FIBK-2014.03.31-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________ 
FORM 10-Q
________________________________________________________________________________________________________ 
ý
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
OR
 
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   
COMMISSION FILE NUMBER 001-34653
________________________________________________________________________________________________________ 
First Interstate BancSystem, Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________ 
Montana
 
81-0331430
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
401 North 31st Street, Billings, MT
 
59116-0918
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 406/255-5390
______________________________________________________________ 
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.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
  
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:
 
March 31, 2014 – Class A common stock
 
20,343,161

 
 
March 31, 2014 – Class B common stock
 
24,046,934

 
 



FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
Index
 
 
Page
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets - March 31, 2014 and December 31, 2013
3

 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2014 and 2013
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2014 and 2013
5

 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2014 and 2013
6

 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2014 and 2013
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30

 
 
 
Item 3.
42

 
 
 
Item 4.
42

 
 
Part II.
 
 
 
 
Item 1.
42

 
 
 
Item 1A .
42

 
 
 
Item  2.
43

 
 
 
Item 3.
43

 
 
 
Item 4.
Mine Safety Disclosures
43

 
 
 
Item 5.
43

 
 
 
Item 6.
43

 
 
45








2

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
March 31,
2014
 
December 31,
2013
Assets
 
 
 
Cash and due from banks
$
143,041

 
$
141,663

Federal funds sold
562

 
672

Interest bearing deposits in banks
466,928

 
392,492

Total cash and cash equivalents
610,531

 
534,827

Investment securities:
 
 
 
Available-for-sale
1,893,652

 
1,947,706

Held-to-maturity (estimated fair values of $205,443 and $205,926 at March 31, 2014 and December 31, 2013, respectively)
201,436

 
203,837

Total investment securities
2,095,088

 
2,151,543

Loans held for investment
4,326,367

 
4,303,992

Mortgage loans held for sale
38,471

 
40,861

Total loans
4,364,838

 
4,344,853

Less allowance for loan losses
81,371

 
85,339

Net loans
4,283,467

 
4,259,514

Premises and equipment, net of accumulated depreciation
179,942

 
179,690

Goodwill
183,673

 
183,673

Company-owned life insurance
138,027

 
122,175

Other real estate owned (“OREO”)
16,594

 
15,504

Accrued interest receivable
27,135

 
26,450

Mortgage servicing rights, net of accumulated amortization and impairment reserve
13,474

 
13,546

Deferred tax asset, net
3,895

 
12,154

Core deposit intangibles, net of accumulated amortization
4,165

 
4,519

Other assets
61,834

 
61,056

Total assets
$
7,617,825

 
$
7,564,651

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,458,460

 
$
1,491,683

Interest bearing
4,676,677

 
4,642,067

Total deposits
6,135,137

 
6,133,750

Securities sold under repurchase agreements
488,898

 
457,437

Accounts payable and accrued expenses
43,808

 
47,523

Accrued interest payable
4,953

 
4,963

Long-term debt
36,905

 
36,917

Other borrowed funds
9

 
3

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
6,792,187

 
6,763,070

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of March 31, 2014 or December 31, 2013
—

 
—

Common stock
286,553

 
285,535

Retained earnings
546,444

 
532,087

Accumulated other comprehensive loss, net
(7,359
)
 
(16,041
)
Total stockholders’ equity
825,638

 
801,581

Total liabilities and stockholders’ equity
$
7,617,825

 
$
7,564,651

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Interest income:
 
 
 
Interest and fees on loans
$
53,718

 
$
55,493

Interest and dividends on investment securities:
 
 
 
Taxable
7,640

 
8,046

Exempt from federal taxes
1,097

 
1,226

Interest on deposits in banks
231

 
298

Interest on federal funds sold
1

 
4

Total interest income
62,687

 
65,067

Interest expense:
 
 
 
Interest on deposits
3,424

 
4,355

Interest on securities sold under repurchase agreements
66

 
100

Interest on long-term debt
473

 
480

Interest on preferred stock pending redemption
—

 
159

Interest on subordinated debentures held by subsidiary trusts
588

 
696

Total interest expense
4,551

 
5,790

Net interest income
58,136

 
59,277

Provision for loan losses
(5,000
)
 
