
years.
Loan increases related to the acquisitions in 1996 aggregated approximately
$401,000 (net of allowances for possible loan losses aggregating $10,553).
Other increases in net loans during 1996 totaled approximately $91,500 or an
increase of over 10% from consolidated net loans of $855,207 at December 31,
1995. There were increases in loan volumes in all major categories of loans
in 1996. Increases in loan demand are attributed to continued healthy
economic conditions in the communities served by FIBM's bank subsidiaries.
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- ----------------------------------------------------------------------------------------------------------------
As of December 31,
- ----------------------------------------------------------------------------------------------------------------
1996 PERCENT 1995 Percent 1994 Percent 1993 Percent 1992 Percent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS
Agricultural $ 143,572 10.4% 113,827 13.1% $ 98,194 13.1 $ 85,059 12.7% $ 73,898 12.2%
Commercial 471,458 34.3 311,982 35.9 262,290 34.9 241,535 36.2 224,715 37.0
Real estate 274,141 19.9 142,097 16.3 112,251 14.9 92,906 13.9 90,671 14.9
Consumer 484,865 35.3 300,711 34.5 277,367 36.9 245,493 36.8 216,222 35.6
Other loans 1,443 0.1 1,761 0.2 1,416 .2 2,392 .4 1,619 .3
- ----------------------------------------------------------------------------------------------------------------
Total loans 1,375,479 100.00% 870,378 100.0% 751,518 100.0% 667,385 100.0% 607,125 100.0%
- ----------------------------------------------------------------------------------------------------------------
Less allowance for
loan losses 27,797 15,171 13,726 13,373 12,965
- ----------------------------------------------------------------------------------------------------------------
Total net loans $1,347,682 $ 855,207 $737,792 $654,012 $594,160
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Ratio of allowance
to total loans 2.02% 1.74% 1.83% 2.00% 2.14%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
MATURITIES AND INTEREST RATE SENSITIVITIES(1)
- ---------------------------------------------------------------------------------------------
Within One Year to After
As of December 31, 1996 One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Agricultural $ 87,877 35,278 20,417 143,572
Commercial 215,483 186,458 69,517 471,458
Real estate 70,833 103,126 100,182 274,141
Consumer 157,951 298,247 28,667 484,865
- ---------------------------------------------------------------------------------------------
$532,144 623,109 218,783 1,374,036
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Loans at fixed interest rates $275,266 505,102 136,684 917,052
Loans at variable interest rates 250,056 118,007 82,099 450,162
Nonaccrual loans 6,822 - - 6,822
- ---------------------------------------------------------------------------------------------
$ 532,144 623,109 218,783 1,374,036
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Loan amounts exclude "other loans", consisting primarily
of overdrafts.
Unlike residential mortgage loans and consumer installment loans, which
generally are made on the basis of the borrower's ability to make repayment
from his or her employment and other income, and which are secured by real
property whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of
the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. The Company attempts to limit these
risks by employing underwriting and documentation standards contained in
written loan policies and procedures. These policies and procedures are
reviewed on an ongoing basis by management and adherence to stated policies
are monitored by credit administration.
<TABLE>
<CAPTION>
PROBLEM ASSETS
- ----------------------------------------------------------------------------------------------------------------------
5-Year
Compound
1996/95 Percent
As of December 31, 1996 1995 1994 1993 1992 % Change Change
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Impaired loans:
Renegotiated loans on nonaccrual
status $ - 15 47 11 490 (100.0)% (100.0)%
Other nonaccrual loans 5,122 3,216 NA NA NA 59.3 NA
- ----------------------------------------------------------------------------------------------------------------------
Total impaired loans (1) 5,122 3,231 NA NA NA 58.5 NA
Total nonaccrual loans (1) 6,822 3,632 3,134 3,629 5,496 87.8 (2.9)
Total renegotiated loans 1,763 1,755 1,619 1,526 4,020 0.5 (17.8)
Loans 90 days or more past due
and still accruing 6,432 1,123 534 1,353 2,940 472.8 16.6
Total problem loans 49,545 27,097 21,765 23,220 27,749 82.8 3.8
Total classified loans 24,579 16,687 14,517 13,875 17,283 47.3 (0.1)
Total loans charged off 3,758 2,117 1,880 1,852 2,352 77.5 3.4
Total recoveries on previously
charged-off loans 1,987 1,016 889 915 1,430 95.6 10.4
- ----------------------------------------------------------------------------------------------------------------------
Other Real Estate Owned (OREO):
Other real estate owned $ 2,057 1,903 2,851 4,580 6,737 8.1 (25.4)
Allowances for devaluation
of OREO 511 554 1,048 1,448 1,800 (7.8) (24.7)
Provisions for OREO losses (21) (28) 10 85 80 (25.0) NM
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Ratios (as of December 31):
Allowance for loan losses
at December 31 to:
Total problem loans 56.1% 56.0 63.1 57.6 46.7
Total classified loans 113.1 90.9 94.6 96.4 75.0
Allocated allowance
to gross capital funds (2) 1.3 1.8 2.0 2.2 3.3
Total problem loans to
gross capital funds (2) 28.5 21.8 20.0 23.8 32.7
Total classified loans to
gross capital funds (2) 14.1 13.4 13.3 14.2 20.4
Total nonaccrual loans to
total loans 0.5 0.4 0.4 0.5 0.9
- -----------------------------------------------------------------------------------------
</TABLE>
NA Not Applicable
NM Not Meaningful
(1) Approximately $405, $318, $296, $440 and $691 of gross
interest income would have been accrued if all loans on
nonaccrual had been current in accordance with their
original terms for the years ended December 31, 1996, 1995,
1994, 1993 and 1992, respectively. Of this amount,
approximately $357 and $283 of gross interest income would
have been recognized in 1996 and 1995, respectively, if
impaired loans had been current in accordance with their
original terms.
(2) Gross capital funds is defined as total stockholders' equity
plus the allowance for loan losses.
PROBLEM AND CLASSIFIED LOANS. Federal regulations require that each
financial institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, examiners have
authority to identify problem loans and, if appropriate, classify them.
There are three classifications for classified loans; "substandard",
"doubtful", and "loss". Substandard loans have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable,
and there is a high probability of partial loss. A loan classified loss is
considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Problem loans include classified
loans and another category designated "special mention" maintained for loans
which do not currently expose an insured institution to a sufficient degree
of risk to warrant classification as substandard, doubtful or loss. Loans
classified as substandard or doubtful usually require the institution to
establish general allowances for loan losses. If a loan or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the loan
classified loss, or charge-off such amount.
Exclusive of assets classified loss and which have been fully reserved or
charged-off, FIBM's problem loans at December 31, 1996 consisted of $24,966
of loans classified as special mention, $19,994 of loans classified as
substandard and $4,585 of loans classified as doubtful.
There are no loans classified as loss, doubtful, substandard, or special
mention that have not been disclosed above that represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
-18-
<PAGE>
RECONCILIATION OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Balance as of January 1, $ 15,171 13,726 13,373 12,965 12,257
Beginning allowances of
acquired banks 10,553 917 - - -
Charge-offs:
Agricultural 220 25 4 20 69
Commercial 1,127 393 398 777 1,036
Real estate 27 20 53 20 134
Consumer 2,384 1,679 1,425 1,035 1,113
Other loans - - - - -
- --------------------------------------------------------------------------------
Total charge-offs 3,758 2,117 1,880 1,852 2,352
- --------------------------------------------------------------------------------
Recoveries:
Agricultural 154 88 82 100 450
Commercial 850 252 299 353 467
Real estate 9 119 36 7 22
Consumer 974 557 472 455 491
Other loans - - - - -
- --------------------------------------------------------------------------------
Total recoveries 1,987 1,016 889 915 1,430
- --------------------------------------------------------------------------------
Net charge-offs 1,771 1,101 991 937 922
Provision for loan losses 3,844 1,629 1,344 1,345 1,630
- --------------------------------------------------------------------------------
Balance as of December 31, $ 27,797 15,171 13,726 13,373 12,965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Period end loans $ 1,375,479 870,378 751,518 667,385 607,125
Average loans 1,014,901 837,288 705,690 641,411 595,026
- --------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans 0.17% .13 .14 .15 .15
Ratio of reserve to period
end loans 2.02% 1.74 1.83 2.00 2.14
- --------------------------------------------------------------------------------
The provision for loan losses provides a reserve (the allowance for loan
losses) to which loan losses are charged as those losses become evident.
Management of the banks determine the appropriate level of the allowance for
loan losses on a quarterly basis utilizing a report containing loans with a
more than normal degree of risk. This report is the by-product of an ongoing
loan review process, the purpose of which is to determine the level of credit
risk within the portfolio and to ensure proper adherence to underwriting and
documentation standards. Utilizing this report, a specific portion of the
reserve is allocated to those loans which are considered to represent
significant exposure to risk. In addition, estimates are made for potential
losses on all other loans, not specifically reviewed, based on historical
loan loss experience and other factors and trends.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Allocated % Of Allocated % Of Allocated % Of Allocated % Of Allocated % Of
Reserves Loans Reserves Loans Reserves Loans Reserves Loans Reserves Loans
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Agricultural $ 390 10.4% $ 322 13.1% $ 280 13.1% $ 230 12.7% $ 315 12.2%
Commercial 594 34.3 789 35.9 791 34.9 896 36.2 1,445 37.0
Consumer 436 15.0 372 15.2 330 21.1 879 19.0 383 16.0
Floor plan 48 1.9 45 2.5 45 1.8 - 2.1 29 2.3
Real estate - 19.9 - 16.3 3 14.9 23 13.9 98 14.9
Dealer indirect 797 18.4 701 16.8 778 14.0 128 15.7 503 17.3
Other loans, principally
overdrafts - 0.1 - 0.2 - 0.2 - 0.4 - 0.3
Foreign - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Unallocated 25,532 12,942 11,499 11,217 10,192
- ----------------------------------------------------------------------------------------------------------------------------------
Totals $27,797 100.00% $ 15,171 100.0% $ 13,726 100.0% $ 13,373 100.0% $ 12,965 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the allocated reserves are $436 related to impaired loans at
December 31, 1996.
-19-
<PAGE>
FUNDING SOURCES. Earning assets are funded by various sources, each of which
is continuously monitored to ensure an appropriate level of liquidity to meet
customer demand and to support the Company's operating needs. The primary
funding source is a broad and diversified base of core deposits gathered by
its twenty-eight banking offices in Montana and Wyoming. Non-interest
bearing demand deposit accounts comprise 22.9% of total customer deposits.
Low cost interest bearing demand and savings deposits comprise an additional
42.5% of total deposits. Higher cost certificates of deposit and IRA
accounts comprise the remainder (34.6%) of total deposits. Large
certificates of deposit, those for $100 and over, represent only 7.3% of
total deposits and 21.1% of total time deposits.
Deposits increased $580,355 from $1,099,069 at December 31, 1995 to
$1,679,424 at December 31, 1996. Again, the increase in deposits was
principally the direct result of the acquisitions of FIB Montana, NA, FIB
Wyoming, NA and FIB Whitefish. Aggregate additions to deposits on the
respective acquisition dates were approximately $524,000, of which
approximately $365 were interest-bearing. The remaining increase of over
$56,000 or approximately 5.1% of deposits at December 31, 1995 is reflective
of moderate growth in overall customer deposits in the last half of 1996
following a seasonal slowdown in overall deposit growth during the first half
of the year.
<TABLE>
<CAPTION>
AVERAGE CUSTOMER DEPOSITS
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 242,117 19.9% 203,258 19.9% $ 181,885 19.8% $ 165,965 18.7% $ 147,316 17.2%
Demand -
interest-bearing 210,153 17.3 171,933 16.9 163,318 17.8 159,321 17.9 152,768 17.9
Savings 301,003 24.8 264,198 25.9 265,521 29.0 261,984 29.5 254,910 29.8
- ----------------------------------------------------------------------------------------------------------------------------------
753,273 62.0 639,389 62.7 610,724 66.6 587,270 66.1 554,994 64.9
- ----------------------------------------------------------------------------------------------------------------------------------
Time deposits:
Time, $100 and over 98,683 8.1 81,191 8.0 66,751 7.3 63,002 7.15 4,818 6.4
Time, other 362,628 29.9 298,926 29.3 239,313 26.1 237,906 26.82 44,635 28.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 461,311 38.0 380,117 37.3 306,064 33.4 300,908 33.92 99,453 35.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total average
deposits $ 1,214,584 100.0% 1,019,506 100.0% $ 916,788 100.0% $ 888,178 100.0% $ 854,447 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL. A significant measure of the strength of a financial institution is
its shareholders' equity, which should expand in close proportion to asset
growth. At December 31, 1996, shareholders' equity totaled more than $146
million or 7.08% of total assets, compared with $109.4 million or 8.09% at
year end 1995. Although FIBM has achieved steady internal capital generation
throughout the past five years, it also issued $20 million of noncumulative
preferred stock in conjunction with acquisitions in 1996. Stockholders'
equity to assets declined in 1996 as the result of acquisitions during the
year.
Risk based guidelines define a two tier capital framework. Tier 1 capital
consists of common shareholders' equity less disallowed intangibles, while
total risk based capital consists of Tier 1 capital, the allowance for loan
losses up to 1.25% of risk adjusted assets and long-term subordinated debt.
Risk adjusted assets are determined by assigning various levels of risk to
different categories of assets and off-balance-sheet activities.
-20-
<PAGE>
The following table details capital components and ratios for the Company
on a consolidated basis and each of its significant subsidiaries as of December
31, 1996 and 1995:
CAPITAL RATIOS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FIBM FIBOC FIBOC FIB FIB
Consolidated Montana Wyoming Wyoming, N.A. Montana,N.A.
