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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, 1997
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 of (IRS Employer Identification No.)
incorporation or organization)
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 28,
1998 was $21,864,742.
The number of shares outstanding of the registrant's common stock as of
February 28, 1998 was 8,023,826.
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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. In October
1997, FIBS changed its name from "First Interstate BancSystem of Montana,
Inc." to "First Interstate BancSystem, Inc."
FIBS operates two wholly-owned bank subsidiaries (collectively, the
"Banks" and individually a "Bank") with 32 banking offices in 23 Montana and
Wyoming communities and FIB Capital Trust ("FIB Capital"), a wholly-owned
non-bank subsidiary. At December 31, 1997, the Company had assets of $2.2
billion, deposits of $1.8 billion and total stockholders' equity of $146
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 services and commercial, consumer, real estate, agricultural and other
loans. Additionally, the Company operates a substantial data processing
division that performs data processing services for the Banks and 34
non-affiliated financial institutions in Montana, Wyoming and Idaho. The data
processing division also supports over 630 ATM locations in 13 states,
principally Montana, Wyoming, Idaho, Colorado and North Dakota.
The Company is the licensee under a trademark license agreement between
Wells Fargo & Company and the Company 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.
In October 1997, the Company effected a four-for-one stock split of its
existing common stock. Unless otherwise indicated, information regarding
common stock of the Company contained herein has been retroactively restated
to give effect to the stock split.
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 presently 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 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.
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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 will continue to expand its presence in the Montana and Wyoming
markets.
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 and cross-selling existing products and
services. 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. Since September 1996, the Company
has 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 BANKS
First Interstate Bank in Montana ("FIB Montana"), a Montana chartered
bank organized in 1916, has 21 banking offices in 15 Montana communities,
including Billings, Bozeman, Colstrip, Cut Bank, Eureka, Evergreen, Gardiner,
Great Falls, Hamilton, Hardin, Kalispell, Livingston, Miles City, Missoula
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, 1997, FIB Montana held assets
and deposits totaling $1.5 billion and $1.2 billion, respectively. FIB
Montana is the largest independent bank headquartered in Montana. The Bank's
main office is located in Billings, Montana. During June 1997, the Company
merged together three of its Montana bank subsidiaries, First Interstate Bank
of Commerce, First Interstate Bank of Montana, N.A. and Mountain Bank of
Whitefish, and changed the resultant bank name to "First Interstate Bank" in
Montana. In December 1997, First Interstate Bank, fsb, the Company's savings
bank subsidiary, was merged into FIB Montana and the Company's thrift charter
was terminated.
First Interstate Bank in Wyoming ("FIB Wyoming"), a Wyoming chartered
bank organized in 1893, has 11 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, 1997, FIB Wyoming held assets and deposits
totaling $750 million and $642 million, respectively. The Bank's main office
is located in Sheridan, Wyoming. During 1997, the Company merged together
its two Wyoming bank subsidiaries, First Interstate Bank of Commerce in
Wyoming and First Interstate Bank of Wyoming, N.A., and changed the resultant
bank name to "First Interstate Bank" in Wyoming.
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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 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.
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 all 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.
-4-
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. 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.
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, 1997, 35.8% 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, real estate and/or personal guarantees.
CONSUMER LOANS
The Banks' consumer loans include personal automobile loans, home
improvement loans and equity lines of credit. The consumer 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 residential real
estate. 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, 1997, 34.4% of the
Company's loan portfolio was composed of consumer and personal loans.
REAL ESTATE LOANS
The Banks provide interim and permanent financing for both single-family
and multi-unit properties and medium term loans for commercial and industrial
buildings. 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, 1997, 18.3% 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.
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,
buildings and 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, 1997, 11.1% of
the Company's loan portfolio was composed of agricultural loans.
Agricultural loans generally have maturities of five years or less, with
operating lines lasting for one production season.
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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, 1997, approximately 38.0%, 23.9% and 38.1% 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 books 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.
OTHER OPERATIONS
In addition to the services mentioned above, the Company offer 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 34 non-affiliated
financial institutions in Montana, Wyoming and Idaho. The data processing
division also provides support for over 630 ATM locations in 12 states,
principally 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.
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 has
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 Norwest Corporation, 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 971 full-time and 226 part-time
employees as of December 31, 1997. 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.
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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.
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. On
September 30, 1996, 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 are 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.
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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.
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.
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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.
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
final rules governing banks and bank holding companies, which became
effective April 1, 1995 and 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.
-9-
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).
In June 1996, the federal banking agencies 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 the August 1995 regulations
adopted by the federal banking agencies which addressed risk-based capital
standards for interest rate risk.
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:
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%
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-
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-
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final
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. Effective October
1, 1996, the federal banking agencies promulgated safety and soundness
regulations and accompanying interagency compliance guidelines on asset
quality and earnings standards. These new 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.
In December 1993, the federal banking agencies 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, 1998*
Group A Group B Group C
---------------------------------------------------
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
* Assessment figures are expressed in terms of cents per $100 of deposits.
-12-
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 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, beginning as of June 1,
1997, 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 permit such combinations earlier than June 1, 1997 and 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.
On March 20, 1997, the State of Montana 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 in Montana until
October 1, 2001. Nevertheless, after the foregoing prohibition expires,
competition in the Company's market areas could increase significantly.
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.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final 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.
In March 1994, the federal Interagency Task Force on Fair Lending 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 an examination
conducted during 1997, FIB Montana and FIB Wyoming were both rated
"satisfactory."
-13-
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 the fourth quarter 1997, the Company formed FIB Capital, a
statutory business trust incorporated under Delaware law, with an initial
capitalization of $1.2 million. FIB Capital was formed 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.
The Company used proceeds from the issuance of the subordinated debentures to
redeem the noncumulative perpetual preferred stock and to reduce revolving
term debt. 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-
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 Riegal-Neal Interstate Banking and Branching Efficiency
Act of 1994 (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, President and Chief Executive
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 67.3% 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 82.3% 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-
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 92.8% of the shares subject to contractual transfer restrictions set
forth in shareholder agreements and 7.2% 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 less dividends paid. All stock not
subject to such restrictions may be sold at a price per share that is acceptable
to the shareholder. No trades of unrestricted stock within the past three years
are known to FIBS. 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.
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.
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 (1995-1997) FIBS has redeemed a total of 94,752
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-
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
buildings in which five branches are located. 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 a as 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART 11
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 8,030,799 shares were outstanding as of
December 31, 1997, and 100,000 shares of preferred stock without par value, none
of which were outstanding as of December 31, 1997.
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-
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 92.8% of the shares subject to contractual transfer restrictions set
forth in shareholder agreements and 7.2% 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 less dividends paid. 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:
Appraised
Valuation As Of(1) Minority Value(2)
------------------ -----------------
December 31, 1995 $18.75
March 31, 1996 19.38
June 30, 1996 19.88
September 30, 1996 20.25
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
(1) Sales of stock between dates at which updated valuations are received
are adjusted for cash dividends paid.
(2) Prior to dividends.
As of December 31, 1997, options for 123,204 shares of the FIBS common
stock were outstanding at various exercise prices, ranging from $4.56 to $20.05.
The aggregate cash proceeds to be received by FIBS upon exercise of all options
outstanding at December 31, 1997 would be $1,568.9, or a weighted average
exercise price of $12.73 per share.
The book value per share of FIBS common stock as of December 31, 1997 was
$18.14. The appraised minority value as of December 31, 1997 was $29.00. 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-
Shareholders of the Company who are not Scott family members, with the
exception of 13 shareholders who own an aggregate of 580,284 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's Savings Plan are not
restricted by the Shareholder's Agreement, due to requirements of ERISA and the
Internal Revenue Code. However, since the Savings Plan does not allow
distributions "in kind," any distributions from an employee's account in the
Savings Plan will allow, and may require, the Savings Plan trustee to sell the
FIBS stock. While FIBS has no obligation to repurchase the stock, it is
possible that FIBS will repurchase FIBS stock sold out of the Savings Plan.
Any such repurchases would be upon terms set by the Savings Plan trustee and
accepted by FIBS.
There are 400 record shareholders of FIBS as of December 31, 1997,
including the Company's Savings Plan as trustee for shares held on behalf of 586
individual participants in the plan. 221 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 will vote 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 for the fourth quarter of 1995 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 1996 and 1997 are as follows:
Month
Declared Amount Total Cash
Quarter and Paid Per Share Dividend
---------------- ------------ --------- -----------
1st quarter 1996 April 1996 $ .21 $ 1,572,131
2nd quarter 1996 July 1996 .19 1,505,941
3rd quarter 1996 October 1996 .20 1,564,878
4th quarter 1996 January 1997 .22 1,721,584
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
Lower quarterly net income during the fourth quarter 1997 resulted in a
decrease in dividends paid for that period. Fourth quarter charges against net
income consisted primarily of a non-recurring charge related to the
establishment of reserves toward prepayments of indirect dealer loans and
additional severance accruals.
-19-
DIVIDEND RESTRICTIONS
The holders of common stock will be entitled to dividends when, as and if
declared by FIBS's 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 stockholders.
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. FIBS's 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's 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's 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 1997, the Company issued 12,232 unregistered shares of its common
stock to nine employees exercising stock options. Exercise prices ranged from
$4.56 to $20.05 with an average exercise price of $5.83. 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.
-20-
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, 1997, and 1996 and
its results of operations for the fiscal years ended December 31, 1997, 1996,
and 1995, has been derived from the consolidated financial statements of the
Company included in Part IV, Item 14, which have been audited by KPMG Peat
Marwick 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)
Years ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 165,808 117,925 98,970 80,230 77,154
Interest expense 72,663 50,019 41,946 28,451 27,078
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 93,145 67,906 57,024 51,779 50,076
Provision for loan losses 4,240 3,844 1,629 1,344 1,345
Net interest income after provision for
loan losses 88,905 64,062 55,395 50,4354 48,731
Other operating income 26,846 23,927 18,764 16,3871 15,724
Other operating expenses 74,166 53,395 45,978 41,227 39,686
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 41,585 34,594 28,181 25,595 24,769
Income tax expense 15,730 13,351 10,844 9,861 9,321
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 25,855 21,243 17,337 15,734 15,448
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 24,401 20,818 17,337 15,734 15,448
Basic earnings per common share 3.07 2.65 2.22 2.01 1.96
Diluted earnings per common share(1) 3.05 2.64 2.21 2.00 1.96
Dividends per common share 0.98 0.78 0.48 0.40 0.34
Weighted average common shares
outstanding 7,987,921 7,881,024 7,843,644 7,850,188 7,891,160
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS:
Return on average assets 1.22% 1.41 1.39 1.44 1.50
Return on average common stockholders' equity 18.12% 17.84 16.98 17.64 19.97
Average stockholders' equity to average assets 7.17% 8.08 8.20 8.15 7.52
Net interest margin 5.00% 5.15 5.19 5.34 5.51
Net interest spread 4.32% 4.47 4.45 4.76 4.98
Common stock dividend payout ratio(2) 32.13% 29.17 21.72 20.00 17.35
Ratio of earnings to fixed charges(3):
Excluding interest on deposits 4.94x 8.74x 9.50x 12.34x 30.66x
Including interest on deposits 1.55x 1.68x 1.66x 1.87x 1.91x
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
-21-
FIVE YEAR SUMMARY (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
As of December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $2,234,764 2,063,837 1,351,215 1,134,105 1,097,469
Loans 1,470,414 1,375,479 870,378 751,518 667,385
Allowance for loan losses 28,180 27,797 15,171 13,726 13,373
Investment securities 425,603 403,571 258,737 251,745 249,754
Deposits 1,805,006 1,679,424 1,099,069 939,857 936,793
Long-term debt 31,526 64,667 15,867 5,449 6,853
Mandatorily redeemable preferred securities of
subsidiary trust 40,000 - - - -
Stockholders' equity 145,667 146,061 109,366 95,272 84,163
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:
Nonperforming assets to total loans
and OREO(4) 1.15% 1.20 0.97 0.94 1.44
Allowance for loan losses to total loans 1.92% 2.02 1.74 1.83 2.00
Allowance for loan losses to
nonperforming loans(5) 181.99% 185.10 213.74 259.62 205.49
Net charge-offs to average loans 0.27% 0.17 0.13 0.14 0.15
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS:
Tier 1 risk-based capital 9.67% 7.35 10.40 11.32 10.96
Total risk-based capital 12.19% 9.98 11.65 12.58 12.22
Leverage ratio 6.94% 5.28 7.28 8.12 7.28
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
(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. 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-
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 32 banking offices in 23
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. 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 under the purchase method of accounting.
