UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 33-64304 FIRST INTERSTATE BANCSYSTEM, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) MONTANA 81-0331430 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 401 NORTH 31ST STREET BILLINGS, MONTANA 59116 (Address of principal executive offices) (Zip Code) (406) 255-5390 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value (appraised minority value) of the common stock of the registrant held by non-affiliates of the registrant as of February 19, 1999 was $295,370,075. The number of shares outstanding of the registrant's common stock as of February 19, 1999 was 7,982,975. - 1 -
PART I ITEM 1. BUSINESS THE COMPANY First Interstate BancSystem, Inc. ("FIBS" and collectively with its subsidiaries, the "Company") is a bank holding company. FIBS was incorporated in 1971 and is headquartered in Billings, Montana. FIBS operates two wholly-owned bank subsidiaries (collectively, the "Banks" and individually a "Bank") with 35 banking offices in 24 Montana and Wyoming communities. FIB Capital Trust ("FIB Capital") and Commerce Financial, Inc. ("CFI") are wholly-owned non-bank subsidiaries of FIBS. At December 31, 1998, the Company had assets of $2.5 billion, deposits of $2.0 billion and total stockholders' equity of $164 million, making it the largest independent banking organization headquartered in Montana or Wyoming. The Company, through the Banks, delivers a comprehensive range of consumer and commercial banking services to individual and business customers. These services include personal and business checking and savings accounts, time deposits, individual retirement accounts, cash management, trust and brokerage services and commercial, consumer, real estate, agricultural and other loans. Additionally, the Company operates a data processing division that performs data processing services for the Banks and 31 non-affiliated financial institutions in Montana, Wyoming and Idaho. The data processing division also provides processing support for over 986 ATM locations in 19 states, most of which are located in Montana, Wyoming, Idaho, Colorado and North Dakota. The Company is the licensee under a trademark license agreement granting it an exclusive, nontransferable license to use the "First Interstate" name and logo in the states of Montana and Wyoming with additional rights in selected other states. COMMUNITY BANKING PHILOSOPHY The Company's banking offices are located in communities with populations generally ranging from approximately 5,000 to 70,000 people, but serve market areas with greater populations because of the limited number of financial institutions within a reasonable distance from the communities in which such offices are located. The Company believes that these communities provide a stable core deposit and funding base, as well as economic diversification across a number of industries, including agriculture, energy, mining, timber processing, tourism, government services, education and medical services. The banking industry is undergoing change with respect to regulatory matters, consolidation, changing consumer needs and economic and market conditions. The Company believes that it can best address this changing environment through its "Strategic Vision." Through the Strategic Vision, the Company emphasizes providing its customers full service commercial and consumer banking at a local level using a personalized service approach, while serving and strengthening the communities in which the Banks are located through community service activities. The Company grants significant autonomy and flexibility to the banking offices in delivering and pricing products at the local level in response to market considerations and customer needs. This flexibility and autonomy enables the banking offices to remain competitive and enhances the relationships between the banking offices and the customers they serve. The Company also emphasizes accountability, however, by establishing performance and incentive standards for the Banks which are tied to net income at the individual branch and market level. The Company believes that this combination of autonomy and accountability allows the banking offices to provide a high level of personalized service to customers while remaining attentive to financial performance. GROWTH STRATEGY The Company's growth strategy includes growing internally and expanding into new and complementary markets when appropriate opportunities arise. The Company believes it has in place an infrastructure that will allow for growth and yield economies of scale on a going forward basis. The Company has received regulatory approval to open three new banking offices in Montana and Wyoming and intends to continue to expand its presence in the Montana and Wyoming markets. - 2 -
INTERNAL GROWTH The Company's internal growth strategy is to attract and retain customers by providing personalized "high touch" service, increasing its offering of products and services, cross-selling existing products and services and opening new branches to better serve its customer base. The Company believes its ability to offer a complete package of consumer and commercial banking products and services enhances the Company's image as a "one-stop" banking organization. The Company creates awareness of its products and services through various marketing and promotional efforts, including involvement in community activities. EXTERNAL GROWTH The Company has grown in recent years by selectively acquiring banks in additional markets in Montana and Wyoming. In the fourth quarter of 1996, the Company acquired eight banking offices. The Company considers acquisitions which will enhance its existing position within a market, expand its presence into complementary markets, or add capabilities or personnel that will enhance the Company as a whole. The Company has a selective acquisition strategy in that it principally considers those institutions with strong financial and managerial resources already in place. The Company's data processing division has also successfully grown its ATM network which provides processing support for over 900 ATMs owned by other banks and third parties. THE BANKS First Interstate Bank in Montana ("FIB Montana"), a Montana chartered bank organized in 1916, has 23 banking offices in 16 Montana communities, including Billings, Bozeman, Colstrip, Cut Bank, Eureka, Evergreen, Gardiner, Great Falls, Hamilton, Hardin, Kalispell, Livingston, Miles City, Missoula, West Yellowstone and Whitefish. These communities are home to a variety of industries, including agriculture, mining, energy, timber processing, tourism, government services, education and medical services, with a significant number of small to medium sized businesses. As of December 31, 1998, FIB Montana held assets and deposits totaling $1.6 billion and $1.3 billion, respectively. FIB Montana is the largest independent bank headquartered in Montana. The Bank's main office is located in Billings, Montana. First Interstate Bank in Wyoming ("FIB Wyoming"), a Wyoming chartered bank organized in 1893, has 12 banking offices in eight Wyoming communities, including Buffalo, Casper, Gillette, Greybull, Lander, Laramie, Riverton and Sheridan. These communities are home to a variety of industries, including energy, agriculture, mining, tourism, government services, education and medical services with a significant number of small to medium sized businesses. As of December 31, 1998, FIB Wyoming held assets and deposits totaling $862 million and $754 million, respectively. The Bank's main office is located in Sheridan, Wyoming. ADMINISTRATION OF THE BANKS Each of the Banks and their respective banking offices operate with a significant level of autonomy and are responsible for day-to-day operations, the pricing of loans and deposits, lending decisions and community relations. FIBS also emphasizes accountability, however, by establishing performance and incentive standards for the Banks which are tied to net income at the individual branch and market level. FIBS provides general oversight and centralized services for the Banks to enable them to serve their markets more effectively. These services include data processing, credit administration, auditing, asset/liability management, investment analysis, human resources management, marketing and planning coordination. FIBS continues to emphasize corporate administration of functions which assist the Banks and their branches in more effectively focusing on their respective markets and customers. Key among those functions are the following: DATA PROCESSING FIBS provides most of its and the Banks' data processing requirements. These services, including general ledger, investment securities management and loan and deposit processing, are performed through the use of computer hardware which the Company owns and maintains and software which it licenses. The Company's data processing division also operates an extensive ATM network for the benefit of the Banks' customers. - 3 -
CREDIT ADMINISTRATION FIBS has established comprehensive credit policies which guide the Banks' lending activities. These policies establish system-wide standards and assist Bank management in the lending process. On the local level, the Banks are granted significant autonomy and flexibility with respect to credit pricing issues and lending decisions. FINANCIAL AND ACCOUNTING FIBS provides accounting services for the Banks, including general ledger administration, internal and external reporting, asset/liability management and investment portfolio analysis. In addition, the Company has established policies regarding capital expenditures, asset/liability management and capital management. SUPPORT SERVICES FIBS provides the Banks with legal and compliance services, internal auditing services, marketing services, planning coordination, human resources and employee benefits administration, and various other services. The Company believes the centralization of these services yields economies of scale, increases the efficiency of the Banks and allows management of the banking offices to focus on serving their market areas and customers. LENDING ACTIVITIES The Banks offer short and long-term commercial, consumer, real estate, agricultural and other loans to individuals and small to medium sized businesses in each of their market areas. The lending activities of the Banks and their branches are guided by the Company's comprehensive lending and credit guidelines. The Company believes that it is important to keep the credit decision at the local branch level in order to enhance the speed and efficiency with which the customer is served. While each loan must meet minimum underwriting standards established in the Company's lending policy, lending officers are granted certain levels of autonomy in approving and pricing loans. The Company-established credit policies are intended to maximize the quality and mix of loans, while also assuring that the Banks and their branches are responsive to competitive issues and community needs in each market area. The credit policies establish specific lending authorities to Bank officers, reflecting their individual experience and level of authority, type of loan and collateral, and thresholds at which loan requests must also be approved at a Bank committee level and/or by FIBS. FIBS oversees the lending activities of the Banks and is responsible for monitoring general lending activities. Areas of oversight include the types of loans, the mix of variable and fixed rate loans, delinquencies, non-performing assets, classified loans and other credit information to evaluate the risk within each Bank's loan portfolio and to recommend general reserve percentages and specific reserve allocations. The Company's loan portfolio is diversified across commercial, consumer, real estate, agricultural and other loans, with a mix of fixed and variable rate loans. The Company's loan portfolio was reclassified in 1998 to aggregate all loans secured by real estate (i.e., agricultural, commercial, consumer, residential and construction) in the real estate category. Individual branches are granted autonomy with respect to product pricing, which is significantly influenced by the markets in which the particular banking offices are located. Unlike residential mortgage loans and consumer installment loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income or which are secured by real property whose value tends to be more easily ascertainable, commercial business loans involve different risks and are typically made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Company attempts to limit these risks by employing underwriting and documentation standards contained in written loan policies and procedures. These policies and procedures are reviewed on an ongoing basis by management and adherence to stated policies are monitored by credit administration. - 4 -
REAL ESTATE LOANS The Banks provide interim and permanent financing for both single-family and multi-unit properties, medium term loans for commercial, agricultural and industrial property and/or buildings, and equity lines of credit secured by real estate. The Banks originate variable and fixed rate real estate mortgages, generally in accordance with the guidelines of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Loans originated in accordance with these guidelines are sold in the secondary market. Real estate loans are typically secured by first liens on the financed property. As of December 31, 1998, 45.9% of the Company's loan portfolio was composed of real estate loans, many of which are fixed rate loans, with maturities generally less than 15 years. CONSUMER LOANS The Banks' consumer loans include personal loans and equity lines of credit. The personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis. The equity lines of credit are generally floating rate, reviewed annually and secured by personal property. Over two-thirds of the Company's consumer loans are indirect dealer paper which is created when the Company advances money to dealers of consumer products who in turn lend such money to consumers purchasing automobiles, boats and other consumer goods. As of December 31, 1998, 25.5% of the Company's loan portfolio was composed of consumer and personal loans. COMMERCIAL LOANS The Banks provide a mix of variable and fixed rate commercial loans. The loans are typically made to small to medium sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansions. As of December 31, 1998, 21.0% of the Company's loan portfolio was composed of commercial loans. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with the business operations as the primary source of repayment, but also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. AGRICULTURAL LOANS Agricultural loans generally consist of short and medium-term loans and lines of credit and are made to the large base of farm and ranch operations in the Company's market areas. The Banks make agricultural loans in many of the communities they serve, which are generally used for crops, livestock, equipment, and general operating purposes. Agricultural loans are generally secured by assets such as livestock or equipment and are repaid from the operations of the farm or ranch. As of December 31, 1998, 7.2% of the Company's loan portfolio was composed of agricultural loans. Agricultural loans generally have maturities of five years or less, with operating lines for one production season. FUNDING SOURCES Each of the Banks offers usual and customary depository products provided by commercial and retail banks, including personal and business checking accounts, savings accounts and time deposits (including IRAs). Deposits at the Banks are insured by the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. While the Company develops and offers a wide array of deposit products, local branch management is given relative autonomy in pricing the depository products offered to customers in an attempt to best compete in each Bank's particular market. As of December 31, 1998, approximately 36.5%, 24.7% and 38.8% of the Company's deposits consisted of demand, savings and time deposits, respectively. The Company also has a significant number of repurchase agreements primarily with commercial depositors. Under the repurchase agreements, the Company sells, but does not transfer on its financial statements or otherwise, investment securities held by the Company to a customer under an agreement to repurchase the investment security at a specified time or on demand. As of December 31, 1998, all outstanding repurchase agreements were due in one day. - 5 -
OTHER OPERATIONS In addition to the services mentioned above, the Company offers safe deposit boxes, night depository services and wire transfers, among other things. The Company also operates a substantial data processing division that performs data processing services for the Banks and 31 non-affiliated financial institutions in Montana, Wyoming and Idaho. The data processing division also provides processing support for over 986 ATM locations in 19 states, most of which are located in Montana, Wyoming, Idaho, Colorado and North Dakota. The Company, through the Banks, offers a full range of fee-based trust services to its individual, non-profit and corporate clients, including corporate pension plans, individual retirements plans and 401(k) plans. The Company also offers brokerage services through the Banks utilizing a third-party broker-dealer with 7 registered brokerage representatives serving 20 communities within the Company's market areas. COMPETITION The banking and financial services business in both Montana and Wyoming is highly competitive. The Banks compete for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers. The Company competes in its markets on the basis of its Strategic Vision philosophy, timely and responsive customer service and general market presence. Several of the Company's competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Banks. Moreover, the Banking and Branching Act creates the potential for increased competition in the Banks' markets, particularly from larger, multi-state banks. See "Regulation and Supervision." The Company competes with several large, multi-state banks as well as numerous smaller community banks. Principal competitors include Wells Fargo and Company, U.S. Bancorp and Community First Bankshares, Inc. With respect to core deposits, the Company believes it ranks second in market share to all other competitors in each of Montana and Wyoming. See "Risk Factors-Competition." EMPLOYEES The Company employed approximately 1,027 full-time and 240 part-time employees as of December 31, 1998. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. REGULATION AND SUPERVISION Bank holding companies and commercial banks are subject to extensive regulation under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of FIBS and the Banks. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. FIRST INTERSTATE BANCSYSTEM, INC. As a bank holding company, FIBS is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to supervision and regulation by the Federal Reserve. The Federal Reserve may require that FIBS terminate an activity or terminate control of or liquidate or divest certain Banks if the Federal Reserve believes such activity or control constitutes a significant risk to the financial safety, soundness or stability of any of the Banks or is in violation of the BHCA. The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, FIBS must file written notice and obtain approval from the Federal Reserve prior to purchasing or redeeming its equity securities. Further, FIBS is required by the Federal Reserve to maintain certain levels of capital. See "Capital Standards" herein. FIBS is required to obtain the prior approval of the Federal Reserve for the acquisition of 5% or more of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve is also required for the merger or consolidation of FIBS and another bank holding company. - 6 -
FIBS is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of 5% or more of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, FIBS, subject to the prior approval of the Federal Reserve, may engage in, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve may consider, among other things, whether the performance of such activities by FIBS or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "1996 Budget Act") eliminated the requirement that bank holding companies seek Federal Reserve approval before engaging de novo in permissible nonbanking activities listed in Regulation Y, which governs bank holding companies, if the holding company and its lead depository institution are well-managed and Well-Capitalized (as defined herein) and certain other criteria specified in the statute are met. For purposes of determining the capital levels at which a bank holding company is considered "Well-Capitalized" under the 1996 Budget Act and Regulation Y, the Federal Reserve adopted, as a rule, risk-based capital ratios (on a consolidated basis) that ae the same as the levels set for determining that a state member bank is Well Capitalized under the provisions established under the prompt corrective action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein. Under Federal Reserve regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. THE BANKS FIB Montana is subject to the supervision of and regular examination by the Federal Reserve and the State of Montana. FIB Wyoming is subject to the supervision of and regular examination by the FDIC and the State of Wyoming. If any of the foregoing regulatory agencies determine that the financial condition, capital resources, asset quality, earning prospects, management, liquidity or other aspects of a Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to such agencies. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate a Bank's deposit insurance, which would result in a revocation of the Bank's charter. None of the Banks has been the subject of any such actions by their respective regulatory agencies. The FDIC insures the deposits of the Banks in the manner and to the extent provided by law. For this protection, the Banks pay a semiannual statutory assessment. See "Premiums for Deposit Insurance" herein. Various requirements and restrictions under the laws of the states of Montana and Wyoming and the United States affect the operations of the Banks. State and federal statutes and regulations relate to many aspects of the Banks' operations, including levels of capital, reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of banking offices and capital requirements. - 7 -
RESTRICTIONS ON TRANSFERS OF FUNDS TO FIBS AND THE BANKS FIBS is a legal entity separate and distinct from the Banks. Statutory and regulatory limitations exist with respect to the amount of dividends which may be paid to FIBS by the Banks. Under Montana banking law, FIB Montana may not declare dividends in any one calendar year in excess of its net earnings of the preceding two years without giving notice to the Montana Commissioner of Banking and Financial Institutions. As a Federal Reserve member bank, FIB Montana may not, without the consent of the Federal Reserve, declare dividends in a calendar year which, when aggregated with prior dividends in that calendar year, exceed the calendar year net profits of FIB Montana together with retained earnings for the prior two calendar years. Under Wyoming banking law, FIB Wyoming may not, without the approval of the Wyoming Banking Commissioner, declare dividends in any one calendar year in excess of its net profits in the current year combined with retained net profits of the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. In addition, there are restrictions under the Company's debt instruments which may limit the amount of the Banks' dividends in certain circumstances. The bank regulatory agencies also have authority to prohibit the Banks from engaging in activities that, in their respective opinions, constitute unsafe or unsound practices in conducting their business. It is possible, depending upon the financial condition of the Bank in question and other factors, that the bank regulatory agencies could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. Further, the bank regulatory agencies have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Banks or FIBS may pay. See "Prompt Corrective Action and Other Enforcement Mechanisms" and "Capital Standards" herein for a discussion of these additional restrictions on capital distributions. A large portion of FIBS's revenues, including funds available for the payment of interest on the indebtedness of the Company, dividends and operating expenses are, and will continue to be, dividends paid by the Banks. The Banks are also subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, FIBS or any affiliate of FIBS, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of FIBS or the Banks. Such restrictions prevent FIBS and the Banks from borrowing from the Banks unless the loans are secured by marketable obligations or other acceptable collateral of designated amounts. Further, such secured loans and investments by the Banks to or in FIBS are limited to 10% of the respective Bank's capital stock and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the respective Bank's capital stock and surplus (as defined by federal regulations). Additional restrictions on transactions may be imposed on the Banks by state or federal regulations including under the prompt corrective action provisions of federal law. See "Prompt Corrective Action and Other Enforcement Mechanisms" herein. COMMON LIABILITY Under federal law, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly controlled FDIC-insured institution in danger of default. These provisions can have the effect of making one Bank responsible for FDIC-insured losses at another Bank. EFFECT OF GOVERNMENT POLICIES AND LEGISLATION Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by the Banks on their deposits and borrowings and the interest rate received by the Banks on loans extended to their customers and on investment securities comprises a major portion of the Banks' earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and potential growth of the Banks are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. - 8 -
The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States government securities, by adjusting the required level of reserves for financial institutions subject to the Federal Reserve's reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial service providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial service providers are frequently made in Congress, in the Montana and Wyoming legislatures and before various bank regulatory and other professional agencies. The likelihood of any major legislative changes and the impact such changes might have on FIBS or the Banks are impossible to predict. CAPITAL STANDARDS The Federal Reserve and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for transactions reported on the balance sheet as both assets and transactions, such as letters of credit and recourse arrangements. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with high credit risk, such as commercial loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets. The regulators measure risk-adjusted assets, which include off-balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital (both as defined herein)) and Tier 1 capital. The Company's "Tier 1 capital" consists of: (i) common stockholders' equity and retained earnings; (ii) noncumulative perpetual preferred stock, if any; (iii) mandatorily redeemable preferred securities of subsidiary trust, if any; and (iv) minority interests in certain subsidiaries, less goodwill. The Company's "Tier 2 capital" consists of: (i) a limited amount of allowance for loan losses ("ALL"); and (ii) term subordinated debt. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. Federally supervised banks are currently required to report deferred tax assets in accordance with SFAS No. 109. The federal banking agencies issued rules governing banks and bank holding companies which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, based on projected taxable income for that year or (ii) 10% of Tier 1 capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 capital and total assets and regulatory capital calculations. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the "leverage ratio." For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be at least 5%. See "Prompt Corrective Action and Other Enforcement Mechanisms." In addition to the uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. FIBS and the Banks are all rated as Well Capitalized (as defined below). - 9 -