500

Net interest income after provision for loan losses
63,136

 
58,777

Non-interest income:
 
 
 
Other service charges, commissions and fees
9,156

 
8,256

Income from the origination and sale of loans
4,660

 
10,675

Wealth management revenues
4,455

 
4,134

Service charges on deposit accounts
3,875

 
4,068

Investment securities gains, net
71

 
8

Other income
1,889

 
1,678

Total non-interest income
24,106

 
28,819

Non-interest expense:
 
 
 
Salaries and wages
22,411

 
23,405

Employee benefits
8,313

 
8,175

Occupancy, net
4,239

 
4,026

Furniture and equipment
3,201

 
3,052

Outsourced technology services
2,300

 
2,157

OREO expense, net of income
(19
)
 
1,896

FDIC insurance premiums
1,116

 
1,377

Professional fees
1,370

 
1,127

Mortgage servicing rights amortization
600

 
839

Mortgage servicing rights impairment (recovery)
(45
)
 
(48
)
Core deposit intangibles amortization
354

 
354

Other expenses
10,498

 
10,325

Total non-interest expense
54,338

 
56,685

Income before income tax expense
32,904

 
30,911

Income tax expense
11,511

 
10,867

Net income
$
21,393

 
$
20,044

 
 
 
 
Basic earnings per common share
$
0.49

 
$
0.46

Diluted earnings per common share
$
0.48

 
$
0.46

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2014
2013
Net income
$
21,393

$
20,044

Other comprehensive income (loss), before tax:
 
 
Investment securities available-for sale:
 
 
Change in net unrealized gains/losses during period
14,351

(5,717
)
Reclassification adjustment for net gains included in income
(71
)
(8
)
Defined benefit post-retirement benefits plans:
 
 
Change in net actuarial loss
35

35

Other comprehensive income (loss), before tax
14,315

(5,690
)
Deferred tax benefit (expense) related to other comprehensive income/loss
(5,633
)
2,239

Other comprehensive income (loss), net of tax
8,682

(3,451
)
Comprehensive income, net of tax
$
30,075

$
16,593

See accompanying notes to unaudited consolidated financial statements.


5

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
(Unaudited)
 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at December 31, 2013
$
285,535

 
$
532,087

 
$
(16,041
)
 
$
801,581

Net income
—

 
21,393

 
—

 
21,393

Other comprehensive income, net of tax expense
—

 
—

 
8,682

 
8,682

Common stock transactions:
 
 
 
 
 
 
 
124,867 common shares purchased and retired
(3,159
)
 
—

 
—

 
(3,159
)
147,876 non-vested common shares issued
—

 
—

 
—

 
—

3,782 non-vested common shares forfeited
—

 
—

 
—

 
—

215,805 stock options exercised, net of 152,131 shares tendered in payment of option price and income tax withholding amounts
2,476

 
—

 
—

 
2,476

Tax benefit of stock-based compensation
989

 
—

 
—

 
989

Stock-based compensation expense
712

 
—

 
—

 
712

Common cash dividend declared ($0.16 per share)
—

 
(7,036
)
 
—

 
(7,036
)
Balance at March 31, 2014
$
286,553

 
$
546,444

 
$
(7,359
)
 
$
825,638

 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
271,335

 
$
463,860

 
$
15,991

 
$
751,186

Net income
—

 
20,044

 
—

 
20,044

Other comprehensive loss, net of tax benefit
—

 
—

 
(3,451
)
 
(3,451
)
Common stock transactions:
 
 
 
 
 
 
 
25,667 common shares purchased and retired
(448
)
 
—

 
—

 
(448
)
108,873 non-vested common shares issued
—

 
—

 
—

 
—

1,815 non-vested common shares forfeited
—

 
—

 
—

 
—

243,238 stock options exercised, net of 87,933 shares tendered in payment of option price and income tax withholding amounts
3,145

 
—

 
—

 
3,145

Tax benefit of stock-based compensation
202

 
—

 
—

 
202

Stock-based compensation expense
695

 
—

 
—

 
695

Balance at March 31, 2013
$
274,929

 
$
483,904

 
$
12,540

 
$
771,373

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
21,393

 
$
20,044

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
(5,000
)
 