Amortization of goodwill resulting from the acquisitions totaled
approximately $1.8 million in 1997. 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 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 increased 21.7% to $25.9 million in
1997 from $21.2 million in 1996. This increase resulted from internal growth
and earnings provided by the Acquired Banks. Net income increased 22.5% to
$21.2 million in 1996 from $17.3 million in 1995, due principally to internal
growth.
Net income during the fourth quarter 1997 decreased 17.1% from the third
quarter. This decrease resulted from fourth quarter charges including a
non-recurring charge related to the establishment of reserves toward
prepayment of indirect dealer loans and additional severance accruals.
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.
- 23 -
Net interest income increased 37.2% to $93.1 million from $67.9 million
in 1996. This increase resulted primarily from the incremental net interest
income provided by the Acquired Banks. Net interest income increased 19.1%
to $67.9 million in 1996 from $57.0 million in 1995. This increase resulted
primarily from the Acquired Banks and from a higher volume of loans due to
internal growth.
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.
AVERAGE BALANCE SHEETS, YIELDS AND RATES
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
Average Average Average Average Average Average
(DOLLARS IN THOUSANDS) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans(1) $1,441,800 140,299 9.73% $1,014,901 100,039 9.86% $ 837,288 83,735 10.00%
U.S. and agencies securities 345,771 20,481 5.92 244,314 13,951 5.71 199,750 11,278 5.65
Federal funds sold 39,936 2,210 5.53 25,462 1,342 5.27 36,665 2,095 5.71
Other securities 23,302 1,467 6.30 21,868 1,392 6.37 13,904 864 6.21
Tax exempt securities(2) 21,253 1,737 8.17 19,100 1,575 8.25 15,704 1,230 7.83
Interest-bearing deposits
in banks 7,491 448 5.98 6,555 376 5.74 6,276 372 5.93
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,879,553 166,642 8.87 1,332,200 118,675 8.91 1,109,587 99,574 8.97
Noninterest-earning assets 235,941 173,888 134,912
- -------------------------------------------------------------------------------------------------------------------------
Total assets $2,115,494 $1,506,088 $1,244,499
=========================================================================================================================
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits $ 304,511 6,369 2.09% $ 210,153 4,489 2.14% $ 171,933 4,248 2.47%
Savings deposits 417,352 16,021 3.84 301,003 11,305 3.76 264,198 9,917 3.75
Time deposits 626,925 35,739 5.70 464,712 26,328 5.67 380,117 21,733 5.72
Borrowings(3) 184,605 8,846 4.79 126,135 5,869 4.65 97,799 4,866 4.98
Long-term debt 56,197 5,165 9.19 23,760 2,028 8.54 13,147 1,182 8.99
Mandatorily redeemable
preferred securities
of subsidiary trust 5,808 523 9.00 - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities 1,595,398 72,663 4.55 1,125,763 50,019 4.44 927,194 41,946 4.52
- -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 345,372 242,117 203,258
Other noninterest-bearing
liabilities 22,994 16,487 11,961
Stockholders' equity 151,730 121,721 102,086
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,115,494 $1,506,088 $1,244,499
=========================================================================================================================
Net interest income $93,979 $68,656 $57,628
Interest rate spread 4.32% 4.47% 4.45%
Contribution of interest free funds 0.68 0.68 0.74
Net yield on interest-earning assets(4) 5.00 5.15 5.19
Less FTE adjustments 834 750 604
- -------------------------------------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $93,145 $67,906 $57,024
=========================================================================================================================
(1) Average loan balances include nonaccrual loans. Loan fees included in
interest income were $6.1 million, $5.0 million and $4.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
(2) Interest income and average rates for tax exempt securities are presented
on a fully-taxable equivalent 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.
- 24 -
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.
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year ended December 31, 1997 December 31, 1996 December 31, 1995
compared with compared with compared with
December 31, 1996 December 31, 1995 December 31, 1994
favorable (unfavorable) favorable (unfavorable) favorable (unfavorable)
------------------------ ------------------------ ------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans(1) $41,541 (1,281) 40,260 17,761 (1,457) 16,304 12,291 5,509 17,800
U.S. and agencies 6,010 520 6,530 2,518 155 2,673 (993) 418 (575)
Federal funds sold 801 67 868 (640) (113) (753) 369 533 902
Other securities 90 (15) 75 495 33 528 96 (158) (62)
Tax exempt securities(1) 176 (14) 162 65 280 345 115 593 708
Interest-bearing deposits
in banks 56 16 72 17 (13) 4 127 95 222
- -------------------------------------------------------------------------------------------------------------------
Total 48,674 (707) 47,967 20,216 (1,115) 19,101 12,005 6,990 18,995
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits 1,974 (94) 1,880 944 (703) 241 184 577 761
Savings deposits 4,466 250 4,716 1,469 (81) 1,388 (23) 1,869 1,846
Time deposits 9,247 164 9,411 4,647 (52) 4,595 3,320 4,725 8,045
Borrowings(2) 2,802 175 2,977 1,318 (315) 1,003 1,267 908 2,175
Long-term debt 2,981 156 3,137 906 (60) 846 625 43 668
Mandatorily redeemable preferred
securities of subsidiary
trust 523 - 523 - - - - - -
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 21,993 651 22,644 9,284 (1,211) 8,073 5,373 8,122 13,495
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $26,681 (1,358) 25,323 10,932 96 11,028 6,632 (1,132) 5,500
===================================================================================================================
(1) Interest income and average rates for tax exempt loans and securities are
presented on a fully-taxable equivalent basis.
(2) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds.
Interest income increased 40.6% to $165.8 million in 1997 from $117.9
million in 1996. This increase was due primarily to the significant increase
in loans, principally due to the Acquired Banks. The yield on average
interest-earning assets during 1997 was 8.87% compared to 8.91% during 1996.
In 1996, interest income increased 19.2% to $117.9 million from $99.0
million in 1995. This increase resulted primarily from the Acquired Banks,
offset by a slight decrease of six basis points in the yield on average
interest-earning assets from 8.97% in 1995 to 8.91% in 1996.
Customer loan fees, included in interest income, increased 22.0% to $6.1
million in 1997 from $5.0 million in 1996 due to loan fees generated by the
Acquired Banks. Loan fees increased 23.5% to $5.0 million in 1996 from $4.1
million in 1995. The most significant increases from 1995 to 1996 were in
commercial, consumer and real estate loan fees.
- 25 -
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.
Interest expense increased 19.2% to $50.0 million in 1996 from $41.9
million in 1995. The increase resulted primarily from the customer deposits
and indebtedness incurred with respect to the Acquired Banks, offset in part
by a slight decrease of eight basis points in the rate on average
interest-bearing liabilities from 4.52% in 1995 to 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 risk 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 increased 10.3% to $4.2 million in 1997 from
$3.8 million in 1996. The increase resulted from higher loan volumes resulting
from the 1996 acquisitions.
The provision for loan losses increased 136.0% to $3.8 million in 1996
from $1.6 million in 1995. Of the increase, approximately $500,000 was
associated with the Acquired Banks. The remaining increase of $1.7 million
was due principally to higher loan volumes and an increase in non-performing
and classified assets. Non-performing loans, comprised of non-accrual loans
and accruing loans past due 90 days or more and restructured loans, increased
only slightly to 1.1% of loans outstanding at December 31, 1996 from 0.8% at
December 31, 1995.
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 12.2% to
$26.8 million in 1997 from $23.9 million in 1996. This increase was
attributable primarily 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. These increases, however, were partially offset by one-time
accounting adjustments, primarily with respect to data processing fees, made
in January 1996. Increases in other operating income from 1996 to 1997 and
from 1995 to 1996 were a function of changes in each of the principal
categories, as discussed below.
Service charges on deposit accounts increased 27.1% to $9.9 million in
1997 from $7.8 million in 1996 and 18.7% to $7.8 million in 1996 from $6.5
million in 1995. Of these increases, approximately $740,000 in 1997 and
$563,000 in 1996 were attributable to the Acquired Banks, with the remainder
resulting primarily from increased overdraft fees.
As discussed above, increases in operating income from data processing
services for 1997 compared to the 1996 were mostly offset as a result of
non-recurring accounting adjustments of $300,000 made in January 1996. The
Company serviced 630 locations in its ATM network at December 31, 1997
compared to 477 locations at December 31, 1996. Data processing fees
increased 18.2% to $7.3 million in 1996 from $6.2 million in 1995 due
primarily to a greater number of data processing customers using the
Company's ATM network and a corresponding increase in transaction volumes.
Since 1995, the Company's network expanded from 216 ATM locations at December
31, 1994 to 343 locations at year-end 1995, 477 locations at year-end 1996,
and to 630 locations at year-end 1997. 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 1995, 1996 and 1997. There were no increases in basic charges
for data processing services in 1997, 1996 or 1995.
- 26 -
Revenues from fiduciary activities increased 29.2% to $4.1 million in
1997 from $3.2 million in 1996 and 20.7% to $3.2 million in 1996 from $2.6
million in 1995. Of these increases, approximately $889,000 in 1997 and
$243,000 in 1996 were attributable to trust services provided by the Acquired
Banks, with the remainder resulting from increases in the value of assets
under trust management.
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 and
increased 217.0% to $2.8 million in 1996 from $888,000 in 1995. The increase
in 1996 and decrease in 1997 was primarily attributable to the sale of
certain merchant credit card processing assets at a gain of $1.4 million 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 38.8% to $74.1 million in 1997 from
$53.4 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 in 1997.
In 1996, other operating expenses increased 16.1% to $53.4 million from
$46.0 million in 1995. Of this increase, approximately $6.3 million was
attributable to direct and indirect expenses resulting from the Acquired
Banks and acquisitions in 1995.
Increases in salaries, wages and benefits from 1996 to 1997 and from
1995 to 1996 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.
Given the Company's increasing data processing and transaction volumes,
together with the expansion of its ATM network, employee and related
compensation expenses are expected to continue to increase, but at a slower
rate than has been experienced over the periods presented.
Occupancy and furniture and equipment expenses have increased over the
periods primarily as a result of the additional facilities associated with
the 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 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. The significant decreases in premiums
from 1995 to 1996 were due to a substantial FDIC rate reduction in 1996. The
FDIC rates reflect the Company's "well-capitalized" rating by the FDIC.
OREO losses, including provisions for losses on OREO, are included net
of any gains on sales of OREO. Variations in net OREO expense during the
periods resulted principally from fluctuations in such gains. These gains
are anticipated to decline as the number and value of OREO properties
decrease. OREO expense is directly related to prevailing economic conditions,
and such expense could increase significantly should an unfavorable shift
occur in the economic conditions of the Company's markets.
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 in 1997 over 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 (i)
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, and (ii) approximately $319,000 due to
additional accruals for the increased value of stock appreciation rights
resulting from a 23% increase in the appraised value of the Company's Common
Stock during 1997. The increases in other expenses from 1995 to 1997 were due
primarily to the direct and indirect costs related to the Acquired Banks and
bank acquisitions in 1995.
- 27 -
INCOME TAX EXPENSE
The Company's effective federal tax rate was 33.3%, 33.3%, and 33.1% for
the years ended December 31, 1997, 1996 and 1995, respectively. State income
tax applies only to pretax earnings of entities operating within Montana. The
Company's effective state tax rate was 4.5%, 5.3%, and 5.4% for years ended
December 31, 1997, 1996 and 1995, respectively. Pretax earnings subject to
Montana state income tax decreased to approximately 57% of consolidated
pretax earnings in 1997 from approximately 67% of consolidated pretax
earnings in 1996 resulting in a lower effective state tax rate.
FINANCIAL CONDITION
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. Total assets increased 52.7% to $2,064
million as of December 31, 1996 from $1,351.2 million as of December 31,
1995. This increase was due principally to the significant increases in loans
and investment securities provided by the bank acquisitions in 1995, funded
by growth in deposits and increases in indebtedness.
LOANS
Total loans increased 6.9% to $1,470 million as of December 31, 1997
from $1,375 million as of December 31, 1996. As shown below, all categories
of loans except real estate loans showed increases in volumes during this
period due to continued strong economic conditions in the Company's markets
and internal growth resulting from the Company's marketing activities. The
growth in loans during 1997 was slightly lower than the growth rate during
1996 due primarily to a slowing in the growth of consumer and real estate
loans.