The federal banking agencies have adopted a joint agency policy statement to provide guidance on managing interest rate risk. These agencies indicated that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the agencies' evaluation of the bank's capital adequacy. A bank with material weaknesses in its risk management process or high levels of exposure relative to its capital will be directed by the agencies to take corrective action. Such actions will include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, reduce levels of exposure, or some combination thereof depending upon the individual institution's circumstances. This policy statement augments regulations adopted by the federal banking agencies. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends. For information concerning the capital ratios of FIBS, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Capital Resources." PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS Federal law requires each federal banking agency to take prompt corrective action to resolve problems of insured depository institutions, including, without limitation, those institutions which fall below one or more prescribed minimum capital ratios. In accordance with federal law, each federal banking agency has promulgated regulations defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios. The five categories are "Well Capitalized," "Adequately Capitalized," "Undercapitalized," "Significantly Undercapitalized" and "Critically Undercapitalized." An insured depository institution will be classified in the following categories based, in part, on the capital measures indicated below: <TABLE> <S> <C> WELL CAPITALIZED ADEQUATELY CAPITALIZED Total risk-based capital of at least 10%, Total risk-based capital of at least 8%, Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5% Leverage ratio of 4% UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED Total risk-based capital less than 8%, Total risk-based capital less than 6%, Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4% Leverage ratio less than 3% CRITICALLY UNDERCAPITALIZED Tangible equity to total assets less than 2% </TABLE> An institution classified as Well Capitalized, Adequately Capitalized or Undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a Significantly Undercapitalized institution as Critically Undercapitalized unless its capital ratio actually warrants such treatment. - 10 -
Insured depository institutions are prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be Undercapitalized. If an insured depository institution is Undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any Undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency within 45 days after receiving or being deemed to have received notice, that the institution is Undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan: (i) specifies: (a) the steps the institution will take to become Adequately Capitalized; (b) the levels of capital to be attained during each year in which the plan will be in effect; (c) how the institution will comply with the applicable restrictions or requirements then in effect of the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"); and (d) the types and levels of activities in which the institution will engage; (ii) is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital; and (iii) would not appreciably increase the risk (including credit risk, interest-rate risk and other types of risk) to which the institution is exposed. In addition, each company controlling an Undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been Adequately Capitalized on average during each of four consecutive calendar quarters and must otherwise provide appropriate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (i) an amount equal to 5% of the depository institution's total assets at the time the institution became Undercapitalized or (ii) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on Significantly Undercapitalized institutions if it determines that such action will further the purpose of the prompt correction action provisions. An insured depository institution that is Significantly Undercapitalized, or is Undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to: (i) force a sale of shares or obligations of the bank, or require the bank to be acquired by or combine with another institution; (ii) impose restrictions on affiliate transactions and (iii) impose restrictions on rates paid on deposits, unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a Significantly Undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became Undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are Critically Undercapitalized. For example, a Critically Undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming Critically Undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes Critically Undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's stockholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. See "Potential Enforcement Actions" herein. - 11 -
SAFETY AND SOUNDNESS STANDARDS The federal banking agencies have adopted guidelines establishing standards for safety and soundness, as required by the FDICIA. These standards are designed to identify potential safety and soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance funds. The standards relate to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. If a federal banking agency determines that an institution fails to meet any of these standards, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency. The federal banking agencies have promulgated safety and soundness regulations and accompanying interagency compliance guidelines on asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. The institution should: (i) conduct periodic asset quality reviews to identify problem assets; (ii) estimate the inherent losses in those assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset reports with adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. The federal banking agencies have issued an interagency policy statement on the ALL which, among other things, established certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. This amount is neither a "floor" nor a "safe harbor" level for an institution's ALL. PREMIUMS FOR DEPOSIT INSURANCE The FDIC has adopted final regulations implementing a risk-based premium system required by federal law, which establishes an assessment rate schedule ranging from nothing to 27 cents per $100 of deposits applicable to members of the Bank Insurance Fund ("BIF"). To determine the risk-based assessment for each institution, the FDIC will categorize an institution as Well Capitalized, Adequately Capitalized or Undercapitalized using the same standards used by the FDIC for its prompt corrective action regulations. For purposes of assessing FDIC premiums, an Undercapitalized institution will generally be one that does not meet either a Well Capitalized or an Adequately Capitalized standard. The FDIC will also assign each institution to one of three subgroups based upon reviews by the institution's primary federal or state regulator, statistical analyses of financial statements and other information relevant to evaluating the risk posed by the institution. The three supervisory categories are: financially sound with only a few minor weaknesses ("Group A"), demonstrates weaknesses that could result in significant deterioration ("Group B") and poses a substantial probability of loss ("Group C"). The BIF assessment rates are set forth below for institutions based on their risk-based assessment categorization: Assessment Rates Effective January 1, 1999* <TABLE> <CAPTION> Group A Group B Group C --------------------------------------------------------------------- <S> <C> <C> <C> Well Capitalized 0 3 17 Adequately Capitalized 3 10 24 Undercapitalized 10 24 27 </TABLE> * Assessment figures are expressed in terms of cents per $100 of deposits. - 12 -
The 1996 Budget Act required banks to share in part of the interest payments on the Financing Corporation ("FICO") bonds which were issued to help fund the federal government costs associated with the savings and loan crisis of the late 1980s. Effective January 1, 1998, for FICO payments, BIF-insured institutions, like the Banks, pay 0.64 cents per $100 in domestic deposits. Full pro rata sharing of FICO interest payments takes effect on January 1, 2000. INTERSTATE BANKING AND BRANCHING Under the Riegal-Neal Interstate Banking and Banking Efficiency Act of 1994 (the "Banking and Branching Act"), a bank holding company may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company is not permitted to make such an acquisition if, upon consummation of the acquisition, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks or bank holding companies. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law, except that a state may not impose more than a five-year age requirement. The Banking and Branching Act also permits, subject to limitations under state law, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph also apply to such mergers. The Banking and Branching Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. The State of Montana has enacted legislation which authorizes de novo branching within the state by banks chartered under the laws of the State of Montana. In the same legislation, Montana elected to "opt out" of full interstate branching available under the Banking and Branching Act, thereby precluding interstate branching and branching by interstate merger in Montana until October 1, 2001. Nevertheless, after the foregoing prohibition expires, competition in the Company's market areas could increase significantly. The State of Wyoming authorizes branching by interstate merger, but currently limits intrastate branching in certain respects. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The federal banking agencies have issued regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending, service and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements. The Federal Interagency Task Force on Fair Lending has issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." Based on the most recent examinations received, FIB Montana and FIB Wyoming were both rated "satisfactory." - 13 -
POTENTIAL ENFORCEMENT ACTIONS Commercial banking organizations, such as the Banks and their institution-affiliated parties, which includes FIBS, may be subject to potential enforcement actions by the Federal Reserve and the FDIC for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of the Banks), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of the FDICIA. Additionally, a bank holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against such bank holding company. Neither FIBS nor the Banks has been subject to any such enforcement actions. NON-BANK SUBSIDIARY During 1997, the Company formed FIB Capital, a statutory business trust incorporated under Delaware law, for the exclusive purpose of issuing $40 million of mandatorily redeemable trust preferred securities ("trust preferred securities") and using the proceeds to purchase junior subordinated debentures ("subordinated debentures") issued by FIBS. See also "Notes to Consolidated Financial Statements - Mandatorily Redeemable Preferred Securities of Subsidiary Trust" of the financial statements included in Part IV, Item 14. RISK FACTORS ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY The financial performance and profitability of the Company will depend on its ability to execute its business strategy and manage its possible future growth. Although the Company believes that it has substantially integrated the recently acquired banks into the Company's operations, there can be no assurance that unforeseen issues relating to the assimilation or prior operations of these banks, including the emergence of any material undisclosed liabilities, will not materially adversely affect the Company. In addition, any future acquisitions or other possible future growth may present operating and other problems that could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's financial performance will also depend on the Company's ability to maintain profitable operations through implementation of its Strategic Vision. Moreover, the Company's future performance is subject to a number of factors beyond its control, including pending and future federal and state banking legislation, regulatory changes, unforeseen litigation outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased competition and economic conditions. Accordingly, there can be no assurance that the Company will be able to continue the growth or maintain the level of profitability it has recently experienced. INTEREST RATE RISK Banking companies' earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of non-performing assets. Fluctuations in interest rates affect the demand of customers for the Company's products and services. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on the Company's business, financial condition and results of operations. - 14 -
ECONOMIC CONDITIONS; LIMITED GEOGRAPHIC DIVERSIFICATION The Company's operations are located in Montana and Wyoming. As a result of the geographic concentration of its operations, the Company's results depend largely upon economic conditions in these areas. The Company believes the primary industries in Montana and Wyoming include agriculture, energy, mining, timber processing, tourism, government services, education and medical services. A deterioration in economic conditions in the Company's market areas could adversely impact the quality of the Company's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION AND MONETARY POLICY The Company and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts its banking business, undertakes new investments and activities and obtains financing. This regulation is designed primarily for the protection of the deposit insurance funds and consumers and not to benefit holders of the Company's securities. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Company. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Company's business, financial condition and results of operations. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, and any unfavorable change in these conditions could have a material adverse effect on the Company's business, financial condition and results of operations. See "Regulation and Supervision." COMPETITION The banking and financial services business in both Montana and Wyoming is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial services providers. The Banks compete for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial services providers. Several of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Banks. Moreover, the Banking and Branching Act has increased competition in the Banks' markets, particularly from larger, multi-state banks. There can be no assurance that the Company will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Company's business, financial condition and results of operations. See "Competition" and "Regulation and Supervision." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent on the management skills of its existing executive officers and directors, many of whom have held officer and director positions with the Company for many years. The loss or unavailability of any of its key executives, including Homer A. Scott, Jr., Chairman of the Board, Thomas W. Scott, Chief Executive Officer, Lyle R. Knight, President and Chief Operating Officer, or Terrill R. Moore, Senior Vice President, Chief Financial Officer and Secretary, could have a material adverse effect on the Company's business, financial condition and results of operations. See Part III, Item 10, "Directors and Executive Officers of Registrant." CONTROL BY AFFILIATES The directors and executive officers of the Company beneficially own approximately 60.1% of the outstanding common stock of the Company. Many of these directors and executive officers are members of the Scott family, which collectively owns approximately 82.14% of the outstanding common stock. By virtue of such ownership, these affiliates are able to control the election of directors and the determination of the Company's business, including transactions involving any merger, share exchange, sale of assets outside the ordinary course of business and dissolution. - 15 -
ASSET QUALITY A significant source of risk for the Company arises from the possibility that losses will be sustained by the Banks because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the ALL, that management believes are appropriate to mitigate this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Company's credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-Lending Activities." LACK OF TRADING MARKET; MARKET PRICES The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 92.18% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 7.82% held by 13 shareholders without such restrictions. FIBS has the right of first refusal to purchase the restricted stock at the minority appraised value per share based upon the most recent quarterly appraisal available to FIBS. All stock not subject to such restrictions may be sold at a price per share that is acceptable to the shareholder. FIBS has no obligation to purchase unrestricted stock, but has historically purchased such stock in order to reduce the amount of its stock not subject to transfer restrictions. During 1998, 8,362 shares of its unrestricted stock were offered to and repurchased by the Company from participants in the Company's Savings Plan. All shares were repurchased at the most recent minority appraised value at the repurchase date. The appraised minority value of the FIBS common stock represents the estimated fair market valuation of a minority block of such stock, taking into account adjustments for the lack of marketability of the stock and other factors. This value does not represent an actual trading price between a willing buyer and seller of the FIBS common stock in an informed, arm's-length transaction. As such, the appraised minority value is only an estimate as of a specific date, and there can be no assurance that such appraisal is an indication of the actual value holders of the FIBS common stock may realize with respect to shares held by them. Moreover, the estimated fair market value of the FIBS common stock may be materially different at any date other than the valuation dates. FIBS has no obligation, by contract, policy or otherwise to purchase stock from any shareholder desiring to sell, or to create any market for the stock. Historically, it has been the practice of FIBS to repurchase common stock to maintain a shareholder base with restrictions on sale or transfer of the stock. In the last three calendar years (1996-1998), FIBS has redeemed a total of 241,338 shares of common stock, all of which was restricted by the shareholder agreements. FIBS has redeemed the stock at the price determined in accordance with the shareholder agreements. FIBS has no present intention to change its historical practice for redemption of stock, but no assurances can be provided that FIBS will not change or end its practice of redeeming stock. Furthermore, FIBS redemptions of stock are subject to corporate law and regulatory restrictions which could prevent stock redemptions. There is a limited public market for the trust preferred securities. Future trading prices of the trust preferred securities depend on many factors including, among other things, prevailing interest rates, the operating results and financial condition of the Company and the market for similar securities. As a result of the existence of FIBS's right to defer interest payments on or, subject to prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, shorten the stated maturity of the subordinated debentures, the market price of the trust preferred securities may be more volatile than the market prices of subordinated debentures that are not subject to such optional deferrals or reduction in maturity. There can be no assurance as to the market prices for the trust preferred securities or the subordinated debentures that may be distributed in exchange for the trust preferred securities if the Company exercises its right to dissolve FIB Capital. - 16 -
FORWARD-LOOKING STATEMENTS Certain statements contained in this document including, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates; demographic changes; competition; fluctuations in interest rates; changes in business strategy or development plans; changes in governmental regulation; credit quality; the availability of capital to fund the expected expansion of the Company's business; and other factors referenced in this document, including, without limitation, under the captions "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, shareholders, trust security holders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. ITEM 2. PROPERTIES The Company is the anchor tenant in a commercial building in which the Company's principal executive offices are located in Billings, Montana. The building is owned by a joint venture partnership in which FIB Montana is one of the two partners, owning a 50% interest in the partnership. The Company and FIB Montana lease space for operations in the building. The Company also leases space for operations and seven branch facilities in eight buildings. All other branches are located in Company-owned facilities. The Company believes its leased and owned facilities are adequate for its present needs and anticipated future growth. See also "Notes to Consolidated Financial Statements - Premises and Equipment" and "Notes to Consolidated Financial Statements - Commitments and Contingencies" included in Part IV, Item 14. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits. In the opinion of management, following consultation with legal counsel, the pending lawsuits are without merit or, in the event the plaintiff prevails, the ultimate liability or disposition thereof will not have a material adverse effect on the Company's business, financial condition or results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DESCRIPTION OF FIBS CAPITAL STOCK The authorized capital stock of FIBS consists of 20,000,000 shares of common stock without par value, of which 7,988,573 shares were outstanding as of December 31, 1998, and 100,000 shares of preferred stock without par value, none of which were outstanding as of December 31, 1998. COMMON STOCK Each share of the common stock is entitled to one vote in the election of directors and in all other matters submitted to a vote of stockholders. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election if they choose to do so, subject to the rights of the holders of the preferred stock. Voting for directors is noncumulative. - 17 -
Subject to the preferential rights of any preferred stock that may at the time be outstanding, each share of common stock has an equal and ratable right to receive dividends when, if and as declared by the Board of Directors out of assets legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock will be entitled to share equally and ratably in the assets available for distribution after payments to creditors and to the holders of any preferred stock that may at the time be outstanding. Holders of common stock have no conversion rights or pre-emptive or other rights to subscribe for any additional shares of common stock or for other securities. All outstanding common stock is fully paid and non-assessable. The common stock of FIBS is not actively traded, and there is no established trading market for the stock. There is only one class of common stock, with 92.18% of the shares subject to contractual transfer restrictions set forth in shareholder agreements and 7.82% held by 13 shareholders without such restrictions. FIBS has the right of first refusal to purchase the restricted stock at the minority appraised value per share based on the most recent quarterly appraisal available to FIBS. All stock not subject to such restrictions may be sold at a price per share that is acceptable to the shareholder. Quarter-end minority appraisal values for the past two years, determined by Alex Sheshunoff & Co. Investment Banking are as follows: <TABLE> <CAPTION> Appraised Valuation As Of(1) Minority Value --------------- -------------- <S> <C> December 31, 1996 21.50 March 31, 1997 21.50 June 30, 1997 23.75 September 30, 1997 25.00 December 31, 1997 29.00 March 31, 1998 32.00 June 30, 1998 35.00 September 30, 1998 33.00 December 31, 1998 37.00 </TABLE> (1) Sales of stock between dates at which updated valuations are received are adjusted for cash dividends paid. As of December 31, 1998, options for 169,280 shares of the FIBS common stock were outstanding at various exercise prices, ranging from $5.24 to $32.00. The aggregate cash proceeds to be received by FIBS upon exercise of all options outstanding at December 31, 1998 would be $3.0 million, or a weighted average exercise price of $17.69 per share. The book value per share of FIBS common stock as of December 31, 1998 was $20.47. The appraised minority value as of December 31, 1998 was $37.00. The appraised minority value of the FIBS common stock represents the estimated fair market valuation of a minority block of such stock, taking into account adjustments for the lack of marketability of the stock and other factors. This value does not represent an actual trading price between a willing buyer and seller of the FIBS common stock in an informed, arm's-length transaction. As such, the appraised minority value is only an estimate as of a specific date, and there can be no assurance that such appraisal is an indication of the actual value holders of the FIBS common stock may realize with respect to shares held by them. Moreover, the estimated fair market value of the FIBS common stock may be materially different at any date other than the valuation dates indicated above. Resale of FIBS stock may be restricted pursuant to the Securities Act of 1933 and applicable state securities laws. In addition, most shares of FIBS stock are subject to one of two shareholders' agreements. Members of the Scott family, as majority shareholders of FIBS, are subject to a shareholder's agreement ("Scott Agreement"). The Scott family, under the Scott Agreement, has agreed to limit the transfer of shares owned by members of the Scott family to family members or charities, or with FIBS's approval, to the Company's officers, directors, advisory directors, or to the Savings Plan. - 18 -
Shareholders of the Company who are not Scott family members, with the exception of 13 shareholders who own an aggregate of 624,349 shares of unrestricted stock, are subject to a shareholder's agreement ("Shareholder's Agreement"). The Shareholder's Agreement grants FIBS the option to purchase the stock in any of the following events: 1) the shareholder's intention to sell the stock, 2) the shareholder's death, 3) transfer of the stock by operation of law, 4) termination of the shareholder's status as a director, officer or employee of the Company, and 5) total disability of the shareholder. Stock subject to the Shareholder's Agreement may not be sold or transferred by the shareholder without triggering FIBS's option to acquire the stock in accordance with the terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement allows FIBS to repurchase any of the FIBS stock acquired by the shareholder after January 1, 1994 if FIBS determines that the number of shares owned by the shareholder is excessive in view of a number of factors including but not limited to (a) the relative contribution of the shareholder to the economic performance of the Company, (b) the effort being put forth by the shareholder, and (c) the level of responsibility of the shareholder. Purchases of FIBS common stock made through FIBS Savings Plan are not restricted by the Shareholder's Agreement, due to requirements of ERISA and the Internal Revenue Code. However, since the Savings Plan does not allow distributions "in kind," any distributions from an employee's account in the Savings Plan will allow, and may require, the Savings Plan trustee to sell the FIBS stock. While FIBS has no obligation to repurchase the stock, it is possible that FIBS will repurchase FIBS stock sold by the Savings Plan. Any such repurchases would be upon terms set by the Savings Plan trustee and accepted by FIBS. There are 458 record shareholders of FIBS as of December 31, 1998, including the Company's Savings Plan as trustee for shares held on behalf 661 individual participants in the plan. 247 individuals in the Savings Plan also own shares of FIBS stock outside of the Plan. The Plan is administered by the Trust Department of FIB Montana, which votes the shares based on the instructions of each participant. In the event the participant does not provide the Trustee with instructions, the Trustee votes those shares in accordance with voting instructions received from a majority of the participants in the Plan. DIVIDENDS It is the policy of FIBS to pay a dividend to all common shareholders quarterly. Dividends are declared and paid in the month following the calendar quarter and the amount has historically been determined based upon a percentage of net income for the calendar quarter immediately preceding the dividend payment date. Effective with the dividend paid in January 1996, the dividend has been 30% of quarterly net income. The Board of Directors of FIBS has no current intention to change its dividend policy, but no assurance can be given that the Board may not, in the future, change or eliminate the payment of dividends. Historical quarterly dividends for 1997 and 1998 are as follows: <TABLE> <CAPTION> Month Declared Amount Total Cash Quarter And Paid Per Share Dividend ------- -------- --------- -------- <S> <C> <C> <C> 1st quarter 1997 April 1997 $ .25 $ 1,934,003 2nd quarter 1997 July 1997 .25 1,991,274 3rd quarter 1997 October 1997 .26 2,089,967 4th quarter 1997 January 1998 .22 1,765,154 1st quarter 1998 April 1997 .23 1,843,844 2nd quarter 1998 July 1998 .23 1,848,623 3rd quarter 1998 October 1998 .26 2,093,395 4th quarter 1998 January 1999 .24 1,917,327 </TABLE> The difference in quarterly dividends is reflective of the actual quarterly net income. - 19 -
