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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 33-64304
FIRST INTERSTATE BANCSYSTEM, INC.
(Exact name of registrant as specified in its charter)
MONTANA 81-0331430
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
401 NORTH 31ST STREET
BILLINGS, MONTANA 59116
(Address of principal executive offices) (Zip Code)
(406) 255-5390
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value (appraised minority value) of the common stock of
the registrant held by non-affiliates of the registrant as of February 28,
1998 was $21,864,742.
The number of shares outstanding of the registrant's common stock as of
February 28, 1998 was 8,023,826.
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PART I
ITEM 1. BUSINESS
THE COMPANY
First Interstate BancSystem, Inc. ("FIBS" and collectively with its
subsidiaries, the "Company") is a bank holding company. FIBS was
incorporated in 1971 and is headquartered in Billings, Montana. In October
1997, FIBS changed its name from "First Interstate BancSystem of Montana,
Inc." to "First Interstate BancSystem, Inc."
FIBS operates two wholly-owned bank subsidiaries (collectively, the
"Banks" and individually a "Bank") with 32 banking offices in 23 Montana and
Wyoming communities and FIB Capital Trust ("FIB Capital"), a wholly-owned
non-bank subsidiary. At December 31, 1997, the Company had assets of $2.2
billion, deposits of $1.8 billion and total stockholders' equity of $146
million, making it the largest independent banking organization headquartered
in Montana or Wyoming.
The Company, through the Banks, delivers a comprehensive range of
consumer and commercial banking services to individual and business
customers. These services include personal and business checking and savings
accounts, time deposits, individual retirement accounts, cash management,
trust services and commercial, consumer, real estate, agricultural and other
loans. Additionally, the Company operates a substantial data processing
division that performs data processing services for the Banks and 34
non-affiliated financial institutions in Montana, Wyoming and Idaho. The data
processing division also supports over 630 ATM locations in 13 states,
principally Montana, Wyoming, Idaho, Colorado and North Dakota.
The Company is the licensee under a trademark license agreement between
Wells Fargo & Company and the Company granting it an exclusive,
nontransferable license to use the "First Interstate" name and logo in the
states of Montana and Wyoming with additional rights in selected other
states.
In October 1997, the Company effected a four-for-one stock split of its
existing common stock. Unless otherwise indicated, information regarding
common stock of the Company contained herein has been retroactively restated
to give effect to the stock split.
COMMUNITY BANKING PHILOSOPHY
The Company's banking offices are located in communities with
populations generally ranging from approximately 5,000 to 70,000 people, but
serve market areas with greater populations because of the limited number of
financial institutions within a reasonable distance from the communities in
which such offices are located. The Company believes that these communities
provide a stable core deposit and funding base, as well as economic
diversification across a number of industries, including agriculture, energy,
mining, timber processing, tourism, government services, education and
medical services.
The banking industry is presently undergoing change with respect to
regulatory matters, consolidation, changing consumer needs and economic and
market conditions. The Company believes that it can best address this
changing environment through its "Strategic Vision." Through the Strategic
Vision, the Company emphasizes providing its customers full service
commercial and consumer banking at a local level using a personalized service
approach, while serving and strengthening the communities in which the Banks
are located through community service activities.
The Company grants significant autonomy and flexibility to the banking
offices in delivering and pricing products at the local level in response to
market considerations and customer needs. This flexibility and autonomy
enables the banking offices to remain competitive and enhances the
relationships between the banking offices and the customers they serve. The
Company also emphasizes accountability, however, by establishing performance
and incentive standards for the Banks which are tied to net income at the
individual branch level. The Company believes that this combination of
autonomy and accountability allows the banking offices to provide a high
level of personalized service to customers while remaining attentive to
financial performance.
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GROWTH STRATEGY
The Company's growth strategy includes growing internally and expanding
into new and complementary markets when appropriate opportunities arise. The
Company believes it has in place an infrastructure that will allow for growth
and yield economies of scale on a going forward basis. The Company has
received regulatory approval to open three new banking offices in Montana and
Wyoming and will continue to expand its presence in the Montana and Wyoming
markets.
INTERNAL GROWTH
The Company's internal growth strategy is to attract and retain
customers by providing personalized "high touch" service, increasing its
offering of products and services and cross-selling existing products and
services. The Company believes its ability to offer a complete package of
consumer and commercial banking products and services enhances the Company's
image as a "one-stop" banking organization. The Company creates awareness of
its products and services through various marketing and promotional efforts,
including involvement in community activities.
EXTERNAL GROWTH
The Company has grown in recent years by selectively acquiring banks in
additional markets in Montana and Wyoming. Since September 1996, the Company
has acquired eight banking offices. The Company considers acquisitions which
will enhance its existing position within a market, expand its presence into
complementary markets, or add capabilities or personnel that will enhance the
Company as a whole. The Company has a selective acquisition strategy in that
it principally considers those institutions with strong financial and
managerial resources already in place.
THE BANKS
First Interstate Bank in Montana ("FIB Montana"), a Montana chartered
bank organized in 1916, has 21 banking offices in 15 Montana communities,
including Billings, Bozeman, Colstrip, Cut Bank, Eureka, Evergreen, Gardiner,
Great Falls, Hamilton, Hardin, Kalispell, Livingston, Miles City, Missoula
and Whitefish. These communities are home to a variety of industries,
including agriculture, mining, energy, timber processing, tourism, government
services, education and medical services, with a significant number of small
to medium sized businesses. As of December 31, 1997, FIB Montana held assets
and deposits totaling $1.5 billion and $1.2 billion, respectively. FIB
Montana is the largest independent bank headquartered in Montana. The Bank's
main office is located in Billings, Montana. During June 1997, the Company
merged together three of its Montana bank subsidiaries, First Interstate Bank
of Commerce, First Interstate Bank of Montana, N.A. and Mountain Bank of
Whitefish, and changed the resultant bank name to "First Interstate Bank" in
Montana. In December 1997, First Interstate Bank, fsb, the Company's savings
bank subsidiary, was merged into FIB Montana and the Company's thrift charter
was terminated.
First Interstate Bank in Wyoming ("FIB Wyoming"), a Wyoming chartered
bank organized in 1893, has 11 banking offices in eight Wyoming communities,
including Buffalo, Casper, Gillette, Greybull, Lander, Laramie, Riverton and
Sheridan. These communities are home to a variety of industries, including
energy, agriculture, mining, tourism, government services, education and
medical services with a significant number of small to medium sized
businesses. As of December 31, 1997, FIB Wyoming held assets and deposits
totaling $750 million and $642 million, respectively. The Bank's main office
is located in Sheridan, Wyoming. During 1997, the Company merged together
its two Wyoming bank subsidiaries, First Interstate Bank of Commerce in
Wyoming and First Interstate Bank of Wyoming, N.A., and changed the resultant
bank name to "First Interstate Bank" in Wyoming.
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ADMINISTRATION OF THE BANKS
Each of the Banks and their respective banking offices operate with a
significant level of autonomy and are responsible for day-to-day operations,
the pricing of loans and deposits, lending decisions and community relations.
FIBS also emphasizes accountability, however, by establishing performance
and incentive standards for the Banks which are tied to net income at the
individual branch level. FIBS provides general oversight and centralized
services for the Banks to enable them to serve their markets more
effectively. These services include data processing, credit administration,
auditing, asset/liability management, investment analysis, human resources
management, marketing and planning coordination. FIBS continues to emphasize
corporate administration of functions which assist the Banks and their
branches in more effectively focusing on their respective markets and
customers. Key among those functions are the following:
DATA PROCESSING
FIBS provides most of its and the Banks' data processing requirements.
These services, including general ledger, investment securities management
and loan and deposit processing, are performed through the use of computer
hardware which the Company owns and maintains and software which it licenses.
The Company's data processing division also operates an extensive ATM network
for the benefit of the Banks' customers.
CREDIT ADMINISTRATION
FIBS has established comprehensive credit policies which guide the
Banks' lending activities. These policies establish system-wide standards and
assist Bank management in the lending process. On the local level, the Banks
are granted significant autonomy and flexibility with respect to credit
pricing issues and lending decisions.
FINANCIAL AND ACCOUNTING
FIBS provides all accounting services for the Banks, including general
ledger administration, internal and external reporting, asset/liability
management and investment portfolio analysis. In addition, the Company has
established policies regarding capital expenditures, asset/liability
management and capital management.
SUPPORT SERVICES
FIBS provides the Banks with legal and compliance services, internal
auditing services, marketing services, planning coordination, human resources
and employee benefits administration, and various other services. The Company
believes the centralization of these services yields economies of scale,
increases the efficiency of the Banks and allows management of the banking
offices to focus on serving their market areas and customers.
