ITEM 1. BUSINESS
First Interstate BancSystem of Montana, Inc. ("FIBM" and collectively with its subsidiaries, the "Company") is a bank and savings and loan holding company registered as a bank holding company under the Bank Holding Company Act of 1956 ("Act") and the Home Owners' Loan Act. FIBM was incorporated on March 15, 1971. FIBM's primary business is that of managing its wholly owned subsidiaries, First Interstate Bank of Commerce in Montana ("FIBOC Montana"), First Interstate Bank of Commerce in Wyoming ("FIBOC Wyoming"), First Interstate Bank of Montana, N.A. ("FIB Montana, NA"), First Interstate Bank of Wyoming, N.A. ("FIB Wyoming, NA"), Mountain Bank in Whitefish, Montana doing business as First Interstate Bank ("FIB Whitefish"), First Interstate Bank, fsb in Hamilton, Montana ("First Interstate, fsb"), and Commerce Financial, Inc. ("CFI"). FIBOC Montana has thirteen banking offices in eight Montana communities. FIBOC Wyoming has six banking offices in four Wyoming communities. FIB Montana, NA was acquired October 1, 1996 and has three banking offices in three Montana communities. FIB Wyoming, NA was also acquired on October 1, 1996 and has three banking offices in three Wyoming communities. FIB Whitefish was acquired on December 18, 1996 and has two banking offices in two Montana communities. First Interstate, fsb was opened as a de novo savings bank on December 12, 1996 and currently has only one banking office.
In addition to management of its subsidiaries, FIBM has a data processing division headquartered in Billings, Montana, which performs data processing services for FIBM's subsidiaries, and 35 non affiliated financial institutions with 79 locations in Montana, Wyoming and Idaho. The data processing division also provides ATM support for 138 financial institutions in Montana, Wyoming, Idaho, Colorado and North Dakota.
In addition to being the sole shareholder, FIBM functions as a service organization for each of its subsidiaries. FIBM provides advice, counsel and specialized services to its subsidiaries in connection with a wide range of banking and operating policies and activities. These services include data processing, auditing, credit administration, planning coordination, marketing, human resources management, asset/liability management and investments.
BUSINESS OF FIBM'S SUBSIDIARIES
FIBOC Montana is a Montana chartered bank originally incorporated in 1916, having its principal office in Billings, Montana. FIBOC Montana currently has thirteen banking offices in eight Montana communities - Billings, Bozeman, Missoula, Hardin, Miles City, Colstrip, Livingston, and Gardiner. The present structure of FIBOC Montana began December 1, 1992, when FIBM merged its eight Montana subsidiary banks into FIBOC Montana, which became a state/federal reserve member bank with eight offices. FIBOC Montana opened an additional banking office in Billings, Montana in December 1994, and an additional banking office in Missoula, Montana in January 1995. Acquisitions in 1995 increased FIBOC Montana's banking offices to the current number of thirteen.
FIBOC Wyoming is a Wyoming chartered bank originally incorporated in 1893 and currently has six banking offices in four northern Wyoming communities - Sheridan, Gillette, Greybull and Buffalo. The present structure of FIBOC Wyoming was created on December 30, 1988, when FIBM merged its five Wyoming subsidiary banks into FIBOC Wyoming, which became a state non-federal reserve member bank with six offices.
FIB Montana, NA was acquired on October 1, 1996 and is a nationally chartered bank. FIB Montana, NA has three banking offices in three Montana communities - - Kalispell, Great Falls, and Cut Bank.
FIB Wyoming, NA was acquired on October 1, 1996 and is a nationally chartered bank. FIB Wyoming, NA has three banking offices in three Wyoming communities - - Casper, Laramie and Riverton.
First Interstate, fsb is a nationally chartered savings bank with its only office located in Hamilton, Montana. First Interstate, fsb was a de novo charter, and first opened for business on December 12, 1996.
FIB Whitefish, which was acquired on December 18, 1996, is a Montana chartered bank having its principal office in Whitefish, Montana. FIB Whitefish currently has two banking offices in two northwestern Montana communities - Whitefish and Evergreen.
FIBM's banking subsidiaries are each engaged in general commercial banking activities, including all types of demand and time deposits, trust services, and commercial, agricultural, real estate, personal and consumer loans. The banks also provide such other services as are generally furnished by commercial banks located in the principal cities and towns of Montana and Wyoming.
CFI, FIBM's only nonbank subsidiary, was incorporated in 1978, principally to originate and broker secured real estate loans. During the past five years, CFI's principal activity has been the liquidation of assets acquired through foreclosure actions by FIBM.
SUPERVISION AND REGULATION
Bank holding companies, commercial banks and savings banks are extensively regulated under both federal and state law. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the banks.
The FIBM, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board ("FRB") under the Bank Holding Company Act of 1956. Also, as a registered savings and loan holding company, the Company is subject to the supervision of and regulation by the Office of Thrift Supervision ("OTS").
FIB Montana, NA and FIB Wyoming NA are subject to the supervision of, and regular examination by, the Office of the Comptroller of the Currency ("OCC"). First Interstate, fsb is subject to the supervision of, and regular examination by, the OTS. FIBOC Wyoming is subject to the supervision of, and regular examination by, the Federal Deposit Insurance Corporation ("FDIC") and State of Wyoming. FIBOC Montana is subject to the supervision of, and regulations by, the FRB and State of Montana. FIB Whitefish is subject to the supervision of, and regular examination by, the FDIC and State of Montana. The FDIC insures the deposits of the banks to the current maximum of $100,000 per depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act") passed by Congress and signed into law on September 29, 1994, significantly changed interstate banking rules. Pursuant to the Interstate Banking and Branching Act, bank holding companies are able to acquire banks in states other than its home state effective September 29, 1995, regardless of applicable state law.
In March 1997, Montana enacted legislation effective July 1, 1997 which authorizes de novo branching within the state by banks with a charter in Montana.
The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each subsidiary bank in circumstances which it might not do so absent such policy.
FIBM is a legal entity separate and distinct from its subsidiaries. FIBM's revenues (on a parent company basis) result in part from dividends of its banking subsidiaries. Under Montana banking law, neither FIBOC Montana nor FIB Whitefish may declare dividends in any one calendar year in excess of its net profits of the preceding two years without the approval of the Montana Commissioner of Financial Institutions. Under Wyoming banking law, FIBOC Wyoming may not, without the approval of the Wyoming State Examiner, declare dividends in any one calendar year in excess of its net profits in the current year combined with retained net profits of the preceding two years, less any required transfers to surplus. Under national banking laws, neither FIB Montana, NA nor FIB Wyoming, NA may declare dividends in any one calendar year in excess of its net profits of the preceding two years without the approval of the OCC. FIBM's loan agreement with its primary lender prohibits declaration or payment of dividends to shareholders in excess of 33% of FIBM's net income for the immediately preceding year. FIBM has also agreed with its primary lender to maintain capital levels in its banking subsidiaries that the FDIC would categorize as "Adequately Capitalized".
In addition, federal regulatory agencies (e.g., the FDIC, OCC, OTS and FRB) have authority to prohibit a bank under their supervision from engaging in practices which, in the opinion of the federal regulatory agency, are unsafe or unsound or constitute violations of applicable law. Each federal regulatory agency has established guidelines for the maintenance of appropriate levels of capital for a bank under its supervision. Compliance with the standards set forth in such guidelines could limit the amount of dividends which a bank could pay.
RECENT DEVELOPMENTS
On October 1, 1996, FIBM purchased all of the outstanding capital stock of FIB Wyoming, NA and FIB Montana, NA from Wells Fargo and Company. On October 1, 1996, these two banks had total assets of $324.2 million and $276.4 million, respectively. The transaction was accounted for using the purchase method of accounting.
In conjunction with the acquisition of FIB Wyoming, NA and FIB Montana, NA, FIBM issued $20 million of non-voting, non-cumulative preferred stock, and $20 million of subordinated debt and refinanced its existing term indebtedness, adding an additional $32 million.
On December 12, 1996, FIBM opened First Interstate, fsb, a national savings bank with its only office in Hamilton, Montana with initial capitalization of $2 million.
On December 18, 1996, FIBM acquired all the outstanding capital stock of FIB Whitefish with offices in Whitefish and Evergreen, Montana. On December 18, 1996, FIB Whitefish had total assets of $70.9 million. The transaction was accounted for using the purchase method of accounting. The transaction cost of $7.9 million was funded with cash reserves and advances on FIBM's outstanding term loan.
In the first quarter of 1997, FIBM has made application with appropriate regulatory agencies to merge FIB Wyoming, NA into FIBOC Wyoming and to merge both FIB Montana, NA and FIB Whitefish into FIBOC Montana. Consummation of these banking subsidiary mergers is expected to be completed in the second quarter of 1997.
See also "Notes to Consolidated Financial Statements - Acquisitions and Expansion" of the financial statements included herewith in Exhibit 14.
In September 1983, FIBM entered into a franchise agreement ("Franchise Agreement") with First Interstate Bancorp ("First Interstate"), a Los Angeles based bank holding company which was acquired by Wells Fargo and Company April 1, 1996. Under the Franchise Agreement, FIBM was First Interstate's exclusive licensee in the states of Montana and Wyoming. On May 24, 1996, FIBM entered into a trademark license agreement granting the Company and its subsidiaries an exclusive, nontransferable license to use the "First Interstate" name and logo in the states of Montana, Wyoming, North Dakota, South Dakota and Nebraska. By mutual agreement of the parties, the franchise agreement between FIBM and Wells Fargo and Company was terminated.
ITEM 2.
ITEM 2. PROPERTIES
FIBM's executive offices are located in the same building in which the home office of FIBOC Montana is located. The Billings office, which subleases space to FIBM as part of a master lease, is the anchor tenant in an eighteen story building. FIBOC Montana owns a 50% undivided interest in the building. In addition, FIBOC Montana leases the buildings in which the West Billings, South Missoula and Gardiner branches are located.
FIBM's subsidiaries own twenty-four buildings in fourteen communities which are used, in whole or in part, in its banking operations.
See also "Notes to Consolidated Financial Statements - Premises and Equipment" and "Notes to Consolidated Financial Statements - Commitments and Contingencies" of the financial statements included herewith in exhibit 14.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of their business, the Company's bank subsidiaries are named or threatened to be named as defendants in various lawsuits. With respect to each of these suits, it is the opinion of management, following consultation with legal counsel, that the suits are without merit or in the event the plaintiff prevails, the ultimate liability or disposition thereof will not have a material adverse effect on consolidated financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last quarter of the period covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of FIBM is not actively traded, and there is no established public trading market for the stock. There is only one class of common stock with 93.7% of the shares restricted by agreement and 6.3% held by 13 shareholders are unrestricted. FIBM has the right of first refusal to purchase the restricted stock at the most recent quarterly appraised minority value, less dividends paid since the appraisal date. All unrestricted stock is purchased and sold at a price per share that is acceptable to the shareholder. Quarter-end minority appraisal values for the past two years follows:
APPRAISED VALUATION DATE(1) MINORITY VALUE(2)(3) ----------------- -------------------- December 31, 1994 $ 66.25 March 31, 1995 67.50 June 30, 1995 69.50 September 30, 1995 72.00 December 31, 1995 75.00 March 31, 1996 77.50 June 30, 1996 79.50 September 30, 1996 81.00 December 31, 1996 86.00
(1) Sales of stock between valuation dates are adjusted for cash dividends paid.
(2) Prior to dividends.
(3) Based upon appraisal by Alex Sheshunoff & Co. Investment Banking.
As of March 5, 1997, options for 31,667 shares of the FIBM's common stock were outstanding at various contractual exercise prices, ranging from $18.97 to $80.21. The aggregate cash proceeds to be received by FIBM upon exercise of all options outstanding at March 5, 1997 would be $1.6 million, or a weighted average exercise price of $50.54 per share.
The book value per share of FIBM's Common Stock as of February 28, 1997 was $64.77. The appraised minority value, adjusted for dividends paid in January 1997, was $85.13 at February 28, 1997.
Resale of FIBM stock may be restricted pursuant to the Securities Act of 1933 and applicable state securities laws. In addition, most shares of FIBM stock are subject to one of two shareholder's agreements. Members of the Scott family, as majority shareholders of FIBM, are subject to a Shareholder's Agreement ("Scott Agreement"). The Scott Family, under the Scott Agreement, has agreed to limit the transfer of shares owned by members of the Scott Family to family members or charities, or with FIBM's approval, to the Company's officers, directors, advisory directors, or to the Savings Plan.
Shareholders of the Company who are not Scott Family members, with the exception of 13 shareholders who own 124,092 shares of unrestricted stock, are subject to a Shareholder's Agreement ("Shareholder's Agreement"). The Shareholder's Agreement grants FIBM the option to purchase the stock at the minority appraised value per share (less dividends paid since the date of the last appraisal) in any of the following events: 1) the shareholder's intention to sell the stock, 2) the shareholder's death, 3) transfer of the stock by operation of law, 4) termination of the shareholder's status as a director, officer or employee of the Company, and 5) total disability of the shareholder. Stock subject to the Shareholder's Agreement may not be sold or transferred by the shareholder without triggering FIBM's option to acquire the stock in accordance with the terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement allows FIBM to repurchase any of the FIBM stock acquired by the shareholder after January 1, 1994 if FIBM determines that the number of shares owned by the shareholder is excessive in view of a number of factors including but not limited to (a) the relative contribution of the shareholder to the economic performance of the Company, (b) the effort being put forth by the shareholder, and (c) the level of responsibility of the shareholder.
Purchases of FIBM common stock made through FIBM's Savings Plan are not restricted by the Shareholder's Agreement, due to requirements of ERISA and the Internal Revenue Code. However, since the Savings Plan does not allow distributions "in kind," any distributions from an employee's account in the Savings Plan will allow, and may require, the Savings Plan trustee to sell the FIBM stock. While FIBM has no obligation to repurchase the stock, it is possible that FIBM will repurchase FIBM stock sold out of the Savings Plan. Any such repurchases would be upon terms set by the Savings Plan trustee and accepted by FIBM.