DIVIDEND RESTRICTIONS The holders of common stock will be entitled to dividends when, as and if declared by the FIBS Board of Directors out of funds legally available therefor. Under the Company's revolving term loan, the Company is prohibited from declaring or paying any dividends to common stockholders in excess of 33% of net income for the immediately preceding year. The Company has also agreed that the Banks will maintain ratios of tangible primary capital to tangible primary assets not less than the ratios required by regulators or applicable law or regulation, and that the Banks will at all times maintain capital at adequately capitalized levels. The loan restrictions limit the funds available for the payment of dividends from the Banks to FIBS and from FIBS to its shareholders. Under Montana banking law, FIB Montana may not declare dividends in excess of its net undivided earnings (as defined) less any required transfers to surplus and may not declare a dividend larger than the previous two years' net earnings unless prior notice is given to the Montana Commissioner of Banking and Financial Institutions. As a Federal Reserve member bank, FIB Montana may not, without the consent of the Federal Reserve, declare dividends in a calendar year which, when aggregated with prior dividends in that calendar year, exceed the calendar year net profits of FIB Montana together with retained earnings for the prior two calendar years. Under Wyoming banking law, FIB Wyoming may not declare dividends without meeting surplus fund requirements and may not, without the approval of the Wyoming Banking Commissioner, declare dividends in any one calendar year in excess of its net profits (as defined) in the current year combined with retained net profits of the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, federal regulatory agencies (e.g., the FDIC and Federal Reserve) have authority to prohibit a bank under their supervision from engaging in practices which, in the opinion of the particular federal regulatory agency, are unsafe or unsound or constitute violations of applicable law. For example, depending upon the financial condition of a bank in question and other factors, the appropriate federal regulatory agency could determine that the payment of dividends might under some circumstances constitute an unsafe and unsound practice. Moreover, each federal regulatory agency has established guidelines for the maintenance of appropriate levels of capital for a bank under its supervision. Compliance with the standards set forth in such guidelines could limit the amount of dividends which FIBS or any of the Banks could pay. See Part I, Item 1, "Regulation and Supervision." PREFERRED STOCK The authorized capital stock of FIBS includes 100,000 shares of preferred stock. The FIBS Board of Directors is authorized, without approval of the holders of Common Stock, to provide for the issuance of preferred stock from time to time in one or more series in such number and with such designations, preferences, powers and other special rights as may be stated in the resolution or resolutions providing for such preferred stock. FIBS Board of Directors may cause FIBS to issue preferred stock with voting, conversion and other rights that could adversely affect the holders of the common stock or make it more difficult to effect a change of control of the Company. In the event of any dissolution, liquidation or winding up of the affairs of FIBS, before any distribution or payment may be made to the holders of common stock, the holders of preferred stock would be entitled to be paid in full with the respective amounts fixed by FIBS Board of Directors in the resolution or resolutions authorizing the issuance of such series, together with a sum equal to the accrued and unpaid dividends thereon to the date fixed for such distribution or payment. After payment in full of the amount which the holders of preferred stock are entitled to receive, the remaining assets of FIBS would be distributed ratably to the holders of the common stock. If the assets available are not sufficient to pay in full the amount so payable to the holders of all outstanding preferred stock, the holders of all series of such shares would share ratably in any distribution of assets in proportion to the full amounts to which they would otherwise be respectively entitled. The consolidation or merger of FIBS into or with any other corporation or corporations would not be deemed a liquidation, dissolution, or winding up of the affairs of FIBS. SALES OF UNREGISTERED SECURITIES During 1998, the Company issued 5,224 unregistered shares of its common stock to seven individuals exercising stock options. The exercise price was $4.74 per share. The Company also issued 1,827 unregistered shares of its common stock to four Scott Family members for $35 per share, the minority appraised value on the date of issuance. - 20 -
These sales were made pursuant to the exemption from registration under Section 4(2) of the Securities Act of 1933. For additional information regarding stock options, see "Notes to Consolidated Financial Statements - Employee Benefit Plans" included in Part IV, Item 14. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data with respect to the Company's consolidated financial position as of December 31, 1998, and 1997 and its results of operations for the fiscal years ended December 31, 1998, 1997, and 1996, has been derived from the consolidated financial statements of the Company included in Part IV, Item 14, which have been audited by KPMG LLP, independent certified public accountants. This data should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and such consolidated financial statements, including the notes thereto. FIVE YEAR SUMMARY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Years ended December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> OPERATING DATA: Interest income $ 179,414 165,808 117,925 98,970 80,230 Interest expense 81,652 72,663 50,019 41,946 28,451 - ---------------------------------------------------------------------------------------------------- Net interest income 97,762 93,145 67,906 57,024 51,779 Provision for loan losses 4,170 4,240 3,844 1,629 1,344 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 93,592 88,905 64,062 55,395 50,435 Other operating income 29,484 27,311 24,141 19,350 16,844 Other operating expenses 81,848 74,631 53,609 46,564 41,684 - ---------------------------------------------------------------------------------------------------- Income before income taxes 41,228 41,585 34,594 28,181 25,595 Income tax expense 15,592 15,730 13,351 10,844 9,861 - ---------------------------------------------------------------------------------------------------- Net income $ 25,636 25,855 21,243 17,337 15,734 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 25,636 24,401 20,818 17,337 15,734 Basic earnings per common share 3.20 3.07 2.65 2.22 2.01 Diluted earnings per common share(1) 3.17 3.05 2.64 2.21 2.00 Dividends per common share 0.94 0.98 0.78 0.48 0.40 Weighted average common shares outstanding - diluted 8,087,809 7,987,921 7,881,024 7,843,644 7,850,188 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- OPERATING RATIOS: Return on average assets 1.10% 1.22 1.41 1.39 1.44 Return on average common stockholders' equity 16.62 18.12 17.84 16.98 17.64 Average stockholders' equity to average assets 6.65 7.17 8.08 8.20 8.15 Net interest margin 4.76 5.00 5.15 5.19 5.34 Net interest spread 4.08 4.32 4.47 4.45 4.76 Common stock dividend payout ratio(2) 29.38 32.13 29.17 21.72 20.00 Ratio of earnings to fixed charges(3): Excluding interest on deposits 6.95x 4.94x 8.74x 9.50x 12.34x Including interest on deposits 1.50x 1.55x 1.68x 1.66x 1.87x - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - 21 -
<CAPTION> FIVE YEAR SUMMARY (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) As of December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Total assets $ 2,478,833 2,234,764 2,063,837 1,351,215 1,134,105 Loans 1,484,459 1,470,414 1,375,479 870,378 751,518 Allowance for loan losses 28,803 28,180 27,797 15,171 13,726 Investment securities 678,678 425,603 403,571 258,737 251,745 Deposits 2,041,932 1,805,006 1,679,424 1,099,069 939,857 Long-term debt 24,288 31,526 64,667 15,867 5,449 Trust preferred securities 40,000 40,000 - - - Stockholders' equity 163,531 145,667 146,061 109,366 95,272 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- ASSET QUALITY RATIOS: Nonperforming assets to total loans and OREO(4) 1.29% 1.15 1.20 0.97 0.94 Allowance for loan losses to total loans 1.94 1.92 2.02 1.74 1.83 Allowance for loan losses to nonperforming loans(5) 159.63 181.99 185.10 213.74 259.62 Net charge-offs to average loans 0.24 0.27 0.17 0.13 0.14 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- REGULATORY CAPITAL RATIOS: Tier 1 risk-based capital 9.89% 9.67 7.35 10.40 11.32 Total risk-based capital 12.30 12.19 9.98 11.65 12.58 Leverage ratio 7.10 6.94 5.28 7.28 8.12 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- </TABLE> (1) Diluted earnings per common share represent the amount of earnings available to each share of common stock outstanding during the period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128. (2) Dividends per common share divided by net income per common share. (3) For purposes of computing the ratio of earnings to fixed charges, earnings represents income before income taxes and fixed charges. Fixed charges represent interest expense and preferred stock dividends, which dividends commenced in October 1996 and concluded in October 1997. Deposits include interest-bearing deposits and repurchase agreements. Without including preferred stock dividends in fixed charges and excluding interest on deposits, the ratio of earnings to fixed charges for the years ended December 31, 1997 and 1996 were 5.87x and 9.91x, respectively. Without including preferred stock dividends in fixed charges and including interest on deposits, the ratio of earnings to fixed charges for the years ended December 31, 1997 and 1996 were 1.57x and 1.68x, respectively. (4) For purposes of computing the ratio of non-performing assets to total loans and other real estate owned ("OREO"), non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing, restructured debt and other real estate owned. (5) For purposes of computing the ratio of allowance for loan losses to non-performing loans, non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing and restructured debt. - 22 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with the information under Part II, Item 6, "Selected Consolidated Financial Data" and the Company's consolidated financial statements, including the notes thereto, and other financial data appearing elsewhere in this document. Certain statements included in the following discussion constitute "forward-looking statements" which involve various risks and uncertainties. The Company's actual results may differ significantly from those anticipated in such forward-looking statements. Factors that might cause such a difference include, without limitation, the ability of the Company to execute its business strategy, interest rate risk, economic conditions, government regulation, competition and asset quality. For additional information concerning these and other factors, see Part I, Item 1, "Business - Risk Factors." The Company, through the Banks, operates 35 banking offices in 24 communities throughout Montana and Wyoming. The Company's income is derived primarily from the net interest income and other operating income. Net interest income consists of the excess of interest income, received primarily on customer loans and investment securities, over interest expense, paid principally on customer deposits and indebtedness. Other operating income primarily includes service charges on deposit accounts, data processing fees and income from fiduciary activities. The Company has continued to increase earnings during the periods reported herein while expanding its operations through a combination of internal and external growth. The Company opened four new banking offices in the second half of 1997 and two new banking offices in 1998 to better serve its existing customer base. Approximately $3 million has been invested in property and equipment for the new banking offices and branch staffing levels have increased by approximately 28 full-time employees. A majority of the Company's growth in recent years has resulted from acquisitions of other banks. In October 1996, the Company acquired First Interstate Bank of Montana, N.A. and First Interstate Bank of Wyoming, N.A., which collectively included six branch banks (the "FIBNA Banks"). In December 1996, the Company acquired Mountain Bank of Whitefish ("FIB Whitefish"), which included two branch locations. Immediately prior to the acquisitions, the FIBNA Banks had assets of $553.2 million and deposits of $423.9 million, and FIB Whitefish had assets of $66.9 million and deposits of $54.4 million. Prior to the acquisition, the FIBNA Banks were operated as branch locations without independent administrative support, data processing and other required services. In connection with the acquisition, the Company increased its staffing at both the holding company and branch levels to provide the administrative, data processing and other operational support to facilitate integration and operation of such banks. The acquisitions of the FIBNA Banks and FIB Whitefish (collectively, the "Acquired Banks") were accounted for using the purchase method of accounting. Amortization of goodwill resulting from the acquisitions totaled approximately $1.7 million in 1998. The Company believes that the Acquired Banks have been substantially integrated into the Company's operations. RESULTS OF OPERATIONS The Company's increased earnings and expansion of operations in recent years have been effected through a successful combination of acquisitions and internal growth. The internal growth experienced by the Company is reflected by an increased volume of customer loans and deposits, without giving effect to such acquisitions. The Company's internal growth has largely been accomplished through its effective offering and promotion of competitively priced products and services. Net income was flat in 1998 as compared to 1997 reflecting narrowing interest margins, increasingly competitive pricing by the Company's competitors, increased operating costs associated with the opening of new banking offices as discussed above and the Company's focus on enhancing existing facilities and providing substantial human resources training. However, net income to common shareholders increased 5.1% to $25.6 million in 1998 from $24.4 million in 1997 as a result of the November 1997 redemption of preferred stock and issuance of trust preferred securities. Net income increased 21.7% to $25.9 million in 1997 from $21.2 million in 1996 and net income to common shareholders increased 17.2% to $24.4 million in 1997 from $20.8 million in 1996, due principally to internal growth and earnings provided by the Acquired Banks. Net income during the fourth quarter 1998 decreased 9.7% from the third quarter. This decrease was principally due to normal increases in expenses related to facility and equipment enhancements, additional rental expense related to expansion of facilities and increases in certain expenses such as supplies, postage and telephone. The remaining increase is attributable to additional OREO provisions, a loss on the sale of OREO property and a non-recurring loss recorded by the Trust Department. - 23 -
NET INTEREST INCOME Net interest income is the largest source of the Company's operating income. As discussed above, net interest income is derived from interest, dividends and fees received from interest-earning assets, less interest expense incurred on interest-bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest-bearing liabilities primarily include deposits and various forms of indebtedness. Net interest income increased 4.7% to $97.8 million in 1998 from $93.1 million in 1997. This increase resulted primarily from internal growth. Net interest income increased 37.2% to $93.1 million in 1997 from $67.9 million in 1996. This increase resulted primarily from the incremental net interest income provided by the Acquired Banks. The following table presents, for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities. Average balances are averaged daily balances. <TABLE> <CAPTION> AVERAGE BALANCE SHEETS, YIELDS AND RATES - ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------------------------------------------------- 1998 1997 --------------------------------------- ------------------------------------ Average Average Average Average (DOLLARS IN THOUSANDS) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans(1) $ 1,469,741 143,435 9.76% $ 1,441,800 140,299 9.73% U.S. and agency securities 416,965 25,006 6.00 345,771 20,481 5.92 Federal funds sold 64,351 3,457 5.37 39,936 2,210 5.53 Other securities 71,170 4,610 6.48 23,302 1,467 6.30 Tax exempt securities(2) 43,578 3,290 7.55 21,253 1,737 8.17 Interest-bearing deposits in banks 18,992 997 5.25 7,491 448 5.98 - ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,084,797 180,795 8.67 1,879,553 166,642 8.87 Noninterest-earning assets 236,075 235,941 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 2,320,872 $ 2,115,494 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES: Demand deposits $ 320,088 6,673 2.08% $ 304,511 6,369 2.09% Savings deposits 464,527 18,077 3.89 417,352 16,021 3.84 Time deposits 754,725 43,498 5.76 626,925 35,739 5.70 Borrowings(3) 172,725 7,550 4.37 184,605 8,846 4.79 Long-term debt 28,085 2,327 8.29 56,197 5,165 9.19 Trust preferred securities 40,000 3,527 8.82 5,808 523 9.00 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities and trust preferred securities 1,780,150 81,652 4.59 1,595,398 72,663 4.55 - ------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 360,628 345,372 Other noninterest-bearing liabilities 25,832 22,994 Stockholders' equity 154,262 151,730 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,320,872 2,115,494 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Net FTE interest income $ 99,143 93,979 Interest rate spread 4.08% 4.32% Contribution of interest free funds 0.68 0.68 Net yield on interest-earning assets(4) 4.76 5.00 Less FTE adjustments(2) (1,381) (834) - ------------------------------------------------------------------------------------------------------------------- Net interest income per consolidated statements of income $ 97,762 93,145 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- <CAPTION> Years Ended December 31, ------------------------------------------ 1996 ------------------------------------------ Average Average (DOLLARS IN THOUSANDS) Balance Interest Rate - --------------------------------------------------------------------------------------------- <C> <C> <C> <C> Interest-earning assets: Loans(1) $ 1,014,901 100,039 9.86% U.S. and agency securities 244,314 13,951 5.71 Federal funds sold 25,462 1,342 5.27 Other securities 21,868 1,392 6.37 Tax exempt securities(2) 19,100 1,575 8.25 Interest-bearing deposits in banks 6,555 376 5.74 - --------------------------------------------------------------------------------------------- Total interest-earning assets 1,332,200 118,675 8.91 Noninterest-earning assets 173,888 - --------------------------------------------------------------------------------------------- Total assets $ 1,506,088 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES: Demand deposits $ 210,153 4,489 2.14% Savings deposits 301,003 11,305 3.76 Time deposits 464,712 26,328 5.67 Borrowings(3) 126,135 5,869 4.65 Long-term debt 23,760 2,028 8.54 Trust preferred securities - - - - --------------------------------------------------------------------------------------------- Total interest-bearing liabilities and trust preferred securities 1,125,763 50,019 4.44 - --------------------------------------------------------------------------------------------- Noninterest-bearing deposits 242,117 Other noninterest-bearing liabilities 16,487 Stockholders' equity 121,721 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,506,088 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Net FTE interest income 68,656 Interest rate spread 4.47% Contribution of interest free funds 0.68 Net yield on interest-earning assets(4) 5.15 Less FTE adjustments(2) (750) - --------------------------------------------------------------------------------------------- Net interest income per consolidated statements of income 67,906 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- </TABLE> (1) Average loan balances include nonaccrual loans. Loan fees included in interest income were $8.1 million, $6.1 million and $5.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. - 24 -
(2) Interest income and average rates for tax exempt securities are presented on a fully-taxable equivalent (FTE) basis. (3) Includes interest on Federal funds purchased, securities sold under repurchase agreements and other borrowed funds. Excludes long-term debt. (4) Net yield on interest-earning assets during the period equals (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities and trust preferred securities, divided by (ii) average interest-earning assets for the period. The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of loans, investment securities and other interest-earning assets, compared to the volume of interest-bearing deposits and indebtedness, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from estimated changes in average asset and liability balances (volume) and estimated changes in average interest rates (rate). Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other. <TABLE> <CAPTION> ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES - ----------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Year ended December 31, 1998 December 31, 1997 compared with compared with December 31, 1997 December 31, 1996 favorable (unfavorable) Favorable (unfavorable) -------------------------------- ---------------------------------- Volume Rate Net Volume Rate Net - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS: Loans(1) $ 2,727 409 3,136 41,541 (1,281) 40,260 U.S. and agency securities 4,270 255 4,525 6,010 520 6,530 Federal funds sold 1,312 (65) 1,247 801 67 868 Other securities 3,101 42 3,143 90 (15) 75 Tax exempt securities(1) 1,685 (132) 1,553 176 (14) 162 Interest-bearing deposits in banks 604 (55) 549 56 16 72 - ----------------------------------------------------------------------------------------------------------------- Total change 13,699 454 14,153 48,674 (707) 47,967 - ----------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES: Demand deposits 325 (21) 304 1,974 (94) 1,880 Savings deposits 1,836 220 2,056 4,466 250 4,716 Time deposits 7,366 393 7,759 9,247 164 9,411 Borrowings(2) (519) (777) (1,296) 2,802 175 2,977 Long-term debt (2,329) (509) (2,838) 2,981 156 3,137 Trust preferred securities 3,015 (11) 3,004 523 - 523 - ----------------------------------------------------------------------------------------------------------------- Total change 9,694 (705) 8,989 21,993 651 22,644 - ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in FTE net interest income (1) $ 4,005 1,159 5,164 26,681 (1,358) 25,323 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- <CAPTION> - ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Year ended December 31, 1996 compared with December 31, 1995 favorable (unfavorable) ---------------------------------- Volume Rate Net - ----------------------------------------------------------------------------- <S> <C> <C> <C> INTEREST-EARNING ASSETS: Loans(1) 17,761 (1,457) 16,304 U.S. and agency securities 2,518 155 2,673 Federal funds sold (640) (113) (753) Other securities 495 33 528 Tax exempt securities(1) 65 280 345 Interest-bearing deposits in banks 17 (13) 4 - ----------------------------------------------------------------------------- Total change 20,216 (1,115) 19,101 - ----------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES: Demand deposits 944 (703) 241 Savings deposits 1,469 (81) 1,388 Time deposits 4,647 (52) 4,595 Borrowings(2) 1,318 (315) 1,003 Long-term debt 906 (60) 846 Trust preferred securities - - - - ----------------------------------------------------------------------------- Total change 9,284 (1,211) 8,073 - ----------------------------------------------------------------------------- Increase (decrease) in FTE net interest income (1) 10,932 96 11,028 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- </TABLE> (1) Interest income and average rates for tax exempt loans and securities are presented on a fully-taxable equivalent (FTE) basis. (2) Includes interest on Federal funds purchased, securities sold under repurchase agreements and other borrowed funds. FTE interest income increased 8.5% to $180.8 million in 1998 from $166.6 million in 1997. This increase resulted primarily from internal growth in earning assets (principally investment securities), offset by a decrease of 20 basis points in the yield on average interest earning assets from 8.87% in 1997 to 8.67% in 1998. The decrease in yield is due to shifts in the mix of average interest earning assets from higher yielding loans to investment securities which produce a lower yield. In 1997, FTE interest income increased 40.4% to $166.6 million from $118.7 million in 1996. This increase was due primarily to significant increases in loans due to the Acquired Banks. The yield on average interest earning assets during 1997 was 8.87% compared to 8.91% in 1996. - 25 -
Customer loan fees, included in interest income, increased 32.8% to $8.1 million in 1998 from $6.1 million in 1997. The most significant increases from 1997 to 1998 were in real estate loan fees. Loan fees increased 22.0% to $6.1 million in 1997 from $5.0 million in 1996 due to loan fees generated by the Acquired Banks. Interest expense increased 12.4% to $81.7 million during 1998 from $72.7 million in 1997. This increase was due primarily to internally generated growth in customer deposits. The rate on average interest-bearing liabilities and trust preferred securities of 4.59% in 1998 increased 4 basis points from 4.55% in 1997. Interest expense increased 45.3% to $72.7 million during 1997 from $50.0 million in 1996. This increase was due primarily to the customer deposits and indebtedness incurred in connection with the Acquired Banks. The rate on average interest-bearing liabilities and trust preferred securities of 4.55% in 1997 increased 11 basis points from 4.44% in 1996. PROVISION FOR LOAN LOSSES The provision for loan losses creates an allowance for future loan losses. The loan loss provision for each year is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Company's markets. The Company performs a quarterly assessment of the risks inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Company makes provisions for potential loan losses. Specific allocations are made for loans where the probability of a loss can be defined and reasonably determined, while the balance of the provisions for loan losses are based on historical data, delinquency trends, economic conditions in the Company's markets and industry averages. Annual fluctuation in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses, and ultimate loan losses may vary from current estimates. The provision for loan losses decreased by $70,000 in 1998 to $4.2 million. The provision for loan losses increased 10.3% to $4.2 million in 1997 from $3.8 million in 1996 due to higher loan volumes resulting from the 1996 acquisitions. OTHER OPERATING INCOME The principal sources of other operating income include service charges on deposit accounts, data processing fees, income from fiduciary activities, comprised principally of fees earned on trust assets, and other service charges, commissions and fees. Other operating income increased 8.0% to $29.5 million in 1998 from $27.3 million in 1997 with all four principal categories increasing from the prior year. Other operating income increased 13.1% to $27.3 million in 1997 from $24.1 million in 1996 primarily due to income provided by the Acquired Banks. Without giving effect to the Acquired Banks, operating income from each of the four principal categories except other service charges showed increases in 1997 over 1996. Increases in other operating income from 1997 to 1998 and from 1996 to 1997 were a function of changes in each of the principal categories, as discussed below. Service charges on deposit accounts increased 5.3% to $10.4 million in 1998 from $9.9 million in 1997 due primarily to increased overdraft fees. Service charges on deposit accounts increased 18.7% to $9.9 million in 1997 from $7.8 million in 1996. Of this increase, approximately $740,000 was attributable to the Acquired Banks, with the remainder resulting primarily from increased overdraft fees. Data processing fees increased 9.5% to $8.1 million in 1998 from $7.4 million in 1997 due primarily to a greater number of data processing customers using the Company's ATM network and a corresponding increase in transaction volumes. The Company's network expanded from 343 ATM locations at December 31, 1995 to 477 locations at year-end 1996, 630 locations at year-end 1997, and to 986 locations at year-end 1998. Although continued expansion of the Company's ATM network and increases in data processing fees are expected to continue, the Company does not expect to continue the rate of growth experienced in recent years. There were no increases in basic charges for data processing services in 1998, 1997 or 1996. Increases in operating income from data processing services for 1997 compared to the 1996 were mostly offset by non-recurring adjustments of $300,000 made in January 1996. - 26 -
