<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, 1998
COMMISSION FILE NUMBER: 33-64304
FIRST INTERSTATE BANCSYSTEM, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
MONTANA 81-0331430
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
401 NORTH 31ST STREET
BILLINGS, MONTANA 59116
(Address of principal executive offices) (Zip Code)
(406) 255-5390
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 is not contained herein, and will not be contained, to the
best of the 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 common stock of the
registrant held by non-affiliates of the registrant as of February 19, 1999 was
$295,370,075.
The number of shares outstanding of the registrant's common stock as of February
19, 1999 was 7,982,975.
- 1 -
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
First Interstate BancSystem, Inc. ("FIBS" and collectively with its
subsidiaries, the "Company") is a bank holding company. FIBS was incorporated
in 1971 and is headquartered in Billings, Montana.
FIBS operates two wholly-owned bank subsidiaries (collectively, the
"Banks" and individually a "Bank") with 35 banking offices in 24 Montana and
Wyoming communities. FIB Capital Trust ("FIB Capital") and Commerce Financial,
Inc. ("CFI") are wholly-owned non-bank subsidiaries of FIBS. At December 31,
1998, the Company had assets of $2.5 billion, deposits of $2.0 billion and total
stockholders' equity of $164 million, making it the largest independent banking
organization headquartered in Montana or Wyoming.
The Company, through the Banks, delivers a comprehensive range of
consumer and commercial banking services to individual and business customers.
These services include personal and business checking and savings accounts, time
deposits, individual retirement accounts, cash management, trust and brokerage
services and commercial, consumer, real estate, agricultural and other loans.
Additionally, the Company operates a data processing division that performs data
processing services for the Banks and 31 non-affiliated financial institutions
in Montana, Wyoming and Idaho. The data processing division also provides
processing support for over 986 ATM locations in 19 states, most of which are
located in Montana, Wyoming, Idaho, Colorado and North Dakota.
The Company is the licensee under a trademark license agreement granting
it an exclusive, nontransferable license to use the "First Interstate" name and
logo in the states of Montana and Wyoming with additional rights in selected
other states.
COMMUNITY BANKING PHILOSOPHY
The Company's banking offices are located in communities with
populations generally ranging from approximately 5,000 to 70,000 people, but
serve market areas with greater populations because of the limited number of
financial institutions within a reasonable distance from the communities in
which such offices are located. The Company believes that these communities
provide a stable core deposit and funding base, as well as economic
diversification across a number of industries, including agriculture, energy,
mining, timber processing, tourism, government services, education and medical
services.
The banking industry is undergoing change with respect to regulatory
matters, consolidation, changing consumer needs and economic and market
conditions. The Company believes that it can best address this changing
environment through its "Strategic Vision." Through the Strategic Vision, the
Company emphasizes providing its customers full service commercial and consumer
banking at a local level using a personalized service approach, while serving
and strengthening the communities in which the Banks are located through
community service activities.
The Company grants significant autonomy and flexibility to the banking
offices in delivering and pricing products at the local level in response to
market considerations and customer needs. This flexibility and autonomy enables
the banking offices to remain competitive and enhances the relationships between
the banking offices and the customers they serve. The Company also emphasizes
accountability, however, by establishing performance and incentive standards for
the Banks which are tied to net income at the individual branch and market
level. The Company believes that this combination of autonomy and accountability
allows the banking offices to provide a high level of personalized service to
customers while remaining attentive to financial performance.
GROWTH STRATEGY
The Company's growth strategy includes growing internally and expanding
into new and complementary markets when appropriate opportunities arise. The
Company believes it has in place an infrastructure that will allow for growth
and yield economies of scale on a going forward basis. The Company has received
regulatory approval to open three new banking offices in Montana and Wyoming and
intends to continue to expand its presence in the Montana and Wyoming markets.
- 2 -
<PAGE>
INTERNAL GROWTH
The Company's internal growth strategy is to attract and retain
customers by providing personalized "high touch" service, increasing its
offering of products and services, cross-selling existing products and services
and opening new branches to better serve its customer base. The Company believes
its ability to offer a complete package of consumer and commercial banking
products and services enhances the Company's image as a "one-stop" banking
organization. The Company creates awareness of its products and services through
various marketing and promotional efforts, including involvement in community
activities.
EXTERNAL GROWTH
The Company has grown in recent years by selectively acquiring banks in
additional markets in Montana and Wyoming. In the fourth quarter of 1996, the
Company acquired eight banking offices. The Company considers acquisitions
which will enhance its existing position within a market, expand its presence
into complementary markets, or add capabilities or personnel that will enhance
the Company as a whole. The Company has a selective acquisition strategy in
that it principally considers those institutions with strong financial and
managerial resources already in place. The Company's data processing division
has also successfully grown its ATM network which provides processing support
for over 900 ATMs owned by other banks and third parties.
THE BANKS
First Interstate Bank in Montana ("FIB Montana"), a Montana chartered
bank organized in 1916, has 23 banking offices in 16 Montana communities,
including Billings, Bozeman, Colstrip, Cut Bank, Eureka, Evergreen, Gardiner,
Great Falls, Hamilton, Hardin, Kalispell, Livingston, Miles City, Missoula, West
Yellowstone and Whitefish. These communities are home to a variety of
industries, including agriculture, mining, energy, timber processing, tourism,
government services, education and medical services, with a significant number
of small to medium sized businesses. As of December 31, 1998, FIB Montana held
assets and deposits totaling $1.6 billion and $1.3 billion, respectively. FIB
Montana is the largest independent bank headquartered in Montana. The Bank's
main office is located in Billings, Montana.
First Interstate Bank in Wyoming ("FIB Wyoming"), a Wyoming chartered
bank organized in 1893, has 12 banking offices in eight Wyoming communities,
including Buffalo, Casper, Gillette, Greybull, Lander, Laramie, Riverton and
Sheridan. These communities are home to a variety of industries, including
energy, agriculture, mining, tourism, government services, education and medical
services with a significant number of small to medium sized businesses. As of
December 31, 1998, FIB Wyoming held assets and deposits totaling $862 million
and $754 million, respectively. The Bank's main office is located in Sheridan,
Wyoming.
ADMINISTRATION OF THE BANKS
Each of the Banks and their respective banking offices operate with a
significant level of autonomy and are responsible for day-to-day operations, the
pricing of loans and deposits, lending decisions and community relations. FIBS
also emphasizes accountability, however, by establishing performance and
incentive standards for the Banks which are tied to net income at the individual
branch and market level. FIBS provides general oversight and centralized
services for the Banks to enable them to serve their markets more effectively.
These services include data processing, credit administration, auditing,
asset/liability management, investment analysis, human resources management,
marketing and planning coordination. FIBS continues to emphasize corporate
administration of functions which assist the Banks and their branches in more
effectively focusing on their respective markets and customers. Key among those
functions are the following:
DATA PROCESSING
FIBS provides most of its and the Banks' data processing requirements.
These services, including general ledger, investment securities management and
loan and deposit processing, are performed through the use of computer hardware
which the Company owns and maintains and software which it licenses. The
Company's data processing division also operates an extensive ATM network for
the benefit of the Banks' customers.
- 3 -
<PAGE>
CREDIT ADMINISTRATION
FIBS has established comprehensive credit policies which guide the
Banks' lending activities. These policies establish system-wide standards and
assist Bank management in the lending process. On the local level, the Banks are
granted significant autonomy and flexibility with respect to credit pricing
issues and lending decisions.
FINANCIAL AND ACCOUNTING
FIBS provides accounting services for the Banks, including general
ledger administration, internal and external reporting, asset/liability
management and investment portfolio analysis. In addition, the Company has
established policies regarding capital expenditures, asset/liability management
and capital management.
SUPPORT SERVICES
FIBS provides the Banks with legal and compliance services, internal
auditing services, marketing services, planning coordination, human resources
and employee benefits administration, and various other services. The Company
believes the centralization of these services yields economies of scale,
increases the efficiency of the Banks and allows management of the banking
offices to focus on serving their market areas and customers.
LENDING ACTIVITIES
The Banks offer short and long-term commercial, consumer, real estate,
agricultural and other loans to individuals and small to medium sized businesses
in each of their market areas. The lending activities of the Banks and their
branches are guided by the Company's comprehensive lending and credit
guidelines. The Company believes that it is important to keep the credit
decision at the local branch level in order to enhance the speed and efficiency
with which the customer is served. While each loan must meet minimum
underwriting standards established in the Company's lending policy, lending
officers are granted certain levels of autonomy in approving and pricing loans.
The Company-established credit policies are intended to maximize the quality and
mix of loans, while also assuring that the Banks and their branches are
responsive to competitive issues and community needs in each market area. The
credit policies establish specific lending authorities to Bank officers,
reflecting their individual experience and level of authority, type of loan and
collateral, and thresholds at which loan requests must also be approved at a
Bank committee level and/or by FIBS.
FIBS oversees the lending activities of the Banks and is responsible for
monitoring general lending activities. Areas of oversight include the types of
loans, the mix of variable and fixed rate loans, delinquencies, non-performing
assets, classified loans and other credit information to evaluate the risk
within each Bank's loan portfolio and to recommend general reserve percentages
and specific reserve allocations.
The Company's loan portfolio is diversified across commercial, consumer,
real estate, agricultural and other loans, with a mix of fixed and variable rate
loans. The Company's loan portfolio was reclassified in 1998 to aggregate all
loans secured by real estate (i.e., agricultural, commercial, consumer,
residential and construction) in the real estate category. Individual branches
are granted autonomy with respect to product pricing, which is significantly
influenced by the markets in which the particular banking offices are located.
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 or which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
involve different risks and are typically 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.
- 4 -
<PAGE>
REAL ESTATE LOANS
The Banks provide interim and permanent financing for both single-family
and multi-unit properties, medium term loans for commercial, agricultural and
industrial property and/or buildings, and equity lines of credit secured by real
estate. The Banks originate variable and fixed rate real estate mortgages,
generally in accordance with the guidelines of the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Loans originated in
accordance with these guidelines are sold in the secondary market. Real estate
loans are typically secured by first liens on the financed property. As of
December 31, 1998, 45.9% of the Company's loan portfolio was composed of real
estate loans, many of which are fixed rate loans, with maturities generally less
than 15 years.
CONSUMER LOANS
The Banks' consumer loans include personal loans and equity lines of
credit. The personal loans are generally secured by automobiles, boats and other
types of personal property and are made on an installment basis. The equity
lines of credit are generally floating rate, reviewed annually and secured by
personal property. Over two-thirds of the Company's consumer loans are indirect
dealer paper which is created when the Company advances money to dealers of
consumer products who in turn lend such money to consumers purchasing
automobiles, boats and other consumer goods. As of December 31, 1998, 25.5% of
the Company's loan portfolio was composed of consumer and personal loans.
COMMERCIAL LOANS
The Banks provide a mix of variable and fixed rate commercial loans. The
loans are typically made to small to medium sized manufacturing, wholesale,
retail and service businesses for working capital needs and business expansions.
As of December 31, 1998, 21.0% of the Company's loan portfolio was composed of
commercial loans. Commercial loans generally include lines of credit and loans
with maturities of five years or less. The loans are generally made with the
business operations as the primary source of repayment, but also include
collateralization by inventory, accounts receivable, equipment and/or personal
guarantees.
AGRICULTURAL LOANS
Agricultural loans generally consist of short and medium-term loans and
lines of credit and are made to the large base of farm and ranch operations in
the Company's market areas. The Banks make agricultural loans in many of the
communities they serve, which are generally used for crops, livestock,
equipment, and general operating purposes. Agricultural loans are generally
secured by assets such as livestock or equipment and are repaid from the
operations of the farm or ranch. As of December 31, 1998, 7.2% of the Company's
loan portfolio was composed of agricultural loans. Agricultural loans generally
have maturities of five years or less, with operating lines for one production
season.
FUNDING SOURCES
Each of the Banks offers usual and customary depository products
provided by commercial and retail banks, including personal and business
checking accounts, savings accounts and time deposits (including IRAs). Deposits
at the Banks are insured by the Federal Deposit Insurance Corporation ("FDIC")
up to statutory limits. While the Company develops and offers a wide array of
deposit products, local branch management is given relative autonomy in pricing
the depository products offered to customers in an attempt to best compete in
each Bank's particular market. As of December 31, 1998, approximately 36.5%,
24.7% and 38.8% of the Company's deposits consisted of demand, savings and time
deposits, respectively.
The Company also has a significant number of repurchase agreements
primarily with commercial depositors. Under the repurchase agreements, the
Company sells, but does not transfer on its financial statements or otherwise,
investment securities held by the Company to a customer under an agreement to
repurchase the investment security at a specified time or on demand. As of
December 31, 1998, all outstanding repurchase agreements were due in one day.
- 5 -
<PAGE>
OTHER OPERATIONS
In addition to the services mentioned above, the Company offers safe
deposit boxes, night depository services and wire transfers, among other
things. The Company also operates a substantial data processing division that
performs data processing services for the Banks and 31 non-affiliated
financial institutions in Montana, Wyoming and Idaho. The data processing
division also provides processing support for over 986 ATM locations in 19
states, most of which are located in Montana, Wyoming, Idaho, Colorado and
North Dakota.
The Company, through the Banks, offers a full range of fee-based trust
services to its individual, non-profit and corporate clients, including
corporate pension plans, individual retirements plans and 401(k) plans. The
Company also offers brokerage services through the Banks utilizing a third-party
broker-dealer with 7 registered brokerage representatives serving 20 communities
within the Company's market areas.
COMPETITION
The banking and financial services business in both Montana and Wyoming
is highly competitive. The Banks compete for loans, deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions and other nonbank financial
service providers. The Company competes in its markets on the basis of its
Strategic Vision philosophy, timely and responsive customer service and general
market presence. Several of the Company's competitors are much larger in total
assets and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Banks. Moreover, the Banking and
Branching Act creates the potential for increased competition in the Banks'
markets, particularly from larger, multi-state banks. See "Regulation and
Supervision." The Company competes with several large, multi-state banks as
well as numerous smaller community banks. Principal competitors include Wells
Fargo and Company, U.S. Bancorp and Community First Bankshares, Inc. With
respect to core deposits, the Company believes it ranks second in market share
to all other competitors in each of Montana and Wyoming. See "Risk
Factors-Competition."
EMPLOYEES
The Company employed approximately 1,027 full-time and 240 part-time
employees as of December 31, 1998. None of the Company's employees are covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
REGULATION AND SUPERVISION
Bank holding companies and commercial banks are subject to extensive
regulation under both federal and state law. Set forth below is a summary
description of certain laws which relate to the regulation of FIBS and the
Banks. The description does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
FIRST INTERSTATE BANCSYSTEM, INC.
As a bank holding company, FIBS is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and to supervision and
regulation by the Federal Reserve.
The Federal Reserve may require that FIBS terminate an activity or
terminate control of or liquidate or divest certain Banks if the Federal Reserve
believes such activity or control constitutes a significant risk to the
financial safety, soundness or stability of any of the Banks or is in violation
of the BHCA. The Federal Reserve also has the authority to regulate provisions
of certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
FIBS must file written notice and obtain approval from the Federal Reserve prior
to purchasing or redeeming its equity securities. Further, FIBS is required by
the Federal Reserve to maintain certain levels of capital. See "Capital
Standards" herein.
FIBS is required to obtain the prior approval of the Federal Reserve for
the acquisition of 5% or more of the outstanding shares of any class of voting
securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve is also required for the merger
or consolidation of FIBS and another bank holding company.
- 6 -
<PAGE>
FIBS is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of 5% or more
of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, FIBS, subject to the prior approval of the Federal
Reserve, may engage in, or acquire shares of companies engaged in, activities
that are deemed by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making any
such determination, the Federal Reserve may consider, among other things,
whether the performance of such activities by FIBS or an affiliate can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve is also empowered to differentiate between activities commenced
de novo and activities commenced by acquisition, in whole or in part, of a going
concern. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"1996 Budget Act") eliminated the requirement that bank holding companies seek
Federal Reserve approval before engaging de novo in permissible nonbanking
activities listed in Regulation Y, which governs bank holding companies, if the
holding company and its lead depository institution are well-managed and
Well-Capitalized (as defined herein) and certain other criteria specified in the
statute are met. For purposes of determining the capital levels at which a bank
holding company is considered "Well-Capitalized" under the 1996 Budget Act and
Regulation Y, the Federal Reserve adopted, as a rule, risk-based capital ratios
(on a consolidated basis) that ae the same as the levels set for determining
that a state member bank is Well Capitalized under the provisions established
under the prompt corrective action provisions of federal law. See "Prompt
Corrective Action and Other Enforcement Mechanisms" herein.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve's policy that in serving as a source of strength to
its subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the Federal Reserve to be an unsafe and unsound
banking practice or a violation of the Federal Reserve's regulations or both.
THE BANKS
FIB Montana is subject to the supervision of and regular examination by
the Federal Reserve and the State of Montana. FIB Wyoming is subject to the
supervision of and regular examination by the FDIC and the State of Wyoming. If
any of the foregoing regulatory agencies determine that the financial condition,
capital resources, asset quality, earning prospects, management, liquidity or
other aspects of a Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to such agencies. These remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, to remove
officers and directors and ultimately to terminate a Bank's deposit insurance,
which would result in a revocation of the Bank's charter. None of the Banks has
been the subject of any such actions by their respective regulatory agencies.
The FDIC insures the deposits of the Banks in the manner and to the
extent provided by law. For this protection, the Banks pay a semiannual
statutory assessment. See "Premiums for Deposit Insurance" herein.
Various requirements and restrictions under the laws of the states of
Montana and Wyoming and the United States affect the operations of the Banks.
State and federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of banking offices and capital requirements.
- 7 -
<PAGE>
RESTRICTIONS ON TRANSFERS OF FUNDS TO FIBS AND THE BANKS
FIBS is a legal entity separate and distinct from the Banks. Statutory
and regulatory limitations exist with respect to the amount of dividends which
may be paid to FIBS by the Banks. Under Montana banking law, FIB Montana may not
declare dividends in any one calendar year in excess of its net earnings of the
preceding two years without giving notice to the Montana Commissioner of Banking
and Financial Institutions. As a Federal Reserve member bank, FIB Montana may
not, without the consent of the Federal Reserve, declare dividends in a calendar
year which, when aggregated with prior dividends in that calendar year, exceed
the calendar year net profits of FIB Montana together with retained earnings for
the prior two calendar years. Under Wyoming banking law, FIB Wyoming may not,
without the approval of the Wyoming Banking Commissioner, 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 or a fund for the retirement of any preferred stock. In
addition, there are restrictions under the Company's debt instruments which may
limit the amount of the Banks' dividends in certain circumstances.
The bank regulatory agencies also have authority to prohibit the Banks
from engaging in activities that, in their respective opinions, constitute
unsafe or unsound practices in conducting their business. It is possible,
depending upon the financial condition of the Bank in question and other
factors, that the bank regulatory agencies could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the bank regulatory agencies have established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding companies under their jurisdiction. Compliance with the
standards set forth in such guidelines and the restrictions that are or may be
imposed under the prompt corrective action provisions of federal law could limit
the amount of dividends which the Banks or FIBS may pay. See "Prompt Corrective
Action and Other Enforcement Mechanisms" and "Capital Standards" herein for a
discussion of these additional restrictions on capital distributions.
A large portion of FIBS's revenues, including funds available for the
payment of interest on the indebtedness of the Company, dividends and operating
expenses are, and will continue to be, dividends paid by the Banks.
The Banks are also subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, FIBS or any affiliate of FIBS, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of FIBS or the Banks. Such
restrictions prevent FIBS and the Banks from borrowing from the Banks unless the
loans are secured by marketable obligations or other acceptable collateral of
designated amounts. Further, such secured loans and investments by the Banks to
or in FIBS are limited to 10% of the respective Bank's capital stock and surplus
(as defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the respective Bank's capital stock and
surplus (as defined by federal regulations). Additional restrictions on
transactions may be imposed on the Banks by state or federal regulations
including under the prompt corrective action provisions of federal law. See
"Prompt Corrective Action and Other Enforcement Mechanisms" herein.
COMMON LIABILITY
Under federal law, a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with the default of a commonly controlled FDIC-insured
depository institution or any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default. These provisions can
have the effect of making one Bank responsible for FDIC-insured losses at
another Bank.
EFFECT OF GOVERNMENT POLICIES AND LEGISLATION
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by the Banks on their
deposits and borrowings and the interest rate received by the Banks on loans
extended to their customers and on investment securities comprises a major
portion of the Banks' earnings. These rates are highly sensitive to many factors
that are beyond the control of the Banks. Accordingly, the earnings and
potential growth of the Banks are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
- 8 -
<PAGE>
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve. The Federal Reserve implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its open-market
operations in United States government securities, by adjusting the required
level of reserves for financial institutions subject to the Federal Reserve's
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial service providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial service providers are frequently made in Congress, in the Montana and
Wyoming legislatures and before various bank regulatory and other professional
agencies. The likelihood of any major legislative changes and the impact such
changes might have on FIBS or the Banks are impossible to predict.
CAPITAL STANDARDS
The Federal Reserve and the FDIC have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for transactions
reported on the balance sheet as both assets and transactions, such as letters
of credit and recourse arrangements. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets. The
regulators measure risk-adjusted assets, which include off-balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital (both as defined herein)) and Tier 1 capital. The
Company's "Tier 1 capital" consists of: (i) common stockholders' equity and
retained earnings; (ii) noncumulative perpetual preferred stock, if any; (iii)
mandatorily redeemable preferred securities of subsidiary trust, if any; and
(iv) minority interests in certain subsidiaries, less goodwill. The Company's
"Tier 2 capital" consists of: (i) a limited amount of allowance for loan losses
("ALL"); and (ii) term subordinated debt. The inclusion of elements of Tier 2
capital is subject to certain other requirements and limitations of the federal
banking agencies. The federal banking agencies require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of
Tier 1 capital to risk-adjusted assets of 4%.
Federally supervised banks are currently required to report deferred tax
assets in accordance with SFAS No. 109. The federal banking agencies issued
rules governing banks and bank holding companies which limit the amount of
deferred tax assets that are allowable in computing an institution's regulatory
capital. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, based on projected taxable income for that year or
(ii) 10% of Tier 1 capital. The amount of any deferred tax in excess of this
limit would be excluded from Tier 1 capital and total assets and regulatory
capital calculations.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the "leverage ratio." For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets must be at least 5%. See "Prompt Corrective Action and Other
Enforcement Mechanisms." In addition to the uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios. FIBS and the Banks are all rated as Well Capitalized (as defined
below).
- 9 -
<PAGE>
The federal banking agencies have adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments regulations adopted by the federal banking
agencies.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends. For information
concerning the capital ratios of FIBS, see Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Capital Resources."
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve problems of insured depository institutions,
including, without limitation, those institutions which fall below one or more
prescribed minimum capital ratios. In accordance with federal law, each federal
banking agency has promulgated regulations defining five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios. The five categories are "Well Capitalized," "Adequately Capitalized,"
"Undercapitalized," "Significantly Undercapitalized" and "Critically
Undercapitalized." An insured depository institution will be classified in the
following categories based, in part, on the capital measures indicated below:
<TABLE>
<S> <C>
WELL CAPITALIZED ADEQUATELY CAPITALIZED
Total risk-based capital of at least 10%, Total risk-based capital of at least 8%,
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5% Leverage ratio of 4%
UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED
Total risk-based capital less than 8%, Total risk-based capital less than 6%,
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% Leverage ratio less than 3%
CRITICALLY UNDERCAPITALIZED
Tangible equity to total assets less than 2%
</TABLE>
An institution classified as Well Capitalized, Adequately Capitalized or
Undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and opportunity
for hearing, determines that an unsafe or unsound condition or an unsafe or
unsound practice warrants such treatment. At each successive lower capital
category, an insured depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat a Significantly
Undercapitalized institution as Critically Undercapitalized unless its capital
ratio actually warrants such treatment.