500

Net gain on disposal of property and equipment
(13
)
 
(20
)
Depreciation and amortization
3,896

 
4,203

Net premium amortization on investment securities
3,371

 
4,082

Net gain on investment securities transactions
(71
)
 
(8
)
Net gain on sale of mortgage loans held for sale
(3,323
)
 
(7,898
)
Net gain on sale of OREO
(435
)
 
(820
)
Write-downs of OREO and other assets pending disposal
—

 
2,305

Net reversal of impairment of mortgage servicing rights
(45
)
 
(48
)
Deferred income tax expense
2,630

 
1,853

Net increase in cash surrender value of company-owned life insurance
(852
)
 
(429
)
Stock-based compensation expense
712

 
695

Tax benefits from stock-based compensation expense
989

 
202

Excess tax benefits from stock-based compensation expense
(982
)
 
(165
)
Originations of loans held for sale
(151,911
)
 
(371,684
)
Proceeds from sales of loans held for sale
157,141

 
389,437

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(685
)
 
(506
)
Increase in other assets
(1,083
)
 
(64
)
Decrease in accrued interest payable
(10
)
 
(69
)
Decrease in accounts payable and accrued expenses
(3,694
)
 
(1,861
)
Net cash provided by operating activities
22,028

 
39,749

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
—

 
(6,347
)
Available-for-sale
(95,077
)
 
(227,040
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
2,185

 
3,512

Available-for-sale
160,337

 
201,621

Purchases of company-owned life insurance
(15,000
)
 
—

Proceeds from sales of mortgage servicing rights
266

 
311

Extensions of credit to customers, net of repayments
(28,580
)
 
(22,997
)
Recoveries of loans charged-off
3,822

 
2,913

Proceeds from sales of OREO
2,760

 
3,957

Capital expenditures, net of sales
(3,142
)
 
(650
)
Net cash provided by (used in) investing activities
$
27,571

 
$
(44,720
)

7

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
1,387

 
$
(212,066
)
Net increase (decrease) in repurchase agreements
31,461

 
(38,580
)
Net increase (decrease) in other borrowed funds
6

 
(24
)
Repayments of long-term debt
(12
)
 
(10
)
Redemption of preferred stock
—

 
(50,000
)
Proceeds from issuance of common stock
2,476

 
3,145

Excess tax benefits from stock-based compensation expense
982

 
165

Purchase and retirement of common stock
(3,159
)
 
(448
)
Dividends paid to common stockholders
(7,036
)
 
—

Net cash provided by (used in) financing activities
26,105

 
(297,818
)
Net increase (decrease) in cash and cash equivalents
75,704

 
(302,789
)
Cash and cash equivalents at beginning of period
534,827

 
801,332

Cash and cash equivalents at end of period
$
610,531

 
$
498,543

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
—

 
$
3,376

Cash paid during the period for interest expense
4,561

 
5,859

See accompanying notes to unaudited consolidated financial statements.


8

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


(1)
Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at March 31, 2014 and December 31, 2013, and the results of operations and cash flows for each of the three month periods ended March 31, 2014 and 2013 in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2013 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the March 31, 2014 presentation. These reclassifications did not change previously reported net income or stockholders’ equity.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

(2)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
March 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
712,895

$
1,563

$
(7,866
)
$
706,592

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,190,134

13,316

(16,779
)
1,186,671

Private mortgage-backed securities
384

7

(2
)
389

Total
$
1,903,413

$
14,886

$
(24,647
)
$
1,893,652

March 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
183,472

$
5,101

$
(1,209
)
$
187,364

Corporate securities
17,964

115

—

18,079

Total
$
201,436

$
5,216

$
(1,209
)
$
205,443

December 31, 2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
774,055

$
1,432

$
(12,249
)
$
763,238

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,197,295

11,905

(25,147
)
1,184,053

Private mortgage-backed securities
407

9

(1
)
415

Total
$
1,971,757

$
13,346

$
(37,397
)
$
1,947,706


9

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


December 31, 2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
185,818

$
4,043

$
(2,049
)
$
187,812

Corporate securities
18,019

103

(8
)
18,114

Total
$
203,837

$
4,146

$
(2,057
)
$
205,926


Gross realized gains and losses from the disposition of investment securities are summarized in the following table:
    