Revenues from fiduciary activities increased 6.5% to $4.3 million in 1998 from $4.1 million in 1997 and 29.2% to $4.1 million in 1997 from $3.2 million in 1996. The increase in 1998 from 1997 was due to increases in the value of assets under trust management. Approximately $889,000 of the increase in 1997 from 1996 was attributable to trust services provided by the Acquired Banks, with the remainder resulting from increases in the value of assets under trust management. Other service charges, commissions and fees increased 22.1% to $4.6 million in 1998 from $3.8 million in 1997 and 32.67% to $3.8 million in 1997 from $2.9 million in 1996. The increase in 1998 from 1997 was primarily due to brokerage service fees. The Company began expanding the range and scope of brokerage services offered through its banking offices in December 1997 and currently employs seven registered brokerage representatives. The remaining increase in 1998 was attributable to increases in foreign exchange fees. The increase in other service charges, commissions and fees from 1996 to 1997 is principally attributable to the Acquired Banks. OREO gains are included net of provisions for OREO losses and losses on sales of OREO. Variations in net OREO income during the periods resulted principally from fluctuations in such gains and losses. OREO income is anticipated to decline as the number and value of OREO properties decrease. OREO income is directly related to prevailing economic conditions, and such income could decrease significantly should an unfavorable shift occur in the economic conditions of the Company's markets. In addition to the principal categories discussed above, other income decreased 41.3% to $1.7 million in 1997 from $2.8 million in 1996. The decrease was primarily attributable to the sale of certain merchant credit card processing assets in 1996. The sale included alignment with a third-party credit card processing provider that has enhanced the Company's ability to compete in this highly specialized area. OTHER OPERATING EXPENSES Other operating expenses increased 9.7% to $81.8 million in 1998 from $74.6 million in 1997. Significant components of this increase are discussed below. Other operating expenses increased 39.2% to $74.6 million in 1997 from $53.6 million in 1996. This increase resulted primarily from both direct and indirect expenses attributable to the Acquired Banks. Direct expenses totaled approximately $16.1 million in 1997. A significant portion of the remaining increase was due to various indirect expenses associated with the Company's need to increase its data processing support and other operational services to the FIBNA Banks which had been previously operated as dependent branch offices prior to their acquisition by the Company. The increases in administrative personnel and other resources to provide such support and services were necessary to facilitate integration of such banks into the Company's operations. In addition, goodwill associated with the acquisition of the Acquired Banks resulted in increased amortization expense of approximately $1.8 million from 1996 to 1997. Salaries and wages expense increased 11.1% to $32.7 million in 1998 from $29.4 million in 1997. This increase is primarily attributable to inflationary wage increases, the additional staffing requirements of the six new branch banks opened since August 1997 and the addition of administrative personnel providing support for the data processing division. Given the Company's present growth strategy, employee and related compensation expenses are expected to continue to increase. Increases in salaries and wages from 1996 to 1997 were due primarily to the direct and indirect expense attributable to the bank acquisitions, as discussed above. The indirect expenses were related particularly to the Company's data processing division and bank operation centers. The remainder of the increases in salaries, wages and benefits during these periods were principally inflationary in nature. Employee benefits expense increased 23.7% to $10.0 million in 1998 from $8.1 million in 1997. Approximately $961,000 of this increase is attributable to additional accruals for the increased value of stock appreciation rights resulting from significant increases in the appraised value of the Company's common stock during 1998. The remaining increase is attributable to increases in staffing levels as discussed above. Employee benefits expense increased 41.0% to $8.1 million in 1997 from $5.7 million in 1996 primarily due to the direct and indirect expense attributable to the bank acquisitions. - 27 -
Occupancy and furniture and equipment expenses have increased over the periods primarily as a result of the additional facilities associated with internal growth and bank acquisitions, the expansion of the ATM network and additional equipment used in the data processing division. Furthermore, these expenses have increased due to higher depreciation, maintenance and other costs related to the foregoing items and various other computer hardware and software, including upgrades, used in the Company's operations. FDIC deposit insurance premiums in 1998 of $215,000 were comparable to premiums in 1997, however, FDIC deposit insurance premiums increased to $206,000 in 1997 from $5,000 in 1996. This increase resulted from an increase in FDIC FICO bond assessment effective January 1, 1997. FDIC deposit insurance rates reflect the Company's "well-capitalized" rating by the FDIC. Other expenses primarily include advertising and public relations costs, legal, audit and other professional fees, and office supply, postage and telephone expenses. Other expenses increased 4.9% to $21.5 million in 1998 from $20.5 million in 1997 due primarily to increases in professional fees resulting from Company-wide sales and service training and employee development activities conducted during 1998. Other expenses increased 43.3% to $20.5 million in 1997 from $14.3 million in 1996 as a result of the direct and indirect costs associated with the Acquired Banks. Exclusive of these costs, during 1997 compared to 1996, other expenses increased approximately $484,000 due principally to consulting fees associated with revision of the Company's employee job evaluation system and accruals for financial planning activities. INCOME TAX EXPENSE The Company's effective federal tax rate was 32.5%, 33.3% and 33.3% for the years ended December 31, 1998, 1997 and 1996, respectively. State income tax applies only to pretax earnings of entities operating within Montana. The Company's effective state tax rate was 5.3%, 4.5% and 5.3% for years ended December 31, 1998, 1997 and 1996, respectively. Pretax earnings subject to Montana state income tax were approximately 57%, 57% and 67% of consolidated pretax earnings in 1998, 1997 and 1996, respectively. FINANCIAL CONDITION Total assets increased 10.9% to $2,479 million as of December 31, 1998 from $2,235 million as of December 31, 1997. This increase was due principally to increases in investment securities funded through internally generated deposit growth. Total assets increased 8.3% to $2,235 million as of December 31, 1997 from $2,064 million as of December 31, 1996. This increase resulted primarily from internal growth in the Company's loan portfolio funded by increases in repurchase agreements and deposits. LOANS Total loans increased 1.0% to $1,484 million as of December 31, 1998 from $1,470 million as of December 31, 1997. The Company's loan portfolio was reclassified in 1998 to aggregate all loans secured by real estate (i.e., agricultural, commercial, consumer, residential and construction) in the real estate category. These reclassifications have been made to all historical amounts to conform to the 1998 presentation. As shown below, growth in commercial loans was partially offset by decreases in real estate, agriculture and consumer loans. Management attributes this decline in growth rate to increasingly competitive loan pricing by competitors in the Company's market area and the Company's unwillingness to expand credit risk to meet competition for certain consumer loans. As of December 31, 1997, total loans increased 6.9% to $1,470 million from $1,375 million as of December 31, 1996. All categories of loans except commercial loans showed increases in volumes during this period due to strong economic conditions in the Company's markets and internal growth resulting from the Company's marketing activities. The Company's loan portfolio consists of a mix of commercial, consumer, real estate, agricultural and other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities served by the Company. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could have a material adverse effect on the borrowers' abilities to repay their loans. - 28 -
The following tables present the composition of the Company's loan portfolio as of the dates indicated: <TABLE> <CAPTION> LOANS OUTSTANDING - -------------------------------------------------------------------------------------------------------------------- As of December 31, ---------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 Percent 1997 Percent 1996 Percent - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> LOANS Real estate(1) $ 681,670 45.9% $ 683,212 46.5% $ 600,007 43.6% Consumer 379,197 25.5 412,231 28.0 410,258 29.8 Commercial 311,040 21.0 261,513 17.8 272,888 19.8 Agricultural 106,707 7.2 107,649 7.3 90,883 6.6 Other loans 5,845 0.4 5,809 0.4 1,443 0.2 - -------------------------------------------------------------------------------------------------------------------- Total loans 1,484,459 100.0% 1,470,414 100.0% 1,375,479 100.0% - -------------------------------------------------------------------------------------------------------------------- Less allowance for loan losses 28,803 28,180 27,797 - -------------------------------------------------------------------------------------------------------------------- Net loans $ 1,455,656 1,442,234 $ 1,347,682 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Ratio of allowance to total loans 1.94% 1.92% 2.02% - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- <CAPTION> - ------------------------------------------------------------------------------------------- As of December 31, ------------------------------------------------------ (DOLLARS IN THOUSANDS) 1995 Percent 1994 Percent - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> LOANS Real estate(1) $ 384,349 44.2% $ 291,011 38.8% Consumer 247,665 28.5 234,680 31.2 Commercial 166,602 19.1 161,822 21.5 Agricultural 70,001 8.0 62,589 8.3 Other loans 1,761 0.2 1,416 0.2 - ------------------------------------------------------------------------------------------- Total loans 870,378 100.0% 751,518 100.0% - ------------------------------------------------------------------------------------------- Less allowance for loan losses 15,171 13,726 - ------------------------------------------------------------------------------------------- Net loans $ 855,207 $ 737,792 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Ratio of allowance to total loans 1.74% 1.83% - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- </TABLE> (1) Includes consumer, commercial and agricultural loans secured by real estate as follows: <TABLE> <CAPTION> 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Consumer $ 102,622 93,510 74,607 53,046 42,687 Commercial 351,229 264,842 198,570 145,380 100,468 Agricultural 60,459 56,397 52,689 43,826 35,605 </TABLE> The following table presents the maturity distribution of the Company's loan portfolio and the sensitivity of the loans to changes in interest rates as of December 31, 1998: <TABLE> <CAPTION> MATURITIES AND INTEREST RATE SENSITIVITIES - ---------------------------------------------------------------------------------------- Within One Year to After (DOLLARS IN THOUSANDS) One Year Five Years Five Years Total - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Real estate $ 233,321 289,290 159,059 681,670 Consumer 163,811 205,788 9,598 379,197 Commercial 184,384 101,386 25,270 311,040 Agriculture 86,705 18,095 1,907 106,707 Other loans 5,845 - - 5,845 - ---------------------------------------------------------------------------------------- $ 674,066 614,559 195,834 1,484,459 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Loans at fixed interest rates $ 362,587 469,328 89,929 921,844 Loans at variable interest rates 300,780 145,231 105,905 551,916 Nonaccrual loans 10,699 - - 10,699 - ---------------------------------------------------------------------------------------- $ 674,066 614,559 195,834 1,484,459 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- </TABLE> For additional information concerning the Company's loan portfolio and its credit administration policies, see Part I, Item 1, "Business-Lending Activities." INVESTMENT SECURITIES The Company's investment portfolio is managed to result in obtaining the highest yield while meeting the Company's risk tolerance and liquidity needs and to satisfy pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, tax exempt securities, corporate securities, other mortgage-backed securities, and other equity securities. Federal funds sold are additional investments which are not classified as investment securities. Investment securities classified as available-for-sale are recorded at fair market value, while investment securities classified as held-to-maturity are recorded at cost. Unrealized gains or losses, net of the deferred tax effect, are reported as increases or decreases in stockholders' equity for available-for-sale securities. - 29 -
Investment securities increased 59.5% to $679 million as of December 31, 1998 from $426 million as of December 31, 1997 as a result of growth in funding sources exceeding loan growth. The majority of this increase occurred in U.S. Government agencies, tax exempt securities and other mortgage-backed securities and resulted in a significant increase in the duration of the portfolio. Investment securities increased 5.5% to $426 million as of December 31, 1997 from $404 million as of December 31, 1996. This increase resulted from the investment securities held by the Acquired Banks at the time of acquisition. As of December 31, 1998, there were no concentrations of investments greater than 10% of the Company's stockholders' equity in any individual security issuer, other than the U.S. Treasury and U.S. Government agencies. The following table sets forth the book value, percentage of total investment securities and average yield for the Company's investment securities as of December 31, 1998. <TABLE> <CAPTION> SECURITIES MATURITIES AND YIELD - ------------------------------------------------------------------------------- % of Total Book Investment Average (DOLLARS IN THOUSANDS) Value Securities Yield(1) - ------------------------------------------------------------------------------- <S> <C> <C> <C> U.S. TREASURY SECURITIES Maturing within one year $ 40,575 6.0 5.82% Maturing in one to five years 121,330 17.9 6.11 - ------------------------------------------------------------------------------- 161,905 Mark-to-market adjustments on securities available-for-sale 1,937 - ------------------------------------------------------------------------------- Total 163,842 24.1 6.03 - ------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY SECURITIES Maturing within one year 85,158 12.5 5.89 Maturing in one to five years 71,284 10.5 5.90 - ------------------------------------------------------------------------------- 156,442 Mark-to-market adjustments on securities available-for-sale 1,124 - ------------------------------------------------------------------------------- Total 157,566 23.2 5.90 - ------------------------------------------------------------------------------- TAX EXEMPT SECURITIES Maturing within one year 2,685 0.4 8.02 Maturing in one to five years 12,948 1.9 8.03 Maturing in five to ten years 51,292 7.6 6.97 Maturing after ten years 1,198 0.2 9.08 - ------------------------------------------------------------------------------- 68,123 Mark-to-market adjustments on securities available-for-sale 291 - ------------------------------------------------------------------------------- Total 68,414 10.1 7.25 - ------------------------------------------------------------------------------- CORPORATE SECURITIES Maturing within one year 44,525 6.6 5.72 Maturing in one to five years 20,104 3.0 6.04 - ------------------------------------------------------------------------------- 64,629 Mark-to-market adjustments on securities available-for-sale 44 - ------------------------------------------------------------------------------- Total 64,673 9.6 5.80 - ------------------------------------------------------------------------------- OTHER MORTGAGE-BACKED SECURITIES Maturing within one year 55,438 8.2 6.43 Maturing in one to five years 79,819 11.8 6.39 Maturing in one to five years 17,985 2.7 6.42 Maturing after ten years 60,002 8.8 6.26 - ------------------------------------------------------------------------------- 213,244 Mark-to-market adjustments on securities available-for-sale (54) - ------------------------------------------------------------------------------- Total 213,190 31.4 6.37 - ------------------------------------------------------------------------------- - 30 -
<CAPTION> SECURITIES MATURITIES AND YIELD, CONTINUED - ------------------------------------------------------------------------------- % of Total Book Investment Average (DOLLARS IN THOUSANDS) Value Securities Yield(1) - ------------------------------------------------------------------------------- <S> <C> <C> <C> Equity securities with no stated maturity 10,819 1.6 Mark-to-market adjustments on securities available-for-sale 174 - ------------------------------------------------------------------------------- Total 10,993 1.6 - ------------------------------------------------------------------------------- Total $ 678,678 100.0 6.11 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- </TABLE> (1) Average yields have been calculated on a fully-taxable basis. The maturities noted above doe not reflect $85,103 of investment securities with call provisions exercisable within the next year. For additional information concerning investment securities, see "Notes to Consolidated Financial Statements - Investment Securities" included in Part IV, Item 14. DEPOSITS The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base, which is the Company's primary funding source. The Company's deposits consist primarily of the following interest bearing accounts: demand deposits, savings accounts, IRAs and time deposits (CDs). For additional information concerning the Company's deposits, including its use of repurchase agreements, as discussed below, see Part I, Item 1, "Business-Funding Sources." Deposits increased 13.1% to $2,042 million as of December 31, 1998, as compared to $1,805 million as of December 31, 1997 and 7.5% to $1,805 million as of December 31, 1997 compared to $1,679 million as of December 31, 1996. These increases resulted from internal growth in 1997 and 1998. For additional information concerning customer deposits as of December 31, 1998 and 1997, see "Notes to Consolidated Financial Statements - Deposits" included in Part IV, Item 14. OTHER BORROWINGS In addition to deposits, the Company also uses repurchase agreements with commercial depositors as significant sources of funding and, on a seasonal basis, federal funds purchased. The following table sets forth certain information regarding these two sources of funding as of the dates indicated: <TABLE> <CAPTION> As of and for the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Federal funds purchased: Balance at period end $ 1,675 4,025 13,450 Average balance 1,321 28,651 18,687 Maximum amount outstanding at any month-end 15,340 83,185 56,700 Average interest rate: During the year 4.99% 5.46 5.58 At period end 4.12 5.95 5.61 Securities sold under repurchase agreements: Balance at period end $ 173,593 176,350 129,137 Average balance 162,583 141,825 101,046 Maximum amount outstanding at any month-end 173,593 176,350 129,137 Average interest rate: During the year 4.32% 4.69 4.46 At period end 3.94 4.61 4.42 </TABLE> - 31 -
NON-PERFORMING AND CLASSIFIED ASSETS Federal regulations require that each financial institution classify its assets on a regular basis. Management generally places loans on non-accrual when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Company has granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. OREO consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table sets forth information regarding non-performing assets as of the dates indicated: <TABLE> <CAPTION> As of December 31, 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Non-performing loans: Nonaccrual loans $ 10,699 9,681 6,822 3,632 3,134 Accruing loans past due 90 days or more 4,039 4,883 6,432 1,711 534 Restructured loans 3,306 928 1,763 1,755 1,619 - ----------------------------------------------------------------------------------------------------- Total non-performing loans 18,044 15,492 15,017 7,098 5,287 OREO 1,113 1,362 1,546 1,349 1,803 - ----------------------------------------------------------------------------------------------------- Total non-performing assets $ 19,157 16,854 16,563 8,447 7,090 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Non-performing assets to total loans and OREO 1.29% 1.15% 1.20% 0.97% 0.94% - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> Non-performing loans increased 16.5% to $18 million as of December 31, 1998 as compared to $15 million as of December 31, 1997 due to slight deteriorations in the agricultural and consumer market sectors. Non-performing loans increased 3.2% to $15 million as of December 31, 1997 as compared to $15 million as of December 31, 1996. The increase was due to the non-performing loans held by the Acquired Banks, an increase in the loan portfolio and a slight deterioration in the agricultural and consumer market sector. Approximately $1,062,000, $763,000, $405,000, $318,000 and $296,000 of gross interest income would have been accrued if all loans on non-accrual had been current in accordance with their original terms for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings with a provision for losses on foreclosed property in the period in which they are identified. The Company reviews and classifies its loans on a regular basis according to three classifications: "Substandard," "Doubtful" and "Loss." Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The following table sets forth classified loans as of the dates indicated. <TABLE> <CAPTION> As of December 31, 1998 1997 1996 - ---------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Substandard $ 43,449 34,161 19,994 Doubtful 3,561 2,468 2,321 Loss 3,033 2,584 2,264 - ---------------------------------------------------------------------------- Total $50,043 39,213 24,579 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Classified loans to total loans 3.37% 2.67% 1.79% Allowance for loan losses to classified loans 57.56% 71.86% 113.09% - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- </TABLE> - 32 -
Loans classified as substandard increased 27.2% to $43.4 million as of December 31, 1998. Approximately $9.0 million of the increase is the result of downgrading the loans of three commercial borrowers. With the exception of these classified loans, management is not aware of any loans as of December 31, 1998 where the known credit problems of the borrowers would cause management to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being included in the non-performing asset table above at some future date. Management cannot, however, predict the extent to which economic conditions in the Company's market areas may worsen or the full impact such conditions may have on the Company's loan portfolio. Accordingly, there can be no assurances that other loans will not become 90 days or more past due, be placed on non-accrual status or become restructured loans or OREO in the future. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in its loan portfolio and economic conditions in the Company's market areas. See "Provision for Loan Losses" herein. The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Consumer loans are generally charged off when they become 120 days past due. Other loans, or portions thereof, are charged off when they become 180 days past due unless they are well-secured and in the process of collection. Recoveries are generally recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses as of the dates and for the years indicated. <TABLE> <CAPTION> As of and for the years ended December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Balance at the beginning of period $ 28,180 27,797 15,171 13,726 13,373 Beginning allowance of acquired banks - - 10,553 917 - Charge-offs: Real estate 370 141 27 20 53 Consumer 3,988 5,607 2,384 1,679 1,425 Commercial 1,920 1,132 1,127 393 398 Agricultural 349 71 220 25 4 - ---------------------------------------------------------------------------------------------------- Total charge-offs 6,627 6,951 3,758 2,117 1,880 Recoveries: Real estate 213 246 9 119 36 Consumer 1,500 1,816 974 557 472 Commercial 1,315 732 850 252 299 Agricultural 52 300 154 88 82 - ---------------------------------------------------------------------------------------------------- Total recoveries 3,080 3,094 1,987 1,016 889 - ---------------------------------------------------------------------------------------------------- Net charge-offs 3,547 3,857 1,771 1,101 991 Provision for loan losses 4,170 4,240 3,844 1,629 1,344 - ---------------------------------------------------------------------------------------------------- Balance at end of period $ 28,803 28,180 27,797 15,171 13,726 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- Period end loans 1,484,459 1,470,414 1,375,479 870,378 751,518 Average loans 1,469,741 1,441,800 1,014,901 837,288 705,690 Net charge-offs to average loans 0.24% 0.27% 0.17% 0.13% 0.14% Allowance to period end loans 1.94% 1.92% 2.02% 1.74% 1.83% - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- </TABLE> - 33 -
Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the allowance for loan losses. Although management believes that the allowance for loan losses is adequate to provide for both potential losses and estimated inherent losses in the portfolio, future provisions will be subject to continuing evaluations of the inherent risk in the portfolio and if the economy declines or asset quality deteriorates, material additional provisions could be required. The following table provides a summary of the allocation of the allowance for loan losses for specific loan categories as of the dates indicated. The allocations presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amount available for future losses that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio. <TABLE> <CAPTION> ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) As of December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Allocated % Of Allocated % Of Allocated % Of Reserves Loans Reserves Loans Reserves Loans - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Real estate $207 45.9% $ - 46.5% $ - 43.6% Consumer 1,708 25.5 1,383 28.0 1,280 29.8 Commercial 834 21.0 870 17.8 594 19.8 Agricultural 284 7.2 331 7.3 390 6.6 Other loans - 0.4 - 0.4 - 0.2 - ------------------------------------------------------------------------------------------------------------------ Total allocated 3,033 2,584 2,264 Unallocated 25,770 25,596 25,533 - ------------------------------------------------------------------------------------------------------------------ Totals $28,803 100.0% $ 28,180 100.0% $27,797 100.0% - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ <CAPTION> (DOLLARS IN THOUSANDS) - ----------------------------------------------------------------------------------------- As of December 31, 1995 1994 - ----------------------------------------------------------------------------------------- Allocated % Of Allocated % Of Reserves Loans Reserves Loans - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Real estate $ - 44.2% $ 3 38.8% Consumer 1,118 28.5 1,154 31.2 Commercial 789 19.1 791 21.5 Agricultural 322 8.0 280 8.3 Other loans - 0.2 - 0.2 - ----------------------------------------------------------------------------------------- Total allocated 2,229 2,228 Unallocated 12,942 11,498 - ----------------------------------------------------------------------------------------- Totals $15,171 100.0% $13,726 100.0% - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- </TABLE> Allocated reserves as presented above for 1997 and prior years have not been restated to reflect the reclassifications of loans secured by real estate included in other categories of loans in those years (e.g., agricultural, commercial and consumer). Comparable data for allocated reserves was not readily available for 1997 and prior years to give effect to the reclassification of real estate loans and recreation of such information was not deemed practical. Management does not believe that the impact on trends presented without such reclassification is significant. LIQUIDITY AND CASH FLOW The objective of liquidity management is to maintain the Company's ability to meet the day-to-day cash flow requirements of its customers who either wish to withdraw funds or require funds to meet their credit needs. The Company manages its liquidity position to meet the needs of its customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of its stockholders. The Company monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position, principally through deposit receipts and check payments; loan originations, extensions and repayments; and management of investment securities. Net cash provided by operating activities, primarily representing net income, totaled $39 million for 1998, $44 million for 1997 and $29 million for 1996. Net cash used for investing activities totaled $277 million for 1998, $128 million for 1997 and $122 million for 1996. The funds used for investing activities primarily represent increases in loans and investments in connection with internal growth in 1998 and 1997 and acquisitions and internal growth in 1996. The primary financing activities of the Company are deposits, borrowings and capital. The Company's current liquidity position is also supported by the management of its investment portfolio, which provides a structured flow of maturing and reinvestable funds that could be converted to cash, should the need arise. Maturing balances in the Company's loan portfolio also provides options for cash flow management. The ability to redeploy these funds is an important source of immediate to long-term liquidity. Additional sources of liquidity include Federal funds lines, other borrowings and access to the capital markets. - 34 -