There are 298 shareholders of FIBM as of March 5, 1997, including the Company's Savings Plan as trustee for shares held on behalf of 467 individual participants in the plan. 155 individuals in the Savings Plan also own shares of FIBM stock outside of the Plan. The Plan is administered by the Trust department of FIBOC Montana, which votes the shares based on the instructions of each participant. In the event the participant does not provide the Trustee with instructions, the Trustee will vote those shares in accordance with voting instructions received from a majority of the participants in the Plan.
It is the policy of FIBM to pay a dividend to all common shareholders quarterly. Dividends are paid in the month following the calendar quarter and the amount has been determined based upon a percentage of net income for the calendar quarter immediately preceding the dividend payment date. Dividends for second and third quarters of 1995 were calculated at the rate of 25% of net income. Prior to July 1995, 20% of net income was paid quarterly as a dividend. Effective with the dividend for the fourth quarter of 1995 paid in January 1996, the dividend was increased to 30% of quarterly net income. The Board of Directors of FIBM has no current intention to change its dividend policy, but no assurance can be given that the Board may not, in the future, limit or eliminate the payment of dividends.
Historical quarterly dividends for 1995 and 1996 were as follows:
AMOUNT TOTAL CASH QUARTER MONTH PAID PER SHARE DIVIDEND ------- ---------- --------- ---------- 4th quarter 1994 January 1995 $ .38 $ 744,482 1st quarter 1995 April 1995 $ .39 $ 763,700 2nd quarter 1995 July 1995 $ .56 $ 1,093,372 3rd quarter 1995 October 1995 $ .58 $ 1,131,304 4th quarter 1995 January 1996 $ .71 $ 1,384,775 1st quarter 1996 April 1996 $ .81 $ 1,572,131 2nd quarter 1996 July 1996 $ .76 $ 1,505,941 3rd quarter 1996 October 1996 $ .79 $ 1,564,878 4th quarter 1996 January 1997 $ .87 $ 1,721,584
Federal laws and regulations contain restrictions on the ability of FIBM and its subsidiaries to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, "Supervision and Regulation."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA)
- ------------------- NM - Not Meaningful FTE - Fully taxable equivalent
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The profitability of FIBM is primarily dependent on the net interest income of its subsidiary banks. Net interest income is the difference between the bank's interest and dividend income on interest-earning assets (principally loans and investment securities) and interest expense on interest-bearing liabilities and borrowings. Net income is also affected by the quality of its loan portfolio and related provisions for loan losses, as well as the amount of non-interest income, including loan fees, service charges and other fees, and non-interest expenses. Operating results of FIBM's banking operations are also affected, to a lesser extent, by the type of lending, fixed rate versus adjustable or short-term, each of which has a different rate and fee structure. Operating expenses of FIBM's banking operations principally consist of employee compensation, occupancy expenses, furniture and equipment expenses and other general and administrative expenses.
FIBM generates its income from (1) dividends received from its bank subsidiaries, (2) undistributed earnings of subsidiaries, (3) management fees charged to subsidiaries, (4) net data processing income, and (5) other income, principally federal income tax benefits. In 1996, 69%, 14%, 6%, 7% and 4% of FIBM's income was generated by each of the above five sources, respectively.
FIBM's net income is also effected by the profitability of its data processing division. Income of the data division includes data service fees for item processing, ATM services, and bank data processing services, including general ledger, investment securities, loans, deposits and asset/liability management. Expenses of the data division are primarily employee compensation, equipment maintenance and depreciation, leased telephone lines and supplies.
To a lesser extent, FIBM's net income is also effected by the profitability of its trust operations. Income of FIBM's trust operations are the result of trust administration fees charged to trust customers. Expenses of FIBM's trust operations are principally employee compensation and related benefits, and other general administrative expenses.
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
NET INCOME. 1996 was another excellent year for the Company. For the eighth consecutive year, the Company exceeded all of its prior earnings records, recording net income of $21,243 in 1996, which topped 1995 net income of $17,337 by $3,906 or 22.5%. Net income in 1995 was up $1,603 or 10.2% from 1994 earnings of $15,734. The increases in 1996 and 1995 were due in large part to the acquisitions of FIB Montana, NA and FIB Wyoming, NA at the beginning of the fourth quarter of 1996 and the acquisition of Citizens BancShares, Inc. ("CBI") and First Park County BancShares, Inc. ("FPCBI") which occurred effective January 3, 1995 and May 19, 1995, respectively. The additional consolidated earnings as a direct result of the acquisitions in both years were partially offset by lower short-term investment income and higher interest expense at the Parent Company as a result of funding of the acquisitions.
NET INTEREST INCOME. Net interest income is the largest source of the Company's operating income. Net interest income increased to $67,906 in 1996, up $10,882 or 19.1% from 1995 net interest income of $57,024. 1995 net interest income was $5,245 higher than 1994 net interest income of $51,779, an increase of 10.1%.
Substantially all of the $10,882 increase in net interest income in 1996 was the result of increases in volume which were due in large part to the acquisitions of FIB Montana, NA and FIB Wyoming, NA at the beginning of the fourth quarter. The acquisition of FIB Whitefish in mid-December, to a much lesser degree, also contributed to the increase in net interest income in 1996. The net interest income of banks acquired in 1996 aggregated approximately $6,660, but was partially offset by approximately $1,130 of interest expense of the Parent Company in the fourth quarter from increased senior indebtedness and new subordinated notes to fund the acquisitions.
In 1995, approximately $4,000 of the increase in consolidated net interest income was net interest income resulting from the acquisitions of CBI and FPCBI. Additional interest expense at the Parent Company resulting from increased indebtedness to fund these acquisitions partially offset the increased net interest margin in 1995 by approximately $800.
The effect on FIBM's interest income and interest expense due to the changes in volume and rate for the periods indicated are shown below (in thousands):
Note: Because of the numerous simultaneous volume and rate changes during the period analyzed, it is not possible to precisely allocate the changes between volumes and rates. For purposes of this table, changes which are not due solely to volume changes or to rate changes have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.
The primary component of the year-to-year increases in net interest income is the growth in the volume of earning assets. As shown in the above table, net interest income was significantly impacted by the increases in earning assets associated with banking acquisitions in 1996 and 1995, coupled with steady growth in average earning assets. Net interest income in 1995 was also affected by changes in interest rates, while rate changes in 1996 resulted in little change in net interest income. The net interest margin for 1995 of 5.16% is only 3 basis points lower than 1995's margin of 5.19%. The net interest margin for 1995 is 15 basis points lower than 1994's margin of 5.34%. The effect of these changes in percentage margin on net interest income is shown in the above table as the change due to rate.
AVERAGE BALANCE SHEETS, YIELDS AND RATES
(1) Interest income and average rates for certain loans and securities exempt from federal income taxes are presented on a fully-taxable equivalent basis. (2) Average loan balances include nonaccrual loans. (3) Loan fees included in interest income for financial reporting purposes were $5,028, $4,070, $4,213, $4,847 and $4,055 for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively.
Customer loan fees, included in interest income for financial reporting purposes, were $5,028 in 1996, up $958 or 23.5% from $4,070 in 1995. Loan fees in 1995 were down $143 or 3.4% from $4,213 in 1994. Customer loan fees included in 1996 and 1995 income associated with banking acquisitions were $136 and $131, respectively. The decline in customer loan fees in 1995 was principally the result of reduced real estate loan processing in the first half of 1995, However, new real estate loans and refinancing of existing loans rebounded in the last half of 1995 and continued through 1996, resulting in an increase in real estate loan fees of $402 in 1996 of which only $31 was the result of acquisitions. Loan fees for other categories of loans also increased in 1996 from 1995. Agricultural loan fees increased $33 of which $10 was acquisition-related. But the most significant increases were in commercial and consumer loan fees which contributed over half the overall increase in loan fees.
Maintaining steady growth in net interest income is one of the Company's primary objectives and is monitored by management through its asset/liability management process. The Company has historically achieved this objective, in part, as a result of having the necessary systems, procedures, and products in place to manage and promote balance sheet growth, maintain a strong net interest margin and remain competitively priced. Management believes the Company, as in the past, is well positioned to maintain its solid growth in net interest income.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $3,844 and $1,629 for the years ended December 31, 1996 and 1995, respectively, as compared to $1,344 in 1994. Of the $2,215 increase in the 1996 loan loss provision, $500 is related to acquired banking locations. The remaining increase of $1,715 from 1995 is principally associated with overall increases in loan volumes and a slight deterioration in agricultural and consumer lending loans. Net chargeoffs as a percentage of average loans was .17% in 1996, up slightly from .13% in 1995, and .14% of in 1994. The allowance for loan losses as a percentage of loans increased to 2.02% at December 31, 1996 from 1.74% and 1.83% at December 31, 1995 and 1994, respectively, in large part due to reserve balances of banks acquired. Loan loss provisions and reserve levels are reflective of the levels of problem and classified loans.
Total classified loans increased $7,892 or 47.3% to $24,579 at December 31, 1996 from $16,687 at December 31, 1995. Total problem loans increased $22,448 or 82.8% from $27,097 at December 31, 1995 to $49,545 at December 31, 1996. Total nonaccrual loans increased $3,190 or 87.8% between years to $6,822 at December 31, 1996. These increases in levels of problem, classified, and nonaccrual loans are due to bank acquisitions in 1995 and 1996, increases in outstanding loans, and the slight deterioration in the agricultural and consumer sector. Further discussion on loan quality and the allowance for loan losses is included later in this review in the PROBLEM AND CLASSIFIED LOANS section.
Management actively monitors local industry for strengths and diversity and unemployment levels, and evaluates its banking markets for their effects on its loan portfolio. Although nonperforming and problem assets increased in 1996, the fundamental economies within the Company's markets have remained strong. The loan loss provisions and current levels of loan loss reserves reflect management's evaluation of the risks inherent in the loan portfolio and local economic conditions. Should a significant shift in economic trends and/or increased volumes of problem credits or charge-offs occur, such events would likely require increased loan loss provisions in the future.
NON-INTEREST INCOME. Total noninterest income increased $5,163 to $23,927 from $18,764 for the years ended December 31, 1996 and 1995, respectively. Of this increase, approximately $1,450 is attributed to acquisitions in 1996. In 1995, total noninterest income was up $2,377 from $16,387 in 1994, of which approximately $719 is attributed to the CBI and FPCBI acquisitions in 1995.
Revenue from fiduciary activities increased $542 to $3,161 in 1996 from $2,619 in 1995, due in part to $243 of additional revenues of the banks acquired in 1996, but also the result of fee increases that took effect at the end of 1994, more aggressive marketing of its fiduciary services in 1995 and 1996, and increased market values of the trusts under management.
Revenues from data processing services increased $1,128 or 18.2% to $7,324 in 1996 from $6,196 in 1995, which were up $1,450 or 30.6% from revenues of $4,746 in 1994. The increase in data processing revenue is the result of increases in data processing customers and the resulting increase in transaction volumes. During 1996 and 1995, the Company's data processing division expanded its ATM network from 216 total ATM locations at the beginning of 1995 to 343 at December 31, 1995 and to 477 at December 31, 1996. Although future growth in data processing revenues is not assured, continued expansion of the Company's ATM network and, to a lesser degree, regular data processing services are expected to continue into 1997, although not at the rates experienced in 1996 and 1995. Increases in data processing revenues as the result of expansion of the Data Division's customer base have been offset by similar increases in operating expenses of the Data Division. On a pretax basis, data processing division revenues, net of its direct operating expenses for 1996, increased $324 or 19.4% from 1995, which was up $359 or 27.5% from 1994. There were no increases in basic charges for data processing services in 1996 or 1995.
Service charges on deposit accounts increased $1,220 or 18.7% to $7,752 from $6,532 in 1995. Of this amount, approximately $650 is attributable to banking acquisitions. The remaining increase is primarily the result of increases in overdraft fees. Other service charges, commissions and fees increased $322 in 1996, primarily the result of banking acquisitions during the year.
Other income more than doubled in 1996, increasing $1,927 from $888 in 1995 to $2,815 in 1996. Banks acquired in 1996 generated other income aggregating $135 in the last quarter of the year, however, the most significant component was from the sale of merchant credit card processing at a gain of $1,359 in December 1996. The sale included alignment with a specialized merchant processing provider that enhances the Company's ability to compete in this highly specialized area.
NON-INTEREST EXPENSES. Total non-interest expenses increased $7,417 to $53,395 for the year ended December 31, 1996 from $45,978 for the year ended December 31, 1995. Approximately $6,375 of the increase relates to banking locations added as a result of the acquisitions. The remaining increase of approximately $1,040 or 2.3%, is principally inflationary increases. Total non-interest expenses increased $4,751 from $41,227 for the year ended December 31, 1994. Approximately $3,320 of the increase relates to banking locations added as a result of the CBI and FPCBI acquisitions, while an additional $651 relates to the addition of two new banking offices opened in Billings (December 1994) and Missoula (January 1995). The remaining increase of $780 or 1.9% of 1994 expense is principally inflationary increases. The following table lists significant operating expenses:
Data division expenses, which are included throughout the various categories above, increased in both years, principally related to increases in data processing volumes and expansion of the ATM network, and additional depreciation associated with upgrades of data processing equipment. Total data processing expenses increased $1,133 or 16.9% to $7,487 in 1996 from $6,714 in 1995, and $1,224 or 22.3% from $5,490 in 1994. FIBM acquired a small data service center in Helena, Montana during 1994. FIBM has expanded the customer base of the new facility, and continues to process certain correspondent activity at the Helena location. Increases in data division expenses in 1996 and 1995 were offset by increases in data division income.
Salaries and benefits were $27,531 and $23,694 for the years ended December 31, 1996 and 1995, respectively, an increase of $3,837 in 1996. Approximately $1,850 of the increase in salaries and benefits directly relates to banks acquired, while a portion of the remaining increase relates to personnel increases indirectly the result of acquisitions, particularly in the banks' operation centers and the data division. Other increases in salaries and benefits are primarily inflationary in nature.
In 1995, salaries and benefits increased $2,515 from $21,179 for the year ended December 31, 1994. Approximately two-thirds of the 1995 increase in salaries and benefits ($1,689) related to the acquisitions of CBI and FPCBI, and the two new facilities opened in Billings and Missoula. The remaining increase in salaries and benefits ($826 or 3.9%) was principally the result of inflationary increases and additional staffing of the data division in 1995, including the purchase of the data processing facility in Helena in mid-1994.