As of December 31, 1996, total loans increased 58.0% to $1,375 million
from $870 million as of December 31, 1995. This increase was attributable to
the growth in the loan portfolio provided by the Acquired Banks, and to a
lesser extent, internal growth which reflected continued favorable economic
conditions.
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.
The following tables present the composition of the Company's loan
portfolio as of the dates indicated:
LOANS OUTSTANDING
- -----------------------------------------------------------------------------------------------------------------------
As of December 31,
----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 Percent 1996 Percent 1995 Percent 1994 Percent 1993 Percent
- -----------------------------------------------------------------------------------------------------------------------
LOANS
Commercial $ 526,355 35.8% $ 471,458 34.3% $311,982 35.9% $262,290 34.9% $241,535 36.2%
Consumer 505,741 34.4 484,865 35.3 300,711 34.5 277,367 36.9 245,493 36.8
Real estate 268,463 18.3 274,141 19.9 142,097 16.3 112,251 14.9 92,906 13.9
Agricultural 164,046 11.1 143,572 10.4 113,827 13.1 98,194 13.1 85,059 12.7
Other loans 5,809 0.4 1,443 0.1 1,761 0.2 1,416 0.2 2,392 0.4
- -----------------------------------------------------------------------------------------------------------------------
Total loans 1,470,414 100.0% 1,375,479 100.0% 870,378 100.0% 751,518 100.0% 667,385 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Less allowance for
loan losses 28,180 27,797 15,171 13,726 13,373
- -----------------------------------------------------------------------------------------------------------------------
Net loans $1,442,234 $1,347,682 $855,207 $737,792 $654,012
=======================================================================================================================
Ratio of allowance
to total loans 1.92% 2.02% 1.74% 1.83% 2.00%
=======================================================================================================================
- 28 -
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, 1997:
MATURITIES AND INTEREST RATE SENSITIVITIES
- ----------------------------------------------------------------------------------
Within One Year to After
(DOLLARS IN THOUSANDS) One Year Five Years Five Years Total
- ----------------------------------------------------------------------------------
Commercial $ 223,359 220,691 82,305 526,355
Consumer 160,404 305,741 39,596 505,741
Real estate 83,425 92,519 92,519 268,463
Agriculture 108,746 41,380 13,920 164,046
Other loans 5,809 - - 5,809
- ----------------------------------------------------------------------------------
$ 581,743 660,331 228,340 1,470,414
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Loans at fixed interest rates $ 270,256 502,627 131,562 904,445
Loans at variable interest rates 301,806 157,704 96,778 556,288
Nonaccrual loans 9,681 - - 9,681
- ----------------------------------------------------------------------------------
$ 581,743 660,331 228,340 1,470,414
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
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 the highest
yield while meeting the Company's liquidity needs and utilizing 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.
Investment securities increased 5.5% to $426 million as of December 31,
1997 from $404 million as of December 31, 1996 as a result of growth in
funding sources exceeding loan growth. Investment securities increased 56.0%
to $404 million as of December 31, 1996 from $259 million as of December 31,
1995. This increase resulted from the substantial investment securities held
by the Acquired Banks at the time of acquisition. As of December 31, 1997,
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, 1997.
SECURITIES MATURITIES AND YIELD
- ----------------------------------------------------------------------------------
% of Total
Book Investment Average
(DOLLARS IN THOUSANDS) Value Securities Yield(1)
- ----------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
Maturing within one year $ 83,148 19.5% 5.59%
Maturing in one to five years 154,595 36.3 6.03
Maturing in five to ten years 7,554 1.8 6.08
- ----------------------------------------------------------------------------------
245,297
Mark-to-market adjustments on
securities available-for-sale 594
- ----------------------------------------------------------------------------------
Total 245,891 57.8 5.88
- ----------------------------------------------------------------------------------
-29-
SECURITIES MATURITIES AND YIELD (CONTINUED)
- ----------------------------------------------------------------------------------
% of Total
Book Investment Average
(DOLLARS IN THOUSANDS) Value Securities Yield(1)
- ----------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES
Maturing within one year $ 24,943 5.9 6.40
Maturing in one to five years 59,253 13.9 6.21
- ----------------------------------------------------------------------------------
84,196
Mark-to-market adjustments on
securities available-for-sale 17
- ----------------------------------------------------------------------------------
Total 84,213 19.8 6.26
- ----------------------------------------------------------------------------------
TAX EXEMPT SECURITIES
Maturing within one year 4,459 1.0 7.88
Maturing in one to five years 12,240 2.9 7.94
Maturing in five to ten years 7,024 1.7 8.41
Maturing after ten years 1,401 0.3 8.36
- ----------------------------------------------------------------------------------
25,124
Mark-to-market adjustments on
securities available-for-sale 315
- ----------------------------------------------------------------------------------
Total 25,439 6.0 8.08
- ----------------------------------------------------------------------------------
CORPORATE SECURITIES
Maturing within one year 5,756 1.4% 5.68%
Maturing in one to five years 4,835 1.1 6.24
- ----------------------------------------------------------------------------------
10,591
Mark-to-market adjustments on
securities available-for-sale 5
- ----------------------------------------------------------------------------------
Total 10,596 2.5 5.93
- ----------------------------------------------------------------------------------
OTHER MORTGAGE-BACKED SECURITIES
Maturing within one year 14,339 3.4 6.91
Maturing in one to five years 25,225 5.9 6.87
Maturing in one to five years 2,386 0.6 7.12
Maturing after ten years 7,835 1.8 6.79
- ----------------------------------------------------------------------------------
49,785
Mark-to-market adjustments on
securities available-for-sale 284
- ----------------------------------------------------------------------------------
Total 50,069 11.7 6.88
- ----------------------------------------------------------------------------------
Equity securities with no stated maturity 9,136 2.2
Mark-to-market adjustments on
securities available-for-sale 259
- ----------------------------------------------------------------------------------
Total 9,395 2.2
- ----------------------------------------------------------------------------------
Total $425,603 100.0 6.07
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
(1) Average yields have been calculated on a fully-taxable basis.
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-Deposits."
-30-
Deposits increased 7.5% to $1,805 million as of December 31, 1997, as
compared to $1,679 million as of December 31, 1996 due to internal growth in
1997. Deposits increased 52.8% to $1,679 million as of December 31, 1996
from $1,099 million as of December 31, 1995. This increase resulted
principally from the deposits of the Acquired Banks combined with internal
growth. For additional information concerning customer deposits as of
December 31, 1997 and 1996, 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:
As of and for the years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Federal funds purchased:
Balance at period end $ 4,025 13,450 3,125
Average balance 28,651 18,687 16,596
Maximum amount outstanding at any month-end 83,185 56,700 27,670
Average interest rate:
During the year 5.46% 5.58 6.07
At period end 5.95% 5.61 5.50
Securities sold under repurchase agreements:
Balance at period end 176,350 129,137 104,898
Average balance 141,825 101,046 75,252
Maximum amount outstanding at any month-end 176,350 129,137 104,898
Average interest rate:
During the year 4.69% 4.46 4.73
At period end 4.61% 4.42 4.85
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:
As of December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-performing loans:
Nonaccrual loans $ 9,681 6,822 3,632 3,134 3,629
Accruing loans past due 90 days or more 4,883 6,432 1,711 534 1,353
Restructured loans 928 1,763 1,755 1,619 1,526
- -----------------------------------------------------------------------------------------------
Total non-performing loans 15,492 15,017 7,098 5,287 6,508
OREO 1,362 1,546 1,349 1,803 3,132
- -----------------------------------------------------------------------------------------------
Total non-performing assets 16,854 16,563 8,447 7,090 9,640
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Non-performing assets to total loans and OREO 1.15% 1.20% 0.97% 0.94% 1.44%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
-31-
Non-performing loans increased 3.2% to $15 million as of December 31,
1997 as compared to $15 million as of December 31, 1996 due to slight
deteriorations in all market sectors. Non-performing loans increased 111.6%
to $15 million at December 31, 1996 from $7 million at December 31, 1995.
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 $763,000, $405,000,
$318,000, $296,000 and $440,000 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, 1997, 1996, 1995, 1994 and
1993, 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.
As of December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Substandard $ 34,161 19,994 12,936
Doubtful 2,468 2,321 1,522
Loss 2,584 2,264 2,229
- ----------------------------------------------------------------------------------------
Total $ 39,213 24,579 16,687
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Classified loans to total loans 2.67% 1.79% 1.92%
Allowance for loan losses to classified loans 71.86% 113.09% 90.92%
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Loans classified as substandard increased 70.9% to $34,161 as of
December 31, 1997. Approximately $9 million of the increase is the result of
downgrading the loans of two agricultural borrowers and three commercial
borrowers. The remaining increase is principally due to increases in loan
volume, combined with a slight deterioration of the credit quality of
consumer loans, which are generally classified as substandard upon becoming
90 days past due.
With the exception of these classified loans, management is not aware of
any loans as of December 31, 1997 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.
-32-
The following table sets forth information concerning the Company's allowance
for loan losses as of the dates and for the years indicated.
As of and for the years ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Balance as of January 1 $ 27,797 15,171 13,726 13,373 12,965
Beginning allowance of acquired banks - 10,553 917 - -
Commercial 1,132 1,127 393 398 777
Consumer 5,607 2,384 1,679 1,425 1,035
Real estate 141 27 20 53 20
Agricultural 71 220 25 4 20
- ------------------------------------------------------------------------------------------------------------------
Total charge-offs 6,951 3,758 2,117 1,880 1,852
Recoveries:
Commercial 732 850 252 299 353
Consumer 1,816 974 557 472 455
Real estate 246 9 119 36 7
Agricultural 300 154 88 82 100
- ------------------------------------------------------------------------------------------------------------------
Total recoveries 3,094 1,987 1,016 889 915
- ------------------------------------------------------------------------------------------------------------------
Net charge-offs 3,857 1,771 1,101 991 937
Provision for loan losses 4,240 3,844 1,629 1,344 1,345
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 28,180 27,797 15,171 13,726 13,373
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Period end loans 1,470,414 1,375,479 870,378 751,518 667,385
Average loans 1,441,800 1,014,901 837,288 705,690 641,411
Net charge-offs to average loans 0.27% 0.17% 0.13% 0.14% 0.15%
Allowance to period end loans 1.92% 2.02% 1.74% 1.83% 2.00%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997, net charge-offs were $4 million
and the provision for loan losses was $4 million. These two line items show
increases from prior comparative periods due to the expanded loan portfolio
resulting primarily from the Acquired Banks. As of December 31, 1997, the
allowance for loan losses was $28.2 million, representing an increase of
$383,000 from the allowance as of December 31, 1996. Net charge-offs to
average loans were 0.27% in 1997. The increase from prior periods is due
primarily to consumer loans. The allowance to period end loans was 1.92% as
of December 31, 1997.
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.
-33-
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
As of December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Allocated % Of Allocated % Of Allocated % Of Allocated % Of Allocated % Of
Reserves Loans Reserves Loans Reserves Loans Reserves Loans Reserves Loans
- ------------------------------------------------------------------------------------------------------------------
Commercial $ 870 35.8% $ 594 34.3% $ 789 35.9% $ 791 34.9% $ 896 36.2%
Consumer 1,383 34.4 1,280 35.3 1,118 34.5 1,154 36.9 1,007 36.8
Real estate - 18.3 - 19.9 - 16.3 3 14.9 23 13.9
Agricultural 331 11.1 390 10.4 322 13.1 280 13.1 230 12.7
Other loans - 0.4 - 0.1 - 0.2 - 0.2 - 0.4
- ------------------------------------------------------------------------------------------------------------------
Total allocated 2,584 2,264 2,229 2,228 2,156
Unallocated 25,596 25,533 12,942 11,498 11,217
- ------------------------------------------------------------------------------------------------------------------
Totals $ 28,180 100.0% $ 27,797 100.0% $ 15,171 100.0% $ 13,726 100.0% $ 13,373 100.0%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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 must manage 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 repayments; loan originations, extensions and repayments; and
management of investment securities.
Net cash provided by operating activities, primarily representing net
income, totaled $44 million for 1997, $29 million for 1996 and $28 million
for 1995. Net cash used for investing activities totaled $155 million for
1997, $105 million for 1996 and $79 million for 1995. The funds used for
investing activities primarily represent increases in loans and investments
in connection with acquisitions and internal growth for each year reported.