As a holding company, FIBS is a corporation separate and apart from the Banks, and therefore, provides for its own liquidity. Substantially all of FIBS's revenues are obtained from management fees, dividends declared and paid by the Banks and net revenues of the data processing division. As of December 31, 1998, the Banks had approximately $15 million available to be paid as dividends to FIBS. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to FIBS. See Part I, Item 1, "Business-Regulation and Supervision." Management of FIBS believes that such restrictions will not have an impact on the ability of FIBS to meet its ongoing cash obligations. In connection with the acquisition of the FIBNA Banks, the Company obtained a revolving term loan and issued subordinated notes and shares of noncumulative perpetual preferred stock. The revolving term loan bears interest at variable rates and was issued by a syndicate of banks. The loan expires in December 2003, and is secured by all of the outstanding capital stock of the Banks. The available borrowing amount under the loan is reduced by $2 million on a semi-annual basis. The loan contains various restrictions dealing with, among other things, minimum capital ratios, the sale or issuance of capital stock and the maximum amount of dividends. As of December 31, 1998, no amounts were outstanding under the revolving term loan and the borrowing capacity available thereunder was $8 million. The subordinated notes are held by an institutional investor, bear interest at 7.5% per annum, are unsecured and mature in increasing annual payments during the period from October 2002 to October 2006. For additional information concerning the revolving term loan and the subordinated notes, see "Notes to Consolidated Financial Statements - Long Term Debt" included in Part IV, Item 14. The noncumulative perpetual preferred stock was redeemed on November 7, 1997 with a portion of the proceeds from issuance of trust preferred securities by FIB Capital. The trust preferred securities are unsecured, bear interest at a rate of 8.625%, and mature on December 1, 2027. Interest distributions are payable quarterly, however, the Company may defer interest payments at any time for a period not exceeding 20 consecutive quarters. The trust preferred securities may be redeemed prior to maturity at the Company's option on or after December 1, 2002 or at any time in the event of unfavorable changes in tax laws or regulations in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company has guaranteed the payment of distributions and payments for redemption or liquidation of the trust preferred securities to the extent of funds held by FIB Capital. The remaining proceeds from the issuance of trust preferred securities were used to reduce the Company's revolving term loan. For additional information concerning the trust preferred securities see "Notes to Consolidated Financial Statements - -Mandatorily Redeemable Preferred Securities of Subsidiary Trust" included in Part IV, Item 14. CAPITAL RESOURCES Stockholders' equity increased 12.3% to $164 million as of December 31, 1998. This increase was due primarily to increases in retained earnings. Stockholders' equity decreased 0.3% to $146 million as of December 31, 1997 from $146 million as of December 31, 1996 due to the redemption of $20 million of noncumulative perpetual preferred stock which was partially offset by an increase in retained earnings. Stockholders' equity is influenced primarily by earnings, dividends and, to a lesser extent, sales and redemptions of common stock involving employees of the Company. For the years ended December 31, 1998, 1997 and 1996, the Company paid aggregate cash dividends to stockholders of $8 million, $9 million and $6 million, respectively. Pursuant to FDICIA, the Federal Reserve and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 1998, each of the Banks had levels of capital which met or exceeded the well-capitalized guidelines. For additional information concerning the capital levels of the Company, see "Notes to Consolidated Financial Statements - Regulatory Matters" contained in Part IV, Item 14. INTEREST RATE RISK MANAGEMENT The Company's primary earnings source is the net interest margin, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, and the mix of interest-bearing assets and liabilities. - 35 -
The ability to optimize the net interest margin is largely dependent upon the achievement of an interest rate spread which can be managed during periods of fluctuating interest rates. Interest sensitivity is a measure of the extent to which net interest income will be affected by market interest rates over a period of time. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest bearing liabilities which either reprice or mature within a given period of time. The difference is known as interest rate sensitivity gap. The following table shows interest rate sensitivity gaps for different intervals as of December 31, 1998: <TABLE> <CAPTION> Three Three One Months Months Year to After (DOLLARS IN THOUSANDS) or Less to One Year Five Years Five Years Total - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS: Loans(1) $ 571,328 220,640 546,298 135,494 1,473,760 Investment securities(2) 114,254 127,054 308,091 129,279 678,678 Interest-bearing deposits in banks 17,562 - - - 17,562 Federal funds sold 31,930 - - - 31,930 - ----------------------------------------------------------------------------------------------------- Total interest-earning assets $ 735,074 347,694 854,389 264,773 2,201,930 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES: Interest-bearing demand accounts(3) $ 26,624 79,872 248,490 - 354,986 Savings deposits(3) 381,146 30,025 93,411 - 504,582 Time deposits, $100 or more 88,136 87,936 44,037 - 220,109 Other time deposits 167,117 220,303 183,396 441 571,257 Federal funds purchased 1,675 - - - 1,675 Securities sold under repurchase agreements 173,593 - - - 173,593 Other borrowed funds 9,828 - - - 9,828 Long-term debt 387 118 7,483 16,300 24,288 Trust preferred securities - - - 40,000 40,000 - ----------------------------------------------------------------------------------------------------- Total interest-bearing liabilities and trust preferred securities $ 848,506 418,254 576,817 56,741 1,900,318 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Rate gap (113,432) (70,560) 277,572 208,032 301,612 Cumulative rate gap (113,432) (183,992) 93,580 301,612 Cumulative rate gap as a percentage of total interest-earning assets (5.15)% (8.36)% 4.25% 13.70% - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> Assumptions used: (1) Does not include nonaccrual loans of $10,699. (2) Adjusted to reflect: (a) expected shorter maturities based upon the Company's historical experience of early prepayments of principal, and (b) the redemption of callable securities on their next call date. (3) Historical analysis shows that these deposit categories, while technically subject to immediate withdrawal, actually display sensitivity characteristics that generally fall within one and five years. The allocation presented is based on that historical analysis. As noted in footnote 3 above, interest-bearing demand accounts and savings deposits are allocated based on historical analysis of their interest sensitivity characteristics although they are technically subject to immediate withdrawal. If these deposits were included in the three month or less category, the above table would reflect a negative three month gap of $565 million, a negative cumulative one year gap of $526 million and a positive cumulative one to five year gap of $96 million. - 36 -
The balance sheet structure is primarily short-term in nature with most assets and liabilities repricing or maturing in less than five years. Management monitors the sensitivity of net interest margin by utilizing income simulation models and traditional gap analysis. The income simulation model involves a degree of estimation based on certain assumptions management believes to be reasonable including estimated cash flows, prepayments, repricing characteristics, actual maturities, deposit growth and retention, and the relative sensitivity of assets and liabilities to change in market interest rates. The relative sensitivity is important to consider since the Company's deposit base is not subject to the same degree of interest sensitivity as its assets. The Company attempts to maintain a mix of interest earning assets and deposits such that no more than 5% of the net interest margin will be at risk should interest rates vary one percent over a one year period. However, there can be no assurance as to the actual effect changes in interest rates will have on the Company's net interest margin. In evaluating exposure to interest rate risk, management does not view the gap amounts in the preceding table as presenting an unusually high risk potential. However, no assurances can be given that the Company is not at risk in the event of rate increases or decreases. YEAR 2000 During 1997 the Company established a Year 2000 Taskforce charged with the responsibility of ensuring all internal and external information and non-information technology systems critical to business functions are Year 2000 compliant. The taskforce developed a five-phase "key step plan." Each phase is identified and described below: - Education - During this phase, Year 2000 issues relating to the Company are identified, resources are committed and an overall strategy is developed. - Assessment - during the assessment phase three areas of concern are identified: internal computing systems and programs consisting of hardware, software, networks, processing platforms and computer programs; environmental and non-information technology systems including security systems, heating, ventilation and air conditioning systems, elevators, and vault systems; and external vendors and suppliers including entities providing the Company with hardware, software, and office equipment. - Renovation - Code enhancements, hardware and software upgrades, system replacements and vendor certifications from hardware, software and office equipment providers are completed during the renovation phase. - Validation - In this phase, systems will be tested to ensure they will function properly in the Year 2000. Any errors noted during the validation phase will be corrected and the systems will be retested. This phase will continue until all critical systems are deemed compliant. - Special Support - The Company will provide staffing support to monitor all systems as the new century approaches and develop contingency plans in the event a critical system fails. Currently, the Company has completed the education, assessment and renovation phases of the key step plan and the validation phase is substantially complete for all critical business systems. Validation will continue through 1999 as new software releases and hardware upgrades are received and implemented. Validation of all secondary systems is currently expected to be completed by September 30, 1999. To date, the validation phase has not revealed any material Year 2000 issues in any of the Company's internal systems or programs. The Company's internal audit department will audit validation results. The Company has initiated communications about Year 2000 issues with each of its material service providers, including, without limitation, providers of utilities, suppliers of telecommunications services, and various industry groups, clearing houses and federal and state regulatory agencies. While the Company does not have any reason to believe these service providers will experience Year 2000 problems that will affect their provision of services to the Company, the Company has not yet received sufficient information from these parties to predict the outcomes of their Year 2000 efforts. There can be no assurance that Year 2000 problems experienced by these providers will not materially and adversely affect the Company's operations. The Company is in the process of developing a contingency plan. This plan, called the Business Resumption Contingency Plan, will address mitigation of risks associated with system failures at critical dates including staffing issues, security concerns, customer communication, utility failures, hot-site identification and backup system identification. This plan is currently anticipated to be completed by June 30, 1999. - 37 -
Management currently estimates total costs of the Company's Year 2000 compliance to be less than $300,000, $125,000 of which has already been incurred. Of the 39 critical business systems identified, only one system is an internally developed system. The cost of renovation of external systems is generally included in the annual maintenance fees paid to suppliers and has not been included in the cost estimates presented. All Year 2000 costs are expensed as incurred. There are many risks associated with the Year 2000 issue, including the possibility of a failure of third parties to remediate their own Year 2000 issues. The failure of third parties with which the Company has financial or operational relationships such as clearing organizations, regulatory agencies, business customers, suppliers and utilities, to remediate their technology systems in a timely manner could result in a material financial risk to the Company. While the Company exercises no control over such third parties, the Company's Year 2000 project plan includes a survey assessment of critical third parties response and remediation plans and their potential impact to the Company. The Company's expectations about future costs and the timely completion of its Year 2000 modifications are subject to uncertainties that could cause actual results to differ markedly from what has been discussed above. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The provisions of SFAS No. 130 apply to financial statements issued for periods beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company adopted the provisions of SFAS No. 130 as of January 1, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement requires public business enterprises to disclose selected information about operating segments including segment income, revenues and asset data. Operating segments, as defined in SFAS No. 131, would include those components for which financial information is available and evaluated regularly by the chief operating decision maker in assessing performance and making resource allocation determinations for operating components such as those which contribute ten percent or more of combined revenue, income or assets. The Company adopted the provisions of SFAS No. 131 as of January 1, 1998. As of December 31, 1998, the Company had no reportable segments as defined by SFAS No. 131. In June 1997, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for all fiscal quarters or fiscal years beginning after June 15, 1999. Management expects that adoption will not have a material effect on the consolidated financial statements or results of operations of the Company. As of December 31, 1998, the Company was not engaged in hedging activities nor did it hold any derivative instruments which will be affected by the statement. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk. The business of the Company and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans and investment securities) which are primarily funded by interest-bearing liabilities (deposits and indebtedness). Such financial instruments have varying levels of sensitivity to changes in market interest rates. Interest rate risk results when, due to different maturity dates and repricing intervals, interest rate indices for interest-earning assets decrease relative to interest-bearing liabilities, thereby creating a risk of decreased net earnings and cash flow. The following tables provide information about the Company's market sensitive financial instruments, categorized by maturity and the instruments' fair values at December 31, 1998 and December 31, 1997. The table constitutes a "forward-looking statement." The Company's major market risk exposure is changing interest rates. For a description of the Company's policies with respect to managing risks associated with changing interest rates, see Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation-Financial Condition-Interest Rate Risk Management." - 38 -
Although the Company characterizes some of its interest-sensitive assets as securities available-for-sale, such securities are not purchased with a view to sell in the near term. Rather, such securities may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk. Thus, all interest-sensitive assets described below are non-trading. See "Notes to Consolidated Financial Statements-Summary of Significant Accounting Policies" included in Part IV, Item 14. <TABLE> <CAPTION> December 31, 1998 Expected Maturity/Principal Repayment ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST-SENSITIVE ASSETS: Cash and short-term investments $ 204,019 - - - - - Net loans 715,319 248,998 175,107 120,000 75,906 127,006 Securities available-for-sale 116,157 60,449 56,030 54,483 19,612 72,662 Securities held-to-maturity 112,113 42,987 41,051 32,760 3,788 70,024 - ----------------------------------------------------------------------------------------------------------------- INTEREST-SENSITIVE LIABILITIES AND TRUST PREFERRED SECURITIES: Total deposits excluding time deposits 634,966 131,914 131,914 351,772 - - Time deposits 577,002 136,309 55,688 12,539 11,588 335 Federal funds purchased 1,675 - - - - - Securities sold under repurchase agreements 173,593 - - - - - Other borrowed funds 9,828 - - - - - Long-term debt 2,111 1,707 1,538 4,094 3,881 12,642 Trust preferred securities - - - - - 41,600 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- <CAPTION> December 31, 1998 Expected Maturity/Principal Repayment ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002 Thereafter - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST-SENSITIVE ASSETS: Cash and short-term investments $ 229,147 - - - - - Net loans 572,477 221,485 173,478 129,847 116,771 217,010 Securities available-for-sale 41,720 12,284 50,877 20,856 33,552 29,361 Securities held-to-maturity 90,606 56,067 32,356 36,723 14,601 7,769 - ----------------------------------------------------------------------------------------------------------------- INTEREST-SENSITIVE LIABILITIES AND TRUST PREFERRED SECURITIES: Total deposits excluding time deposits 553,856 194,257 194,257 175,317 - - Time deposits 463,907 160,633 49,381 11,416 10,193 474 Federal funds purchased 4,025 - - - - - Securities sold under repurchase agreements 176,350 - - - - - Other borrowed funds 11,591 - - - - - Long-term debt 489 667 135 51 4,151 26,033 Trust preferred securities - - - - - 43,600 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- </TABLE> The prepayment projections of net loans are based on experience and do not take into account any allowance for loan losses. The expected maturities of securities are based upon contractual maturities adjusted for projected prepayments of principal and assumes no reinvestment of proceeds. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. All other financial instruments are stated at contractual maturities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of FIBS and subsidiaries are contained elsewhere herein [see Item 14(a)1]: Report of KPMG LLP, Independent Auditors Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Income - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements - 39 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following table sets forth information concerning each of the directors and executive officers of the Company: <TABLE> <CAPTION> Name Age Position ----- ---- --------- <S> <C> <C> Homer A. Scott, Jr. 64 Chairman of the Board James R. Scott 49 Vice Chairman of the Board Thomas W. Scott 55 Chief Executive Officer and Director Lyle R. Knight 53 President, Chief Operating Officer and Director Terrill R. Moore 46 Senior Vice President, Chief Financial Officer and Secretary William G. Wilson 59 Senior Vice President Edward Garding 49 Senior Vice President Dan S. Scott 67 Director Randy Scott 45 Director John M. Heyneman 31 Director Joel Long 58 Director James Haugh 61 Director </TABLE> HOMER A. SCOTT, JR. has been a director of FIBS since 1971 and the Chairman of the Board since 1988. Mr. Scott has served as a director of Montana-Dakota Utilities Resources Group, Inc. since 1983. Mr. Scott is the brother of James R. Scott, Thomas W. Scott and Dan S. Scott and the uncle of John M. Heyneman. JAMES R. SCOTT has been a director of FIBS since 1971 and the Vice Chairman of the Board since January 1990. Currently, Mr. Scott is also President of the First Interstate Bank Foundation. Mr. Scott is the brother of Homer A. Scott, Jr., Thomas W. Scott and Dan S. Scott and the uncle of John M. Heyneman. THOMAS W. SCOTT has been a director of FIBS since 1971 and has served as Chief Executive Officer of FIBS since 1978. Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott and Dan S. Scott and the uncle of John M. Heyneman. LYLE R. KNIGHT has been a director of FIBS and has served as President and Chief Operating Officer of FIBS since May 1998. Prior to FIBS, Mr. Knight has 28 years of bank management experience with multi-branch banks in Arizona and Nevada, most recently as President of Pacific Century Bank of Arizona. From 1995 to 1997, Mr. Knight was a consultant to Norwest Banks of Arizona with responsibilities for business and community development, strategic planning and other special projects. TERRILL R. MOORE has been a Senior Vice President, the Chief Financial Officer and Secretary of FIBS since November 1989, and served in various finance and accounting positions within the Company since April 1979. Mr. Moore was formerly a manager with KPMG LLP. WILLIAM G. WILSON has been a Senior Vice President of FIBS since 1983. He was also Chief Financial Officer of FIBS until November 1989. EDWARD GARDING has been a Senior Vice President of FIBS since September 1996. In addition, Mr. Garding has been President of FIB Montana and President of FIB Wyoming since October 1997. Prior to joining the FIBS management team in 1996, Mr. Garding has served in various management positions within the Company since 1971, including President of the Sheridan, Wyoming branch of FIB Wyoming from 1988 to 1996. - 40 -
DAN S. SCOTT has been a director of FIBS since 1971. Mr. Scott has served as President and General Manager of Padlock Ranch Co. since 1970. Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott and Thomas W. Scott and the uncle of John M. Heyneman and the father of Randy Scott. RANDY SCOTT has been a director of FIBS since August 1993. Currently, Mr. Scott is the managing general partner of the Nbar5 Limited Partnership. Previously, Mr. Scott worked in various capacities for the Company over a period of nineteen years. From 1991 until 1996, Mr. Scott was a trust officer in FIB Montana's trust division. From 1996 through 1998, Mr. Scott worked part time as a consultant to the Company, during which period he obtained his credentials as a certified financial planner. Mr. Scott is the son of Dan S. Scott and the nephew of Homer A. Scott, Jr., James R. Scott and Thomas W. Scott, and the cousin of John M. Heyneman. JOHN M. HEYNEMAN has been a director of the Company since March 1998. He received a bachelor of arts degree from Carlton College in 1989 and a masters degree in plant, soil and environmental sciences from Montana State University in 1998. Prior to entering his masters program at Montana State University, Mr. Heyneman worked in various jobs in the U.S. and abroad, most recently as an international representative for Latin America Sales Corporation, a petroleum processing equipment manufacturer. Currently, Mr. Heyneman is assistant manager at the Padlock Ranch Co. Mr. Heyneman is the nephew of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott and Dan S. Scott, and the cousin of Randy Scott. JOEL LONG has been a director of FIBS since May 1996. Mr. Long has been the owner and Chairman of the Board of JTL Group, Inc., a construction firm doing business in Montana and Wyoming, since 1990. JAMES HAUGH has been a director of the Company since November 1997. Mr. Haugh formed American Capital LLC, a financial consulting firm, in October 1994 and has operated this firm since its inception. Prior to forming American Capital LLC, Mr. Haugh was a partner in the accounting firm of KPMG LLP. BOARD COMMITTEE The Company's compensation committee is comprised of Homer A. Scott, Jr., James R. Scott, Dan S. Scott, James Haugh and Joel Long. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE ACT") Because the Company does not have a class of equity securities registered under the Exchange Act, officers, directors and shareholders owning more than 10% of the common stock are not required to file any reports pursuant to Section 16 of the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth data concerning the compensation received by the Chief Executive Officer of FIBS and the four other most highly compensated executive officers of FIBS as of December 31, 1998, whose salary and bonus for the year ended December 31, 1998, exceeded $100,000 in the aggregate. In all cases, payment was for services in all capacities of the Company and its subsidiaries: <TABLE> <CAPTION> Summary Compensation Table -------------------------- Long-Term Compensation Other ------------- Name and Annual Options/ All Other Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2) - ------------------ ---- ------ ----- ------------- ----- ------------ <S> <C> <C> <C> <C> <C> <C> Thomas W. Scott 1998 $250,000 $150,000 $7,200 $1500/1500 $26,793 President & CEO 1997 216,000 125,000 7,200 - 23,698 1996 206,000 75,000 7,200 - 23,002 Lyle R. Knight 1998 $141,538 $67,000 $1,108 $25000/0 $68,566 President & COO(3) 1997 - - - - - 1996 - - - - - - 41 -
<CAPTION> Summary Compensation Table -------------------------- Long-Term Compensation Other ------------- Name and Annual Options/ All Other Principal Position Year Salary Bonus Compensation(1) SARS (#) Compensation(2) - ------------------ ---- ------ ----- ------------- ----- ------------ <S> <C> <C> <C> <C> <C> <C> William G. Wilson 1998 $110,775 $35,500 $7,200 $1200/1200 $13,445 Senior Vice President 1997 105,500 31,500 7,200 800/800 13,304 1996 102,000 39,580 7,200 600/600 12,544 Edward Garding 1998 $136,750 $38,500 $7,200 $1200/1200 $15,850 Senior Vice President 1997 129,000 38,700 7,200 1200/1200 15,606 1996 106,730 30,000 20,860 800/800 12,431 Terrill R. Moore 1998 $125,000 $40,000 $7,200 $1200/1200 $14,762 Senior Vice President 1997 100,862 40,000 7,200 1200/1200 12,836 & CFO 1996 86,684 35,184 7,200 800/800 12,740 </TABLE> (1) Other annual compensation principally relates to an auto allowance or the value of personal usage of a Company-owned vehicle. (2) All other compensation includes (i) premiums paid by the Company on health and group life insurance policies, (ii) contributions by the Company to the Company's noncontributory qualified profit sharing plan and (iii) contributions by the Company to the Company's contributory qualified employee savings plan, qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). For the fiscal year ending December 31, 1998, premiums on health and life insurance on behalf of Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding and Terrill R. Moore were $3,631, $2,113, $3,183, $3,183 and $3,183, respectively. For the fiscal year ending December 31, 1998, contributions to the Company's profit sharing plan on behalf of Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding and Terrill R. Moore were $10,662, $0, $4,723, $5,830 and $5,329, respectively. For the fiscal year ending December 31, 1998, contributions to the Company's employee savings plan on behalf of Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding and Terrill R. Moore were $12,500, $0, $5,539, $6,837 and $6,250, respectively. (3) Not an executive officer of FIBS prior to 1998. Included in "Other Annual Compensation" for 1998 are reimbursements of moving and related expenses of $16,453 and a signing bonus of $50,000. OPTION/SAR GRANTS TABLE The following table provides information concerning grants of options to purchase FIBS common stock, no par value, and related stock appreciation rights ("SARs") made during the year ended December 31, 1998, to the persons named in the Summary Compensation Table. <TABLE> <CAPTION> Option/SAR Grants in Last Fiscal Year -------------------------------------- Potential Realizable Individual Grants Value at ------------------------------------ Assumed Annual % of Total Rates of Stock Options/SARs Price Appreciation Options/ Granted to Exercise For Option Term SARS Employees in Price Expiration --------------------- Name Granted (#) Fiscal Year ($/SH) Date 5% ($) 10% ($) ------ --------- ------------ -------- ----------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Thomas W. Scott 1,500/1,500 2.90%/5.62% $24.74 1/12/08 $ 46,677 $ 118,288 Lyle R. Knight 25,000/0 48.36%/0.00% 32.00 5/24/08 503,116 1,274,994 William G. Wilson 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630 Edward Garding 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630 Terrill R. Moore 1,200/1,200 2.32%/4.49% 24.74 1/12/08 37,341 94,630 </TABLE> - 42 -