Aggregate occupancy furniture and equipment costs increased $1,594 or 17.4% to $10,754 in 1996 from $9,160 in 1995. Added facilities included the six new banking locations in Montana (Kalispell, Great Falls, Cut Bank, Whitefish, Evergreen and Hamilton) as well as the three new banking locations in Wyoming (Casper, Laramie and Riverton). 1996 expenses directly related to these locations aggregated $671. In addition, higher depreciation, maintenance and other costs associated with the major hardware and software upgrades in the data division that began in early 1996 were the primary reasons for additional increases in occupancy, furniture and equipment expenses aggregating $679. The remaining increase in these expenses was less than $250 and only 2.7% of 1995 expense totals.
Occupancy expenses increased $370 or 10.4% to $3,916 in 1995 from $3,546 in 1994, principally due to added facilities in Bozeman, Livingston, Gardiner, Billings, Missoula and Helena. Similarly, furniture and equipment expenses increased $686 or 15.1% in 1995 as compared to 1994 due, in part, to the additional facilities in 1995, however, increased furniture and equipment expenses were also the result of higher maintenance and other costs associated with the significant growth in the ATM network supported by the Company's Data Processing Division.
Other real estate ("OREO") expense, including provisions for OREO are included in non-interest expenses, net of gains on sales of OREO. In 1996, FIBM recorded net OREO income of $214 compared to net OREO income of $586 and $457 in 1995 and 1994, respectively, or an increase in non-interest expenses of $372 in 1996 and a reduction in noninterest expenses of $129 in 1995. These net variances in expense were primarily the result of fluctuations in gains on sales of OREO. OREO sales gains were $335, $527 and $578 in 1996, 1995 and 1994, respectively. Negative provisions for OREO of ($21) and ($28) were recorded in 1996 and 1995, respectively, compared to a provision of $10 in 1994. Decreased provisions and the reversals recorded in 1996 and 1995 are reflective of dispositions of properties at gains and reduced loss exposure on remaining unsold properties. Although expected to continue through liquidation of remaining OREO properties, gains on disposition of OREO properties are expected to decline as the numbers and value of properties held in OREO continue to decrease. Continued decreases in properties held, reductions in loss provisions and gains on disposition of properties, however, are not assured should a shift in economic trends occur.
FDIC deposit insurance premiums decreased $1,122 to only $5 in 1996 as compared to a decrease of $881 or 43.9% in 1995. The reduced insurance costs in 1996 and 1995 were the result of an FDIC rate reduction of over 80% that took effect in June 1995, followed by an additional decrease during 1996 due to reductions in rates assessed by the FDIC that virtually eliminated FDIC insurance premiums in 1996. These cost reductions are also reflective of the Company subsidiaries' "well-capitalized" rating by the FDIC. So long as FIBM's bank subsidiaries in Montana and Wyoming continue to fall into the "well-capitalized" category, they will be assessed the lowest premium rate.
Other expenses increased $2,736 to $15,319 in 1996 from $12,583 in 1995. This increase is due to higher subsidiary expenses resulting from the acquisitions in 1996, aggregating approximately $2,921 including additional goodwill amortization of $569. The Parent Company also incurred additional other expenses in 1996 which were directly related to the acquisitions. These increases were partially offset by a decrease in First Interstate royalty fees, which were discontinued in May 1996 after the Franchise Agreement was terminated.
In 1995, other expenses increased $2,190 to $12,583 from $10,393 in 1994. Approximately $1,727 of this increase is higher subsidiary expenses resulting from the acquisitions of CBI and FPCBI, including additional goodwill amortization of $422, and the additions of new facilities in Billings and Missoula. Further, the Parent Company incurred more than $200 in additional other expenses in 1995 which were directly related to the acquisitions of CBI and FPCBI. Net of these items, the increase in other expense was $463 or 4.5% of expense in 1994.
INCOME TAX EXPENSE. Total income tax expense increased $2,507 from $10,844 for the year ended December 31, 1995 to $13,351 for the year ended December 31, 1996. Federal income tax expense of $11,516 in 1996 represented an effective tax rate of 33.3% compared to Federal income tax expense of $9,328 in 1995 which was an effective rate of 33.1%. State income tax expense of $1,835 in 1996 and $1,516 in 1995, applied only to pretax earnings of entities operating within the state of Montana, represent effective tax rates of 5.3% in 1996 and 5.4% in 1995.
By comparison, total income tax expense for 1995 increased $983 from $9,861 for the year ended December 31, 1994. Federal income tax expense of $8,532 for the year ended December 31, 1994 represented an effective tax rate of 33.3%. 1994 Montana income tax expense was $1,329 or an effective tax rate of 5.2%.
FINANCIAL CONDITION AT DECEMBER 31, 1996
FIBM's earning assets include a mix of 76.8% in loans and 22.5% in investment securities, with the balance in short term Federal funds and an interest-bearing deposit in another bank.
GENERAL. During 1996, total assets increased $712,622 or 52.7% from $1,351,215 at December 31, 1995 to $2,063,837 at December 31, 1996.
The increase in consolidated assets was largely the direct result of acquisitions which occurred in the last quarter of 1996. FIB Montana, NA and FIB Wyoming, NA with consolidated assets of approximately $276,000 and $324,000, respectively, at the transaction date were acquired on October 1, 1996. FIB Whitefish with total assets of approximately $71,000 at the transaction date was acquired effective December 18, 1996. Exclusive of acquired assets, total assets at December 31, 1996 increased approximately $45,000 or 3.3% from December 31, 1995.
INVESTMENT SECURITIES. FIBM manages its investment portfolio within established policies which provide for the management of interest rate sensitivity risks, to meet earnings objectives, to provide ample liquidity and to provide adequate collateral to support deposit and repurchase agreement activities. There are no significant concentrations of investments as of December 31, 1996 (greater than 10% of stockholders' equity) in any individual security issuer, except for the U.S. Government and U.S. Government-sponsored agencies.
Increases in investment securities associated with the acquisitions of FIB Montana, NA, FIB Wyoming, NA and FIB Whitefish in 1996 aggregated approximately $100,000. The investment policy does not permit the use of portfolio securities for speculative purposes, including, but not limited to, gains trading (selling investment assets prior to maturity in order to recognize market appreciation, while continuing to hold securities which have unrealized market losses). Management has, however, identified certain investment securities as available-for-sale which, in the event of changing market conditions, may be sold prior to their stated maturities.
(1) Average yields have been calculated on a fully-taxable equivalent basis.
The investment portfolio, representing 22.5% of earning assets, is well diversified. Approximately 95.5% of the investment portfolio is at fixed rates of interest, with the remaining portion at variable rates, of which most are issues of agencies of the U.S. government. U.S. treasury securities comprise 53.2% of the investment portfolio, with 30% maturing within one year. No U.S. Treasury securities held at December 31, 1996 have maturities beyond five years. An additional 35.9% of the investment portfolio is comprised of obligations of U.S. government agencies. 35% of the agency securities mature within one year, an additional 38% within five years, an additional 7% within ten years, and the remaining 20% in over ten years. Maturities of securities do not reflect rate repricing opportunities present in many adjustable rate mortgage-backed and corporate securities, nor do they reflect expected shorter maturities based upon early prepayments of principal. Tax exempt investments in issues of state, county and municipal entities represent 4.9% of the investment portfolio, and are all at fixed rates with slightly over two-thirds of the securities maturing within five years. The remaining 6.0% of the investment portfolio is principally comprised of a mix of corporate, mortgage backed, and other securities with varying maturities. It is currently management's intent to hold most investment securities to maturity.
LOANS. The loan portfolio is well diversified, including a mix of commercial, consumer, agricultural and real estate loans as well as a mix of fixed and variable rate loans. Approximately 67% of total loans are at fixed rates. 34.3% of the Company's loan portfolio is comprised of commercial loans, of which 54% are at adjustable rates and 46% are at fixed rates. 35.4% of the loan portfolio is direct and indirect consumer loans and credit card loans, over 90% of which are at fixed rates. Approximately 94% of fixed rate consumer loans are for terms of less than five years. Agricultural loans comprise 10.4% of the portfolio, of which 59% are at adjustable rates. 20.0% of the loan portfolio is comprised of real estate loans, 77% of which are at fixed rates. Two-thirds of fixed rate real estate loans mature within five years.
Loan increases related to the acquisitions in 1996 aggregated approximately $401,000 (net of allowances for possible loan losses aggregating $10,553). Other increases in net loans during 1996 totaled approximately $91,500 or an increase of over 10% from consolidated net loans of $855,207 at December 31, 1995. There were increases in loan volumes in all major categories of loans in 1996. Increases in loan demand are attributed to continued healthy economic conditions in the communities served by FIBM's bank subsidiaries.
(1) Loan amounts exclude "other loans", consisting primarily of overdrafts.
Unlike residential mortgage loans and consumer installment loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Company attempts to limit these risks by employing underwriting and documentation standards contained in written loan policies and procedures. These policies and procedures are reviewed on an ongoing basis by management and adherence to stated policies are monitored by credit administration.
NA Not Applicable NM Not Meaningful
(1) Approximately $405, $318, $296, $440 and $691 of gross interest income would have been accrued if all loans on nonaccrual had been current in accordance with their original terms for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Of this amount, approximately $357 and $283 of gross interest income would have been recognized in 1996 and 1995, respectively, if impaired loans had been current in accordance with their original terms.
(2) Gross capital funds is defined as total stockholders' equity plus the allowance for loan losses.
PROBLEM AND CLASSIFIED LOANS. Federal regulations require that each financial institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, examiners have authority to identify problem loans and, if appropriate, classify them. There are three classifications for classified loans; "substandard", "doubtful", and "loss". Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high probability of partial loss. A loan classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Problem loans include classified loans and another category designated "special mention" maintained for loans which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Loans classified as substandard or doubtful usually require the institution to establish general allowances for loan losses. If a loan or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the loan classified loss, or charge-off such amount.
Exclusive of assets classified loss and which have been fully reserved or charged-off, FIBM's problem loans at December 31, 1996 consisted of $24,966 of loans classified as special mention, $19,994 of loans classified as substandard and $4,585 of loans classified as doubtful.
There are no loans classified as loss, doubtful, substandard, or special mention that have not been disclosed above that represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
RECONCILIATION OF THE ALLOWANCE FOR LOAN LOSSES - --------------------------------------------------------------------------------
1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------- Balance as of January 1, $ 15,171 13,726 13,373 12,965 12,257
Beginning allowances of acquired banks 10,553 917 - - -
Charge-offs: Agricultural 220 25 4 20 69 Commercial 1,127 393 398 777 1,036 Real estate 27 20 53 20 134 Consumer 2,384 1,679 1,425 1,035 1,113 Other loans - - - - - - -------------------------------------------------------------------------------- Total charge-offs 3,758 2,117 1,880 1,852 2,352 - -------------------------------------------------------------------------------- Recoveries: Agricultural 154 88 82 100 450 Commercial 850 252 299 353 467 Real estate 9 119 36 7 22 Consumer 974 557 472 455 491 Other loans - - - - - - -------------------------------------------------------------------------------- Total recoveries 1,987 1,016 889 915 1,430 - -------------------------------------------------------------------------------- Net charge-offs 1,771 1,101 991 937 922 Provision for loan losses 3,844 1,629 1,344 1,345 1,630 - -------------------------------------------------------------------------------- Balance as of December 31, $ 27,797 15,171 13,726 13,373 12,965 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Period end loans $ 1,375,479 870,378 751,518 667,385 607,125 Average loans 1,014,901 837,288 705,690 641,411 595,026 - -------------------------------------------------------------------------------- Ratio of net charge-offs to average loans 0.17% .13 .14 .15 .15 Ratio of reserve to period end loans 2.02% 1.74 1.83 2.00 2.14 - --------------------------------------------------------------------------------
The provision for loan losses provides a reserve (the allowance for loan losses) to which loan losses are charged as those losses become evident. Management of the banks determine the appropriate level of the allowance for loan losses on a quarterly basis utilizing a report containing loans with a more than normal degree of risk. This report is the by-product of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Utilizing this report, a specific portion of the reserve is allocated to those loans which are considered to represent significant exposure to risk. In addition, estimates are made for potential losses on all other loans, not specifically reviewed, based on historical loan loss experience and other factors and trends.
Included in the allocated reserves are $436 related to impaired loans at December 31, 1996.
FUNDING SOURCES. Earning assets are funded by various sources, each of which is continuously monitored to ensure an appropriate level of liquidity to meet customer demand and to support the Company's operating needs. The primary funding source is a broad and diversified base of core deposits gathered by its twenty-eight banking offices in Montana and Wyoming. Non-interest bearing demand deposit accounts comprise 22.9% of total customer deposits. Low cost interest bearing demand and savings deposits comprise an additional 42.5% of total deposits. Higher cost certificates of deposit and IRA accounts comprise the remainder (34.6%) of total deposits. Large certificates of deposit, those for $100 and over, represent only 7.3% of total deposits and 21.1% of total time deposits.
Deposits increased $580,355 from $1,099,069 at December 31, 1995 to $1,679,424 at December 31, 1996. Again, the increase in deposits was principally the direct result of the acquisitions of FIB Montana, NA, FIB Wyoming, NA and FIB Whitefish. Aggregate additions to deposits on the respective acquisition dates were approximately $524,000, of which approximately $365 were interest-bearing. The remaining increase of over $56,000 or approximately 5.1% of deposits at December 31, 1995 is reflective of moderate growth in overall customer deposits in the last half of 1996 following a seasonal slowdown in overall deposit growth during the first half of the year.
CAPITAL. A significant measure of the strength of a financial institution is its shareholders' equity, which should expand in close proportion to asset growth. At December 31, 1996, shareholders' equity totaled more than $146 million or 7.08% of total assets, compared with $109.4 million or 8.09% at year end 1995. Although FIBM has achieved steady internal capital generation throughout the past five years, it also issued $20 million of noncumulative preferred stock in conjunction with acquisitions in 1996. Stockholders' equity to assets declined in 1996 as the result of acquisitions during the year.