LENDING ACTIVITIES
The Banks offer short and long-term commercial, consumer, real estate,
agricultural and other loans to individuals and small to medium sized
businesses in each of their market areas. The lending activities of the Banks
and their branches are guided by the Company's comprehensive lending and
credit guidelines. The Company believes that it is important to keep the
credit decision at the local branch level in order to enhance the speed and
efficiency with which the customer is served. While each loan must meet
minimum underwriting standards established in the Company's lending policy,
lending officers are granted certain levels of autonomy in approving and
pricing loans. The Company-established credit policies are intended to
maximize the quality and mix of loans, while also assuring that the Banks and
their branches are responsive to competitive issues and community needs in
each market area. The credit policies establish specific lending authorities
to Bank officers, reflecting their individual experience and level of
authority, type of loan and collateral, and thresholds at which loan requests
must also be approved at a Bank committee level and/or by FIBS.
FIBS oversees the lending activities of the Banks and is responsible for
monitoring general lending activities. Areas of oversight include the types
of loans, the mix of variable and fixed rate loans, delinquencies,
non-performing assets, classified loans and other credit information to
evaluate the risk within each Bank's loan portfolio and to recommend general
reserve percentages and specific reserve allocations.
-4-
The Company's loan portfolio is diversified across commercial, consumer,
real estate, agricultural and other loans, with a mix of fixed and variable
rate loans. Individual branches are granted autonomy with respect to product
pricing, which is significantly influenced by the markets in which the
particular banking offices are located.
Unlike residential mortgage loans and consumer installment loans, which
generally are made on the basis of the borrower's ability to make repayment
from his or her employment and other income or which are secured by real
property whose value tends to be more easily ascertainable, commercial
business loans involve different risks and are typically made on the basis of
the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of
the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. The Company attempts to limit these
risks by employing underwriting and documentation standards contained in
written loan policies and procedures. These policies and procedures are
reviewed on an ongoing basis by management and adherence to stated policies
are monitored by credit administration.
COMMERCIAL LOANS
The Banks provide a mix of variable and fixed rate commercial loans. The
loans are typically made to small to medium sized manufacturing, wholesale,
retail and service businesses for working capital needs and business
expansions. As of December 31, 1997, 35.8% of the Company's loan portfolio
was composed of commercial loans. Commercial loans generally include lines of
credit and loans with maturities of five years or less. The loans are
generally made with the business operations as the primary source of
repayment, but also include collateralization by inventory, accounts
receivable, equipment, real estate and/or personal guarantees.
CONSUMER LOANS
The Banks' consumer loans include personal automobile loans, home
improvement loans and equity lines of credit. The consumer loans are
generally secured by automobiles, boats and other types of personal property
and are made on an installment basis. The equity lines of credit are
generally floating rate, reviewed annually and secured by residential real
estate. Over two-thirds of the Company's consumer loans are indirect dealer
paper which is created when the Company advances money to dealers of consumer
products who in turn lend such money to consumers purchasing automobiles,
boats and other consumer goods. As of December 31, 1997, 34.4% of the
Company's loan portfolio was composed of consumer and personal loans.
REAL ESTATE LOANS
The Banks provide interim and permanent financing for both single-family
and multi-unit properties and medium term loans for commercial and industrial
buildings. The Banks originate variable and fixed rate real estate mortgages,
generally in accordance with the guidelines of the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Loans originated
in accordance with these guidelines are sold in the secondary market. Real
estate loans are typically secured by first liens on the financed property.
As of December 31, 1997, 18.3% of the Company's loan portfolio was composed
of real estate loans, many of which are fixed rate loans, with maturities
generally less than 15 years.
AGRICULTURAL LOANS
Agricultural loans generally consist of short and medium-term loans and
lines of credit and are made to the large base of farm and ranch operations
in the Company's market areas. The Banks make agricultural loans in many of
the communities they serve, which are generally used for crops, livestock,
buildings and equipment, and general operating purposes. Agricultural loans
are generally secured by assets such as livestock or equipment and are repaid
from the operations of the farm or ranch. As of December 31, 1997, 11.1% of
the Company's loan portfolio was composed of agricultural loans.
Agricultural loans generally have maturities of five years or less, with
operating lines lasting for one production season.
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FUNDING SOURCES
Each of the Banks offers usual and customary depository products
provided by commercial and retail banks, including personal and business
checking accounts, savings accounts and time deposits (including IRAs).
Deposits at the Banks are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to statutory limits. While the Company develops and
offers a wide array of deposit products, local branch management is given
relative autonomy in pricing the depository products offered to customers, in
an attempt to best compete in each Bank's particular market. As of December
31, 1997, approximately 38.0%, 23.9% and 38.1% of the Company's deposits
consisted of demand, savings and time deposits, respectively.
The Company also has a significant number of repurchase agreements
primarily with commercial depositors. Under the repurchase agreements, the
Company sells, but does not transfer on its books or otherwise, investment
securities held by the Company to a customer under an agreement to repurchase
the investment security at a specified time or on demand.
OTHER OPERATIONS
In addition to the services mentioned above, the Company offer safe
deposit boxes, night depository services and wire transfers, among other
things. The Company also operates a substantial data processing division
that performs data processing services for the Banks and 34 non-affiliated
financial institutions in Montana, Wyoming and Idaho. The data processing
division also provides support for over 630 ATM locations in 12 states,
principally in Montana, Wyoming, Idaho, Colorado and North Dakota.
The Company, through the Banks, offers a full range of fee-based trust
services to its individual, non-profit and corporate clients, including
corporate pension plans, individual retirements plans and 401(k) plans.
COMPETITION
The banking and financial services business in both Montana and Wyoming
is highly competitive. The Banks compete for loans, deposits and customers
for financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions and
other nonbank financial service providers. The Company competes in its
markets on the basis of its Strategic Vision philosophy, timely and
responsive customer service and general market presence. Several of the
Company's competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than the Banks. Moreover, the Banking and Branching Act has
increased competition in the Banks' markets, particularly from larger,
multi-state banks. See "Regulation and Supervision." The Company competes
with several large, multi-state banks as well as numerous smaller community
banks. Principal competitors include Norwest Corporation, U.S. Bancorp and
Community First Bankshares, Inc. With respect to core deposits, the Company
believes it ranks second in market share to all other competitors in each of
Montana and Wyoming. See "Risk Factors-Competition."
EMPLOYEES
The Company employed approximately 971 full-time and 226 part-time
employees as of December 31, 1997. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
REGULATION AND SUPERVISION
Bank holding companies and commercial banks are subject to extensive
regulation under both federal and state law. Set forth below is a summary
description of certain laws which relate to the regulation of FIBS and the
Banks. The description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
FIRST INTERSTATE BANCSYSTEM, INC.
As a bank holding company, FIBS is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and to supervision and
regulation by the Federal Reserve.
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The Federal Reserve may require that FIBS terminate an activity or terminate
control of or liquidate or divest certain Banks if the Federal Reserve
believes such activity or control constitutes a significant risk to the
financial safety, soundness or stability of any of the Banks or is in
violation of the BHCA. The Federal Reserve also has the authority to regulate
provisions of certain bank holding company debt, including authority to
impose interest ceilings and reserve requirements on such debt. Under certain
circumstances, FIBS must file written notice and obtain approval from the
Federal Reserve prior to purchasing or redeeming its equity securities.
Further, FIBS is required by the Federal Reserve to maintain certain levels
of capital. See "Capital Standards" herein.
FIBS is required to obtain the prior approval of the Federal Reserve for
the acquisition of 5% or more of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of FIBS and another bank holding company.
FIBS is prohibited by the BHCA, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of 5% or
more of the outstanding voting shares of any company that is not a bank or
bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, FIBS, subject to the prior approval of
the Federal Reserve, may engage in, or acquire shares of companies engaged
in, activities that are deemed by the Federal Reserve to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. In making any such determination, the Federal Reserve may
consider, among other things, whether the performance of such activities by
FIBS or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve is also empowered
to differentiate between activities commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern. On
September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (the "1996 Budget Act") eliminated the requirement that bank
holding companies seek Federal Reserve approval before engaging de novo in
permissible nonbanking activities listed in Regulation Y, which governs bank
holding companies, if the holding company and its lead depository institution
are well-managed and Well-Capitalized (as defined herein) and certain other
criteria specified in the statute are met. For purposes of determining the
capital levels at which a bank holding company is considered
"Well-Capitalized" under the 1996 Budget Act and Regulation Y, the Federal
Reserve adopted, as a rule, risk-based capital ratios (on a consolidated
basis) that are the same as the levels set for determining that a state
member bank is Well Capitalized under the provisions established under the
prompt corrective action provisions of federal law. See "Prompt Corrective
Action and Other Enforcement Mechanisms" herein.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve's policy that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve to
be an unsafe and unsound banking practice or a violation of the Federal
Reserve's regulations or both.