As of December 31, 1996 1995 1996 1995 1996 1995 1996(6) 1996(6)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total shareholders' equity
(excluding fair value
adjustment) (1) $ 145,554 108,973 88,096 85,567 29,167 28,136 38,774 35,051
Less disallowed intangible
assets (37,958) (10,221) (6,779) (7,295) - - (13,901) (11,092)
- ----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital 107,596 98,752 81,317 78,272 29,167 28,136 24,873 23,959
Subordinated debt 20,000 - - - - - - -
Allowance for loan losses (2) 18,265 11,914 9,697 8,647 3,467 3,217 2,279 2,430
- ----------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 145,861 110,666 91,014 86,919 32,634 31,353 27,152 26,389
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 1,461,228 949,880 773,936 690,132 275,568 255,658 177,277 193,646
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital to
risk-adjusted assets(3) 7.35% 10.40 10.51 11.34 10.58 11.01 14.03 12.37
Total risk-based capital
to risk-adjusted assets(4) 9.98 11.65 11.76 12.59 11.84 12.26 15.32 13.63
Leverage(5) 5.26 7.28 7.76 7.96 7.68 7.61 7.92 8.48
Tier 1 capital to total assets
less intangible assets 7.19 8.13 8.43 8.80 7.69 7.72 12.89 12.43
Total equity to total assets 7.08 8.09 8.41 8.77 7.70 7.72 12.01 11.96
Average equity to average assets 8.08 8.20 9.03 8.86 8.13 8.01 12.05 12.81
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For computation of capital ratios, the regulatory agencies have
determined that the FASB 115 fair value adjustment does not enter
into the calculation of capital ratios.
(2) Limited to 1.25% of risk-adjusted assets, with the excess deducted
from risk-adjusted assets.
(3) The regulatory "minimum" and requirement for "well capitalized" Tier
1 capital are 4.00% and 6.00%, respectively.
(4) The regulatory "minimum" and requirement for "well capitalized" total
risk-based capital are 8.00% and 10.00%, respectively.
(5) The regulatory "minimum" and requirement for "well capitalized"
leverage capital are 3.00% and 5.00%, respectively.
(6) Subsidiary acquired in 1996.
ASSET AND LIABILITY MANAGEMENT
The primary objective of the asset/liability management process is
to optimize the net interest income while prudently managing
balance sheet risks. Specifically, these risks include interest
rate risk, maintaining sufficient levels of capital, and a
sufficient level of liquidity to meet the needs of depositors and
borrowers. Fundamental to most risk management decisions are the
inherent tradeoffs between risk reduction and Company
profitability. In certain circumstances, a measured amount of
interest rate sensitivity in the balance sheet may produce an
improved level of earnings for the Company. Thus, it is not the
intent of the Asset/Liability Committee (ALCO) to eliminate
interest rate risk. Rather, the Company attempts to understand
the level of risk accompanying its decisions and to monitor and
manage these risks.
The ability to optimize the net interest income is largely
dependent upon the achievement of an interest rate spread which
can be managed during fluctuations of prevailing market interest
rates. Interest rate sensitivity is a measure of the extent to
which net interest income will be affected by market interest
rates over a period of time. Interest rate sensitivity is related
to the difference between amounts of interest earning assets and
interest bearing liabilities which either reprice or mature within
a given period of time. The difference is known as interest rate
sensitivity "gap".
-21-
<PAGE>
STATIC REPRICING AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three Months Three Months One Year to After
As of December 31, 1996 or Less to One Year Five Years Five Years Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED ASSETS
Loans (1) $ 497,593 191,752 535,595 143,717 1,368,657
Investment securities 119,057 38,737 223,796 21,981 403,571
Interest-bearing deposit in bank 6,545 - - - 6,545
Federal funds sold 4,945 - - - 4,945
--------------------------------------------------------------------------------------------------------------------
$ 628,140 230,489 759,391 165,698 1,783,718
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES (2)
Interest-bearing demand
accounts 316,964 - - - 316,964
Savings deposits 396,845 - - - 396,845
Time deposits, $100 or more 74,470 19,711 26,400 1,661 122,242
Other time deposits 205,859 86,868 164,658 617 458,002
Federal funds purchased 13,450 - - - 13,450
Securities sold under repurchase agreements 129,137 - - - 129,137
Other borrowed funds 13,071 - - - 13,071
Long-term debt 16,726 22,960 710 24,271 64,667
--------------------------------------------------------------------------------------------------------------------
$ 1,166,522 129,539 191,768 26,549 1,514,378
--------------------------------------------------------------------------------------------------------------------
Rate gap $ (538,382) 100,950 567,623 139,149 269,340
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Cumulative rate gap $ (538,382) (437,432) 130,191 269,340
Cumulative rate gap as a percentage
of total interest-earning assets (30.2)% (24.5)% 7.3% 15.1%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include nonaccrual loans of $6,822.
(2) Does not include noninterest-bearing demand deposits of
$385,371.
The declining interest rate environment FIBM experienced in the early 1990's
provided for growth in net interest income as the Company's funding costs
declined, which improved the spread realized between the yields on assets and
the cost of funds. This factor, along with loan volume growth, has provided
the Company with favorable interest margins. In anticipation of interest
rates rising during 1994, and in order to protect its net interest margin,
FIBM undertook actions to promote the lengthening of deposit maturities and
the generation of variable rate loans. No swaps, financial futures or
options contracts have been utilized by the Company. FIBM had a relatively
high percentage of interest earning assets maturing or repricing within one
year at December 31, 1996, which provides some cushion to the net interest
margin when interest rates are flat or rising.
FIBM uses interest sensitivity "gap" analysis, income statement 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 the net interest margin of the subsidiary banks. By
specific policy, FIBM will attempt to maintain a mix of earning assets and
deposits in the one year time period, such that no more than 5% of the net
interest margin will be at risk should interest rates rise or fall 1%. In
evaluating exposure to interest rate movements, Management does not view the
gap amounts as presenting an unusually high risk potential, although no
assurances can be given that FIBM is not at risk in the event of rate
increases or decreases. Also, certain assets have features which restrict
changes in interest rates on a short-term basis as well as over the life of
the asset. In the event of a change in interest rates, prepayment of assets
and deposit outflows would likely deviate significantly from historical or
expected levels. The above gap fails to consider the interest rate
sensitivities of those asset and liability accounts. It is recognized that a
rising rate environment may decrease the ability of many borrowers to service
their debt. Management cannot provide any assurance as to what the actual
affect of changes in interest rates will be on FIBM's interest margin.
The ALCO attempts to keep informed as to the inherent tradeoffs resulting
from risk elimination and profitability objectives.
-22-
<PAGE>
LIQUIDITY
FIBM's ALCO has established specific policies and procedures for managing
existing liquidity levels and has also developed contingency plans to address
potential liquidity needs. The Company's current liquidity position is
supported in large part through core deposits generated from the Company's
banking offices and from a high quality investment portfolio.
FIBM's 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. The ability to
redeploy these funds is an important source of intermediate to long-term
liquidity.
Backup sources of liquidity are provided by Federal funds lines carried with
both upstream and downstream correspondent banks. Additional liquidity could
be generated through borrowings from the Federal Reserve Bank of Minneapolis,
of which FIBOC Montana is a member. Additionally, liquidity and/or matched
funding can be obtained from the Federal Home Loan Bank of Seattle, of which
FIBOC Montana, FIBOC Wyoming and FIB Whitefish all are members.
At December 31, 1996, the Company had $2.8 million available on its
revolving term loan.
The Company is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have a material
effect on the Company's liquidity, capital resources or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of First Interstate
BancSystem of Montana, Inc. and Subsidiaries are contained elsewhere herein
[see Item 14(a)1]:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets- December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure.
-23-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of FIBM are as follows:
Date First
Elected
Name and Age Position Director/Officer
------------ -------- ----------------
DIRECTORS:
Homer A. Scott, Jr., 62(1) Director and Chairman of the 1971
Board
Dan S. Scott, 65(1) Director and Chairman of 1971
Compensation Committee
James R. Scott, 47(1) Director, Vice Chairman of 1971
the Board and Chairman of Audit
Committee
Randy Scott, 43 Director 1993
Susan Scott Heyneman, 58 Director 1994
Joel Long, 56 (1) Director 1996
DIRECTORS AND EXECUTIVE OFFICERS:
Thomas W. Scott, 53 Director, President and Chief 1971
Executive Officer
William H. Ruegamer, 52 Director, Chief Operating Officer
and Executive Vice President 1988
Executive Officers:
William G. Wilson, 57 Senior Vice President 1973
Terrill R. Moore, 44 Senior Vice President, Chief 1989
Financial Officer and Secretary
Edward Garding, 47 Senior Vice President, Branch 1996
Administration Officer
- ---------------------
(1) Member of compensation committee.
All of the directors listed above will hold office until the next
annual meeting of shareholders, or until their successors are duly
elected and qualified. All of the officers listed will hold
office until successors are appointed by the Board of Directors.
There are no arrangements or understandings between any of the
directors or officers or any other persons, pursuant to which any
of the above directors have been selected as directors, or
officers have been selected as officers, except for Randall I.
Scott. The third generation of the Scott Family recommended that
Randall I. Scott be elected to the Board of Directors to be their
representative for their ownership interests.
The business of FIBM is conducted through meetings of the Board of
Directors. During the fiscal year ended December 31, 1996, the
Board of Directors held 6 regular meetings and 3 special meetings
and none of the existing directors attended fewer than 80% of the
total meetings, except Susan Scott Heyneman and James R. Scott
each attended 7 of the 9 board meetings (78%) in 1996.
Director Dan S. Scott is Chairman of the Compensation Committee.
The Compensation Committee meets in such capacity periodically to
review the performance of the Company's officers and to determine
compensation programs and adjustments for all employees. The
Compensation Committee met formally once in 1996 plus several
compensation committee agenda items were dealt with in the board
meetings as a matter of convenience.
24
<PAGE>
Director James R. Scott is Chairman of the Audit Committee of the Company.
The Audit Committee reviews the records and affairs of the Company to
determine their financial condition, reviews with management and the
independent auditors the systems of internal control, and monitors the
subsidiaries' adherence in accounting and financial reporting to generally
accepted accounting principles. The Audit Committee of FIBM met once
in 1996.
Terrill R. Moore is Chairman of the Audit Committee of the Company's Wyoming
subsidiaries. This Audit Committee met formally once in 1996.
During the past five years, the business experience of each of the directors
and executive officers has been as follows:
HOMER A. SCOTT, JR. Has been a director of FIBM since 1971, and is currently
Chairman of the Board. Mr. Scott has also been a director and chairman of
the Board of FIBOC Wyoming since June 1976. Mr. Scott is also a director of
the Board of FIBOC Montana, FIB Wyoming NA and First Interstate, fsb.
THOMAS W. SCOTT Has been a director of FIBM since 1971. Mr. Scott serves as
President and Chief Executive Officer of FIBM, and has held the office of
President for more than five years. Currently Mr. Scott is also a director of
FIBOC Wyoming and CFI, and Chairman of the Board of FIBOC Montana, FIB
Wyoming, NA, FIB Montana, NA, FIB Whitefish and First Interstate, fsb.
JAMES R. SCOTT Has been a director of FIBM since 1971. Mr. Scott has been
Vice Chairman of the Board since January 1990. Currently Mr. Scott is also a
director of FIBOC Montana. Mr. Scott is President of the First Interstate
Bank Foundation.
DAN S. SCOTT Has been a director of FIBM since 1971. Currently Mr. Scott is
also a director of FIBOC Wyoming, FIBOC Montana and FIB Wyoming, NA. Mr.
Scott has also been a rancher for more than five years.
WILLIAM H. RUEGAMER Is the Executive Vice President and Chief Operating
Officer of FIBM. He has served as a director of FIBM since June 1988, and of
CFI since February 1993. Mr. Ruegamer has had 10 years of experience with
the OCC and has held various executive positions with the Company's
subsidiaries. Effective December 1992 he is the President of FIBOC Montana.
Mr. Ruegamer is also a director of FIBOC Montana, FIBOC Wyoming, FIB Montana,
NA, First Interstate, fsb and FIB Whitefish.
SUSAN SCOTT HEYNEMAN Was elected to be a director of FIBM in March 1994.
Ms. Heyneman served previously as a director of FIBM, having resigned in 1989
to pursue personal interests. Ms. Heyneman has continued to serve as a
director of FIBOC Montana for more than five years. With her husband, Ms.
Heyneman has been in ranching for more than five years.
RANDY SCOTT Has been a director of FIBM since August 1993. Mr. Scott was a
trust officer of FIBOC Montana's trust division from 1991 until 1996. From
1985 until 1991, Mr. Scott was an officer of FIBM's audit department. In
total, Mr. Scott was employed by FIBM or a subsidiary thereof for nineteen
years.
JOEL LONG Is a resident of Sheridan, Wyoming and is President of JTL Group,
Inc., a construction firm doing business in Montana and Wyoming. Mr. Long is
a past director of First Interstate Bank-West Billings and First Interstate
Bank-Billings.
WILLIAM G. WILSON Has been a Senior Vice President of FIBM since 1983. He
was also Chief Financial Officer of FIBM until November 1989. Mr. Wilson was
formerly a Vice President from 1973 to 1979 and a Senior Vice President of
the Billings office of FIBOC Montana from 1979 to 1983. Effective December
1992 he is Senior Vice President, Cashier, and Secretary of FIBOC Montana.
Mr. Wilson is also a board member of FIB Montana, NA.
TERRILL R. MOORE Has been a Senior Vice President, the Chief Financial
Officer and Secretary of FIBM since November 1989. In addition, he is a
director and an assistant to the secretary of FIBOC Wyoming. Effective
December 1992 he is Senior Vice President and Chief Financial Officer of
FIBOC Montana. Mr. Moore is also a board member of CFI, FIB Montana, NA,
First Interstate, fsb and FIB Whitefish.
EDWARD GARDING Is a Senior Vice President of FIBM. He is also President of
FIBOC Wyoming. Mr. Garding has been in banking for the past 25 years. He is
past president of the Wyoming Bankers Association and is currently the
Chairman of their Government Relations Committee. He also serves on the
board of the Pacific Coast Banking School which is at the University of
Washington and he is the past president of the Sheridan College Foundation.
Mr. Garding is a board member of FIBOC Wyoming, FIB Whitefish, and effective
January 1997, a director of FIBOC Montana.
-25-
<PAGE>
Many of the directors and officers of FIBM are related. Homer A.
Scott, Jr., Thomas W. Scott, Dan S. Scott, Susan Scott Heyneman
and James R. Scott are siblings. Randy Scott is a son of Dan S.