Risk based guidelines define a two tier capital framework. Tier 1 capital consists of common shareholders' equity less disallowed intangibles, while total risk based capital consists of Tier 1 capital, the allowance for loan losses up to 1.25% of risk adjusted assets and long-term subordinated debt. Risk adjusted assets are determined by assigning various levels of risk to different categories of assets and off-balance-sheet activities.
The following table details capital components and ratios for the Company on a consolidated basis and each of its significant subsidiaries as of December 31, 1996 and 1995:
CAPITAL RATIOS
(1) For computation of capital ratios, the regulatory agencies have determined that the FASB 115 fair value adjustment does not enter into the calculation of capital ratios. (2) Limited to 1.25% of risk-adjusted assets, with the excess deducted from risk-adjusted assets. (3) The regulatory "minimum" and requirement for "well capitalized" Tier 1 capital are 4.00% and 6.00%, respectively. (4) The regulatory "minimum" and requirement for "well capitalized" total risk-based capital are 8.00% and 10.00%, respectively. (5) The regulatory "minimum" and requirement for "well capitalized" leverage capital are 3.00% and 5.00%, respectively. (6) Subsidiary acquired in 1996.
ASSET AND LIABILITY MANAGEMENT
The primary objective of the asset/liability management process is to optimize the net interest income while prudently managing balance sheet risks. Specifically, these risks include interest rate risk, maintaining sufficient levels of capital, and a sufficient level of liquidity to meet the needs of depositors and borrowers. Fundamental to most risk management decisions are the inherent tradeoffs between risk reduction and Company profitability. In certain circumstances, a measured amount of interest rate sensitivity in the balance sheet may produce an improved level of earnings for the Company. Thus, it is not the intent of the Asset/Liability Committee (ALCO) to eliminate interest rate risk. Rather, the Company attempts to understand the level of risk accompanying its decisions and to monitor and manage these risks.
The ability to optimize the net interest income is largely dependent upon the achievement of an interest rate spread which can be managed during fluctuations of prevailing market interest rates. Interest rate sensitivity is a measure of the extent to which net interest income will be affected by market interest rates over a period of time. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest bearing liabilities which either reprice or mature within a given period of time. The difference is known as interest rate sensitivity "gap".
STATIC REPRICING AND INTEREST RATE SENSITIVITY
(1) Does not include nonaccrual loans of $6,822. (2) Does not include noninterest-bearing demand deposits of $385,371.
The declining interest rate environment FIBM experienced in the early 1990's provided for growth in net interest income as the Company's funding costs declined, which improved the spread realized between the yields on assets and the cost of funds. This factor, along with loan volume growth, has provided the Company with favorable interest margins. In anticipation of interest rates rising during 1994, and in order to protect its net interest margin, FIBM undertook actions to promote the lengthening of deposit maturities and the generation of variable rate loans. No swaps, financial futures or options contracts have been utilized by the Company. FIBM had a relatively high percentage of interest earning assets maturing or repricing within one year at December 31, 1996, which provides some cushion to the net interest margin when interest rates are flat or rising.
FIBM uses interest sensitivity "gap" analysis, income statement simulation models, and, to a limited extent, duration analysis (including estimation of borrower prepayment options) to evaluate the potential effects of changing interest rates on the net interest margin of the subsidiary banks. By specific policy, FIBM will attempt to maintain a mix of earning assets and deposits in the one year time period, such that no more than 5% of the net interest margin will be at risk should interest rates rise or fall 1%. In evaluating exposure to interest rate movements, Management does not view the gap amounts as presenting an unusually high risk potential, although no assurances can be given that FIBM is not at risk in the event of rate increases or decreases. Also, certain assets have features which restrict changes in interest rates on a short-term basis as well as over the life of the asset. In the event of a change in interest rates, prepayment of assets and deposit outflows would likely deviate significantly from historical or expected levels. The above gap fails to consider the interest rate sensitivities of those asset and liability accounts. It is recognized that a rising rate environment may decrease the ability of many borrowers to service their debt. Management cannot provide any assurance as to what the actual affect of changes in interest rates will be on FIBM's interest margin.
The ALCO attempts to keep informed as to the inherent tradeoffs resulting from risk elimination and profitability objectives.
LIQUIDITY
FIBM's ALCO has established specific policies and procedures for managing existing liquidity levels and has also developed contingency plans to address potential liquidity needs. The Company's current liquidity position is supported in large part through core deposits generated from the Company's banking offices and from a high quality investment portfolio.
FIBM's current investment portfolio contains a mix of maturities which provide a structured flow of maturing and reinvestable funds that can be converted to cash, should the need arise. Maturing balances in the loan portfolio also provide options for managing cash flows. The ability to redeploy these funds is an important source of intermediate to long-term liquidity.
Backup sources of liquidity are provided by Federal funds lines carried with both upstream and downstream correspondent banks. Additional liquidity could be generated through borrowings from the Federal Reserve Bank of Minneapolis, of which FIBOC Montana is a member. Additionally, liquidity and/or matched funding can be obtained from the Federal Home Loan Bank of Seattle, of which FIBOC Montana, FIBOC Wyoming and FIB Whitefish all are members.
At December 31, 1996, the Company had $2.8 million available on its revolving term loan.
The Company is not aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on the Company's liquidity, capital resources or results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of First Interstate BancSystem of Montana, Inc. and Subsidiaries are contained elsewhere herein [see Item 14(a)1]:
Report of KPMG Peat Marwick LLP, Independent Auditors Consolidated Balance Sheets- December 31, 1996 and 1995 Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements
Item 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of FIBM are as follows:
Date First Elected Name and Age Position Director/Officer ------------ -------- ----------------
DIRECTORS:
Homer A. Scott, Jr., 62(1) Director and Chairman of the 1971 Board
Dan S. Scott, 65(1) Director and Chairman of 1971 Compensation Committee
James R. Scott, 47(1) Director, Vice Chairman of 1971 the Board and Chairman of Audit Committee
Randy Scott, 43 Director 1993
Susan Scott Heyneman, 58 Director 1994
Joel Long, 56 (1) Director 1996
DIRECTORS AND EXECUTIVE OFFICERS:
Thomas W. Scott, 53 Director, President and Chief 1971 Executive Officer
William H. Ruegamer, 52 Director, Chief Operating Officer and Executive Vice President 1988
Executive Officers:
William G. Wilson, 57 Senior Vice President 1973
Terrill R. Moore, 44 Senior Vice President, Chief 1989 Financial Officer and Secretary
Edward Garding, 47 Senior Vice President, Branch 1996 Administration Officer
- --------------------- (1) Member of compensation committee.
All of the directors listed above will hold office until the next annual meeting of shareholders, or until their successors are duly elected and qualified. All of the officers listed will hold office until successors are appointed by the Board of Directors. There are no arrangements or understandings between any of the directors or officers or any other persons, pursuant to which any of the above directors have been selected as directors, or officers have been selected as officers, except for Randall I. Scott. The third generation of the Scott Family recommended that Randall I. Scott be elected to the Board of Directors to be their representative for their ownership interests.
The business of FIBM is conducted through meetings of the Board of Directors. During the fiscal year ended December 31, 1996, the Board of Directors held 6 regular meetings and 3 special meetings and none of the existing directors attended fewer than 80% of the total meetings, except Susan Scott Heyneman and James R. Scott each attended 7 of the 9 board meetings (78%) in 1996.
Director Dan S. Scott is Chairman of the Compensation Committee. The Compensation Committee meets in such capacity periodically to review the performance of the Company's officers and to determine compensation programs and adjustments for all employees. The Compensation Committee met formally once in 1996 plus several compensation committee agenda items were dealt with in the board meetings as a matter of convenience.
Director James R. Scott is Chairman of the Audit Committee of the Company. The Audit Committee reviews the records and affairs of the Company to determine their financial condition, reviews with management and the independent auditors the systems of internal control, and monitors the subsidiaries' adherence in accounting and financial reporting to generally accepted accounting principles. The Audit Committee of FIBM met once in 1996.
Terrill R. Moore is Chairman of the Audit Committee of the Company's Wyoming subsidiaries. This Audit Committee met formally once in 1996.
During the past five years, the business experience of each of the directors and executive officers has been as follows:
HOMER A. SCOTT, JR. Has been a director of FIBM since 1971, and is currently Chairman of the Board. Mr. Scott has also been a director and chairman of the Board of FIBOC Wyoming since June 1976. Mr. Scott is also a director of the Board of FIBOC Montana, FIB Wyoming NA and First Interstate, fsb.
THOMAS W. SCOTT Has been a director of FIBM since 1971. Mr. Scott serves as President and Chief Executive Officer of FIBM, and has held the office of President for more than five years. Currently Mr. Scott is also a director of FIBOC Wyoming and CFI, and Chairman of the Board of FIBOC Montana, FIB Wyoming, NA, FIB Montana, NA, FIB Whitefish and First Interstate, fsb.
JAMES R. SCOTT Has been a director of FIBM since 1971. Mr. Scott has been Vice Chairman of the Board since January 1990. Currently Mr. Scott is also a director of FIBOC Montana. Mr. Scott is President of the First Interstate Bank Foundation.
DAN S. SCOTT Has been a director of FIBM since 1971. Currently Mr. Scott is also a director of FIBOC Wyoming, FIBOC Montana and FIB Wyoming, NA. Mr. Scott has also been a rancher for more than five years.
WILLIAM H. RUEGAMER Is the Executive Vice President and Chief Operating Officer of FIBM. He has served as a director of FIBM since June 1988, and of CFI since February 1993. Mr. Ruegamer has had 10 years of experience with the OCC and has held various executive positions with the Company's subsidiaries. Effective December 1992 he is the President of FIBOC Montana. Mr. Ruegamer is also a director of FIBOC Montana, FIBOC Wyoming, FIB Montana, NA, First Interstate, fsb and FIB Whitefish.
SUSAN SCOTT HEYNEMAN Was elected to be a director of FIBM in March 1994. Ms. Heyneman served previously as a director of FIBM, having resigned in 1989 to pursue personal interests. Ms. Heyneman has continued to serve as a director of FIBOC Montana for more than five years. With her husband, Ms. Heyneman has been in ranching for more than five years.
RANDY SCOTT Has been a director of FIBM since August 1993. Mr. Scott was a trust officer of FIBOC Montana's trust division from 1991 until 1996. From 1985 until 1991, Mr. Scott was an officer of FIBM's audit department. In total, Mr. Scott was employed by FIBM or a subsidiary thereof for nineteen years.
JOEL LONG Is a resident of Sheridan, Wyoming and is President of JTL Group, Inc., a construction firm doing business in Montana and Wyoming. Mr. Long is a past director of First Interstate Bank-West Billings and First Interstate Bank-Billings.
WILLIAM G. WILSON Has been a Senior Vice President of FIBM since 1983. He was also Chief Financial Officer of FIBM until November 1989. Mr. Wilson was formerly a Vice President from 1973 to 1979 and a Senior Vice President of the Billings office of FIBOC Montana from 1979 to 1983. Effective December 1992 he is Senior Vice President, Cashier, and Secretary of FIBOC Montana. Mr. Wilson is also a board member of FIB Montana, NA.
TERRILL R. MOORE Has been a Senior Vice President, the Chief Financial Officer and Secretary of FIBM since November 1989. In addition, he is a director and an assistant to the secretary of FIBOC Wyoming. Effective December 1992 he is Senior Vice President and Chief Financial Officer of FIBOC Montana. Mr. Moore is also a board member of CFI, FIB Montana, NA, First Interstate, fsb and FIB Whitefish.
EDWARD GARDING Is a Senior Vice President of FIBM. He is also President of FIBOC Wyoming. Mr. Garding has been in banking for the past 25 years. He is past president of the Wyoming Bankers Association and is currently the Chairman of their Government Relations Committee. He also serves on the board of the Pacific Coast Banking School which is at the University of Washington and he is the past president of the Sheridan College Foundation. Mr. Garding is a board member of FIBOC Wyoming, FIB Whitefish, and effective January 1997, a director of FIBOC Montana.
Many of the directors and officers of FIBM are related. Homer A. Scott, Jr., Thomas W. Scott, Dan S. Scott, Susan Scott Heyneman and James R. Scott are siblings. Randy Scott is a son of Dan S. Scott.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE AND DIRECTOR COMPENSATION
The following table sets forth for the three fiscal years ended December 31, 1996, certain information as to the cash compensation received by each executive officer and director of FIBM listed above who received total cash compensation in excess of $100,000 and by all executive officers of FIBM as a group for services in all capacities of FIBM and its subsidiaries.
(1) The amount included under Other Annual Compensation principally relates to an auto allowance, or the value of personal usage of a company owned vehicle, except that Edward Garding received reimbursement of moving and related expenses aggregating $13,660 in 1996.
(2) FIBM has five executive officers (4 executive officers prior to 1996).
(3) Not an executive officer of FIBM prior to 1996.
BOARD FEES. Inside directors do not receive separate fees for their services. The compensation of their services is included in the salary and bonus amount shown in the above table. Outside directors, presently only Joel Long, receive a $400 monthly retainer, $500 per board meeting attended plus $250 for each attended committee meeting.
HEALTH AND LIFE INSURANCE. FIBM and its subsidiaries currently provide all full time employees (30 or more hours per week) with health and dental insurance coverage, as well as life insurance (up to two and one half times salary) and disability insurance benefits at no cost to them. The contributions to the plan on behalf of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott, William H. Ruegamer, William G. Wilson, Terrill R. Moore, Edward Garding, and all executive officers as a group, were $3,465, $3,216, $3,307, $2,687, $2,687, $3,131, $2,870 and $14,682, respectively, for the fiscal year ended December 31, 1996.
PROFIT SHARING PLAN. FIBM and its subsidiaries have a noncontributory qualified profit sharing plan. To be eligible to participate, an employee must complete one year of employment and 1,000 hours or more of service. Contributions are determined by the FIBM Board of Directors, but are not to exceed, on an individual basis, the lesser of 25% of compensation or $30,000. There is immediate 100% vesting. The contributions to the plan on behalf of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott, William H. Ruegamer, William G. Wilson, Terrill R. Moore, Edward Garding, and all executive officers as a group, were $4,896, $5,056, $10,187, $9,396, $5,044, $4,272, $5,227 and $34,126, respectively, for the fiscal year ended December 31, 1996. Total contributions to this plan for all participating employees were $839,360, $685,435, and $620,261 in 1996, 1995 and 1994, respectively.