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.
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, 1997, the Banks had approximately $16 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. As of December 31, 1997, the Company did not
have any material commitments for capital expenditures.
-34-
In connection with the acquisition of the FIB 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 (7.44% weighted average rate as of December 31,
1997) and was issued by a syndicate of banks led by First Security Bank, N.A.
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, 1997, the amount outstanding under the revolving term loan was
$7 million, with an additional $19 million in borrowing capacity available
thereunder. 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 decreased 0.3% to $146 million as of December 31,
1997. This decrease resulted primarily from the redemption of $20 million of
noncumulative perpetual preferred stock which was partially offset by an
increase in retained earnings. Stockholders' equity increased 33.6% to $146
million as of December 31, 1996 from $109 million as of December 31, 1995.
This increase was due primarily to the issuance of the noncumulative
perpetual preferred stock, together with 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, 1997, 1996 and 1995, the Company
paid aggregate cash dividends to stockholders of $9 million, $6 million and
$4 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, 1997,
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-
The ability to optimize the net interest margin is largely dependent
upon the achievement of an interest rate spread which can be managed during
fluctuations of 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, 1997:
Three Three One
Months Months Year to After
(DOLLARS IN THOUSANDS) or Less to One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans(1) $ 615,124 182,139 532,256 131,214 1,460,733
Investment securities 73,982 133,301 184,696 33,624 425,603
Interest-bearing deposits in bank 34,447 - - - 34,447
Federal funds sold 58,675 - - - 58,675
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 782,228 315,440 716,952 164,838 1,979,458
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST
PREFERRED SECURITIES:
Interest-bearing demand accounts(2) $ 25,255 75,765 213,165 - 314,185
Savings deposits(2) 307,933 29,870 93,643 - 431,446
Time deposits, $100 or more 50,866 71,060 41,717 - 163,643
Other time deposits 132,408 203,318 187,481 469 523,676
Federal funds purchased 4,025 - - - 4,025
Securities sold under repurchase
agreements 176,350 - - - 176,350
Other borrowed funds 11,591 - - - 11,591
Long-term debt 342 6,847 4,304 20,033 31,526
Mandatorily redeemable preferred
securities of subsidiary trust - - - 40,000 40,000
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities $ 708,770 386,860 540,310 60,502 1,696,442
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Rate gap 73,458 (71,420) 176,642 104,336 283,016
Cumulative rate gap 73,458 2,038 178,680 283,016
Cumulative rate gap as a percentage of
total interest-earning assets 3.71% 0.10% 9.03% 14.30%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Assumptions used:
(1) Does not include nonaccrual loans of $9,681.
(2) 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 2 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
$339 million, a negative cumulative one year gap of $305 million and a
positive cumulative one to five year gap of $179 million.
-36-
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.
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 following 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
In 1997, the Company completed the evaluation phase of its Year 2000
project to ensure business is not interrupted by the change in the
millennium. The project calls for either system modification to, or
replacement of, existing business system applications. Upon completion of the
project, all systems including microsystems, payment systems, ATM software
and mainframe systems, will be Year 2000 compliant. The Company anticipates
that substantially all of the remaining work under this project, including
testing of critical systems, will be initially completed by the end of 1998.
The cost of the Year 2000 project was not material to the Company's 1997
earnings and is not expected to be material to the Company's 1998 earnings or
thereafter. Such costs will be expensed as incurred. Unanticipated problems
or difficulties, however, could significantly increase the Company's
estimated expenditures for the Year 2000 project.
The Company has provided its business customers, suppliers and vendors
with information regarding the Company's progress on Year 2000 issues and has
requested similar information in return. The Company continues to bear some
risk related to the Year 2000 issue and could be adversely affected if other
entities not affiliated with the Company do not appropriately address their
own Year 2000 compliance issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The provisions of SFAS No. 125 apply to
transactions occurring after December 31, 1996. This adoption has not had a
material effect on the consolidated financial position or results of
operations of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
This statement simplifies the standards for computing earnings per share
("EPS") and replaces the presentation of primary and fully diluted EPS with a
presentation of basic and fully diluted EPS on the face of the income
statement for all entities with complex capital structures. The provisions of
SFAS No. 128 apply to financial statements issued for periods ending after
December 15, 1997. Adoption did not have a material effect on the reported
EPS of the Company.
In June 1997, the FASB issued 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.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management expects that adoption will not
have a material effect on the consolidated financial position or results of
operations of the Company.
-37-
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. SFAS
No. 131 is effective for financial statements for periods beginning after
December 31, 1997. Management expects that adoption will not have a material
impact on the Company's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 table provides information about the Company's market
sensitive financial instruments, categorized by maturity and the instruments'
fair values at 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."
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.
Expected Maturity/Principal Repayment
-------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------
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
Mandatorily redeemable preferred
securities of subsidiary trust -- -- -- -- -- 43,600
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
The expected maturities of securities are based upon contractual
maturities adjusted for projected prepayments of principal and assumes no
reinvestment of proceeds. The prepayment projections are based on the
Company's historical experience and do not take into account any allowance
for loan losses. 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.
-38-
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 Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Stockholders' Equity - Years Ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
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:
Name Age Position
---- --- --------
Homer A. Scott, Jr. 63 Chairman of the Board
James R. Scott 48 Vice Chairman of the Board
Thomas W. Scott 54 President, Chief Executive Officer and Director
Terrill R. Moore 45 Senior Vice President, Chief Financial Officer
and Secretary
William G. Wilson 58 Senior Vice President
Edward Garding 48 Senior Vice President
Dan S. Scott 66 Director
Randy Scott 44 Director
Susan Scott Heyneman 59 Past Director
John M. Heyneman 30 Director
Joel Long 57 Director
James Haugh 60 Director
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, Dan S. Scott and Susan Scott
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, Dan S. Scott and Susan Scott
Heyneman.
THOMAS W. SCOTT has been a director of FIBS since 1971 and has served as
President and Chief Executive Officer of FIBS since 1978. Mr. Scott is the
brother of Homer A. Scott, Jr., James R. Scott, Dan S. Scott and Susan Scott
Heyneman.
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 Peat Marwick 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.
-39-
EDWARD GARDING has been a Senior Vice President of FIBS since September
1996, and served in various management positions within the Company since
1971.
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, Thomas W. Scott
and Susan Scott Heyneman.
RANDY SCOTT has been a director of FIBS since August 1993. Mr. Scott was
a trust officer of FIB Montana's trust division from 1991 until 1996. In
total, Mr. Scott was employed by the Company for nineteen years. Mr. Scott is
the son of Dan S. Scott.
SUSAN SCOTT HEYNEMAN has been a director of FIBS since March 1994. Ms.
Heyneman served previously as a director of FIBS, having resigned in 1989 due
to pursue personal interests. With her husband, Ms. Heyneman has been a
co-owner of the Bench Ranch for more than five years. Ms. Heyneman is the
sister of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott and Dan S.
Scott. Ms. Heyneman resigned as director effective March 19, 1998.
JOHN M. HEYNEMAN became a director of the Company on March 19, 1998.
Mr. Heyneman is currently pursuing his graduate degree at Montana State
University. Prior to beginning his graduate work, Mr. Heyneman was an
international manufacturer's representative for petroleum processing
equipment. Mr. Heyneman is the son of Susan Scott Heyneman and the nephew of
Homer A. Scott, Jr., James R. Scott, Thomas W. Scott and Dan S. 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 became a director of the Company in 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
Peat Marwick 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 four other executive officers of
FIBS as of December 31, 1997, whose salary and bonus for the year ended
December 31, 1997, exceeded $100,000 in the aggregate. In all cases, payment
was for services in all capacities of the Company and its subsidiaries:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Other -------------
Name and Annual Options/ All Other
Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2)
- ------------------ ---- --------- --------- -------------- ------------ ---------------
Thomas W. Scott 1997 $ 216,000 $ 125,000 $ 7,200 $ -- $ 23,698
President & CEO 1996 206,000 75,000 7,200 -- 23,002
1995 200,000 63,000 7,200 -- 17,697
-40-
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Other -------------
Name and Annual Options/ All Other
Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2)
- ------------------ ---- --------- --------- -------------- ------------ ---------------
William H. Ruegamer 1997 $ 167,115 $ 55,000 $ -- $ 1600/1600 $ 18,507
Executive Vice 1996 190,000 66,500 199 1400/1400 21,583
President & COO(3) 1995 184,000 58,000 699 1400/1400 18,602
William G. Wilson 1997 $ 105,500 $ 31,500 $ 7,200 $ 800/800 $ 13,304
Senior Vice 1996 102,000 39,580 7,200 600/600 12,544
President 1995 99,000 27,720 7,200 800/800 12,597
Edward Garding (4) 1997 $ 129,000 $ 38,700 $ 7,200 $ 1200/1200 $ 15,606
Senior Vice 1996 106,730 30,000 20,860 800/800 12,431
President 1995 NA NA NA NA NA
Terrill R. Moore 1997 $ 100,862 $ 40,000 $ 7,200 $ 1200/1200 $ 12,836
Senior Vice 1996 86,684 35,184 7,200 800/800 12,740
President & CFO 1995 80,800 22,624 7,200 800/800 11,462
(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 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, 1997, premiums on health and life insurance on
behalf of Thomas W. Scott, William H. Ruegamer, William G. Wilson,
Edward Garding and Terrill R. Moore were $2,984 for each, respectively.
For the fiscal year ending December 31, 1997, contributions to the
Company's profit sharing plan on behalf of Thomas W. Scott, William H.
Ruegamer, William G. Wilson, Edward Garding and Terrill R. Moore were
$10,329, $7,167, $5,045, $6,172 and $4,809, respectively. For the fiscal
year ending December 31, 1997, contributions to the Company's employee
savings plan on behalf of Thomas W. Scott, William H. Ruegamer, William
G. Wilson, Edward Garding and Terrill R. Moore were $10,385, $8,356,
$5,275, $6,450 and $5,043, respectively.
(3) Mr. Ruegamer resigned from all positions with the Company effective
October 31, 1997. The "Salary," "Bonus" and "Other Annual Compensation"
amounts for 1997 include amounts earned through October 31, 1997.
(4) Not an executive officer of FIBS prior to 1996. Included in "Other
Annual Compensation" for 1996 was an amount of $13,660 for
reimbursement of moving and related expenses.
-41-
OPTION/SAR GRANTS TABLE
The following table provides information concerning grants of options to
purchase FIBS common stock, no par value (the "Common Stock"), and related
stock appreciation rights ("SARs") made during the year ended December 31,
1997, to the persons named in the Summary Compensation Table.
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Individual Grants Value at
----------------------------- Assumed Annual
% of Total Rates of Stock
Options/SARs Price Appreciation
Options/ Granted to Exercise for Option Term
SARS Employees in Price Expiration --------------------
Name Granted (#) Fiscal Year ($/sh) Date 5% ($) 10% ($)
---- ------------ ------------ -------- ---------- -------- --------
Thomas W. Scott -- -- $ -- -- $ -- $ --
William H. Ruegamer 1,600/1,600 8.16% 20.05 1/16/07 40,350 102,255
William G. Wilson 800/800 4.08% 20.05 1/16/07 20,175 51,127
Edward Garding 1,200/1,200 6.12% 20.05 1/16/07 30,262 76,691
Terrill R. Moore 1,200/1,200 6.12% 20.05 1/16/07 30,262 76,691
The following table indicates the number and value of the stock options
and SARs exercised in 1997 and the number and value of unexercised stock
options and SARs as of December 31, 1997. All stock options and SARs are
currently exercisable.
AGGREGATED OPTION/SAR EXERCISED IN 1997 AND FISCAL YEAR-END VALUES
Number of Value of Unexercised
Shares Unexercised In-The-Money
Acquired Value Options and SARS at Options and SARS at
Name on Exercise Realized December 31, 1997 December 31, 1997
---- ----------- -------- ------------------- --------------------
Thomas W. Scott -- $ -- -- $ --
William H. Ruegamer 2,304 53,533 10,784/7,892 184,628
William G. Wilson -- -- 6,000/4,300 102,305
Edward Garding 1,384 32,157 7,956/5,578 143,074
Terrill R. Moore 1,384 32,157 7,292/5,246 124,763
TERMINATION OF EMPLOYMENT ARRANGEMENT
On August 25, 1997, the Company entered into an agreement with William
H. Ruegamer (the "Resignation Agreement"), pursuant to which Mr. Ruegamer and
the Company agreed that Mr. Ruegamer resign from his employment with the
Company effective October 31, 1997. Under the Resignation Agreement, Mr.