THE BANKS
FIB Montana is subject to the supervision of and regular examination by
the Federal Reserve and the State of Montana. FIB Wyoming is subject to the
supervision of and regular examination by the FDIC and the State of Wyoming.
If any of the foregoing regulatory agencies determine that the financial
condition, capital resources, asset quality, earning prospects, management,
liquidity or other aspects of a Bank's operations are unsatisfactory or that
the Bank or its management is violating or has violated any law or
regulation, various remedies are available to such agencies. These remedies
include the power to enjoin "unsafe or unsound" practices, to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced,
to direct an increase in capital, to restrict the growth of the Bank, to
assess civil monetary penalties, to remove officers and directors and
ultimately to terminate a Bank's deposit insurance, which would result in a
revocation of the Bank's charter. None of the Banks has been the subject of
any such actions by their respective regulatory agencies.
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The FDIC insures the deposits of the Banks in the manner and to the
extent provided by law. For this protection, the Banks pay a semiannual
statutory assessment. See "Premiums for Deposit Insurance" herein.
Various requirements and restrictions under the laws of the states of
Montana and Wyoming and the United States affect the operations of the Banks.
State and federal statutes and regulations relate to many aspects of the
Banks' operations, including levels of capital, reserves against deposits,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of banking offices and capital
requirements.
RESTRICTIONS ON TRANSFERS OF FUNDS TO FIBS AND THE BANKS
FIBS is a legal entity separate and distinct from the Banks. Statutory
and regulatory limitations exist with respect to the amount of dividends
which may be paid to FIBS by the Banks. Under Montana banking law, FIB
Montana may not declare dividends in any one calendar year in excess of its
net earnings of the preceding two years without giving notice to the Montana
Commissioner of Banking and Financial Institutions. As a Federal Reserve
member bank, FIB Montana may not, without the consent of the Federal Reserve,
declare dividends in a calendar year which, when aggregated with prior
dividends in that calendar year, exceed the calendar year net profits of FIB
Montana together with retained earnings for the prior two calendar years.
Under Wyoming banking law, FIB Wyoming may not, without the approval of the
Wyoming Banking Commissioner, declare dividends in any one calendar year in
excess of its net profits in the current year combined with retained net
profits of the preceding two years, less any required transfers to surplus or
a fund for the retirement of any preferred stock. In addition, there are
restrictions under the Company's debt instruments which may limit the amount
of the Banks' dividends in certain circumstances.
The bank regulatory agencies also have authority to prohibit the Banks
from engaging in activities that, in their respective opinions, constitute
unsafe or unsound practices in conducting their business. It is possible,
depending upon the financial condition of the Bank in question and other
factors, that the bank regulatory agencies could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the bank regulatory agencies have established
guidelines with respect to the maintenance of appropriate levels of capital
by banks or bank holding companies under their jurisdiction. Compliance with
the standards set forth in such guidelines and the restrictions that are or
may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the Banks or FIBS may pay. See
"Prompt Corrective Action and Other Enforcement Mechanisms" and "Capital
Standards" herein for a discussion of these additional restrictions on
capital distributions.
A large portion of FIBS's revenues, including funds available for the
payment of interest on the indebtedness of the Company, dividends and
operating expenses are, and will continue to be, dividends paid by the Banks.
The Banks are also subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter
of credit on behalf of, FIBS or any affiliate of FIBS, the purchase of or
investments in stock or other securities thereof, the taking of such
securities as collateral for loans and the purchase of assets of FIBS or the
Banks. Such restrictions prevent FIBS and the Banks from borrowing from the
Banks unless the loans are secured by marketable obligations or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in FIBS are limited to 10% of the respective
Bank's capital stock and surplus (as defined by federal regulations) and such
secured loans and investments are limited, in the aggregate, to 20% of the
respective Bank's capital stock and surplus (as defined by federal
regulations). Additional restrictions on transactions may be imposed on the
Banks by state or federal regulations including under the prompt corrective
action provisions of federal law. See "Prompt Corrective Action and Other
Enforcement Mechanisms" herein.
COMMON LIABILITY
Under federal law, a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred
by, the FDIC in connection with the default of a commonly controlled
FDIC-insured depository institution or any assistance provided by the FDIC to
a commonly controlled FDIC-insured institution in danger of default. These
provisions can have the effect of making one Bank responsible for
FDIC-insured losses at another Bank.
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EFFECT OF GOVERNMENT POLICIES AND LEGISLATION
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by the Banks on their
deposits and borrowings and the interest rate received by the Banks on loans
extended to their customers and on investment securities comprises a major
portion of the Banks' earnings. These rates are highly sensitive to many
factors that are beyond the control of the Banks. Accordingly, the earnings
and potential growth of the Banks are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve. The Federal Reserve implements national monetary policies
(with objectives such as curbing inflation and combating recession) by its
open-market operations in United States government securities, by adjusting
the required level of reserves for financial institutions subject to the
Federal Reserve's reserve requirements and by varying the discount rates
applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial service providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial service providers are frequently made in Congress, in the
Montana and Wyoming legislatures and before various bank regulatory and other
professional agencies. The likelihood of any major legislative changes and
the impact such changes might have on FIBS or the Banks are impossible to
predict.
CAPITAL STANDARDS
The Federal Reserve and the FDIC have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree
of risk associated with a banking organization's operations for transactions
reported on the balance sheet as both assets and transactions, such as
letters of credit and recourse arrangements. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off-balance sheet
items are multiplied by one of several risk adjustment percentages, which
range from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with high credit risk, such as commercial
loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets. The
regulators measure risk-adjusted assets, which include off-balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital (both as defined herein)) and Tier 1
capital. The Company's "Tier 1 capital" consists of: (i) common stockholders'
equity and retained earnings; (ii) noncumulative perpetual preferred stock,
if any; (iii) mandatorily redeemable preferred securities of subsidiary
trust, if any; and (iv) minority interests in certain subsidiaries, less
goodwill. The Company's "Tier 2 capital" consists of: (i) a limited amount
of allowance for loan losses ("ALL"); and (ii) term subordinated debt. The
inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
Federally supervised banks are currently required to report deferred tax
assets in accordance with SFAS No. 109. The federal banking agencies issued
final rules governing banks and bank holding companies, which became
effective April 1, 1995 and which limit the amount of deferred tax assets
that are allowable in computing an institution's regulatory capital. Deferred
tax assets that can be realized for taxes paid in prior carryback years and
from future reversals of existing taxable temporary differences are generally
not limited. Deferred tax assets that can only be realized through future
taxable earnings are limited for regulatory capital purposes to the lesser of
(i) the amount that can be realized within one year of the quarter-end report
date, based on projected taxable income for that year or (ii) 10% of Tier 1
capital. The amount of any deferred tax in excess of this limit would be
excluded from Tier 1 capital and total assets and regulatory capital
calculations.
-9-
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the "leverage ratio." For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets must be at least 5%. See "Prompt Corrective Action and Other
Enforcement Mechanisms." In addition to the uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios. FIBS and the Banks are all rated as Well Capitalized (as defined
below).
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's
circumstances. This policy statement augments the August 1995 regulations
adopted by the federal banking agencies which addressed risk-based capital
standards for interest rate risk.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Banks to grow and could restrict the amount
of profits, if any, available for the payment of dividends. For information
concerning the capital ratios of FIBS, see Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Capital Resources."
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve problems of insured depository institutions,
including, without limitation, those institutions which fall below one or
more prescribed minimum capital ratios. In accordance with federal law, each
federal banking agency has promulgated regulations defining five categories
in which an insured depository institution will be placed, based on the level
of its capital ratios. The five categories are "Well Capitalized,"
"Adequately Capitalized," "Undercapitalized," "Significantly
Undercapitalized" and "Critically Undercapitalized." An insured depository
institution will be classified in the following categories based, in part, on
the capital measures indicated below:
WELL CAPITALIZED ADEQUATELY CAPITALIZED
Total risk-based capital of at least 10%, Total risk-based capital of at least 8%,
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5% Leverage ratio of 4%
UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED
Total risk-based capital less than 8%, Total risk-based capital less than 6%,
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% Leverage ratio less than 3%
CRITICALLY UNDERCAPITALIZED
Tangible equity to total assets less than 2%
An institution classified as Well Capitalized, Adequately Capitalized or
Undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and
opportunity for hearing, determines that an unsafe or unsound condition or an
unsafe or unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat a
Significantly Undercapitalized institution as Critically Undercapitalized
unless its capital ratio actually warrants such treatment.
-10-
Insured depository institutions are prohibited from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
Undercapitalized. If an insured depository institution is Undercapitalized,
it will be closely monitored by the appropriate federal banking agency,
subject to asset growth restrictions and required to obtain prior regulatory
approval for acquisitions, branching and engaging in new lines of business.