EMPLOYEE SAVINGS PLAN. FIBM and its subsidiaries have a contributory qualified employee savings plan (401(k)). Eligibility requirements for this plan are the same as those for the profit sharing plan as discussed in the preceding paragraph. Employee participation in the plan is at the option of the employee. FIBM and its subsidiaries are required to match $1.25 for every $1.00 of employee contributions up to 4% of participating employee's compensation. There is immediate 100% vesting. The contributions to the plan on behalf of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott, William H. Ruegamer, William G. Wilson, Terrill R. Moore, Edward Garding, and all executive officers as a group, were $4,696, $5,112, $9,508, $9,500, $4,813, $5,337, $4,334 and $33,492, respectively, for the year ended December 31, 1996. Total contributions to this plan for all participating employees were $814,165 in 1996, $703,128 in 1995 and $647,565 in 1994.
PRE-TAX SPENDING PLAN. Full time employees of FIBM and its subsidiaries are eligible to participate in the qualified pre-tax spending plan. The pre-tax spending plan allows employees to pay for dependent health insurance premiums, unreimbursed medical and/or dependent child care expenses with before-tax dollars rather than with after-tax dollars.
RESTRICTED STOCK AWARDS PLAN. There were no unvested shares issued and outstanding under the plan at December 31, 1996 or December 31, 1995.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN. FIBM has a non-qualified Stock Option and Stock Appreciation Rights Plan ("Plan") for key senior officers of FIBM and its subsidiaries. The Plan provides for the granting of stock options and stock appreciation rights of FIBM's common stock at a value at the time the options are granted of not less than the existing value of stock at the date of the grant. Each option granted under the Plan may be exercised within a period of ten years from the date of grant. The Plan provides for the granting of stock appreciation rights in tandem with stock options. The Plan allows the holder to surrender an exercisable stock option in exchange for cash or shares of common stock in an amount equal to the appraised minority value of covered shares over the option price of such shares.
The stock options and stock appreciation rights granted to Executive Officers in 1996 are shown in the following table:
The following table indicates the number and value of FIBM Stock Options and Stock Appreciation Rights exercised in 1996 and the number and value of unexercised FIBM Stock Options and Stock Appreciation Rights as of December 31, 1996:
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
OTHER AWARDS OR ARRANGEMENTS. There were no Long-Term Incentive Plan awards granted nor any repricing of Stock Options and Stock Appreciation Rights in 1996. FIBM has no employment contracts and no compensatory plans or arrangements relating to termination of employment or change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Homer A. Scott, Jr., Dan S. Scott, James R. Scott and Joel Long serve on the Compensation Committee. Therefore, all Committee members except Joel Long were officers or employees receiving compensation from FIBM for services rendered. Homer A. Scott, Jr. and James R. Scott were formerly officers of FIBM.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION. The Compensation Committee established the general compensation policies of FIBM and its Subsidiaries, establishes the compensation plans and specific compensation levels for executive officers, and administers the Annual Bonus Plan, Restricted Stock Awards Plan and Stock Option and Stock Appreciation Rights Plan.
As required by recently adopted rules designated to enhance the disclosure of FIBM's executive compensation policies and practices, the following is the Compensation Committee's report submitted to the Board of Directors addressing the compensation of FIBM and its Subsidiaries' executive officers for 1996.
COMPENSATION POLICY
FIBM's executive compensation policy is designed to establish an appropriate relationship between executive pay and FIBM's annual performance, its long-term growth objectives and its ability to attract and retain qualified executive officers. The Compensation Committee attempts to achieve these goals by integrating competitive annual base salaries with (a) bonuses based on corporate performance and on the achievement of specified performance objectives and (b) key officer options through the Stock Option Plan. The Compensation Committee believes that cash compensation in the form of salary and bonus provides company executives with short term rewards for success in operations, and that long term compensation through the award of stock options encourages growth in management stock ownership which leads to expansion of management's stake in the long term performance and success of FIBM.
BASE SALARY. For 1996, the Compensation Committee approved the base salary of the executive officers. In determining the base salary of each of the executive officers, the company relied on three industry surveys of salaries paid to executive officers of financial institutions with comparable asset size and similar operating regions to that of FIBM. The Compensation Committee set the base salaries of FIBM and its Subsidiaries' executive officers within a reasonable range of those salaries reflected in the surveys. In 1996, executive officers generally received raises in their base salary, with the largest raise of $6,000 going to the Chief Operating Officer, William H. Ruegamer. Raises in base salary reflected an inflationary increase combined with improved corporate performance and profitability in 1995.
BONUSES. Annual incentives for the CEO and other executive officers are intended to reflect FIBM's belief that management's contribution to stockholder returns (via increasing return on equity and return on assets) comes from maximizing earnings and the quality of these earnings. Awards are based on the attainment of specified performance objectives, and the bonus amount is determined as a percentage of the recipient's base salary. For 1996, the CEO and other executive officers were assigned bonus amounts ranging from 28.1% to 38.8% of the base salaries paid to such persons. The varying percentages reflect the Committee's belief that, as an executive officer's duties and responsibilities in the company increase, the officer will be increasingly responsible for the performance of FIBM. Accordingly, a larger portion of the officer's compensation should be incentive compensation. Actual bonuses payable depend on the level of achievement of specified performance objectives. For 1996, the performance objective necessary to achieve a bonus was attainment of specified return on stockholders' equity. During 1996, the specified performance objectives were attained and exceeded, and therefore the CEO received the largest bonus of $75,000 (36.4%). The largest bonus as a percentage of base salary was paid to the CFO (38.8%). Increases in bonuses reflect the continued improved corporate performance in 1996 and completion of significant acquisitions.
STOCK OPTIONS. In January 1996, the executive officers as well as certain other officers of FIBM and its subsidiaries, excluding the CEO and all other Scott Family members, were each granted options under FIBM's Stock Option Plan to purchase a specified number of shares of FIBM common stock. The number of shares that each officer was granted an option to purchase was in turn based primarily on the individual's ability to influence the company's long term growth and profitability as well as the number of options previously granted. The Compensation Committee believes that stock option grants afford a desirable long term compensation method because they closely ally the interests of management with stockholder value and the grants of stock options are the best way to link directly the financial interests of management with those of stockholders. Options granted are immediately exercisable but must be exercised within ten years after the date of the grant.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee believes that the compensation of the CEO should be heavily influenced by the performance of FIBM. Therefore, although there is necessarily some subjectivity in setting the CEO's salary, a major element of the compensation package is directly tied to FIBM performance. In 1996, the annual base salary of Thomas W. Scott, FIBM's CEO, was raised from $200,000 to $206,000. Such increase was determined to be appropriate by the Compensation Committee based on comparable chief executive salaries, as set forth in surveys reviewed by FIBM, and improvements in the company's performance and profitability in 1995. The performance targets of FIBM were attained and exceeded in 1996 and therefore the Compensation Committee awarded a bonus of $75,000, or 36.4% of annual base compensation. Thomas W. Scott did not participate in the decisions of the Compensation Committee with respect to the salary and bonus paid to him in 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On March 5, 1997, there were 1,974,162 shares of the Common Stock of FIBM outstanding, held of record by 610 shareholders. Each shareholder of record is entitled to vote at meetings of shareholders, and each share is entitled to one vote.
The following table sets forth as of March 5, 1997 the number of shares of Common Stock of FIBM owned of record or beneficially by each person who owned of record, or to the knowledge of FIBM, beneficially, more than 5% of the Common Stock of FIBM or is a Scott Family member.
Name and Address Number of FIBM % of FIBM of Beneficial Owner Shares Outstanding Shares Outstanding - -------------------- -------------------- --------------------- James R. Scott 189,975 9.62 439 Grandview Blvd. Billings, Montana 59102 Managing partner, J.S. Investments Limited Partnership (2) 140,017 7.09 Trustee for John M. Heyneman, Jr. 6,247 0.32 Trustee for Thomas Scott Heyneman 6,247 0.32 ---------- ---------- 342,486 17.35
Name and Address Number of FIBM % of FIBM of Beneficial Owner Shares Outstanding Shares Outstanding - -------------------- -------------------- ---------------------
Dan Scott 46,267 2.34 P.O. Box 65 Ranchester, Wyoming 82839 Managing partner, Nbar5 A (2) 12,240 0.62 Managing partner, Nbar5 O (2) 10,363 0.52 Managing partner, Nbar5 K (2) 9,425 0.48 Managing partner, Nbar5 S (2) 8,486 0.43 Managing partner, Nbar5 T (2) 8,486 0.43 ---------- ---------- 95,267 4.82
Homer Scott, Jr. 200,968 10.18 122 Scott Drive Sheridan, Wyoming 82801 Trustee for Riki Rae Scott Davidson 22,204 1.12 Trustee for Risa Kae Scott Brown 18,819 0.95 Trustee for Rae Ann Scott Morse 22,206 1.13 ---------- ---------- 264,197 13.38
Thomas W. Scott 196,030 9.93 P.O. Box 30876 Billings, Montana 59107
Susan Scott Heyneman 61,704 3.13 Bench Ranch Fishtail, Montana 59028
FIB Montana P.O. Box 30918 Billings, Montana 59116 Trustee for Jonathan R. Scott 55,590 2.82 Trustee for Julie Anne Scott 57,334 2.90 Trustee for James F. Heyneman 8,800 0.45 Trustee for James R. Scott, Jr. 655 0.03 ---------- ---------- 122,379 6.20
Jeanne I. Scott 5,402 0.27 P.O. Box 65 Ranchester, Wyoming 82839
Susan Elizabeth Scott 32,506 1.65 1241 Trojan Casper, Wyoming 82609
James Marshall Scott 28,362 1.44 53-025 Avenida Obregon LaQuinta, California 92253
Homer Rollins Scott 30,576 1.55 3536 Tradition Drive Ft. Collins, Colorado 80526
Randy Scott 10,149 0.51 521 Freedom Avenue Billings, Montana 59105 Managing partner, NBar5 Limited Partnership (2) 279,948 14.18 ---------- ---------- 290,097 14.69
Lynette E. Scott 7,000 0.35 521 Freedom Avenue Billings, Montana 59105
Name and Address Number of FIBM % of FIBM of Beneficial Owner Shares Outstanding Shares Outstanding - -------------------- -------------------- ---------------------
Ronald Noel Scott 22,842 1.16 P.O. Box 65 Ranchester, Wyoming 82839
John M. Heyneman 9,251 0.47 Bench Ranch Fishtail, Montana 59028 Managing partner, Towanda Investments Limited Partnership (2) 80,765 4.09 ---------- ---------- 90,016 4.56
Charles Matthew Heyneman 7,756 0.39 1817 Patricia Lane Billings, Montana 59102
Alexander Paul Heyneman 7,697 0.39 2517 Beth Drive Billings, Montana 59102 Trustee for Alexander Paul Heyneman, Jr. 320 0.02 ---------- ---------- 8,017 0.41
Sandra Arlene Scott Suzor 22,447 1.14 2943 Silver Plume Ft. Collins, Colorado 80526
FIB Wyoming P.O. Box 2007 Sheridan, Wyoming 82801 Trustee for Homer A. Scott, Jr. 14,359 0.73 Trustee for Sarah E. Scott Suzor 5,580 0.28 Trustee for Samuel Moise Suzor 3,255 0.16 Trustee for Brekken Arlene Baker 1,004 0.05 Trustee for Baylee Mae Baker 983 0.05 ---------- ---------- 25,181 1.27
Janet E. Scott 2,752 0.14 122 Scott Drive Sheridan, Wyoming 82801
Christine M. Scott 430 Grandview Blvd. Billings, Montana 59102 Trustee for Courtney L. Scott 655 0.03 Trustee for Dana A. Scott 655 0.03 ---------- ---------- 1,310 0.06
Thomas S. Heyneman 100 0.01 106-F Branegan Court Bozeman, Montana 59705 Custodian for Jacob Ryan Heyneman 320 0.02 ---------- ---------- 420 0.03
Joan Scott 288 0.01 P.O. Box 30876 Billings, Montana 59107 ---------- ----------
Scott Family shares outstanding 1,657,035 83.94 Minority shares (other than Scott ---------- ---------- Family) outstanding 317,127 16.06 ---------- ---------- Totals 1,974,162 100.00% ---------- ---------- ---------- ----------
Name and Address Number of FIBM % of FIBM of Beneficial Owner Shares Outstanding Shares Outstanding - -------------------- -------------------- ---------------------
Directors and executive officers: James R. Scott 342,486 17.35% Dan S. Scott 95,267 4.82 Homer Scott, Jr. 264,197 13.38 Thomas W. Scott 196,030 9.93 Susan Scott Heyneman 61,704 3.13 Randy Scott 290,097 14.69 William H. Ruegamer 7,478 0.38 William G. Wilson 5,941 0.30 Edward Garding 2,722 0.14 Terrill R. Moore 2,351 0.12 Joel Long 1,000 0.05 ---------- ---------- As a Group (11 persons) 1,269,273 64.29% ---------- ---------- ---------- ----------
(1) Shares held in trust with a bank and an individual listed as joint trustees are listed under the name of the individual. (2) As a part of overall estate and family succession planning, certain Scott Family members have formed partnerships to hold FIBM stock. The Scott Family as a group will continue to control, directly or indirectly, the same number of shares of FIBM stock, however, each partnership will be a specific shareholder.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FIBM and its subsidiaries have had, and expect to have in the future, banking transactions in the ordinary course of business with related parties, including business with directors, officers, shareholders and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. Such transactions include correspondent banking relationships with affiliated banks, and data processing servicing for affiliated banks, in addition to other customary banking services. To the extent that such transactions consisted of extensions of credit, they did not in the opinion of management, involve more than a normal risk of collectibility, present other unfavorable features, and for directors and executive officers were not made at preferential rates of interest. All such transactions are arm's length in nature. Loans to executive officers, directors and related interests of FIBM represent approximately 6% of shareholders' equity as of December 31, 1996. Loans to executive officers, directors and related interests of FIBM and its subsidiaries represent approximately 8% of FIBM's shareholders' equity as of December 31, 1996.