Ruegamer agreed to release the Company from any potential claims, and the
Company agreed to provide Mr. Ruegamer (i) a 1997 performance bonus of
$55,000, (ii) the sum of $250,000, payable in 24 equal monthly installments,
(iii) health and dental insurance for Mr. Ruegamer and his spouse until
October 31, 2001 (unless Mr. Ruegamer obtains other employment prior to that
time), and (iv) a term life insurance policy in the amount of $500,000 to be
funded by the Company for a period of 10 years. In consideration of Mr.
Ruegamer agreeing not to compete for a period of two years, the Company also
agreed (i) to extend the period in which the Company could repurchase any
Common Stock owned by Mr. Ruegamer, (ii) to extend the exercise period of
stock options and SARs held by Mr. Ruegamer, and (iii) to provide a lump-sum
payment of $250,000 to Mr. Ruegamer on November 1, 1999.
-42-
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 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.
COMPENSATION OF DIRECTORS
Directors who are members of the Scott family 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 1997, 1996 and 1995. He was also paid a bonus
of $20,000 in 1997, $15,000 in 1996 and $4,000 in 1995. James R. Scott was
paid a salary of $102,250 in each of 1997, 1996 and 1995 and a bonus of
$20,000 in 1997, $15,000 in 1996 and $10,000 in 1995. Dan S. Scott was paid a
salary of $39,000 in each of 1997, 1996 and 1995 and a bonus of $20,000 in
1997, $15,000 in 1996 and $15,000 in 1995. Randy Scott was paid a salary of
$18,050 in 1997 and 1996. 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.
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.
-43-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1997 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.
Number of Percent
Shares Beneficially
Beneficial Owner(1) Beneficially Owned Owned
------------------- ------------------ ------------
James R. Scott(2) 1,351,316 16.83%
439 Grandview Blvd.
Billings, Montana 59102
Randy Scott(3) 1,156,193 14.40%
521 Freedom Avenue
Billings, Montana 59105
Homer Scott, Jr.(4) 1,052,628 13.11%
122 Scott Drive
Sheridan, Wyoming 82801
Thomas W. Scott 773,788 9.64%
P.O. Box 30876
Billings, Montana 59107
Susan Scott Heyneman(5) 569,876 7.10%
P.O. Box 285
Fishtail, Montana 59028
FIB Montana(6) 494,864 6.16%
P.O. Box 30918
Billings, Montana 59116
Dan S. Scott(7) 381,068 4.75%
William H. Ruegamer(8) 40,696 0.51%
William G. Wilson(8) 31,528 0.39%
Edward Garding(8) 21,644 0.27%
Terrill R. Moore(8) 16,164 0.20%
Joel Long 4,940 0.06%
James Haugh 4,940 0.06%
All directors and executive officers as a group
(12 persons)(8) 67.30%
(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, 1997, 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, 24,988 shares as trustee for John
M. Heyneman, Jr. and 24,988 shares as trustee for Thomas Scott Heyneman.
(3) Includes 1,119,792 shares owned beneficially as managing partner of
Nbar5 Limited Partnership.
-44-
(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 230,360 shares owned beneficially as trustee for Jonathan R.
Scott, 229,304 shares as trustee for Julie Anne Scott and 35,200 shares
as trustee for James F. Heyneman.
(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 10,784 shares, 6,000 shares 7,956 shares
7,292 shares held by William H. Ruegamer, 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 7.0% of the Company's stockholders' equity as of December 31,
1997. Loans to executive officers, directors and related interests of
officers and directors of FIBS and the Banks represented approximately 10.5%
of the Company's stockholders' equity as of December 31, 1997.
In July 1997, 78,072 shares of common stock were sold by the Company to
certain officers, directors, director nominees and employees. The total cash
price was $1.66 million.
In October 1997, 87,236 shares of common stock were sold by the Company
to 403 individual participants in the Company's 401(k) Savings Plan. The
total cash price was $2.05 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, 1997, the Company redeemed shares of common stock from the
Company's 401(k) Savings Plan in the amount of $137,437.
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 ($10.4 million as of
December 31, 1997) is recourse to the partners and guaranteed by the Company.
The Company paid rent to the partnership of $814,000 in 1997.
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.
-45-
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick 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, 1997 and
1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Billings, Montana
February 6, 1998
-46-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 136,025 160,962
Federal funds sold 58,675 4,945
Interest-bearing deposits in banks 34,447 6,545
Investment securities:
Available-for-sale 188,650 124,502
Held-to-maturity 236,953 279,069
- -------------------------------------------------------------------------------------------------------
425,603 403,571
- -------------------------------------------------------------------------------------------------------
Loans 1,470,414 1,375,479
Less allowance for loan losses 28,180 27,797
- -------------------------------------------------------------------------------------------------------
Net loans 1,442,234 1,347,682
- -------------------------------------------------------------------------------------------------------
Premises and equipment, net 61,274 58,183
Accrued interest receivable 22,046 19,573
Goodwill, net of accumulated amortization of $8,486
in 1997 and $5,901 in 1996 31,801 37,958
Other real estate owned, net 1,362 1,546
Deferred tax asset 5,946 4,921
Other assets 15,351 17,951
- -------------------------------------------------------------------------------------------------------
$ 2,234,764 2,063,837
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 372,056 385,371
Interest bearing 1,432,950 1,294,053
- -------------------------------------------------------------------------------------------------------
Total deposits 1,805,006 1,679,424
- -------------------------------------------------------------------------------------------------------
Federal funds purchased 4,025 13,450
Securities sold under repurchase agreements 176,350 129,137
Accounts payable and accrued expenses 20,599 18,027
Other borrowed funds 11,591 13,071
Long-term debt 31,526 64,667
- -------------------------------------------------------------------------------------------------------
Total liabilities 2,049,097 1,917,776
- -------------------------------------------------------------------------------------------------------
Mandatorily redeemable preferred securities of subsidiary trust 40,000 -
Stockholders' equity:
Non-voting noncumulative 8.53% preferred stock without par value;
authorized 100,000 shares, none and 20,000 shares issued and
outstanding as of December 31, 1997 and 1996, respectively - 20,000
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 8,030,799 shares and 7,913,072 shares
as of December 31, 1997 and 1996, respectively 11,490 8,941
Retained earnings 133,277 116,613
Unrealized holding gain on investment securities
available-for-sale, net 900 507
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 145,667 146,061
- -------------------------------------------------------------------------------------------------------
$ 2,234,764 2,063,837
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Book value per common share $ 18.14 15.93
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-47-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 140,083 99,882 83,577
Interest and dividends on investment securities:
Taxable 21,958 15,343 12,147
Exempt from Federal taxes 1,109 982 783
Interest on deposits with banks 448 376 368
Interest on Federal funds sold 2,210 1,342 2,095
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 165,808 117,925 98,970
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 58,129 42,122 35,898
Interest on Federal funds purchased 1,499 1,043 1,008
Interest on securities sold under repurchase agreements 6,474 4,508 3,560
Interest on other borrowed funds 873 318 298
Interest on long-term debt 5,165 2,028 1,182
Interest on mandatorily redeemable preferred securities
of subsidiary trust 523 - -
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 72,663 50,019 41,946
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 93,145 67,906 57,024
Provision for loan losses 4,240 3,844 1,629
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 88,905 64,062 55,395
Other operating income:
Income from fiduciary activities 4,083 3,161 2,619
Service charges on deposit accounts 9,855 7,752 6,532
Data processing 7,380 7,324 6,196
Other service charges, commissions, and fees 3,787 2,857 2,535
Investment securities gains (losses), net 89 18 (6)
Other income 1,652 2,815 888
- ---------------------------------------------------------------------------------------------------------------------
Total other operating income 26,846 23,927 18,764
- ---------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and wages 29,448 21,789 18,917
Employee benefits 8,097 5,742 4,777
Occupancy, net 6,077 4,505 3,916
Furniture and equipment 7,721 6,249 5,244
Other real estate income, net (465) (214) (586)
FDIC insurance 206 5 1,127
Goodwill amortization expense 2,585 1,019 442
Other expenses 20,497 14,300 12,141
- ---------------------------------------------------------------------------------------------------------------------
Total other operating expenses 74,166 53,395 45,978
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 41,585 34,594 28,181
Income tax expense 15,730 13,351 10,844
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 25,855 21,243 17,337
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 24,401 20,818 17,337
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 3.07 2.65 2.22
Diluted earnings per common share 3.05 2.64 2.21
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-48-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Unrealized Total
Preferred Common Retained holding gains stockholders'
stock stock earnings (losses), net equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ - 7,531 88,677 (936) 95,272
Common stock transactions:
75,524 shares retired - (1,197) - - (1,197)
26,908 shares issued - 358 - - 358
Cash dividends declared
($0.48 per common share) - - (3,733) - (3,733)
Increase in unrealized gains
on available-for-sale
investment securities, net - - - 1,329 1,329
Net income - - 17,337 - 17,337
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 6,692 102,281 393 109,366
Preferred stock issuance:
20,000 shares issued 20,000 - - - 20,000
Preferred stock issuance costs - - (458) - (458)
Common stock transactions:
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)
Increase in unrealized gains
on available-for-sale
investment securities, net - - - 114 114
Net income - - 21,243 - 21,243
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 20,000 8,941 116,613 507 146,061
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)
Increase in unrealized gains
on available-for-sale
investment securities, net - - - 393 393
Net income - - 25,855 - 25,855
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - 11,490 133,277 900 145,667
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-49-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 25,855 21,243 17,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and other real estate losses 4,236 3,823 1,601
Depreciation and amortization 8,549 5,584 4,272
Net premium amortization (discount accretion)
on investment securities (1,049) 591 1,111
Loss (gain) on sale of investments, net (89) (18) 6
Gain on sale of other real estate owned (595) (335) (527)
Gain on sale of premises and equipment (9) (2) -
Provision for deferred income taxes (1,306) (528) 129
Increase in interest receivable (2,473) (507) (1,828)
Decrease (increase) in other assets 5,198 (1,697) 2,069
Increase in accounts payable and accrued expenses 6,144 394 3,553
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,461 28,548 27,723
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in interest-bearing deposits (27,902) 16,495 (22,012)
Purchases of investment securities:
Held-to-maturity (412,855) (200,361) (88,857)
Available-for-sale (133,043) (63,477) (12,254)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity 456,069 150,313 116,267
Available-for-sale 38,401 62,460 12,901
Sales of investment securities:
Available-for-sale 31,208 5,523 -
Extensions of credit to customers, net of repayments (101,673) (98,142) (70,149)
Recoveries on loans charged-off 3,094 1,987 1,016
Proceeds from sale of other real estate owned 2,130 1,121 1,236
Acquisitions of subsidiaries, net (1,726) 24,840 (10,465)
Capital distribution from (contribution to) joint venture (275) 150 (2,100)
Capital expenditures, net (8,880) (6,324) (4,675)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (155,452) (105,415) (79,092)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 125,582 56,674 76,354
Net increase (decrease) in federal funds and repurchase agreements 37,788 (15,938) 29,148
Repayments of other borrowed funds, net (1,480) (871) (1,594)
Borrowings of long-term debt 5,750 66,939 13,484
Repayment of long-term debt (38,891) (22,410) (3,066)
Proceeds of issuance of mandatorily redeemable preferred
securities of subsidiary trust 40,000 - -
Debt issuance costs (2,323) - -
Proceeds from issuance of common stock 3,871 3,478 358
Proceeds from issuance of preferred stock, net of issuance costs - 19,542 -
Payments to retire common stock (1,322) (1,229) (1,197)
Payments to retire preferred stock (20,000) - -
Dividends paid on common stock (7,737) (6,028) (3,733)
Dividends paid on preferred stock (1,454) (425) -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 139,784 99,732 109,754
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 28,793 22,865 58,385
Cash and cash equivalents at beginning of year 165,907 143,042 84,657
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 194,700 165,907 143,042
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 70,484 48,334 38,944
Cash paid during the year for taxes 17,830 12,805 9,845
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities - The Company transferred loans of
$1,347, $668 and $227 to other real estate owned in 1997, 1996 and 1995,
respectively.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-50-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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.