Any Undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency within 45 days
after receiving or being deemed to have received notice, that the institution
is Undercapitalized. The appropriate federal banking agency cannot accept a
capital plan unless, among other things, it determines that the plan: (i)
specifies: (a) the steps the institution will take to become Adequately
Capitalized; (b) the levels of capital to be attained during each year in
which the plan will be in effect; (c) how the institution will comply with
the applicable restrictions or requirements then in effect of the Federal
Deposit Insurance Corporation Improvement Act of 1991, as amended ("FDICIA");
and (d) the types and levels of activities in which the institution will
engage; (ii) is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital; and (iii) would not
appreciably increase the risk (including credit risk, interest-rate risk and
other types of risk) to which the institution is exposed. In addition, each
company controlling an Undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been Adequately Capitalized on average during each of four
consecutive calendar quarters and must otherwise provide appropriate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (i) an amount equal to 5% of the depository
institution's total assets at the time the institution became
Undercapitalized or (ii) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose
any of the additional restrictions or sanctions that it may impose on
Significantly Undercapitalized institutions if it determines that such action
will further the purpose of the prompt correction action provisions.
An insured depository institution that is Significantly
Undercapitalized, or is Undercapitalized and fails to submit, or in a
material respect to implement, an acceptable capital restoration plan, is
subject to additional restrictions and sanctions. These include, among other
things: (i) a forced sale of voting shares to raise capital or, if grounds
exist for appointment of a receiver or conservator, a forced merger; (ii)
restrictions on transactions with affiliates; (iii) further limitations on
interest rates paid on deposits; (iv) further restrictions on growth or
required shrinkage; (v) modification or termination of specified activities;
(vi) replacement of directors or senior executive officers; (vii)
prohibitions on the receipt of deposits from correspondent institutions;
(viii) restrictions on capital distributions by the holding companies of such
institutions; (ix) required divestiture of subsidiaries by the institution;
or (x) other restrictions as determined by the appropriate federal banking
agency. Although the appropriate federal banking agency has discretion to
determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to: (i) force a sale of shares or obligations of the
bank, or require the bank to be acquired by or combine with another
institution; (ii) impose restrictions on affiliate transactions and (iii)
impose restrictions on rates paid on deposits, unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the
appropriate federal banking agency, a Significantly Undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average
rate of base compensation during the 12 calendar months preceding the month
in which the institution became Undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are Critically Undercapitalized. For example, a
Critically Undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated
debt beginning 60 days after becoming Critically Undercapitalized. Most
importantly, however, except under limited circumstances, the appropriate
federal banking agency, not later than 90 days after an insured depository
institution becomes Critically Undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of directors of an
insured depository institution would not be liable to the institution's
stockholders or creditors for consenting in good faith to the appointment of
a receiver or conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement
with the agency. See "Potential Enforcement Actions" herein.
-11-
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final
guidelines establishing standards for safety and soundness, as required by
the FDICIA. These standards are designed to identify potential safety and
soundness concerns and ensure that action is taken to address those concerns
before they pose a risk to the deposit insurance funds. The standards relate
to (i) internal controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v)
earnings; and (vi) compensation, fees and benefits. If a federal banking
agency determines that an institution fails to meet any of these standards,
the agency may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard. If the institution fails to
submit an acceptable plan within the time allowed by the agency or fails in
any material respect to implement an accepted plan, the agency must, by
order, require the institution to correct the deficiency. Effective October
1, 1996, the federal banking agencies promulgated safety and soundness
regulations and accompanying interagency compliance guidelines on asset
quality and earnings standards. These new guidelines provide six standards
for establishing and maintaining a system to identify problem assets and
prevent those assets from deteriorating. The institution should: (i) conduct
periodic asset quality reviews to identify problem assets; (ii) estimate the
inherent losses in those assets and establish reserves that are sufficient to
absorb estimated losses; (iii) compare problem asset totals to capital; (iv)
take appropriate corrective action to resolve problem assets; (v) consider
the size and potential risks of material asset concentrations; and (vi)
provide periodic asset reports with adequate information for management and
the board of directors to assess the level of asset risk. These guidelines
also set forth standards for evaluating and monitoring earnings and for
ensuring that earnings are sufficient for the maintenance of adequate capital
and reserves. If an institution fails to comply with a safety and soundness
standard, the appropriate federal banking agency may require the institution
to submit a compliance plan. Failure to submit a compliance plan or to
implement an accepted plan may result in enforcement action.
In December 1993, the federal banking agencies issued an interagency
policy statement on the ALL which, among other things, established certain
benchmark ratios of loan loss reserves to classified assets. The benchmark
set forth by such policy statement is the sum of (a) assets classified loss;
(b) 50% of assets classified doubtful; (c) 15% of assets classified
substandard; and (d) estimated credit losses on other assets over the
upcoming 12 months. This amount is neither a "floor" nor a "safe harbor"
level for an institution's ALL.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law, which establishes an assessment rate schedule
ranging from nothing to 27 cents per $100 of deposits applicable to members
of the Bank Insurance Fund ("BIF"). To determine the risk-based assessment
for each institution, the FDIC will categorize an institution as Well
Capitalized, Adequately Capitalized or Undercapitalized using the same
standards used by the FDIC for its prompt corrective action regulations. For
purposes of assessing FDIC premiums, an Undercapitalized institution will
generally be one that does not meet either a Well Capitalized or an
Adequately Capitalized standard. The FDIC will also assign each institution
to one of three subgroups based upon reviews by the institution's primary
federal or state regulator, statistical analyses of financial statements and
other information relevant to evaluating the risk posed by the institution.
The three supervisory categories are: financially sound with only a few minor
weaknesses ("Group A"), demonstrates weaknesses that could result in
significant deterioration ("Group B") and poses a substantial probability of
loss ("Group C").
The BIF assessment rates are set forth below for institutions based on
their risk-based assessment categorization:
Assessment Rates Effective January 1, 1998*
Group A Group B Group C
---------------------------------------------------
Well Capitalized 0 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
* Assessment figures are expressed in terms of cents per $100 of deposits.
-12-
The 1996 Budget Act required banks to share in part of the interest
payments on the Financing Corporation ("FICO") bonds which were issued to
help fund the federal government costs associated with the savings and loan
crisis of the late 1980s. Effective January 1, 1998, for FICO payments,
BIF-insured institutions, like the Banks, pay 0.64 cents per $100 in domestic
deposits. Full pro rata sharing of FICO interest payments takes effect on
January 1, 2000.
INTERSTATE BANKING AND BRANCHING
Under the Banking and Branching Act, a bank holding company may obtain
approval under the BHCA to acquire an existing bank located in another state
without regard to state law. A bank holding company is not permitted to make
such an acquisition if, upon consummation of the acquisition, it would
control (a) more than 10% of the total amount of deposits of insured
depository institutions in the United States or (b) 30% or more of the
deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank
or bank holding company if application of such limitation does not
discriminate against out-of-state banks or bank holding companies. An
out-of-state bank holding company may not acquire a state bank in existence
for less than a minimum length of time that may be prescribed by state law,
except that a state may not impose more than a five-year age requirement.
The Banking and Branching Act also permits, beginning as of June 1,
1997, mergers of insured banks located in different states and conversion of
the branches of the acquired bank into branches of the resulting bank. Each
state may permit such combinations earlier than June 1, 1997 and may adopt
legislation to prohibit interstate mergers after that date in that state or
in other states by that state's banks. The same concentration limits
discussed in the preceding paragraph also apply to such mergers. The Banking
and Branching Act also permits a national or state bank to establish branches
in a state other than its home state if permitted by the laws of that state,
subject to the same requirements and conditions as for a merger transaction.
On March 20, 1997, the State of Montana enacted legislation which
authorizes de novo branching within the state by banks chartered under the
laws of the State of Montana. In the same legislation, Montana elected to
"opt out" of full interstate branching available under the Banking and
Branching Act, thereby precluding interstate branching in Montana until
October 1, 2001. Nevertheless, after the foregoing prohibition expires,
competition in the Company's market areas could increase significantly.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institution's actual lending, service
and investment performance, rather than on the extent to which the
institution conducts needs assessments, documents community outreach
activities or complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued
a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In connection with its assessment of CRA performance, the appropriate
bank regulatory agency assigns a rating of "outstanding," "satisfactory,"
"needs to improve" or "substantial noncompliance." Based on an examination
conducted during 1997, FIB Montana and FIB Wyoming were both rated
"satisfactory."
-13-
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks and their
institution-affiliated parties, which includes FIBS, may be subject to
potential enforcement actions by the Federal Reserve and the FDIC for unsafe
or unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of
deposits (in the case of the Banks), the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDICIA.
Additionally, a bank holding company's inability to serve as a source of
strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against such bank holding company. Neither FIBS
nor the Banks has been subject to any such enforcement actions.