- 10 -
<PAGE>
Insured depository institutions are prohibited from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
Undercapitalized. If an insured depository institution is Undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
Undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency within 45 days after
receiving or being deemed to have received notice, that the institution is
Undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan: (i) specifies:
(a) the steps the institution will take to become Adequately Capitalized;
(b) the levels of capital to be attained during each year in which the plan will
be in effect; (c) how the institution will comply with the applicable
restrictions or requirements then in effect of the Federal Deposit Insurance
Corporation Improvement Act of 1991, as amended ("FDICIA"); and (d) the types
and levels of activities in which the institution will engage; (ii) is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital; and (iii) would not appreciably increase the risk
(including credit risk, interest-rate risk and other types of risk) to which the
institution is exposed. In addition, each company controlling an
Undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
Adequately Capitalized on average during each of four consecutive calendar
quarters and must otherwise provide appropriate assurances of performance. The
aggregate liability of such guarantee is limited to the lesser of (i) an amount
equal to 5% of the depository institution's total assets at the time the
institution became Undercapitalized or (ii) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on Significantly
Undercapitalized institutions if it determines that such action will further the
purpose of the prompt correction action provisions.
An insured depository institution that is Significantly
Undercapitalized, or is Undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage;
(v) modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to: (i) force a
sale of shares or obligations of the bank, or require the bank to be acquired by
or combine with another institution; (ii) impose restrictions on affiliate
transactions and (iii) impose restrictions on rates paid on deposits, unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval of
the appropriate federal banking agency, a Significantly Undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became Undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are Critically Undercapitalized. For example, a
Critically Undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming Critically Undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
Critically Undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's stockholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. See "Potential Enforcement Actions" herein.
- 11 -
<PAGE>
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines establishing
standards for safety and soundness, as required by the FDICIA. These standards
are designed to identify potential safety and soundness concerns and ensure that
action is taken to address those concerns before they pose a risk to the deposit
insurance funds. The standards relate to (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and
benefits. If a federal banking agency determines that an institution fails to
meet any of these standards, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
institution fails to submit an acceptable plan within the time allowed by the
agency or fails in any material respect to implement an accepted plan, the
agency must, by order, require the institution to correct the deficiency. The
federal banking agencies have promulgated safety and soundness regulations and
accompanying interagency compliance guidelines on asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. The institution should: (i) conduct periodic asset quality
reviews to identify problem assets; (ii) estimate the inherent losses in those
assets and establish reserves that are sufficient to absorb estimated losses;
(iii) compare problem asset totals to capital; (iv) take appropriate corrective
action to resolve problem assets; (v) consider the size and potential risks of
material asset concentrations; and (vi) provide periodic asset reports with
adequate information for management and the board of directors to assess the
level of asset risk. These guidelines also set forth standards for evaluating
and monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves. If an institution fails to comply
with a safety and soundness standard, the appropriate federal banking agency may
require the institution to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action.
The federal banking agencies have issued an interagency policy statement
on the ALL which, among other things, established certain benchmark ratios of
loan loss reserves to classified assets. The benchmark set forth by such policy
statement is the sum of (a) assets classified loss; (b) 50% of assets classified
doubtful; (c) 15% of assets classified substandard; and (d) estimated credit
losses on other assets over the upcoming 12 months. This amount is neither a
"floor" nor a "safe harbor" level for an institution's ALL.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law, which establishes an assessment rate schedule
ranging from nothing to 27 cents per $100 of deposits applicable to members of
the Bank Insurance Fund ("BIF"). To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as Well Capitalized,
Adequately Capitalized or Undercapitalized using the same standards used by the
FDIC for its prompt corrective action regulations. For purposes of assessing
FDIC premiums, an Undercapitalized institution will generally be one that does
not meet either a Well Capitalized or an Adequately Capitalized standard. The
FDIC will also assign each institution to one of three subgroups based upon
reviews by the institution's primary federal or state regulator, statistical
analyses of financial statements and other information relevant to evaluating
the risk posed by the institution. The three supervisory categories are:
financially sound with only a few minor weaknesses ("Group A"), demonstrates
weaknesses that could result in significant deterioration ("Group B") and poses
a substantial probability of loss ("Group C").
The BIF assessment rates are set forth below for institutions based on
their risk-based assessment categorization:
Assessment Rates Effective January 1, 1999*
<TABLE>
<CAPTION>
Group A Group B Group C
---------------------------------------------------------------------
<S> <C> <C> <C>
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
</TABLE>
* Assessment figures are expressed in terms of cents per $100 of
deposits.
- 12 -
<PAGE>
The 1996 Budget Act required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to help
fund the federal government costs associated with the savings and loan crisis of
the late 1980s. Effective January 1, 1998, for FICO payments, BIF-insured
institutions, like the Banks, pay 0.64 cents per $100 in domestic deposits.
Full pro rata sharing of FICO interest payments takes effect on January 1, 2000.
INTERSTATE BANKING AND BRANCHING
Under the Riegal-Neal Interstate Banking and Banking Efficiency Act of
1994 (the "Banking and Branching Act"), a bank holding company may obtain
approval under the BHCA to acquire an existing bank located in another state
without regard to state law. A bank holding company is not permitted to make
such an acquisition if, upon consummation of the acquisition, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such limitation does not discriminate against out-of-state
banks or bank holding companies. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law, except that a state may not impose more than a
five-year age requirement.
The Banking and Branching Act also permits, subject to limitations under
state law, mergers of insured banks located in different states and conversion
of the branches of the acquired bank into branches of the resulting bank. Each
state may adopt legislation to prohibit interstate mergers after that date in
that state or in other states by that state's banks. The same concentration
limits discussed in the preceding paragraph also apply to such mergers. The
Banking and Branching Act also permits a national or state bank to establish
branches in a state other than its home state if permitted by the laws of that
state, subject to the same requirements and conditions as for a merger
transaction.
The State of Montana has enacted legislation which authorizes de novo
branching within the state by banks chartered under the laws of the State of
Montana. In the same legislation, Montana elected to "opt out" of full
interstate branching available under the Banking and Branching Act, thereby
precluding interstate branching and branching by interstate merger in Montana
until October 1, 2001. Nevertheless, after the foregoing prohibition expires,
competition in the Company's market areas could increase significantly. The
State of Wyoming authorizes branching by interstate merger, but currently limits
intrastate branching in certain respects.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
The federal banking agencies have issued regulations which change the
manner in which they measure a bank's compliance with its CRA obligations. The
regulations adopt a performance-based evaluation system which bases CRA ratings
on an institution's actual lending, service and investment performance, rather
than on the extent to which the institution conducts needs assessments,
documents community outreach activities or complies with other procedural
requirements.
The Federal Interagency Task Force on Fair Lending has issued a policy
statement on discrimination in lending. The policy statement describes the three
methods that federal agencies will use to prove discrimination: overt evidence
of discrimination, evidence of disparate treatment and evidence of disparate
impact.
In connection with its assessment of CRA performance, the appropriate
bank regulatory agency assigns a rating of "outstanding," "satisfactory," "needs
to improve" or "substantial noncompliance." Based on the most recent
examinations received, FIB Montana and FIB Wyoming were both rated
"satisfactory."
- 13 -
<PAGE>
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks and their
institution-affiliated parties, which includes FIBS, may be subject to potential
enforcement actions by the Federal Reserve and the FDIC for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of
the Banks), the imposition of civil money penalties, the issuance of directives
to increase capital, the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against institution affiliated
parties and the imposition of restrictions and sanctions under the prompt
corrective action provisions of the FDICIA. Additionally, a bank holding
company's inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
such bank holding company. Neither FIBS nor the Banks has been subject to any
such enforcement actions.
NON-BANK SUBSIDIARY
During 1997, the Company formed FIB Capital, a statutory business trust
incorporated under Delaware law, for the exclusive purpose of issuing $40
million of mandatorily redeemable trust preferred securities ("trust preferred
securities") and using the proceeds to purchase junior subordinated debentures
("subordinated debentures") issued by FIBS. See also "Notes to Consolidated
Financial Statements - Mandatorily Redeemable Preferred Securities of Subsidiary
Trust" of the financial statements included in Part IV, Item 14.
RISK FACTORS
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance and profitability of the Company will depend
on its ability to execute its business strategy and manage its possible future
growth. Although the Company believes that it has substantially integrated the
recently acquired banks into the Company's operations, there can be no assurance
that unforeseen issues relating to the assimilation or prior operations of these
banks, including the emergence of any material undisclosed liabilities, will not
materially adversely affect the Company. In addition, any future acquisitions or
other possible future growth may present operating and other problems that could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's financial performance will also depend
on the Company's ability to maintain profitable operations through
implementation of its Strategic Vision. Moreover, the Company's future
performance is subject to a number of factors beyond its control, including
pending and future federal and state banking legislation, regulatory changes,
unforeseen litigation outcomes, inflation, lending and deposit rate changes,
interest rate fluctuations, increased competition and economic conditions.
Accordingly, there can be no assurance that the Company will be able to continue
the growth or maintain the level of profitability it has recently experienced.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between
the yield on earning assets, primarily loans and investments, and the cost of
funds, primarily deposits and borrowings. This relationship, known as the
interest rate spread, is subject to fluctuation and is affected by economic and
competitive factors which influence interest rates, the volume and mix of
interest-earning assets and interest-bearing liabilities and the level of
non-performing assets. Fluctuations in interest rates affect the demand of
customers for the Company's products and services. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities reprice
or mature more slowly or more rapidly or on a different basis than its
interest-earning assets. Significant fluctuations in interest rates could have a
material adverse effect on the Company's business, financial condition and
results of operations.
- 14 -
<PAGE>
ECONOMIC CONDITIONS; LIMITED GEOGRAPHIC DIVERSIFICATION
The Company's operations are located in Montana and Wyoming. As a result
of the geographic concentration of its operations, the Company's results depend
largely upon economic conditions in these areas. The Company believes the
primary industries in Montana and Wyoming include agriculture, energy, mining,
timber processing, tourism, government services, education and medical services.
A deterioration in economic conditions in the Company's market areas could
adversely impact the quality of the Company's loan portfolio and the demand for
its products and services, and accordingly, could have a material adverse effect
on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY
The Company and the banking industry are subject to extensive regulation
and supervision under federal and state laws and regulations. The restrictions
imposed by such laws and regulations limit the manner in which the Company
conducts its banking business, undertakes new investments and activities and
obtains financing. This regulation is designed primarily for the protection of
the deposit insurance funds and consumers and not to benefit holders of the
Company's securities. Financial institution regulation has been the subject of
significant legislation in recent years and may be the subject of further
significant legislation in the future, none of which is in the control of the
Company. Significant new laws or changes in, or repeals of, existing laws could
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for the Company, and any unfavorable change in these conditions could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Regulation and Supervision."
COMPETITION
The banking and financial services business in both Montana and Wyoming
is highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial services
providers. The Banks compete for loans, deposits and customers for financial
services with other commercial banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions and other nonbank financial
services providers. Several of these competitors are much larger in total assets
and capitalization, have greater access to capital markets and offer a broader
array of financial services than the Banks. Moreover, the Banking and Branching
Act has increased competition in the Banks' markets, particularly from larger,
multi-state banks. There can be no assurance that the Company will be able to
compete effectively in its markets. Furthermore, developments increasing the
nature or level of competition could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Competition" and "Regulation and Supervision."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the management
skills of its existing executive officers and directors, many of whom have held
officer and director positions with the Company for many years. The loss or
unavailability of any of its key executives, including Homer A. Scott, Jr.,
Chairman of the Board, Thomas W. Scott, Chief Executive Officer, Lyle R. Knight,
President and Chief Operating Officer, or Terrill R. Moore, Senior Vice
President, Chief Financial Officer and Secretary, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Part III, Item 10, "Directors and Executive Officers of Registrant."
CONTROL BY AFFILIATES
The directors and executive officers of the Company beneficially own
approximately 60.1% of the outstanding common stock of the Company. Many of
these directors and executive officers are members of the Scott family, which
collectively owns approximately 82.14% of the outstanding common stock. By
virtue of such ownership, these affiliates are able to control the election of
directors and the determination of the Company's business, including
transactions involving any merger, share exchange, sale of assets outside the
ordinary course of business and dissolution.
- 15 -
<PAGE>
ASSET QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained by the Banks because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loans.
The Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the ALL, that management
believes are appropriate to mitigate this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Company's credit
portfolio. Such policies and procedures, however, may not prevent unexpected
losses that could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business-Lending
Activities."
LACK OF TRADING MARKET; MARKET PRICES
The common stock of FIBS is not actively traded, and there is no
established trading market for the stock. There is only one class of common
stock, with 92.18% of the shares subject to contractual transfer restrictions
set forth in shareholder agreements and 7.82% held by 13 shareholders without
such restrictions. FIBS has the right of first refusal to purchase the
restricted stock at the minority appraised value per share based upon the most
recent quarterly appraisal available to FIBS. All stock not subject to such
restrictions may be sold at a price per share that is acceptable to the
shareholder. FIBS has no obligation to purchase unrestricted stock, but has
historically purchased such stock in order to reduce the amount of its stock not
subject to transfer restrictions. During 1998, 8,362 shares of its unrestricted
stock were offered to and repurchased by the Company from participants in the
Company's Savings Plan. All shares were repurchased at the most recent minority
appraised value at the repurchase date.
The appraised minority value of the FIBS common stock represents the
estimated fair market valuation of a minority block of such stock, taking into
account adjustments for the lack of marketability of the stock and other
factors. This value does not represent an actual trading price between a
willing buyer and seller of the FIBS common stock in an informed, arm's-length
transaction. As such, the appraised minority value is only an estimate as of a
specific date, and there can be no assurance that such appraisal is an
indication of the actual value holders of the FIBS common stock may realize with
respect to shares held by them. Moreover, the estimated fair market value of
the FIBS common stock may be materially different at any date other than the
valuation dates.
FIBS has no obligation, by contract, policy or otherwise to purchase
stock from any shareholder desiring to sell, or to create any market for the
stock. Historically, it has been the practice of FIBS to repurchase common
stock to maintain a shareholder base with restrictions on sale or transfer of
the stock. In the last three calendar years (1996-1998), FIBS has redeemed a
total of 241,338 shares of common stock, all of which was restricted by the
shareholder agreements. FIBS has redeemed the stock at the price determined in
accordance with the shareholder agreements. FIBS has no present intention to
change its historical practice for redemption of stock, but no assurances can be
provided that FIBS will not change or end its practice of redeeming stock.
Furthermore, FIBS redemptions of stock are subject to corporate law and
regulatory restrictions which could prevent stock redemptions.
There is a limited public market for the trust preferred securities.
Future trading prices of the trust preferred securities depend on many factors
including, among other things, prevailing interest rates, the operating results
and financial condition of the Company and the market for similar securities.
As a result of the existence of FIBS's right to defer interest payments on or,
subject to prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, shorten the
stated maturity of the subordinated debentures, the market price of the trust
preferred securities may be more volatile than the market prices of subordinated
debentures that are not subject to such optional deferrals or reduction in
maturity. There can be no assurance as to the market prices for the trust
preferred securities or the subordinated debentures that may be distributed in
exchange for the trust preferred securities if the Company exercises its right
to dissolve FIB Capital.
- 16 -
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which the Company operates; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; the
availability of capital to fund the expected expansion of the Company's
business; and other factors referenced in this document, including, without
limitation, under the captions "Risk Factors" and Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Given these uncertainties, shareholders, trust security holders and prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
ITEM 2. PROPERTIES
The Company is the anchor tenant in a commercial building in which the
Company's principal executive offices are located in Billings, Montana. The
building is owned by a joint venture partnership in which FIB Montana is one of
the two partners, owning a 50% interest in the partnership. The Company and FIB
Montana lease space for operations in the building. The Company also leases
space for operations and seven branch facilities in eight buildings. All other
branches are located in Company-owned facilities. The Company believes its
leased and owned facilities are adequate for its present needs and anticipated
future growth.
See also "Notes to Consolidated Financial Statements - Premises and
Equipment" and "Notes to Consolidated Financial Statements - Commitments and
Contingencies" included in Part IV, Item 14.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is named or threatened to
be named as a defendant in various lawsuits. In the opinion of management,
following consultation with legal counsel, the pending lawsuits are without
merit or, in the event the plaintiff prevails, the ultimate liability or
disposition thereof will not have a material adverse effect on the Company's
business, financial condition or results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DESCRIPTION OF FIBS CAPITAL STOCK
The authorized capital stock of FIBS consists of 20,000,000 shares of
common stock without par value, of which 7,988,573 shares were outstanding as of
December 31, 1998, and 100,000 shares of preferred stock without par value, none
of which were outstanding as of December 31, 1998.
COMMON STOCK
Each share of the common stock is entitled to one vote in the election
of directors and in all other matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election if they choose to do so, subject to the rights of the holders of the
preferred stock. Voting for directors is noncumulative.
- 17 -
<PAGE>
Subject to the preferential rights of any preferred stock that may at
the time be outstanding, each share of common stock has an equal and ratable
right to receive dividends when, if and as declared by the Board of Directors
out of assets legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, the holders of common stock will be
entitled to share equally and ratably in the assets available for distribution
after payments to creditors and to the holders of any preferred stock that may
at the time be outstanding. Holders of common stock have no conversion rights
or pre-emptive or other rights to subscribe for any additional shares of common
stock or for other securities. All outstanding common stock is fully paid and
non-assessable.
The common stock of FIBS is not actively traded, and there is no
established trading market for the stock. There is only one class of common
stock, with 92.18% of the shares subject to contractual transfer restrictions
set forth in shareholder agreements and 7.82% held by 13 shareholders without
such restrictions. FIBS has the right of first refusal to purchase the
restricted stock at the minority appraised value per share based on the most
recent quarterly appraisal available to FIBS. All stock not subject to such
restrictions may be sold at a price per share that is acceptable to the
shareholder.
Quarter-end minority appraisal values for the past two years, determined
by Alex Sheshunoff & Co. Investment Banking are as follows:
<TABLE>
<CAPTION>
Appraised
Valuation As Of(1) Minority Value
--------------- --------------
<S> <C>
December 31, 1996 21.50
March 31, 1997 21.50
June 30, 1997 23.75
September 30, 1997 25.00
December 31, 1997 29.00
March 31, 1998 32.00
June 30, 1998 35.00
September 30, 1998 33.00
December 31, 1998 37.00
</TABLE>
(1) Sales of stock between dates at which updated valuations are
received are adjusted for cash dividends paid.
As of December 31, 1998, options for 169,280 shares of the FIBS common
stock were outstanding at various exercise prices, ranging from $5.24 to
$32.00. The aggregate cash proceeds to be received by FIBS upon exercise of
all options outstanding at December 31, 1998 would be $3.0 million, or a
weighted average exercise price of $17.69 per share.
The book value per share of FIBS common stock as of December 31, 1998
was $20.47. The appraised minority value as of December 31, 1998 was $37.00.
The appraised minority value of the FIBS common stock represents the
estimated fair market valuation of a minority block of such stock, taking
into account adjustments for the lack of marketability of the stock and other
factors. This value does not represent an actual trading price between a
willing buyer and seller of the FIBS common stock in an informed,
arm's-length transaction. As such, the appraised minority value is only an
estimate as of a specific date, and there can be no assurance that such
appraisal is an indication of the actual value holders of the FIBS common
stock may realize with respect to shares held by them. Moreover, the
estimated fair market value of the FIBS common stock may be materially
different at any date other than the valuation dates indicated above.
Resale of FIBS stock may be restricted pursuant to the Securities Act of
1933 and applicable state securities laws. In addition, most shares of FIBS
stock are subject to one of two shareholders' agreements. Members of the Scott
family, as majority shareholders of FIBS, 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 FIBS's approval, to the Company's officers,
directors, advisory directors, or to the Savings Plan.
- 18 -
<PAGE>
Shareholders of the Company who are not Scott family members, with the
exception of 13 shareholders who own an aggregate of 624,349 shares of
unrestricted stock, are subject to a shareholder's agreement ("Shareholder's
Agreement"). The Shareholder's Agreement grants FIBS the option to purchase the
stock 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 FIBS's option to acquire the stock in accordance with the
terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement
allows FIBS to repurchase any of the FIBS stock acquired by the shareholder
after January 1, 1994 if FIBS 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 FIBS common stock made through FIBS 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
FIBS stock. While FIBS has no obligation to repurchase the stock, it is
possible that FIBS will repurchase FIBS stock sold by the Savings Plan. Any
such repurchases would be upon terms set by the Savings Plan trustee and
accepted by FIBS.
There are 458 record shareholders of FIBS as of December 31, 1998,
including the Company's Savings Plan as trustee for shares held on behalf 661
individual participants in the plan. 247 individuals in the Savings Plan also
own shares of FIBS stock outside of the Plan. The Plan is administered by the
Trust Department of FIB 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 votes those shares in accordance with
voting instructions received from a majority of the participants in the Plan.
DIVIDENDS
It is the policy of FIBS to pay a dividend to all common shareholders
quarterly. Dividends are declared and paid in the month following the calendar
quarter and the amount has historically been determined based upon a percentage
of net income for the calendar quarter immediately preceding the dividend
payment date. Effective with the dividend paid in January 1996, the dividend
has been 30% of quarterly net income. The Board of Directors of FIBS has no
current intention to change its dividend policy, but no assurance can be given
that the Board may not, in the future, change or eliminate the payment of
dividends.
Historical quarterly dividends for 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Month
Declared Amount Total Cash
Quarter And Paid Per Share Dividend
------- -------- --------- --------
<S> <C> <C> <C>
1st quarter 1997 April 1997 $ .25 $ 1,934,003
2nd quarter 1997 July 1997 .25 1,991,274
3rd quarter 1997 October 1997 .26 2,089,967
4th quarter 1997 January 1998 .22 1,765,154
1st quarter 1998 April 1997 .23 1,843,844
2nd quarter 1998 July 1998 .23 1,848,623
3rd quarter 1998 October 1998 .26 2,093,395
4th quarter 1998 January 1999 .24 1,917,327
</TABLE>
The difference in quarterly dividends is reflective of the actual
quarterly net income.
- 19 -
<PAGE>
DIVIDEND RESTRICTIONS
The holders of common stock will be entitled to dividends when, as and
if declared by the FIBS Board of Directors out of funds legally available
therefor. Under the Company's revolving term loan, the Company is prohibited
from declaring or paying any dividends to common stockholders in excess of 33%
of net income for the immediately preceding year. The Company has also agreed
that the Banks will maintain ratios of tangible primary capital to tangible
primary assets not less than the ratios required by regulators or applicable law
or regulation, and that the Banks will at all times maintain capital at
adequately capitalized levels. The loan restrictions limit the funds available
for the payment of dividends from the Banks to FIBS and from FIBS to its
shareholders.