During 1997, the Company merged its six banking subsidiaries into two
resultant bank subsidiaries, First Interstate Bank in Montana and First
Interstate Bank in Wyoming.
Effective October 7, 1997, First Interstate BancSystem of Montana, Inc.
changed its name to First Interstate BancSystem, Inc.
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 and
federal funds sold for one day periods.
At December 31, 1997 the Company was required to have aggregate reserves
in the form of cash on hand and deposits with the Federal Reserve Bank
of approximately $7,247. Also, an additional $16,000 compensating
balance was maintained with the Federal Reserve Bank to mitigate the
payment of service charges for check clearing services.
-51-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INVESTMENT SECURITIES. 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. Subordinated debentures that may be sold in
response to or in anticipation of changes in interest rates and
resulting prepayment risk, or other factors, and 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 1997, 1996 or 1995.
Management determines the appropriate classification of securities at
the time of purchase and at each reporting date management reassesses
the appropriateness of the classification.
The amortized cost of subordinated debentures 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 may affect the borrowers' ability to pay.
-52-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company may also establish a reserve for losses on specific loans
which are deemed to be impaired. Groups of small balance homogeneous
basis loans (generally consumer loans) are evaluated for impairment
collectively. A loan is considered impaired when, based upon current
information and events, it is probable that the Company will be unable
to collect, on a timely basis, all principal and interest according to
the contractual terms of the loan's original agreement. When a specific
loan is determined to be impaired, the allowance for loan losses is
increased through a charge to expense for the amount of the impairment.
The amount of the impairment is measured using cash flows discounted at
the loan's effective interest rate, except when it is determined that
the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such cases, the current
value of the collateral, reduced by anticipated selling costs, will be
used to measure impairment instead of discounted cash flows. The
Company's impaired loans are those non-consumer loans which are
non-accrual or a troubled debt restructuring. Interest income is
recognized on impaired loans only to the extent that cash payments are
received. The Company's existing policies for evaluating the adequacy
of the allowance for loan losses and policies for discontinuing the
accrual of interest on loans are used to establish the basis for
determining whether a loan is impaired.
GOODWILL. Goodwill consists of the excess purchase price over the fair
value of 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.
OTHER INTANGIBLES. Purchased mortgage servicing rights ("MSR")
represent the value of purchased rights to service mortgage loans. The
MSR are amortized over the period of estimated net servicing income not
expected to exceed 12 years. MSR are evaluated for impairment based on
the MSR current fair value. MSR of $781 and $1,052 as of December 31,
1997 and 1996, respectively, are included in other assets.
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 $5,964 in 1997, $4,182 in 1996 and $3,541 in
1995.
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 assets' fair value, which may
be estimated by discounting the expected future cash flows. There were
no impairment losses recognized during 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.
-53-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES. In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings.
SFAS No. 125 generally requires the Company to recognize as separate
assets the rights to service mortgage loans for others, whether the
servicing rights are acquired through purchases or loan originations.
Servicing rights are initially recorded at fair value based on market
quotes and are amortized in proportion to and over the period of
estimated net servicing income. Servicing rights are subsequently
evaluated for impairment by stratifying the servicing assets based on
risk characteristics including loan type, note rate, and loan term.
Adoption of the statement did not have a material impact on the
financial condition or results of operations of the Company. The
Company capitalized mortgage servicing rights of $238 on loans sold with
servicing retained in 1997. There were no impairment losses recognized
in 1997.
INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice,
income for trust services is recognized on the basis of cash received.
However, use of this method in lieu of accrual basis accounting does not
materially affect reported earnings.
INCOME TAXES. The Parent Company and its subsidiaries have elected to
be included in a consolidated Federal income tax return. For state
income tax purposes, the combined taxable income of the Parent Company
and its subsidiaries is apportioned between the states in which
operations take place. Federal and state income taxes attributable to
the subsidiaries, computed on a separate return basis, are paid to or
received from the Parent Company.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
PER SHARE DATA. The Company adopted SFAS No. 128, "Earnings Per Share,"
as of January 1, 1997. SFAS No. 128 revises the manner in which
earnings per share (EPS) is calculated by replacing the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and
diluted EPS. All periods presented have been restated to conform with
SFAS No. 128. The Company also adopted SFAS No. 129, "Disclosures of
Information About Capital Structure." This statement was issued in
connection with SFAS No. 128 and lists required disclosures about
capital structure that had been included in a number of previously
existing separate statements and opinions.
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.
On October 7, 1997, the Company effected a four-for-one split of the
Parent Company's existing common stock. All share and per share data
presented have been restated to give effect to the stock split.
-54-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STOCK-BASED COMPENSATION. The Company measures compensation costs for
stock-based employee compensation plans using the intrinsic value-based
method of accounting in accordance with Accounting Principles Board
No. 25.
YEAR 2000. In 1997, the Company established an overall plan to address
the Year 2000 issues as they affect financial reporting. Year 2000
issues involve the use of only two digits to identify a year in a date
field, potentially causing application failures or erroneous results at
the Year 2000. Upon development of the overall plan, the Company began
modifying its computer systems to be Year 2000 compliant by the end of
1998. Management does not expect costs related to the modification
project to be material. Such costs will be expensed as incurred.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1996
and 1995 amounts to conform to the 1997 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,
1997, the Company exceeded all capital adequacy requirements to which is
was subject.
As of December 31, 1997, 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.
The Company's actual capital amounts and ratios as of December 31, 1997
and 1996 are presented in the following table:
Adequately Well
Actual Capitalized Capitalized
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------
-55-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Adequately Well
Actual Capitalized Capitalized
----------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
Total risk-based capital:
Consolidated $ 145,782 10.0% $ 116,898 8.0% $ 146,123 10.0%
FIB Montana 124,102 12.2 81,437 8.0 101,796 10.0
FIB Wyoming 59,786 13.2 36,228 8.0 45,285 10.0
Tier 1 risk-based capital:
Consolidated 107,399 7.4 58,449 4.0 87,674 6.0
FIB Montana 109,690 11.0 40,718 4.0 61,077 6.0
FIB Wyoming 54,040 11.9 18,114 4.0 27,171 6.0
Leverage capital ratio:
Consolidated 107,399 5.3 81,382 4.0 101,728 5.0
FIB Montana 109,690 8.0 55,930 4.0 69,913 5.0
FIB Wyoming 54,040 7.8 27,764 4.0 34,705 5.0
------------------------------------------------------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES
The amortized cost and approximate market values of investment securities
are summarized as follows:
AVAILABLE-FOR-SALE
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1997 cost gains losses value
-----------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1997 cost gains losses value
-----------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Gross gains of $89 and no gross losses were realized on the sale of
available-for-sale securities in 1997.
-56-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AVAILABLE-FOR-SALE
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1996 cost gains losses value
-----------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 45,272 153 - 45,425
Obligations of U.S. Government agencies 54,919 340 (114) 55,145
States, county and municipal securities 7,717 295 (2) 8,010
Corporate securities 2,484 7 (5) 2,486
Other mortgage-backed securities 3,703 16 (10) 3,709
Other securities 9,607 120 - 9,727
-----------------------------------------------------------------------------------------------------------
Total $ 123,702 931 (131) 124,502
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
Gross Gross Estimated
Amortized unrealized unrealized market
December 31, 1996 cost gains losses value
-----------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 169,196 445 (731) 168,910
Obligations of U.S. Government agencies 89,600 158 (179) 89,579
States, county and municipal securities 11,793 152 (12) 11,933
Corporate securities 8,480 1 (27) 8,454
-----------------------------------------------------------------------------------------------------------
Total $ 279,069 756 (949) 278,876
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Gross gains of $18 and no gross losses were realized on the sale of
available-for-sale securities in 1996.
Gross gains of $6 and gross losses of $12 were realized on the sale of
available-for-sale securities in 1995.
Maturities of investment securities by contractual maturity at December
31, 1997 are shown below. Maturities of securities do not reflect rate
repricing opportunities present in many adjustable rate mortgage-backed
and corporate securities. Maturities of mortgage-backed securities have
been adjusted to reflect expected shorter maturities based upon early
prepayments of principal.
------------------------------------------------------------------------------------------------------
December 31,1997 Available-for-Sale Held-to-Maturity
------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
------------------------------------------------------------------------------------------------------
Within one year $ 42,018 42,122 90,627 90,653
After one but within five years 117,439 118,326 138,709 139,786
After five years but within ten years 11,270 11,444 5,694 5,744
After ten years 7,313 7,363 1,923 1,939
------------------------------------------------------------------------------------------------------
Total 178,040 179,255 236,953 238,122
------------------------------------------------------------------------------------------------------
Other 9,136 9,395 - -
------------------------------------------------------------------------------------------------------
Total $ 187,176 188,650 236,953 238,122
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
There are no significant concentrations of investments at December 31, 1997
(greater than 10 percent of stockholders' equity) in any individual
security issuer, except for U.S. Government or agency-backed securities.
-57-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At December 31, 1997 and 1996, $14,097 and $18,148, respectively, of
variable rate securities are included in investment securities.
Investment securities with amortized cost of $333,920 and $251,709 at
December 31, 1997 and 1996, 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, 1997 and 1996 was $335,500 and
$252,070, 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:
December 31, 1997 1996
---------------------------------------------------------------
Agricultural (1) $ 164,046 143,572
Commercial (2) 526,355 471,458
Real estate 268,463 274,141
Consumer (3) 505,741 484,865
Other loans, including overdrafts 5,809 1,443
---------------------------------------------------------------
Total loans $ 1,470,414 1,375,479
---------------------------------------------------------------
---------------------------------------------------------------
(1) Includes loans to agricultural customers secured by real estate of
$56,397 and $52,689 at December 31, 1997 and 1996, respectively.
(2) Includes loans secured by commercial real estate properties of
$264,842 and $198,570 at December 31, 1997 and 1996, respectively.
(3) Includes loans secured by second mortgages on real estate of
$93,510 and $74,607 at December 31, 1997 and 1996, respectively.
At December 31, 1997, 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 $9,681 and $6,822 at December 31, 1997 and
1996, respectively. If interest on nonaccrual loans had been accrued,
such income would have approximated $763 and $405, respectively. Loans
contractually past due ninety days or more aggregating $4,883 on
December 31, 1997 and $6,432 on December 31, 1996 were on accrual
status. Such loans are deemed adequately secured and in the process of
collection.
Included in the nonaccrual loans at December 31, 1997 and 1996 are
$1,909 and $5,122, respectively, of loans which are considered impaired.
Of this amount, an impairment allowance of $676 and $436, respectively,
is included in the Company's allowance for loan losses. The average
recorded investment in impaired loans for the years ended December 31,
1997, 1996 and 1995 was approximately $7,580, $3,870 and $3,080,
respectively. If interest on impaired loans had been accrued, the
amount of interest income on impaired loans during 1997, 1996 and 1995
would have been approximately $706, $357 and $283, respectively.
-58-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Also included in total loans at December 31, 1997 and 1996 are loans
with a carrying value of $928 and $1,763, respectively, the terms of
which have been modified in troubled debt restructurings. Restructured
debt includes nonaccrual loans of $2 at December 31, 1997. There were
no nonaccrual loans included in restructured debt at December 31, 1996.
The interest income recognized on restructured loans approximated
$122, $158 and $161 during the years ended December 31, 1997, 1996 and
1995, respectively. At December 31, 1997, 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 $15,329 at December
31, 1997 and $12,174 at December 31, 1996 (including outstanding loans
of new executive officers and directors in 1997). During 1997, new
loans and advances on existing loans of $11,613 were funded and
repayments totaled $8,458. 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:
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Balance at beginning of year $ 27,797 15,171 13,726
Allowance of acquired banks - 10,553 917
Provision charged to operating expense 4,240 3,844 1,629
Less loans charged-off (6,951) (3,758) (2,117)
Add back recoveries of loans previously charged-off 3,094 1,987 1,016
------------------------------------------------------------------------------------------------
Balance at end of year $ 28,180 27,797 15,171
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as
follows:
December 31, 1997 1996
-------------------------------------------------------------------------------
Land $ 9,639 8,350
Buildings and improvements 56,443 53,609
Furniture and equipment 24,253 24,689
-------------------------------------------------------------------------------
90,335 86,648
Less accumulated depreciation 29,061 28,465
-------------------------------------------------------------------------------
Premises and equipment, net $ 61,274 58,183
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Parent Company and a branch office lease premises from an
affiliated partnership (see note 13).