NON-BANK SUBSIDIARY
During the fourth quarter 1997, the Company formed FIB Capital, a
statutory business trust incorporated under Delaware law, with an initial
capitalization of $1.2 million. FIB Capital was formed for the exclusive
purpose of issuing $40 million of mandatorily redeemable trust preferred
securities ("trust preferred securities") and using the proceeds to purchase
junior subordinated debentures ("subordinated debentures") issued by FIBS.
The Company used proceeds from the issuance of the subordinated debentures to
redeem the noncumulative perpetual preferred stock and to reduce revolving
term debt. See also "Notes to Consolidated Financial Statements -
Mandatorily Redeemable Preferred Securities of Subsidiary Trust" of the
financial statements included in Part IV, Item 14.
RISK FACTORS
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance and profitability of the Company will depend
on its ability to execute its business strategy and manage its possible
future growth. Although the Company believes that it has substantially
integrated the recently acquired banks into the Company's operations, there
can be no assurance that unforeseen issues relating to the assimilation or
prior operations of these banks, including the emergence of any material
undisclosed liabilities, will not materially adversely affect the Company. In
addition, any future acquisitions or other possible future growth may present
operating and other problems that could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's financial performance will also depend on the Company's ability to
maintain profitable operations through implementation of its strategic
vision. Moreover, the Company's future performance is subject to a number of
factors beyond its control, including pending and future federal and state
banking legislation, regulatory changes, unforeseen litigation outcomes,
inflation, lending and deposit rate changes, interest rate fluctuations,
increased competition and economic conditions. Accordingly, there can be no
assurance that the Company will be able to continue the growth or maintain
the level of profitability it has recently experienced.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between
the yield on earning assets, primarily loans and investments, and the cost of
funds, primarily deposits and borrowings. This relationship, known as the
interest rate spread, is subject to fluctuation and is affected by economic
and competitive factors which influence interest rates, the volume and mix of
interest-earning assets and interest-bearing liabilities and the level of
non-performing assets. Fluctuations in interest rates affect the demand of
customers for the Company's products and services. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities
reprice or mature more slowly or more rapidly or on a different basis than
its interest-earning assets. Significant fluctuations in interest rates could
have a material adverse effect on the Company's business, financial condition
and results of operations.
-14-
ECONOMIC CONDITIONS; LIMITED GEOGRAPHIC DIVERSIFICATION
The Company's operations are located in Montana and Wyoming. As a result
of the geographic concentration of its operations, the Company's results
depend largely upon economic conditions in these areas. The Company believes
the primary industries in Montana and Wyoming include agriculture, energy,
mining, timber processing, tourism, government services, education and
medical services. A deterioration in economic conditions in the Company's
market areas could adversely impact the quality of the Company's loan
portfolio and the demand for its products and services, and accordingly,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY
The Company and the banking industry are subject to extensive regulation
and supervision under federal and state laws and regulations. The
restrictions imposed by such laws and regulations limit the manner in which
the Company conducts its banking business, undertakes new investments and
activities and obtains financing. This regulation is designed primarily for
the protection of the deposit insurance funds and consumers and not to
benefit holders of the Company's securities. Financial institution regulation
has been the subject of significant legislation in recent years and may be
the subject of further significant legislation in the future, none of which
is in the control of the Company. Significant new laws or changes in, or
repeals of, existing laws could have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects credit conditions for the Company, and
any unfavorable change in these conditions could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Regulation and Supervision."
COMPETITION
The banking and financial services business in both Montana and Wyoming
is highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product
delivery systems and the accelerating pace of consolidation among financial
services providers. The Banks compete for loans, deposits and customers for
financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions and
other nonbank financial services providers. Several of these competitors are
much larger in total assets and capitalization, have greater access to
capital markets and offer a broader array of financial services than the
Banks. Moreover, the Riegal-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Banking and Branching Act") has increased competition in
the Banks' markets, particularly from larger, multi-state banks. There can be
no assurance that the Company will be able to compete effectively in its
markets. Furthermore, developments increasing the nature or level of
competition could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Competition" and
"Regulation and Supervision."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the management
skills of its existing executive officers and directors, many of whom have
held officer and director positions with the Company for many years. The loss
or unavailability of any of its key executives, including Homer A. Scott,
Jr., Chairman of the Board, Thomas W. Scott, President and Chief Executive
Officer or Terrill R. Moore, Senior Vice President, Chief Financial Officer
and Secretary, could have a material adverse effect on the Company's
business, financial condition and results of operations. See Part III, Item
10, "Directors and Executive Officers of Registrant."
CONTROL BY AFFILIATES
The directors and executive officers of the Company beneficially own
approximately 67.3% of the outstanding common stock of the Company. Many of
these directors and executive officers are members of the Scott family, which
collectively owns approximately 82.3% of the outstanding common stock. By
virtue of such ownership, these affiliates are able to control the election
of directors and the determination of the Company's business, including
transactions involving any merger, share exchange, sale of assets outside the
ordinary course of business and dissolution.
-15-
ASSET QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained by the Banks because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loans.
The Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the ALL, that management
believes are appropriate to mitigate this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Company's credit
portfolio. Such policies and procedures, however, may not prevent unexpected
losses that could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business-Lending
Activities."
LACK OF TRADING MARKET; MARKET PRICES
The common stock of FIBS is not actively traded, and there is no
established trading market for the stock. There is only one class of common
stock, with 92.8% of the shares subject to contractual transfer restrictions set
forth in shareholder agreements and 7.2% held by 13 shareholders without such
restrictions. FIBS has the right of first refusal to purchase the restricted
stock at the minority appraised value per share based upon the most recent
quarterly appraisal available to FIBS less dividends paid. All stock not
subject to such restrictions may be sold at a price per share that is acceptable
to the shareholder. No trades of unrestricted stock within the past three years
are known to FIBS. FIBS has no obligation to purchase unrestricted stock, but
has historically purchased such stock in order to reduce the amount of its stock
not subject to transfer restrictions.
The appraised minority value of the FIBS common stock represents the
estimated fair market valuation of a minority block of such stock, taking into
account adjustments for the lack of marketability of the stock and other
factors. This value does not represent an actual trading price between a
willing buyer and seller of the FIBS common stock in an informed, arm's-length
transaction. As such, the appraised minority value is only an estimate as of a
specific date, and there can be no assurance that such appraisal is an
indication of the actual value holders of the FIBS common stock may realize with
respect to shares held by them. Moreover, the estimated fair market value of
the FIBS common stock may be materially different at any date other than the
valuation dates indicated above.
FIBS has no obligation, by contract, policy or otherwise to purchase stock
from any shareholder desiring to sell, or to create any market for the stock.
Historically, it has been the practice of FIBS to repurchase common stock to
maintain a shareholder base with restrictions on sale or transfer of the stock.
In the last three calendar years (1995-1997) FIBS has redeemed a total of 94,752
shares of common stock, all of which was restricted by the shareholder
agreements. FIBS has redeemed the stock at the price determined in accordance
with the shareholder agreements. FIBS has no present intention to change its
historical practice for redemption of stock, but no assurances can be provided
that FIBS will not change or end its practice of redeeming stock. Furthermore,
FIBS redemptions of stock are subject to corporate law and regulatory
restrictions which could prevent stock redemptions.
There is a limited public market for the trust preferred securities.
Future trading prices of the trust preferred securities depend on many factors
including, among other things, prevailing interest rates, the operating results
and financial condition of the Company and the market for similar securities.
As a result of the existence of FIBS's right to defer interest payments on or,
subject to prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, shorten the
stated maturity of the subordinated debentures, the market price of the trust
preferred securities may be more volatile than the market prices of subordinated
debentures that are not subject to such optional deferrals or reduction in
maturity. There can be no assurance as to the market prices for the trust
preferred securities or the subordinated debentures that may be distributed in
exchange for the trust preferred securities if the Company exercises its right
to dissolve FIB Capital.
-16-
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which the Company operates; demographic changes;
competition; fluctuations in interest rates; changes in business strategy or
development plans; changes in governmental regulation; credit quality; the
availability of capital to fund the expected expansion of the Company's
business; and other factors referenced in this document, including, without
limitation, under the captions "Risk Factors" and Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Given these uncertainties, shareholders, trust security holders and prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
ITEM 2. PROPERTIES
The Company is the anchor tenant in a commercial building in which the
Company's principal executive offices are located in Billings, Montana. The
building is owned by a joint venture partnership in which FIB Montana is one of
the two partners, owning a 50% interest in the partnership. The Company and FIB
Montana lease space for operations in the building. The Company also leases
buildings in which five branches are located. All other branches are located in
Company-owned facilities. The Company believes its leased and owned facilities
are adequate for its present needs and anticipated future growth.