 
Three Months Ended March 31,
 
2014
 
2013
Gross realized gains
$
225

 
$
8

Gross realized losses
154

 
—

 
The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of March 31, 2014 and December 31, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
289,936

$
(4,862
)
 
$
143,933

$
(3,004
)
 
$
433,869

$
(7,866
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
427,631

(6,268
)
 
304,999

(10,511
)
 
732,630

(16,779
)
Private mortgage-backed securities
—

—

 
100

(2
)
 
100

(2
)
Total
$
717,567

$
(11,130
)
 
$
449,032

$
(13,517
)
 
$
1,166,599

$
(24,647
)
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
21,088

$
(473
)
 
$
21,777

$
(736
)
 
$
42,865

$
(1,209
)
Total
$
21,088

$
(473
)
 
$
21,777

$
(736
)
 
$
42,865

$
(1,209
)

 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2013
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
458,385

$
(10,355
)
 
$
59,362

$
(1,894
)
 
$
517,747

$
(12,249
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
634,199

(17,273
)
 
166,930

(7,874
)
 
801,129

(25,147
)
Private mortgage-backed securities
—

—

 
104

(1
)
 
104

(1
)
Total
$
1,092,584

$
(27,628
)
 
$
226,396

$
(9,769
)
 
$
1,318,980

$
(37,397
)

10

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2013
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
37,550

$
(1,319
)
 
$
14,296

$
(730
)
 
$
51,846

$
(2,049
)
Corporate securities
7,294

(8
)
 
—

—

 
7,294

(8
)
Total
$
44,844

$
(1,327
)
 
$
14,296

$
(730
)
 
$
59,140

$
(2,057
)
    
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 198 and 229 individual investment securities that were in an unrealized loss position as of March 31, 2014 and December 31, 2013, respectively. Unrealized losses as of March 31, 2014 and December 31, 2013 related primarily to fluctuations in the current interest rates. The Company does not have the intent to sell any of the available-for-sale securities in the above table and it is not likely that the Company will have to sell any such securities before a recovery in cost. No impairment losses were recorded during the three months ended March 31, 2014 and 2013.

Maturities of investment securities at March 31, 2014 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment securities maturities are shown at contractual maturity dates.
 
Available-for-Sale
 
Held-to-Maturity
March 31, 2014
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
249,676

$
249,281

 
$
6,992

$
7,067

After one year but within five years
1,200,266

1,195,368

 
59,141

59,905

After five years but within ten years
393,945

389,650

 
84,471

86,512

After ten years
59,526

59,353

 
50,832

51,959

Total
$
1,903,413

$
1,893,652

 
$
201,436

$
205,443


As of March 31, 2014, the Company had investment securities callable within one year with amortized costs and estimated fair values of $200,270 and $198,596, respectively, including callable structured notes with amortized costs and estimated fair values of $54,985 and $54,994, respectively. These investment securities are primarily classified as available-for-sale and included in the after one year but within five years category in the table above.


11

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


(3)
Loans

The following table presents loans by class as of the dates indicated:
 
March 31,
2014
 
December 31,
2013
Real estate loans:
 
 
 
Commercial
$
1,452,967

 
$
1,449,174

Construction:
 
 
 
Land acquisition & development
197,582

 
205,911

Residential
81,411

 
76,488

Commercial
75,356

 
69,236

Total construction loans
354,349

 
351,635

Residential
868,836

 
867,912

Agricultural
160,570

 
173,534

Total real estate loans
2,836,722

 
2,842,255

Consumer:
 
 
 
Indirect consumer
481,482

 
476,012

Other consumer
130,614

 
133,039

Credit card
58,310

 
62,536

Total consumer loans
670,406

 
671,587

Commercial
707,237

 
676,544

Agricultural
108,376

 
111,872

Other, including overdrafts
3,626

 
1,734

Loans held for investment
4,326,367

 
4,303,992

Mortgage loans held for sale
38,471

 
40,861

Total loans
$
4,364,838

 
$
4,344,853

    

12

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)



Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following tables present the contractual aging of the Company’s recorded investment in past due loans by class as of the dates indicated:
 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of March 31, 2014
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
12,692