-59-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of the following:
December 31, 1997 1996
-------------------------------------------------------------------------------
Other real estate $ 1,824 2,057
Less allowance for OREO losses 462 511
-------------------------------------------------------------------------------
$ 1,362 1,546
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
A summary of transactions in the allowance for OREO losses follows:
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Balance at beginning of year $ 511 554 1,048
Provision (reversal) during the year (4) (21) (28)
Property writedowns (45) (16) (449)
Losses on sales - (6) (17)
------------------------------------------------------------------------------------------------
Balance at end of year $ 462 511 554
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
(8) CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains key-executive life insurance policies on certain
principal shareholders. Under the key-executive insurance, the Company
receives the cash surrender value if the policy is terminated, or
receives all benefits payable upon the death of the insured. The
aggregate face amount of key-executive insurance policies was $7,000 at
December 31, 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, 1997 and 1996 are
$2,621 and $2,540, respectively. The net cash surrender value of
key-executive insurance policies included in other assets is $400 and
$278 at December 31, 1997 and 1996, respectively.
During 1994, the Company provided insurance contracts for certain key
officers. The net cash surrender value of these contracts is $1,525
and $1,365 at December 31, 1997 and 1996, respectively, and is included
in other assets. Upon retirement, the officers have the option of
entering into a split-dollar contract with the Company providing
insurance coverage for the difference between the Company's cash
surrender value and the face amount of the policy. The Company
currently accrues the earned portion of the post-employment benefit.
(9) DEPOSITS
Deposits are summarized as follows:
December 31, 1997 1996
-------------------------------------------------------------------------------
Noninterest bearing demand $ 372,056 385,371
Interest bearing:
Demand 314,185 316,964
Savings 431,446 396,845
Time, $100 and over 163,643 122,242
Time, other 523,676 458,002
-------------------------------------------------------------------------------
Total interest bearing 1,432,950 1,294,053
-------------------------------------------------------------------------------
$ 1,805,006 1,679,424
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-60-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Maturities of time deposits at December 31, 1997 are as follows:
Time, $100
and Over Total Time
-----------------------------------------------------------------------
1998 $ 121,588 458,119
1999 34,024 158,629
2000 5,541 48,765
2001 1,790 11,273
2002 700 10,066
Thereafter - 467
-----------------------------------------------------------------------
$ 163,643 687,319
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Interest expense on time deposits of $100 or more was $7,778, $5,514
and $4,581 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Current:
Federal $ 15,006 12,004 9,194
State 2,030 1,875 1,521
------------------------------------------------------------------------------------------------
17,036 13,879 10,715
------------------------------------------------------------------------------------------------
Deferred:
Federal (1,140) (492) 134
State (166) (36) (5)
------------------------------------------------------------------------------------------------
(1,306) (528) 129
------------------------------------------------------------------------------------------------
$ 15,730 13,351 10,844
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Total income tax expense differs from the amount computed by applying
the Federal income tax rate of 35 percent in 1997, 1996 and 1995 to
income before income taxes as a result of the following:
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Tax expense at the statutory tax rate $ 14,555 12,108 9,863
Increase (decrease) in tax resulting from:
Tax-exempt income (520) (472) (374)
State income tax, net of Federal income tax benefit 1,211 1,190 985
Amortization of nondeductible Goodwill 311 318 289
Other, net 173 207 81
------------------------------------------------------------------------------------------------
$ 15,730 13,351 10,844
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
-61-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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:
December 31, 1997 1996
-------------------------------------------------------------------------------
Deferred tax assets:
Loans, principally due to allowance for
loan losses $ 9,296 8,712
Other real estate owned, principally due to
differences in bases 283 118
Employee benefits 1,374 828
Other 275 45
-------------------------------------------------------------------------------
Net deferred tax assets 11,228 9,703
-------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets, principally differences in bases
and depreciation (928) (926)
Investment in joint venture partnership,
principally due to differences in
depreciation of partnership assets (1,025) (904)
Prepaid amounts (273) (138)
Investment securities, principally differences
in bases (550) (370)
Investment securities available-for-sale (574) (293)
Goodwill (1,896) (2,151)
Other (36) -
-------------------------------------------------------------------------------
Net deferred tax liabilities (5,282) (4,782)
-------------------------------------------------------------------------------
Net deferred tax asset $ 5,946 4,921
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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, 1997 management
continues to believe it is more likely than not that the Company will
realize the benefits of these deductible differences.
The Company had current income taxes receivable of $286 at December 31,
1997 and current income taxes payable of $508 at December 31, 1996.
-62-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
December 31, 1997 1996
-------------------------------------------------------------------------------
Parent Company:
Revolving term loan due December 31, 2003 at
variable interest rates (7.44% weighted
average rate at December 31, 1997) $ 6,700 39,200
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
8.50% due in annual installments aggregating
$486, plus interest, through March 1999 710 1,196
Subsidiaries:
Various notes payable to Federal Home Loan
Bank of Seattle, interest due monthly at
various rates and maturities (weighted
average rate of 6.53% at December 31, 1997) 4,116 4,271
-------------------------------------------------------------------------------
$ 31,526 64,667
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Maturities of long-term debt for the years ending December 31 follow:
1998 $ 489
1999 667
2000 135
2001 51
2002 4,151
Thereafter 26,033
-------------------------------------------------------------------------------
$ 31,526
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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 in the
amount of $6,700 at December 31, 1997. The available borrowing amount
at December 31, 1997 of $19.3 million is reduced by $2,000 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 term note payable is
secured by 100% of the outstanding capital stock of the Company's bank
subsidiaries.
The notes payable to Federal Home Loan Bank of Seattle (FHLB) are
secured by FHLB stock, unencumbered residential real estate mortgages
and certain mortgage-backed securities.
-63-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following is a summary of other borrowed funds, all of which mature
within one year:
December 31, 1997 1996
-------------------------------------------------------------------------------
Interest bearing demand notes issued to the United
States Treasury, secured by investment
securities (5.16% weighted average rate at
December 31, 1997) $ 11,591 11,071
5.45% interest bearing demand note issued to
Federal Home Loan Bank of Seattle paid in 1997 - 2,000
-------------------------------------------------------------------------------
$ 11,591 13,071
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Company has Federal funds lines of credit with third parties
amounting to $135,000, subject to funds availability. These lines are
subject to cancellation without notice. The Company also has been
approved for participation in the Federal Home Loan Bank Cash
Management Advance Program for borrowings up to approximately $98,687.
(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 $1,022,
$839 and $685 in 1997, 1996 and 1995, 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 $1,030 in 1997, $814 in
1996 and $703 in 1995.
STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and
Stock Appreciation Rights Plan for senior officers of the Company. All
options and stock appreciation rights ("SAR's") granted have an
exercise price of book value of the Company prior to 1993 and appraised
value thereafter. Each option granted under the Plan can be
immediately exercised up to ten years from the date of grant. SAR's
are granted and exercised in tandem with options. The stock issued in
conjunction with the exercise of options is subject to a shareholder
agreement (see note 15). The consolidated expense related to this plan
was $514 in 1997, $72 in 1996 and $170 in 1995.
Information with respect to the Company's stock options and SAR's are as
follows:
1997 1996 1995
Year ended December 31, Options SAR's Options SAR's Options SAR's
--------------------------------------------------------------------------------------------
Outstanding, beginning of year 115,836 78,320 116,752 79,236 120,464 82,140
Granted 19,600 19,600 16,600 16,600 16,500 16,500
Exercised (12,232) (6,468) (17,516) (17,516) (20,212) (19,404)
--------------------------------------------------------------------------------------------
Outstanding, end of year 123,204 91,452 115,836 78,320 116,752 79,236
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
-64-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the weighted-average stock option exercise
prices are as follows:
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Granted during year $ 20.05 $ 17.86 $ 15.80
Exercised during year 5.83 4.95 5.68
Outstanding, end of year 12.73 9.67 8.89
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Stratification and additional detail regarding the exercisable options
outstanding at December 31, 1997 are as follows:
Exercise Number Weighted-average Weighted-average
price range outstanding remaining life exercise price
------------------------------------------------------------------------------------------------
$4.56 - $ 7.61 39,704 2.56 years $ 6.45
$11.40 - $20.05 83,500 7.28 years 15.72
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
The Company has elected to continue to measure compensation costs as
prescribed by APB Opinion No. 25 and, accordingly, does not recognize
compensation expense on the options granted where the exercise price is
equal to appraisal value at the date of grant. SFAS No. 123 requires
the Company to disclose pro forma information reflecting net income and
earnings per share had the Company elected to record compensation
expense based on the fair value method described in SFAS No. 123. The
fair value of the options was estimated at the grant date using a
Black-Scholes option pricing model. Option valuation models require the
input of highly subjective assumptions. Because the Company's common
stock and stock options have characteristics significantly different
from listed securities and traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock options.
The following weighted-average assumptions were used in the valuation
model: risk-free interest rates of 6.58%, 5.65% and 7.78% in 1997, 1996
and 1995, respectively; dividend yield of 4.03%, 2.50% and 2.67% in
1997, 1996 and 1995, respectively; and expected life of options of 10
years in 1997, 1996 and 1995.
Pro forma disclosures, listed below, include options granted in 1997,
1996 and 1995 and are not likely to be representative of the pro forma
disclosures for future years. The estimated fair value of the options
is expensed in the year granted as all options are vested upon grant.
Year ending December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------
Net income as reported $ 25,855 21,243 17,337
Pro forma net income 25,692 21,102 17,211
Net income applicable to common stock as reported 24,401 20,818 17,337
Pro forma net income applicable to common stock 24,238 20,677 17,211
Basic earnings per common share as reported 3.07 2.65 2.22
Pro forma basic earnings per common share 3.05 2.63 2.20
Diluted earnings per common share as reported 3.05 2.64 2.21
Pro forma diluted earnings per common share 3.03 2.62 2.19
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
-65-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(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 a Cessna
aircraft. The investment is accounted for using the equity method.
The Company is jointly and severally liable for aircraft indebtedness
of $1,259 as of December 31, 1997. Usage charges and overhaul accruals
expensed in 1997 totaled $104.
The Parent Company and the Billings office of First Interstate Bank in
Montana ("FIB Montana") are the anchor tenants in a building owned by a
joint venture partnership in which FIB Montana is one of the two
partners, and has a 50% partnership interest. The investment in the
partnership is accounted for using the equity method. Indebtedness of
the partnership in the amount of $10,405 at December 31, 1997 is
recourse to the partners. Total rents paid to the partnership were
$814 in 1997 and 1996 and $711 in 1995.
The Company also leases certain premises and equipment from third
parties under operating leases. Total rental expense to third parties
was $1,204 in 1997, $1,019 in 1996 and $1,425 in 1995.
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, 1997 are as follows:
Third
parties Partnership Total
------------------------------------------------------------------------
For the year ending December 31:
1998 $ 407 814 1,221
1999 408 814 1,222
2000 307 814 1,121
2001 255 814 1,070
2002 221 814 1,035
Thereafter 1,495 2,240 3,734
------------------------------------------------------------------------
$ 3,093 6,310 9,403
------------------------------------------------------------------------
------------------------------------------------------------------------
In September 1983, the Company entered into a franchise agreement
("Franchise Agreement") with First Interstate Bancorp ("First
Interstate"), a Los Angeles based bank holding company which was
acquired by Wells Fargo and Company April 1, 1996. Under the Franchise
Agreement, the Company was First Interstate's exclusive licensee in the
states of Montana and Wyoming. On May 24, 1996, the Company entered
into a trademark license agreement granting the Company and its
subsidiaries an exclusive, nontransferable license to use the "First
Interstate" name and logo in the states of Montana, Wyoming, North
Dakota, South Dakota and Nebraska and the franchise agreement was
terminated.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of amounts recorded in the consolidated balance sheet.
-66-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Most commitments extend
less than two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds various collateral
supporting those commitments for which collateral is deemed necessary.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial
properties.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. Generally, all standby letters of credit
and commitments to extend credit are subject to annual renewal. At
December 31, 1997, stand-by letters of credit in the amount of $20,692,
were outstanding. Commitments to extend credit to existing and new
borrowers approximated $297,767 at December 31, 1997, which includes
$30,513 on unused credit card lines.
(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, 1997 nearly all shares of common stock held by
shareholders are subject to shareholder's agreements (Agreements).