See also "Notes to Consolidated Financial Statements - Premises and
Equipment" and "Notes to Consolidated Financial Statements - Commitments and
Contingencies" included in Part IV, Item 14.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is named or threatened to be
named a as defendant in various lawsuits. In the opinion of management,
following consultation with legal counsel, the pending lawsuits are without
merit or, in the event the plaintiff prevails, the ultimate liability or
disposition thereof will not have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
DESCRIPTION OF FIBS CAPITAL STOCK
The authorized capital stock of FIBS consists of 20,000,000 shares of
common stock without par value, of which 8,030,799 shares were outstanding as of
December 31, 1997, and 100,000 shares of preferred stock without par value, none
of which were outstanding as of December 31, 1997.
COMMON STOCK
Each share of the common stock is entitled to one vote in the election of
directors and in all other matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election if they choose to do so, subject to the rights of the holders of the
preferred stock. Voting for directors is noncumulative.
-17-
Subject to the preferential rights of any preferred stock that may at the
time be outstanding, each share of common stock has an equal and ratable right
to receive dividends when, if and as declared by the Board of Directors out of
assets legally available therefor. In the event of a liquidation, dissolution
or winding up of the Company, the holders of common stock will be entitled to
share equally and ratably in the assets available for distribution after
payments to creditors and to the holders of any preferred stock that may at the
time be outstanding. Holders of common stock have no conversion rights or
pre-emptive or other rights to subscribe for any additional shares of common
stock or for other securities. All outstanding common stock is fully paid and
non-assessable.
The common stock of FIBS is not actively traded, and there is no
established trading market for the stock. There is only one class of common
stock, with 92.8% of the shares subject to contractual transfer restrictions set
forth in shareholder agreements and 7.2% held by 13 shareholders without such
restrictions. FIBS has the right of first refusal to purchase the restricted
stock at the minority appraised value per share based on the most recent
quarterly appraisal available to FIBS less dividends paid. All stock not
subject to such restrictions may be sold at a price per share that is acceptable
to the shareholder.
Quarter-end minority appraisal values for the past two years, determined by
Alex Sheshunoff & Co. Investment Banking are as follows:
Appraised
Valuation As Of(1) Minority Value(2)
------------------ -----------------
December 31, 1995 $18.75
March 31, 1996 19.38
June 30, 1996 19.88
September 30, 1996 20.25
December 31, 1996 21.50
March 31, 1997 21.50
June 30, 1997 23.75
September 30, 1997 25.00
December 31, 1997 29.00
(1) Sales of stock between dates at which updated valuations are received
are adjusted for cash dividends paid.
(2) Prior to dividends.
As of December 31, 1997, options for 123,204 shares of the FIBS common
stock were outstanding at various exercise prices, ranging from $4.56 to $20.05.
The aggregate cash proceeds to be received by FIBS upon exercise of all options
outstanding at December 31, 1997 would be $1,568.9, or a weighted average
exercise price of $12.73 per share.
The book value per share of FIBS common stock as of December 31, 1997 was
$18.14. The appraised minority value as of December 31, 1997 was $29.00. The
appraised minority value of the FIBS common stock represents the estimated fair
market valuation of a minority block of such stock, taking into account
adjustments for the lack of marketability of the stock and other factors. This
value does not represent an actual trading price between a willing buyer and
seller of the FIBS common stock in an informed, arm's-length transaction. As
such, the appraised minority value is only an estimate as of a specific date,
and there can be no assurance that such appraisal is an indication of the actual
value holders of the FIBS common stock may realize with respect to shares held
by them. Moreover, the estimated fair market value of the FIBS common stock may
be materially different at any date other than the valuation dates indicated
above.
Resale of FIBS stock may be restricted pursuant to the Securities Act of
1933 and applicable state securities laws. In addition, most shares of FIBS
stock are subject to one of two shareholders' agreements. Members of the Scott
family, as majority shareholders of FIBS, are subject to a shareholder's
agreement ("Scott Agreement"). The Scott family, under the Scott Agreement, has
agreed to limit the transfer of shares owned by members of the Scott family to
family members or charities, or with FIBS's approval, to the Company's officers,
directors, advisory directors, or to the Savings Plan.
-18-
Shareholders of the Company who are not Scott family members, with the
exception of 13 shareholders who own an aggregate of 580,284 shares of
unrestricted stock, are subject to a shareholder's agreement ("Shareholder's
Agreement"). The Shareholder's Agreement grants FIBS the option to purchase the
stock in any of the following events: 1) the shareholder's intention to sell the
stock, 2) the shareholder's death, 3) transfer of the stock by operation of law,
4) termination of the shareholder's status as a director, officer or employee of
the Company, and 5) total disability of the shareholder. Stock subject to the
Shareholder's Agreement may not be sold or transferred by the shareholder
without triggering FIBS's option to acquire the stock in accordance with the
terms of the Shareholder's Agreement. In addition, the Shareholder's Agreement
allows FIBS to repurchase any of the FIBS stock acquired by the shareholder
after January 1, 1994 if FIBS determines that the number of shares owned by the
shareholder is excessive in view of a number of factors including but not
limited to (a) the relative contribution of the shareholder to the economic
performance of the Company, (b) the effort being put forth by the shareholder,
and (c) the level of responsibility of the shareholder.
Purchases of FIBS common stock made through FIBS's Savings Plan are not
restricted by the Shareholder's Agreement, due to requirements of ERISA and the
Internal Revenue Code. However, since the Savings Plan does not allow
distributions "in kind," any distributions from an employee's account in the
Savings Plan will allow, and may require, the Savings Plan trustee to sell the
FIBS stock. While FIBS has no obligation to repurchase the stock, it is
possible that FIBS will repurchase FIBS stock sold out of the Savings Plan.
Any such repurchases would be upon terms set by the Savings Plan trustee and
accepted by FIBS.
There are 400 record shareholders of FIBS as of December 31, 1997,
including the Company's Savings Plan as trustee for shares held on behalf of 586
individual participants in the plan. 221 individuals in the Savings Plan also
own shares of FIBS stock outside of the Plan. The Plan is administered by the
Trust Department of FIB Montana, which votes the shares based on the
instructions of each participant. In the event the participant does not provide
the Trustee with instructions, the Trustee will vote those shares in accordance
with voting instructions received from a majority of the participants in the
Plan.
DIVIDENDS
It is the policy of FIBS to pay a dividend to all common shareholders
quarterly. Dividends are declared and paid in the month following the calendar
quarter and the amount has historically been determined based upon a percentage
of net income for the calendar quarter immediately preceding the dividend
payment date. Effective with the dividend for the fourth quarter of 1995 paid
in January 1996, the dividend has been 30% of quarterly net income. The Board
of Directors of FIBS has no current intention to change its dividend policy, but
no assurance can be given that the Board may not, in the future, change or
eliminate the payment of dividends.
Historical quarterly dividends for 1996 and 1997 are as follows:
Month
Declared Amount Total Cash
Quarter and Paid Per Share Dividend
---------------- ------------ --------- -----------
1st quarter 1996 April 1996 $ .21 $ 1,572,131
2nd quarter 1996 July 1996 .19 1,505,941
3rd quarter 1996 October 1996 .20 1,564,878
4th quarter 1996 January 1997 .22 1,721,584
1st quarter 1997 April 1997 .25 1,934,003
2nd quarter 1997 July 1997 .25 1,991,274
3rd quarter 1997 October 1997 .26 2,089,967
4th quarter 1997 January 1998 .22 1,765,154
Lower quarterly net income during the fourth quarter 1997 resulted in a
decrease in dividends paid for that period. Fourth quarter charges against net
income consisted primarily of a non-recurring charge related to the
establishment of reserves toward prepayments of indirect dealer loans and
additional severance accruals.
-19-
DIVIDEND RESTRICTIONS
The holders of common stock will be entitled to dividends when, as and if
declared by FIBS's Board of Directors out of funds legally available therefor.
Under the Company's revolving term loan, the Company is prohibited from
declaring or paying any dividends to common stockholders in excess of 33% of net
income for the immediately preceding year. The Company has also agreed that the
Banks will maintain ratios of tangible primary capital to tangible primary
assets not less than the ratios required by regulators or applicable law or
regulation, and that the Banks will at all times maintain capital at adequately
capitalized levels. The loan restrictions limit the funds available for the
payment of dividends from the Banks to FIBS and from FIBS to its stockholders.
Under Montana banking law, FIB Montana may not declare dividends in excess
of its net undivided earnings (as defined) less any required transfers to
surplus and may not declare a dividend larger than the previous two years' net
earnings unless prior notice is given to the Montana Commissioner of Banking and
Financial Institutions. As a Federal Reserve member bank, FIB Montana may not,
without the consent of the Federal Reserve, declare dividends in a calendar year
which, when aggregated with prior dividends in that calendar year, exceed the
calendar year net profits of FIB Montana together with retained earnings for the
prior two calendar years. Under Wyoming banking law, FIB Wyoming may not
declare dividends without meeting surplus fund requirements and may not, without
the approval of the Wyoming Banking Commissioner, declare dividends in any one
calendar year in excess of its net profits (as defined) in the current year
combined with retained net profits of the preceding two years, less any required
transfers to surplus or to a fund for the retirement of any preferred stock.