The following table indicates the number and value of the stock options and SARs exercised in 1998 and the number and value of unexercised stock options and SARs as of December 31, 1998. All stock options and SARs are currently exercisable. <TABLE> <CAPTION> Aggregated Option/SAR exercised in 1998 and Fiscal Year-End Values ------------------------------------------------------------------- Number of Value of Unexercised Shares Unexercised In-The-Money Acquired Value Options/SARS at Options and SARS at Name on Exercise Realized December 31, 1998 December 31, 1998 ----- ------------ -------- ------------------- -------------------- <S> <C> <C> <C> <C> Thomas W. Scott - $ - 1,500/1,500 $ 24,780 Lyle R. Knight - - 25,000/0 25,000 William G. Wilson - - 7,200/5,500 213,329 Edward Garding 832 24,960 8,324/6,362 249,592 Terrill R. Moore 692 20,760 7,800/6,100 229,749 </TABLE> SURVIVOR INCOME BENEFIT The Company has entered into survivor income agreements (the "Survivor Agreements") with certain executive employees. Under the Survivor Agreements, designated beneficiaries are entitled to receive a survivor income benefit if the executive dies before otherwise terminating employment with the Company. Pursuant to the Survivor Agreements and addenda thereto, the Survivor Agreement may convert to a split dollar insurance agreement subject to a 10 year vesting schedule. The Company has entered into this type of Survivor Agreement with Lyle R. Knight, Terrill R. Moore, William G. Wilson and Edward Garding. STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN The Company has a Stock Option and Stock Appreciation Rights Plan (the "Plan") for key senior officers of the Company. The Plan provides for the granting of stock options which are non-qualified under the Code and SARs in tandem with such options. Each option granted under the Plan may be exercised within a period of ten years from the date of grant. During December 1998, the Company determined that future grants of stock options would no longer include SARs and substantially all outstanding SARs would be eligible to convert to stock options. COMPENSATION OF DIRECTORS Directors who are members of the Scott family, with the exception of John M. Heyneman, or who are executive officers of the Company ("Inside Directors") are compensated for their services in the form of a salary and bonus, as determined by the Compensation Committee of the Board of Directors from time to time. Of the directors not named in the Summary Compensation Table above, Homer A. Scott, Jr. was paid a salary of $99,000 in each of 1998, 1997 and 1996. He was also paid a bonus of $20,000 in 1997 and $15,000 in 1996. James R. Scott was paid a salary of $102,250 in each of 1998, 1997 and 1996 and a bonus of $20,000 in 1997 and $15,000 in 1996. Dan S. Scott was paid a salary of $39,000 in each of 1998, 1997 and 1996 and a bonus of $20,000 in 1997 and $15,000 in 1996. Randy Scott was paid a salary of $18,050 in 1998, 1997 and 1996. No bonuses were paid to non-management directors in 1998. Non-Inside Directors, presently consisting of Joel Long and James Haugh, receive a $400 monthly retainer, $500 per board meeting attended and $250 for each committee meeting attended. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Homer A. Scott, Jr., James R. Scott, Dan S. Scott, James Haugh, and Joel Long serve on the Compensation Committee of the Board of Directors. With the exception of Joel Long and James Haugh, all committee members were officers or employees receiving compensation from FIBS for services rendered. Homer A. Scott, Jr. and James R. Scott were formerly officers of FIBS. - 43 -
INDEMNIFICATION Officers and directors of FIBS are entitled to indemnification under the Montana Business Corporation Act and pursuant to a Resolution of the Board of Directors dated January 12, 1987. A summary of the indemnification provision in such resolution follows: Pursuant to a resolution of the Board of Directors dated January 12, 1987, and under the authority of Section 35-1-414 of the Montana Business Corporation Act, the Company shall indemnify each director and officer of the Company (including former officers and directors) and each agent of the Company serving as a director or officer of a Bank, serving at the specific direction or request of the Company (but only to the extent that such director, officer or agent is not indemnified by the Bank or by insurance provided by the Company), against judgments, penalties, fines, settlements and reasonable expenses actually and reasonably paid by such director, officer or agent by reason of the fact that he or she is or was a director or officer of the Company or such Bank, to the extent provided by and subject to the limitations of the Montana Business Corporation Act. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of December 31, 1998 with respect to the beneficial ownership of the Common Stock for (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the executive officers named in the Summary Compensation Table, and (iv) all directors and executive officers as a group. Unless otherwise indicated in the notes to the table, all shares shown in the following table are owned both of record and beneficially and each of the following parties has sole voting and investment power with respect to such shares. <TABLE> <CAPTION> Number of Percent Shares Beneficially Beneficial Owner(1) Beneficially Owned Owned ----------------- ------------------ ------------- <S> <C> <C> James R. Scott(2) 1,340,912 16.79% 439 Grandview Blvd. Billings, Montana 59102 Randy Scott(3) 1,158,585 14.50% 521 Freedom Avenue Billings, Montana 59105 Homer Scott, Jr.(4) 1,024,223 12.82% 122 Scott Drive Sheridan, Wyoming 82801 Thomas W. Scott 751,578 9.41% P.O. Box 30876 Billings, Montana 59107 Susan Scott Heyneman(5) 560,988 7.02% P.O. Box 285 Fishtail, Montana 59028 FIB Wyoming(6) 435,249 5.45% P.O. Box 30918 Billings, Montana 59116 - 44 -
<CAPTION> Number of Percent Shares Beneficially Beneficial Owner(1) Beneficially Owned Owned ----------------- ------------------ ------------- <S> <C> <C> Dan S. Scott(7) 381,068 4.77% John M. Heyneman 37,004 0.46% William G. Wilson(8) 32,855 0.41% Lyle R. Knight(8) 26,314 0.33% Edward Garding(8) 23,491 0.29% Terrill R. Moore(8) 17,357 0.22% Joel Long 5,511 0.07% James Haugh 571 0.01% All directors and executive officers as a group (12 persons)(8) 4,799,469 60.08% </TABLE> (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the securities owned. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of December 31, 1998, are deemed outstanding for purposes of computing the percentage of the person or entity holding such securities but are not deemed outstanding for purposes of computing the percentage of any other person or entity. (2) Includes 560,068 shares owned beneficially as managing partner of J.S. Investments Limited Partnership, 25,796 shares as trustee for John M. Heyneman, Jr. and 25,796 shares as trustee for Thomas Scott Heyneman. (3) Includes 1,119,792 shares owned beneficially as managing partner of Nbar5 Limited Partnership. (4) Includes 88,816 shares owned beneficially as trustee for Riki Rae Scott Davidson, 75,276 shares as trustee for Risa Kae Scott Brown and 88,824 shares as trustee for Rae Ann Scott Morse. (5) Includes 323,060 shares owned beneficially as general partner of Towanda Investments, Limited Partnership. (6) Includes 53,330 shares owned beneficially as trustee for Homer Scott, Jr. Charitable Remainder Unitrust, 113,448 shares as trustee for James Marshall Scott, 122,304 shares as trustee for Homer Rollins Scott, 88,400 shares as trustee for Sandra Arlene Scott, 7,085 shares as trustee for Brekken Arlene Baker, 7,001 shares for Baylee Mae Baker, 2,812 shares for Blake Scott Baker, 24,770 shares for Sarah E. Suzor Wugma and 16,099 shares for Samuel Moise Suzor Wugma. (7) Includes 48,960 shares owned beneficially as managing partner of Nbar5 A, 41,452 shares as managing partner of Nbar5 O, 37,700 shares as managing partner of Nbar5 K, 33,944 shares as managing partner of Nbar5 S and 33,944 shares as managing partner of Nbar5 T. (8) Includes options to purchase 1,500 shares, 25,000 shares, 7,200 shares, 8,324 shares and 7,800 shares held by Thomas W. Scott, Lyle R. Knight, William G. Wilson, Edward Garding and Terrill R. Moore, respectively. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has had, and expects to have in the future, banking transactions in the ordinary course of business with related parties, including business with directors, officers, stockholders and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with unrelated persons and that did not involve more than a normal risk of collectibility or present other unfavorable features. To the extent that such transactions consisted of extensions of credit to Company executive officers and directors and to certain members of the Scott family, such extensions of credit were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Loans to FIBS's executive officers, directors and their related interests represented approximately 6.4% of the Company's stockholders' equity as of December 31, 1998. Loans to executive officers, directors and related interests of officers and directors of FIBS and the Banks represented approximately 7.4% of the Company's stockholders' equity as of December 31, 1998. - 45 -
In July 1998, 30,604 shares of common stock were sold by the Company to 485 individual participants in the Company's 401(k) Savings Plan. The total cash price was $979,000. In September 1998, 34,348 shares of common stock were sold by the Company to certain officers, directors, director nominees and employees. The total cash price was $1.20 million. From time to time the Company repurchases shares of common stock from stockholders of the Company pursuant to stockholder repurchase agreements and otherwise at the then appraised value thereof. In addition, the Company may redeem shares of common stock from the Company's 401(k) Savings Plan on a quarterly basis in accordance with the investment elections of the plan's participants or in connection with distributions under the plan. For the year ended December 31, 1998, the Company redeemed shares of common stock from the Company's 401(k) Savings Plan in the amount of $56,560. The Company is the anchor tenant in a commercial building in which the Company's principal executive offices are located in Billings, Montana. The building is owned by a joint venture partnership in which FIB Montana is one of the two partners, owning a 50% interest in the partnership. The other 50% interest in the partnership is owned by a company in which Joel Long, a director of the Company, owns beneficially an equity interest of approximately 33%. Indebtedness of the partnership ($9.9 million as of December 31, 1998) is recourse to the partners and guaranteed by the Company. The Company paid rent to the partnership of $1.1 million in 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Following are the Company's audited consolidated financial statements. - 46 -
INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- KPMG LLP The Board of Directors and Stockholders First Interstate BancSystem, Inc.: We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Billings, Montana January 29, 1999 - 47 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> December 31, 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 154,527 136,025 Federal funds sold 31,930 58,675 Interest-bearing deposits in banks 17,562 34,447 Investment securities: Available-for-sale 379,393 188,650 Held-to-maturity 299,285 236,953 - ------------------------------------------------------------------------------- Total investment securities 678,678 425,603 - ------------------------------------------------------------------------------- Loans 1,484,459 1,470,414 Less allowance for loan losses 28,803 28,180 - ------------------------------------------------------------------------------- Net loans 1,455,656 1,442,234 - ------------------------------------------------------------------------------- Premises and equipment, net 63,382 61,274 Accrued interest receivable 22,433 22,046 Goodwill and core deposit intangible, net of accumulated amortization of $10,950 in 1998 and $8,486 in 1997 29,337 31,801 Other real estate owned, net 1,113 1,362 Deferred tax asset 5,498 5,946 Other assets 18,717 15,351 - ------------------------------------------------------------------------------- $ 2,478,833 2,234,764 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ 390,998 372,056 Interest bearing 1,650,934 1,432,950 - ------------------------------------------------------------------------------- Total deposits 2,041,932 1,805,006 - ------------------------------------------------------------------------------- Federal funds purchased 1,675 4,025 Securities sold under repurchase agreements 173,593 176,350 Accrued interest payable 13,364 11,306 Accounts payable and accrued expenses 10,622 9,293 Other borrowed funds 9,828 11,591 Long-term debt 24,288 31,526 - ------------------------------------------------------------------------------- Total liabilities 2,275,302 2,049,097 - ------------------------------------------------------------------------------- Mandatorily redeemable preferred securities of subsidiary trust 40,000 40,000 Stockholders' equity: Common stock without par value; authorized 20,000,000 shares; issued and outstanding 7,988,573 shares and 8,030,799 shares as of December 31, 1998 and 1997, respectively 10,001 11,490 Retained earnings 151,362 133,277 Accumulated other comprehensive income 2,168 900 - ------------------------------------------------------------------------------- Total stockholders' equity 163,531 145,667 - ------------------------------------------------------------------------------- $ 2,478,833 2,234,764 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Book value per common share $ 20.47 18.14 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 48 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (In thousands, except share and per share data) Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Interest income: Interest and fees on loans $ 143,236 140,083 99,882 Interest and dividends on investment securities: Taxable 29,616 21,958 15,343 Exempt from Federal taxes 2,108 1,109 982 Interest on deposits with banks 997 448 376 Interest on Federal funds sold 3,457 2,210 1,342 - -------------------------------------------------------------------------------- Total interest income 179,414 165,808 117,925 - -------------------------------------------------------------------------------- Interest expense: Interest on deposits 68,248 58,129 42,122 Interest on Federal funds purchased 66 1,499 1,043 Interest on securities sold under repurchase agreements 7,023 6,474 4,508 Interest on other borrowed funds 461 873 318 Interest on long-term debt 2,327 5,165 2,028 Interest on mandatorily redeemable preferred securities of subsidiary trust 3,527 523 - - -------------------------------------------------------------------------------- Total interest expense 81,652 72,663 50,019 - -------------------------------------------------------------------------------- Net interest income 97,762 93,145 67,906 Provision for loan losses 4,170 4,240 3,844 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 93,592 88,905 64,062 Non-interest income: Income from fiduciary activities 4,347 4,083 3,161 Service charges on deposit accounts 10,379 9,855 7,752 Data processing 8,081 7,380 7,324 Other service charges, commissions, and fees 4,623 3,787 2,857 Investment securities gains (losses), net 282 89 18 Other real estate income, net 89 465 214 Other income 1,683 1,652 2,815 - -------------------------------------------------------------------------------- Total other operating income 29,484 27,311 24,141 - -------------------------------------------------------------------------------- Non-interest expenses: Salaries and wages 32,716 29,448 21,789 Employee benefits 10,015 8,097 5,742 Occupancy, net 6,418 6,077 4,505 Furniture and equipment 8,524 7,721 6,249 FDIC insurance 215 206 5 Goodwill and core deposit amortization expense 2,464 2,585 1,019 Other expenses 21,496 20,497 14,300 - -------------------------------------------------------------------------------- Total other operating expenses 81,848 74,631 53,609 - -------------------------------------------------------------------------------- Income before income taxes 41,228 41,585 34,594 Income tax expense 15,592 15,730 13,351 - -------------------------------------------------------------------------------- Net income $ 25,636 25,855 21,243 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Net income applicable to common stockholders $ 25,636 24,401 20,818 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Basic earnings per common share $ 3.20 3.07 2.65 Diluted earnings per common share 3.17 3.05 2.64 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 49 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Accumulated other Total Preferred Common Retained comprehensive stockholders' stock stock earnings income equity - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 1995 $ - 6,692 102,281 393 109,366 Comprehensive income: Net income - - 21,243 - 21,243 Unrealized gains on available-for-sale investment securities, net of reclassification adjustment - - - 114 114 ------ Total comprehensive income 21,357 Preferred stock issuance: 20,000 shares issued 20,000 - - - 20,000 Preferred stock issuance costs - - (458) - (458) Common stock transactions: 65,808 shares retired - (1,229) - - (1,229) 187,840 shares issued - 3,478 - - 3,478 Cash dividends declared: Common ($0.78 per share) - - (6,028) - (6,028) Preferred (8.53%) - - (425) - (425) - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 20,000 8,941 116,613 507 146,061 Comprehensive income: Net income - - 25,855 - 25,855 Unrealized gains on available-for-sale investment securities, net of reclassification adjustment - - - 393 393 ------ Total comprehensive income 26,248 Preferred stock retirement: 20,000 shares retired (20,000) - - - (20,000) Common stock transactions: 60,169 shares retired - (1,322) - - 3,871 177,896 shares issued - 3,871 - - (1,322) Cash dividends declared: Common ($0.98 per share) - - (7,737) - (7,737) Preferred (8.53%) - - (1,454) - (1,454) - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 - 11,490 133,277 900 145,667 Comprehensive income: Net income - - 25,636 - 25,636 Unrealized gains on available-for-sale investment securities, net of reclassification adjustment - - - 1,268 1,268 ------ Total comprehensive incom 26,904 Common stock transactions: 115,361 shares retired - (3,830) - - (3,830) 73,135 shares issued - 2,341 - - 2,341 Cash dividends declared: Common ($0.94 per share) - - (7,551) - (7,551) - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ - 10,001 151,362 2,168 163,531 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- </TABLE> (Continued on next page) - 50 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (CONCLUDED) - ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> Disclosure of reclassification amount: Unrealized and realized holding gains arising during the period, net of income tax of $921, $286 and $80 in 1998, 1997 and 1996, respectively $ 1,440 447 125 Less reclassification adjustment for gains included in net income, net of income tax of $110, $35 and $7 in 1998, 1997 and 1996, respectively (172) (54) (11) - ------------------------------------------------------------------------------------------ Net unrealized gain on available-for-sale investment securities $ 1,268 393 114 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 51 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> Cash flows from operating activities: Net income $ 25,636 25,855 21,243 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan and other real estate losses 4,215 4,236 3,823 Depreciation and amortization 9,270 8,549 5,584 Net premium amortization (discount accretion) on investment securities 286 (1,049) 591 Net gain on sale of investments (282) (89) (18) Gain on sale of other real estate owned (248) (595) (335) Loss (gain) on sale of premises and equipment 346 (9) (2) Provision for deferred income taxes (326) (1,306) (528) Increase in accrued interest receivable (387) (2,473) (507) Decrease (increase) in other assets (3,340) 5,198 (1,697) Increase in accrued interest payable 2,058 2,402 1,685 Increase (decrease) in accounts payable and accrued expenses 1,329 3,742 (1,291) - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 38,557 44,461 28,548 - ------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of investment securities: Held-to-maturity (163,430) (412,855) (200,361) Available-for-sale (388,698) (133,043) (63,477) Proceeds from maturities and paydowns of investment securities: Held-to-maturity 101,048 456,069 150,313 Available-for-sale 166,326 38,401 62,460 Proceeds from sales of available-for-sale investment securities 33,718 31,208 5,523 Extensions of credit to customers, net of repayments (21,947) (101,673) (98,142) Recoveries on loans charged-off 3,080 3,094 1,987 Proceeds from sale of other real estate owned 1,727 2,130 1,121 Proceeds from sale of premises 2,219 - - Acquisitions of subsidiaries, net - (1,726) 24,840 Capital distribution from (contribution to) joint ventures 321 (275) 150 Capital expenditures, net (11,787) (8,880) (6,324) - ------------------------------------------------------------------------------------------ Net cash used in investing activities (277,423) (127,550) (121,910) - ------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 236,926 125,582 56,674 Net increase (decrease) in federal funds purchased and repurchase agreements (5,107) 37,788 (15,938) Repayments of other borrowed funds, net (1,763) (1,480) (871) Borrowings of long-term debt 2,371 5,750 66,939 Repayment of long-term debt (9,609) (38,891) (22,410) Proceeds of issuance of mandatorily redeemable preferred securities of subsidiary trust - 40,000 - Debt issuance costs (40) (2,323) - Proceeds from issuance of common stock 2,341 3,871 3,478 Proceeds from issuance of preferred stock, net of issuance costs - - 19,542 Payments to retire common stock (3,830) (1,322) (1,229) Payments to retire preferred stock - (20,000) - Dividends paid on common stock (7,551) (7,737) (6,028) Dividends paid on preferred stock - (1,454) (425) - ------------------------------------------------------------------------------------------ Net cash provided by financing activities 213,738 139,784 99,732 Net increase (decrease) in cash and cash equivalents (25,128) 56,695 6,370 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 229,147 172,452 166,082 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 204,019 229,147 172,452 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 79,594 70,484 48,334 Cash paid during the year for taxes 16,865 17,830 12,805 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ </TABLE> Noncash Investing and Financing Activities - The Company transferred loans of $1,275, $1,347 and $668 to other real estate owned in 1998, 1997 and 1996, respectively. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 52 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. The Company, through the branch offices of its banking subsidiaries, provides a full range of banking services to individual and corporate customers throughout the states of Montana and Wyoming. The Company is subject to competition from other financial institutions and financial service providers, and is also subject to the regulations of various government agencies and undergoes periodic examinations by those regulatory authorities. The following is a summary of significant accounting policies utilized by the Company: PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of First Interstate BancSystem, Inc. (Parent Company) and its operating subsidiaries: First Interstate Bank in Montana ("FIB Montana"), First Interstate Bank in Wyoming ("FIB Wyoming"), Commerce Financial, Inc. and FIB Capital Trust. All material intercompany transactions have been eliminated in consolidation. BASIS OF PRESENTATION. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowances for losses on loans and real estate owned are adequate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and real estate owned. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions which may affect the borrowers' ability to pay or regulatory requirements. In addition to purchasing and selling Federal funds for their own account, the Company purchases and sells Federal funds as an agent. These and other assets held in an agency or fiduciary capacity are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold for one day periods, and interest-bearing deposits in banks with original maturities of less than three months. At December 31, 1998 the Company was required to have aggregate reserves, exclusive of cash on hand, with the Federal Reserve Bank of approximately $11,365. Also, an additional $25,000 compensating balance was maintained with the Federal Reserve Bank to mitigate the payment of service charges for check clearing services. INVESTMENT SECURITIES. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Debt securities that may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk, or other factors, and any marketable equity securities, are classified as available-for-sale and carried at fair value. The unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of stockholders' equity. Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading account assets and reported at fair value. The Company carried no trading account assets during 1998, 1997 or 1996. Management determines the appropriate classification of securities at the time of purchase and at each reporting date management reassesses the appropriateness of the classification. - 53 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums over the estimated average life of the security, accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income with interest and dividends. Realized gains and losses, and declines in value judged to be other-than-temporary, are included in investment securities gains (losses). The cost of securities sold is based on the specific identification method. LOANS. Loans are reported at the principal amount outstanding. Interest is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal unless such past due loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgement of management, the loans are estimated to be fully collectible as to both principal and interest. Renegotiated loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty. Significant loan origination fees and prepaid interest, net of related costs, are recognized over the expected lives of the related loans as an adjustment of yield. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses which is charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance balance is an amount that management believes will be adequate to absorb losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, leases and commitments, and current and anticipated economic conditions that affect the borrowers' ability to pay. The Company also establishes a reserve for losses on specific loans which are deemed to be impaired. Groups of small balance homogeneous basis loans (generally consumer loans) are evaluated for impairment collectively. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect, on a timely basis, all principal and interest according to the contractual terms of the loan's original agreement. When a specific loan is determined to be impaired, the allowance for loan losses is increased through a charge to expense for the amount of the impairment. The amount of the impairment is measured using cash flows discounted at the loan's effective interest rate, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current value of the collateral, reduced by anticipated selling costs, will be used to measure impairment instead of discounted cash flows. The Company's impaired loans are those non-consumer loans which are non-accrual or a troubled debt restructuring. Interest income is recognized on impaired loans only to the extent that cash payments are received. The Company's existing policies for evaluating the adequacy of the allowance for loan losses and policies for discontinuing the accrual of interest on loans are used to establish the basis for determining whether a loan is impaired. - 54 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) GOODWILL. Goodwill consists of the excess purchase price over the fair value of identifiable net assets from acquisitions ("excess purchase price") and the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions ("core deposit intangibles"). Excess purchase price is being amortized using the straight-line method over periods of primarily 15 to 25 years. Core deposit intangibles are amortized using an accelerated method based on an estimated runoff of the related deposits, not exceeding 10 years. PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is provided over estimated useful lives of 5 to 50 years for buildings and improvements and 3 to 15 years for furniture and equipment using straight-line methods. Leasehold improvements are amortized using straight-line methods over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Consolidated depreciation expense was $6,692 in 1998, $5,964 in 1997 and $4,182 in 1996. LONG-LIVED ASSETS. Long-lived assets and certain identifiable intangibles (e.g. premises, Goodwill, core deposit intangibles) are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. The amount of the impairment loss, if any, is based on the asset's fair value, which may be estimated by discounting the expected future cash flows. There were no impairment losses recognized during 1998, 1997 or 1996. OTHER REAL ESTATE OWNED. Real estate acquired in satisfaction of loans is carried at the lower of the recorded investment in the property at the date of foreclosure or its current fair value less selling cost ("Net Realizable Value"). The value of the underlying loan is written down to the fair market value of the real estate acquired by a charge to the allowance for loan losses, if necessary, at the date of foreclosure. A provision to the real estate owned valuation allowance is charged against other real estate expense for any current or subsequent write-downs to Net Realizable Value. Operating expenses of such properties, net of related income, and gains on sales are included in other real estate expenses. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. Effective January 1, 1997 the Company recognizes as assets the rights to service mortgage loans for others, whether acquired through purchases or loan originations. Servicing rights of $1,099 and $238 were capitalized in 1998 and 1997, respectively. Servicing rights are initially recorded at fair value based on comparable market quotes and are amortized in proportion to and over the period of estimated net servicing income. Amortization expense of $317 and $285 was recognized in 1998 and 1997, respectively. Servicing rights are evaluated for impairment by stratifying the servicing assets based on risk characteristics including loan type, note rate and loan term. There were no impairment losses recognized in 1998 or 1997. Carrying value approximates market value at December 31, 1998. INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice, income for trust services is recognized on the basis of cash received. However, use of this method in lieu of accrual basis accounting does not materially affect reported earnings. INCOME TAXES. The Parent Company and its subsidiaries have elected to be included in a consolidated Federal income tax return. For state income tax purposes, the combined taxable income of the Parent Company and its subsidiaries is apportioned between the states in which operations take place. Federal and state income taxes attributable to the subsidiaries, computed on a separate return basis, are paid to or received from the Parent Company. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. - 55 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) PER SHARE DATA. Basic earnings per common share is calculated by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income less preferred stock dividends by the weighted average number of common shares and potential common stock outstanding during the period. Book value per common share is calculated by dividing total stockholders' equity less preferred stock by the number of common shares outstanding at the end of the year. STOCK-BASED COMPENSATION. The Company measures compensation cost for stock-based employee compensation plans based on the intrinsic value of the award. Intrinsic value is the excess of the appraised value of the underlying stock at the date of grant over the amount an employee must pay to acquire the stock. RECLASSIFICATIONS. Certain reclassifications have been made to the 1997 and 1996 amounts to conform to the 1998 presentation. (2) REGULATORY MATTERS The Company is subject to the regulatory capital requirements administered by the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as defined in the regulations. As of December 31, 1998, the Company exceeded all capital adequacy requirements to which is was subject. As of December 31, 1998, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier 1 risk-based, and leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. - 56 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The Company's actual capital amounts and ratios and selected regulatory thresholds as of December 31, 1998 and 1997 are presented in the following table: <TABLE> <CAPTION> Adequately Well Actual Capitalized Capitalized ---------------------- ------------------------ ---------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> AS OF DECEMBER 31, 1998: Total risk-based capital: Consolidated $ 213,734 12.3% $ 139,024 8.0% $ 173,781 10.0% FIB Montana 136,558 12.1 90,665 8.0 113,331 10.0 FIB Wyoming 70,046 11.7 47,762 8.0 59,702 10.0 Tier 1 risk-based capital: Consolidated 171,846 9.9 69,512 4.0 104,268 6.0 FIB Montana 122,316 10.8 45,333 4.0 67,999 6.0 FIB Wyoming 62,492 10.5 23,881 4.0 35,821 6.0 Leverage capital ratio: Consolidated 171,846 7.1 96,766 4.0 120,958 5.0 FIB Montana 122,316 7.8 62,956 4.0 78,695 5.0 FIB Wyoming 62,492 7.4 33,599 4.0 41,999 5.0 - -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Adequately Well Actual Capitalized Capitalized ---------------------- ------------------------ ---------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> AS OF DECEMBER 31, 1997: Total risk-based capital: Consolidated $ 192,839 12.2% $126,516 8.0% $ 158,145 10.0% FIB Montana 131,374 12.4 84,603 8.0 105,754 10.0 FIB Wyoming 64,231 12.4 41,421 8.0 51,777 10.0 Tier 1 risk-based capital: Consolidated 152,967 9.7 63,258 4.0 94,887 6.0 FIB Montana 118,113 11.2 42,302 4.0 63,452 6.0 FIB Wyoming 57,696 11.1 20,711 4.0 31,066 6.0 Leverage capital ratio: Consolidated 152,967 6.9 88,207 4.0 110,259 5.0 FIB Montana 118,113 8.1 58,423 4.0 73,028 5.0 FIB Wyoming 57,696 7.8 29,565 4.0 36,956 5.0 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- </TABLE> (3) INVESTMENT SECURITIES The amortized cost and approximate market values of investment securities are summarized as follows: <TABLE> <CAPTION> AVAILABLE-FOR-SALE Gross Gross Estimated Amortized unrealized unrealized market December 31, 1998 cost gains losses value - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 48,623 1,937 - 50,560 Obligations of U.S. Government agencies 141,505 1,376 (252) 142,629 States, county and municipal securities 6,638 291 - 6,929 Corporate securities 4,326 44 - 4,370 Other mortgage-backed securities 163,966 557 (611) 163,912 Other securities 10,819 174 - 10,993 - ----------------------------------------------------------------------------------------------------- Total $ 375,877 4,379 (863) 379,393 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> - 57 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> HELD-TO-MATURITY Gross Gross Estimated Amortized unrealized unrealized market December 31, 1998 cost gains losses value - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 113,282 2,569 - 115,851 Obligations of U.S. Government agencies 14,937 62 - 14,999 States, county and municipal securities 61,485 1,070 (87) 62,468 Corporate securities 60,303 319 (125) 60,497 Other mortgage-backed securities 49,278 14 (384) 48,908 - ----------------------------------------------------------------------------------------------------- Total $ 299,285 4,034 (596) 302,723 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> Gross gains of $284 and gross losses of $2 were realized on the sale of available-for-sale securities in 1998. Other securities available-for-sale include equity stocks of the Federal Reserve and the Federal Home Loan Bank with amortized costs of $3,062 and $7,447, respectively, at December 31, 1998. <TABLE> <CAPTION> AVAILABLE-FOR-SALE Gross Gross Estimated Amortized unrealized unrealized market December 31, 1998 cost gains losses value - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 63,869 594 - 64,463 Obligations of U.S. Government agencies 56,304 76 (59) 56,321 States, county and municipal securities 7,479 315 - 7,794 Corporate securities 4,331 5 - 4,336 Other mortgage-backed securities 46,057 321 (37) 46,341 Other securities 9,136 259 - 9,395 - ----------------------------------------------------------------------------------------------------- Total $ 187,176 1,570 (96) 188,650 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> HELD-TO-MATURITY Gross Gross Estimated Amortized unrealized unrealized market December 31, 1997 cost gains losses value - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities $ 181,428 1,019 (128) 182,319 Obligations of U.S. Government agencies 27,892 117 (34) 27,975 States, county and municipal securities 17,645 174 (2) 17,817 Corporate securities 6,260 - (6) 6,254 Other mortgage-backed securities 3,728 29 - 3,757 - ----------------------------------------------------------------------------------------------------- Total $ 236,953 1,339 (170) 238,122 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> Gross gains of $89 and no gross losses were realized on the sale of available-for-sale securities in 1997. Gross gains of $18 and no gross losses were realized on the sale of available-for-sale securities in 1996. Other securities available-for-sale include equity stocks of the Federal Reserve and the Federal Home Loan Bank with amortized costs of $3,002 and $6,074, respectively, at December 31, 1997. - 58 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Maturities of investment securities at December 31, 1998 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. At December 31, 1998, the Company had securities callable within one year with amortized costs and estimated market values of $85,103 and $84,936, respectively. <TABLE> <CAPTION> December 31,1998 Available-for-Sale Held-to-Maturity - ----------------------------------------------------------------------------------------------------- Amortized Estimated Amortized Estimated cost market value cost market value - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Within one year $ 44,406 44,404 98,896 98,928 After one but within five years 217,507 220,894 128,964 131,618 After five years but within ten years 57,026 56,999 36,698 37,285 After ten years 46,119 46,103 34,727 34,892 - ----------------------------------------------------------------------------------------------------- Total 365,058 368,400 299,285 302,723 - ----------------------------------------------------------------------------------------------------- Other 10,819 10,993 - - - ----------------------------------------------------------------------------------------------------- Total $ 375,877 379,393 299,285 302,723 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> Maturities of securities do not reflect rate repricing opportunities present in many adjustable rate mortgage-backed and corporate securities. At December 31, 1998 and 1997, $8,652 and $14,097, respectively, of variable rate securities are included in investment securities. There are no significant concentrations of investments at December 31, 1998 (greater than 10 percent of stockholders' equity) in any individual security issuer, except for U.S. Government or agency-backed securities. Investment securities with amortized cost of $419,349 and $333,920 at December 31, 1998 and 1997, respectively, were pledged to secure public deposits, securities sold under repurchase agreements and for other purposes required or permitted by law. The approximate market value of securities pledged at December 31, 1998 and 1997 was $424,372 and $335,500, respectively. All securities sold under repurchase agreements are with customers and generally mature on the next banking day. The Company retains possession of the underlying securities sold under repurchase agreements. (4) LOANS Major categories and balances of loans included in the loan portfolios are as follows: <TABLE> <CAPTION> December 31, 1998 1997 - -------------------------------------------------------------------------------------------- <S> <C> <C> Real estate (1) $ 681,670 683,212 Consumer (2) 379,197 412,231 Commercial 311,040 261,513 Agricultural 106,707 107,649 Other loans, including overdrafts 5,845 5,809 - -------------------------------------------------------------------------------------------- Total loans $ 1,484,459 1,470,414 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- </TABLE> (1) Includes agricultural, commercial and consumer loans secured by real estate of $60,459, $351,229 and $102,622, respectively, as of December 31, 1998 and $56,397, $264,842 and $93,510, respectively, as of December 31, 1997. (2) Includes indirect lending of $252,458 and $266,601 at December 31, 1998 and 1997, respectively. - 59 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) At December 31, 1998, the Company had no concentrations of loans which exceeded 10% of total loans other than the categories disclosed above. The Company has no loans or loan commitments to highly leveraged companies. Nonaccrual loans amounted to $10,699 and $9,681 at December 31, 1998 and 1997, respectively, all of which are deemed to be impaired. If interest on nonaccrual loans had been accrued, such income would have approximated $1,062 and $763, respectively. Loans contractually past due ninety days or more aggregating $4,039 on December 31, 1998 and $4,883 on December 31, 1997 were on accrual status. Such loans are deemed adequately secured and in the process of collection. Included in impaired loans at December 31, 1998 and 1997 are $2,648 and $1,909, respectively, of loans which have an impairment allowance of $903 and $676, respectively, included in the Company's allowance for loan losses. The average recorded investment in impaired loans for the years ended December 31, 1998, 1997 and 1996 was approximately $10,976, $7,580 and $3,870, respectively. If interest on impaired loans had been accrued, the amount of interest income on impaired loans during 1998, 1997 and 1996 would have been approximately $1,014, $706 and $357, respectively. Also included in total loans at December 31, 1998 and 1997 are loans with a carrying value of $3,306 and $928, respectively, the terms of which have been modified in troubled debt restructurings. Restructured debt includes nonaccrual loans of $1,710 and $2 at December 31, 1998 and 1997, respectively. The interest income recognized on restructured loans approximated $188, $122 and $158 during the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, there were no commitments to lend additional funds to borrowers whose existing loans have been restructured or are classified as nonaccrual. Most of the Company's business activity is with customers within the states of Montana and Wyoming. Loans where the customers or related collateral are out of the Company's trade area are not significant and management's anticipated credit losses arising from these transactions compare favorably with the Company's credit loss experience on its loan portfolio as a whole. Certain executive officers and directors of the Company and certain corporations and individuals related to such persons, incurred indebtedness in the form of loans, as customers, of $12,025 at December 31, 1998 and $16,411 at December 31, 1997 (including outstanding loans of new executive officers and directors in 1998). During 1998, new loans and advances on existing loans of $13,166 were funded and repayments totaled $17,552. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable risk of collectibility. (5) ALLOWANCE FOR LOAN LOSSES A summary of changes in the allowance for loan losses follows: <TABLE> <CAPTION> Year ending December 31, 1998 1997 1996 <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------ Balance at beginning of year $ 28,180 27,797 15,171 Allowance of acquired banks - - 10,553 Provision charged to operating expense 4,170 4,240 3,844 Less loans charged-off (6,627) (6,951) (3,758) Add back recoveries of loans previously charged-off 3,080 3,094 1,987 - ------------------------------------------------------------------------------------------------ Balance at end of year $ 28,803 28,180 27,797 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ </TABLE> - 60 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (6) PREMISES AND EQUIPMENT Premises and equipment and related accumulated depreciation are as follows: <TABLE> <CAPTION> December 31, 1998 1997 ---------------------------------------------------------------------------------- <S> <C> <C> Land $ 9,480 9,639 Buildings and improvements 56,484 56,443 Furniture and equipment 25,181 24,253 ---------------------------------------------------------------------------------- 91,145 90,335 Less accumulated depreciation 27,763 29,061 ---------------------------------------------------------------------------------- Premises and equipment, net $ 63,382 61,274 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> The Parent Company and a branch office lease premises from an affiliated partnership (see note 13). (7) OTHER REAL ESTATE OWNED Other real estate owned (OREO) consists of the following: <TABLE> <CAPTION> December 31, 1998 1997 ---------------------------------------------------------------------------------- <S> <C> <C> OREO $ 1,590 1,824 Less allowance for OREO losses 477 462 ---------------------------------------------------------------------------------- $ 1,113 1,362 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> A summary of changes in the allowance for OREO losses follows: <TABLE> <CAPTION> Year ending December 31, 1998 1997 1996 ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $ 462 511 554 Provision (reversal) during the year 45 (4) (21) Property writedowns (30) (45) (16) Losses on sales - - (6) ---------------------------------------------------------------------------------------------- Balance at end of year $ 477 462 511 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- </TABLE> (8) CASH SURRENDER VALUE OF LIFE INSURANCE The Company maintains key-executive life insurance policies on certain principal shareholders. Under these policies, the Company receives the cash surrender value if the policy is terminated, or receives all benefits payable upon the death of the insured. The aggregate face amount of the key-executive insurance was $7,000 at December 31, 1998 and 1997. Cash surrender values are recorded net of outstanding policy loans, since the Company has no current plans for repayment. Outstanding policy loans at December 31, 1998 and 1997 are $2,713 and $2,621, respectively. The net cash surrender value of key-executive insurance policies included in other assets is $440 and $400 at December 31, 1998 and 1997, respectively. The Company has also obtained insurance policies covering certain other key officers. The net cash surrender value of these policies is $1,832 and $1,525 at December 31, 1998 and 1997, respectively, and is included in other assets. Upon retirement, the officers have the option of entering into split-dollar contracts with the Company which provide continuing post-employment insurance coverage for a specified death benefit amount. The Company accrues the earned portion of the post-employment benefit through the specified vesting date. - 61 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (9) DEPOSITS Deposits are summarized as follows: <TABLE> <CAPTION> December 31, 1998 1997 ----------------------------------------------------------- <S> <C> <C> Noninterest bearing demand $ 390,998 372,056 Interest bearing: Demand 354,986 314,185 Savings 504,582 431,446 Time, $100 and over 220,109 163,643 Time, other 571,257 523,676 ----------------------------------------------------------- Total interest bearing 1,650,934 1,432,950 ----------------------------------------------------------- $ 2,041,932 1,805,006 ----------------------------------------------------------- ----------------------------------------------------------- </TABLE> Maturities of time deposits at December 31, 1998 are as follows: <TABLE> <CAPTION> Time, $100 and Over Total Time ----------------------------------------------------------- <S> <C> <C> 1999 $ 176,073 563,492 2000 27,671 138,620 2001 12,365 60,416 2002 1,106 13,898 2003 2,894 14,500 Thereafter - 440 ----------------------------------------------------------- $ 220,109 791,366 ----------------------------------------------------------- ----------------------------------------------------------- </TABLE> Interest expense on time deposits of $100 or more was $11,466, $7,778 and $5,514 for the years ended December 31, 1998, 1997 and 1996, respectively. (10) INCOME TAXES Income tax expense (benefit) consists of the following: <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------- <S> <C> <C> <C> Current: Federal $ 13,716 15,006 12,004 State 2,202 2,030 1,875 - ----------------------------------------------------------------------------- 15,918 17,036 13,879 - ----------------------------------------------------------------------------- Deferred: Federal (315) (1,140) (492) State (11) (166) (36) - ----------------------------------------------------------------------------- (326) (1,306) (528) - ----------------------------------------------------------------------------- $ 15,592 15,730 13,351 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- </TABLE> - 62 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Total income tax expense differs from the amount computed by applying the Federal income tax rate of 35 percent in 1998, 1997 and 1996 to income before income taxes as a result of the following: <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 ------------------------------------------------------------------------------------ <S> <C> <C> <C> Tax expense at the statutory tax rate $ 14,430 14,555 12,108 Increase (decrease) in tax resulting from: Tax-exempt income (881) (520) (472) State income tax, net of Federal income tax benefit 1,430 1,211 1,190 Amortization of nondeductible Goodwill 312 311 318 Other, net 301 173 207 ------------------------------------------------------------------------------------ $ 15,592 15,730 13,351 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ </TABLE> The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax asset relate to the following: <TABLE> <CAPTION> December 31, 1998 1997 ------------------------------------------------------------------------------------------------- <S> <C> <C> Deferred tax assets: Loans, principally due to allowance for loan losses $ 9,666 9,296 Other real estate owned, principally due to differences in bases 44 283 Employee benefits 1,700 1,374 Other 530 275 ------------------------------------------------------------------------------------------------- Deferred tax assets 11,940 11,228 ------------------------------------------------------------------------------------------------- Deferred tax liabilities: Fixed assets, principally differences in bases and depreciation (1,269) (928) Investment in joint venture partnership, principally due to differences in depreciation of partnership assets (899) (1,025) Prepaid amounts (278) (273) Investment securities, principally differences in bases (810) (550) Investment securities, unrealized gains (1,348) (574) Goodwill (1,716) (1,896) Other (122) (36) ------------------------------------------------------------------------------------------------- Deferred tax liabilities (6,442) (5,282) ------------------------------------------------------------------------------------------------- Net deferred tax asset $ 5,498 5,946 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- </TABLE> In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income in the periods which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at December 31, 1998 management continues to believe it is more likely than not that the Company will realize the benefits of these deductible differences. - 63 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The Company had current income taxes receivable of $1,233 and $286 at December 31, 1998 and 1997, respectively. (11) LONG-TERM DEBT AND OTHER BORROWED FUNDS A summary of long-term debt follows: <TABLE> <CAPTION> December 31, 1998 1997 ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Parent Company: Revolving term loan due December 31, 2003 at variable interest rates $ - 6,700 7.50% subordinated notes, unsecured, interest payable semi-annually, due in increasing annual principal payments beginning October 1, 2002 in the amount of $3,400 with final maturity on October 1, 2006 20,000 20,000 Various unsecured notes payable to former stockholders at various rates of 5.80% to 8.00% due in annual principal installments aggregating $347 in 1999 and $57 through January 2001 461 710 Subsidiaries: Various notes payable to Federal Home Loan Bank of Seattle, interest due monthly at various rates and maturities (weighted average rate of 6.43% at December 31, 1998) 3,827 4,116 ------------------------------------------------------------------------------------------------------------- $ 24,288 31,526 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- </TABLE> Maturities of long-term debt at December 31, 1998 follow: <TABLE> <CAPTION> <S> <C> 1999 $ 505 2000 192 2001 107 2002 3,451 2003 3,733 Thereafter 16,300 -------------------------------------------------------------------------- $ 24,288 -------------------------------------------------------------------------- </TABLE> The proceeds from issuance of the revolving term note, subordinated notes and preferred stock (see note 15) were utilized to fund acquisitions (see note 20). In connection with its borrowings, the Company has agreed to certain restrictions dealing with, among other things, minimum capital ratios, the sale or issuance of capital stock and the maximum amount of dividends. The Company has a revolving term loan with its primary lender. The available borrowing amount at December 31, 1998 of $8 million is reduced by $2 million on a semi-annual basis. The revolving facility requires an annual commitment fee of 0.15% on the unadvanced amount. The Company may elect at various dates either prime or a Eurodollar rate which varies depending on the Company's capital ratios. The revolving term note is secured by 100% of the outstanding capital stock of the Company's bank subsidiaries. - 64 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The notes payable to Federal Home Loan Bank of Seattle (FHLB) are secured by FHLB stock, unencumbered residential real estate mortgages and certain mortgage-backed securities. The following is a summary of other borrowed funds, all of which mature within one year: <TABLE> <CAPTION> December 31, 1998 1997 ---------------------------------------------------------------------------------------------- <S> <C> <C> Interest bearing demand notes issued to the United States Treasury, secured by investment securities (4.12% and 5.16% weighted average rate at December 31, 1998 and 1997, respectively) $ 9,828 11,591 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- </TABLE> The Company has Federal funds lines of credit with third parties amounting to $145 million, subject to funds availability. These lines are subject to cancellation without notice. The Company has been approved for participation in the Federal Home Loan Bank Cash Management Advance Program for borrowings up to approximately $115 million. The Company also has an unadvanced, irrevocable letter of credit for $16.1 million with the Federal Home Loan Bank of Seattle which expires on April 1, 1999. No amounts were outstanding on these facilities at December 31, 1998. (12) EMPLOYEE BENEFIT PLANS PROFIT SHARING PLAN. The Company has a noncontributory profit sharing plan. To be eligible for the profit sharing plan, an employee must complete one year of employment and 1,000 hours or more of service. Quarterly contributions are determined by the Company's Board of Directors, but are not to exceed, on an individual basis, the lesser of 25% of compensation or $30. Contributions to this plan were $1,032, $1,022 and $839 in 1998, 1997 and 1996, respectively. SAVINGS PLAN. In addition, the Company has a contributory employee savings plan. Eligibility requirements for this plan are the same as those for the profit sharing plan as discussed in the preceding paragraph. Employee participation in the plan is at the option of the employee. The Company contributes $1.25 for each $1.00 of employee contributions up to 4% of the participating employee's compensation. The recorded expense related to this plan was $1,164 in 1998, $1,030 in 1997 and $814 in 1996. STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and Stock Appreciation Rights Plan ("Stock Option Plan") for senior officers of the Company. All options and stock appreciation rights ("SARs") granted have an exercise price of book value of the Company prior to 1993 and appraised value thereafter. Each option granted under the Stock Option Plan can be immediately exercised up to ten years from the date of grant. SARs are granted and exercised in tandem with options. The stock issued in conjunction with the exercise of options is subject to a shareholder agreement (see note 15). The consolidated expense related to this plan was $1,280 in 1998, $514 in 1997 and $72 in 1996. During 1998, the Company determined that future grants of stock options would no longer include stock appreciation rights. Grantees with outstanding SARs were given an election to convert the SARs to stock options with similar terms in a one-for-one exchange. In January 1999, 106,300 SARs were exchanged for stock options resulting in a reduction of accrued expenses and an increase in stockholders' equity of $1,184. Information with respect to the Company's stock options and SARs are as follows: <TABLE> <CAPTION> 1998 1997 1996 ------------------- ------------------- ------------------- Year ended December 31, Options SARs Options SARs Options SARs ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding, beginning of year 123,204 91,452 115,836 78,320 