Under Montana banking law, FIB Montana may not declare dividends in
excess of its net undivided earnings (as defined) less any required transfers to
surplus and may not declare a dividend larger than the previous two years' net
earnings unless prior notice is given to the Montana Commissioner of Banking and
Financial Institutions. As a Federal Reserve member bank, FIB Montana may not,
without the consent of the Federal Reserve, declare dividends in a calendar year
which, when aggregated with prior dividends in that calendar year, exceed the
calendar year net profits of FIB Montana together with retained earnings for the
prior two calendar years. Under Wyoming banking law, FIB Wyoming may not
declare dividends without meeting surplus fund requirements and may not, without
the approval of the Wyoming Banking Commissioner, declare dividends in any one
calendar year in excess of its net profits (as defined) in the current year
combined with retained net profits of the preceding two years, less any required
transfers to surplus or to a fund for the retirement of any preferred stock.
In addition, federal regulatory agencies (e.g., the FDIC and Federal
Reserve) have authority to prohibit a bank under their supervision from engaging
in practices which, in the opinion of the particular federal regulatory agency,
are unsafe or unsound or constitute violations of applicable law. For example,
depending upon the financial condition of a bank in question and other factors,
the appropriate federal regulatory agency could determine that the payment of
dividends might under some circumstances constitute an unsafe and unsound
practice. Moreover, 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 FIBS or any of the Banks could pay. See
Part I, Item 1, "Regulation and Supervision."
PREFERRED STOCK
The authorized capital stock of FIBS includes 100,000 shares of
preferred stock. The FIBS Board of Directors is authorized, without approval of
the holders of Common Stock, to provide for the issuance of preferred stock from
time to time in one or more series in such number and with such designations,
preferences, powers and other special rights as may be stated in the resolution
or resolutions providing for such preferred stock. FIBS Board of Directors may
cause FIBS to issue preferred stock with voting, conversion and other rights
that could adversely affect the holders of the common stock or make it more
difficult to effect a change of control of the Company.
In the event of any dissolution, liquidation or winding up of the
affairs of FIBS, before any distribution or payment may be made to the holders
of common stock, the holders of preferred stock would be entitled to be paid in
full with the respective amounts fixed by FIBS Board of Directors in the
resolution or resolutions authorizing the issuance of such series, together with
a sum equal to the accrued and unpaid dividends thereon to the date fixed for
such distribution or payment. After payment in full of the amount which the
holders of preferred stock are entitled to receive, the remaining assets of FIBS
would be distributed ratably to the holders of the common stock. If the assets
available are not sufficient to pay in full the amount so payable to the holders
of all outstanding preferred stock, the holders of all series of such shares
would share ratably in any distribution of assets in proportion to the full
amounts to which they would otherwise be respectively entitled. The
consolidation or merger of FIBS into or with any other corporation or
corporations would not be deemed a liquidation, dissolution, or winding up of
the affairs of FIBS.
SALES OF UNREGISTERED SECURITIES
During 1998, the Company issued 5,224 unregistered shares of its common
stock to seven individuals exercising stock options. The exercise price was
$4.74 per share. The Company also issued 1,827 unregistered shares of its
common stock to four Scott Family members for $35 per share, the minority
appraised value on the date of issuance.
- 20 -
<PAGE>
These sales were made pursuant to the exemption from registration under
Section 4(2) of the Securities Act of 1933. For additional information
regarding stock options, see "Notes to Consolidated Financial Statements -
Employee Benefit Plans" included in Part IV, Item 14.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1998, and 1997 and
its results of operations for the fiscal years ended December 31, 1998, 1997,
and 1996, has been derived from the consolidated financial statements of the
Company included in Part IV, Item 14, which have been audited by KPMG LLP,
independent certified public accountants. This data should be read in
conjunction with Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and such consolidated financial
statements, including the notes thereto.
FIVE YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income $ 179,414 165,808 117,925 98,970 80,230
Interest expense 81,652 72,663 50,019 41,946 28,451
- ----------------------------------------------------------------------------------------------------
Net interest income 97,762 93,145 67,906 57,024 51,779
Provision for loan losses 4,170 4,240 3,844 1,629 1,344
- ----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 93,592 88,905 64,062 55,395 50,435
Other operating income 29,484 27,311 24,141 19,350 16,844
Other operating expenses 81,848 74,631 53,609 46,564 41,684
- ----------------------------------------------------------------------------------------------------
Income before income taxes 41,228 41,585 34,594 28,181 25,595
Income tax expense 15,592 15,730 13,351 10,844 9,861
- ----------------------------------------------------------------------------------------------------
Net income $ 25,636 25,855 21,243 17,337 15,734
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Net income applicable to
common stock $ 25,636 24,401 20,818 17,337 15,734
Basic earnings per common share 3.20 3.07 2.65 2.22 2.01
Diluted earnings per common
share(1) 3.17 3.05 2.64 2.21 2.00
Dividends per common share 0.94 0.98 0.78 0.48 0.40
Weighted average common shares
outstanding - diluted 8,087,809 7,987,921 7,881,024 7,843,644 7,850,188
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
OPERATING RATIOS:
Return on average assets 1.10% 1.22 1.41 1.39 1.44
Return on average common
stockholders' equity 16.62 18.12 17.84 16.98 17.64
Average stockholders' equity to
average assets 6.65 7.17 8.08 8.20 8.15
Net interest margin 4.76 5.00 5.15 5.19 5.34
Net interest spread 4.08 4.32 4.47 4.45 4.76
Common stock dividend payout
ratio(2) 29.38 32.13 29.17 21.72 20.00
Ratio of earnings to fixed
charges(3):
Excluding interest on deposits 6.95x 4.94x 8.74x 9.50x 12.34x
Including interest on deposits 1.50x 1.55x 1.68x 1.66x 1.87x
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- 21 -
<PAGE>
<CAPTION>
FIVE YEAR SUMMARY (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
As of December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 2,478,833 2,234,764 2,063,837 1,351,215 1,134,105
Loans 1,484,459 1,470,414 1,375,479 870,378 751,518
Allowance for loan losses 28,803 28,180 27,797 15,171 13,726
Investment securities 678,678 425,603 403,571 258,737 251,745
Deposits 2,041,932 1,805,006 1,679,424 1,099,069 939,857
Long-term debt 24,288 31,526 64,667 15,867 5,449
Trust preferred securities 40,000 40,000 - - -
Stockholders' equity 163,531 145,667 146,061 109,366 95,272
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:
Nonperforming assets to total
loans and OREO(4) 1.29% 1.15 1.20 0.97 0.94
Allowance for loan losses to
total loans 1.94 1.92 2.02 1.74 1.83
Allowance for loan losses to
nonperforming loans(5) 159.63 181.99 185.10 213.74 259.62
Net charge-offs to average loans 0.24 0.27 0.17 0.13 0.14
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS:
Tier 1 risk-based capital 9.89% 9.67 7.35 10.40 11.32
Total risk-based capital 12.30 12.19 9.98 11.65 12.58
Leverage ratio 7.10 6.94 5.28 7.28 8.12
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Diluted earnings per common share represent the amount of earnings
available to each share of common stock outstanding during the period
and to each share that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares
outstanding during the period pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 128.
(2) Dividends per common share divided by net income per common share.
(3) For purposes of computing the ratio of earnings to fixed charges,
earnings represents income before income taxes and fixed charges.
Fixed charges represent interest expense and preferred stock
dividends, which dividends commenced in October 1996 and concluded in
October 1997. Deposits include interest-bearing deposits and
repurchase agreements. Without including preferred stock dividends in
fixed charges and excluding interest on deposits, the ratio of
earnings to fixed charges for the years ended December 31, 1997 and
1996 were 5.87x and 9.91x, respectively. Without including preferred
stock dividends in fixed charges and including interest on deposits,
the ratio of earnings to fixed charges for the years ended December
31, 1997 and 1996 were 1.57x and 1.68x, respectively.
(4) For purposes of computing the ratio of non-performing assets to total
loans and other real estate owned ("OREO"), non-performing assets
include non-accrual loans, loans past due 90 days or more and still
accruing, restructured debt and other real estate owned.
(5) For purposes of computing the ratio of allowance for loan losses to
non-performing loans, non-performing loans include non-accrual loans,
loans past due 90 days or more and still accruing and restructured
debt.
- 22 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
Part II, Item 6, "Selected Consolidated Financial Data" and the Company's
consolidated financial statements, including the notes thereto, and other
financial data appearing elsewhere in this document. Certain statements
included in the following discussion constitute "forward-looking statements"
which involve various risks and uncertainties. The Company's actual results may
differ significantly from those anticipated in such forward-looking statements.
Factors that might cause such a difference include, without limitation, the
ability of the Company to execute its business strategy, interest rate risk,
economic conditions, government regulation, competition and asset quality. For
additional information concerning these and other factors, see Part I, Item 1,
"Business - Risk Factors."
The Company, through the Banks, operates 35 banking offices in 24
communities throughout Montana and Wyoming. The Company's income is derived
primarily from the net interest income and other operating income. Net interest
income consists of the excess of interest income, received primarily on customer
loans and investment securities, over interest expense, paid principally on
customer deposits and indebtedness. Other operating income primarily includes
service charges on deposit accounts, data processing fees and income from
fiduciary activities.
The Company has continued to increase earnings during the periods
reported herein while expanding its operations through a combination of internal
and external growth. The Company opened four new banking offices in the second
half of 1997 and two new banking offices in 1998 to better serve its existing
customer base. Approximately $3 million has been invested in property and
equipment for the new banking offices and branch staffing levels have increased
by approximately 28 full-time employees.
A majority of the Company's growth in recent years has resulted from
acquisitions of other banks. In October 1996, the Company acquired First
Interstate Bank of Montana, N.A. and First Interstate Bank of Wyoming, N.A.,
which collectively included six branch banks (the "FIBNA Banks"). In
December 1996, the Company acquired Mountain Bank of Whitefish ("FIB
Whitefish"), which included two branch locations. Immediately prior to the
acquisitions, the FIBNA Banks had assets of $553.2 million and deposits of
$423.9 million, and FIB Whitefish had assets of $66.9 million and deposits of
$54.4 million. Prior to the acquisition, the FIBNA Banks were operated as branch
locations without independent administrative support, data processing and other
required services. In connection with the acquisition, the Company increased its
staffing at both the holding company and branch levels to provide the
administrative, data processing and other operational support to facilitate
integration and operation of such banks.
The acquisitions of the FIBNA Banks and FIB Whitefish (collectively, the
"Acquired Banks") were accounted for using the purchase method of accounting.
Amortization of goodwill resulting from the acquisitions totaled approximately
$1.7 million in 1998. The Company believes that the Acquired Banks have been
substantially integrated into the Company's operations.
RESULTS OF OPERATIONS
The Company's increased earnings and expansion of operations in recent
years have been effected through a successful combination of acquisitions and
internal growth. The internal growth experienced by the Company is reflected by
an increased volume of customer loans and deposits, without giving effect to
such acquisitions. The Company's internal growth has largely been accomplished
through its effective offering and promotion of competitively priced products
and services. Net income was flat in 1998 as compared to 1997 reflecting
narrowing interest margins, increasingly competitive pricing by the Company's
competitors, increased operating costs associated with the opening of new
banking offices as discussed above and the Company's focus on enhancing existing
facilities and providing substantial human resources training. However, net
income to common shareholders increased 5.1% to $25.6 million in 1998 from $24.4
million in 1997 as a result of the November 1997 redemption of preferred stock
and issuance of trust preferred securities. Net income increased 21.7% to $25.9
million in 1997 from $21.2 million in 1996 and net income to common shareholders
increased 17.2% to $24.4 million in 1997 from $20.8 million in 1996, due
principally to internal growth and earnings provided by the Acquired Banks.
Net income during the fourth quarter 1998 decreased 9.7% from the third
quarter. This decrease was principally due to normal increases in expenses
related to facility and equipment enhancements, additional rental expense
related to expansion of facilities and increases in certain expenses such as
supplies, postage and telephone. The remaining increase is attributable to
additional OREO provisions, a loss on the sale of OREO property and a
non-recurring loss recorded by the Trust Department.
- 23 -
<PAGE>
NET INTEREST INCOME
Net interest income is the largest source of the Company's operating
income. As discussed above, net interest income is derived from interest,
dividends and fees received from interest-earning assets, less interest expense
incurred on interest-bearing liabilities. Interest earning assets primarily
include loans and investment securities. Interest-bearing liabilities primarily
include deposits and various forms of indebtedness.
Net interest income increased 4.7% to $97.8 million in 1998 from $93.1
million in 1997. This increase resulted primarily from internal growth. Net
interest income increased 37.2% to $93.1 million in 1997 from $67.9 million in
1996. This increase resulted primarily from the incremental net interest income
provided by the Acquired Banks.
The following table presents, for the periods indicated, condensed
average balance sheet information for the Company, together with interest income
and yields earned on average interest-earning assets, and interest expense and
rates paid on average interest-bearing liabilities. Average balances are
averaged daily balances.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS, YIELDS AND RATES
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------
Average Average Average Average
(DOLLARS IN THOUSANDS) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 1,469,741 143,435 9.76% $ 1,441,800 140,299 9.73%
U.S. and agency securities 416,965 25,006 6.00 345,771 20,481 5.92
Federal funds sold 64,351 3,457 5.37 39,936 2,210 5.53
Other securities 71,170 4,610 6.48 23,302 1,467 6.30
Tax exempt securities(2) 43,578 3,290 7.55 21,253 1,737 8.17
Interest-bearing deposits
in banks 18,992 997 5.25 7,491 448 5.98
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,084,797 180,795 8.67 1,879,553 166,642 8.87
Noninterest-earning assets 236,075 235,941
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 2,320,872 $ 2,115,494
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits $ 320,088 6,673 2.08% $ 304,511 6,369 2.09%
Savings deposits 464,527 18,077 3.89 417,352 16,021 3.84
Time deposits 754,725 43,498 5.76 626,925 35,739 5.70
Borrowings(3) 172,725 7,550 4.37 184,605 8,846 4.79
Long-term debt 28,085 2,327 8.29 56,197 5,165 9.19
Trust preferred securities 40,000 3,527 8.82 5,808 523 9.00
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities 1,780,150 81,652 4.59 1,595,398 72,663 4.55
- -------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 360,628 345,372
Other noninterest-bearing
liabilities 25,832 22,994
Stockholders' equity 154,262 151,730
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 2,320,872 2,115,494
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net FTE interest income $ 99,143 93,979
Interest rate spread 4.08% 4.32%
Contribution of interest free funds 0.68 0.68
Net yield on interest-earning assets(4) 4.76 5.00
Less FTE adjustments(2) (1,381) (834)
- -------------------------------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $ 97,762 93,145
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31,
------------------------------------------
1996
------------------------------------------
Average Average
(DOLLARS IN THOUSANDS) Balance Interest Rate
- ---------------------------------------------------------------------------------------------
<C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 1,014,901 100,039 9.86%
U.S. and agency securities 244,314 13,951 5.71
Federal funds sold 25,462 1,342 5.27
Other securities 21,868 1,392 6.37
Tax exempt securities(2) 19,100 1,575 8.25
Interest-bearing deposits
in banks 6,555 376 5.74
- ---------------------------------------------------------------------------------------------
Total interest-earning assets 1,332,200 118,675 8.91
Noninterest-earning assets 173,888
- ---------------------------------------------------------------------------------------------
Total assets $ 1,506,088
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits $ 210,153 4,489 2.14%
Savings deposits 301,003 11,305 3.76
Time deposits 464,712 26,328 5.67
Borrowings(3) 126,135 5,869 4.65
Long-term debt 23,760 2,028 8.54
Trust preferred securities - - -
- ---------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities 1,125,763 50,019 4.44
- ---------------------------------------------------------------------------------------------
Noninterest-bearing deposits 242,117
Other noninterest-bearing
liabilities 16,487
Stockholders' equity 121,721
- ---------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,506,088
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Net FTE interest income 68,656
Interest rate spread 4.47%
Contribution of interest free funds 0.68
Net yield on interest-earning assets(4) 5.15
Less FTE adjustments(2) (750)
- ---------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income 67,906
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Average loan balances include nonaccrual loans. Loan fees included in
interest income were $8.1 million, $6.1 million and $5.0 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
- 24 -
<PAGE>
(2) Interest income and average rates for tax exempt securities are
presented on a fully-taxable equivalent (FTE) basis.
(3) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds. Excludes long-term
debt.
(4) Net yield on interest-earning assets during the period equals (i) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities and trust preferred
securities, divided by (ii) average interest-earning assets for the
period.
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of loans, investment securities and other interest-earning assets,
compared to the volume of interest-bearing deposits and indebtedness, combined
with the spread, produces the changes in the net interest income between
periods.
The table below sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from estimated changes
in average asset and liability balances (volume) and estimated changes in
average interest rates (rate). Changes which are not due solely to volume or
rate have been allocated to these categories based on the respective percent
changes in average volume and average rate as they compare to each other.
<TABLE>
<CAPTION>
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year ended December 31, 1998 December 31, 1997
compared with compared with
December 31, 1997 December 31, 1996
favorable (unfavorable) Favorable (unfavorable)
-------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $ 2,727 409 3,136 41,541 (1,281) 40,260
U.S. and agency securities 4,270 255 4,525 6,010 520 6,530
Federal funds sold 1,312 (65) 1,247 801 67 868
Other securities 3,101 42 3,143 90 (15) 75
Tax exempt securities(1) 1,685 (132) 1,553 176 (14) 162
Interest-bearing deposits
in banks 604 (55) 549 56 16 72
- -----------------------------------------------------------------------------------------------------------------
Total change 13,699 454 14,153 48,674 (707) 47,967
- -----------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits 325 (21) 304 1,974 (94) 1,880
Savings deposits 1,836 220 2,056 4,466 250 4,716
Time deposits 7,366 393 7,759 9,247 164 9,411
Borrowings(2) (519) (777) (1,296) 2,802 175 2,977
Long-term debt (2,329) (509) (2,838) 2,981 156 3,137
Trust preferred securities 3,015 (11) 3,004 523 - 523
- -----------------------------------------------------------------------------------------------------------------
Total change 9,694 (705) 8,989 21,993 651 22,644
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in FTE net
interest income (1) $ 4,005 1,159 5,164 26,681 (1,358) 25,323
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year ended December 31, 1996
compared with
December 31, 1995
favorable (unfavorable)
----------------------------------
Volume Rate Net
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) 17,761 (1,457) 16,304
U.S. and agency securities 2,518 155 2,673
Federal funds sold (640) (113) (753)
Other securities 495 33 528
Tax exempt securities(1) 65 280 345
Interest-bearing deposits
in banks 17 (13) 4
- -----------------------------------------------------------------------------
Total change 20,216 (1,115) 19,101
- -----------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits 944 (703) 241
Savings deposits 1,469 (81) 1,388
Time deposits 4,647 (52) 4,595
Borrowings(2) 1,318 (315) 1,003
Long-term debt 906 (60) 846
Trust preferred securities - - -
- -----------------------------------------------------------------------------
Total change 9,284 (1,211) 8,073
- -----------------------------------------------------------------------------
Increase (decrease) in FTE net
interest income (1) 10,932 96 11,028
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(1) Interest income and average rates for tax exempt loans and securities
are presented on a fully-taxable equivalent (FTE) basis.
(2) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds.
FTE interest income increased 8.5% to $180.8 million in 1998 from $166.6
million in 1997. This increase resulted primarily from internal growth in
earning assets (principally investment securities), offset by a decrease of 20
basis points in the yield on average interest earning assets from 8.87% in 1997
to 8.67% in 1998. The decrease in yield is due to shifts in the mix of average
interest earning assets from higher yielding loans to investment securities
which produce a lower yield.
In 1997, FTE interest income increased 40.4% to $166.6 million from
$118.7 million in 1996. This increase was due primarily to significant increases
in loans due to the Acquired Banks. The yield on average interest earning
assets during 1997 was 8.87% compared to 8.91% in 1996.
- 25 -
<PAGE>
Customer loan fees, included in interest income, increased 32.8% to $8.1
million in 1998 from $6.1 million in 1997. The most significant increases from
1997 to 1998 were in real estate loan fees. Loan fees increased 22.0% to $6.1
million in 1997 from $5.0 million in 1996 due to loan fees generated by the
Acquired Banks.
Interest expense increased 12.4% to $81.7 million during 1998 from $72.7
million in 1997. This increase was due primarily to internally generated growth
in customer deposits. The rate on average interest-bearing liabilities and
trust preferred securities of 4.59% in 1998 increased 4 basis points from 4.55%
in 1997.
Interest expense increased 45.3% to $72.7 million during 1997 from
$50.0 million in 1996. This increase was due primarily to the customer deposits
and indebtedness incurred in connection with the Acquired Banks. The rate on
average interest-bearing liabilities and trust preferred securities of 4.55% in
1997 increased 11 basis points from 4.44% in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses creates an allowance for future loan
losses. The loan loss provision for each year is dependent on many factors,
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of the quality of the loan
portfolio, the value of the underlying collateral on problem loans and the
general economic conditions in the Company's markets. The Company performs a
quarterly assessment of the risks inherent in its loan portfolio, as well as a
detailed review of each asset determined to have identified weaknesses. Based on
this analysis, which includes reviewing historical loss trends, current economic
conditions, industry concentrations and specific reviews of assets classified
with identified weaknesses, the Company makes provisions for potential loan
losses. Specific allocations are made for loans where the probability of a loss
can be defined and reasonably determined, while the balance of the provisions
for loan losses are based on historical data, delinquency trends, economic
conditions in the Company's markets and industry averages. Annual fluctuation in
the provision for loan losses result from management's assessment of the
adequacy of the allowance for loan losses, and ultimate loan losses may vary
from current estimates.
The provision for loan losses decreased by $70,000 in 1998 to $4.2
million. The provision for loan losses increased 10.3% to $4.2 million in 1997
from $3.8 million in 1996 due to higher loan volumes resulting from the 1996
acquisitions.
OTHER OPERATING INCOME
The principal sources of other operating income include service charges
on deposit accounts, data processing fees, income from fiduciary activities,
comprised principally of fees earned on trust assets, and other service charges,
commissions and fees. Other operating income increased 8.0% to $29.5 million in
1998 from $27.3 million in 1997 with all four principal categories increasing
from the prior year. Other operating income increased 13.1% to $27.3 million in
1997 from $24.1 million in 1996 primarily due to income provided by the Acquired
Banks. Without giving effect to the Acquired Banks, operating income from each
of the four principal categories except other service charges showed increases
in 1997 over 1996. Increases in other operating income from 1997 to 1998 and
from 1996 to 1997 were a function of changes in each of the principal
categories, as discussed below.
Service charges on deposit accounts increased 5.3% to $10.4 million in
1998 from $9.9 million in 1997 due primarily to increased overdraft fees.
Service charges on deposit accounts increased 18.7% to $9.9 million in 1997 from
$7.8 million in 1996. Of this increase, approximately $740,000 was attributable
to the Acquired Banks, with the remainder resulting primarily from increased
overdraft fees.
Data processing fees increased 9.5% to $8.1 million in 1998 from
$7.4 million in 1997 due primarily to a greater number of data processing
customers using the Company's ATM network and a corresponding increase in
transaction volumes. The Company's network expanded from 343 ATM locations at
December 31, 1995 to 477 locations at year-end 1996, 630 locations at year-end
1997, and to 986 locations at year-end 1998. Although continued expansion of
the Company's ATM network and increases in data processing fees are expected to
continue, the Company does not expect to continue the rate of growth experienced
in recent years. There were no increases in basic charges for data processing
services in 1998, 1997 or 1996.
Increases in operating income from data processing services for 1997
compared to the 1996 were mostly offset by non-recurring adjustments of $300,000
made in January 1996.