Scott.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE AND DIRECTOR COMPENSATION
The following table sets forth for the three fiscal years ended
December 31, 1996, certain information as to the cash compensation
received by each executive officer and director of FIBM listed
above who received total cash compensation in excess of $100,000
and by all executive officers of FIBM as a group for services in
all capacities of FIBM and its subsidiaries.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation
------------------------------------- ----------------------------------------
Other Restricted Long-Term
Name and Annual Stock Options/ Incentive
Principal Position Year Salary Bonus Compensation(1) Awards ($) SARS (#) Payouts ($)
- ------------------ ---- -------- -------- --------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors:
Homer A. Scott, Jr. 1996 $ 99,000 $ 15,000 $ 1,736 $ - - $ -
Chairman 1995 -99,000 - 4,000 -1,575 - - -
1994 125,000 10,000 1,500 - - -
James R. Scott 1996 $102,250 $ 15,000 $ 7,200 $ - - $ -
Vice Chairman 1995 102,250 10,000 - - - -
& Chairman of 1994 102,250 10,000 - - - -
Audit Committee
Directors and Executive Officers:
Thomas W. Scott 1996 $206,000 $ 75,000 $ 7,200 $ - - $ -
President & CEO 1995 200,000 63,000 7,200 - - -
1994 194,000 60,000 7,200 - - -
William H. Ruegamer 1996 $190,000 $ 66,500 $ 199 $ - 350/350 $ -
Executive Vice 1995 184,000 58,000 699 - 350/350 -
President & COO 1994 173,500 55,000 167 - 300/225 -
Executive Officers:
William G. Wilson 1996 $102,000 $ 39,580 $ 7,200 $ - 150/150 $ -
Senior Vice 1995 99,000 27,720 7,200 - 200/200 -
President 1994 95,500 25,785 7,200 - 200/150 -
Terrill R. Moore 1996 $ 86,684 $ 35,184 $ 7,200 $ - 200/200 $ -
Senior Vice 1995 80,800 22,624 7,200 - 200/200 -
President & CFO 1994 77,800 21,006 7,200 - 200/150 -
Edward Garding (3) 1996 $106,730 $ 30,000 $20,860 $ - 200/200 $ -
Senior Vice 1995 NA NA NA NA NA NA
President 1994 NA NA NA NA NA NA
All executive Officers
as a Group (5 persons)(2) 1996 $691,414 $246,264 $42,659 $ - 900/900 $ -
1995 563,800 171,344 22,299 - 750/750 -
1994 540,800 161,791 21,767 - 700/525 -
</TABLE>
(1) The amount included under Other Annual Compensation principally relates
to an auto allowance, or the value of personal usage of a company owned
vehicle, except that Edward Garding received reimbursement of moving
and related expenses aggregating $13,660 in 1996.
(2) FIBM has five executive officers (4 executive officers prior to 1996).
(3) Not an executive officer of FIBM prior to 1996.
BOARD FEES. Inside directors do not receive separate fees for their
services. The compensation of their services is included in the salary and
bonus amount shown in the above table. Outside directors, presently only
Joel Long, receive a $400 monthly retainer, $500 per board meeting attended
plus $250 for each attended committee meeting.
-26-
<PAGE>
HEALTH AND LIFE INSURANCE. FIBM and its subsidiaries currently provide all
full time employees (30 or more hours per week) with health and dental
insurance coverage, as well as life insurance (up to two and one half times
salary) and disability insurance benefits at no cost to them. The
contributions to the plan on behalf of Homer A. Scott, Jr., James R. Scott,
Thomas W. Scott, William H. Ruegamer, William G. Wilson, Terrill R. Moore,
Edward Garding, and all executive officers as a group, were $3,465, $3,216,
$3,307, $2,687, $2,687, $3,131, $2,870 and $14,682, respectively, for the
fiscal year ended December 31, 1996.
PROFIT SHARING PLAN. FIBM and its subsidiaries have a noncontributory
qualified profit sharing plan. To be eligible to participate, an employee
must complete one year of employment and 1,000 hours or more of service.
Contributions are determined by the FIBM Board of Directors, but are not to
exceed, on an individual basis, the lesser of 25% of compensation or $30,000.
There is immediate 100% vesting. The contributions to the plan on behalf of
Homer A. Scott, Jr., James R. Scott, Thomas W. Scott, William H. Ruegamer,
William G. Wilson, Terrill R. Moore, Edward Garding, and all executive
officers as a group, were $4,896, $5,056, $10,187, $9,396, $5,044, $4,272,
$5,227 and $34,126, respectively, for the fiscal year ended December 31,
1996. Total contributions to this plan for all participating employees were
$839,360, $685,435, and $620,261 in 1996, 1995 and 1994, respectively.
EMPLOYEE SAVINGS PLAN. FIBM and its subsidiaries have a contributory
qualified employee savings plan (401(k)). Eligibility requirements for this
plan are the same as those for the profit sharing plan as discussed in the
preceding paragraph. Employee participation in the plan is at the option of
the employee. FIBM and its subsidiaries are required to match $1.25 for
every $1.00 of employee contributions up to 4% of participating employee's
compensation. There is immediate 100% vesting. The contributions to the
plan on behalf of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott,
William H. Ruegamer, William G. Wilson, Terrill R. Moore, Edward Garding, and
all executive officers as a group, were $4,696, $5,112, $9,508, $9,500,
$4,813, $5,337, $4,334 and $33,492, respectively, for the year ended December
31, 1996. Total contributions to this plan for all participating employees
were $814,165 in 1996, $703,128 in 1995 and $647,565 in 1994.
PRE-TAX SPENDING PLAN. Full time employees of FIBM and its subsidiaries are
eligible to participate in the qualified pre-tax spending plan. The pre-tax
spending plan allows employees to pay for dependent health insurance
premiums, unreimbursed medical and/or dependent child care expenses with
before-tax dollars rather than with after-tax dollars.
RESTRICTED STOCK AWARDS PLAN. There were no unvested shares issued and
outstanding under the plan at December 31, 1996 or December 31, 1995.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN. FIBM has a non-qualified
Stock Option and Stock Appreciation Rights Plan ("Plan") for key senior
officers of FIBM and its subsidiaries. The Plan provides for the granting of
stock options and stock appreciation rights of FIBM's common stock at a value
at the time the options are granted of not less than the existing value of
stock at the date of the grant. Each option granted under the Plan may be
exercised within a period of ten years from the date of grant. The Plan
provides for the granting of stock appreciation rights in tandem with stock
options. The Plan allows the holder to surrender an exercisable stock option
in exchange for cash or shares of common stock in an amount equal to the
appraised minority value of covered shares over the option price of such
shares.
The stock options and stock appreciation rights granted to Executive Officers
in 1996 are shown in the following table:
<TABLE>
<CAPTION>
Option/SAR Grants in 1996
Potential Realizable
Individual Grants Value at
--------------------------- Assumed Annual
% of Total Rates of Stock
Options/SARs Price Appreciation
Options/ Granted to Exercise for Option Term
SARS Employees Price Expiration --------------------
Name Granted (#) in 1996 ($/sh) Date 5% ($) 10% ($)
---- ----------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Scott - - $ - - $ - $ -
William H. Ruegamer 350/350 8.43% 71.42 1/16/06 31,441 79,678
William G. Wilson 150/150 3.61% 71.42 1/16/06 13,475 34,148
Terrill R. Moore 200/200 4.82% 71.42 1/16/06 17,966 45,530
Edward Garding 200/200 4.82% 71.42 1/16/06 17,966 45,530
</TABLE>
-27-
<PAGE>
The following table indicates the number and value of FIBM Stock Options and
Stock Appreciation Rights exercised in 1996 and the number and value of
unexercised FIBM Stock Options and Stock Appreciation Rights as of December
31, 1996:
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised In-The-Money
Shares Options/SARS at Options/SARS at
Acquired Value December 31, 1996 December 31, 1 996 ($)
Name on Exercise (#) Realized ($) All Exercisable All Exercisable
---- --------------- ------------ ----------------- -----------------------
<S> <C> <C> <C> <C>
Thomas W. Scott - $ - - $ -
William H. Ruegamer 806 75,095 2,872/1,861 195,311
William G. Wilson 152 11,906 1,300/875 79,679
Terrill R. Moore 472 43,976 1,869/1,184.5 127,912
Edward Garding 426 39,690 2,035/1,267.5 144,362
</TABLE>
OTHER AWARDS OR ARRANGEMENTS. There were no Long-Term Incentive Plan awards
granted nor any repricing of Stock Options and Stock Appreciation Rights in
1996. FIBM has no employment contracts and no compensatory plans or
arrangements relating to termination of employment or change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Homer A. Scott,
Jr., Dan S. Scott, James R. Scott and Joel Long serve on the Compensation
Committee. Therefore, all Committee members except Joel Long were officers
or employees receiving compensation from FIBM for services rendered. Homer
A. Scott, Jr. and James R. Scott were formerly officers of FIBM.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION. The
Compensation Committee established the general compensation policies of FIBM
and its Subsidiaries, establishes the compensation plans and specific
compensation levels for executive officers, and administers the Annual Bonus
Plan, Restricted Stock Awards Plan and Stock Option and Stock Appreciation
Rights Plan.
As required by recently adopted rules designated to enhance the disclosure of
FIBM's executive compensation policies and practices, the following is the
Compensation Committee's report submitted to the Board of Directors
addressing the compensation of FIBM and its Subsidiaries' executive officers
for 1996.
COMPENSATION POLICY
FIBM's executive compensation policy is designed to establish an
appropriate relationship between executive pay and FIBM's annual
performance, its long-term growth objectives and its ability to
attract and retain qualified executive officers. The
Compensation Committee attempts to achieve these goals by
integrating competitive annual base salaries with (a) bonuses
based on corporate performance and on the achievement of
specified performance objectives and (b) key officer options
through the Stock Option Plan. The Compensation Committee
believes that cash compensation in the form of salary and bonus
provides company executives with short term rewards for success
in operations, and that long term compensation through the award
of stock options encourages growth in management stock ownership
which leads to expansion of management's stake in the long term
performance and success of FIBM.
BASE SALARY. For 1996, the Compensation Committee approved the
base salary of the executive officers. In determining the base
salary of each of the executive officers, the company relied on
three industry surveys of salaries paid to executive officers of
financial institutions with comparable asset size and similar
operating regions to that of FIBM. The Compensation Committee
set the base salaries of FIBM and its Subsidiaries' executive
officers within a reasonable range of those salaries reflected
in the surveys. In 1996, executive officers generally received
raises in their base salary, with the largest raise of $6,000
going to the Chief Operating Officer, William H. Ruegamer.
Raises in base salary reflected an inflationary increase
combined with improved corporate performance and profitability
in 1995.
-28-
<PAGE>
BONUSES. Annual incentives for the CEO and other executive
officers are intended to reflect FIBM's belief that management's
contribution to stockholder returns (via increasing return on
equity and return on assets) comes from maximizing earnings and
the quality of these earnings. Awards are based on the
attainment of specified performance objectives, and the bonus
amount is determined as a percentage of the recipient's base
salary. For 1996, the CEO and other executive officers were
assigned bonus amounts ranging from 28.1% to 38.8% of the base
salaries paid to such persons. The varying percentages reflect
the Committee's belief that, as an executive officer's duties
and responsibilities in the company increase, the officer will
be increasingly responsible for the performance of FIBM.
Accordingly, a larger portion of the officer's compensation
should be incentive compensation. Actual bonuses payable depend
on the level of achievement of specified performance objectives.
For 1996, the performance objective necessary to achieve a bonus
was attainment of specified return on stockholders' equity.
During 1996, the specified performance objectives were attained
and exceeded, and therefore the CEO received the largest bonus
of $75,000 (36.4%). The largest bonus as a percentage of base
salary was paid to the CFO (38.8%). Increases in bonuses
reflect the continued improved corporate performance in 1996 and
completion of significant acquisitions.
STOCK OPTIONS. In January 1996, the executive officers as well
as certain other officers of FIBM and its subsidiaries,
excluding the CEO and all other Scott Family members, were each
granted options under FIBM's Stock Option Plan to purchase a
specified number of shares of FIBM common stock. The number of
shares that each officer was granted an option to purchase was
in turn based primarily on the individual's ability to influence
the company's long term growth and profitability as well as the
number of options previously granted. The Compensation
Committee believes that stock option grants afford a desirable
long term compensation method because they closely ally the
interests of management with stockholder value and the grants of
stock options are the best way to link directly the financial
interests of management with those of stockholders. Options
granted are immediately exercisable but must be exercised within
ten years after the date of the grant.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee believes that the compensation of the
CEO should be heavily influenced by the performance of FIBM.
Therefore, although there is necessarily some subjectivity in
setting the CEO's salary, a major element of the compensation
package is directly tied to FIBM performance. In 1996, the
annual base salary of Thomas W. Scott, FIBM's CEO, was raised
from $200,000 to $206,000. Such increase was determined to be
appropriate by the Compensation Committee based on comparable
chief executive salaries, as set forth in surveys reviewed by
FIBM, and improvements in the company's performance and
profitability in 1995. The performance targets of FIBM were
attained and exceeded in 1996 and therefore the Compensation
Committee awarded a bonus of $75,000, or 36.4% of annual base
compensation. Thomas W. Scott did not participate in the
decisions of the Compensation Committee with respect to the
salary and bonus paid to him in 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On March 5, 1997, there were 1,974,162 shares of the Common Stock of FIBM
outstanding, held of record by 610 shareholders. Each shareholder of record
is entitled to vote at meetings of shareholders, and each share is entitled
to one vote.
The following table sets forth as of March 5, 1997 the number of shares of
Common Stock of FIBM owned of record or beneficially by each person who owned
of record, or to the knowledge of FIBM, beneficially, more than 5% of the
Common Stock of FIBM or is a Scott Family member.