In addition, federal regulatory agencies (e.g., the FDIC and Federal
Reserve) have authority to prohibit a bank under their supervision from engaging
in practices which, in the opinion of the particular federal regulatory agency,
are unsafe or unsound or constitute violations of applicable law. For example,
depending upon the financial condition of a bank in question and other factors,
the appropriate federal regulatory agency could determine that the payment of
dividends might under some circumstances constitute an unsafe and unsound
practice. Moreover, each federal regulatory agency has established guidelines
for the maintenance of appropriate levels of capital for a bank under its
supervision. Compliance with the standards set forth in such guidelines could
limit the amount of dividends which FIBS or any of the Banks could pay. See
Part I, Item 1, "Regulation and Supervision."
PREFERRED STOCK
The authorized capital stock of FIBS includes 100,000 shares of preferred
stock. FIBS's Board of Directors is authorized, without approval of the holders
of Common Stock, to provide for the issuance of preferred stock from time to
time in one or more series in such number and with such designations,
preferences, powers and other special rights as may be stated in the resolution
or resolutions providing for such preferred stock. FIBS's Board of Directors
may cause FIBS to issue preferred stock with voting, conversion and other rights
that could adversely affect the holders of the common stock or make it more
difficult to effect a change of control of the Company.
In the event of any dissolution, liquidation or winding up of the affairs
of FIBS, before any distribution or payment may be made to the holders of common
stock, the holders of preferred stock would be entitled to be paid in full with
the respective amounts fixed by FIBS's Board of Directors in the resolution or
resolutions authorizing the issuance of such series, together with a sum equal
to the accrued and unpaid dividends thereon to the date fixed for such
distribution or payment. After payment in full of the amount which the holders
of preferred stock are entitled to receive, the remaining assets of FIBS would
be distributed ratably to the holders of the common stock. If the assets
available are not sufficient to pay in full the amount so payable to the holders
of all outstanding preferred stock, the holders of all series of such shares
would share ratably in any distribution of assets in proportion to the full
amounts to which they would otherwise be respectively entitled. The
consolidation or merger of FIBS into or with any other corporation or
corporations would not be deemed a liquidation, dissolution, or winding up of
the affairs of FIBS.
SALES OF UNREGISTERED SECURITIES
During 1997, the Company issued 12,232 unregistered shares of its common
stock to nine employees exercising stock options. Exercise prices ranged from
$4.56 to $20.05 with an average exercise price of $5.83. These sales were made
pursuant to the exemption from registration under Section 4(2) of the Securities
Act of 1933. For additional information regarding stock options, see "Notes to
Consolidated Financial Statements - Employee Benefit Plans" included in Part IV,
Item 14.
-20-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1997, and 1996 and
its results of operations for the fiscal years ended December 31, 1997, 1996,
and 1995, has been derived from the consolidated financial statements of the
Company included in Part IV, Item 14, which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. This data should be read
in conjunction with Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and such consolidated financial
statements, including the notes thereto.
FIVE YEAR SUMMARY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Years ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Interest income $ 165,808 117,925 98,970 80,230 77,154
Interest expense 72,663 50,019 41,946 28,451 27,078
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 93,145 67,906 57,024 51,779 50,076
Provision for loan losses 4,240 3,844 1,629 1,344 1,345
Net interest income after provision for
loan losses 88,905 64,062 55,395 50,4354 48,731
Other operating income 26,846 23,927 18,764 16,3871 15,724
Other operating expenses 74,166 53,395 45,978 41,227 39,686
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 41,585 34,594 28,181 25,595 24,769
Income tax expense 15,730 13,351 10,844 9,861 9,321
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 25,855 21,243 17,337 15,734 15,448
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 24,401 20,818 17,337 15,734 15,448
Basic earnings per common share 3.07 2.65 2.22 2.01 1.96
Diluted earnings per common share(1) 3.05 2.64 2.21 2.00 1.96
Dividends per common share 0.98 0.78 0.48 0.40 0.34
Weighted average common shares
outstanding 7,987,921 7,881,024 7,843,644 7,850,188 7,891,160
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS:
Return on average assets 1.22% 1.41 1.39 1.44 1.50
Return on average common stockholders' equity 18.12% 17.84 16.98 17.64 19.97
Average stockholders' equity to average assets 7.17% 8.08 8.20 8.15 7.52
Net interest margin 5.00% 5.15 5.19 5.34 5.51
Net interest spread 4.32% 4.47 4.45 4.76 4.98
Common stock dividend payout ratio(2) 32.13% 29.17 21.72 20.00 17.35
Ratio of earnings to fixed charges(3):
Excluding interest on deposits 4.94x 8.74x 9.50x 12.34x 30.66x
Including interest on deposits 1.55x 1.68x 1.66x 1.87x 1.91x
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
-21-
FIVE YEAR SUMMARY (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
As of December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $2,234,764 2,063,837 1,351,215 1,134,105 1,097,469
Loans 1,470,414 1,375,479 870,378 751,518 667,385
Allowance for loan losses 28,180 27,797 15,171 13,726 13,373
Investment securities 425,603 403,571 258,737 251,745 249,754
Deposits 1,805,006 1,679,424 1,099,069 939,857 936,793
Long-term debt 31,526 64,667 15,867 5,449 6,853
Mandatorily redeemable preferred securities of
subsidiary trust 40,000 - - - -
Stockholders' equity 145,667 146,061 109,366 95,272 84,163
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:
Nonperforming assets to total loans
and OREO(4) 1.15% 1.20 0.97 0.94 1.44
Allowance for loan losses to total loans 1.92% 2.02 1.74 1.83 2.00
Allowance for loan losses to
nonperforming loans(5) 181.99% 185.10 213.74 259.62 205.49
Net charge-offs to average loans 0.27% 0.17 0.13 0.14 0.15
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS:
Tier 1 risk-based capital 9.67% 7.35 10.40 11.32 10.96
Total risk-based capital 12.19% 9.98 11.65 12.58 12.22
Leverage ratio 6.94% 5.28 7.28 8.12 7.28
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
(1) Diluted earnings per common share represent the amount of earnings
available to each share of common stock outstanding during the period and
to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during
the period pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 128.
(2) Dividends per common share divided by net income per common share.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes and fixed charges. Fixed charges
represent interest expense and preferred stock dividends. Deposits include
interest-bearing deposits and repurchase agreements. Without including
preferred stock dividends in fixed charges and excluding interest on
deposits, the ratio of earnings to fixed charges for the years ended
December 31, 1997 and 1996 were 5.87x and 9.91x, respectively. Without
including preferred stock dividends in fixed charges and including interest
on deposits, the ratio of earnings to fixed charges for the years ended
December 31, 1997 and 1996 were 1.57x and 1.68x, respectively.
(4) For purposes of computing the ratio of non-performing assets to total loans
and other real estate owned ("OREO"), non-performing assets include
non-accrual loans, loans past due 90 days or more and still accruing,
restructured debt and other real estate owned.
(5) For purposes of computing the ratio of allowance for loan losses to
non-performing loans, non-performing loans include non-accrual loans, loans
past due 90 days or more and still accruing and restructured debt.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company.
The following discussion should be read in conjunction with the information
under Part II, Item 6, "Selected Consolidated Financial Data" and the
Company's consolidated financial statements, including the notes thereto, and
other financial data appearing elsewhere in this document. Certain
statements included in the following discussion constitute "forward-looking
statements" which involve various risks and uncertainties. The Company's
actual results may differ significantly from those anticipated in such
forward-looking statements. Factors that might cause such a difference
include, without limitation, the ability of the Company to execute its
business strategy, interest rate risk, economic conditions, government
regulation, competition and asset quality. For additional information
concerning these and other factors, see Part I, Item 1, "Business - Risk
Factors."
The Company, through the Banks, operates 32 banking offices in 23
communities throughout Montana and Wyoming. The Company's income is derived
primarily from the net interest income and other operating income. Net
interest income consists of the excess of interest income, received primarily
on customer loans and investment securities, over interest expense, paid
principally on customer deposits and indebtedness. Other operating income
primarily includes service charges on deposit accounts, data processing fees
and income from fiduciary activities.
The Company has continued to increase earnings during the periods
reported herein while expanding its operations. A majority of the Company's
growth in recent years has resulted from acquisitions of other banks. In
October 1996, the Company acquired First Interstate Bank of Montana, N.A. and
First Interstate Bank of Wyoming, N.A., which collectively included six
branch banks (the "FIBNA Banks"). In December 1996, the Company acquired
Mountain Bank of Whitefish ("FIB Whitefish"), which included two branch
locations. Immediately prior to the acquisitions, the FIBNA Banks had assets
of $553.2 million and deposits of $423.9 million, and FIB Whitefish had
assets of $66.9 million and deposits of $54.4 million. Prior to the
acquisition, the FIBNA Banks were operated as branch locations without
independent administrative support, data processing and other required
services. In connection with the acquisition, the Company increased its
staffing at both the holding company and branch levels to provide the
administrative, data processing and other operational support to facilitate
integration and operation of such banks.