- 26 -
<PAGE>
Revenues from fiduciary activities increased 6.5% to $4.3 million in
1998 from $4.1 million in 1997 and 29.2% to $4.1 million in 1997 from $3.2
million in 1996. The increase in 1998 from 1997 was due to increases in the
value of assets under trust management. Approximately $889,000 of the increase
in 1997 from 1996 was attributable to trust services provided by the Acquired
Banks, with the remainder resulting from increases in the value of assets under
trust management.
Other service charges, commissions and fees increased 22.1% to $4.6
million in 1998 from $3.8 million in 1997 and 32.67% to $3.8 million in 1997
from $2.9 million in 1996. The increase in 1998 from 1997 was primarily due to
brokerage service fees. The Company began expanding the range and scope of
brokerage services offered through its banking offices in December 1997 and
currently employs seven registered brokerage representatives. The remaining
increase in 1998 was attributable to increases in foreign exchange fees. The
increase in other service charges, commissions and fees from 1996 to 1997 is
principally attributable to the Acquired Banks.
OREO gains are included net of provisions for OREO losses and losses on
sales of OREO. Variations in net OREO income during the periods resulted
principally from fluctuations in such gains and losses. OREO income is
anticipated to decline as the number and value of OREO properties decrease. OREO
income is directly related to prevailing economic conditions, and such income
could decrease significantly should an unfavorable shift occur in the economic
conditions of the Company's markets.
In addition to the principal categories discussed above, other income
decreased 41.3% to $1.7 million in 1997 from $2.8 million in 1996. The decrease
was primarily attributable to the sale of certain merchant credit card
processing assets in 1996. The sale included alignment with a third-party
credit card processing provider that has enhanced the Company's ability to
compete in this highly specialized area.
OTHER OPERATING EXPENSES
Other operating expenses increased 9.7% to $81.8 million in 1998 from
$74.6 million in 1997. Significant components of this increase are discussed
below. Other operating expenses increased 39.2% to $74.6 million in 1997 from
$53.6 million in 1996. This increase resulted primarily from both direct and
indirect expenses attributable to the Acquired Banks. Direct expenses totaled
approximately $16.1 million in 1997. A significant portion of the remaining
increase was due to various indirect expenses associated with the Company's need
to increase its data processing support and other operational services to the
FIBNA Banks which had been previously operated as dependent branch offices prior
to their acquisition by the Company. The increases in administrative personnel
and other resources to provide such support and services were necessary to
facilitate integration of such banks into the Company's operations. In addition,
goodwill associated with the acquisition of the Acquired Banks resulted in
increased amortization expense of approximately $1.8 million from 1996 to 1997.
Salaries and wages expense increased 11.1% to $32.7 million in 1998 from
$29.4 million in 1997. This increase is primarily attributable to inflationary
wage increases, the additional staffing requirements of the six new branch banks
opened since August 1997 and the addition of administrative personnel providing
support for the data processing division. Given the Company's present growth
strategy, employee and related compensation expenses are expected to continue to
increase.
Increases in salaries and wages from 1996 to 1997 were due primarily to
the direct and indirect expense attributable to the bank acquisitions, as
discussed above. The indirect expenses were related particularly to the
Company's data processing division and bank operation centers. The remainder of
the increases in salaries, wages and benefits during these periods were
principally inflationary in nature.
Employee benefits expense increased 23.7% to $10.0 million in 1998 from
$8.1 million in 1997. Approximately $961,000 of this increase is attributable
to additional accruals for the increased value of stock appreciation rights
resulting from significant increases in the appraised value of the Company's
common stock during 1998. The remaining increase is attributable to increases
in staffing levels as discussed above.
Employee benefits expense increased 41.0% to $8.1 million in 1997 from
$5.7 million in 1996 primarily due to the direct and indirect expense
attributable to the bank acquisitions.
- 27 -
<PAGE>
Occupancy and furniture and equipment expenses have increased over the
periods primarily as a result of the additional facilities associated with
internal growth and bank acquisitions, the expansion of the ATM network and
additional equipment used in the data processing division. Furthermore, these
expenses have increased due to higher depreciation, maintenance and other costs
related to the foregoing items and various other computer hardware and software,
including upgrades, used in the Company's operations.
FDIC deposit insurance premiums in 1998 of $215,000 were comparable to
premiums in 1997, however, FDIC deposit insurance premiums increased to $206,000
in 1997 from $5,000 in 1996. This increase resulted from an increase in FDIC
FICO bond assessment effective January 1, 1997. FDIC deposit insurance rates
reflect the Company's "well-capitalized" rating by the FDIC.
Other expenses primarily include advertising and public relations costs,
legal, audit and other professional fees, and office supply, postage and
telephone expenses. Other expenses increased 4.9% to $21.5 million in 1998 from
$20.5 million in 1997 due primarily to increases in professional fees resulting
from Company-wide sales and service training and employee development activities
conducted during 1998. Other expenses increased 43.3% to $20.5 million in 1997
from $14.3 million in 1996 as a result of the direct and indirect costs
associated with the Acquired Banks. Exclusive of these costs, during 1997
compared to 1996, other expenses increased approximately $484,000 due
principally to consulting fees associated with revision of the Company's
employee job evaluation system and accruals for financial planning activities.
INCOME TAX EXPENSE
The Company's effective federal tax rate was 32.5%, 33.3% and 33.3% for
the years ended December 31, 1998, 1997 and 1996, respectively. State income tax
applies only to pretax earnings of entities operating within Montana. The
Company's effective state tax rate was 5.3%, 4.5% and 5.3% for years ended
December 31, 1998, 1997 and 1996, respectively. Pretax earnings subject to
Montana state income tax were approximately 57%, 57% and 67% of consolidated
pretax earnings in 1998, 1997 and 1996, respectively.
FINANCIAL CONDITION
Total assets increased 10.9% to $2,479 million as of December 31, 1998
from $2,235 million as of December 31, 1997. This increase was due principally
to increases in investment securities funded through internally generated
deposit growth. Total assets increased 8.3% to $2,235 million as of
December 31, 1997 from $2,064 million as of December 31, 1996. This increase
resulted primarily from internal growth in the Company's loan portfolio funded
by increases in repurchase agreements and deposits.
LOANS
Total loans increased 1.0% to $1,484 million as of December 31, 1998
from $1,470 million as of December 31, 1997. The Company's loan portfolio was
reclassified in 1998 to aggregate all loans secured by real estate (i.e.,
agricultural, commercial, consumer, residential and construction) in the real
estate category. These reclassifications have been made to all historical
amounts to conform to the 1998 presentation. As shown below, growth in
commercial loans was partially offset by decreases in real estate, agriculture
and consumer loans. Management attributes this decline in growth rate to
increasingly competitive loan pricing by competitors in the Company's market
area and the Company's unwillingness to expand credit risk to meet competition
for certain consumer loans.
As of December 31, 1997, total loans increased 6.9% to $1,470 million
from $1,375 million as of December 31, 1996. All categories of loans except
commercial loans showed increases in volumes during this period due to strong
economic conditions in the Company's markets and internal growth resulting from
the Company's marketing activities.
The Company's loan portfolio consists of a mix of commercial,
consumer, real estate, agricultural and other loans, including fixed and
variable rate loans. Fluctuations in the loan portfolio are directly related
to the economies of the communities served by the Company. Thus, the
Company's borrowers could be adversely impacted by a downturn in these
sectors of the economy which could have a material adverse effect on the
borrowers' abilities to repay their loans.
- 28 -
<PAGE>
The following tables present the composition of the Company's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
LOANS OUTSTANDING
- --------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 Percent 1997 Percent 1996 Percent
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOANS
Real estate(1) $ 681,670 45.9% $ 683,212 46.5% $ 600,007 43.6%
Consumer 379,197 25.5 412,231 28.0 410,258 29.8
Commercial 311,040 21.0 261,513 17.8 272,888 19.8
Agricultural 106,707 7.2 107,649 7.3 90,883 6.6
Other loans 5,845 0.4 5,809 0.4 1,443 0.2
- --------------------------------------------------------------------------------------------------------------------
Total loans 1,484,459 100.0% 1,470,414 100.0% 1,375,479 100.0%
- --------------------------------------------------------------------------------------------------------------------
Less allowance for
loan losses 28,803 28,180 27,797
- --------------------------------------------------------------------------------------------------------------------
Net loans $ 1,455,656 1,442,234 $ 1,347,682
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Ratio of allowance
to total loans 1.94% 1.92% 2.02%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 Percent 1994 Percent
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOANS
Real estate(1) $ 384,349 44.2% $ 291,011 38.8%
Consumer 247,665 28.5 234,680 31.2
Commercial 166,602 19.1 161,822 21.5
Agricultural 70,001 8.0 62,589 8.3
Other loans 1,761 0.2 1,416 0.2
- -------------------------------------------------------------------------------------------
Total loans 870,378 100.0% 751,518 100.0%
- -------------------------------------------------------------------------------------------
Less allowance for
loan losses 15,171 13,726
- -------------------------------------------------------------------------------------------
Net loans $ 855,207 $ 737,792
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Ratio of allowance
to total loans 1.74% 1.83%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Includes consumer, commercial and agricultural loans secured by
real estate as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consumer $ 102,622 93,510 74,607 53,046 42,687
Commercial 351,229 264,842 198,570 145,380 100,468
Agricultural 60,459 56,397 52,689 43,826 35,605
</TABLE>
The following table presents the maturity distribution of the Company's
loan portfolio and the sensitivity of the loans to changes in interest rates as
of December 31, 1998:
<TABLE>
<CAPTION>
MATURITIES AND INTEREST RATE SENSITIVITIES
- ----------------------------------------------------------------------------------------
Within One Year to After
(DOLLARS IN THOUSANDS) One Year Five Years Five Years Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate $ 233,321 289,290 159,059 681,670
Consumer 163,811 205,788 9,598 379,197
Commercial 184,384 101,386 25,270 311,040
Agriculture 86,705 18,095 1,907 106,707
Other loans 5,845 - - 5,845
- ----------------------------------------------------------------------------------------
$ 674,066 614,559 195,834 1,484,459
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Loans at fixed interest rates $ 362,587 469,328 89,929 921,844
Loans at variable interest rates 300,780 145,231 105,905 551,916
Nonaccrual loans 10,699 - - 10,699
- ----------------------------------------------------------------------------------------
$ 674,066 614,559 195,834 1,484,459
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
For additional information concerning the Company's loan portfolio and
its credit administration policies, see Part I, Item 1, "Business-Lending
Activities."
INVESTMENT SECURITIES
The Company's investment portfolio is managed to result in obtaining the
highest yield while meeting the Company's risk tolerance and liquidity needs and
to satisfy pledging requirements for deposits of state and political
subdivisions and securities sold under repurchase agreements. The portfolio is
comprised of U.S. Treasury securities, U.S. government agency securities, tax
exempt securities, corporate securities, other mortgage-backed securities, and
other equity securities. Federal funds sold are additional investments which are
not classified as investment securities. Investment securities classified as
available-for-sale are recorded at fair market value, while investment
securities classified as held-to-maturity are recorded at cost. Unrealized gains
or losses, net of the deferred tax effect, are reported as increases or
decreases in stockholders' equity for available-for-sale securities.
- 29 -
<PAGE>
Investment securities increased 59.5% to $679 million as of December 31,
1998 from $426 million as of December 31, 1997 as a result of growth in funding
sources exceeding loan growth. The majority of this increase occurred in U.S.
Government agencies, tax exempt securities and other mortgage-backed securities
and resulted in a significant increase in the duration of the portfolio.
Investment securities increased 5.5% to $426 million as of December 31, 1997
from $404 million as of December 31, 1996. This increase resulted from the
investment securities held by the Acquired Banks at the time of acquisition. As
of December 31, 1998, there were no concentrations of investments greater than
10% of the Company's stockholders' equity in any individual security issuer,
other than the U.S. Treasury and U.S. Government agencies.
The following table sets forth the book value, percentage of total
investment securities and average yield for the Company's investment securities
as of December 31, 1998.
<TABLE>
<CAPTION>
SECURITIES MATURITIES AND YIELD
- -------------------------------------------------------------------------------
% of Total
Book Investment Average
(DOLLARS IN THOUSANDS) Value Securities Yield(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY SECURITIES
Maturing within one year $ 40,575 6.0 5.82%
Maturing in one to five years 121,330 17.9 6.11
- -------------------------------------------------------------------------------
161,905
Mark-to-market adjustments on
securities available-for-sale 1,937
- -------------------------------------------------------------------------------
Total 163,842 24.1 6.03
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES
Maturing within one year 85,158 12.5 5.89
Maturing in one to five years 71,284 10.5 5.90
- -------------------------------------------------------------------------------
156,442
Mark-to-market adjustments on
securities available-for-sale 1,124
- -------------------------------------------------------------------------------
Total 157,566 23.2 5.90
- -------------------------------------------------------------------------------
TAX EXEMPT SECURITIES
Maturing within one year 2,685 0.4 8.02
Maturing in one to five years 12,948 1.9 8.03
Maturing in five to ten years 51,292 7.6 6.97
Maturing after ten years 1,198 0.2 9.08
- -------------------------------------------------------------------------------
68,123
Mark-to-market adjustments on
securities available-for-sale 291
- -------------------------------------------------------------------------------
Total 68,414 10.1 7.25
- -------------------------------------------------------------------------------
CORPORATE SECURITIES
Maturing within one year 44,525 6.6 5.72
Maturing in one to five years 20,104 3.0 6.04
- -------------------------------------------------------------------------------
64,629
Mark-to-market adjustments on
securities available-for-sale 44
- -------------------------------------------------------------------------------
Total 64,673 9.6 5.80
- -------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES
Maturing within one year 55,438 8.2 6.43
Maturing in one to five years 79,819 11.8 6.39
Maturing in one to five years 17,985 2.7 6.42
Maturing after ten years 60,002 8.8 6.26
- -------------------------------------------------------------------------------
213,244
Mark-to-market adjustments on
securities available-for-sale (54)
- -------------------------------------------------------------------------------
Total 213,190 31.4 6.37
- -------------------------------------------------------------------------------
- 30 -
<PAGE>
<CAPTION>
SECURITIES MATURITIES AND YIELD, CONTINUED
- -------------------------------------------------------------------------------
% of Total
Book Investment Average
(DOLLARS IN THOUSANDS) Value Securities Yield(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity securities with no stated
maturity 10,819 1.6
Mark-to-market adjustments on
securities available-for-sale 174
- -------------------------------------------------------------------------------
Total 10,993 1.6
- -------------------------------------------------------------------------------
Total $ 678,678 100.0 6.11
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Average yields have been calculated on a fully-taxable basis.
The maturities noted above doe not reflect $85,103 of investment
securities with call provisions exercisable within the next year.
For additional information concerning investment securities, see "Notes
to Consolidated Financial Statements - Investment Securities" included in Part
IV, Item 14.
DEPOSITS
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base, which is the Company's
primary funding source. The Company's deposits consist primarily of the
following interest bearing accounts: demand deposits, savings accounts, IRAs and
time deposits (CDs). For additional information concerning the Company's
deposits, including its use of repurchase agreements, as discussed below, see
Part I, Item 1, "Business-Funding Sources."
Deposits increased 13.1% to $2,042 million as of December 31, 1998, as
compared to $1,805 million as of December 31, 1997 and 7.5% to $1,805 million as
of December 31, 1997 compared to $1,679 million as of December 31, 1996. These
increases resulted from internal growth in 1997 and 1998. For additional
information concerning customer deposits as of December 31, 1998 and 1997, see
"Notes to Consolidated Financial Statements - Deposits" included in Part IV,
Item 14.
OTHER BORROWINGS
In addition to deposits, the Company also uses repurchase agreements
with commercial depositors as significant sources of funding and, on a seasonal
basis, federal funds purchased.
The following table sets forth certain information regarding these two
sources of funding as of the dates indicated:
<TABLE>
<CAPTION>
As of and for the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased:
Balance at period end $ 1,675 4,025 13,450
Average balance 1,321 28,651 18,687
Maximum amount outstanding
at any month-end 15,340 83,185 56,700
Average interest rate:
During the year 4.99% 5.46 5.58
At period end 4.12 5.95 5.61
Securities sold under repurchase
agreements:
Balance at period end $ 173,593 176,350 129,137
Average balance 162,583 141,825 101,046
Maximum amount outstanding
at any month-end 173,593 176,350 129,137
Average interest rate:
During the year 4.32% 4.69 4.46
At period end 3.94 4.61 4.42
</TABLE>
- 31 -
<PAGE>
NON-PERFORMING AND CLASSIFIED ASSETS
Federal regulations require that each financial institution classify its
assets on a regular basis. Management generally places loans on non-accrual when
they become 90 days past due, unless they are well secured and in the process of
collection. When a loan is placed on non-accrual status, any interest previously
accrued but not collected is reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Company has granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. OREO
consists of real property acquired through foreclosure on the related collateral
underlying defaulted loans.
The following table sets forth information regarding non-performing
assets as of the dates indicated:
<TABLE>
<CAPTION>
As of December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Nonaccrual loans $ 10,699 9,681 6,822 3,632 3,134
Accruing loans past due 90 days
or more 4,039 4,883 6,432 1,711 534
Restructured loans 3,306 928 1,763 1,755 1,619
- -----------------------------------------------------------------------------------------------------
Total non-performing loans 18,044 15,492 15,017 7,098 5,287
OREO 1,113 1,362 1,546 1,349 1,803
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $ 19,157 16,854 16,563 8,447 7,090
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Non-performing assets to total
loans and OREO 1.29% 1.15% 1.20% 0.97% 0.94%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans increased 16.5% to $18 million as of December 31,
1998 as compared to $15 million as of December 31, 1997 due to slight
deteriorations in the agricultural and consumer market sectors.
Non-performing loans increased 3.2% to $15 million as of December 31, 1997 as
compared to $15 million as of December 31, 1996. The increase was due to the
non-performing loans held by the Acquired Banks, an increase in the loan
portfolio and a slight deterioration in the agricultural and consumer market
sector. Approximately $1,062,000, $763,000, $405,000, $318,000 and $296,000
of gross interest income would have been accrued if all loans on non-accrual
had been current in accordance with their original terms for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
The Company records OREO at the lower of carrying value or fair value
less estimated costs to sell. Estimated losses that result from the ongoing
periodic valuation of these properties are charged to earnings with a
provision for losses on foreclosed property in the period in which they are
identified.
The Company reviews and classifies its loans on a regular basis
according to three classifications: "Substandard," "Doubtful" and "Loss."
Substandard loans are inadequately protected by the current sound worth and
paying capacity of the obligor or of the collateral pledged. Doubtful loans
have the weaknesses of substandard loans with the additional characteristic
that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and
improbable. Loans classified as Loss loans are considered uncollectible and
of such little value that their continuance as bankable assets is not
warranted.
The following table sets forth classified loans as of the dates
indicated.
<TABLE>
<CAPTION>
As of December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Substandard $ 43,449 34,161 19,994
Doubtful 3,561 2,468 2,321
Loss 3,033 2,584 2,264
- ----------------------------------------------------------------------------
Total $50,043 39,213 24,579
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Classified loans to total loans 3.37% 2.67% 1.79%
Allowance for loan losses to
classified loans 57.56% 71.86% 113.09%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
- 32 -
<PAGE>
Loans classified as substandard increased 27.2% to $43.4 million as of
December 31, 1998. Approximately $9.0 million of the increase is the result
of downgrading the loans of three commercial borrowers.
With the exception of these classified loans, management is not aware
of any loans as of December 31, 1998 where the known credit problems of the
borrowers would cause management to have serious doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which
would result in such loans being included in the non-performing asset table
above at some future date. Management cannot, however, predict the extent to
which economic conditions in the Company's market areas may worsen or the
full impact such conditions may have on the Company's loan portfolio.
Accordingly, there can be no assurances that other loans will not become 90
days or more past due, be placed on non-accrual status or become restructured
loans or OREO in the future.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of risk inherent in its loan
portfolio and economic conditions in the Company's market areas. See
"Provision for Loan Losses" herein. The allowance is increased by provisions
charged against earnings and reduced by net loan charge-offs. Consumer loans
are generally charged off when they become 120 days past due. Other loans,
or portions thereof, are charged off when they become 180 days past due
unless they are well-secured and in the process of collection. Recoveries
are generally recorded only when cash payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses as of the dates and for the years indicated.
<TABLE>
<CAPTION>
As of and for the years ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period $ 28,180 27,797 15,171 13,726 13,373
Beginning allowance of acquired banks - - 10,553 917 -
Charge-offs:
Real estate 370 141 27 20 53
Consumer 3,988 5,607 2,384 1,679 1,425
Commercial 1,920 1,132 1,127 393 398
Agricultural 349 71 220 25 4
- ----------------------------------------------------------------------------------------------------
Total charge-offs 6,627 6,951 3,758 2,117 1,880
Recoveries:
Real estate 213 246 9 119 36
Consumer 1,500 1,816 974 557 472
Commercial 1,315 732 850 252 299
Agricultural 52 300 154 88 82
- ----------------------------------------------------------------------------------------------------
Total recoveries 3,080 3,094 1,987 1,016 889
- ----------------------------------------------------------------------------------------------------
Net charge-offs 3,547 3,857 1,771 1,101 991
Provision for loan losses 4,170 4,240 3,844 1,629 1,344
- ----------------------------------------------------------------------------------------------------
Balance at end of period $ 28,803 28,180 27,797 15,171 13,726
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Period end loans 1,484,459 1,470,414 1,375,479 870,378 751,518
Average loans 1,469,741 1,441,800 1,014,901 837,288 705,690
Net charge-offs to average loans 0.24% 0.27% 0.17% 0.13% 0.14%
Allowance to period end loans 1.94% 1.92% 2.02% 1.74% 1.83%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
- 33 -
<PAGE>
Management considers changes in the size and character of the loan
portfolio, changes in non-performing and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although
management believes that the allowance for loan losses is adequate to provide
for both potential losses and estimated inherent losses in the portfolio,
future provisions will be subject to continuing evaluations of the inherent
risk in the portfolio and if the economy declines or asset quality
deteriorates, material additional provisions could be required.
The following table provides a summary of the allocation of the
allowance for loan losses for specific loan categories as of the dates
indicated. The allocations presented should not be interpreted as an
indication that charges to the allowance for loan losses will be incurred in
these amounts or proportions, or that the portion of the allowance allocated
to each loan category represents the total amount available for future losses
that may occur within these categories. The unallocated portion of the
allowance for loan losses and the total allowance is applicable to the entire
loan portfolio.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
As of December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Allocated % Of Allocated % Of Allocated % Of
Reserves Loans Reserves Loans Reserves Loans
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate $207 45.9% $ - 46.5% $ - 43.6%
Consumer 1,708 25.5 1,383 28.0 1,280 29.8
Commercial 834 21.0 870 17.8 594 19.8
Agricultural 284 7.2 331 7.3 390 6.6
Other loans - 0.4 - 0.4 - 0.2
- ------------------------------------------------------------------------------------------------------------------
Total allocated 3,033 2,584 2,264
Unallocated 25,770 25,596 25,533
- ------------------------------------------------------------------------------------------------------------------
Totals $28,803 100.0% $ 28,180 100.0% $27,797 100.0%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------
As of December 31, 1995 1994
- -----------------------------------------------------------------------------------------
Allocated % Of Allocated % Of
Reserves Loans Reserves Loans
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate $ - 44.2% $ 3 38.8%
Consumer 1,118 28.5 1,154 31.2
Commercial 789 19.1 791 21.5
Agricultural 322 8.0 280 8.3
Other loans - 0.2 - 0.2
- -----------------------------------------------------------------------------------------
Total allocated 2,229 2,228
Unallocated 12,942 11,498
- -----------------------------------------------------------------------------------------
Totals $15,171 100.0% $13,726 100.0%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
Allocated reserves as presented above for 1997 and prior years have
not been restated to reflect the reclassifications of loans secured by real
estate included in other categories of loans in those years (e.g.,
agricultural, commercial and consumer). Comparable data for allocated
reserves was not readily available for 1997 and prior years to give effect to
the reclassification of real estate loans and recreation of such information
was not deemed practical. Management does not believe that the impact on
trends presented without such reclassification is significant.