Name and Address Number of FIBM % of FIBM
of Beneficial Owner Shares Outstanding Shares Outstanding
- -------------------- -------------------- ---------------------
James R. Scott 189,975 9.62
439 Grandview Blvd.
Billings, Montana 59102
Managing partner, J.S. Investments
Limited Partnership (2) 140,017 7.09
Trustee for John M. Heyneman, Jr. 6,247 0.32
Trustee for Thomas Scott Heyneman 6,247 0.32
---------- ----------
342,486 17.35
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<PAGE>
Name and Address Number of FIBM % of FIBM
of Beneficial Owner Shares Outstanding Shares Outstanding
- -------------------- -------------------- ---------------------
Dan Scott 46,267 2.34
P.O. Box 65
Ranchester, Wyoming 82839
Managing partner, Nbar5 A (2) 12,240 0.62
Managing partner, Nbar5 O (2) 10,363 0.52
Managing partner, Nbar5 K (2) 9,425 0.48
Managing partner, Nbar5 S (2) 8,486 0.43
Managing partner, Nbar5 T (2) 8,486 0.43
---------- ----------
95,267 4.82
Homer Scott, Jr. 200,968 10.18
122 Scott Drive
Sheridan, Wyoming 82801
Trustee for Riki Rae Scott Davidson 22,204 1.12
Trustee for Risa Kae Scott Brown 18,819 0.95
Trustee for Rae Ann Scott Morse 22,206 1.13
---------- ----------
264,197 13.38
Thomas W. Scott 196,030 9.93
P.O. Box 30876
Billings, Montana 59107
Susan Scott Heyneman 61,704 3.13
Bench Ranch
Fishtail, Montana 59028
FIB Montana
P.O. Box 30918
Billings, Montana 59116
Trustee for Jonathan R. Scott 55,590 2.82
Trustee for Julie Anne Scott 57,334 2.90
Trustee for James F. Heyneman 8,800 0.45
Trustee for James R. Scott, Jr. 655 0.03
---------- ----------
122,379 6.20
Jeanne I. Scott 5,402 0.27
P.O. Box 65
Ranchester, Wyoming 82839
Susan Elizabeth Scott 32,506 1.65
1241 Trojan
Casper, Wyoming 82609
James Marshall Scott 28,362 1.44
53-025 Avenida Obregon
LaQuinta, California 92253
Homer Rollins Scott 30,576 1.55
3536 Tradition Drive
Ft. Collins, Colorado 80526
Randy Scott 10,149 0.51
521 Freedom Avenue
Billings, Montana 59105
Managing partner, NBar5
Limited Partnership (2) 279,948 14.18
---------- ----------
290,097 14.69
Lynette E. Scott 7,000 0.35
521 Freedom Avenue
Billings, Montana 59105
-30-
<PAGE>
Name and Address Number of FIBM % of FIBM
of Beneficial Owner Shares Outstanding Shares Outstanding
- -------------------- -------------------- ---------------------
Ronald Noel Scott 22,842 1.16
P.O. Box 65
Ranchester, Wyoming 82839
John M. Heyneman 9,251 0.47
Bench Ranch
Fishtail, Montana 59028
Managing partner, Towanda Investments
Limited Partnership (2) 80,765 4.09
---------- ----------
90,016 4.56
Charles Matthew Heyneman 7,756 0.39
1817 Patricia Lane
Billings, Montana 59102
Alexander Paul Heyneman 7,697 0.39
2517 Beth Drive
Billings, Montana 59102
Trustee for Alexander Paul Heyneman, Jr. 320 0.02
---------- ----------
8,017 0.41
Sandra Arlene Scott Suzor 22,447 1.14
2943 Silver Plume
Ft. Collins, Colorado 80526
FIB Wyoming
P.O. Box 2007
Sheridan, Wyoming 82801
Trustee for Homer A. Scott, Jr. 14,359 0.73
Trustee for Sarah E. Scott Suzor 5,580 0.28
Trustee for Samuel Moise Suzor 3,255 0.16
Trustee for Brekken Arlene Baker 1,004 0.05
Trustee for Baylee Mae Baker 983 0.05
---------- ----------
25,181 1.27
Janet E. Scott 2,752 0.14
122 Scott Drive
Sheridan, Wyoming 82801
Christine M. Scott
430 Grandview Blvd.
Billings, Montana 59102
Trustee for Courtney L. Scott 655 0.03
Trustee for Dana A. Scott 655 0.03
---------- ----------
1,310 0.06
Thomas S. Heyneman 100 0.01
106-F Branegan Court
Bozeman, Montana 59705
Custodian for Jacob Ryan Heyneman 320 0.02
---------- ----------
420 0.03
Joan Scott 288 0.01
P.O. Box 30876
Billings, Montana 59107
---------- ----------
Scott Family shares outstanding 1,657,035 83.94
Minority shares (other than Scott ---------- ----------
Family) outstanding 317,127 16.06
---------- ----------
Totals 1,974,162 100.00%
---------- ----------
---------- ----------
-31-
<PAGE>
Name and Address Number of FIBM % of FIBM
of Beneficial Owner Shares Outstanding Shares Outstanding
- -------------------- -------------------- ---------------------
Directors and executive officers:
James R. Scott 342,486 17.35%
Dan S. Scott 95,267 4.82
Homer Scott, Jr. 264,197 13.38
Thomas W. Scott 196,030 9.93
Susan Scott Heyneman 61,704 3.13
Randy Scott 290,097 14.69
William H. Ruegamer 7,478 0.38
William G. Wilson 5,941 0.30
Edward Garding 2,722 0.14
Terrill R. Moore 2,351 0.12
Joel Long 1,000 0.05
---------- ----------
As a Group (11 persons) 1,269,273 64.29%
---------- ----------
---------- ----------
(1) Shares held in trust with a bank and an individual
listed as joint trustees are listed under the name of the
individual.
(2) As a part of overall estate and family succession
planning, certain Scott Family members have formed
partnerships to hold FIBM stock. The Scott Family as a group
will continue to control, directly or indirectly, the same
number of shares of FIBM stock, however, each partnership
will be a specific shareholder.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FIBM and its subsidiaries have had, and expect to have in the future, banking
transactions in the ordinary course of business with related parties,
including business with directors, officers, shareholders and their
associates, on the same terms, including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with
others. Such transactions include correspondent banking relationships with
affiliated banks, and data processing servicing for affiliated banks, in
addition to other customary banking services. To the extent that such
transactions consisted of extensions of credit, they did not in the opinion
of management, involve more than a normal risk of collectibility, present
other unfavorable features, and for directors and executive officers were not
made at preferential rates of interest. All such transactions are arm's
length in nature. Loans to executive officers, directors and related
interests of FIBM represent approximately 6% of shareholders' equity as of
December 31, 1996. Loans to executive officers, directors and related
interests of FIBM and its subsidiaries represent approximately 8% of FIBM's
shareholders' equity as of December 31, 1996.
In January 1995, 52,017 shares of the Company's capital stock were sold by
the Scott family to 337 individual participants in the Company's 401(k)
Savings Plan. The total cash price was $3,307,241. Further, during 1995,
the Scott Family sold 12,658 shares of the Company's capital stock to certain
officers and directors, including certain executive officers, for an
aggregate cash price of $833,782.
In January 1996, 19,706 shares of the Company's capital stock were sold by
the Scott Family to 287 individual participants in the Company's 401(k)
Savings Plan. The total cash price was $1,407,403.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Following are the Company's audited consolidated
financial statements.
-32-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Interstate BancSystem of Montana, Inc.:
We have audited the accompanying consolidated balance sheets of First
Interstate BancSystem of Montana, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Interstate BancSystem of Montana, Inc. and subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in note 1, the Company changed its method of accounting for
investment securities to adopt the provisions of the Financial Accounting
Standards Board's Statement on Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, effective
January 1, 1994.
/s/ KPMG Peat Marwick LLP
Billings, Montana
March 21, 1997
-33-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- ---------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------
ASSETS
Cash and due from banks $ 160,962 98,622
Federal funds sold 4,945 44,420
Interest-bearing deposits in banks 6,545 23,040
Investment securities:
Available-for-sale 124,502 65,790
Held-to-maturity 279,069 192,947
- ---------------------------------------------------------------------
403,571 258,737
- ---------------------------------------------------------------------
Loans 1,375,479 870,378
Less allowance for loan losses 27,797 15,171
- ---------------------------------------------------------------------
Net loans 1,347,682 855,207
- ---------------------------------------------------------------------
Premises and equipment, net 58,183 32,540
Accrued interest receivable 19,573 14,344
Goodwill and other intangibles,
net of accumulated amortization
of $5,971 in 1996 and $4,594 in 1995 39,010 10,221
Other real estate owned, net 1,546 1,349
Deferred tax asset 4,921 4,432
Other assets 16,899 8,303
- ---------------------------------------------------------------------
$2,063,837 1,351,215
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 385,371 230,136
Interest bearing 1,294,053 868,933
- ---------------------------------------------------------------------
Total deposits 1,679,424 1,099,069
- ---------------------------------------------------------------------
Federal funds purchased 13,450 3,125
Securities sold under repurchase agreements 129,137 104,898
Accounts payable and accrued expenses 18,027 13,396
Other borrowed funds 13,071 5,494
Long-term debt 64,667 15,867
- ---------------------------------------------------------------------
Total liabilities 1,917,776 1,241,849
- ---------------------------------------------------------------------
Stockholders' equity:
Non-voting noncumulative 8.53% preferred
stock without par value; authorized
100,000 shares; issued and outstanding
20,000 shares in 1996 20,000 -
Common stock without par value; authorized
5,000,000 shares; issued and outstanding
1,978,268 shares in 1996 and 1,947,760
shares in 1995 8,941 6,692
Retained earnings 116,613 102,281
Unrealized holding gain on investment
securities available-for-sale, net 507 393
- ---------------------------------------------------------------------
Total stockholders' equity 146,061 109,366
- ---------------------------------------------------------------------
$2,063,837 1,351,215
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Book value per common share $ 63.72 56.15
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-34-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 99,882 83,577 65,778
Interest and dividends on
investment securities:
Taxable 15,343 12,147 12,790
Exempt from Federal taxes 982 783 331
Interest on deposits with banks 376 368 35
Interest on Federal funds sold 1,342 2,095 1,296
- -------------------------------------------------------------------------------
Total interest income 117,925 98,970 80,230
- -------------------------------------------------------------------------------
Interest expense:
Interest on deposits 42,122 35,898 25,246
Interest on Federal funds purchased 1,043 1,008 690
Interest on securities sold under
repurchase agreements 4,508 3,560 1,814
Interest on other borrowed funds 318 298 187
Interest on long-term debt 2,028 1,182 514
- -------------------------------------------------------------------------------
Total interest expense 50,019 41,946 28,451
- -------------------------------------------------------------------------------
Net interest income 67,906 57,024 51,779
Provision for loan losses 3,844 1,629 1,344
- -------------------------------------------------------------------------------
Net interest income after
provision for
loan losses 64,062 55,395 50,435
Other operating income:
Income from fiduciary activities 3,161 2,619 2,542
Service charges on deposit accounts 7,752 6,532 5,883
Data processing 7,324 6,196 4,746
Other service charges,
commissions, and fees 2,857 2,535 2,268
Investment securities gains
(losses), net 18 (6) 69
Other income 2,815 888 879
- -------------------------------------------------------------------------------
Total other operating income 23,927 18,764 16,387
- -------------------------------------------------------------------------------
Other operating expenses:
Salaries and wages 21,789 18,917 16,565
Employee benefits 5,742 4,777 4,614
Occupancy, net 4,505 3,916 3,546
Furniture and equipment 6,249 5,244 4,558
Other real estate expense (income), net (214) (586) (457)
FDIC insurance 5 1,127 2,008
Other expenses 15,319 12,583 10,393
- -------------------------------------------------------------------------------
Total other operating expenses 53,395 45,978 41,227
- -------------------------------------------------------------------------------
Income before income taxes 34,594 28,181 25,595
Income tax expense 13,351 10,844 9,861
- -------------------------------------------------------------------------------
Net income $ 21,243 17,337 15,734
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income applicable to common stock $ 20,818 17,337 15,734
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income per common share $ 10.57 8.84 8.02
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Weighted average common shares outstanding 1,970,256 1,960,911 1,962,547
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-35-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Total
Preferred Common Retained holding gains stockholders'
stock stock earnings (losses), net equity
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ - 8,119 76,044 - 84,163
Effect of change in accounting
for investment securities
January 1, 1994 - - - 122 122
Common stock transactions:
17,483 shares retired - (950) - - (950)
7,014 shares issued - 362 - - 362
Cash dividends declared ($1.58 per
common share) - - (3,101) - (3,101)
Increase in unrealized loss on
available-for-sale
investment securities, net - - - (1,058) (1,058)
Net income - - 15,734 - 15,734
- --------------------------------------------------------------------------------------------
Balance at December 31, 1994 - 7,531 88,677 (936) 95,272
Common stock transactions:
18,131 shares retired - (1,197) - - (1,197)
6,727 shares issued - 358 - - 358
Cash dividends declared ($1.91
per common share) - - (3,733) - (3,733)
Increase in unrealized gains on
available-for-sale
investment securities, net - - - 1,329 1,329
Net income - - 17,337 - 17,337
- --------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 6,692 102,281 393 109,366
Preferred stock issuance:
20,000 shares issued 20,000 - - - 20,000
Preferred stock issuance costs - - (458) - (458)
Common stock transactions:
16,452 shares retired - (1,229) - - (1,229)
46,960 shares issued - 3,478 - - 3,478
Cash dividends declared:
Common ($3.07 per share) - - (6,028) - (6,028)
Preferred (8.53%) - - (425) - (425)
Increase in unrealized gains on
available-for-sale
investment securities, net - - - 114 114
Net income - - 21,243 - 21,243
- --------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 20,000 8,941 116,613 507 146,061
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-36-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $21,243 17,337 15,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Provisions for loan and other real estate losses 3,823 1,601 1,354
Depreciation and amortization 5,654 4,272 3,612
Net premium amortization on investment securities 591 1,111 1,688
Loss (gain) on sale of investments, net (18) 6 (69)
Gain on sale of other real estate net owned (335) (527) (578)
(Gain) loss on sales of premises and equipment (2) - 13
Provision for deferred income taxes (528) 129 232
Increase in interest receivable (507) (1,828) (1,440)
Decrease (increase) in other assets (1,767) 2,069 (4,621)
Increase (decrease) in accounts payable
and accrued expenses 394 3,553 7
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 28,548 27,723 15,932
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest-bearing deposits 16,495 (22,012) (1,028)
Purchases of investment securities:
Held-to-maturity (200,361) (88,857) (73,771)
Available-for-sale (63,477) (12,254) (13,329)
Proceeds from maturities and paydowns
of investment securities:
Held-to-maturity 150,313 116,267 70,497
Available-for-sale 62,460 12,901 11,437
Sales of investment securities:
Available-for-sale 5,523 - 117
Extensions of credit to customers,
net of repayments (98,142) (70,149) (86,118)
Recoveries on loans charged-off 1,987 1,016 889
Proceeds from sale of other real estate owned 1,121 1,236 1,942
Acquisitions of subsidiaries, net of
cash and cash equivalents acquired 24,840 (10,465) -
Capital distribution from (contribution to)
building joint venture 150 (2,100) -
Capital expenditures, net (6,324) (4,675) (3,391)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (105,415) (79,092) (92,755)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 56,674 76,354 3,064
Net increase (decrease) in federal funds
and repurchase agreements (15,938) 29,148 23,860
Advances (repayments) of other borrowed funds, net (871) (1,594) -
Borrowings of long-term debt 66,939 13,484 122
Repayment of long-term debt (22,410) (3,066) (1,526)
Proceeds from issuance of common stock 3,478 358 362
Proceeds from issuance of preferred stock,
net of issuance costs 19,542 - -
Payments to retire common stock (1,229) (1,197) (950)
Dividends paid on common stock (6,028) (3,733) (3,101)
Dividends paid on preferred stock (425) - -
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 99,732 109,754 21,831
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22,865 58,385 (54,992)
Cash and cash equivalents at beginning of year 143,042 84,657 139,649
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $165,907 143,042 84,657
- -----------------------------------------------------------------------------------------
</TABLE>
Noncash Investing and Financing Activities - The Company transferred
loans of $668, $227 and $106 to other real estate owned
in 1996, 1995 and 1994, respectively.