The acquisitions of the FIBNA Banks and FIB Whitefish (collectively, the
"Acquired Banks") were accounted for under the purchase method of accounting.
Amortization of goodwill resulting from the acquisitions totaled
approximately $1.8 million in 1997. The Company believes that the Acquired
Banks have been substantially integrated into the Company's operations.
RESULTS OF OPERATIONS
The Company's increased earnings and expansion of operations have been
effected through a successful combination of acquisitions and internal
growth. The internal growth experienced by the Company is reflected by an
increased volume of customer loans and deposits, without giving effect to
such acquisitions. The Company's internal growth has largely been
accomplished through its effective offering and promotion of competitively
priced products and services. Net income increased 21.7% to $25.9 million in
1997 from $21.2 million in 1996. This increase resulted from internal growth
and earnings provided by the Acquired Banks. Net income increased 22.5% to
$21.2 million in 1996 from $17.3 million in 1995, due principally to internal
growth.
Net income during the fourth quarter 1997 decreased 17.1% from the third
quarter. This decrease resulted from fourth quarter charges including a
non-recurring charge related to the establishment of reserves toward
prepayment of indirect dealer loans and additional severance accruals.
NET INTEREST INCOME
Net interest income is the largest source of the Company's operating
income. As discussed above, net interest income is derived from interest,
dividends and fees received from interest-earning assets, less interest
expense incurred on interest-bearing liabilities. Interest earning assets
primarily include loans and investment securities. Interest-bearing
liabilities primarily include deposits and various forms of indebtedness.
- 23 -
Net interest income increased 37.2% to $93.1 million from $67.9 million
in 1996. This increase resulted primarily from the incremental net interest
income provided by the Acquired Banks. Net interest income increased 19.1%
to $67.9 million in 1996 from $57.0 million in 1995. This increase resulted
primarily from the Acquired Banks and from a higher volume of loans due to
internal growth.
The following table presents, for the periods indicated, condensed
average balance sheet information for the Company, together with interest
income and yields earned on average interest-earning assets, and interest
expense and rates paid on average interest-bearing liabilities. Average
balances are averaged daily balances.
AVERAGE BALANCE SHEETS, YIELDS AND RATES
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
Average Average Average Average Average Average
(DOLLARS IN THOUSANDS) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans(1) $1,441,800 140,299 9.73% $1,014,901 100,039 9.86% $ 837,288 83,735 10.00%
U.S. and agencies securities 345,771 20,481 5.92 244,314 13,951 5.71 199,750 11,278 5.65
Federal funds sold 39,936 2,210 5.53 25,462 1,342 5.27 36,665 2,095 5.71
Other securities 23,302 1,467 6.30 21,868 1,392 6.37 13,904 864 6.21
Tax exempt securities(2) 21,253 1,737 8.17 19,100 1,575 8.25 15,704 1,230 7.83
Interest-bearing deposits
in banks 7,491 448 5.98 6,555 376 5.74 6,276 372 5.93
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,879,553 166,642 8.87 1,332,200 118,675 8.91 1,109,587 99,574 8.97
Noninterest-earning assets 235,941 173,888 134,912
- -------------------------------------------------------------------------------------------------------------------------
Total assets $2,115,494 $1,506,088 $1,244,499
=========================================================================================================================
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits $ 304,511 6,369 2.09% $ 210,153 4,489 2.14% $ 171,933 4,248 2.47%
Savings deposits 417,352 16,021 3.84 301,003 11,305 3.76 264,198 9,917 3.75
Time deposits 626,925 35,739 5.70 464,712 26,328 5.67 380,117 21,733 5.72
Borrowings(3) 184,605 8,846 4.79 126,135 5,869 4.65 97,799 4,866 4.98
Long-term debt 56,197 5,165 9.19 23,760 2,028 8.54 13,147 1,182 8.99
Mandatorily redeemable
preferred securities
of subsidiary trust 5,808 523 9.00 - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and trust preferred securities 1,595,398 72,663 4.55 1,125,763 50,019 4.44 927,194 41,946 4.52
- -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 345,372 242,117 203,258
Other noninterest-bearing
liabilities 22,994 16,487 11,961
Stockholders' equity 151,730 121,721 102,086
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,115,494 $1,506,088 $1,244,499
=========================================================================================================================
Net interest income $93,979 $68,656 $57,628
Interest rate spread 4.32% 4.47% 4.45%
Contribution of interest free funds 0.68 0.68 0.74
Net yield on interest-earning assets(4) 5.00 5.15 5.19
Less FTE adjustments 834 750 604
- -------------------------------------------------------------------------------------------------------------------------
Net interest income per consolidated
statements of income $93,145 $67,906 $57,024
=========================================================================================================================
(1) Average loan balances include nonaccrual loans. Loan fees included in
interest income were $6.1 million, $5.0 million and $4.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
(2) Interest income and average rates for tax exempt securities are presented
on a fully-taxable equivalent basis.
(3) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds. Excludes long-term debt.
(4) Net yield on interest-earning assets during the period equals (i) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities and trust preferred
securities, divided by (ii) average interest-earning assets for the period.
- 24 -
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of loans, investment securities and other interest-earning assets,
compared to the volume of interest-bearing deposits and indebtedness, combined
with the spread, produces the changes in the net interest income between
periods.
The table below sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from estimated changes
in average asset and liability balances (volume) and estimated changes in
average interest rates (rate). Changes which are not due solely to volume or
rate have been allocated to these categories based on the respective percent
changes in average volume and average rate as they compare to each other.
ANALYSIS OF INTEREST CHANGES DUE TO VOLUME AND RATES
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Year ended December 31, 1997 December 31, 1996 December 31, 1995
compared with compared with compared with
December 31, 1996 December 31, 1995 December 31, 1994
favorable (unfavorable) favorable (unfavorable) favorable (unfavorable)
------------------------ ------------------------ ------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans(1) $41,541 (1,281) 40,260 17,761 (1,457) 16,304 12,291 5,509 17,800
U.S. and agencies 6,010 520 6,530 2,518 155 2,673 (993) 418 (575)
Federal funds sold 801 67 868 (640) (113) (753) 369 533 902
Other securities 90 (15) 75 495 33 528 96 (158) (62)
Tax exempt securities(1) 176 (14) 162 65 280 345 115 593 708
Interest-bearing deposits
in banks 56 16 72 17 (13) 4 127 95 222
- -------------------------------------------------------------------------------------------------------------------
Total 48,674 (707) 47,967 20,216 (1,115) 19,101 12,005 6,990 18,995
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES AND TRUST PREFERRED SECURITIES:
Demand deposits 1,974 (94) 1,880 944 (703) 241 184 577 761
Savings deposits 4,466 250 4,716 1,469 (81) 1,388 (23) 1,869 1,846
Time deposits 9,247 164 9,411 4,647 (52) 4,595 3,320 4,725 8,045
Borrowings(2) 2,802 175 2,977 1,318 (315) 1,003 1,267 908 2,175
Long-term debt 2,981 156 3,137 906 (60) 846 625 43 668
Mandatorily redeemable preferred
securities of subsidiary
trust 523 - 523 - - - - - -
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 21,993 651 22,644 9,284 (1,211) 8,073 5,373 8,122 13,495
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $26,681 (1,358) 25,323 10,932 96 11,028 6,632 (1,132) 5,500
===================================================================================================================
(1) Interest income and average rates for tax exempt loans and securities are
presented on a fully-taxable equivalent basis.
(2) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds.
Interest income increased 40.6% to $165.8 million in 1997 from $117.9
million in 1996. This increase was due primarily to the significant increase
in loans, principally due to the Acquired Banks. The yield on average
interest-earning assets during 1997 was 8.87% compared to 8.91% during 1996.
In 1996, interest income increased 19.2% to $117.9 million from $99.0
million in 1995. This increase resulted primarily from the Acquired Banks,
offset by a slight decrease of six basis points in the yield on average
interest-earning assets from 8.97% in 1995 to 8.91% in 1996.
Customer loan fees, included in interest income, increased 22.0% to $6.1
million in 1997 from $5.0 million in 1996 due to loan fees generated by the
Acquired Banks. Loan fees increased 23.5% to $5.0 million in 1996 from $4.1
million in 1995. The most significant increases from 1995 to 1996 were in
commercial, consumer and real estate loan fees.
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Interest expense increased 45.3% to $72.7 million during 1997 from $50.0
million in 1996. This increase was du