LIQUIDITY AND CASH FLOW
The objective of liquidity management is to maintain the Company's
ability to meet the day-to-day cash flow requirements of its customers who
either wish to withdraw funds or require funds to meet their credit needs.
The Company manages its liquidity position to meet the needs of its
customers, while maintaining an appropriate balance between assets and
liabilities to meet the return on investment objectives of its stockholders.
The Company monitors the sources and uses of funds on a daily basis to
maintain an acceptable liquidity position, principally through deposit
receipts and check payments; loan originations, extensions and repayments;
and management of investment securities.
Net cash provided by operating activities, primarily representing net
income, totaled $39 million for 1998, $44 million for 1997 and $29 million
for 1996. Net cash used for investing activities totaled $277 million for
1998, $128 million for 1997 and $122 million for 1996. The funds used for
investing activities primarily represent increases in loans and investments
in connection with internal growth in 1998 and 1997 and acquisitions and
internal growth in 1996.
The primary financing activities of the Company are deposits,
borrowings and capital. The Company's current liquidity position is also
supported by the management of its investment portfolio, which provides a
structured flow of maturing and reinvestable funds that could be converted to
cash, should the need arise. Maturing balances in the Company's loan
portfolio also provides options for cash flow management. The ability to
redeploy these funds is an important source of immediate to long-term
liquidity. Additional sources of liquidity include Federal funds lines, other
borrowings and access to the capital markets.
- 34 -
<PAGE>
As a holding company, FIBS is a corporation separate and apart from
the Banks, and therefore, provides for its own liquidity. Substantially all
of FIBS's revenues are obtained from management fees, dividends declared and
paid by the Banks and net revenues of the data processing division. As of
December 31, 1998, the Banks had approximately $15 million available to be
paid as dividends to FIBS. There are statutory and regulatory provisions that
could limit the ability of the Banks to pay dividends to FIBS. See Part I,
Item 1, "Business-Regulation and Supervision." Management of FIBS believes
that such restrictions will not have an impact on the ability of FIBS to meet
its ongoing cash obligations.
In connection with the acquisition of the FIBNA Banks, the Company
obtained a revolving term loan and issued subordinated notes and shares of
noncumulative perpetual preferred stock. The revolving term loan bears
interest at variable rates and was issued by a syndicate of banks. The loan
expires in December 2003, and is secured by all of the outstanding capital
stock of the Banks. The available borrowing amount under the loan is reduced
by $2 million on a semi-annual basis. The loan contains various restrictions
dealing with, among other things, minimum capital ratios, the sale or
issuance of capital stock and the maximum amount of dividends. As of December
31, 1998, no amounts were outstanding under the revolving term loan and the
borrowing capacity available thereunder was $8 million. The subordinated
notes are held by an institutional investor, bear interest at 7.5% per annum,
are unsecured and mature in increasing annual payments during the period from
October 2002 to October 2006. For additional information concerning the
revolving term loan and the subordinated notes, see "Notes to Consolidated
Financial Statements - Long Term Debt" included in Part IV, Item 14.
The noncumulative perpetual preferred stock was redeemed on November
7, 1997 with a portion of the proceeds from issuance of trust preferred
securities by FIB Capital. The trust preferred securities are unsecured,
bear interest at a rate of 8.625%, and mature on December 1, 2027. Interest
distributions are payable quarterly, however, the Company may defer interest
payments at any time for a period not exceeding 20 consecutive quarters. The
trust preferred securities may be redeemed prior to maturity at the Company's
option on or after December 1, 2002 or at any time in the event of
unfavorable changes in tax laws or regulations in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of
redemption. The Company has guaranteed the payment of distributions and
payments for redemption or liquidation of the trust preferred securities to
the extent of funds held by FIB Capital. The remaining proceeds from the
issuance of trust preferred securities were used to reduce the Company's
revolving term loan. For additional information concerning the trust
preferred securities see "Notes to Consolidated Financial Statements
- -Mandatorily Redeemable Preferred Securities of Subsidiary Trust" included in
Part IV, Item 14.
CAPITAL RESOURCES
Stockholders' equity increased 12.3% to $164 million as of December
31, 1998. This increase was due primarily to increases in retained earnings.
Stockholders' equity decreased 0.3% to $146 million as of December 31, 1997
from $146 million as of December 31, 1996 due to the redemption of $20
million of noncumulative perpetual preferred stock which was partially offset
by an increase in retained earnings. Stockholders' equity is influenced
primarily by earnings, dividends and, to a lesser extent, sales and
redemptions of common stock involving employees of the Company. For the
years ended December 31, 1998, 1997 and 1996, the Company paid aggregate cash
dividends to stockholders of $8 million, $9 million and $6 million,
respectively.
Pursuant to FDICIA, the Federal Reserve and the FDIC have adopted
regulations setting forth a five-tier system for measuring the capital
adequacy of the financial institutions they supervise. At December 31, 1998,
each of the Banks had levels of capital which met or exceeded the
well-capitalized guidelines. For additional information concerning the
capital levels of the Company, see "Notes to Consolidated Financial
Statements - Regulatory Matters" contained in Part IV, Item 14.
INTEREST RATE RISK MANAGEMENT
The Company's primary earnings source is the net interest margin,
which is affected by changes in the level of interest rates, the relationship
between rates, the impact of interest rate fluctuations on asset prepayments,
and the mix of interest-bearing assets and liabilities.
- 35 -
<PAGE>
The ability to optimize the net interest margin is largely dependent
upon the achievement of an interest rate spread which can be managed during
periods of fluctuating interest rates. Interest sensitivity is a measure of
the extent to which net interest income will be affected by market interest
rates over a period of time. Interest rate sensitivity is related to the
difference between amounts of interest earning assets and interest bearing
liabilities which either reprice or mature within a given period of time.
The difference is known as interest rate sensitivity gap. The following
table shows interest rate sensitivity gaps for different intervals as of
December 31, 1998:
<TABLE>
<CAPTION>
Three Three One
Months Months Year to After
(DOLLARS IN THOUSANDS) or Less to One Year Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $ 571,328 220,640 546,298 135,494 1,473,760
Investment securities(2) 114,254 127,054 308,091 129,279 678,678
Interest-bearing deposits in banks 17,562 - - - 17,562
Federal funds sold 31,930 - - - 31,930
- -----------------------------------------------------------------------------------------------------
Total interest-earning assets $ 735,074 347,694 854,389 264,773 2,201,930
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Interest-bearing demand accounts(3) $ 26,624 79,872 248,490 - 354,986
Savings deposits(3) 381,146 30,025 93,411 - 504,582
Time deposits, $100 or more 88,136 87,936 44,037 - 220,109
Other time deposits 167,117 220,303 183,396 441 571,257
Federal funds purchased 1,675 - - - 1,675
Securities sold under repurchase
agreements 173,593 - - - 173,593
Other borrowed funds 9,828 - - - 9,828
Long-term debt 387 118 7,483 16,300 24,288
Trust preferred securities - - - 40,000 40,000
- -----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities $ 848,506 418,254 576,817 56,741 1,900,318
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Rate gap (113,432) (70,560) 277,572 208,032 301,612
Cumulative rate gap (113,432) (183,992) 93,580 301,612
Cumulative rate gap as a percentage of
total interest-earning assets (5.15)% (8.36)% 4.25% 13.70%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used:
(1) Does not include nonaccrual loans of $10,699.
(2) Adjusted to reflect: (a) expected shorter maturities based upon the
Company's historical experience of early prepayments of principal,
and (b) the redemption of callable securities on their next call
date.
(3) Historical analysis shows that these deposit categories, while
technically subject to immediate withdrawal, actually display
sensitivity characteristics that generally fall within one and five
years. The allocation presented is based on that historical
analysis.
As noted in footnote 3 above, interest-bearing demand accounts and
savings deposits are allocated based on historical analysis of their interest
sensitivity characteristics although they are technically subject to
immediate withdrawal. If these deposits were included in the three month or
less category, the above table would reflect a negative three month gap of
$565 million, a negative cumulative one year gap of $526 million and a
positive cumulative one to five year gap of $96 million.
- 36 -
<PAGE>
The balance sheet structure is primarily short-term in nature with
most assets and liabilities repricing or maturing in less than five years.
Management monitors the sensitivity of net interest margin by utilizing
income simulation models and traditional gap analysis. The income simulation
model involves a degree of estimation based on certain assumptions management
believes to be reasonable including estimated cash flows, prepayments,
repricing characteristics, actual maturities, deposit growth and retention,
and the relative sensitivity of assets and liabilities to change in market
interest rates. The relative sensitivity is important to consider since the
Company's deposit base is not subject to the same degree of interest
sensitivity as its assets. The Company attempts to maintain a mix of
interest earning assets and deposits such that no more than 5% of the net
interest margin will be at risk should interest rates vary one percent over a
one year period. However, there can be no assurance as to the actual effect
changes in interest rates will have on the Company's net interest margin.
In evaluating exposure to interest rate risk, management does not view
the gap amounts in the preceding table as presenting an unusually high risk
potential. However, no assurances can be given that the Company is not at
risk in the event of rate increases or decreases.
YEAR 2000
During 1997 the Company established a Year 2000 Taskforce charged with
the responsibility of ensuring all internal and external information and
non-information technology systems critical to business functions are Year
2000 compliant. The taskforce developed a five-phase "key step plan." Each
phase is identified and described below:
- Education - During this phase, Year 2000 issues relating to the
Company are identified, resources are committed and an overall
strategy is developed.
- Assessment - during the assessment phase three areas of concern are
identified: internal computing systems and programs consisting of
hardware, software, networks, processing platforms and computer
programs; environmental and non-information technology systems
including security systems, heating, ventilation and air
conditioning systems, elevators, and vault systems; and external
vendors and suppliers including entities providing the Company with
hardware, software, and office equipment.
- Renovation - Code enhancements, hardware and software upgrades,
system replacements and vendor certifications from hardware,
software and office equipment providers are completed during the
renovation phase.
- Validation - In this phase, systems will be tested to ensure they
will function properly in the Year 2000. Any errors noted during
the validation phase will be corrected and the systems will be
retested. This phase will continue until all critical systems are
deemed compliant.
- Special Support - The Company will provide staffing support to
monitor all systems as the new century approaches and develop
contingency plans in the event a critical system fails.
Currently, the Company has completed the education, assessment and
renovation phases of the key step plan and the validation phase is
substantially complete for all critical business systems. Validation will
continue through 1999 as new software releases and hardware upgrades are
received and implemented. Validation of all secondary systems is currently
expected to be completed by September 30, 1999. To date, the validation
phase has not revealed any material Year 2000 issues in any of the Company's
internal systems or programs. The Company's internal audit department will
audit validation results.
The Company has initiated communications about Year 2000 issues with
each of its material service providers, including, without limitation,
providers of utilities, suppliers of telecommunications services, and various
industry groups, clearing houses and federal and state regulatory agencies.
While the Company does not have any reason to believe these service providers
will experience Year 2000 problems that will affect their provision of
services to the Company, the Company has not yet received sufficient
information from these parties to predict the outcomes of their Year 2000
efforts. There can be no assurance that Year 2000 problems experienced by
these providers will not materially and adversely affect the Company's
operations.
The Company is in the process of developing a contingency plan. This
plan, called the Business Resumption Contingency Plan, will address
mitigation of risks associated with system failures at critical dates
including staffing issues, security concerns, customer communication, utility
failures, hot-site identification and backup system identification. This
plan is currently anticipated to be completed by June 30, 1999.
- 37 -
<PAGE>
Management currently estimates total costs of the Company's Year 2000
compliance to be less than $300,000, $125,000 of which has already been
incurred. Of the 39 critical business systems identified, only one system is
an internally developed system. The cost of renovation of external systems
is generally included in the annual maintenance fees paid to suppliers and
has not been included in the cost estimates presented. All Year 2000 costs
are expensed as incurred.
There are many risks associated with the Year 2000 issue, including
the possibility of a failure of third parties to remediate their own Year
2000 issues. The failure of third parties with which the Company has
financial or operational relationships such as clearing organizations,
regulatory agencies, business customers, suppliers and utilities, to
remediate their technology systems in a timely manner could result in a
material financial risk to the Company. While the Company exercises no
control over such third parties, the Company's Year 2000 project plan
includes a survey assessment of critical third parties response and
remediation plans and their potential impact to the Company.
The Company's expectations about future costs and the timely
completion of its Year 2000 modifications are subject to uncertainties that
could cause actual results to differ markedly from what has been discussed
above.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. This
statement requires that all items required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The provisions of SFAS No. 130 apply to financial statements
issued for periods beginning after December 15, 1997 and reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company adopted the provisions of SFAS No. 130 as of January
1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement requires
public business enterprises to disclose selected information about operating
segments including segment income, revenues and asset data. Operating
segments, as defined in SFAS No. 131, would include those components for
which financial information is available and evaluated regularly by the chief
operating decision maker in assessing performance and making resource
allocation determinations for operating components such as those which
contribute ten percent or more of combined revenue, income or assets. The
Company adopted the provisions of SFAS No. 131 as of January 1, 1998. As of
December 31, 1998, the Company had no reportable segments as defined by SFAS
No. 131.
In June 1997, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters or fiscal
years beginning after June 15, 1999. Management expects that adoption will
not have a material effect on the consolidated financial statements or
results of operations of the Company. As of December 31, 1998, the Company
was not engaged in hedging activities nor did it hold any derivative
instruments which will be affected by the statement.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. The
business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans and investment
securities) which are primarily funded by interest-bearing liabilities
(deposits and indebtedness). Such financial instruments have varying levels
of sensitivity to changes in market interest rates. Interest rate risk
results when, due to different maturity dates and repricing intervals,
interest rate indices for interest-earning assets decrease relative to
interest-bearing liabilities, thereby creating a risk of decreased net
earnings and cash flow.
The following tables provide information about the Company's market
sensitive financial instruments, categorized by maturity and the instruments'
fair values at December 31, 1998 and December 31, 1997. The table
constitutes a "forward-looking statement." The Company's major market risk
exposure is changing interest rates. For a description of the Company's
policies with respect to managing risks associated with changing interest
rates, see Part I, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Financial Condition-Interest Rate Risk
Management."
- 38 -
<PAGE>
Although the Company characterizes some of its interest-sensitive
assets as securities available-for-sale, such securities are not purchased
with a view to sell in the near term. Rather, such securities may be sold in
response to or in anticipation of changes in interest rates and resulting
prepayment risk. Thus, all interest-sensitive assets described below are
non-trading. See "Notes to Consolidated Financial Statements-Summary of
Significant Accounting Policies" included in Part IV, Item 14.
<TABLE>
<CAPTION>
December 31, 1998 Expected Maturity/Principal Repayment
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Cash and short-term investments $ 204,019 - - - - -
Net loans 715,319 248,998 175,107 120,000 75,906 127,006
Securities available-for-sale 116,157 60,449 56,030 54,483 19,612 72,662
Securities held-to-maturity 112,113 42,987 41,051 32,760 3,788 70,024
- -----------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES AND
TRUST PREFERRED SECURITIES:
Total deposits excluding time deposits 634,966 131,914 131,914 351,772 - -
Time deposits 577,002 136,309 55,688 12,539 11,588 335
Federal funds purchased 1,675 - - - - -
Securities sold under repurchase
agreements 173,593 - - - - -
Other borrowed funds 9,828 - - - - -
Long-term debt 2,111 1,707 1,538 4,094 3,881 12,642
Trust preferred securities - - - - - 41,600
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1998 Expected Maturity/Principal Repayment
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002 Thereafter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Cash and short-term investments $ 229,147 - - - - -
Net loans 572,477 221,485 173,478 129,847 116,771 217,010
Securities available-for-sale 41,720 12,284 50,877 20,856 33,552 29,361
Securities held-to-maturity 90,606 56,067 32,356 36,723 14,601 7,769
- -----------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES AND
TRUST PREFERRED SECURITIES:
Total deposits excluding time deposits 553,856 194,257 194,257 175,317 - -
Time deposits 463,907 160,633 49,381 11,416 10,193 474
Federal funds purchased 4,025 - - - - -
Securities sold under repurchase
agreements 176,350 - - - - -
Other borrowed funds 11,591 - - - - -
Long-term debt 489 667 135 51 4,151 26,033
Trust preferred securities - - - - - 43,600
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The prepayment projections of net loans are based on experience and do
not take into account any allowance for loan losses. The expected maturities
of securities are based upon contractual maturities adjusted for projected
prepayments of principal and assumes no reinvestment of proceeds. The actual
maturities of these instruments could vary substantially if future
prepayments differ from the Company's historical experience. All other
financial instruments are stated at contractual maturities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of FIBS and
subsidiaries are contained elsewhere herein [see Item 14(a)1]:
Report of KPMG LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity and
Comprehensive Income - Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
- 39 -
<PAGE>
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth information concerning each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
----- ---- ---------
<S> <C> <C>
Homer A. Scott, Jr. 64 Chairman of the Board
James R. Scott 49 Vice Chairman of the Board
Thomas W. Scott 55 Chief Executive Officer and Director
Lyle R. Knight 53 President, Chief Operating Officer and
Director
Terrill R. Moore 46 Senior Vice President, Chief Financial
Officer and Secretary
William G. Wilson 59 Senior Vice President
Edward Garding 49 Senior Vice President
Dan S. Scott 67 Director
Randy Scott 45 Director
John M. Heyneman 31 Director
Joel Long 58 Director
James Haugh 61 Director
</TABLE>
HOMER A. SCOTT, JR. has been a director of FIBS since 1971 and the
Chairman of the Board since 1988. Mr. Scott has served as a director of
Montana-Dakota Utilities Resources Group, Inc. since 1983. Mr. Scott is the
brother of James R. Scott, Thomas W. Scott and Dan S. Scott and the uncle of
John M. Heyneman.
JAMES R. SCOTT has been a director of FIBS since 1971 and the Vice
Chairman of the Board since January 1990. Currently, Mr. Scott is also President
of the First Interstate Bank Foundation. Mr. Scott is the brother of Homer A.
Scott, Jr., Thomas W. Scott and Dan S. Scott and the uncle of John M. Heyneman.
THOMAS W. SCOTT has been a director of FIBS since 1971 and has served as
Chief Executive Officer of FIBS since 1978. Mr. Scott is the brother of Homer A.
Scott, Jr., James R. Scott and Dan S. Scott and the uncle of John M. Heyneman.
LYLE R. KNIGHT has been a director of FIBS and has served as President
and Chief Operating Officer of FIBS since May 1998. Prior to FIBS, Mr. Knight
has 28 years of bank management experience with multi-branch banks in Arizona
and Nevada, most recently as President of Pacific Century Bank of Arizona. From
1995 to 1997, Mr. Knight was a consultant to Norwest Banks of Arizona with
responsibilities for business and community development, strategic planning and
other special projects.
TERRILL R. MOORE has been a Senior Vice President, the Chief Financial
Officer and Secretary of FIBS since November 1989, and served in various finance
and accounting positions within the Company since April 1979. Mr. Moore was
formerly a manager with KPMG LLP.
WILLIAM G. WILSON has been a Senior Vice President of FIBS since 1983.
He was also Chief Financial Officer of FIBS until November 1989.
EDWARD GARDING has been a Senior Vice President of FIBS since
September 1996. In addition, Mr. Garding has been President of FIB Montana and
President of FIB Wyoming since October 1997. Prior to joining the FIBS
management team in 1996, Mr. Garding has served in various management positions
within the Company since 1971, including President of the Sheridan, Wyoming
branch of FIB Wyoming from 1988 to 1996.
- 40 -
<PAGE>
DAN S. SCOTT has been a director of FIBS since 1971. Mr. Scott has
served as President and General Manager of Padlock Ranch Co. since 1970.
Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott and Thomas W.
Scott and the uncle of John M. Heyneman and the father of Randy Scott.
RANDY SCOTT has been a director of FIBS since August 1993. Currently,
Mr. Scott is the managing general partner of the Nbar5 Limited Partnership.
Previously, Mr. Scott worked in various capacities for the Company over a period
of nineteen years. From 1991 until 1996, Mr. Scott was a trust officer in FIB
Montana's trust division. From 1996 through 1998, Mr. Scott worked part time as
a consultant to the Company, during which period he obtained his credentials as
a certified financial planner. Mr. Scott is the son of Dan S. Scott and the
nephew of Homer A. Scott, Jr., James R. Scott and Thomas W. Scott, and the
cousin of John M. Heyneman.
JOHN M. HEYNEMAN has been a director of the Company since March 1998.
He received a bachelor of arts degree from Carlton College in 1989 and a masters
degree in plant, soil and environmental sciences from Montana State University
in 1998. Prior to entering his masters program at Montana State University, Mr.
Heyneman worked in various jobs in the U.S. and abroad, most recently as an
international representative for Latin America Sales Corporation, a petroleum
processing equipment manufacturer. Currently, Mr. Heyneman is assistant manager
at the Padlock Ranch Co. Mr. Heyneman is the nephew of Homer A. Scott, Jr.,
James R. Scott, Thomas W. Scott and Dan S. Scott, and the cousin of Randy Scott.
JOEL LONG has been a director of FIBS since May 1996. Mr. Long has been
the owner and Chairman of the Board of JTL Group, Inc., a construction firm
doing business in Montana and Wyoming, since 1990.
JAMES HAUGH has been a director of the Company since November 1997.
Mr. Haugh formed American Capital LLC, a financial consulting firm, in October
1994 and has operated this firm since its inception. Prior to forming American
Capital LLC, Mr. Haugh was a partner in the accounting firm of KPMG LLP.
BOARD COMMITTEE
The Company's compensation committee is comprised of Homer A. Scott,
Jr., James R. Scott, Dan S. Scott, James Haugh and Joel Long.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE
ACT")
Because the Company does not have a class of equity securities
registered under the Exchange Act, officers, directors and shareholders owning
more than 10% of the common stock are not required to file any reports pursuant
to Section 16 of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth data concerning the compensation received
by the Chief Executive Officer of FIBS and the four other most highly
compensated executive officers of FIBS as of December 31, 1998, whose salary and
bonus for the year ended December 31, 1998, exceeded $100,000 in the aggregate.
In all cases, payment was for services in all capacities of the Company and its
subsidiaries:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
Other -------------
Name and Annual Options/ All Other
Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2)
- ------------------ ---- ------ ----- ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Scott 1998 $250,000 $150,000 $7,200 $1500/1500 $26,793
President & CEO 1997 216,000 125,000 7,200 - 23,698
1996 206,000 75,000 7,200 - 23,002
Lyle R. Knight 1998 $141,538 $67,000 $1,108 $25000/0 $68,566
President & COO(3) 1997 - - - - -
1996 - - - - -
- 41 -
<PAGE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
Other -------------
Name and Annual Options/ All Other
Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2)
- ------------------ ---- ------ ----- ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
William G. Wilson 1998 $110,775 $35,500 $7,200 $1200/1200 $13,445
Senior Vice President 1997 105,500 31,500 7,200 800/800 13,304
1996 102,000 39,580 7,200 600/600 12,544
Edward Garding 1998 $136,750 $38,500 $7,200 $1200/1200 $15,850
Senior Vice President 1997 129,000 38,700 7,200 1200/1200 15,606
1996 106,730 30,000 20,860 800/800 12,431
Terrill R. Moore 1998 $125,000 $40,000 $7,200 $1200/1200 $14,762
Senior Vice President 1997 100,862 40,000 7,200 1200/1200 12,836
& CFO 1996 86,684 35,184 7,200 800/800 12,740
</TABLE>
(1) Other annual compensation principally relates to an auto allowance or
the value of personal usage of a Company-owned vehicle.