In January 1995, 52,017 shares of the Company's capital stock were sold by the Scott family to 337 individual participants in the Company's 401(k) Savings Plan. The total cash price was $3,307,241. Further, during 1995, the Scott Family sold 12,658 shares of the Company's capital stock to certain officers and directors, including certain executive officers, for an aggregate cash price of $833,782.
In January 1996, 19,706 shares of the Company's capital stock were sold by the Scott Family to 287 individual participants in the Company's 401(k) Savings Plan. The total cash price was $1,407,403.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Following are the Company's audited consolidated financial statements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders First Interstate BancSystem of Montana, Inc.:
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem of Montana, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Interstate BancSystem of Montana, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in note 1, the Company changed its method of accounting for investment securities to adopt the provisions of the Financial Accounting Standards Board's Statement on Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, effective January 1, 1994.
/s/ KPMG Peat Marwick LLP
Billings, Montana March 21, 1997
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - --------------------------------------------------------------------- December 31, 1996 1995 - --------------------------------------------------------------------- ASSETS Cash and due from banks $ 160,962 98,622 Federal funds sold 4,945 44,420 Interest-bearing deposits in banks 6,545 23,040 Investment securities: Available-for-sale 124,502 65,790 Held-to-maturity 279,069 192,947 - --------------------------------------------------------------------- 403,571 258,737 - ---------------------------------------------------------------------
Loans 1,375,479 870,378 Less allowance for loan losses 27,797 15,171 - --------------------------------------------------------------------- Net loans 1,347,682 855,207 - ---------------------------------------------------------------------
Premises and equipment, net 58,183 32,540 Accrued interest receivable 19,573 14,344 Goodwill and other intangibles, net of accumulated amortization of $5,971 in 1996 and $4,594 in 1995 39,010 10,221 Other real estate owned, net 1,546 1,349 Deferred tax asset 4,921 4,432 Other assets 16,899 8,303 - --------------------------------------------------------------------- $2,063,837 1,351,215 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ 385,371 230,136 Interest bearing 1,294,053 868,933 - --------------------------------------------------------------------- Total deposits 1,679,424 1,099,069 - --------------------------------------------------------------------- Federal funds purchased 13,450 3,125 Securities sold under repurchase agreements 129,137 104,898 Accounts payable and accrued expenses 18,027 13,396 Other borrowed funds 13,071 5,494 Long-term debt 64,667 15,867 - --------------------------------------------------------------------- Total liabilities 1,917,776 1,241,849 - --------------------------------------------------------------------- Stockholders' equity: Non-voting noncumulative 8.53% preferred stock without par value; authorized 100,000 shares; issued and outstanding 20,000 shares in 1996 20,000 - Common stock without par value; authorized 5,000,000 shares; issued and outstanding 1,978,268 shares in 1996 and 1,947,760 shares in 1995 8,941 6,692 Retained earnings 116,613 102,281 Unrealized holding gain on investment securities available-for-sale, net 507 393 - --------------------------------------------------------------------- Total stockholders' equity 146,061 109,366 - --------------------------------------------------------------------- $2,063,837 1,351,215 - --------------------------------------------------------------------- - --------------------------------------------------------------------- Book value per common share $ 63.72 56.15 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 99,882 83,577 65,778 Interest and dividends on investment securities: Taxable 15,343 12,147 12,790 Exempt from Federal taxes 982 783 331 Interest on deposits with banks 376 368 35 Interest on Federal funds sold 1,342 2,095 1,296 - ------------------------------------------------------------------------------- Total interest income 117,925 98,970 80,230 - ------------------------------------------------------------------------------- Interest expense: Interest on deposits 42,122 35,898 25,246 Interest on Federal funds purchased 1,043 1,008 690 Interest on securities sold under repurchase agreements 4,508 3,560 1,814 Interest on other borrowed funds 318 298 187 Interest on long-term debt 2,028 1,182 514 - ------------------------------------------------------------------------------- Total interest expense 50,019 41,946 28,451 - ------------------------------------------------------------------------------- Net interest income 67,906 57,024 51,779
Provision for loan losses 3,844 1,629 1,344 - ------------------------------------------------------------------------------- Net interest income after provision for loan losses 64,062 55,395 50,435
Other operating income: Income from fiduciary activities 3,161 2,619 2,542 Service charges on deposit accounts 7,752 6,532 5,883 Data processing 7,324 6,196 4,746 Other service charges, commissions, and fees 2,857 2,535 2,268 Investment securities gains (losses), net 18 (6) 69 Other income 2,815 888 879 - ------------------------------------------------------------------------------- Total other operating income 23,927 18,764 16,387 - ------------------------------------------------------------------------------- Other operating expenses: Salaries and wages 21,789 18,917 16,565 Employee benefits 5,742 4,777 4,614 Occupancy, net 4,505 3,916 3,546 Furniture and equipment 6,249 5,244 4,558 Other real estate expense (income), net (214) (586) (457) FDIC insurance 5 1,127 2,008 Other expenses 15,319 12,583 10,393 - ------------------------------------------------------------------------------- Total other operating expenses 53,395 45,978 41,227 - ------------------------------------------------------------------------------- Income before income taxes 34,594 28,181 25,595
Income tax expense 13,351 10,844 9,861 - ------------------------------------------------------------------------------- Net income $ 21,243 17,337 15,734 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Net income applicable to common stock $ 20,818 17,337 15,734 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Net income per common share $ 10.57 8.84 8.02 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Weighted average common shares outstanding 1,970,256 1,960,911 1,962,547 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
Noncash Investing and Financing Activities - The Company transferred loans of $668, $227 and $106 to other real estate owned in 1996, 1995 and 1994, respectively.
On January 1, 1994, the Company reclassified investment securities of $46,237 as available-for-sale.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company provides a full range of banking services to individual and corporate customers through its bank and non-bank subsidiaries and their branch offices throughout the states of Montana and Wyoming. The Company is subject to competition from other financial institutions and financial service providers. The Company is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by those regulatory authorities. The following is a summary of significant accounting policies utilized by the Company:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of First Interstate BancSystem of Montana, Inc. (Parent Company) and its operating subsidiaries: First Interstate Bank of Commerce in Montana, First Interstate Bank of Commerce in Wyoming, First Interstate Bank of Montana, N.A., First Interstate Bank of Wyoming, N.A., Mountain Bank, doing business as First Interstate Bank in Whitefish, Montana, First Interstate Bank, fsb and Commerce Financial, Inc. All material intercompany transactions have been eliminated in consolidation.
BASIS OF PRESENTATION. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowances for losses on loans and real estate owned are adequate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions which may affect the borrowers' ability to pay or regulatory requirements.
In addition to purchasing and selling Federal funds for their own account, the Company purchases and sells Federal funds as an agent. These and other assets held in an agency or fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold for one day periods.
At December 31, 1996 the Company was required to have aggregate reserves in the form of cash on hand and deposits with the Federal Reserve Bank of approximately $16,060. Also, an additional $23,800 compensating balance was maintained with the Federal Reserve Bank to mitigate the payment of service charges for check clearing services.
INVESTMENT SECURITIES. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company adopted the provisions of the statement as of January 1, 1994. There were no cumulative adjustments to income as a result of adopting the statement, however, the beginning balance of stockholders' equity was increased by $122 (which is net of $66 in deferred income taxes) to reflect net unrealized gains on securities classified as available-for-sale previously carried at the lower of amortized cost or market. The Company's accounting policy for investment securities is as follows:
TRADING ACCOUNT ASSETS
Trading account assets consist of debt and equity securities that are bought and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and losses included in earnings. The Company carried no trading account assets during 1996 and 1995.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INVESTMENT SECURITIES HELD-TO-MATURITY AND INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading account assets are classified as available-for-sale. In addition, all equity securities not classified as trading are classified as available- for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of deferred taxes, reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums over the estimated average life of the security, accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income with interest and dividends. Realized gains and losses, and declines in value judged to be other-than-temporary, are included in investment securities gains (losses). The cost of securities sold is based on the specific identification method.
LOANS. Loans are reported at the principal amount outstanding. Interest is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal unless such past due loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgement of management, the loans are estimated to be fully collectible as to both principal and interest.
Renegotiated loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty.
Significant loan origination fees, net of related costs, are recognized over the lives of the related loans as an adjustment of yield.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses which is charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance balance is an amount that management believes will be adequate to absorb losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, leases and commitments, and current and anticipated economic conditions that may affect the borrowers' ability to pay.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company may also establish a reserve for losses on specific loans which are deemed to be impaired. Groups of small balance homogeneous basis loans (generally consumer loans) are evaluated for impairment collectively. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect, on a timely basis, all principal and interest according to the contractual terms of the loan's original agreement. When a specific loan is determined to be impaired, the allowance for loan losses is increased through a charge to expense for the amount of the impairment. The amount of the impairment is measured using cash flows discounted at the loan's effective interest rate, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current value of the collateral, reduced by anticipated selling costs, will be used to measure impairment instead of discounted cash flows. The Company's impaired loans are those non-consumer loans which are non-accrual or a troubled debt restructuring. Interest income is recognized on impaired loans only to the extent that cash payments are received. The Company's existing policies for evaluating the adequacy of the allowance for loan losses and policies for discontinuing the accrual of interest on loans are used to establish the basis for determining whether a loan is impaired.
GOODWILL AND OTHER INTANGIBLES. The excess of purchase price over the fair value of net assets from acquisitions ("Goodwill") is being amortized using the straight-line method over periods of primarily 15 to 25 years. The Company assesses the recoverability of Goodwill by determining whether the unamortized balance related to an acquisition can be recovered through undiscounted future cash flows over the remaining amortization period.
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions and are amortized using an accelerated method based on an estimated runoff of the related deposits, not exceeding 10 years. Purchased mortgage servicing rights ("MSR") represent the value of purchased rights to service mortgage loans. The MSR are amortized in proportion to and over the period of estimated net servicing income not expected to exceed 12 years. MSR are evaluated for impairment based on the MSR current fair value.
PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is provided over estimated useful lives of 5 to 50 years for buildings and improvements and 3 to 15 years for furniture and equipment using straight-line methods. Leasehold improvements are amortized using straight-line methods over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Consolidated depreciation expense was $4,182 in 1996, $3,541 in 1995 and $3,318 in 1994.
LONG-LIVED ASSETS. The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed Of," on January 1, 1996. The statement requires long-lived assets and certain identifiable intangibles (e.g. premises, Goodwill, core deposit intangibles) be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. The amount of the impairment loss is based on the assets' fair value, which may be estimated by discounting the expected future cash flows. The adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial position or consolidated results of operations.
OTHER REAL ESTATE OWNED. Real estate acquired in satisfaction of loans is carried at the lower of the recorded investment in the property at the date of foreclosure or its current fair value less selling cost ("Net Realizable Value"). The value of the underlying loan is written down to the fair market value of the real estate acquired by a charge to the allowance for loan losses, if necessary, at the date of foreclosure. A provision to the real estate owned valuation allowance is charged against other real estate expense for any current or subsequent write-downs to Net Realizable Value. Operating expenses of such properties, net of related income, and gains on sales are included in other real estate expenses.
SELF-INSURANCE. The Company is self-insured with respect to employee medical claims up to specified limits per claim. The Company has an accrual of approximately $560 for estimated unsettled and incurred but not reported claims.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice, income for trust services is recognized on the basis of cash received. However, use of this method in lieu of accrual basis accounting does not materially affect reported earnings.
INCOME TAXES. The Parent Company and its subsidiaries have elected to be included in a consolidated Federal income tax return. For state income tax purposes, the combined taxable income of the Parent Company and its subsidiaries is apportioned between the states in which operations take place. Federal and state income taxes attributable to the subsidiaries, computed on a separate return basis, are paid to or received from the Parent Company.
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
PER SHARE DATA. Earnings per common share is calculated by dividing net income less preferred stock dividends by the weighted average number of common shares and common share equivalents outstanding during the period. Book value per common share is calulated by dividing total stockholders' equity less preferred stock by the number of common shares outstanding at the end of the year.
STOCK-BASED COMPENSATION. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," as of January 1, 1996. SFAS No. 123 encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those stock-based employee compensation plans using the intrinsic value-based method of accounting, which generally results in compensation expense only when the exercise price is less than the fair value of the underlying stock at the date of grant. Companies that elect to remain with the intrinsic value method are required to disclose in a footnote to the financial statements pro forma net income and earnings per share, as if the fair value method of SFAS No. 123 had been adopted. The Company has elected to continue accounting for stock-based employee compensation plans in accordance with Accounting Principles Board No. 25 (see note 12).
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and 1994 amounts to conform to the 1996 presentation.
(2) REGULATORY MATTERS
The Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) have issued risk-based capital guidelines to more accurately consider the credit risk inherent in the assets and off-balance-sheet activities of a bank or bank holding company and their assessment of capital adequacy.
Under the guidelines, total capital has been redefined as core capital and supplementary capital. Core capital consists primarily of stockholders' equity, while supplementary capital consists primarily of the allowance for loan losses (not to exceed 1.25% of risk weighted assets). Under the guidelines, all intangible assets are to be excluded from the components of core capital. The definition of assets has also been modified to include items on and off the balance sheet, with each item being assigned a predefined credit "risk-weight".
At December 31, 1996, the Company's consolidated risk-based capital (core plus supplementary) and core capital ratios, calculated in accordance with the guidelines, were 10.0% and 7.4%, respectively.
In addition to the risk-based guidelines discussed above, the FRB and FDIC also established a leverage ratio defined as core capital as a percentage of average tangible assets. The Company's consolidated leverage ratio at December 31, 1996 was 5.3%.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), which was enacted on December 19, 1992, substantially revises the bank regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Among other things, FDICIA requires the federal banking agencies to implement differing levels of oversight depending on the institution's capital category, as defined in the regulations. A depository institution's capital category will depend upon where its capital ratios are in relation to various relevant capital measures, which include the risk-based capital and leverage ratios. The capital categories represent minimum standards that will generally be applied to all institutions. However, the regulatory agencies may impose higher minimum standards on individual institutions or may downgrade an institution at the applicable agency's discretion. FDICIA generally restricts a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized (less than 8% total risk-based capital or 4% core capital and leverage). At December 31, 1996, the Company's and bank subsidiaries' capital ratios meet or exceed the highest capital category, which requires total risk-based capital of at least 10%, core capital of at least 6% and a leverage ratio of at least 5%.