On January 1, 1994, the Company reclassified investment securities
of $46,237 as available-for-sale.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-37-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company provides a full range of banking services to individual
and corporate customers through its bank and non-bank subsidiaries
and their branch offices throughout the states of Montana and
Wyoming. The Company is subject to competition from other financial
institutions and financial service providers. The Company is subject
to the regulations of certain Federal and state agencies and
undergoes periodic examinations by those regulatory authorities. The
following is a summary of significant accounting policies utilized by
the Company:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of First Interstate BancSystem of Montana, Inc.
(Parent Company) and its operating subsidiaries: First Interstate Bank
of Commerce in Montana, First Interstate Bank of Commerce in Wyoming,
First Interstate Bank of Montana, N.A., First Interstate Bank of Wyoming,
N.A., Mountain Bank, doing business as First Interstate Bank in
Whitefish, Montana, First Interstate Bank, fsb and Commerce Financial, Inc.
All material intercompany transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION. The financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and real estate owned,
management obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and real
estate owned are adequate. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
allowances for losses on loans and real estate owned. While management
uses available information to recognize losses on loans and real estate
owned, future additions to the allowances may be necessary based on
changes in economic conditions which may affect the borrowers' ability to
pay or regulatory requirements.
In addition to purchasing and selling Federal funds for their own account,
the Company purchases and sells Federal funds as an agent. These and other
assets held in an agency or fiduciary capacity are not assets of the
Company and, accordingly, are not included in the accompanying consolidated
financial statements.
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.
At December 31, 1996 the Company was required to have aggregate reserves in
the form of cash on hand and deposits with the Federal Reserve Bank of
approximately $16,060. Also, an additional $23,800 compensating balance was
maintained with the Federal Reserve Bank to mitigate the payment of service
charges for check clearing services.
INVESTMENT SECURITIES. In May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
Company adopted the provisions of the statement as of January 1, 1994.
There were no cumulative adjustments to income as a result of adopting the
statement, however, the beginning balance of stockholders' equity was
increased by $122 (which is net of $66 in deferred income taxes) to reflect
net unrealized gains on securities classified as available-for-sale
previously carried at the lower of amortized cost or market. The Company's
accounting policy for investment securities is as follows:
TRADING ACCOUNT ASSETS
Trading account assets consist of debt and equity securities that are
bought and held principally for the purpose of selling them in the
near term and are reported at fair value, with unrealized gains and
losses included in earnings. The Company carried no trading account
assets during 1996 and 1995.
-38-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INVESTMENT SECURITIES HELD-TO-MATURITY AND INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified
as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading account
assets are classified as available-for-sale. In addition, all equity
securities not classified as trading are classified as available-
for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of deferred taxes, reported
as a separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums over
the estimated average life of the security, accretion of discounts to
maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is
included in interest income with interest and dividends. Realized
gains and losses, and declines in value judged to be other-than-temporary,
are included in investment securities gains (losses). The cost of
securities sold is based on the specific identification method.
LOANS. Loans are reported at the principal amount outstanding. Interest
is calculated by using the simple interest method on the daily balance of
the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or principal or when a loan becomes contractually past due by
ninety days or more with respect to interest or principal unless such
past due loan is well secured and in the process of collection. When a
loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed against current period interest income. Interest
accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully collectible
as to both principal and interest.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty.
Significant loan origination fees, net of related costs, are recognized
over the lives of the related loans as an adjustment of yield.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses which is charged to expense. Loans
are charged against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely or, with
respect to consumer installment loans, according to an established
delinquency schedule. The allowance balance is an amount that
management believes will be adequate to absorb losses inherent in
existing loans, leases and commitments to extend credit, based on
evaluations of the collectibility and prior loss experience of loans,
leases and commitments to extend credit. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific
problem loans, leases and commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
-39-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company may also establish a reserve for losses on specific loans which
are deemed to be impaired. Groups of small balance homogeneous basis
loans (generally consumer loans) are evaluated for impairment
collectively. A loan is considered impaired when, based upon current
information and events, it is probable that the Company will be unable
to collect, on a timely basis, all principal and interest according to
the contractual terms of the loan's original agreement. When a specific
loan is determined to be impaired, the allowance for loan losses is
increased through a charge to expense for the amount of the impairment.
The amount of the impairment is measured using cash flows discounted at
the loan's effective interest rate, except when it is determined that
the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such cases, the current
value of the collateral, reduced by anticipated selling costs, will be
used to measure impairment instead of discounted cash flows. The
Company's impaired loans are those non-consumer loans which are
non-accrual or a troubled debt restructuring. Interest income is
recognized on impaired loans only to the extent that cash payments are
received. The Company's existing policies for evaluating the adequacy
of the allowance for loan losses and policies for discontinuing the
accrual of interest on loans are used to establish the basis for
determining whether a loan is impaired.
GOODWILL AND OTHER INTANGIBLES. The excess of purchase price over the fair
value of net assets from acquisitions ("Goodwill") is being amortized
using the straight-line method over periods of primarily 15 to 25 years.
The Company assesses the recoverability of Goodwill by determining whether
the unamortized balance related to an acquisition can be recovered through
undiscounted future cash flows over the remaining amortization period.
Core deposit intangibles represent the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions
and are amortized using an accelerated method based on an estimated
runoff of the related deposits, not exceeding 10 years. Purchased
mortgage servicing rights ("MSR") represent the value of purchased
rights to service mortgage loans. The MSR are amortized in proportion
to and over the period of estimated net servicing income not expected to
exceed 12 years. MSR are evaluated for impairment based on the MSR
current fair value.
PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at
cost less accumulated depreciation. Depreciation is provided over
estimated useful lives of 5 to 50 years for buildings and improvements
and 3 to 15 years for furniture and equipment using straight-line
methods. Leasehold improvements are amortized using straight-line
methods over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. Consolidated
depreciation expense was $4,182 in 1996, $3,541 in 1995 and $3,318 in
1994.
LONG-LIVED ASSETS. The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets for Long-Lived
Assets to Be Disposed Of," on January 1, 1996. The statement requires
long-lived assets and certain identifiable intangibles (e.g. premises,
Goodwill, core deposit intangibles) be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. An asset is deemed impaired if the sum of
the expected future cash flows is less than the carrying amount of the
asset. The amount of the impairment loss is based on the assets' fair
value, which may be estimated by discounting the expected future cash
flows. The adoption of SFAS No. 121 did not have a material impact on
the Company's consolidated financial position or consolidated results of
operations.
OTHER REAL ESTATE OWNED. Real estate acquired in satisfaction of loans is
carried at the lower of the recorded investment in the property at the
date of foreclosure or its current fair value less selling cost ("Net
Realizable Value"). The value of the underlying loan is written down to
the fair market value of the real estate acquired by a charge to the
allowance for loan losses, if necessary, at the date of foreclosure. A
provision to the real estate owned valuation allowance is charged
against other real estate expense for any current or subsequent
write-downs to Net Realizable Value. Operating expenses of such
properties, net of related income, and gains on sales are included in
other real estate expenses.
SELF-INSURANCE. The Company is self-insured with respect to employee
medical claims up to specified limits per claim. The Company has an
accrual of approximately $560 for estimated unsettled and incurred
but not reported claims.
-40-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice,
income for trust services is recognized on the basis of cash received.
However, use of this method in lieu of accrual basis accounting does not
materially affect reported earnings.
INCOME TAXES. The Parent Company and its subsidiaries have elected to be
included in a consolidated Federal income tax return. For state income
tax purposes, the combined taxable income of the Parent Company and its
subsidiaries is apportioned between the states in which operations take
place. Federal and state income taxes attributable to the subsidiaries,
computed on a separate return basis, are paid to or received from the
Parent Company.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
PER SHARE DATA. Earnings per common share is calculated by dividing
net income less preferred stock dividends by the weighted average number
of common shares and common share equivalents outstanding during the
period. Book value per common share is calulated by dividing total
stockholders' equity less preferred stock by the number of common
shares outstanding at the end of the year.
STOCK-BASED COMPENSATION. The Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," as of January 1, 1996. SFAS No. 123
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies
are, however, allowed to continue to measure compensation cost for those
stock-based employee compensation plans using the intrinsic value-based
method of accounting, which generally results in compensation expense
only when the exercise price is less than the fair value of the
underlying stock at the date of grant. Companies that elect to remain
with the intrinsic value method are required to disclose in a footnote
to the financial statements pro forma net income and earnings per share,
as if the fair value method of SFAS No. 123 had been adopted. The
Company has elected to continue accounting for stock-based employee
compensation plans in accordance with Accounting Principles Board
No. 25 (see note 12).
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995
and 1994 amounts to conform to the 1996 presentation.
(2) REGULATORY MATTERS
The Federal Reserve Board (FRB) and the Federal Deposit Insurance
Corporation (FDIC) have issued risk-based capital guidelines to more
accurately consider the credit risk inherent in the assets and
off-balance-sheet activities of a bank or bank holding company and their
assessment of capital adequacy.
Under the guidelines, total capital has been redefined as core capital and
supplementary capital. Core capital consists primarily of stockholders'
equity, while supplementary capital consists primarily of the allowance
for loan losses (not to exceed 1.25% of risk weighted assets). Under
the guidelines, all intangible assets are to be excluded from the
components of core capital. The definition of assets has also been
modified to include items on and off the balance sheet, with each item
being assigned a predefined credit "risk-weight".
At December 31, 1996, the Company's consolidated risk-based capital (core
plus supplementary) and core capital ratios, calculated in accordance
with the guidelines, were 10.0% and 7.4%, respectively.
In addition to the risk-based guidelines discussed above, the FRB and FDIC
also established a leverage ratio defined as core capital as a percentage
of average tangible assets. The Company's consolidated leverage ratio at
December 31, 1996 was 5.3%.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
which was enacted on December 19, 1992, substantially revises the bank
regulatory and funding provisions of the Federal Deposit Insurance Act
and makes revisions to several other federal banking statutes.
-41-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Among other things, FDICIA requires the federal banking agencies to
implement differing levels of oversight depending on the institution's
capital category, as defined in the regulations. A depository
institution's capital category will depend upon where its capital ratios
are in relation to various relevant capital measures, which include the
risk-based capital and leverage ratios. The capital categories
represent minimum standards that will generally be applied to all
institutions. However, the regulatory agencies may impose higher minimum
standards on individual institutions or may downgrade an institution at
the applicable agency's discretion. FDICIA generally restricts a
depository institution from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding
company if the depository institution would thereafter be
undercapitalized (less than 8% total risk-based capital or 4% core
capital and leverage). At December 31, 1996, the Company's and bank
subsidiaries' capital ratios meet or exceed the highest capital
category, which requires total risk-based capital of at least 10%, core
capital of at least 6% and a leverage ratio of at least 5%.
(3) INVESTMENT SECURITIES
The amortized cost and approximate market values of investment
securities are summarized as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1996 cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 45,272 153 - 45,425
Obligations of U.S. Government agencies 54,919 340 (114) 55,145
States, county and municipal securities 7,717 295 (2) 8,010
Corporate securities 2,484 7 (5) 2,486
Other mortgage-backed securities 3,703 16 (10) 3,709
Other securities 9,607 120 - 9,727
---------------------------------------------------------------------------------------------
Total $ 123,702 931 (131) 124,502
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1996 cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 169,196 445 (731) 168,910
Obligations of U.S. Government agencies 89,600 158 (179) 89,579
States, county and municipal securities 11,793 152 (12) 11,933
Corporate securities 8,480 1 (27) 8,454
---------------------------------------------------------------------------------------------
Total $ 279,069 756 (949) 278,876
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $18 and no gross losses were realized on the sale of
available-for-sale securities in 1996.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1995 cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government agencies $ 48,288 576 (163) 48,701
States, county and municipal securities 7,392 382 (146) 7,628
Corporate securities 808 - (3) 805
Other mortgage-backed securities 3,206 12 (10) 3,208
Other securities 5,448 14 (14) 5,448
---------------------------------------------------------------------------------------------
Total $ 65,142 984 (336) 65,790
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HELD-TO-MATURITY
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1995 cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 121,086 248 (493) 120,841
Obligations of U.S. Government agencies 51,599 314 (137) 51,776
States, county and municipal securities 11,102 206 (34) 11,274
Corporate securities 9,160 7 (21) 9,146
---------------------------------------------------------------------------------------------
Total $ 192,947 775 (685) 193,037
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $6 and gross losses of $12 were realized on the sale of
available-for-sale securities in 1995. Gross gains of $70 and gross losses
of $1 were realized on the sale of securities in 1994.
Maturities of investment securities by contractual maturity at December 31,
1996 are shown below. Maturities of securities do not reflect rate
repricing opportunities present in many adjustable rate mortgage-backed and
corporate securities, nor do they reflect expected shorter maturities based
upon early prepayments of principal.