116,752 79,236 Granted 51,700 26,700 19,600 19,600 16,600 16,600 Exercised (5,624) (3,012) (12,232) (6,468) (17,516) (17,516) ----------------------------------------------------------------------------------------------------------- Outstanding, end of year 169,280 115,140 123,204 91,452 115,836 78,320 ----------------------------------------------------------------------------------------------------------- </TABLE> - 65 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Information with respect to the weighted-average stock option exercise prices are as follows: <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 ------------------------------------------------------------------------- <S> <C> <C> <C> Granted during year $ 28.25 $ 20.05 $ 17.86 Exercised during year 6.16 5.83 4.95 Outstanding, end of year 17.69 12.73 9.67 ------------------------------------------------------------------------- ------------------------------------------------------------------------- </TABLE> Stratification and additional detail regarding the exercisable options outstanding at December 31, 1998 are as follows: <TABLE> <CAPTION> Exercise Number Weighted-average Weighted-average price range outstanding remaining life exercise price -------------------------------------------------------------------------- <S> <C> <C> <C> $5.24 - $7.61 34,480 1.94 years $ 6.71 $11.40 - $17.85 63,900 5.74 years 14.40 $20.05 - $32.00 70,900 8.89 years 26.00 -------------------------------------------------------------------------- -------------------------------------------------------------------------- </TABLE> The Company does not recognize compensation expense for the options granted to employees where the exercise price is equal to appraised value at the date of grant. Had compensation expense been determined based on an estimate of fair value of the option at the date of grant, the Company's pro forma net income and earnings per common share would be estimated as follows: <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income as reported $ 25,636 25,855 21,243 Pro forma net income 25,537 25,826 21,213 Net income applicable to common stock as reported 25,636 24,401 20,818 Pro forma net income applicable to common stock 25,537 24,372 20,788 Basic earnings per common share as reported 3.20 3.07 2.65 Pro forma basic earnings per common share 3.18 3.07 2.65 Diluted earnings per common share as reported 3.17 3.05 2.64 Pro forma diluted earnings per common share 3.16 3.05 2.64 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- </TABLE> The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions. Because the Company's common stock and stock options have characteristics significantly different from listed securities and traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The following weighted-average assumptions were used in the valuation model: risk-free interest rates of 5.62%, 6.58% and 5.65% in 1998, 1997 and 1996, respectively; dividend yield of 3.45%, 4.03% and 2.50% in 1998, 1997 and 1996, respectively; and expected life of options of 7 years in 1998, 1997 and 1996. For purposes of the pro forma presentation, the estimated fair value of the options is expensed in the year granted as all options are fully vested upon grant. - 66 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (13) COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity. During 1997, the Company purchased a 50% ownership interest in an aircraft. The investment is accounted for using the equity method. The Company is jointly and severally liable for aircraft indebtedness of $1,625 as of December 31, 1998. The Company's proportionate share of operating expenses in 1998 and 1997 were $297 and $104, respectively. The Parent Company and the Billings office of FIB Montana are the anchor tenants in a building owned by a partnership in which FIB Montana is one of the two partners, and has a 50% partnership interest. The investment in the partnership is accounted for using the equity method. At December 31, 1998 the partnership has indebtedness of $9,944 which has full recourse to the partners. Total rents paid to the partnership were $1,068 in 1998 and $814 in 1997 and 1996. The Company also leases certain premises and equipment from third parties under operating leases. Total rental expense to third parties was $1,351 in 1998, $1,204 in 1997 and $1,019 in 1996. The total future minimum rental commitments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1998 are as follows: <TABLE> <CAPTION> Third parties Partnership Total ------------------------------------------------------------------------ <S> <C> <C> <C> For the year ending December 31: 1999 $ 789 988 1,777 2000 700 988 1,688 2001 667 988 1,655 2002 629 988 1,617 2003 604 980 1,584 Thereafter 3,375 1,748 5,123 ------------------------------------------------------------------------ $ 6,764 6,680 13,444 ------------------------------------------------------------------------ ------------------------------------------------------------------------ </TABLE> (14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Most commitments extend less than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary. - 67 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Generally, all standby letters of credit and commitments to extend credit are subject to annual renewal. At December 31, 1998, stand-by letters of credit in the amount of $27,324 were outstanding. Commitments to extend credit to existing and new borrowers approximated $313,126 at December 31, 1998, which includes $33,131 on unused credit card lines and $36,766 with commitment maturities beyond one year. (15) CAPITAL STOCK On September 26, 1996 ("Issuance Date"), the Company issued 20,000 shares of no par noncumulative perpetual preferred stock ("Preferred Stock") at a price of $1,000 per share. The holders of Preferred Stock were entitled to receive dividends in cash at the rate of $85.30 per share. On November 7, 1997, the Preferred Stock was redeemed at a price of $1,000 per share plus accrued but unpaid dividends of $178. In conjunction with the redemption the Company recorded a $500 prepayment penalty. At December 31, 1998, 92.18% of the common stock held by stockholders are subject to stockholder's agreements (Agreements). Under the Agreements, the Company has a right of first refusal to repurchase shares from the stockholder at minority interest appraised value in the event of a proposed sale of shares to a third party, death, disability or termination of employment. Additionally, shares purchased by officers, directors and employees after 1993 are also subject to repurchase at the Company's discretion. (16) MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST On October 1, 1997, the Company established FIB Capital Trust ("Trust"), a wholly-owned statutory business trust. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities ("Trust Preferred Securities") in the aggregate amount of $40,000 and using the proceeds to purchase junior subordinated debentures ("Subordinated Debentures") issued by the parent company. The sole assets of the Trust are the Subordinated Debentures. The Trust Preferred Securities bear a cumulative fixed interest rate of 8.625% and mature on December 1, 2027. Interest distributions are payable quarterly beginning December 31, 1997. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company guaranteed the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. The obligations of the Company under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the Trust Preferred Securities. - 68 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The Subordinated Debentures are unsecured, bear interest at a rate of 8.625% per annum and mature on December 1, 2027. Interest is payable quarterly beginning December 31, 1997. The Company may defer the payment of interest at any time from time to time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and the Company's ability to pay dividends on its common shares will be restricted. Subject to approval by the Federal Reserve Bank, the Trust Preferred Securities may be redeemed prior to maturity at the Company's option on or after December 1, 2002. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) FIB Capital becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by FIBS on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for FIB Capital to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as "Tier 1 capital" under the Federal Reserve capital adequacy guidelines. The Trust Preferred Securities qualify as Tier 1 capital under regulatory definitions. Issuance costs consisting primarily of underwriting discounts and professional fees of $40 and $2,323 were capitalized in 1998 and 1997, respectively, and are being amortized through maturity to interest expense using the straight-line method. (17) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Following is condensed financial information of First Interstate BancSystem, Inc.: <TABLE> <CAPTION> December 31, 1998 1997 ------------------------------------------------------------------------------------- <S> <C> <C> CONDENSED BALANCE SHEETS: Cash and cash equivalents $ 6,618 3,208 Investment in subsidiaries, at equity: FIB Montana 139,875 136,349 FIB Wyoming 74,571 69,820 Non-bank subsidiary - Commerce Financial, Inc. 518481 Non-bank subsidiary - FIB Capital Trust 1,237 1,237 ------------------------------------------------------------------------------------- Total investment in subsidiaries 216,201 207,887 Goodwill, net of accumulated amortization 2,047 2,339 Other assets 7,444 6,478 ------------------------------------------------------------------------------------- $ 232,310 219,912 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Other liabilities $ 7,082 5,598 Subordinated debentures - FIB Capital Trust 41,237 41,237 Long-term debt 20,460 27,410 ------------------------------------------------------------------------------------- 68,779 74,245 Stockholders' equity 163,531 145,667 ------------------------------------------------------------------------------------- $ 232,310 219,912 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- </TABLE> - 69 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CONDENSED STATEMENTS OF INCOME: Dividends from subsidiary banks $ 24,207 25,857 19,529 Interest on note receivable from non-bank subsidiary - 5 15 Other interest income 140 70 143 Other income, primarily management fees from subsidiaries 2,528 2,340 1,788 ------------------------------------------------------------------------------------------------- Total income 26,875 28,272 21,475 ------------------------------------------------------------------------------------------------- Salaries and benefits 4,239 3,262 2,627 Interest expense 5,709 4,861 1,919 Other operating expenses, net 3,869 3,406 2,612 ------------------------------------------------------------------------------------------------- Total expenses 13,817 11,529 7,158 ------------------------------------------------------------------------------------------------- Data Division income, net of operating expenses 2,905 2,411 1,990 ------------------------------------------------------------------------------------------------- Earnings before income tax benefits 15,963 19,154 16,307 Income tax benefit 2,627 2,401 979 ------------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiaries 18,590 21,555 17,286 ------------------------------------------------------------------------------------------------- Undistributed earnings of subsidiaries 7,046 4,300 3,957 ------------------------------------------------------------------------------------------------- Net income $ 25,636 25,855 21,243 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS: Cash flows from operating activities: Net income $ 25,636 25,855 21,243 Adjustments to reconcile net income to cash provided by operating activities: Undistributed earnings of subsidiaries (7,046) (4,300) (3,957) Depreciation and amortization 389 303 311 Provision for deferred income taxes 45 (532) 11 Other, net 332 1,119 802 ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 19,356 22,445 18,410 ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net decrease in advances to non-bank subsidiary 163 96 133 Purchase of investments (79) (293) - Decrease (increase) in premises and equipment - 6 (2) Capitalization of subsidiary - (1,237) (2,000) Acquisitions of subsidiaries, net - - (80,393) ------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 84 (1,428) (82,262) ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- </TABLE> - 70 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> Year ended December 31, 1998 1997 1996 -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED): Cash flows from financing activities: Borrowings of long-term debt $ 2,371 46,987 66,939 Repayments of long-term debt (9,321) (38,736) (17,410) Debt issuance costs, net (40) (2,323) - Dividends paid on common stock (7,551) (7,737) (6,028) Payments to retire common stock (3,830) (1,322) (1,229) Payments to retire preferred stock - (20,000) - Issuance of common stock 2,341 3,871 3,478 Proceeds from issuance of preferred stock, net of issuance costs - - 19,542 Dividends paid on preferred stock - (1,454) (425) -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (16,030) (20,714) 64,867 -------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 3,410 303 1,015 Cash and cash equivalents, beginning of year 3,208 2,905 1,890 -------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 6,618 3,208 2,905 -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- </TABLE> (18) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular instrument. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding comparable market interest rates, future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. For financial instruments bearing a variable interest rate, it is presumed that recorded book values are reasonable estimates of fair value. The methods and significant assumptions used to estimate fair values for the various financial instruments are set forth below. FINANCIAL ASSETS. Due to the liquid and/or short-term nature of cash, cash equivalents and interest-bearing deposits in bank, carrying value of these instruments approximates market value. Fair values of investment securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Fair value of fixed rate loans is calculated by discounting scheduled cash flows adjusted for prepayment estimates using discount rates based on secondary market sources, if available, or based on estimated market discount rates that reflect the credit and interest rate risk inherent in the loan category. The fair value of adjustable rate loans approximates the carrying value of these instruments due to the frequent repricing, provided there have been no changes in credit quality since origination. - 71 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) FINANCIAL LIABILITIES AND TRUST SECURITIES. The fair value of demand deposits, savings accounts, federal funds purchased and securities sold under repurchase agreements is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using external market rates currently offered for deposits with similar remaining maturities. The carrying value of the interest bearing demand notes to the United States Treasury is deemed an approximation of fair value due to the frequent repayment and repricing at market rates. The revolving term loan bears interest at a floating market rate and, as such, the carrying amount is deemed to reflect fair value. The fair value of the subordinated notes and notes payable to the Federal Home Loan Bank of Seattle were estimated by discounting future cash flows using current rates for advances with similar characteristics. Fair value of the Trust Preferred Securities is based on quoted market price. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. It is not practicable to estimate the fair value of commitments to extend credit because information necessary to support fair value estimations is not readily available and amounts would not be expected to be significant. A summary of the estimated fair values of financial instruments follows: <TABLE> <CAPTION> 1998 1997 --------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated As of December 31, Amount Fair Value Amount Fair Value --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Financial assets: Cash and short-term investments $ 204,019 204,019 229,147 229,147 Securities available-for-sale 379,393 379,393 188,650 188,650 Securities held-to-maturity 299,285 302,723 236,953 238,122 Net loans 1,455,656 1,462,336 1,442,234 1,431,068 --------------------------------------------------------------------------------------------------------------- Total financial assets $ 2,338,353 2,348,471 2,096,984 2,086,987 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Financial liabilities and trust preferred securities: Total deposits, excluding time deposits $ 1,250,566 1,250,566 1,117,687 1,117,687 Time deposits 791,366 793,461 687,319 696,004 Federal funds purchased 1,675 1,675 4,025 4,025 Securities sold under repurchase agreements 173,593 173,593 176,350 176,350 Other borrowed funds 9,828 9,828 11,591 11,591 Long-term debt 24,288 25,973 31,526 31,526 Trust Preferred Securities 40,000 41,600 40,000 43,600 --------------------------------------------------------------------------------------------------------------- Total financial liabilities and trust preferred securities $ 2,291,316 2,296,696 2,068,498 2,080,783 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- </TABLE> - 72 -
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (19) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> For the year ended December 31, 1998 1997 1996 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income $ 25,636 25,855 21,243 Less preferred stock dividends - (1,454) (425) ------------------------------------------------------------------------------------------------- Net income applicable to common stockholders - basic and diluted $ 25,636 24,401 20,818 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- Average outstanding shares - basic 8,020,221 7,946,092 7,847,668 Add: dilutive stock options 67,588 41,829 33,356 ------------------------------------------------------------------------------------------------- Average outstanding shares - diluted 8,087,809 7,987,921 7,881,024 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- Basic earnings per share $ 3.20 3.07 2.65 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- Diluted earnings per share $ 3.17 3.05 2.64 ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- </TABLE> Other stock options are outstanding but not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. (20) ACQUISITIONS AND EXPANSION FIRST INTERSTATE BANK, FSB. On December 12, 1996, the Company established a de novo savings bank in Hamilton, Montana with an initial capitalization of $2,000. The savings bank was combined with and became a branch of FIB Montana on December 22, 1997. FIRST INTERSTATE BANK OF MONTANA, N.A. AND FIRST INTERSTATE BANK OF WYOMING, N.A. On October 1, 1996, the Company acquired all of the outstanding ownership of First Interstate Bank of Montana, N.A. (FIBNA-MT) and First Interstate Bank of Wyoming, N.A. (FIBNA-WY). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1996 includes FIBNA-MT's and FIBNA-WY's results of operations since the date of purchase. During June 1997, FIBNA-MT merged with FIB Montana and FIBNA-WY merged with FIB Wyoming. MOUNTAIN BANK OF WHITEFISH. On December 18, 1996, the Company acquired all of the outstanding ownership of Mountain Bank of Whitefish (FIB-Whitefish). The transaction was accounted for as a purchase and, accordingly, the consolidated statement of income for the year ended December 31, 1996 includes FIB-Whitefish's results of operations since the date of purchase. During June 1997, FIB-Whitefish merged with FIB Montana. MOUNTAIN FINANCIAL. On February 5, 1997, FIB Montana purchased the assets of Mountain Financial, a loan production office in Eureka, Montana. Mountain Financial subsequently became a branch of FIB Montana. - 73 -
(a) 2. Financial statement schedules All other schedules to the consolidated financial statements of the Registrant are omitted since the required information is either not applicable, deemed immaterial, or is shown in the respective financial statements or in notes thereto. (a) 3. Exhibits 3.1(1) Restated Articles of Incorporation dated February 27, 1986 3.2(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.3(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.4(6) Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 3.5(3) Bylaws of First Interstate BancSystem, Inc. 4.1(4) Specimen of common stock certificate of First Interstate BancSystem, Inc. 4.2(1) Stockholder's Agreement for non-Scott family members 4.3(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.4(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.5(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.7(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.8(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.9(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.10(7) Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6) 10.1(2) Loan Agreement dated October 1, 1996, between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A., Colorado National Bank, N.A. and Wells Fargo Bank, N.A. 10.2(2) Note Purchase Agreement dated August 30, 1996, between First Interstate BancSystem, Inc. and the Montana Board of Investments 10.3(1) Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank Montana and addendum thereto 10.4(5) + Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc., as amended December 31, 1994 10.5(3) + Amendment to the Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. adopted September 21, 1995 10.6(3) + First Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated December 20, 1995 10.7(3) + Second Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated July 18, 1996 10.8(3) + Third Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated September 19, 1996 10.9(3) + Fourth Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated January 16, 1997 10.10(6) + Fifth Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated September 18, 1997 10.11(1) + Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.12(1) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members 10.13(5) Amendment to First Interstate BancSystem, Inc. Stockholder's Agreement with Scott family members dated September 7, 1995 10.14(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.15(3) Trademark License Agreement between Wells Fargo & Company and First Interstate BancSystem, Inc. 10.16+(6) Resignation Agreement between First Interstate BancSystem, Inc. and William H. Ruegamer -74-
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of First Interstate BancSystem, Inc. 23.1 Consent of KPMG LLP, Independent Auditors 27.1 Financial Data Schedule as of December 31, 1998 + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-84540. (2) Incorporated by reference to the Registrant's Form 8-K dated October 1, 1996. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-25633. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-3250. (5) Incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-1, No. 33-84540. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-37847. (7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1997, No. 33-64304. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1998. (c) Exhibits See Item 14(a)3 above. (d) Financial Statements Schedules See Item 14(a)2 above. -75-
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Billings, State of Montana. First Interstate BancSystem, Inc. By: /s/ LYLE R. KNIGHT MARCH 4, 1999 --------------------------------- ------------- Lyle R. Knight Date President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated. By: /s/ HOMER A. SCOTT, JR. FEBRUARY 26, 1999 ----------------------------------------------- ----------------- Homer A. Scott, Jr. Date Chairman By: /s/ DAN S. SCOTT MARCH 1, 1999 ----------------------------------------------- ----------------- Dan S. Scott, Director Date By: /s/ JAMES R. SCOTT MARCH 8, 1999 ----------------------------------------------- ----------------- James R. Scott, Vice Chairman of the Board Date By: /s/ RANDALL I. SCOTT FEBRUARY 24, 1999 ----------------------------------------------- ----------------- Randall I. Scott, Director Date By: /s/ JOHN M. HEYNEMAN FEBRUARY 26, 1999 ----------------------------------------------- ----------------- John M. Heyneman, Director Date By: /s/ JOEL LONG FEBRUARY 26, 1999 ----------------------------------------------- ----------------- Joel Long, Director Date By: /s/ JAMES HAUGH MARCH 8, 1999 ----------------------------------------------- ----------------- James Haugh, Director Date By: /s/ THOMAS W. SCOTT MARCH 8, 1999 ----------------------------------------------- ----------------- Thomas W. Scott Date Chief Executive Officer and Director (Principal executive officer) By: /s/ LYLE R. KNIGHT MARCH 4, 1999 ----------------------------------------------- ----------------- Lyle R. Knight Date President, Chief Operating Officer and Director By: /s/ TERRILL R. MOORE FEBRUARY 24, 1999 ----------------------------------------------- ----------------- Terrill R. Moore Date Senior Vice President, Chief Financial Officer and Secretary (Principal financial and accounting officer) SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT The Registrant has not yet provided any annual report to security holders covering the 1998 fiscal year, nor has any proxy statement, form of proxy or other proxy soliciting material been sent to any security holder of the Registrant with respect to the Registrant's 1999 annual meeting of shareholders. If any such annual report or proxy material is sent to security holders subsequent to the filing of this Annual Report on Form 10-K, the Registrant shall furnish copies of such report and material to the Commission when it is sent to security holders. -76-
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1(1) Restated Articles of Incorporation dated February 27, 1986 3.2(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.3(2) Articles of Amendment to Restated Articles of Incorporation dated September 26, 1996 3.4(6) Articles of Amendment to Restated Articles of Incorporation dated October 7, 1997 3.5(3) Bylaws of First Interstate BancSystem, Inc. 4.1(4) Specimen of common stock certificate of First Interstate BancSystem, Inc. 4.2(1) Stockholder's Agreement for non-Scott family members 4.3(7) Junior Subordinated Indenture dated November 7, 1997 entered into between First Interstate and Wilmington Trust Company, as Indenture Trustee 4.4(6) Certificate of Trust of FIB Capital Trust dated as of October 1, 1997 4.5(6) Trust Agreement of FIB Capital dated as of October 1, 1997 4.6(7) Amended and Restated Trust Agreement of FIB Capital Trust 4.7(7) Trust Preferred Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.8(7) Common Securities Certificate of FIB Capital Trust (included as an exhibit to Exhibit 4.6) 4.9(7) Guarantee Agreement between First Interstate BancSystem, Inc. and Wilmington Trust Company 4.10(7) Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6) 10.1(2) Loan Agreement dated October 1, 1996, between First Interstate BancSystem, Inc., as borrower, and First Security Bank, N.A., Colorado National Bank, N.A. and Wells Fargo Bank, N.A. 10.2(2) Note Purchase Agreement dated August 30, 1996, between First Interstate BancSystem, Inc. and the Montana Board of Investments 10.3(1) Lease Agreement Between Billings 401 Joint Venture and First Interstate Bank Montana and addendum thereto 10.4(5) + Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc., as amended December 31, 1994 10.5(3) + Amendment to the Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. adopted September 21, 1995 10.6(3) + First Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated December 20, 1995 10.7(3) + Second Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated July 18, 1996 10.8(3) + Third Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated September 19, 1996 10.9(3) + Fourth Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated January 16, 1997 10.10(6) + Fifth Amendment to Savings and Profit Sharing Plan for Employees of First Interstate BancSystem, Inc. dated September 18, 1997 10.11(1) + Stock Option and Stock Appreciation Rights Plan of First Interstate BancSystem, Inc., as amended 10.12(1) First Interstate BancSystem, Inc. Stockholders' Agreements with Scott family members 10.13(5) Amendment to First Interstate BancSystem, Inc. Stockholder's Agreement with Scott family members dated September 7, 1995 10.14(5) Credit Agreement between Billings 401 Joint Venture and Colorado National Bank dated as of September 26, 1995 10.15(3) Trademark License Agreement between Wells Fargo & Company and First Interstate BancSystem, Inc. 10.16+(6) Resignation Agreement between First Interstate BancSystem, Inc. and William H. Ruegamer 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of First Interstate BancSystem, Inc. 23.1 Consent of KPMG LLP, Independent Auditors 27.1 Financial Data Schedule as of December 31, 1998 + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-84540. (2) Incorporated by reference to the Registrant's Form 8-K dated October 1, 1996. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-25633. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-3250. (5) Incorporated by reference to the Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-1, No. 33-84540. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-1, No. 333-37847. (7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1997, No. 33-64304.