Under the Agreements, the Company has a right of first refusal to
repurchase shares from the shareholder at minority interest appraised
value in the event of a proposed sale of shares to a third party,
death, disability or termination of employment. Additional shares
purchased by officers, directors and employees after 1993 are also
subject to repurchase at the Company's discretion.
(16) MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
FIB Capital Trust ("Trust"), a wholly-owned statutory business trust,
was formed on October 1, 1997 with an initial capitalization of $1.2
million. The Trust was formed for the exclusive purpose of issuing
Capital Trust Preferred Securities ("trust preferred securities") and
using the proceeds to purchase Junior Subordinated Debentures
("subordinated debentures") issued by the Company. The sole assets of
the Trust are the subordinated debentures.
On November 7, 1997, the Trust issued $40,000 of trust preferred
securities bearing a cumulative fixed interest rate of 8.625% and
maturing 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.
-67-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Also on November 7, 1997, the Company issued $41,237 in subordinated
debentures, the proceeds of which were used to redeem $20,000 of
Preferred Stock and paydown revolving term debt.
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 for regulatory
capital purposes. Issuance costs consisting primarily of underwriting
discounts and professional fees of approximately $2,323 have been
capitalized 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.:
December 31, 1997 1996
----------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS:
Cash and cash equivalents $ 3,208 2,905
Investment in subsidiaries, at equity:
First Interstate Bank in Montana 136,349 133,443
First Interstate Bank in Wyoming 69,820 68,105
Non-bank subsidiary - Commerce Financial, Inc. 481 408
Non-bank subsidiary - FIB Capital Trust 1,237 -
----------------------------------------------------------------------------------
Total investment in subsidiaries, at equity 207,887 201,956
Goodwill, net of accumulated amortization 2,339 2,633
Other assets 6,478 4,068
----------------------------------------------------------------------------------
$ 219,912 211,562
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Other liabilities $ 5,580 5,105
Long-term debt 68,665 60,396
----------------------------------------------------------------------------------
74,245 65,501
Stockholders' equity 145,667 146,061
----------------------------------------------------------------------------------
$ 219,912 211,562
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
-68-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year ended December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME:
Dividends from subsidiary banks $ 25,857 19,529 10,993
Interest on note receivable from non-bank
subsidiary 5 15 32
Other interest income 70 143 30
Other income, primarily management fees
from subsidiaries 2,340 1,788 1,508
--------------------------------------------------------------------------------------------------
Total income 28,272 21,475 12,563
--------------------------------------------------------------------------------------------------
Salaries and benefits 3,262 2,627 2,370
Interest expense 4,861 1,919 1,010
Other operating expenses, net 3,406 2,612 1,835
--------------------------------------------------------------------------------------------------
Total expenses 11,529 7,158 5,215
--------------------------------------------------------------------------------------------------
Data Division income, net of operating expenses 2,411 1,990 1,667
--------------------------------------------------------------------------------------------------
Earnings before income tax benefits 19,154 16,307 9,015
Income tax benefit 2,401 979 565
--------------------------------------------------------------------------------------------------
Income before undistributed earnings
of subsidiaries 21,555 17,286 9,580
--------------------------------------------------------------------------------------------------
Undistributed earnings of subsidiaries 4,300 3,957 7,757
--------------------------------------------------------------------------------------------------
Net income $ 25,855 21,243 17,337
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS:
Cash flows from operating activities:
Net income $ 25,855 21,243 17,337
Adjustments to reconcile net income to cash
provided by operating activities:
Undistributed earnings of subsidiaries (4,300) (3,957) (7,757)
Depreciation and amortization 303 311 312
Provision for deferred income taxes (532) 11 348
Deposit on bank acquisition - - 250
Other, net 1,119 802 967
--------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,445 18,410 11,457
--------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in advances to non-bank subsidiary 96 133 154
Purchase of investments (293) - -
Maturities of investments - - 7,500
Decrease (increase) in premises and equipment 6 (2) (1,095)
Capitalization of de novo subsidiary - (2,000) -
Capitalization of non-bank subsidiary (1,237) - -
Acquisitions of subsidiaries, net - (80,393) (17,478)
--------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,428) (82,262) (10,919)
--------------------------------------------------------------------------------------------------
-69-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year ended December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED):
Cash flows from financing activities:
Borrowings of long-term debt $ 46,987 66,939 8,484
Repayments of long-term debt (38,736) (17,410) (3,066)
Debt issuance costs, net (2,323) - -
Dividends paid on common stock (7,737) (6,028) (3,733)
Payments to retire common stock (1,322) (1,229) (1,197)
Payments to retire preferred stock (20,000) - -
Issuance of common stock 3,871 3,478 358
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 (20,714) 64,867 846
--------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 303 1,015 1,384
Cash and cash equivalents, beginning of year 2,905 1,890 506
--------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,208 2,905 1,890
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
(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.
-70-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(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 term note payable and revolving term loan bear interest at a
floating market rate and, as such, the carrying amounts are
deemed to reflect fair value. The carrying value of the interest
bearing demand notes to the United States Treasury is deemed an
approximation of fair value due to the frequent repayment and
repricing at market rates. The book value of the subordinated
notes approximates fair value estimated by discounting future
cash flows using current rates for advances with similar
characteristics. Fair value of the mandatorily redeemable
preferred securities of subsidiary trust 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.
A summary of the estimated fair values of financial instruments follows:
1997 1996
--------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
As of December 31, Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 229,147 229,147 172,452 172,452
Securities available-for-sale 188,650 188,650 124,502 124,502
Securities held-to-maturity 236,953 238,122 279,069 278,876
Net loans 1,442,234 1,431,068 1,347,682 1,344,336
--------------------------------------------------------------------------------------------------------------
Total financial assets $2,096,984 2,086,987 1,923,705 1,920,166
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Financial liabilities and trust preferred securities:
Total deposits, excluding time deposits $1,117,687 1,117,687 1,099,180 1,099,180
Time deposits 687,319 696,004 580,244 587,718
Federal funds purchased 4,025 4,025 13,450 13,450
Securities sold under repurchase agreements 176,350 176,350 129,137 129,137
Other borrowed funds 11,591 11,591 13,071 13,071
Long-term debt 31,526 31,526 64,667 64,667
Mandatorily redeemable preferred securities
of subsidiary trust 40,000 43,600 - -
--------------------------------------------------------------------------------------------------------------
Total financial liabilities and
trust preferred securities $2,068,498 2,080,783 1,899,749 1,907,223
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
-71-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(19) EARNINGS PER SHARE
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods indicated:
Weighted-Average
Income Shares Per Share
For the years ended December 31, (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------------------
1997:
Net income $25,855
Less preferred stock dividends (1,454)
--------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common stockholders 24,401 7,946,092 3.07
Effect of Dilutive Securities: Options - 41,829
--------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
and assumed conversions $24,401 7,987,921 3.05
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
1996:
Net income $21,243
Less preferred stock dividends (425)
--------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common stockholders 20,818 7,847,668 2.65
Effect of Dilutive Securities: Options - 33,356
--------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
and assumed conversions $20,818 7,881,024 2.64
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
1995:
Net income $17,337
Less preferred stock dividends -
--------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common stockholders 17,337 7,815,612 2.22
Effect of Dilutive Securities: Options - 28,032
--------------------------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
and assumed conversions $17,337 7,843,644 2.21
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
-72-
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(20) ACQUISITIONS AND EXPANSION
FIRST CITIZENS BANK OF BOZEMAN. On January 3, 1995, the Company
acquired all of the outstanding ownership of Citizens BancShares, Inc.
and its bank subsidiary, First Citizens Bank of Bozeman (collectively
"CBI"). The transaction was accounted for as a purchase and,
accordingly, the consolidated statement of income for the year ended
December 31, 1995 includes CBI's results of operations since the date
of the purchase. CBI was merged with First Interstate Bank of Commerce
of Montana in 1995.
FIRST NATIONAL PARK BANK. On May 19, 1995, the Company acquired all of
the outstanding ownership of First Park County Bancshares, Inc. and its
bank subsidiary, First National Park Bank (collectively "FPCBI"). The
transaction was accounted for as a purchase and, accordingly, the
consolidated statement of income for the year ended December 31, 1995
includes FPCBI's results of operations since the date of the purchase.
FPCBI was merged with First Interstate Bank of Commerce of Montana in
1995.
FIRST INTERSTATE BANK, FSB. In November 1995, the Company filed an
application with the Office of Thrift Supervision for permission to
form a de novo savings bank in Hamilton, Montana. Upon approval, the
Company capitalized the savings bank at $2,000 and opened the bank on
December 12, 1996. Effective December 22, 1997, the savings bank was
combined with and became a branch of First Interstate Bank in Montana.
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 First Interstate
Bank in Montana and FIBNA-WY merged with First Interstate Bank in
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 First
Interstate Bank in Montana.
MOUNTAIN FINANCIAL. On February 5, 1997, First Interstate Bank in
Montana purchased the assets of Mountain Financial, a loan production
office in Eureka, Montana. The total cash purchase price of the assets
aggregated $1,726, of which $166 was for premises and equipment and the
remaining $1,560 was for loans acquired. Mountain Financial
subsequently became a branch of First Interstate Bank in Montana.
During June 1997, the Company finalized its allocation of purchase
price related to the 1996 acquisitions of FIBNA-MT, FIBNA-WY and
FIB-Whitefish. Changes in preliminary estimates of the fair value of
loans, other assets and other liabilities resulted in a $3,572 decrease
in goodwill.
-73-
(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 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 Amended and Restated Trust Agreement of FIB Capital Trust
4.7 Trust Preferred Certificate of FIB Capital Trust (included
as an exhibit to Exhibit 4.6)
4.8 Common Securities Certificate of FIB Capital Trust (included
as an exhibit to Exhibit 4.6)
4.9 Guarantee Agreement between First Interstate BancSystem,
Inc. and Wilmington Trust Company
4.10 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.
27.1 Financial Data Schedule as of December 31, 1997
27.2 Financial Data Schedule (Restated) for First, Second and Third
Quarters 1997
27.3 Financial Data Schedule (Restated) as of December 31, 1996 and for
Second and Third Quarters 1996
+ 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statements Schedules
See Item 14(a)2 above.
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/ THOMAS W. SCOTT MARCH 23, 1998
----------------------------------- -------------
Thomas W. Scott Date
President and Chief Executive 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. MARCH 23, 1998
- ----------------------------------- ---------------
Homer A. Scott, Jr. Date
Chairman
By: /s/ DAN S. SCOTT MARCH 23, 1998
- ----------------------------------- ---------------
Dan S. Scott Date
Director
By: /s/ JAMES R. SCOTT* MARCH 23, 1998
- ----------------------------------- ---------------
James R. Scott, Vice Chairman Date
of the Board
By: /s/ RANDALL I. SCOTT MARCH 23, 1998
- ----------------------------------- ---------------
Randall I. Scott, Director Date
By: /s/ JOHN M. HEYNEMAN MARCH 23, 1998
- ----------------------------------- ---------------
John M. Heyneman, Director Date
By: /s/ JOEL LONG MARCH 23, 1998
- ----------------------------------- ---------------
Joel Long, Director Date
By: /s/ JAMES HAUGH MARCH 23, 1998
- ----------------------------------- ---------------
James Haugh, Director Date
By: /s/ THOMAS W. SCOTT MARCH 23, 1998
- ----------------------------------- ---------------
Thomas W. Scott Date
President, Chief Executive
Officer and Director
(Principal executive officer)
By: /s/ TERRILL R. MOORE MARCH 23, 1998
- ----------------------------------- ---------------
Terrill R. Moore Date
Senior Vice President,
Chief Executive
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 1997 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 1998 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.
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 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 Amended and Restated Trust Agreement of FIB Capital Trust
4.7 Trust Preferred Certificate of FIB Capital Trust (included as an
exhibit to Exhibit 4.6)
4.8 Common Securities Certificate of FIB Capital Trust (included as an
exhibit to Exhibit 4.6)
4.9 Guarantee Agreement between First Interstate BancSystem, Inc. and
Wilmington Trust Company
4.10 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.
27.1 Financial Data Schedule as of December 31, 1997
27.2 Financial Data Schedule (Restated) for First, Second and Third
Quarters 1997
27.3 Financial Data Schedule (Restated) as of December 31, 1996 and for
Second and Third Quarters 1996
+ 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.