<TABLE>
<CAPTION>
December 31,1996 Available-for-Sale Held-to-Maturity
---------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 3,720 3,719 109,646 109,538
After one but within five years 68,523 68,809 159,029 158,868
After five years but within ten years 11,277 11,557 5,150 5,239
After ten years 26,301 26,410 619 620
---------------------------------------------------------------------------------------------
Total 109,821 110,495 274,444 274,265
---------------------------------------------------------------------------------------------
Collateralized mortgage obligations
and other 13,881 14,007 4,625 4,611
---------------------------------------------------------------------------------------------
Total $ 123,702 124,502 279,069 278,876
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
There are no significant concentrations of investments at December 31,
1996 (greater than 10 percent of stockholders' equity) in any individual
security issuer, except for U.S. Government or agency-backed securities.
At December 31, 1996 and 1995, $18,148 and $15,028, respectively, of
variable rate securities are included in investment securities.
Investment securities with amortized cost of $263,459 and $182,976 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, securities sold under repurchase agreements and for other
purposes required or permitted by law. The approximate market value of
securities pledged at December 31, 1996 and 1995 was $263,608 and
$182,970, respectively. All securities sold under repurchase agreements
are with customers and generally mature on the next banking day. The
Company retains possession of the underlying securities sold under
repurchase agreements.
-43-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LOANS
Major categories and balances of loans included in the loan portfolios
are as follows:
December 31, 1996 1995
--------------------------------------------------------------------------
Agricultural (1) $ 143,572 113,827
Commercial (2) 471,458 311,982
Real estate 274,141 142,097
Consumer (3) 484,865 300,711
Other loans, including overdrafts 1,443 1,761
--------------------------------------------------------------------------
Total loans $ 1,375,479 870,378
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Includes loans to agricultural customers secured by real estate of
$52,689 and $43,826 at December 31, 1996 and 1995, respectively.
(2) Includes loans secured by commercial real estate properties of
$198,570 and $145,380 at December 31, 1996 and 1995, respectively.
(3) Includes loans secured by second mortgages on real estate of
$74,607 and $53,046 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had no concentrations of loans which
exceeded 10% of total loans other than the categories disclosed above.
The Company has no loans or loan commitments to highly leveraged
companies.
Nonaccrual loans amounted to $6,822 and $3,632 at December 31, 1996 and
1995, respectively. If interest on nonaccrual loans had been accrued,
such income would have approximated $405 and $318, respectively. Loans
contractually past due ninety days or more aggregating $6,432 on
December 31, 1996 and $1,711 on December 31, 1995 were on accrual
status. Such loans are deemed adequately secured and in the process of
collection.
Included in the nonaccrual loans at December 31, 1996 and 1995 are
$5,122 and $3,231, respectively, of loans which are considered impaired.
Of this amount, an impairment allowance of $436 and $407, respectively,
is included in the Company's allowance for loan losses. The average
recorded investment in impaired loans for the years ended December 31,
1996 and 1995 was approximately $3,870 and $3,080, respectively. If
interest on impaired loans had been accrued, the amount of interest
income on impaired loans during 1996 and 1995 would have been
approximately $357 and $283, respectively.
Also included in total loans at December 31, 1996 and 1995 are loans
with a carrying value of $1,763 and $1,755, respectively, the terms of
which have been modified in troubled debt restructurings. There were no
nonaccrual loans included in restructured debt at December 31, 1996.
Restructured debt includes nonaccrual loans of $15 at December 31, 1995.
During the years then ended, the recognized interest income on
restructured loans approximated $158 and $161, respectively. At December
31, 1996, there were no commitments to lend additional funds to
borrowers whose existing loans have been restructured or are classified
as nonaccrual.
Most of the Company's business activity is with customers within the
state of Montana and Wyoming. Loans where the customers or related
collateral are out of the Company's trade area are not significant and
management's anticipated credit losses arising from these transactions
compare favorably with the Company's credit loss experience on its loan
portfolio as a whole.
Certain executive officers and directors of the Company and certain
corporations and individuals related to such persons, incurred
indebtedness in the form of loans, as customers, of approximately
$11,474 at December 31, 1996 and $12,802 at December 31, 1995 (including
outstanding loans of new executive officers and directors in 1996).
During 1996, new loans and advances on existing loans of $2,700 were
funded and repayments totaled $4,028. These loans were made on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable risk of collectibility.
-44-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year ending December 31, 1996 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 15,171 13,726 13,373
Allowance of acquired banks 10,553 917 -
Provision charged to operating expense 3,844 1,629 1,344
Less loans charged-off (3,758) (2,117) (1,880)
Add back recoveries of loans previously charged-off 1,987 1,016 889
-------------------------------------------------------------------------------------
Balance at end of year $ 27,797 15,171 13,726
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
December 31, 1996 1995
--------------------------------------------------------------
Land $ 8,350 5,747
Buildings and improvements 53,609 33,032
Furniture and equipment 24,689 20,406
--------------------------------------------------------------
86,648 59,185
Less accumulated depreciation 28,465 26,645
--------------------------------------------------------------
Premises and equipment, net $ 58,183 32,540
--------------------------------------------------------------
--------------------------------------------------------------
The Parent Company and a branch office lease premises from an affiliated
partnership (see note 13).
(7) OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of the following:
December 31, 1996 1995
--------------------------------------------------------------
Other real estate $ 2,057 1,903
Less allowance for OREO losses 511 554
--------------------------------------------------------------
$ 1,546 1,349
--------------------------------------------------------------
--------------------------------------------------------------
A summary of transactions in the allowance for OREO losses follows:
Year ending December 31, 1996 1995 1994
------------------------------------------------------------------------
Balance at beginning of year $ 554 1,048 1,448
Provision (reversal) during the year (21) (28) 10
Property writedowns (16) (449) (410)
Losses on sales (6) (17) -
------------------------------------------------------------------------
Balance at end of year $ 511 554 1,048
------------------------------------------------------------------------
------------------------------------------------------------------------
-45-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The changes in the balance of other real estate for the years
ending December 31, 1996 and 1995 are summarized as follows:
1996 1995
------------------------------------------------------------------
Balance, beginning of year $1,903 2,851
Add other real estate of banks acquired 294 -
Add transfers from loans 668 227
Cash proceeds from sales $1,121 1,236
Less gains on sales 335 527
------------------------------------------------------------------
Net basis of OREO sold (786) (709)
Property writedowns (22) (466)
------------------------------------------------------------------
Balance, end of year $2,057 1,903
------------------------------------------------------------------
------------------------------------------------------------------
(8) CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains key-executive life insurance policies
on certain principal shareholders. Under the key-executive
insurance, the Company receives the cash surrender value if the
policy is terminated, or receives all benefits payable upon the
death of the insured. The aggregate face amount of key-executive
insurance policies was $7,000 at December 31, 1996. Cash
surrender values are recorded net of outstanding policy loans,
since the Company has no current plans for repayment. Outstanding
policy loans at December 31, 1996 and 1995 are $2,540 and $1,875,
respectively. The net cash surrender value of key-executive
insurance policies included in other assets is $278 and $792 at
December 31, 1996 and 1995, respectively.
During 1994, the Company provided insurance contracts for
certain key officers. The net cash surrender value of these
contracts is $1,365 and $1,218 at December 31, 1996 and 1995,
respectively, and is included in other assets. Upon retirement,
the officers have the option of entering into a split-dollar
contract with the Company providing insurance coverage for the
difference between the Company's cash surrender value and the face
amount of the policy.
(9) DEPOSITS
Deposits are summarized as follows:
December 31, 1996 1995
------------------------------------------------------------------
Noninterest bearing demand $ 385,371 230,136
Interest bearing:
Demand 316,964 180,742
Savings 396,845 263,062
Time, $100 and over 122,242 90,257
Time, other 458,002 334,872
------------------------------------------------------------------
Total interest bearing 1,294,053 868,933
------------------------------------------------------------------
$ 1,679,424 1,099,069
------------------------------------------------------------------
------------------------------------------------------------------
Maturities of time deposits of $100 or more are as follows:
December 31, 1996
------------------------------------------------------------------
Three months or less $ 40,819
Three through six months 24,792
Six months through twelve months 43,839
Over twelve months 12,792
------------------------------------------------------------------
$ 122,242
------------------------------------------------------------------
------------------------------------------------------------------
Interest expense on time deposits of $100 or more was $5,514,
$4,581 and $2,846 for the years ended December 31, 1996, 1995 and
1994, respectively.
-46-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
Year ended December 31, 1996 1995 1994
------------------------------------------------------------------
Current:
Federal $ 12,004 9,194 8,318
State 1,875 1,521 1,311
------------------------------------------------------------------
13,879 10,715 9,629
------------------------------------------------------------------
Deferred:
Federal (492) 134 214
State (36) (5) 18
------------------------------------------------------------------
(528) 129 232
------------------------------------------------------------------
$ 13,351 10,844 9,861
------------------------------------------------------------------
------------------------------------------------------------------
Total income tax expense differs from the amount computed by
applying the Federal income tax rate of 35 percent in 1996, 1995
and 1994 to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at the statutory tax rate $ 12,108 9,863 8,958
Increase (decrease) in tax resulting from:
Tax-exempt income (472) (374) (116)
State income tax, net of Federal income tax benefit 1,190 985 864
Amortization of nondeductible Goodwill 318 289 137
Other, net 207 81 18
------------------------------------------------------------------------------------------
$ 13,351 10,844 9,861
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise
to significant portions of the net deferred tax asset relate to the
following:
<TABLE>
<CAPTION>
December 31, 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 6,561 5,616
Other real estate owned, principally due to differences in bases 118 499
Employee benefits 828 845
Other 45 -
-----------------------------------------------------------------------------------------
Net deferred tax assets 7,552 6,960
Deferred tax liabilities:
Fixed assets, principally differences in bases and depreciation (926) (830)
Investment in joint venture partnership, principally due to
differences in depreciation of partnership assets (904) (845)
Prepaid amounts (138) (299)
Investment securities, principally differences in bases (370) (146)
Investment securities available-for-sale (293) (254)
Other - (154)
-----------------------------------------------------------------------------------------
Net deferred tax liabilities (2,631) (2,528)
-----------------------------------------------------------------------------------------
Net deferred income tax asset $ 4,921 4,432
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
-47-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon
the existence of, or generation of, taxable income in the periods
which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities,
taxes paid in carryback years, projected future taxable income,
and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are
deductible, at December 31, 1996 management continues to believe
it is more likely than not that the Company will realize the
benefits of these deductible differences.
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Revolving term loan due December 31, 2003 at variable interest
rates (7.53% weighted average rate at December 31,1996), with
semi-annual reductions in overall credit line of $2,000 each
June 30 and December 31 $ 39,200 -
7.5% subordinated notes, unsecured, interest payable semi-annually,
due in increasing annual principal payments beginning
October 1, 2002 in the amount of $3,400 with final maturity
on October 1, 2006 20,000 -
Various unsecured notes payable to former stockholders at various
rates of 5.80% to 8.25% due in annual installments aggregating
$486, plus interest, through March 1999 1,196 1,117
Term notes payable to bank, refinanced in 1996 - 9,750
Subsidiaries:
Various notes payable to Federal Home Loan Bank of Seattle,
interest due monthly at various rates and maturities (weighted
average rate of 6.52% at December 31, 1996) 4,271 -
Note payable to Federal Home Loan Bank of Seattle repaid in 1996 - 5,000
----------------------------------------------------------------------------------------------------------
$ 64,667 15,867
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of long-term debt for the years ending December 31 follow:
1997 $ 1,686
1998 4,419
1999 4,642
2000 4,096
2001 4,000
Thereafter 45,824
--------------------------------------------------------------------------
$ 64,667
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The proceeds from issuance of the revolving term note, subordinated notes
and preferred stock (see note 15) were utilized to fund acquisitions
(see note 18).
In connection with its borrowings, the Company has agreed to
certain restrictions dealing with, among other things, minimum
capital ratios, the sale or issuance of capital stock and the
maximum amount of dividends.
-48-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has a revolving term loan with its primary lender
in the amount of $42,000 at December 31, 1996. The available
borrowing amount is reduced by $2,000 on a semi-annual basis
commencing in June 1997. The revolving facility requires an
annual commitment fee of 0.15% on the unadvanced amount. The
Company may elect at various dates either prime or a Eurodollar
rate plus 1.75%. The term note payable is secured by
100% of the outstanding capital stock of the Company's bank
subsidiaries.
The notes payable to Federal Home Loan Bank of Seattle (FHLB)
are secured by FHLB stock, unencumbered residential real estate
mortgages and certain mortgage-backed securities.
The following is a summary of other borrowed funds, all of
which mature within one year:
<TABLE>
<CAPTION>
December 31, 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand notes issued to the United States Treasury,
secured by investment securities $ 11,071 5,494
5.45% interest bearing demand note issued to Federal Home Loan Bank of
Seattle secured by unencumbered real estate mortgages and certain
mortgages and certain mortgage-backed securities 2,000 -
----------------------------------------------------------------------------------------------------
$ 13,071 5,494
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
The Company has Federal funds lines of credit with third
parties amounting to $50,000, subject to funds availability. The
Company also has been approved for participation in the Federal
Home Loan Bank Cash management Advance Program for borrowings up
to approximately $39,500.
(12) EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN. The Company has a noncontributory
profit sharing plan. To be eligible for the profit sharing plan,
an employee must complete one year of employment and 1,000 hours
or more of service. Quarterly contributions are determined by the
Company's Board of Directors, but are not to exceed, on an
individual basis, the lesser of 25% of compensation or $30.
Contributions to this plan were $839, $685 and $620 in 1996, 1995
and 1994, respectively.
SAVINGS PLAN. In addition, the Company has a contributory
employee savings plan. Eligibility requirements for this plan are
the same as those for the profit sharing plan as discussed in the
preceding paragraph. Employee participation in the plan is at the
option of the employee. The Company contributes $1.25 for each
$1.00 of employee contributions up to 4% of the participating
employee's compensation. The recorded expense related to this
plan was $814 in 1996, $703 in 1995 and $648 in 1994.
STOCK OPTION PLAN. The Company has a Nonqualified Stock
Option and Stock Appreciation Rights Plan for senior officers of
the Company. All options and stock appreciation rights ("SAR's")
granted have an exercise price of book value of the Company prior
to 1993 and appraised value thereafter. Each option granted under
the Plan can be immediately exercised up to ten years from the
date of grant. SAR's are granted and exercised in tandem with
options. The stock issued in conjunction with the exercise of
options is subject to a shareholder agreement (see note 15). The
consolidated expense related to this plan was $72 in 1996, $170 in
1995 and $387 in 1994.