$
142

$
231

$
13,065

$
1,395,474

$
44,428

$
1,452,967

Construction:
 
 
 
 
 
 

 

Land acquisition & development
249

—

38

287

184,664

12,631

197,582

Residential
403

—

—

403

79,932

1,076

81,411

Commercial
8,389

—

—

8,389

66,747

220

75,356

Total construction loans
9,041

—

38

9,079

331,343

13,927

354,349

Residential
2,722

449

628

3,799

858,698

6,339

868,836

Agricultural
2,221

4,903

—

7,124

144,692

8,754

160,570

Total real estate loans
26,676

5,494

897

33,067

2,730,207

73,448

2,836,722

Consumer:
 
 
 
 
 
 
 

Indirect consumer
2,193

302

10

2,505

478,631

346

481,482

Other consumer
758

73

25

856

129,182

576

130,614

Credit card
183

244

363

790

57,502

18

58,310

Total consumer loans
3,134

619

398

4,151

665,315

940

670,406

Commercial
3,544

679

303

4,526

689,319

13,392

707,237

Agricultural
770

118

103

991

107,051

334

108,376

Other, including overdrafts
—

—

—

—

3,626

—

3,626

Loans held for investment
34,124

6,910

1,701

42,735

4,195,518

88,114

4,326,367

Mortgage loans originated for sale
—

—

—

—

38,471

—

38,471

Total loans
$
34,124

$
6,910

$
1,701

$
42,735

$
4,233,989

$
88,114

$
4,364,838




13

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of December 31, 2013
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
5,924

$
2,472

$
22

$
8,418

$
1,391,823

$
48,933

$
1,449,174

Construction:
 
 
 
 
 
 

 

Land acquisition & development
1,062

468

38

1,568

188,074

16,269

205,911

Residential
933

250

—

1,183

73,933

1,372

76,488

Commercial
584

—

—

584

68,427

225

69,236

Total construction loans
2,579

718

38

3,335

330,434

17,866

351,635

Residential
3,630

206

1,162

4,998

856,800

6,114

867,912

Agricultural
328

646

—

974

163,986

8,574

173,534

Total real estate loans
12,461

4,042

1,222

17,725

2,743,043

81,487

2,842,255

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,303

430

9

3,742

471,906

364

476,012

Other consumer
925

130

1

1,056

131,508

475

133,039

Credit card
364

187

515

1,066

61,451

19

62,536

Total consumer loans
4,592

747

525

5,864

664,865

858

671,587

Commercial
2,791

1,186

563

4,540

660,035

11,969

676,544

Agricultural
453

672

—

1,125

110,622

125

111,872

Other, including overdrafts
—

—

—

—

1,734

—

1,734

Loans held for investment
20,297

6,647

2,310

29,254

4,180,299

94,439

4,303,992

Mortgage loans originated for sale
—

—

—

—

40,861

—

40,861

Total loans
$
20,297

$
6,647

$
2,310

$
29,254

$
4,221,160

$
94,439

$
4,344,853


If interest on non-accrual loans had been accrued, such income would have been approximately $1,121 and $1,352 for the three months ended March 31, 2014 and 2013.
        

14

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


The Company considers impaired loans to include all loans risk rated doubtful, loans placed on non-accrual status and loans renegotiated in troubled debt restructurings with the exception of consumer loans. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:
As of March 31, 2014
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
58,383

$
29,901

$
26,701

$
56,602

$
4,617

Construction:
 
 
 
 
 
Land acquisition & development
17,776

8,679

4,642

13,321

597

Residential
1,519

1,076

—

1,076

—

Commercial
390

274

83

357

83

Total construction loans
19,685

10,029

4,725

14,754

680

Residential
9,894

5,536

901

6,437

380

Agricultural
9,075

6,663

2,316

8,979

275

Total real estate loans
97,037

52,129

34,643

86,772

5,952

Commercial
16,178

11,579

2,885

14,464

1,458

Agricultural
745

609

84

693

84

Total
$
113,960

$
64,317

$
37,612

$
101,929

$
7,494

As of December 31, 2013
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
64,780

$
29,216

$
33,937

$
63,153

$
5,210

Construction:
 
 
 
 
 