(3) INVESTMENT SECURITIES
The amortized cost and approximate market values of investment securities are summarized as follows:
Gross gains of $18 and no gross losses were realized on the sale of available-for-sale securities in 1996.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Gross gains of $6 and gross losses of $12 were realized on the sale of available-for-sale securities in 1995. Gross gains of $70 and gross losses of $1 were realized on the sale of securities in 1994.
Maturities of investment securities by contractual maturity at December 31, 1996 are shown below. Maturities of securities do not reflect rate repricing opportunities present in many adjustable rate mortgage-backed and corporate securities, nor do they reflect expected shorter maturities based upon early prepayments of principal.
There are no significant concentrations of investments at December 31, 1996 (greater than 10 percent of stockholders' equity) in any individual security issuer, except for U.S. Government or agency-backed securities.
At December 31, 1996 and 1995, $18,148 and $15,028, respectively, of variable rate securities are included in investment securities.
Investment securities with amortized cost of $263,459 and $182,976 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits, securities sold under repurchase agreements and for other purposes required or permitted by law. The approximate market value of securities pledged at December 31, 1996 and 1995 was $263,608 and $182,970, respectively. All securities sold under repurchase agreements are with customers and generally mature on the next banking day. The Company retains possession of the underlying securities sold under repurchase agreements.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LOANS
Major categories and balances of loans included in the loan portfolios are as follows:
December 31, 1996 1995 -------------------------------------------------------------------------- Agricultural (1) $ 143,572 113,827 Commercial (2) 471,458 311,982 Real estate 274,141 142,097 Consumer (3) 484,865 300,711 Other loans, including overdrafts 1,443 1,761 -------------------------------------------------------------------------- Total loans $ 1,375,479 870,378 -------------------------------------------------------------------------- -------------------------------------------------------------------------- (1) Includes loans to agricultural customers secured by real estate of $52,689 and $43,826 at December 31, 1996 and 1995, respectively. (2) Includes loans secured by commercial real estate properties of $198,570 and $145,380 at December 31, 1996 and 1995, respectively. (3) Includes loans secured by second mortgages on real estate of $74,607 and $53,046 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had no concentrations of loans which exceeded 10% of total loans other than the categories disclosed above. The Company has no loans or loan commitments to highly leveraged companies.
Nonaccrual loans amounted to $6,822 and $3,632 at December 31, 1996 and 1995, respectively. If interest on nonaccrual loans had been accrued, such income would have approximated $405 and $318, respectively. Loans contractually past due ninety days or more aggregating $6,432 on December 31, 1996 and $1,711 on December 31, 1995 were on accrual status. Such loans are deemed adequately secured and in the process of collection.
Included in the nonaccrual loans at December 31, 1996 and 1995 are $5,122 and $3,231, respectively, of loans which are considered impaired. Of this amount, an impairment allowance of $436 and $407, respectively, is included in the Company's allowance for loan losses. The average recorded investment in impaired loans for the years ended December 31, 1996 and 1995 was approximately $3,870 and $3,080, respectively. If interest on impaired loans had been accrued, the amount of interest income on impaired loans during 1996 and 1995 would have been approximately $357 and $283, respectively.
Also included in total loans at December 31, 1996 and 1995 are loans with a carrying value of $1,763 and $1,755, respectively, the terms of which have been modified in troubled debt restructurings. There were no nonaccrual loans included in restructured debt at December 31, 1996. Restructured debt includes nonaccrual loans of $15 at December 31, 1995. During the years then ended, the recognized interest income on restructured loans approximated $158 and $161, respectively. At December 31, 1996, there were no commitments to lend additional funds to borrowers whose existing loans have been restructured or are classified as nonaccrual.
Most of the Company's business activity is with customers within the state of Montana and Wyoming. Loans where the customers or related collateral are out of the Company's trade area are not significant and management's anticipated credit losses arising from these transactions compare favorably with the Company's credit loss experience on its loan portfolio as a whole.
Certain executive officers and directors of the Company and certain corporations and individuals related to such persons, incurred indebtedness in the form of loans, as customers, of approximately $11,474 at December 31, 1996 and $12,802 at December 31, 1995 (including outstanding loans of new executive officers and directors in 1996). During 1996, new loans and advances on existing loans of $2,700 were funded and repayments totaled $4,028. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable risk of collectibility.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - --------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
December 31, 1996 1995 --------------------------------------------------------------
Land $ 8,350 5,747 Buildings and improvements 53,609 33,032 Furniture and equipment 24,689 20,406 -------------------------------------------------------------- 86,648 59,185 Less accumulated depreciation 28,465 26,645 --------------------------------------------------------------
Premises and equipment, net $ 58,183 32,540 -------------------------------------------------------------- --------------------------------------------------------------
The Parent Company and a branch office lease premises from an affiliated partnership (see note 13).
(7) OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of the following:
December 31, 1996 1995 --------------------------------------------------------------
Other real estate $ 2,057 1,903 Less allowance for OREO losses 511 554 --------------------------------------------------------------
$ 1,546 1,349 -------------------------------------------------------------- --------------------------------------------------------------
A summary of transactions in the allowance for OREO losses follows:
Year ending December 31, 1996 1995 1994 ------------------------------------------------------------------------
Balance at beginning of year $ 554 1,048 1,448 Provision (reversal) during the year (21) (28) 10 Property writedowns (16) (449) (410) Losses on sales (6) (17) - ------------------------------------------------------------------------
Balance at end of year $ 511 554 1,048 ------------------------------------------------------------------------ ------------------------------------------------------------------------
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The changes in the balance of other real estate for the years ending December 31, 1996 and 1995 are summarized as follows: 1996 1995 ------------------------------------------------------------------
Balance, beginning of year $1,903 2,851 Add other real estate of banks acquired 294 - Add transfers from loans 668 227
Cash proceeds from sales $1,121 1,236 Less gains on sales 335 527 ------------------------------------------------------------------
Net basis of OREO sold (786) (709) Property writedowns (22) (466) ------------------------------------------------------------------
Balance, end of year $2,057 1,903 ------------------------------------------------------------------ ------------------------------------------------------------------
(8) CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains key-executive life insurance policies on certain principal shareholders. Under the key-executive insurance, the Company receives the cash surrender value if the policy is terminated, or receives all benefits payable upon the death of the insured. The aggregate face amount of key-executive insurance policies was $7,000 at December 31, 1996. Cash surrender values are recorded net of outstanding policy loans, since the Company has no current plans for repayment. Outstanding policy loans at December 31, 1996 and 1995 are $2,540 and $1,875, respectively. The net cash surrender value of key-executive insurance policies included in other assets is $278 and $792 at December 31, 1996 and 1995, respectively.
During 1994, the Company provided insurance contracts for certain key officers. The net cash surrender value of these contracts is $1,365 and $1,218 at December 31, 1996 and 1995, respectively, and is included in other assets. Upon retirement, the officers have the option of entering into a split-dollar contract with the Company providing insurance coverage for the difference between the Company's cash surrender value and the face amount of the policy.
(9) DEPOSITS
Deposits are summarized as follows:
December 31, 1996 1995 ------------------------------------------------------------------ Noninterest bearing demand $ 385,371 230,136
Interest bearing: Demand 316,964 180,742 Savings 396,845 263,062 Time, $100 and over 122,242 90,257 Time, other 458,002 334,872 ------------------------------------------------------------------
Total interest bearing 1,294,053 868,933 ------------------------------------------------------------------
$ 1,679,424 1,099,069 ------------------------------------------------------------------ ------------------------------------------------------------------
Maturities of time deposits of $100 or more are as follows:
December 31, 1996 ------------------------------------------------------------------
Three months or less $ 40,819 Three through six months 24,792 Six months through twelve months 43,839 Over twelve months 12,792 ------------------------------------------------------------------
$ 122,242 ------------------------------------------------------------------ ------------------------------------------------------------------
Interest expense on time deposits of $100 or more was $5,514, $4,581 and $2,846 for the years ended December 31, 1996, 1995 and 1994, respectively.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
Year ended December 31, 1996 1995 1994 ------------------------------------------------------------------
Current: Federal $ 12,004 9,194 8,318 State 1,875 1,521 1,311 ------------------------------------------------------------------
13,879 10,715 9,629 ------------------------------------------------------------------
Deferred: Federal (492) 134 214 State (36) (5) 18 ------------------------------------------------------------------
(528) 129 232 ------------------------------------------------------------------
$ 13,351 10,844 9,861 ------------------------------------------------------------------ ------------------------------------------------------------------
Total income tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1996, 1995 and 1994 to income before income taxes as a result of the following:
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:
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income in the periods which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at December 31, 1996 management continues to believe it is more likely than not that the Company will realize the benefits of these deductible differences.
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
Maturities of long-term debt for the years ending December 31 follow:
1997 $ 1,686 1998 4,419 1999 4,642 2000 4,096 2001 4,000 Thereafter 45,824 --------------------------------------------------------------------------
$ 64,667 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The proceeds from issuance of the revolving term note, subordinated notes and preferred stock (see note 15) were utilized to fund acquisitions (see note 18).
In connection with its borrowings, the Company has agreed to certain restrictions dealing with, among other things, minimum capital ratios, the sale or issuance of capital stock and the maximum amount of dividends.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has a revolving term loan with its primary lender in the amount of $42,000 at December 31, 1996. The available borrowing amount is reduced by $2,000 on a semi-annual basis commencing in June 1997. The revolving facility requires an annual commitment fee of 0.15% on the unadvanced amount. The Company may elect at various dates either prime or a Eurodollar rate plus 1.75%. The term note payable is secured by 100% of the outstanding capital stock of the Company's bank subsidiaries.
The notes payable to Federal Home Loan Bank of Seattle (FHLB) are secured by FHLB stock, unencumbered residential real estate mortgages and certain mortgage-backed securities.
The following is a summary of other borrowed funds, all of which mature within one year:
The Company has Federal funds lines of credit with third parties amounting to $50,000, subject to funds availability. The Company also has been approved for participation in the Federal Home Loan Bank Cash management Advance Program for borrowings up to approximately $39,500.
(12) EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN. The Company has a noncontributory profit sharing plan. To be eligible for the profit sharing plan, an employee must complete one year of employment and 1,000 hours or more of service. Quarterly contributions are determined by the Company's Board of Directors, but are not to exceed, on an individual basis, the lesser of 25% of compensation or $30. Contributions to this plan were $839, $685 and $620 in 1996, 1995 and 1994, respectively.
SAVINGS PLAN. In addition, the Company has a contributory employee savings plan. Eligibility requirements for this plan are the same as those for the profit sharing plan as discussed in the preceding paragraph. Employee participation in the plan is at the option of the employee. The Company contributes $1.25 for each $1.00 of employee contributions up to 4% of the participating employee's compensation. The recorded expense related to this plan was $814 in 1996, $703 in 1995 and $648 in 1994.
STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and Stock Appreciation Rights Plan for senior officers of the Company. All options and stock appreciation rights ("SAR's") granted have an exercise price of book value of the Company prior to 1993 and appraised value thereafter. Each option granted under the Plan can be immediately exercised up to ten years from the date of grant. SAR's are granted and exercised in tandem with options. The stock issued in conjunction with the exercise of options is subject to a shareholder agreement (see note 15). The consolidated expense related to this plan was $72 in 1996, $170 in 1995 and $387 in 1994.
Information with respect to the Company's stock options and SAR's are as follows:
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Information with respect to the range of stock option exercise prices are as follows:
Stratification and additional detail regarding the options outstanding at December 31, 1996 are as follows (all exercisable):
Exercise Number Weighted-average Weighted-average price range outstanding remaining life exercise price -------------------------------------------------------------------------- $18.25 - $30.45 12,734 2.97 years $ 24.53 $45.60 - $71.42 16,225 7.73 years 57.63 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The Company has elected to continue to measure compensation costs as prescribed by APB Opinion No. 25 and, accordingly, does not recognize compensation expense on the options granted where the exercise price is equal to appraisal value at the date of grant. SFAS No. 123 requires the Company to disclose pro forma information reflecting net income and earnings per share had the Company elected to record compensation expense based on the fair value method described in SFAS No. 123. The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions. Because the Company's common stock and stock options have characteristics significantly different from listed securities and traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
The following weighted-average assumptions were used in the valuation model: risk-free interest rates of 5.65% and 7.78% in 1996 and 1995; dividend yield of 2.50% and 2.67% in 1996 and 1995; and expected life of options of 10 years in both 1996 and 1995.
Pro forma disclosures, listed below, include options granted in 1996 and 1995 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is expensed in the year granted as all options are vested upon grant.
Year ended December 31, 1996 1995 -------------------------------------------------------------------------- Pro forma net income $ 21,102 17,211 Pro forma net income applicable to common stock 20,677 17,211
Pro forma earnings per common share 10.49 8.77 -------------------------------------------------------------------------- --------------------------------------------------------------------------
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition or results of operations.
The Parent Company and the Billings office of First Interstate Bank of Commerce in Montana ("FIB Montana") are the anchor tenants in a building owned by a joint venture partnership in which FIB Montana is one of the two partners, and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. Indebtedness of the partnership in the amount of $10,827 at December 31, 1996 is recourse to the partners. Total rents paid to the partnership were $814 in 1996, $711 in 1995 and $690 in 1994.
The Company also leases certain premises and equipment from third parties under operating leases. Total rental expense to third parties was $1,019 in 1996, $1,425 in 1995 and $1,267 in 1994.