Information with respect to the Company's stock options and
SAR's are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Year ended December 31, Options SAR's Options SAR's Options SAR's
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 29,188 19,809 30,116 20,535 32,134 23,330
Granted 4,150 4,150 4,125 4,125 3,850 2,888
Exercised (4,379) (4,379) (5,053) (4,851) (5,868) (5,683)
-------------------------------------------------------------------------------------
Outstanding, end of year 28,959 19,580 29,188 19,809 30,116 20,535
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
-49-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the range of stock option exercise prices are
as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted during year $71.42 - $71.42 $63.20 - $63.20 $49.60 - $49.60
Exercised during year $17.20 - $24.62 $17.20 - $23.51 $16.18 - $21.43
Outstanding, end of year $18.25 - $71.42 $17.20 - $63.20 $17.20 - $49.60
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
Stratification and additional detail regarding the options outstanding at
December 31, 1996 are as follows (all exercisable):
Exercise Number Weighted-average Weighted-average
price range outstanding remaining life exercise price
--------------------------------------------------------------------------
$18.25 - $30.45 12,734 2.97 years $ 24.53
$45.60 - $71.42 16,225 7.73 years 57.63
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company has elected to continue to measure compensation costs as
prescribed by APB Opinion No. 25 and, accordingly, does not recognize
compensation expense on the options granted where the exercise price is
equal to appraisal value at the date of grant. SFAS No. 123 requires the
Company to disclose pro forma information reflecting net income and
earnings per share had the Company elected to record compensation expense
based on the fair value method described in SFAS No. 123. The fair value
of the options was estimated at the grant date using a Black-Scholes option
pricing model. Option valuation models require the input of highly
subjective assumptions. Because the Company's common stock and stock
options have characteristics significantly different from listed securities
and traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock options.
The following weighted-average assumptions were used in the valuation
model: risk-free interest rates of 5.65% and 7.78% in 1996 and 1995;
dividend yield of 2.50% and 2.67% in 1996 and 1995; and expected life of
options of 10 years in both 1996 and 1995.
Pro forma disclosures, listed below, include options granted in 1996 and
1995 and are not likely to be representative of the pro forma disclosures
for future years. The estimated fair value of the options is expensed in
the year granted as all options are vested upon grant.
Year ended December 31, 1996 1995
--------------------------------------------------------------------------
Pro forma net income $ 21,102 17,211
Pro forma net income applicable to common stock 20,677 17,211
Pro forma earnings per common share 10.49 8.77
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various claims
and litigation. In the opinion of management, following consultation with
legal counsel, the ultimate liability or disposition thereof will not have
a material adverse effect on the consolidated financial condition or
results of operations.
The Parent Company and the Billings office of First Interstate Bank of
Commerce in Montana ("FIB Montana") are the anchor tenants in a building
owned by a joint venture partnership in which FIB Montana is one of the two
partners, and has a 50% partnership interest. The investment in the
partnership is accounted for using the equity method. Indebtedness of the
partnership in the amount of $10,827 at December 31, 1996 is recourse to
the partners. Total rents paid to the partnership were $814 in 1996, $711
in 1995 and $690 in 1994.
The Company also leases certain premises and equipment from third parties
under operating leases. Total rental expense to third parties was $1,019
in 1996, $1,425 in 1995 and $1,267 in 1994.
-50-
<PAGE>
The total future minimum rental commitments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one
year at December 31, 1996 are as follows:
Third
parties Partnership Total
---------------------------------------------------------------------------
For the year ending December 31:
1997 $ 328 814 1,142
1998 273 814 1,087
1999 268 814 1,082
2000 196 814 1,010
2001 171 814 985
Thereafter 1,476 3,053 4,529
---------------------------------------------------------------------------
$ 2,712 7,123 9,835
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In September 1983, the Company entered into a franchise agreement
("Franchise Agreement") with First Interstate Bancorp ("First
Interstate"), a Los Angeles based bank holding company which was
acquired by Wells Fargo and Company April 1, 1996. Under the Franchise
Agreement, the Company was First Interstate's exclusive licensee in the
states of Montana and Wyoming. On May 24, 1996, the Company 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 and Company
was terminated.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
amounts recorded in the consolidated balance sheet.
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 less 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 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.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. At December 31, 1996, stand-by letters of
credit in the amount of $19,884, were outstanding. Commitments to
extend credit to existing and new borrowers approximated $284,259 at
December 31, 1996, which includes $32,760 on unused credit card lines.
-51-
<PAGE>
(15) CAPITAL STOCK
On September 26, 1996 ("Issuance Date"), the Company issued 20,000
shares of no par noncumulative perpetual preferred stock ("Preferred
Stock") at a price of $1,000. The holders of Preferred Stock are
entitled to receive in any fiscal year, when and if declared by the
Company's Board of Directors, dividends in cash at the rate of $85.30
per share, up to the seventh anniversary of the Issuance Date. From and
after the seventh anniversary of the Issuance Date, the holders of
Preferred Stock shall be entitled to receive in any fiscal year, when
and if declared by the Company's Board of Directors, dividends in cash
at a variable rate equal to 250 basis points over the high yield of the
30-day, 10-year or 30-year U.S. Treasury Bills. The Preferred Stock is
not redeemable prior to the seventh anniversary of the Issuance Date.
The Company may, at its option, redeem all or any part of the Preferred
Stock at any time on or after the seventh anniversary of the Issuance
Date, subject to the approval of the FRB, at a price of $1.00 per share,
plus accrued but unpaid dividends to the date fixed for redemption.
At December 31, 1996 nearly all shares of common stock held by
shareholders are subject to shareholder's agreements (Agreements).
Under the Agreements, the Company has a right of first refusal to
repurchase shares from the shareholder at minority interest appraised
value in the event of a proposed sale of shares to a third party, death,
disability or termination of employment. Additional shares purchased by
officers, directors and employees after 1993 are also subject to
repurchase at the Company's discretion.
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate
BancSystem of Montana, Inc.:
<TABLE>
<CAPTION>
December 31, 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
CONDENSED BALANCE SHEETS:
Cash and cash equivalents $ 2,905 1,890
Investment in subsidiaries, at equity:
First Interstate Bank of Commerce of Montana 88,438 85,951
First Interstate Bank of Commerce of Wyoming 29,196 28,145
First Interstate Bank of Montana, N.A. 35,052 -
First Interstate Bank of Wyoming, N.A. 38,909 -
Mountain Bank (doing business as First Interstate Bank) 7,965 -
First Interstate Bank, fsb 1,988 -
Non-bank subsidiary - Commerce Financial, Inc. 408 381
---------------------------------------------------------------------------------------------------
Total investment in subsidiaries, at equity 201,956 114,477
Goodwill, net of accumulated amortization 2,633 2,927
Other assets 4,068 4,009
---------------------------------------------------------------------------------------------------
$ 211,562 123,303
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Other liabilities $ 5,105 3,070
Long-term debt 60,396 10,867
---------------------------------------------------------------------------------------------------
65,501 13,937
Stockholders' equity 145,554 108,973
Unrealized gain on investment securities available-for-sale, net 507 393
---------------------------------------------------------------------------------------------------
$ 211,562 123,303
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME:
Dividends from subsidiary banks $ 19,529 10,993 10,029
Interest on note receivable from non-bank subsidiary 15 32 41
Other interest income 143 30 159
Other income, primarily management fees
from subsidiaries 1,788 1,508 1,513
--------------------------------------------------------------------------------------------------------
Total income 21,475 12,563 11,742
--------------------------------------------------------------------------------------------------------
Salaries and benefits 2,627 2,370 2,378
Interest expense 1,919 1,010 514
Other operating expenses, net 2,612 1,835 1,506
--------------------------------------------------------------------------------------------------------
Total expenses 7,158 5,215 4,398
--------------------------------------------------------------------------------------------------------
Data Division income, net of operating expenses 1,990 1,667 1,307
--------------------------------------------------------------------------------------------------------
Earnings before income tax benefits 16,307 9,015 8,651
Income tax benefit 979 565 343
--------------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiaries 17,286 9,580 8,994
--------------------------------------------------------------------------------------------------------
Undistributed earnings of subsidiaries 3,957 7,757 6,740
--------------------------------------------------------------------------------------------------------
Net income $ 21,243 17,337 15,734
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS:
Cash flows from operating activities:
Net income $ 21,243 17,337 15,734
Adjustments to reconcile net income to cash
provided by operating activities:
Undistributed earnings of subsidiaries (3,957) (7,757) (6,740)
Depreciation and amortization 311 312 306
Provision for deferred income taxes 11 348 177
Deposit on bank acquisition - 250 (250)
Other, net 802 967 (1,432)
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,410 11,457 7,795
--------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in advances to non-bank subsidiary 133 154 1,040
Purchase of investments - - (8,959)
Maturities of investments - 7,500 2,512
Increase in premises and equipment (2) (1,095) (28)
Capitalization of de novo subsidiary (2,000) - -
Acquisitions of subsidiaries, net (80,393) (17,478) -
--------------------------------------------------------------------------------------------------------
Net cash used in investing activities (82,262) (10,919) (5,435)
--------------------------------------------------------------------------------------------------------
-53-
<PAGE>
<CAPTION>
Year ended December 31, 1996 1995 1994
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of long-term debt $ 66,939 8,484 122
Repayments of long-term debt (17,410) (3,066) (1,526)
Dividends paid on common stock (6,028) (3,733) (3,101)
Redemptions of common stock (1,229) (1,197) (950)
Issuance of common stock 3,478 358 362
Proceeds from issuance of preferred stock,
net of issuance costs 19,542 - -
Dividends paid on preferred stock (425) - -
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 64,867 846 (5,093)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,015 1,384 (2,733)
Cash and cash equivalents, beginning of year 1,890 506 3,239
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,905 1,890 506
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES.
During 1996, the Parent Company transferred other assets of $1,014 to its
subsidiary, First Interstate Bank of Commerce of Montana.
(17) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS (Statement 107), requires the
Company to disclose the estimated fair values of its financial
instruments. Most of the Company's assets and liabilities are
considered financial instruments. Many of the Company's financial
instruments lack an available trading market, and it is the practice and
intent of the Company to hold its financial instruments to maturity. As
a result, significant assumptions and present value calculations were
used in determining estimated fair values.
For financial instruments bearing a variable interest rate, it is
presumed that recorded book values are reasonable estimates of fair
value. The methods and significant assumptions used to estimate fair
values for the various financial instruments are set forth below.
CASH AND CASH EQUIVALENTS. Due to the liquid nature of the
instruments, the carrying value of due from banks and federal funds
sold approximates market value.
INTEREST-BEARING DEPOSITS IN BANK. Due to the short-term nature of
the instrument, the carrying value of the interest-bearing deposit
in bank approximates market value.
INVESTMENT SECURITIES. Fair values of investment securities are
based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
LOANS. Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type
such as commercial, real estate, and consumer. Each loan category
is further segmented into fixed and adjustable rate interest terms
and by performing and nonperforming categories.
-54-
<PAGE>
The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through estimated maturity using
estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan category using the U.S.
Treasury yield curve adjusted to bond equivalent yields. The
estimate of maturity is based on the Company's historical
experience with repayments for each loan classification, modified,
as required, by an estimate of the effect of current economic and
lending conditions. For performing real estate loans, fair value
is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market
sources.
The fair value of adjustable rate loans was considered to be the
carrying value of these instruments due to the frequent repricing,
provided there had been no change in credit quality since
origination.
DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS. The fair value of demand deposits, savings
accounts, federal funds purchased and securities sold under
repurchase agreements is the amount payable on demand at the
reporting date, due to the liquid nature of the instruments and the
frequent repricing.
The fair value of fixed-maturity certificates of deposit is
estimated using external market rates currently offered for
deposits with similar remaining maturities.
OTHER BORROWED FUNDS AND LONG-TERM DEBT. The term note payable and
revolving term loan bear interest at a floating market rate and, as
such, the carrying amounts are deemed to reflect fair value. The
carrying value of the interest bearing demand notes to the United
States Treasury is deemed an approximation of fair value due to the
frequent repayment and repricing at market rates. Due to the
recent issuance date of the subordinated notes and relative
stability of interest rates in the intervening period, book value
is estimated to approximate fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. The
fair value of commitments to extend credit can be estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. It is not practicable to
estimate fair value because information is not readily available to
support estimates of fees which can be expected to be realized on
these instruments.
Loan fees for the year ended December 31, 1996 and 1995, including
fees charged for commitments to extend credit and standby letters
of credit, were approximately $4,981 and $4,070, respectively, of
which a significant portion related to real estate refinancing.
LIMITATIONS. Fair value estimates are made at a specific point in
time, based on relevant market information and information about
the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one
time the entire holdings of a particular instrument. Because no
market exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding
comparable market interest rates, future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. For
example, the Company has a trust department and data processing
division that contribute net operating income annually. Neither
department is considered a financial instrument, and their value
has not been incorporated into the fair value estimates. Other
significant assets that are not considered financial instruments
include the mortgage subsidiary, deferred tax assets, and property
and equipment. In addition, the tax effect of the difference
between the fair value and carrying value of financial instruments
can have a significant effect on fair value estimates and have not
been considered in the estimates.
-55-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- ----------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
As of December 31, Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 172,452 172,452 166,082 166,082
Securities available-for-sale 124,502 124,502 65,790 65,790
Securities held-to-maturity 279,069 278,876 192,947 193,037
Net loans 1,347,682 1,344,336 855,207 863,480
--------------------------------------------------------------------------------------------------------
Total financial assets $ 1,923,705 1,920,166 1,280,026 1,288,389
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Financial liabilities:
Total deposits, excluding certificates $ 1,099,180 1,099,180 673,940 673,940
Certificates of deposit 580,244 587,718 425,129 434,190
Federal funds purchased 13,450 13,450 3,125 3,125
Securities sold under repurchase
agreements 129,137 129,137 104,898 104,898
Other borrowed funds 13,071 13,071 5,494 5,494
Long-term debt 64,667 64,667 15,867 15,867
--------------------------------------------------------------------------------------------------------
Total financial liabilities $ 1,899,749 1,907,223 1,228,453 1,237,514
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
(18) ACQUISITIONS AND EXPANSION
FIRST CITIZENS BANK OF BOZEMAN. On January 3, 1995, the Company
acquired all of the outstanding ownership of Citizens BancShares, Inc.