(2) All other compensation includes (i) premiums paid by the Company on
health and group life insurance policies, (ii) contributions by the
Company to the Company's noncontributory qualified profit sharing plan
and (iii) contributions by the Company to the Company's contributory
qualified employee savings plan, qualified under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). For the fiscal
year ending December 31, 1998, premiums on health and life insurance
on behalf of Thomas W. Scott, Lyle R. Knight, William G. Wilson,
Edward Garding and Terrill R. Moore were $3,631, $2,113, $3,183,
$3,183 and $3,183, respectively. For the fiscal year ending December
31, 1998, contributions to the Company's profit sharing plan on behalf
of Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding
and Terrill R. Moore were $10,662, $0, $4,723, $5,830 and $5,329,
respectively. For the fiscal year ending December 31, 1998,
contributions to the Company's employee savings plan on behalf of
Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding and
Terrill R. Moore were $12,500, $0, $5,539, $6,837 and $6,250,
respectively.
(3) Not an executive officer of FIBS prior to 1998. Included in "Other
Annual Compensation" for 1998 are reimbursements of moving and related
expenses of $16,453 and a signing bonus of $50,000.
OPTION/SAR GRANTS TABLE
The following table provides information concerning grants of options to
purchase FIBS common stock, no par value, and related stock appreciation rights
("SARs") made during the year ended December 31, 1998, to the persons named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------- Potential Realizable
Individual Grants Value at
------------------------------------ Assumed Annual
% of Total Rates of Stock
Options/SARs Price Appreciation
Options/ Granted to Exercise For Option Term
SARS Employees in Price Expiration ---------------------
Name Granted (#) Fiscal Year ($/SH) Date 5% ($) 10% ($)
------ --------- ------------ -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Scott 1,500/1,500 2.90%/5.62% $24.74 1/12/08 $ 46,677 $ 118,288
Lyle R. Knight 25,000/0 48.36%/0.00% 32.00 5/24/08 503,116 1,274,994
William G. Wilson 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630
Edward Garding 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630
Terrill R. Moore 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630
</TABLE>
- 42 -
<PAGE>
The following table indicates the number and value of the stock options
and SARs exercised in 1998 and the number and value of unexercised stock options
and SARs as of December 31, 1998. All stock options and SARs are currently
exercisable.
<TABLE>
<CAPTION>
Aggregated Option/SAR exercised in 1998 and Fiscal Year-End Values
-------------------------------------------------------------------
Number of Value of Unexercised
Shares Unexercised In-The-Money
Acquired Value Options/SARS at Options and SARS at
Name on Exercise Realized December 31, 1998 December 31, 1998
----- ------------ -------- ------------------- --------------------
<S> <C> <C> <C> <C>
Thomas W. Scott - $ - 1,500/1,500 $ 24,780
Lyle R. Knight - - 25,000/0 25,000
William G. Wilson - - 7,200/5,500 213,329
Edward Garding 832 24,960 8,324/6,362 249,592
Terrill R. Moore 692 20,760 7,800/6,100 229,749
</TABLE>
SURVIVOR INCOME BENEFIT
The Company has entered into survivor income agreements (the "Survivor
Agreements") with certain executive employees. Under the Survivor Agreements,
designated beneficiaries are entitled to receive a survivor income benefit if
the executive dies before otherwise terminating employment with the Company.
Pursuant to the Survivor Agreements and addenda thereto, the Survivor Agreement
may convert to a split dollar insurance agreement subject to a 10 year vesting
schedule. The Company has entered into this type of Survivor Agreement with Lyle
R. Knight, Terrill R. Moore, William G. Wilson and Edward Garding.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
The Company has a Stock Option and Stock Appreciation Rights Plan (the
"Plan") for key senior officers of the Company. The Plan provides for the
granting of stock options which are non-qualified under the Code and SARs in
tandem with such options. Each option granted under the Plan may be exercised
within a period of ten years from the date of grant. During December 1998, the
Company determined that future grants of stock options would no longer include
SARs and substantially all outstanding SARs would be eligible to convert to
stock options.
COMPENSATION OF DIRECTORS
Directors who are members of the Scott family, with the exception of
John M. Heyneman, or who are executive officers of the Company ("Inside
Directors") are compensated for their services in the form of a salary and
bonus, as determined by the Compensation Committee of the Board of Directors
from time to time. Of the directors not named in the Summary Compensation Table
above, Homer A. Scott, Jr. was paid a salary of $99,000 in each of 1998, 1997
and 1996. He was also paid a bonus of $20,000 in 1997 and $15,000 in 1996.
James R. Scott was paid a salary of $102,250 in each of 1998, 1997 and 1996 and
a bonus of $20,000 in 1997 and $15,000 in 1996. Dan S. Scott was paid a salary
of $39,000 in each of 1998, 1997 and 1996 and a bonus of $20,000 in 1997 and
$15,000 in 1996. Randy Scott was paid a salary of $18,050 in 1998, 1997 and
1996. No bonuses were paid to non-management directors in 1998. Non-Inside
Directors, presently consisting of Joel Long and James Haugh, receive a $400
monthly retainer, $500 per board meeting attended and $250 for each committee
meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Homer A. Scott, Jr., James R. Scott, Dan S. Scott, James Haugh, and Joel
Long serve on the Compensation Committee of the Board of Directors. With the
exception of Joel Long and James Haugh, all committee members were officers or
employees receiving compensation from FIBS for services rendered. Homer A.
Scott, Jr. and James R. Scott were formerly officers of FIBS.
- 43 -
<PAGE>
INDEMNIFICATION
Officers and directors of FIBS are entitled to indemnification under the
Montana Business Corporation Act and pursuant to a Resolution of the Board of
Directors dated January 12, 1987. A summary of the indemnification provision in
such resolution follows:
Pursuant to a resolution of the Board of Directors dated January 12,
1987, and under the authority of Section 35-1-414 of the Montana
Business Corporation Act, the Company shall indemnify each director
and officer of the Company (including former officers and directors)
and each agent of the Company serving as a director or officer of a
Bank, serving at the specific direction or request of the Company (but
only to the extent that such director, officer or agent is not
indemnified by the Bank or by insurance provided by the Company),
against judgments, penalties, fines, settlements and reasonable
expenses actually and reasonably paid by such director, officer or
agent by reason of the fact that he or she is or was a director or
officer of the Company or such Bank, to the extent provided by and
subject to the limitations of the Montana Business Corporation Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1998 with
respect to the beneficial ownership of the Common Stock for (i) each person who
is known by the Company to own beneficially more than 5% of the Common Stock,
(ii) each of the Company's directors, (iii) each of the executive officers named
in the Summary Compensation Table, and (iv) all directors and executive officers
as a group. Unless otherwise indicated in the notes to the table, all shares
shown in the following table are owned both of record and beneficially and each
of the following parties has sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
Number of Percent
Shares Beneficially
Beneficial Owner(1) Beneficially Owned Owned
----------------- ------------------ -------------
<S> <C> <C>
James R. Scott(2) 1,340,912 16.79%
439 Grandview Blvd.
Billings, Montana 59102
Randy Scott(3) 1,158,585 14.50%
521 Freedom Avenue
Billings, Montana 59105
Homer Scott, Jr.(4) 1,024,223 12.82%
122 Scott Drive
Sheridan, Wyoming 82801
Thomas W. Scott 751,578 9.41%
P.O. Box 30876
Billings, Montana 59107
Susan Scott Heyneman(5) 560,988 7.02%
P.O. Box 285
Fishtail, Montana 59028
FIB Wyoming(6) 435,249 5.45%
P.O. Box 30918
Billings, Montana 59116
- 44 -
<PAGE>
<CAPTION>
Number of Percent
Shares Beneficially
Beneficial Owner(1) Beneficially Owned Owned
----------------- ------------------ -------------
<S> <C> <C>
Dan S. Scott(7) 381,068 4.77%
John M. Heyneman 37,004 0.46%
William G. Wilson(8) 32,855 0.41%
Lyle R. Knight(8) 26,314 0.33%
Edward Garding(8) 23,491 0.29%
Terrill R. Moore(8) 17,357 0.22%
Joel Long 5,511 0.07%
James Haugh 571 0.01%
All directors and executive officers
as a group (12 persons)(8) 4,799,469 60.08%
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities owned. Shares of
Common Stock subject to options currently exercisable or exercisable
within 60 days of December 31, 1998, are deemed outstanding for
purposes of computing the percentage of the person or entity holding
such securities but are not deemed outstanding for purposes of
computing the percentage of any other person or entity.
(2) Includes 560,068 shares owned beneficially as managing partner of J.S.
Investments Limited Partnership, 25,796 shares as trustee for John M.
Heyneman, Jr. and 25,796 shares as trustee for Thomas Scott Heyneman.
(3) Includes 1,119,792 shares owned beneficially as managing partner of
Nbar5 Limited Partnership.
(4) Includes 88,816 shares owned beneficially as trustee for Riki Rae
Scott Davidson, 75,276 shares as trustee for Risa Kae Scott Brown and
88,824 shares as trustee for Rae Ann Scott Morse.
(5) Includes 323,060 shares owned beneficially as general partner of
Towanda Investments, Limited Partnership.
(6) Includes 53,330 shares owned beneficially as trustee for Homer Scott,
Jr. Charitable Remainder Unitrust, 113,448 shares as trustee for James
Marshall Scott, 122,304 shares as trustee for Homer Rollins Scott,
88,400 shares as trustee for Sandra Arlene Scott, 7,085 shares as
trustee for Brekken Arlene Baker, 7,001 shares for Baylee Mae Baker,
2,812 shares for Blake Scott Baker, 24,770 shares for Sarah E. Suzor
Wugma and 16,099 shares for Samuel Moise Suzor Wugma.
(7) Includes 48,960 shares owned beneficially as managing partner of Nbar5
A, 41,452 shares as managing partner of Nbar5 O, 37,700 shares as
managing partner of Nbar5 K, 33,944 shares as managing partner of
Nbar5 S and 33,944 shares as managing partner of Nbar5 T.
(8) Includes options to purchase 1,500 shares, 25,000 shares, 7,200
shares, 8,324 shares and 7,800 shares held by Thomas W. Scott, Lyle R.
Knight, William G. Wilson, Edward Garding and Terrill R. Moore,
respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has had, and expects to have in the future, banking
transactions in the ordinary course of business with related parties, including
business with directors, officers, stockholders 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 unrelated persons
and that did not involve more than a normal risk of collectibility or present
other unfavorable features. To the extent that such transactions consisted of
extensions of credit to Company executive officers and directors and to certain
members of the Scott family, such extensions of credit were made in the ordinary
course of business, were made on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with unrelated persons and did not involve more than a
normal risk of collectibility or present other unfavorable features. Loans to
FIBS's executive officers, directors and their related interests represented
approximately 6.4% of the Company's stockholders' equity as of December 31,
1998. Loans to executive officers, directors and related interests of officers
and directors of FIBS and the Banks represented approximately 7.4% of the
Company's stockholders' equity as of December 31, 1998.
- 45 -
<PAGE>
In July 1998, 30,604 shares of common stock were sold by the Company to
485 individual participants in the Company's 401(k) Savings Plan. The total cash
price was $979,000.
In September 1998, 34,348 shares of common stock were sold by the
Company to certain officers, directors, director nominees and employees. The
total cash price was $1.20 million.
From time to time the Company repurchases shares of common stock from
stockholders of the Company pursuant to stockholder repurchase agreements and
otherwise at the then appraised value thereof. In addition, the Company may
redeem shares of common stock from the Company's 401(k) Savings Plan on a
quarterly basis in accordance with the investment elections of the plan's
participants or in connection with distributions under the plan. For the year
ended December 31, 1998, the Company redeemed shares of common stock from the
Company's 401(k) Savings Plan in the amount of $56,560.
The Company is the anchor tenant in a commercial building in which the
Company's principal executive offices are located in Billings, Montana. The
building is owned by a joint venture partnership in which FIB Montana is one of
the two partners, owning a 50% interest in the partnership. The other 50%
interest in the partnership is owned by a company in which Joel Long, a director
of the Company, owns beneficially an equity interest of approximately 33%.
Indebtedness of the partnership ($9.9 million as of December 31, 1998) is
recourse to the partners and guaranteed by the Company. The Company paid rent to
the partnership of $1.1 million in 1998.
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.
- 46 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
KPMG LLP
The Board of Directors and Stockholders
First Interstate BancSystem, Inc.:
We have audited the accompanying consolidated balance sheets of First Interstate
BancSystem, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Billings, Montana
January 29, 1999
- 47 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 154,527 136,025
Federal funds sold 31,930 58,675
Interest-bearing deposits in banks 17,562 34,447
Investment securities:
Available-for-sale 379,393 188,650
Held-to-maturity 299,285 236,953
- -------------------------------------------------------------------------------
Total investment securities 678,678 425,603
- -------------------------------------------------------------------------------
Loans 1,484,459 1,470,414
Less allowance for loan losses 28,803 28,180
- -------------------------------------------------------------------------------
Net loans 1,455,656 1,442,234
- -------------------------------------------------------------------------------
Premises and equipment, net 63,382 61,274
Accrued interest receivable 22,433 22,046
Goodwill and core deposit
intangible, net of accumulated
amortization of $10,950 in 1998
and $8,486 in 1997 29,337 31,801
Other real estate owned, net 1,113 1,362
Deferred tax asset 5,498 5,946
Other assets 18,717 15,351
- -------------------------------------------------------------------------------
$ 2,478,833 2,234,764
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 390,998 372,056
Interest bearing 1,650,934 1,432,950
- -------------------------------------------------------------------------------
Total deposits 2,041,932 1,805,006
- -------------------------------------------------------------------------------
Federal funds purchased 1,675 4,025
Securities sold under repurchase
agreements 173,593 176,350
Accrued interest payable 13,364 11,306
Accounts payable and accrued
expenses 10,622 9,293
Other borrowed funds 9,828 11,591
Long-term debt 24,288 31,526
- -------------------------------------------------------------------------------
Total liabilities 2,275,302 2,049,097
- -------------------------------------------------------------------------------
Mandatorily redeemable preferred
securities of subsidiary trust 40,000 40,000
Stockholders' equity:
Common stock without par value;
authorized 20,000,000 shares;
issued and outstanding 7,988,573
shares and 8,030,799 shares
as of December 31, 1998 and
1997, respectively 10,001 11,490
Retained earnings 151,362 133,277
Accumulated other comprehensive income 2,168 900
- -------------------------------------------------------------------------------
Total stockholders' equity 163,531 145,667
- -------------------------------------------------------------------------------
$ 2,478,833 2,234,764
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Book value per common share $ 20.47 18.14
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 48 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 143,236 140,083 99,882
Interest and dividends on
investment securities:
Taxable 29,616 21,958 15,343
Exempt from Federal taxes 2,108 1,109 982
Interest on deposits with banks 997 448 376
Interest on Federal funds sold 3,457 2,210 1,342
- --------------------------------------------------------------------------------
Total interest income 179,414 165,808 117,925
- --------------------------------------------------------------------------------
Interest expense:
Interest on deposits 68,248 58,129 42,122
Interest on Federal funds purchased 66 1,499 1,043
Interest on securities sold under
repurchase agreements 7,023 6,474 4,508
Interest on other borrowed funds 461 873 318
Interest on long-term debt 2,327 5,165 2,028
Interest on mandatorily redeemable
preferred securities
of subsidiary trust 3,527 523 -
- --------------------------------------------------------------------------------
Total interest expense 81,652 72,663 50,019
- --------------------------------------------------------------------------------
Net interest income 97,762 93,145 67,906
Provision for loan losses 4,170 4,240 3,844
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 93,592 88,905 64,062
Non-interest income:
Income from fiduciary activities 4,347 4,083 3,161
Service charges on deposit accounts 10,379 9,855 7,752
Data processing 8,081 7,380 7,324
Other service charges, commissions,
and fees 4,623 3,787 2,857
Investment securities gains
(losses), net 282 89 18
Other real estate income, net 89 465 214
Other income 1,683 1,652 2,815
- --------------------------------------------------------------------------------
Total other operating income 29,484 27,311 24,141
- --------------------------------------------------------------------------------
Non-interest expenses:
Salaries and wages 32,716 29,448 21,789
Employee benefits 10,015 8,097 5,742
Occupancy, net 6,418 6,077 4,505
Furniture and equipment 8,524 7,721 6,249
FDIC insurance 215 206 5
Goodwill and core deposit
amortization expense 2,464 2,585 1,019
Other expenses 21,496 20,497 14,300
- --------------------------------------------------------------------------------
Total other operating expenses 81,848 74,631 53,609
- --------------------------------------------------------------------------------
Income before income taxes 41,228 41,585 34,594
Income tax expense 15,592 15,730 13,351
- --------------------------------------------------------------------------------
Net income $ 25,636 25,855 21,243
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income applicable to common
stockholders $ 25,636 24,401 20,818
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic earnings per common share $ 3.20 3.07 2.65
Diluted earnings per common share 3.17 3.05 2.64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 49 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accumulated other Total
Preferred Common Retained comprehensive stockholders'
stock stock earnings income equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - 6,692 102,281 393 109,366
Comprehensive income:
Net income - - 21,243 - 21,243
Unrealized gains on available-for-sale investment
securities, net of reclassification adjustment - - - 114 114
------
Total comprehensive income 21,357
Preferred stock issuance:
20,000 shares issued 20,000 - - - 20,000
Preferred stock issuance costs - - (458) - (458)
Common stock transactions:
65,808 shares retired - (1,229) - - (1,229)
187,840 shares issued - 3,478 - - 3,478
Cash dividends declared:
Common ($0.78 per share) - - (6,028) - (6,028)
Preferred (8.53%) - - (425) - (425)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 20,000 8,941 116,613 507 146,061
Comprehensive income:
Net income - - 25,855 - 25,855
Unrealized gains on available-for-sale investment
securities, net of reclassification adjustment - - - 393 393
------
Total comprehensive income 26,248
Preferred stock retirement:
20,000 shares retired (20,000) - - - (20,000)
Common stock transactions:
60,169 shares retired - (1,322) - - 3,871
177,896 shares issued - 3,871 - - (1,322)
Cash dividends declared:
Common ($0.98 per share) - - (7,737) - (7,737)
Preferred (8.53%) - - (1,454) - (1,454)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - 11,490 133,277 900 145,667
Comprehensive income:
Net income - - 25,636 - 25,636
Unrealized gains on available-for-sale investment
securities, net of reclassification adjustment - - - 1,268 1,268
------
Total comprehensive incom 26,904
Common stock transactions:
115,361 shares retired - (3,830) - - (3,830)
73,135 shares issued - 2,341 - - 2,341
Cash dividends declared:
Common ($0.94 per share) - - (7,551) - (7,551)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - 10,001 151,362 2,168 163,531
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
- 50 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (CONCLUDED)
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Disclosure of reclassification amount:
Unrealized and realized holding gains arising
during the period, net of income tax
of $921, $286 and $80 in 1998, 1997 and
1996, respectively $ 1,440 447 125
Less reclassification adjustment for gains
included in net income, net of income tax
of $110, $35 and $7 in 1998, 1997 and 1996,
respectively (172) (54) (11)
- ------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale
investment securities $ 1,268 393 114
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 51 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,636 25,855 21,243
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provisions for loan and other real estate
losses 4,215 4,236 3,823
Depreciation and amortization 9,270 8,549 5,584
Net premium amortization (discount accretion)
on investment securities 286 (1,049) 591
Net gain on sale of investments (282) (89) (18)
Gain on sale of other real estate owned (248) (595) (335)
Loss (gain) on sale of premises and equipment 346 (9) (2)
Provision for deferred income taxes (326) (1,306) (528)
Increase in accrued interest receivable (387) (2,473) (507)
Decrease (increase) in other assets (3,340) 5,198 (1,697)
Increase in accrued interest payable 2,058 2,402 1,685
Increase (decrease) in accounts payable
and accrued expenses 1,329 3,742 (1,291)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 38,557 44,461 28,548
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity (163,430) (412,855) (200,361)
Available-for-sale (388,698) (133,043) (63,477)
Proceeds from maturities and paydowns of
investment securities:
Held-to-maturity 101,048 456,069 150,313
Available-for-sale 166,326 38,401 62,460
Proceeds from sales of available-for-sale
investment securities 33,718 31,208 5,523
Extensions of credit to customers, net of
repayments (21,947) (101,673) (98,142)
Recoveries on loans charged-off 3,080 3,094 1,987
Proceeds from sale of other real estate owned 1,727 2,130 1,121
Proceeds from sale of premises 2,219 - -
Acquisitions of subsidiaries, net - (1,726) 24,840
Capital distribution from (contribution to)
joint ventures 321 (275) 150
Capital expenditures, net (11,787) (8,880) (6,324)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (277,423) (127,550) (121,910)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 236,926 125,582 56,674
Net increase (decrease) in federal funds
purchased and repurchase agreements (5,107) 37,788 (15,938)
Repayments of other borrowed funds, net (1,763) (1,480) (871)
Borrowings of long-term debt 2,371 5,750 66,939
Repayment of long-term debt (9,609) (38,891) (22,410)
Proceeds of issuance of mandatorily
redeemable preferred securities of
subsidiary trust - 40,000 -
Debt issuance costs (40) (2,323) -
Proceeds from issuance of common stock 2,341 3,871 3,478
Proceeds from issuance of preferred stock,
net of issuance costs - - 19,542
Payments to retire common stock (3,830) (1,322) (1,229)
Payments to retire preferred stock - (20,000) -
Dividends paid on common stock (7,551) (7,737) (6,028)
Dividends paid on preferred stock - (1,454) (425)
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 213,738 139,784 99,732
Net increase (decrease) in cash and cash equivalents (25,128) 56,695 6,370
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 229,147 172,452 166,082
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 204,019 229,147 172,452
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 79,594 70,484 48,334
Cash paid during the year for taxes 16,865 17,830 12,805
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
Noncash Investing and Financing Activities - The Company transferred loans of
$1,275, $1,347 and $668 to other real estate owned in 1998, 1997 and 1996,
respectively.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 52 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. The Company, through the branch offices of its banking
subsidiaries, provides a full range of banking services to individual
and corporate customers throughout the states of Montana and Wyoming.
The Company is subject to competition from other financial institutions
and financial service providers, and is also subject to the regulations
of various government 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, Inc. (Parent
Company) and its operating subsidiaries: First Interstate Bank in
Montana ("FIB Montana"), First Interstate Bank in Wyoming ("FIB
Wyoming"), Commerce Financial, Inc. and FIB Capital Trust. 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,
federal funds sold for one day periods, and interest-bearing deposits in
banks with original maturities of less than three months.
At December 31, 1998 the Company was required to have aggregate
reserves, exclusive of cash on hand, with the Federal Reserve Bank of
approximately $11,365. Also, an additional $25,000 compensating balance
was maintained with the Federal Reserve Bank to mitigate the payment of
service charges for check clearing services.