The total future minimum rental commitments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31, 1996 are as follows:
Third parties Partnership Total --------------------------------------------------------------------------- For the year ending December 31: 1997 $ 328 814 1,142 1998 273 814 1,087 1999 268 814 1,082 2000 196 814 1,010 2001 171 814 985 Thereafter 1,476 3,053 4,529 --------------------------------------------------------------------------- $ 2,712 7,123 9,835 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
In September 1983, the Company entered into a franchise agreement ("Franchise Agreement") with First Interstate Bancorp ("First Interstate"), a Los Angeles based bank holding company which was acquired by Wells Fargo and Company April 1, 1996. Under the Franchise Agreement, the Company was First Interstate's exclusive licensee in the states of Montana and Wyoming. On May 24, 1996, the Company entered into a trademark license agreement granting the Company and its subsidiaries an exclusive, nontransferable license to use the "First Interstate" name and logo in the states of Montana, Wyoming, North Dakota, South Dakota and Nebraska. By mutual agreement of the parties, the franchise agreement between the Company and Wells Fargo and Company was terminated.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend less than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 1996, stand-by letters of credit in the amount of $19,884, were outstanding. Commitments to extend credit to existing and new borrowers approximated $284,259 at December 31, 1996, which includes $32,760 on unused credit card lines.
(15) CAPITAL STOCK
On September 26, 1996 ("Issuance Date"), the Company issued 20,000 shares of no par noncumulative perpetual preferred stock ("Preferred Stock") at a price of $1,000. The holders of Preferred Stock are entitled to receive in any fiscal year, when and if declared by the Company's Board of Directors, dividends in cash at the rate of $85.30 per share, up to the seventh anniversary of the Issuance Date. From and after the seventh anniversary of the Issuance Date, the holders of Preferred Stock shall be entitled to receive in any fiscal year, when and if declared by the Company's Board of Directors, dividends in cash at a variable rate equal to 250 basis points over the high yield of the 30-day, 10-year or 30-year U.S. Treasury Bills. The Preferred Stock is not redeemable prior to the seventh anniversary of the Issuance Date. The Company may, at its option, redeem all or any part of the Preferred Stock at any time on or after the seventh anniversary of the Issuance Date, subject to the approval of the FRB, at a price of $1.00 per share, plus accrued but unpaid dividends to the date fixed for redemption.
At December 31, 1996 nearly all shares of common stock held by shareholders are subject to shareholder's agreements (Agreements). Under the Agreements, the Company has a right of first refusal to repurchase shares from the shareholder at minority interest appraised value in the event of a proposed sale of shares to a third party, death, disability or termination of employment. Additional shares purchased by officers, directors and employees after 1993 are also subject to repurchase at the Company's discretion.
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate BancSystem of Montana, Inc.:
NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES.
During 1996, the Parent Company transferred other assets of $1,014 to its subsidiary, First Interstate Bank of Commerce of Montana.
(17) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Statement 107), requires the Company to disclose the estimated fair values of its financial instruments. Most of the Company's assets and liabilities are considered financial instruments. Many of the Company's financial instruments lack an available trading market, and it is the practice and intent of the Company to hold its financial instruments to maturity. As a result, significant assumptions and present value calculations were used in determining estimated fair values.
For financial instruments bearing a variable interest rate, it is presumed that recorded book values are reasonable estimates of fair value. The methods and significant assumptions used to estimate fair values for the various financial instruments are set forth below.
CASH AND CASH EQUIVALENTS. Due to the liquid nature of the instruments, the carrying value of due from banks and federal funds sold approximates market value.
INTEREST-BEARING DEPOSITS IN BANK. Due to the short-term nature of the instrument, the carrying value of the interest-bearing deposit in bank approximates market value.
INVESTMENT SECURITIES. Fair values of investment securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOANS. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category using the U.S. Treasury yield curve adjusted to bond equivalent yields. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing real estate loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources.
The fair value of adjustable rate loans was considered to be the carrying value of these instruments due to the frequent repricing, provided there had been no change in credit quality since origination.
DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS. The fair value of demand deposits, savings accounts, federal funds purchased and securities sold under repurchase agreements is the amount payable on demand at the reporting date, due to the liquid nature of the instruments and the frequent repricing.
The fair value of fixed-maturity certificates of deposit is estimated using external market rates currently offered for deposits with similar remaining maturities.
OTHER BORROWED FUNDS AND LONG-TERM DEBT. The term note payable and revolving term loan bear interest at a floating market rate and, as such, the carrying amounts are deemed to reflect fair value. The carrying value of the interest bearing demand notes to the United States Treasury is deemed an approximation of fair value due to the frequent repayment and repricing at market rates. Due to the recent issuance date of the subordinated notes and relative stability of interest rates in the intervening period, book value is estimated to approximate fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. The fair value of commitments to extend credit can be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. It is not practicable to estimate fair value because information is not readily available to support estimates of fees which can be expected to be realized on these instruments.
Loan fees for the year ended December 31, 1996 and 1995, including fees charged for commitments to extend credit and standby letters of credit, were approximately $4,981 and $4,070, respectively, of which a significant portion related to real estate refinancing.
LIMITATIONS. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular instrument. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding comparable market interest rates, future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a trust department and data processing division that contribute net operating income annually. Neither department is considered a financial instrument, and their value has not been incorporated into the fair value estimates. Other significant assets that are not considered financial instruments include the mortgage subsidiary, deferred tax assets, and property and equipment. In addition, the tax effect of the difference between the fair value and carrying value of financial instruments can have a significant effect on fair value estimates and have not been considered in the estimates.
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED - ---------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the estimated fair values of financial instruments follows:
(18) ACQUISITIONS AND EXPANSION
FIRST CITIZENS BANK OF BOZEMAN. On January 3, 1995, the Company acquired all of the outstanding ownership of Citizens BancShares, Inc. ("CBI") and its bank subsidiary, First Citizens Bank of Bozeman ("FCB") for $8,606. The historical carrying value of the net assets of CBI as of the acquisition date were $3,724. The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1995 includes CBI's results of operations since the date of the purchase. CBI was subsequently dissolved and FCB became a branch of First Interstate Bank of Commerce in Montana.
FIRST NATIONAL PARK BANK. On May 19, 1995, the Company acquired all of the outstanding ownership of First Park County Bancshares, Inc. ("FPCBI") and its bank subsidiary, First National Park Bank ("FNPB") for $8,872. The historical carrying value of the net assets of FPCBI as of the acquisition date were $5,269. The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1995 includes FPCBI's results of operations since the date of the purchase. FPCBI was subsequently dissolved and FNPB became a branch of First Interstate Bank of Commerce in Montana.
FIRST INTERSTATE BANK, FSB. In November 1995, the Company filed an application with the Office of Thrift Supervision for permission to form a de novo savings bank in Hamilton, Montana. Upon approval, the Company capitalized the savings bank at $2,000 and opened the bank on December 12, 1996.
FIRST INTERSTATE BANK OF MONTANA, N.A. AND FIRST INTERSTATE BANK OF WYOMING, N.A. On October 1, 1996, the Company acquired all of the outstanding ownership of First Interstate Bank of Montana, N.A. (FIBNA-MT) and First Interstate Bank of Wyoming, N.A. (FIBNA-WY). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1996 includes FIBNA-MT's and FIBNA-WY's results of operations since the date of purchase.
MOUNTAIN BANK OF WHITEFISH. On December 18, 1996, the Company acquired all of the outstanding ownership of Mountain Bank of Whitefish, now doing business as First Interstate Bank of Whitefish (FIB-Whitefish). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1996 includes FIB-Whitefish's results of operations since the date of purchase. The premiums paid over the historical carrying value of net assets at the respective dates of purchase were as follows:
FIRST INTERSTATE BANCSYSTEM OF MONTANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED - ---------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The information below presents on a pro forma basis, amounts as if FIBNA-MT, FIBNA-WY, and FIB-Whitefish had been acquired as of January 1, 1996 and 1995 for each year presented.
Years ended December 31, (unaudited) 1996 1995 --------------------------------------------------------------------------
Interest income $ 151,721 142,827 Interest expense 65,404 61,260 -------------------------------------------------------------------------- Net interest income 86,317 81,567 Provision for loan losses 4,955 1,629 -------------------------------------------------------------------------- Net interest income after provision for loan losses 81,362 79,938
Investment security transactions 284 9 Noninterest income 29,988 26,982 Noninterest expense (71,027) (69,008) -------------------------------------------------------------------------- Income before income taxes 40,607 37,921 Income taxes 15,836 14,387 -------------------------------------------------------------------------- Pro forma net income $ 24,771 23,534 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Pro forma net income per common share $ 11.71 11.13 -------------------------------------------------------------------------- --------------------------------------------------------------------------
The unaudited pro forma information above has been prepared for comparative purposes only and does not purport to be indicative of the actual results that would have occurred if the operations had been combined during the periods presented nor is it intended to be a projection of future results.
(19) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides guidance on accounting for transfers and servicing of financial assets, recognition and measurement of servicing assets and liabilities, financial assets subject to prepayment, secured borrowings and collateral, and extinguishment of liabilities.
SFAS No. 125 generally requires the Company to recognize as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through purchases or loan originations. Servicing rights are initially recorded at fair value based upon the present value of estimated future cash flows. Subsequently, the servicing rights are assessed for impairment, with impairment losses recognized in the statement of income in the period the impairment occurs. For purposes of performing the impairment evaluation, the related portfolio must be stratified on the basis of certain risk characteristics including loan type and note rate. SFAS No. 125 also specifies that financial assets subject to prepayment, including loans that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment, be measured like debt securities available-for-sale or trading securities under SFAS No. 115. The provisions of SFAS No. 125 apply prospectively to transactions occurring after December 31, 1996. Management expects adoption will not have a material effect on the consolidated financial position or results of operations of the Company.
At December 31, 1996, the Company serviced loans for others with a principal balance outstanding of approximately $140,000.
(a) 2. Financial statement schedules
All other schedules to the consolidated financial statements of the Registrant are omitted since the required information is either not applicable, deemed immaterial, or is shown in the respective financial statements or in notes thereto.
(a) 3. Exhibits
2.1 Stock Purchase Agreement dated May 24, 1996 between First Interstate BancSystem of Montana, Inc. and Wells Fargo & Company (incorporated by reference to Company's Form 8-K dated October 1, 1996)
3.1 Articles of Incorporation and the amendments thereto of FIBM (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
3.1.1 Articles of Amendment to Restated Articles of Incorporation dated September 1, 1996 (incorporated by reference to the Company's Form 8-K dated October 1, 1996)
3.1.2 Articles of Amendment to Restated Articles of Incorporation dated September 1, 1996 (incorporated by reference to the Company's Form 8-K dated October 1, 1996)
3.2 Bylaws of FIBM and the Amendments thereto (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
4.4 Preferred Stock Purchase Agreement dated September 26, 1996 between First Interstate BancSystem of Montana, Inc. and First Security Corporation (incorporated by reference to the Company's Form 8-K dated October 1, 1996)
10.3 Loan Agreement dated October 1, 1996 between First Interstate BancSystem of Montana, Inc., as borrower, and First Security Bank, NA, Colorado National Bank, NA and Wells Fargo Bank, NA (incorporated by reference to the Company's Form 8-K dated October 1, 1996)
10.4 Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank of Commerce, Billings Office (formerly known as First Interstate Bank of Billings, National Association), and addendum thereto (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.5 FIBM (formerly known as Security Banks of Montana) Sublease to First Interstate Bank of Commerce, West Billings Office (formerly known as Rimrock Bank) (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.8 Savings and Profit Sharing Plan for Employees of FIBM (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.8.1 Savings and Profit Sharing Plan for Employees of FIBM, as amended December 31, 1994 (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.9 Stock Option and Stock Appreciation Rights Plan of FIBM, as amended (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.11 FIBM Shareholders' Agreements with Scott Family (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.11.1 Amendment to FIBM Shareholder's Agreement with Scott Family dated September 7, 1995 (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.12 FIBM Stockholders Agreement for non-Scott Family members, as amended (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.13 Note Purchase Agreement dated August 30, 1996 between First Interstate BancSystem of Montana, Inc. and the Montana Board of Investments (incorporated by reference to the Company's Form 8-K dated October 1, 1996)
10.15 Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.16 Stock Purchase Agreement among FIBM and all stockholders of First Park County Bancshares, Inc. (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.17 Plan of Liquidation and Dissolution of Commerce BancShares of Wyoming, Inc. dated May 17, 1995 (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.18 Articles of Dissolution of Citizens Bancshares, Inc. (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
10.19 Articles of Dissolution of First Park County Bancshares, Inc. (incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement No. 33-84540)
22. Subsidiaries of FIBM.
27. Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K dated October 1, 1996 was filed by the Company describing the acquisitions of two banking subsidiaries of Wells Fargo & Company.
A report on Form 8-K/A dated October 1, 1996 was filed by the Company to provide the required financial information with regard to the acquisition of two banking subsidiaries of Wells Fargo & Company.
A report on Form 8-K dated December 9, 1996 was filed by the Company announcing the proposed acquisition of a banking subsidiary of Mountain Bank Systems, Inc.
A report on Form 8-K dated December 18, 1996 was filed by the Company describing the acquisition of a banking subsidiary of Mountain Bank Systems, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First Interstate BancSystem of Montana, Inc.
By: /s/ Thomas W. Scott 3/20/97 ----------------------------- ---------------- Thomas W. Scott Date Chief Executive Officer
By: /s/ Terrill R. Moore 3/20/97 ----------------------------- ---------------- Terrill R. Moore Date Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
By: /s/ Homer A. Scott, Jr. 3/20/97 ------------------------------------------- ------------------- Homer A. Scott, Jr. Date Chairman
By: /s/ Thomas W. Scott 3/20/97 ------------------------------------------- ------------------- Thomas W. Scott Date Director and Chief Executive Officer
By: /s/ William H. Ruegamer 3/20/97 ------------------------------------------- ------------------- William H. Ruegamer Date Director and Chief Operating Officer
By: /s/ James R. Scott 3/20/97 ------------------------------------------- ------------------- James R. Scott, Director Date
By: /s/ Dan S. Scott 3/20/97 ------------------------------------------- ------------------- Dan S. Scott, Director Date
By: /s/ Randall I. Scott 3/20/97 ------------------------------------------- ------------------- Randall I. Scott, Director Date
By: /s/ Susan S. Heyneman 3/20/97 ------------------------------------------- ------------------- Susan S. Heyneman, Director Date
By: /s/ Joel Long 3/20/97 ------------------------------------------- ------------------- Joel Long, Director Date