("CBI") and its bank subsidiary, First Citizens Bank of Bozeman ("FCB")
for $8,606. The historical carrying value of the net assets of CBI as
of the acquisition date were $3,724. The transaction was accounted for
as a purchase and, accordingly, the consolidated statement of income for
the year ended December 31, 1995 includes CBI's results of operations
since the date of the purchase. CBI was subsequently dissolved and FCB
became a branch of First Interstate Bank of Commerce in Montana.
FIRST NATIONAL PARK BANK. 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")
for $8,872. The historical carrying value of the net assets of FPCBI as
of the acquisition date were $5,269. The transaction was accounted for
as a purchase and, accordingly, the consolidated statement of income for
the year ended December 31, 1995 includes FPCBI's results of operations
since the date of the purchase. FPCBI was subsequently dissolved and
FNPB became a branch of First Interstate Bank of Commerce in Montana.
FIRST INTERSTATE BANK, FSB. 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. Upon
approval, the Company capitalized the savings bank at $2,000 and opened
the bank on December 12, 1996.
FIRST INTERSTATE BANK OF MONTANA, N.A. AND FIRST INTERSTATE BANK OF
WYOMING, N.A. On October 1, 1996, the Company acquired all of the
outstanding ownership of First Interstate Bank of Montana, N.A.
(FIBNA-MT) and First Interstate Bank of Wyoming, N.A. (FIBNA-WY). The
transaction was accounted for as a purchase and, accordingly, the
consolidated statement of income for the year ended December 31, 1996
includes FIBNA-MT's and FIBNA-WY's results of operations since the date
of purchase.
MOUNTAIN BANK OF WHITEFISH. On December 18, 1996, the Company acquired
all of the outstanding ownership of Mountain Bank of Whitefish, now
doing business as First Interstate Bank of Whitefish (FIB-Whitefish).
The transaction was accounted for as a purchase and, accordingly, the
consolidated statement of income for the year ended December 31, 1996
includes FIB-Whitefish's results of operations since the date of
purchase. The premiums paid over the historical carrying value of net
assets at the respective dates of purchase were as follows:
-56-
<PAGE>
<TABLE>
<CAPTION>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- ----------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The premiums paid over the historical carrying value of net assets at
the respective dates of purchase were as follows:
FIBNA-MT FIBNA-WY FIB-Whitefish Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash consideration paid $ 34,622 37,809 7,962 80,393
Historical net assets carrying value 19,557 16,416 3,994 39,967
--------------------------------------------------------------------------------------------------------
Premium paid over historical carrying value $ 15,065 21,393 3,968 40,426
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
The increase (decrease) in net asset values as a result of estimated fair
value adjustments are as follows:
<CAPTION>
FIBNA-MT FIBNA-WY FIB-Whitefish Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Intangible assets:
Core deposit intangible $ 3,920 4,309 - 8,229
Mortgage servicing rights - 1,122 - 1,122
Goodwill 7,392 9,850 3,573 20,815
--------------------------------------------------------------------------------------------------------
Total intangible assets 11,312 15,281 3,573 30,166
--------------------------------------------------------------------------------------------------------
Premises and equipment 3,780 6,327 837 10,944
Investment securities (27) - 13 (14)
Allowance for loan losses - - (455) (455)
Other liabilities - (215) - (215)
--------------------------------------------------------------------------------------------------------
$ 15,065 21,393 3,968 40,426
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
The premium paid and estimated fair value adjustments have been "pushed
down" to the acquired entities. The preliminary allocation of purchase
price is subject to change as fair value estimates are finalized.
The estimated fair value of net assets at the acquisition dates are
summarized as follows:
<CAPTION>
FIBNA-MT FIBNA-WY FIB-Whitefish Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 20,712 24,990 4,132 49,834
Federal funds sold 16,791 32,708 5,900 55,399
Investment securities available-for-sale 1,301 59,014 3,304 63,619
Investment securities held-to-maturity 25,325 10,749 - 36,074
Loans 191,010 172,576 47,799 411,385
Allowance for loan losses (2,983) (7,076) (494) (10,553)
Premises and equipment 8,534 11,934 3,181 23,649
Goodwill 7,392 9,850 3,573 20,815
Other intangibles 3,920 5,431 - 9,351
Other assets 4,394 4,004 3,542 11,940
--------------------------------------------------------------------------------------------------------
276,396 324,180 70,937 671,513
--------------------------------------------------------------------------------------------------------
Deposits 195,484 273,805 54,392 523,681
Federal funds purchased 41,653 8,849 - 50,502
Other liabilities 2,374 1,532 312 4,218
Borrowed funds 2,263 2,185 8,271 12,719
--------------------------------------------------------------------------------------------------------
241,774 286,371 62,975 591,120
--------------------------------------------------------------------------------------------------------
Cash consideration paid $ 34,622 37,809 7,962 80,393
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
-57-
<PAGE>
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
- ----------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The information below presents on a pro forma basis, amounts as if
FIBNA-MT, FIBNA-WY, and FIB-Whitefish had been acquired as of January 1,
1996 and 1995 for each year presented.
Years ended December 31, (unaudited) 1996 1995
--------------------------------------------------------------------------
Interest income $ 151,721 142,827
Interest expense 65,404 61,260
--------------------------------------------------------------------------
Net interest income 86,317 81,567
Provision for loan losses 4,955 1,629
--------------------------------------------------------------------------
Net interest income after provision for loan losses 81,362 79,938
Investment security transactions 284 9
Noninterest income 29,988 26,982
Noninterest expense (71,027) (69,008)
--------------------------------------------------------------------------
Income before income taxes 40,607 37,921
Income taxes 15,836 14,387
--------------------------------------------------------------------------
Pro forma net income $ 24,771 23,534
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Pro forma net income per common share $ 11.71 11.13
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The unaudited pro forma information above has been prepared for comparative
purposes only and does not purport to be indicative of the actual results
that would have occurred if the operations had been combined during the
periods presented nor is it intended to be a projection of future results.
(19) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments 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.
SFAS No. 125 generally 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 provisions of SFAS No.
125 apply prospectively to transactions occurring after December 31,
1996. Management expects adoption will not have a material effect on
the consolidated financial position or results of operations of the
Company.
At December 31, 1996, the Company serviced loans for others with a
principal balance outstanding of approximately $140,000.
-58-
<PAGE>
(a) 2. Financial statement schedules
All other schedules to the consolidated financial
statements of the Registrant are omitted since the required
information is either not applicable, deemed immaterial, or
is shown in the respective financial statements or in notes
thereto.
(a) 3. Exhibits
2.1 Stock Purchase Agreement dated May 24, 1996 between First
Interstate BancSystem of Montana, Inc. and Wells Fargo &
Company (incorporated by reference to Company's Form 8-K
dated October 1, 1996)
3.1 Articles of Incorporation and the amendments thereto of
FIBM (incorporated by reference to the Registrant's Form
S-1 Registration Statement No. 33-84540)
3.1.1 Articles of Amendment to Restated Articles of
Incorporation dated September 1, 1996 (incorporated by
reference to the Company's Form 8-K dated October 1, 1996)
3.1.2 Articles of Amendment to Restated Articles of
Incorporation dated September 1, 1996 (incorporated by
reference to the Company's Form 8-K dated October 1, 1996)
3.2 Bylaws of FIBM and the Amendments thereto (incorporated
by reference to the Registrant's Form S-1 Registration
Statement No. 33-84540)
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 the 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 the
Company's Form 8-K dated October 1, 1996)
10.4 Lease Agreement Between Billings 401 Joint Venture and
First Interstate Bank of Commerce, Billings Office
(formerly known as First Interstate Bank of Billings,
National Association), and addendum thereto (incorporated
by reference to the Registrant's Form S-1 Registration
Statement No. 33-84540)
10.5 FIBM (formerly known as Security Banks of Montana)
Sublease to First Interstate Bank of Commerce, West
Billings Office (formerly known as Rimrock Bank)
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-84540)
10.8 Savings and Profit Sharing Plan for Employees of FIBM
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-84540)
10.8.1 Savings and Profit Sharing Plan for Employees of FIBM, as
amended December 31, 1994 (incorporated by reference to
the Post-Effective Amendment No. 2 to the Registrant's
Form S-1 Registration Statement No. 33-84540)
10.9 Stock Option and Stock Appreciation Rights Plan of FIBM,
as amended (incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-84540)
10.11 FIBM Shareholders' Agreements with Scott Family
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-84540)
10.11.1 Amendment to FIBM Shareholder's Agreement with Scott
Family dated September 7, 1995 (incorporated by reference
to the Post-Effective Amendment No. 2 to the Registrant's
Form S-1 Registration Statement No. 33-84540)
10.12 FIBM Stockholders Agreement for non-Scott Family members,
as amended (incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-84540)
-59-
<PAGE>
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 the Company's Form 8-K dated October 1, 1996)
10.15 Credit Agreement between Billings 401 Joint Venture and
Colorado National Bank dated as of September 26, 1995
(incorporated by reference to the Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement No. 33-84540)
10.16 Stock Purchase Agreement among FIBM and all stockholders
of First Park County Bancshares, Inc. (incorporated by
reference to the Post-Effective Amendment No. 2 to the
Registrant's Form S-1 Registration Statement No. 33-84540)
10.17 Plan of Liquidation and Dissolution of Commerce
BancShares of Wyoming, Inc. dated May 17, 1995
(incorporated by reference to the Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement No. 33-84540)
10.18 Articles of Dissolution of Citizens Bancshares, Inc.
(incorporated by reference to the Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement No. 33-84540)
10.19 Articles of Dissolution of First Park County Bancshares,
Inc. (incorporated by reference to the Post-Effective
Amendment No. 2 to the Registrant's Form S-1 Registration
Statement No. 33-84540)
22. Subsidiaries of FIBM.
27. Financial Data Schedule.
(b) Reports on Form 8-K
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.
A report on Form 8-K/A dated October 1, 1996 was filed by
the Company to provide the required financial information with regard to
the acquisition of two banking subsidiaries of Wells Fargo & Company.
A report on Form 8-K dated December 9, 1996 was filed by
the Company announcing the proposed acquisition of a banking subsidiary of
Mountain Bank Systems, Inc.
A report on Form 8-K dated December 18, 1996 was filed by
the Company describing the acquisition of a banking subsidiary of Mountain
Bank Systems, Inc.
-60-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
First Interstate BancSystem of Montana, Inc.
By: /s/ Thomas W. Scott 3/20/97
----------------------------- ----------------
Thomas W. Scott Date
Chief Executive Officer
By: /s/ Terrill R. Moore 3/20/97
----------------------------- ----------------
Terrill R. Moore Date
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated.
By: /s/ Homer A. Scott, Jr. 3/20/97
------------------------------------------- -------------------
Homer A. Scott, Jr. Date
Chairman
By: /s/ Thomas W. Scott 3/20/97
------------------------------------------- -------------------
Thomas W. Scott Date
Director and Chief Executive Officer
By: /s/ William H. Ruegamer 3/20/97
------------------------------------------- -------------------
William H. Ruegamer Date
Director and Chief Operating Officer
By: /s/ James R. Scott 3/20/97
------------------------------------------- -------------------
James R. Scott, Director Date
By: /s/ Dan S. Scott 3/20/97
------------------------------------------- -------------------
Dan S. Scott, Director Date
By: /s/ Randall I. Scott 3/20/97
------------------------------------------- -------------------
Randall I. Scott, Director Date
By: /s/ Susan S. Heyneman 3/20/97
------------------------------------------- -------------------
Susan S. Heyneman, Director Date
By: /s/ Joel Long 3/20/97
------------------------------------------- -------------------
Joel Long, Director Date
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<PAGE>
EXHIBIT 22
SUBSIDIARIES OF
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC.
First Interstate Bank of Commerce, doing business under its own name only
Incorporated in the State of Montana
Commerce Financial, Inc., doing business under its own name only (Formerly
Security Mortgage Company, doing business under its own name and also doing
business under the nominee name of Homestead Business Park Associates, Inc.)
First Interstate Bank of Commerce, doing business under its own name only
Incorporated in the State of Wyoming
First Interstate Bank of Montana, N.A., doing business under its own name
only Incorporated in the State of Montana
First Interstate Bank of Wyoming, N.A., doing business under its own name
only Incorporated in the State of Wyoming
First Interstate Bank, fsb, doing business under its own name only
Incorporated in the State of Montana
Mountain Bank, doing business as First Interstate Bank Incorporated in the
State of Montana
<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 34 AND 35 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 160,962
<INT-BEARING-DEPOSITS> 6,545
<FED-FUNDS-SOLD> 4,945
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,502
<INVESTMENTS-CARRYING> 279,069
<INVESTMENTS-MARKET> 278,876
<LOANS> 1,375,479
<ALLOWANCE> 27,797
<TOTAL-ASSETS> 2,063,837
<DEPOSITS> 1,679,424
<SHORT-TERM> 155,658
<LIABILITIES-OTHER> 18,027
<LONG-TERM> 64,667
0
20,000
<COMMON> 8,941
<OTHER-SE> 117,120
<TOTAL-LIABILITIES-AND-EQUITY> 2,063,837
<INTEREST-LOAN> 99,882
<INTEREST-INVEST> 16,325
<INTEREST-OTHER> 1,718
<INTEREST-TOTAL> 117,925
<INTEREST-DEPOSIT> 42,122
<INTEREST-EXPENSE> 50,019
<INTEREST-INCOME-NET> 67,906
<LOAN-LOSSES> 3,844
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 53,395
<INCOME-PRETAX> 34,594
<INCOME-PRE-EXTRAORDINARY> 21,243
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,243
<EPS-PRIMARY> 10.57
<EPS-DILUTED> 10.57
<YIELD-ACTUAL> 5.10
<LOANS-NON> 6,822
<LOANS-PAST> 6,432
<LOANS-TROUBLED> 1,763
<LOANS-PROBLEM> 49,545
<ALLOWANCE-OPEN> 15,171
<CHARGE-OFFS> 3,758
<RECOVERIES> 1,987
<ALLOWANCE-CLOSE> 27,797
<ALLOWANCE-DOMESTIC> 2,265
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,532
</TABLE>