INVESTMENT SECURITIES. Debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Debt securities that
may be sold in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or other factors, and any
marketable equity securities, are classified as available-for-sale and
carried at fair value. The unrealized gains and losses on these
securities are reported, net of applicable taxes, as a separate
component of stockholders' equity. Debt and equity securities that are
purchased and held principally for the purpose of selling them in the
near term are classified as trading account assets and reported at fair
value. The Company carried no trading account assets during 1998, 1997
or 1996. Management determines the appropriate classification of
securities at the time of purchase and at each reporting date management
reassesses the appropriateness of the classification.
- 53 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 and prepaid interest, net of related
costs, are recognized over the expected 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 affect the borrowers' ability to pay.
The Company also establishes 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.
- 54 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
GOODWILL. Goodwill consists of the excess purchase price over the fair
value of identifiable net assets from acquisitions ("excess purchase
price") and the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions ("core deposit
intangibles"). Excess purchase price is being amortized using the
straight-line method over periods of primarily 15 to 25 years. Core
deposit intangibles are amortized using an accelerated method based on
an estimated runoff of the related deposits, not exceeding 10 years.
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 $6,692 in 1998, $5,964 in 1997 and $4,182 in
1996.
LONG-LIVED ASSETS. Long-lived assets and certain identifiable
intangibles (e.g. premises, Goodwill, core deposit intangibles) are
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, if any, is based on the asset's fair value, which may
be estimated by discounting the expected future cash flows. There were
no impairment losses recognized during 1998, 1997 or 1996.
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.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES. Effective January 1, 1997 the Company recognizes as assets
the rights to service mortgage loans for others, whether acquired
through purchases or loan originations. Servicing rights of $1,099 and
$238 were capitalized in 1998 and 1997, respectively. Servicing rights
are initially recorded at fair value based on comparable market quotes
and are amortized in proportion to and over the period of estimated net
servicing income. Amortization expense of $317 and $285 was recognized
in 1998 and 1997, respectively. Servicing rights are evaluated for
impairment by stratifying the servicing assets based on risk
characteristics including loan type, note rate and loan term. There
were no impairment losses recognized in 1998 or 1997. Carrying value
approximates market value at December 31, 1998.
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.
- 55 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PER SHARE DATA. Basic earnings per common share is calculated by
dividing net income less preferred stock dividends by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share is calculated by dividing net income less
preferred stock dividends by the weighted average number of common
shares and potential common stock outstanding during the period. Book
value per common share is calculated 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 measures compensation cost for
stock-based employee compensation plans based on the intrinsic value of
the award. Intrinsic value is the excess of the appraised value of the
underlying stock at the date of grant over the amount an employee must
pay to acquire the stock.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1997
and 1996 amounts to conform to the 1998 presentation.
(2) REGULATORY MATTERS
The Company is subject to the regulatory capital requirements
administered by the Federal Reserve Bank. Failure to meet minimum
capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital
to average assets, as defined in the regulations. As of December 31,
1998, the Company exceeded all capital adequacy requirements to which is
was subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Company must maintain minimum total risk-based,
Tier 1 risk-based, and leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the institution's category.
- 56 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's actual capital amounts and ratios and selected regulatory
thresholds as of December 31, 1998 and 1997 are presented in the following
table:
<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
---------------------- ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total risk-based capital:
Consolidated $ 213,734 12.3% $ 139,024 8.0% $ 173,781 10.0%
FIB Montana 136,558 12.1 90,665 8.0 113,331 10.0
FIB Wyoming 70,046 11.7 47,762 8.0 59,702 10.0
Tier 1 risk-based capital:
Consolidated 171,846 9.9 69,512 4.0 104,268 6.0
FIB Montana 122,316 10.8 45,333 4.0 67,999 6.0
FIB Wyoming 62,492 10.5 23,881 4.0 35,821 6.0
Leverage capital ratio:
Consolidated 171,846 7.1 96,766 4.0 120,958 5.0
FIB Montana 122,316 7.8 62,956 4.0 78,695 5.0
FIB Wyoming 62,492 7.4 33,599 4.0 41,999 5.0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Adequately Well
Actual Capitalized Capitalized
---------------------- ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total risk-based capital:
Consolidated $ 192,839 12.2% $126,516 8.0% $ 158,145 10.0%
FIB Montana 131,374 12.4 84,603 8.0 105,754 10.0
FIB Wyoming 64,231 12.4 41,421 8.0 51,777 10.0
Tier 1 risk-based capital:
Consolidated 152,967 9.7 63,258 4.0 94,887 6.0
FIB Montana 118,113 11.2 42,302 4.0 63,452 6.0
FIB Wyoming 57,696 11.1 20,711 4.0 31,066 6.0
Leverage capital ratio:
Consolidated 152,967 6.9 88,207 4.0 110,259 5.0
FIB Montana 118,113 8.1 58,423 4.0 73,028 5.0
FIB Wyoming 57,696 7.8 29,565 4.0 36,956 5.0
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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, 1998 cost gains losses value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 48,623 1,937 - 50,560
Obligations of U.S. Government agencies 141,505 1,376 (252) 142,629
States, county and municipal securities 6,638 291 - 6,929
Corporate securities 4,326 44 - 4,370
Other mortgage-backed securities 163,966 557 (611) 163,912
Other securities 10,819 174 - 10,993
- -----------------------------------------------------------------------------------------------------
Total $ 375,877 4,379 (863) 379,393
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
- 57 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HELD-TO-MATURITY Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1998 cost gains losses value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 113,282 2,569 - 115,851
Obligations of U.S. Government agencies 14,937 62 - 14,999
States, county and municipal securities 61,485 1,070 (87) 62,468
Corporate securities 60,303 319 (125) 60,497
Other mortgage-backed securities 49,278 14 (384) 48,908
- -----------------------------------------------------------------------------------------------------
Total $ 299,285 4,034 (596) 302,723
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $284 and gross losses of $2 were realized on the sale of
available-for-sale securities in 1998.
Other securities available-for-sale include equity stocks of the Federal
Reserve and the Federal Home Loan Bank with amortized costs of $3,062 and
$7,447, respectively, at December 31, 1998.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1998 cost gains losses value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 63,869 594 - 64,463
Obligations of U.S. Government agencies 56,304 76 (59) 56,321
States, county and municipal securities 7,479 315 - 7,794
Corporate securities 4,331 5 - 4,336
Other mortgage-backed securities 46,057 321 (37) 46,341
Other securities 9,136 259 - 9,395
- -----------------------------------------------------------------------------------------------------
Total $ 187,176 1,570 (96) 188,650
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1997 cost gains losses value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 181,428 1,019 (128) 182,319
Obligations of U.S. Government agencies 27,892 117 (34) 27,975
States, county and municipal securities 17,645 174 (2) 17,817
Corporate securities 6,260 - (6) 6,254
Other mortgage-backed securities 3,728 29 - 3,757
- -----------------------------------------------------------------------------------------------------
Total $ 236,953 1,339 (170) 238,122
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $89 and no gross losses were realized on the sale of
available-for-sale securities in 1997.
Gross gains of $18 and no gross losses were realized on the sale of
available-for-sale securities in 1996.
Other securities available-for-sale include equity stocks of the Federal
Reserve and the Federal Home Loan Bank with amortized costs of $3,002 and
$6,074, respectively, at December 31, 1997.
- 58 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Maturities of investment securities at December 31, 1998 are shown below.
Maturities of mortgage-backed securities have been adjusted to reflect
shorter maturities based upon estimated prepayments of principal. At
December 31, 1998, the Company had securities callable within one year with
amortized costs and estimated market values of $85,103 and $84,936,
respectively.
<TABLE>
<CAPTION>
December 31,1998 Available-for-Sale Held-to-Maturity
- -----------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 44,406 44,404 98,896 98,928
After one but within five years 217,507 220,894 128,964 131,618
After five years but within ten years 57,026 56,999 36,698 37,285
After ten years 46,119 46,103 34,727 34,892
- -----------------------------------------------------------------------------------------------------
Total 365,058 368,400 299,285 302,723
- -----------------------------------------------------------------------------------------------------
Other 10,819 10,993 - -
- -----------------------------------------------------------------------------------------------------
Total $ 375,877 379,393 299,285 302,723
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Maturities of securities do not reflect rate repricing opportunities
present in many adjustable rate mortgage-backed and corporate securities.
At December 31, 1998 and 1997, $8,652 and $14,097, respectively, of
variable rate securities are included in investment securities.
There are no significant concentrations of investments at December 31, 1998
(greater than 10 percent of stockholders' equity) in any individual
security issuer, except for U.S. Government or agency-backed securities.
Investment securities with amortized cost of $419,349 and $333,920 at
December 31, 1998 and 1997, 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, 1998 and 1997 was $424,372 and $335,500,
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.
(4) LOANS
Major categories and balances of loans included in the loan portfolios are
as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate (1) $ 681,670 683,212
Consumer (2) 379,197 412,231
Commercial 311,040 261,513
Agricultural 106,707 107,649
Other loans, including overdrafts 5,845 5,809
- --------------------------------------------------------------------------------------------
Total loans $ 1,484,459 1,470,414
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Includes agricultural, commercial and consumer loans secured by real
estate of $60,459, $351,229 and $102,622, respectively, as of December
31, 1998 and $56,397, $264,842 and $93,510, respectively, as of
December 31, 1997.
(2) Includes indirect lending of $252,458 and $266,601 at December 31,
1998 and 1997, respectively.
- 59 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At December 31, 1998, 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 $10,699 and $9,681 at December 31, 1998 and
1997, respectively, all of which are deemed to be impaired. If interest
on nonaccrual loans had been accrued, such income would have
approximated $1,062 and $763, respectively. Loans contractually past
due ninety days or more aggregating $4,039 on December 31, 1998 and
$4,883 on December 31, 1997 were on accrual status. Such loans are
deemed adequately secured and in the process of collection.
Included in impaired loans at December 31, 1998 and 1997 are $2,648 and
$1,909, respectively, of loans which have an impairment allowance of
$903 and $676, respectively, included in the Company's allowance for
loan losses. The average recorded investment in impaired loans for the
years ended December 31, 1998, 1997 and 1996 was approximately $10,976,
$7,580 and $3,870, respectively. If interest on impaired loans had been
accrued, the amount of interest income on impaired loans during 1998,
1997 and 1996 would have been approximately $1,014, $706 and $357,
respectively.
Also included in total loans at December 31, 1998 and 1997 are loans
with a carrying value of $3,306 and $928, respectively, the terms of
which have been modified in troubled debt restructurings. Restructured
debt includes nonaccrual loans of $1,710 and $2 at December 31, 1998 and
1997, respectively. The interest income recognized on restructured
loans approximated $188, $122 and $158 during the years ended December
31, 1998, 1997 and 1996, respectively. At December 31, 1998, 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
states 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 $12,025 at December
31, 1998 and $16,411 at December 31, 1997 (including outstanding loans
of new executive officers and directors in 1998). During 1998, new
loans and advances on existing loans of $13,166 were funded and
repayments totaled $17,552. 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.
(5) ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year ending December 31, 1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Balance at beginning of year $ 28,180 27,797 15,171
Allowance of acquired banks - - 10,553
Provision charged to operating expense 4,170 4,240 3,844
Less loans charged-off (6,627) (6,951) (3,758)
Add back recoveries of loans previously charged-off 3,080 3,094 1,987
- ------------------------------------------------------------------------------------------------
Balance at end of year $ 28,803 28,180 27,797
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
- 60 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 9,480 9,639
Buildings and improvements 56,484 56,443
Furniture and equipment 25,181 24,253
----------------------------------------------------------------------------------
91,145 90,335
Less accumulated depreciation 27,763 29,061
----------------------------------------------------------------------------------
Premises and equipment, net $ 63,382 61,274
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
OREO $ 1,590 1,824
Less allowance for OREO losses 477 462
----------------------------------------------------------------------------------
$ 1,113 1,362
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
A summary of changes in the allowance for OREO losses follows:
<TABLE>
<CAPTION>
Year ending December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 462 511 554
Provision (reversal) during the year 45 (4) (21)
Property writedowns (30) (45) (16)
Losses on sales - - (6)
----------------------------------------------------------------------------------------------
Balance at end of year $ 477 462 511
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
(8) CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains key-executive life insurance policies on certain
principal shareholders. Under these policies, 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 the key-executive insurance was $7,000 at December 31, 1998
and 1997. 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, 1998 and 1997 are $2,713 and
$2,621, respectively. The net cash surrender value of key-executive
insurance policies included in other assets is $440 and $400 at December
31, 1998 and 1997, respectively.
The Company has also obtained insurance policies covering certain other
key officers. The net cash surrender value of these policies is $1,832
and $1,525 at December 31, 1998 and 1997, respectively, and is included
in other assets. Upon retirement, the officers have the option of
entering into split-dollar contracts with the Company which provide
continuing post-employment insurance coverage for a specified death
benefit amount. The Company accrues the earned portion of the
post-employment benefit through the specified vesting date.
- 61 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------
<S> <C> <C>
Noninterest bearing demand $ 390,998 372,056
Interest bearing:
Demand 354,986 314,185
Savings 504,582 431,446
Time, $100 and over 220,109 163,643
Time, other 571,257 523,676
-----------------------------------------------------------
Total interest bearing 1,650,934 1,432,950
-----------------------------------------------------------
$ 2,041,932 1,805,006
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
Maturities of time deposits at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Time, $100
and Over Total Time
-----------------------------------------------------------
<S> <C> <C>
1999 $ 176,073 563,492
2000 27,671 138,620
2001 12,365 60,416
2002 1,106 13,898
2003 2,894 14,500
Thereafter - 440
-----------------------------------------------------------
$ 220,109 791,366
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
Interest expense on time deposits of $100 or more was $11,466, $7,778 and
$5,514 for the years ended December 31, 1998, 1997 and 1996, respectively.
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 13,716 15,006 12,004
State 2,202 2,030 1,875
- -----------------------------------------------------------------------------
15,918 17,036 13,879
- -----------------------------------------------------------------------------
Deferred:
Federal (315) (1,140) (492)
State (11) (166) (36)
- -----------------------------------------------------------------------------
(326) (1,306) (528)
- -----------------------------------------------------------------------------
$ 15,592 15,730 13,351
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
- 62 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Total income tax expense differs from the amount computed by applying the
Federal income tax rate of 35 percent in 1998, 1997 and 1996 to income
before income taxes as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at the statutory tax rate $ 14,430 14,555 12,108
Increase (decrease) in tax resulting from:
Tax-exempt income (881) (520) (472)
State income tax, net of Federal income
tax benefit 1,430 1,211 1,190
Amortization of nondeductible Goodwill 312 311 318
Other, net 301 173 207
------------------------------------------------------------------------------------
$ 15,592 15,730 13,351
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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, 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 9,666 9,296
Other real estate owned, principally due to differences in bases 44 283
Employee benefits 1,700 1,374
Other 530 275
-------------------------------------------------------------------------------------------------
Deferred tax assets 11,940 11,228
-------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets, principally differences in bases and depreciation (1,269) (928)
Investment in joint venture partnership, principally due to
differences in depreciation of partnership assets (899) (1,025)
Prepaid amounts (278) (273)
Investment securities, principally differences in bases (810) (550)
Investment securities, unrealized gains (1,348) (574)
Goodwill (1,716) (1,896)
Other (122) (36)
-------------------------------------------------------------------------------------------------
Deferred tax liabilities (6,442) (5,282)
-------------------------------------------------------------------------------------------------
Net deferred tax asset $ 5,498 5,946
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
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,
1998 management continues to believe it is more likely than not that the
Company will realize the benefits of these deductible differences.
- 63 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company had current income taxes receivable of $1,233 and $286 at
December 31, 1998 and 1997, respectively.
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Revolving term loan due December 31, 2003 at variable
interest rates $ - 6,700
7.50% 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 20,000
Various unsecured notes payable to former stockholders at various
rates of 5.80% to 8.00% due in annual principal installments
aggregating $347 in 1999 and $57 through January 2001 461 710
Subsidiaries:
Various notes payable to Federal Home Loan Bank of Seattle,
interest due monthly at various rates and maturities (weighted
average rate of 6.43% at December 31, 1998) 3,827 4,116
-------------------------------------------------------------------------------------------------------------
$ 24,288 31,526
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of long-term debt at December 31, 1998 follow:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 505
2000 192
2001 107
2002 3,451
2003 3,733
Thereafter 16,300
--------------------------------------------------------------------------
$ 24,288
--------------------------------------------------------------------------
</TABLE>
The proceeds from issuance of the revolving term note, subordinated notes
and preferred stock (see note 15) were utilized to fund acquisitions (see
note 20).
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.
The Company has a revolving term loan with its primary lender. The
available borrowing amount at December 31, 1998 of $8 million is reduced by
$2 million on a semi-annual basis. 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 which varies
depending on the Company's capital ratios. The revolving term note is
secured by 100% of the outstanding capital stock of the Company's bank
subsidiaries.
- 64 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand notes issued to the United States Treasury,
secured by investment securities (4.12% and 5.16% weighted average
rate at December 31, 1998 and 1997, respectively) $ 9,828 11,591
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
The Company has Federal funds lines of credit with third parties amounting
to $145 million, subject to funds availability. These lines are subject to
cancellation without notice. The Company has been approved for
participation in the Federal Home Loan Bank Cash Management Advance Program
for borrowings up to approximately $115 million. The Company also has an
unadvanced, irrevocable letter of credit for $16.1 million with the Federal
Home Loan Bank of Seattle which expires on April 1, 1999. No amounts were
outstanding on these facilities at December 31, 1998.
(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 $1,032, $1,022 and
$839 in 1998, 1997 and 1996, 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 $1,164 in 1998, $1,030 in 1997 and $814 in 1996.
STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and Stock
Appreciation Rights Plan ("Stock Option Plan") for senior officers of the
Company. All options and stock appreciation rights ("SARs") granted have
an exercise price of book value of the Company prior to 1993 and appraised
value thereafter. Each option granted under the Stock Option Plan can be
immediately exercised up to ten years from the date of grant. SARs 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
$1,280 in 1998, $514 in 1997 and $72 in 1996.
During 1998, the Company determined that future grants of stock options
would no longer include stock appreciation rights. Grantees with
outstanding SARs were given an election to convert the SARs to stock
options with similar terms in a one-for-one exchange. In January 1999,
106,300 SARs were exchanged for stock options resulting in a reduction of
accrued expenses and an increase in stockholders' equity of $1,184.
Information with respect to the Company's stock options and SARs are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Year ended December 31, Options SARs Options SARs Options SARs
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 123,204 91,452 115,836 78,320 116,752 79,236
Granted 51,700 26,700 19,600 19,600 16,600 16,600
Exercised (5,624) (3,012) (12,232) (6,468) (17,516) (17,516)
-----------------------------------------------------------------------------------------------------------
Outstanding, end of year 169,280 115,140 123,204 91,452 115,836 78,320
-----------------------------------------------------------------------------------------------------------
</TABLE>
- 65 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the weighted-average stock option exercise
prices are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C>
Granted during year $ 28.25 $ 20.05 $ 17.86
Exercised during year 6.16 5.83 4.95
Outstanding, end of year 17.69 12.73 9.67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
Stratification and additional detail regarding the exercisable options
outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Exercise Number Weighted-average Weighted-average
price range outstanding remaining life exercise price
--------------------------------------------------------------------------
<S> <C> <C> <C>
$5.24 - $7.61 34,480 1.94 years $ 6.71
$11.40 - $17.85 63,900 5.74 years 14.40
$20.05 - $32.00 70,900 8.89 years 26.00
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
The Company does not recognize compensation expense for the options granted
to employees where the exercise price is equal to appraised value at the
date of grant. Had compensation expense been determined based on an
estimate of fair value of the option at the date of grant, the Company's
pro forma net income and earnings per common share would be estimated as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 25,636 25,855 21,243
Pro forma net income 25,537 25,826 21,213
Net income applicable to common stock as reported 25,636 24,401 20,818
Pro forma net income applicable to common stock 25,537 24,372 20,788
Basic earnings per common share as reported 3.20 3.07 2.65
Pro forma basic earnings per common share 3.18 3.07 2.65
Diluted earnings per common share as reported 3.17 3.05 2.64
Pro forma diluted earnings per common share 3.16 3.05 2.64
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
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 5.62%, 6.58% and 5.65% in 1998, 1997 and
1996, respectively; dividend yield of 3.45%, 4.03% and 2.50% in 1998, 1997
and 1996, respectively; and expected life of options of 7 years in 1998,
1997 and 1996. For purposes of the pro forma presentation, the estimated
fair value of the options is expensed in the year granted as all options
are fully vested upon grant.
- 66 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(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, results
of operations or liquidity.
During 1997, the Company purchased a 50% ownership interest in an aircraft.
The investment is accounted for using the equity method. The Company is
jointly and severally liable for aircraft indebtedness of $1,625 as of
December 31, 1998. The Company's proportionate share of operating expenses
in 1998 and 1997 were $297 and $104, respectively.
The Parent Company and the Billings office of FIB Montana are the anchor
tenants in a building owned by a 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. At December 31,
1998 the partnership has indebtedness of $9,944 which has full recourse to
the partners. Total rents paid to the partnership were $1,068 in 1998 and
$814 in 1997 and 1996.
The Company also leases certain premises and equipment from third parties
under operating leases. Total rental expense to third parties was $1,351
in 1998, $1,204 in 1997 and $1,019 in 1996.
The total future minimum rental commitments required under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Third
parties Partnership Total
------------------------------------------------------------------------
<S> <C> <C> <C>
For the year ending December 31:
1999 $ 789 988 1,777
2000 700 988 1,688
2001 667 988 1,655
2002 629 988 1,617
2003 604 980 1,584
Thereafter 3,375 1,748 5,123
------------------------------------------------------------------------
$ 6,764 6,680 13,444
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
(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.
- 67 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. Generally, all standby letters of credit and
commitments to extend credit are subject to annual renewal. At December
31, 1998, stand-by letters of credit in the amount of $27,324 were
outstanding. Commitments to extend credit to existing and new borrowers
approximated $313,126 at December 31, 1998, which includes $33,131 on
unused credit card lines and $36,766 with commitment maturities beyond one
year.
(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 per share. The holders of Preferred Stock were entitled to
receive dividends in cash at the rate of $85.30 per share. On November 7,
1997, the Preferred Stock was redeemed at a price of $1,000 per share plus
accrued but unpaid dividends of $178. In conjunction with the redemption
the Company recorded a $500 prepayment penalty.
At December 31, 1998, 92.18% of the common stock held by stockholders are
subject to stockholder's agreements (Agreements). Under the Agreements,
the Company has a right of first refusal to repurchase shares from the
stockholder at minority interest appraised value in the event of a proposed
sale of shares to a third party, death, disability or termination of
employment. Additionally, shares purchased by officers, directors and
employees after 1993 are also subject to repurchase at the Company's
discretion.
(16) MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
On October 1, 1997, the Company established FIB Capital Trust ("Trust"), a
wholly-owned statutory business trust. The Trust was created for the
exclusive purpose of issuing 30-year capital trust preferred securities
("Trust Preferred Securities") in the aggregate amount of $40,000 and using
the proceeds to purchase junior subordinated debentures ("Subordinated
Debentures") issued by the parent company. The sole assets of the Trust
are the Subordinated Debentures.
The Trust Preferred Securities bear a cumulative fixed interest rate of
8.625% and mature on December 1, 2027. Interest distributions are payable
quarterly beginning December 31, 1997. The Trust Preferred Securities are
subject to mandatory redemption upon repayment of the Subordinated
Debentures at their stated maturity date or their earlier redemption in an
amount equal to their liquidation amount plus accumulated and unpaid
distributions to the date of redemption. The Company guaranteed the
payment of distributions and payments for redemption or liquidation of the
Trust Preferred Securities to the extent of funds held by the Trust. The
obligations of the Company under the Subordinated Debentures together with
the guarantee and other back-up obligations, in the aggregate, constitute a
full and unconditional guarantee by the Company of the obligations of the
Trust under the Trust Preferred Securities.
- 68 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Subordinated Debentures are unsecured, bear interest at a rate of
8.625% per annum and mature on December 1, 2027. Interest is payable
quarterly beginning December 31, 1997. The Company may defer the payment
of interest at any time from time to time for a period not exceeding 20
consecutive quarters provided that deferral period does not extend past the
stated maturity. During any such deferral period, distributions on the
Trust Preferred Securities will also be deferred and the Company's ability
to pay dividends on its common shares will be restricted.
Subject to approval by the Federal Reserve Bank, the Trust Preferred
Securities may be redeemed prior to maturity at the Company's option on or
after December 1, 2002. The Trust Preferred Securities may also be
redeemed at any time in whole (but not in part) in the event of unfavorable
changes in laws or regulations that result in (1) FIB Capital becoming
subject to federal income tax on income received on the Subordinated
Debentures, (2) interest payable by FIBS on the Subordinated Debentures
becoming non-deductible for federal tax purposes, (3) the requirement for
FIB Capital to register under the Investment Company Act of 1940, as
amended, or (4) loss of the ability to treat the Trust Preferred Securities
as "Tier 1 capital" under the Federal Reserve capital adequacy guidelines.
The Trust Preferred Securities qualify as Tier 1 capital under regulatory
definitions. Issuance costs consisting primarily of underwriting discounts
and professional fees of $40 and $2,323 were capitalized in 1998 and 1997,
respectively, and are being amortized through maturity to interest expense
using the straight-line method.
(17) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate
BancSystem, Inc.:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C>
CONDENSED BALANCE SHEETS:
Cash and cash equivalents $ 6,618 3,208
Investment in subsidiaries, at equity:
FIB Montana 139,875 136,349
FIB Wyoming 74,571 69,820
Non-bank subsidiary - Commerce Financial, Inc. 518481
Non-bank subsidiary - FIB Capital Trust 1,237 1,237
-------------------------------------------------------------------------------------
Total investment in subsidiaries 216,201 207,887
Goodwill, net of accumulated amortization 2,047 2,339
Other assets 7,444 6,478
-------------------------------------------------------------------------------------
$ 232,310 219,912
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Other liabilities $ 7,082 5,598
Subordinated debentures - FIB Capital Trust 41,237 41,237
Long-term debt 20,460 27,410
-------------------------------------------------------------------------------------
68,779 74,245
Stockholders' equity 163,531 145,667
-------------------------------------------------------------------------------------
$ 232,310 219,912
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
- 69 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME:
Dividends from subsidiary banks $ 24,207 25,857 19,529
Interest on note receivable from non-bank subsidiary - 5 15
Other interest income 140 70 143
Other income, primarily management fees
from subsidiaries 2,528 2,340 1,788
-------------------------------------------------------------------------------------------------
Total income 26,875 28,272 21,475
-------------------------------------------------------------------------------------------------
Salaries and benefits 4,239 3,262 2,627
Interest expense 5,709 4,861 1,919
Other operating expenses, net 3,869 3,406 2,612
-------------------------------------------------------------------------------------------------
Total expenses 13,817 11,529 7,158
-------------------------------------------------------------------------------------------------
Data Division income, net of operating expenses 2,905 2,411 1,990
-------------------------------------------------------------------------------------------------
Earnings before income tax benefits 15,963 19,154 16,307
Income tax benefit 2,627 2,401 979
-------------------------------------------------------------------------------------------------
Income before undistributed earnings of subsidiaries 18,590 21,555 17,286
-------------------------------------------------------------------------------------------------
Undistributed earnings of subsidiaries 7,046 4,300 3,957
-------------------------------------------------------------------------------------------------
Net income $ 25,636 25,855 21,243
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS:
Cash flows from operating activities:
Net income $ 25,636 25,855 21,243
Adjustments to reconcile net income to cash
provided by operating activities:
Undistributed earnings of subsidiaries (7,046) (4,300) (3,957)
Depreciation and amortization 389 303 311
Provision for deferred income taxes 45 (532) 11
Other, net 332 1,119 802
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,356 22,445 18,410
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in advances to non-bank subsidiary 163 96 133
Purchase of investments (79) (293) -
Decrease (increase) in premises and equipment - 6 (2)
Capitalization of subsidiary - (1,237) (2,000)
Acquisitions of subsidiaries, net - - (80,393)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 84 (1,428) (82,262)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
- 70 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED):
Cash flows from financing activities:
Borrowings of long-term debt $ 2,371 46,987 66,939
Repayments of long-term debt (9,321) (38,736) (17,410)
Debt issuance costs, net (40) (2,323) -
Dividends paid on common stock (7,551) (7,737) (6,028)
Payments to retire common stock (3,830) (1,322) (1,229)
Payments to retire preferred stock - (20,000) -
Issuance of common stock 2,341 3,871 3,478
Proceeds from issuance of preferred stock,
net of issuance costs - - 19,542
Dividends paid on preferred stock - (1,454) (425)
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (16,030) (20,714) 64,867
--------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,410 303 1,015
Cash and cash equivalents, beginning of year 3,208 2,905 1,890
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,618 3,208 2,905
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
(18) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire holdings of a
particular instrument. Because no market exists for a significant
portion of the financial instruments, fair value estimates are based on
judgments regarding comparable market interest rates, future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
For financial instruments bearing a variable interest rate, 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.
FINANCIAL ASSETS. Due to the liquid and/or short-term nature of
cash, cash equivalents and interest-bearing deposits in bank,
carrying value of these instruments approximates market value.
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. Fair value of fixed rate loans is calculated
by discounting scheduled cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources,
if available, or based on estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan
category. The fair value of adjustable rate loans approximates
the carrying value of these instruments due to the frequent
repricing, provided there have been no changes in credit quality
since origination.
- 71 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FINANCIAL LIABILITIES AND TRUST SECURITIES. 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. The fair value of
fixed-maturity certificates of deposit is estimated using
external market rates currently offered for deposits with similar
remaining maturities. 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. The revolving term loan bears
interest at a floating market rate and, as such, the carrying
amount is deemed to reflect fair value. The fair value of the
subordinated notes and notes payable to the Federal Home Loan
Bank of Seattle were estimated by discounting future cash flows
using current rates for advances with similar characteristics.
Fair value of the Trust Preferred Securities is based on quoted
market price.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. It
is not practicable to estimate the fair value of commitments to
extend credit because information necessary to support fair value
estimations is not readily available and amounts would not be
expected to be significant.
A summary of the estimated fair values of financial instruments
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------------------------------
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 $ 204,019 204,019 229,147 229,147
Securities available-for-sale 379,393 379,393 188,650 188,650
Securities held-to-maturity 299,285 302,723 236,953 238,122
Net loans 1,455,656 1,462,336 1,442,234 1,431,068
---------------------------------------------------------------------------------------------------------------
Total financial assets $ 2,338,353 2,348,471 2,096,984 2,086,987
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Financial liabilities and trust preferred securities:
Total deposits, excluding time
deposits $ 1,250,566 1,250,566 1,117,687 1,117,687
Time deposits 791,366 793,461 687,319 696,004
Federal funds purchased 1,675 1,675 4,025 4,025
Securities sold under repurchase
agreements 173,593 173,593 176,350 176,350
Other borrowed funds 9,828 9,828 11,591 11,591
Long-term debt 24,288 25,973 31,526 31,526
Trust Preferred Securities 40,000 41,600 40,000 43,600
---------------------------------------------------------------------------------------------------------------
Total financial liabilities and
trust preferred securities $ 2,291,316 2,296,696 2,068,498 2,080,783
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>
- 72 -
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(19) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the year ended December 31, 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 25,636 25,855 21,243
Less preferred stock dividends - (1,454) (425)
-------------------------------------------------------------------------------------------------
Net income applicable to common stockholders -
basic and diluted $ 25,636 24,401 20,818
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Average outstanding shares - basic 8,020,221 7,946,092 7,847,668
Add: dilutive stock options 67,588 41,829 33,356
-------------------------------------------------------------------------------------------------
Average outstanding shares - diluted 8,087,809 7,987,921 7,881,024
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.20 3.07 2.65
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Diluted earnings per share $ 3.17 3.05 2.64
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
Other stock options are outstanding but not included in the computation
of diluted earnings per share because the options' exercise price was
greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
(20) ACQUISITIONS AND EXPANSION
FIRST INTERSTATE BANK, FSB. On December 12, 1996, the Company
established a de novo savings bank in Hamilton, Montana with an initial
capitalization of $2,000. The savings bank was combined with and became
a branch of FIB Montana on December 22, 1997.
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. During June 1997, FIBNA-MT merged with FIB Montana and
FIBNA-WY merged with FIB Wyoming.
MOUNTAIN BANK OF WHITEFISH. On December 18, 1996, the Company acquired
all of the outstanding ownership of Mountain 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. During June 1997, FIB-Whitefish merged with FIB
Montana.
MOUNTAIN FINANCIAL. On February 5, 1997, FIB Montana purchased the
assets of Mountain Financial, a loan production office in Eureka,
Montana. Mountain Financial subsequently became a branch of FIB
Montana.
- 73 -
<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
3.1(1) Restated Articles of Incorporation dated February 27,
1986
3.2(2) Articles of Amendment to Restated Articles of
Incorporation dated September 26, 1996
3.3(2) Articles of Amendment to Restated Articles of
Incorporation dated September 26, 1996
3.4(6) Articles of Amendment to Restated Articles of
Incorporation dated October 7, 1997
3.5(3) Bylaws of First Interstate BancSystem, Inc.
4.1(4) Specimen of common stock certificate of First Interstate
BancSystem, Inc.
4.2(1) Stockholder's Agreement for non-Scott family members
4.3(7) Junior Subordinated Indenture dated November 7, 1997
entered into between First Interstate and Wilmington
Trust Company, as Indenture Trustee
4.4(6) Certificate of Trust of FIB Capital Trust dated as of
October 1, 1997
4.5(6) Trust Agreement of FIB Capital dated as of October
1, 1997
4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust
4.7(7) Trust Preferred Certificate of FIB Capital Trust
(included as an exhibit to Exhibit 4.6)
4.8(7) Common Securities Certificate of FIB Capital Trust
(included as an exhibit to Exhibit 4.6)
4.9(7) Guarantee Agreement between First Interstate BancSystem,
Inc. and Wilmington Trust Company
4.10(7) Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.6)
10.1(2) Loan Agreement dated October 1, 1996, between First
Interstate BancSystem, Inc., as borrower, and First
Security Bank, N.A., Colorado National Bank, N.A. and
Wells Fargo Bank, N.A.
10.2(2) Note Purchase Agreement dated August 30, 1996, between
First Interstate BancSystem, Inc. and the Montana Board
of Investments
10.3(1) Lease Agreement Between Billings 401 Joint Venture and
First Interstate Bank Montana and addendum thereto
10.4(5) + Savings and Profit Sharing Plan for Employees of First
Interstate BancSystem, Inc., as amended December 31,
1994
10.5(3) + Amendment to the Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. adopted
September 21, 1995
10.6(3) + First Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
December 20, 1995
10.7(3) + Second Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
July 18, 1996
10.8(3) + Third Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
September 19, 1996
10.9(3) + Fourth Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
January 16, 1997
10.10(6) + Fifth Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
September 18, 1997
10.11(1) + Stock Option and Stock Appreciation Rights Plan of First
Interstate BancSystem, Inc., as amended
10.12(1) First Interstate BancSystem, Inc. Stockholders'
Agreements with Scott family members
10.13(5) Amendment to First Interstate BancSystem, Inc.
Stockholder's Agreement with Scott family members dated
September 7, 1995
10.14(5) Credit Agreement between Billings 401 Joint Venture and
Colorado National Bank dated as of September 26, 1995
10.15(3) Trademark License Agreement between Wells Fargo & Company
and First Interstate BancSystem, Inc.
10.16+(6) Resignation Agreement between First Interstate
BancSystem, Inc. and William H. Ruegamer
-74-
<PAGE>
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges
21.1 Subsidiaries of First Interstate BancSystem, Inc.
23.1 Consent of KPMG LLP, Independent Auditors
27.1 Financial Data Schedule as of December 31, 1998
+ Management contract or compensatory plan.
(1) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-84540.
(2) Incorporated by reference to the Registrant's Form 8-K dated
October 1, 1996.
(3) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-25633.
(4) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-3250.
(5) Incorporated by reference to the Post-Effective Amendment No. 2
to the Registrant's Registration Statement on Form S-1, No.
33-84540.
(6) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-37847.
(7) Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1997, No. 33-64304.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statements Schedules
See Item 14(a)2 above.
-75-
<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, in the City of
Billings, State of Montana.
First Interstate BancSystem, Inc.
By: /s/ LYLE R. KNIGHT MARCH 4, 1999
--------------------------------- -------------
Lyle R. Knight Date
President and Chief Operating 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. FEBRUARY 26, 1999
----------------------------------------------- -----------------
Homer A. Scott, Jr. Date
Chairman
By: /s/ DAN S. SCOTT MARCH 1, 1999
----------------------------------------------- -----------------
Dan S. Scott, Director Date
By: /s/ JAMES R. SCOTT MARCH 8, 1999
----------------------------------------------- -----------------
James R. Scott, Vice Chairman of the Board Date
By: /s/ RANDALL I. SCOTT FEBRUARY 24, 1999
----------------------------------------------- -----------------
Randall I. Scott, Director Date
By: /s/ JOHN M. HEYNEMAN FEBRUARY 26, 1999
----------------------------------------------- -----------------
John M. Heyneman, Director Date
By: /s/ JOEL LONG FEBRUARY 26, 1999
----------------------------------------------- -----------------
Joel Long, Director Date
By: /s/ JAMES HAUGH MARCH 8, 1999
----------------------------------------------- -----------------
James Haugh, Director Date
By: /s/ THOMAS W. SCOTT MARCH 8, 1999
----------------------------------------------- -----------------
Thomas W. Scott Date
Chief Executive Officer and Director (Principal executive officer)
By: /s/ LYLE R. KNIGHT MARCH 4, 1999
----------------------------------------------- -----------------
Lyle R. Knight Date
President, Chief Operating Officer and Director
By: /s/ TERRILL R. MOORE FEBRUARY 24, 1999
----------------------------------------------- -----------------
Terrill R. Moore Date
Senior Vice President, Chief Financial Officer and Secretary (Principal
financial and accounting officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Registrant has not yet provided any annual report to security holders
covering the 1998 fiscal year, nor has any proxy statement, form of proxy or
other proxy soliciting material been sent to any security holder of the
Registrant with respect to the Registrant's 1999 annual meeting of shareholders.
If any such annual report or proxy material is sent to security holders
subsequent to the filing of this Annual Report on Form 10-K, the Registrant
shall furnish copies of such report and material to the Commission when it is
sent to security holders.
-76-
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(1) Restated Articles of Incorporation dated February 27, 1986
3.2(2) Articles of Amendment to Restated Articles of Incorporation
dated September 26, 1996
3.3(2) Articles of Amendment to Restated Articles of Incorporation
dated September 26, 1996
3.4(6) Articles of Amendment to Restated Articles of Incorporation
dated October 7, 1997
3.5(3) Bylaws of First Interstate BancSystem, Inc.
4.1(4) Specimen of common stock certificate of First Interstate
BancSystem, Inc.
4.2(1) Stockholder's Agreement for non-Scott family members
4.3(7) Junior Subordinated Indenture dated November 7, 1997 entered
into between First Interstate and Wilmington Trust Company,
as Indenture Trustee
4.4(6) Certificate of Trust of FIB Capital Trust dated as of
October 1, 1997
4.5(6) Trust Agreement of FIB Capital dated as of October 1, 1997
4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust
4.7(7) Trust Preferred Certificate of FIB Capital Trust (included as
an exhibit to Exhibit 4.6)
4.8(7) Common Securities Certificate of FIB Capital Trust (included
as an exhibit to Exhibit 4.6)
4.9(7) Guarantee Agreement between First Interstate BancSystem, Inc.
and Wilmington Trust Company
4.10(7) Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.6)
10.1(2) Loan Agreement dated October 1, 1996, between First Interstate
BancSystem, Inc., as borrower, and First Security Bank,
N.A., Colorado National Bank, N.A. and Wells Fargo Bank,
N.A.
10.2(2) Note Purchase Agreement dated August 30, 1996, between First
Interstate BancSystem, Inc. and the Montana Board of
Investments
10.3(1) Lease Agreement Between Billings 401 Joint Venture and First
Interstate Bank Montana and addendum thereto
10.4(5) + Savings and Profit Sharing Plan for Employees of First
Interstate BancSystem, Inc., as amended December 31, 1994
10.5(3) + Amendment to the Savings and Profit Sharing Plan for Employees
of First Interstate BancSystem, Inc. adopted September 21,
1995
10.6(3) + First Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
December 20, 1995
10.7(3) + Second Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
July 18, 1996
10.8(3) + Third Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
September 19, 1996
10.9(3) + Fourth Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
January 16, 1997
10.10(6) + Fifth Amendment to Savings and Profit Sharing Plan for
Employees of First Interstate BancSystem, Inc. dated
September 18, 1997
10.11(1) + Stock Option and Stock Appreciation Rights Plan of First
Interstate BancSystem, Inc., as amended
10.12(1) First Interstate BancSystem, Inc. Stockholders' Agreements
with Scott family members
10.13(5) Amendment to First Interstate BancSystem, Inc. Stockholder's
Agreement with Scott family members dated September 7, 1995
10.14(5) Credit Agreement between Billings 401 Joint Venture and
Colorado National Bank dated as of September 26, 1995
10.15(3) Trademark License Agreement between Wells Fargo & Company and
First Interstate BancSystem, Inc.
10.16+(6) Resignation Agreement between First Interstate BancSystem,
Inc. and William H. Ruegamer
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges
21.1 Subsidiaries of First Interstate BancSystem, Inc.
23.1 Consent of KPMG LLP, Independent Auditors
27.1 Financial Data Schedule as of December 31, 1998
+ Management contract or compensatory plan.
(1) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-84540.
(2) Incorporated by reference to the Registrant's Form 8-K dated
October 1, 1996.
(3) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-25633.
(4) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-3250.
(5) Incorporated by reference to the Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1, No. 33-84540.
(6) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, No. 333-37847.
(7) Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997, No. 33-64304.
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net income from operations before tax $ 25,636 25,855 21,243 17,337 15,734
Applicable income taxes 15,592 15,730 13,351 10,844 9,861
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 41,228 41,585 34,594 28,181 25,595
Fixed charges:
Interest expense excluding interest on deposits 6,381 8,060 3,389 2,488 1,391
Portion of rents representative of interest 453 472 492 829 866
Preferred stock dividends including
pre-tax effect -- 2,004 589 -- --
Amortization of trust preferred securities
issuance costs 93 14 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Fixed charges excluding interest on deposits 6,927 10,550 4,470 3,317 2,257
Interest on deposits 75,271 64,603 46,630 39,458 27,060
- --------------------------------------------------------------------------------------------------------------------------
Fixed charges including interest on deposits $ 82,198 75,153 51,100 42,775 29,317
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Earnings excluding interest on deposits $ 48,155 52,135 39,064 31,498 27,852
Earnings including interest on deposits 123,426 116,738 85,694 70,956 54,912
Fixed charges excluding interest on deposits 6,927 10,550 4,470 3,317 2,257
Fixed charges including interest on deposits 82,198 75,153 51,100 42,775 29,317
RATIO OF EARNINGS TO FIXED CHARGES:
Excluding interest on deposits 6.95x 4.94x 8.74x 9.50x 12.34xx
Including interest on deposits 1.50x 1.55x 1.68x 1.66x 1.87xx
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes and fixed charges. Fixed charges
represent interest expense and preferred stock dividends, which dividends
commenced in October 1996 and concluded in October 1997. Deposits include
interest-bearing deposits and repurchase agreements. Without including
preferred stock dividends in fixed charges and excluding interest on
deposits, the ratio of earnings to fixed charges for the years ended
December 31, 1997 and 1996 were 5.87x and 9.91x, respectively. Without
including preferred stock dividends in fixed charges and including interest
on deposits, the ratio of earnings to fixed charges for the years ended
December 31, 1997 and 1996 were 1.57x and 1.68x, respectively
-77-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF FIRST INTERSTATE BANCSYSTEM, INC.
<TABLE>
<CAPTION>
State of Incorporation or
Subsidiary Jurisdiction of Organization Business Name
- -------------------------------------------------------------------------------
<S> <C> <C>
First Interstate Bank Montana First Interstate Bank
First Interstate Bank Wyoming First Interstate Bank
Commerce Financial, Inc. Montana Commerce Financial, Inc
FIB Capital Trust Delaware FIB Capital Trust
</TABLE>
-78-
<PAGE>
[LOGO]
P.O. Box 7108
Billings, MT 59103
The Board of Directors
First Interstate BancSystem, Inc.:
We consent to incorporation by reference in the registration statement on
Form S-8 of First Interstate BancSystem, Inc. of our report dated January 29,
1999, relating to the consolidated balance sheets of First Interstate
BancSystem, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31,
1998, annual report on Form 10-K of First Interstate BancSystem, Inc.
/s/ KPMG LLP
Billings, Montana
March 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME INCLUDED AS
EXHIBIT 14 TO THE COMPANY'S FORM 10-K 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 154,527
<INT-BEARING-DEPOSITS> 17,562
<FED-FUNDS-SOLD> 31,930
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 379,393
<INVESTMENTS-CARRYING> 299,285
<INVESTMENTS-MARKET> 302,723
<LOANS> 1,484,459
<ALLOWANCE> 28,803
<TOTAL-ASSETS> 2,478,833
<DEPOSITS> 2,041,932
<SHORT-TERM> 185,096
<LIABILITIES-OTHER> 63,986<F1>
<LONG-TERM> 24,288
0
0
<COMMON> 10,001
<OTHER-SE> 153,530
<TOTAL-LIABILITIES-AND-EQUITY> 2,478,833
<INTEREST-LOAN> 142,236
<INTEREST-INVEST> 31,724
<INTEREST-OTHER> 4,454
<INTEREST-TOTAL> 179,414
<INTEREST-DEPOSIT> 68,248
<INTEREST-EXPENSE> 81,652
<INTEREST-INCOME-NET> 97,762
<LOAN-LOSSES> 4,170
<SECURITIES-GAINS> 282
<EXPENSE-OTHER> 81,848
<INCOME-PRETAX> 41,228
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,636
<EPS-PRIMARY> 3.20
<EPS-DILUTED> 3.17
<YIELD-ACTUAL> 4.76
<LOANS-NON> 10,699
<LOANS-PAST> 4,039
<LOANS-TROUBLED> 3,306
<LOANS-PROBLEM> 50,043
<ALLOWANCE-OPEN> 28,180
<CHARGE-OFFS> 6,627
<RECOVERIES> 3,080
<ALLOWANCE-CLOSE> 28,803
<ALLOWANCE-DOMESTIC> 3,033
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,770
<FN>
<F1>INCLUDES $40,000 MANDATORILY REDEEMABLE SECURITIES OF SUBSIDARY TRUST.
</FN>
</TABLE>