Land acquisition & development
23,906

9,901

7,226

17,127

1,434

Residential
1,816

1,095

277

1,372

26

Commercial
397

279

84

363

85

Total construction loans
26,119

11,275

7,587

18,862

1,545

Residential
9,448

5,081

967

6,048

249

Agricultural
8,895

6,429

2,370

8,799

335

Total real estate loans
109,242

52,001

44,861

96,862

7,339

Commercial
15,448

10,684

2,901

13,585

1,504

Agricultural
177

39

86

125

86

Total
$
124,867

$
62,724

$
47,848

$
110,572

$
8,929





15

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


The following tables present the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended March 31,
 
2014
 
2013
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
62,312

 
$
216

 
$
73,936

 
$
338

Construction:
 
 
 
 
 
 
 
Land acquisition & development
15,553

 
11

 
22,641

 
441

Residential
1,320

 
—

 
2,259

 
—

Commercial
360

 
2

 
7,898

 
—

Total construction loans
17,233

 
13

 
32,798

 
441

Residential
6,128

 
2

 
10,519

 
4

Agricultural
9,233

 
4

 
4,948

 
4

Total real estate loans
94,906

 
235

 
122,201

 
787

Commercial
14,268

 
14

 
12,746

 
18

Agricultural
288

 
6

 
632

 
4

Total
$
109,462

 
$
255

 
$
135,579

 
$
809

 
 
 
 
 
 
 
 
The amount of interest income recognized by the Company within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring that remained on accrual status. Interest payments received on non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. If interest on impaired loans had been accrued, interest income on impaired loans would have been approximately $1,111 and $1,335 for the three months ended March 31, 2014 and 2013, respectively.
            
Collateralized impaired loans are generally recorded at the fair value of the underlying collateral using discounted cash flows, independent appraisals and management estimates based upon current market conditions. For loans measured under the present value of cash flows method, the change in present value attributable to the passage of time, if applicable, is recognized in the provision for loan losses and thus no interest income is recognized.
    
Modifications of performing loans are made in the ordinary course of business and are completed on a case-by-case basis as negotiated with the borrower. Loan modifications typically include interest rate concessions, interest only periods of less than twelve months, short-term payment deferrals and extension of amortization periods to provide payment relief. A loan modification is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and the Company, for economic or legal reasons, grants a concession to the borrower that it would not otherwise consider. Certain troubled debt restructurings are on non-accrual status at the time of restructuring and are typically returned to accrual status after considering the borrower's sustained repayment performance in accordance with the restructuring agreement for a period of at least six months and management is reasonably assured of future performance. If the troubled debt restructuring meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status and the accrual of interest will resume.
    
The Company had loans renegotiated in troubled debt restructurings of $58,320 as of March 31, 2014, of which $38,633 were included in non-accrual loans and $19,687 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $59,792 as of December 31, 2013, of which $38,011 were included in non-accrual loans and $21,781 were on accrual status.


16

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


The following tables present information on the Company's troubled debt restructurings that occurred during the three months ended March 31, 2014:    
 
 
Number of Notes
 
Type of Concession
Principal Balance at Restructure Date
Three Months Ended March 31, 2014
 
 
Interest only period
Extension of terms or maturity
Interest rate adjustment
Other (1)
Real estate:
 
 
 
 
 
 
 
 
Commercial
 
4
 
$
2,473

$
—

$
—

$
243

$
2,716

Total real estate loans
 
4
 
2,473

—

—

243

2,716

Commercial
 
2
 
226

—

—

30

256

Total loans restructured during period
 
6
 
$
2,699

$
—

$
—

$
273

$
2,972

(1) Other includes concessions that reduce or defer payments for a specified period of time and/or do not fit into other designated categories.
 
 
 
 
 
 
 
 
 
For troubled debt restructurings that were on non-accrual status or otherwise deemed impaired before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company continues to evaluate all troubled debt restructurings for possible impairment and recognizes impairment through the allowance. Additionally these loans continue to work their way through the credit cycle through charge-off, pay-off or foreclosure. Financial effects of modifications of troubled debt restructurings may include principal loan forgiveness or other charge-offs directly related to the restructuring. The Company had no charge-offs directly related to modifying troubled debt restructurings during the three months ended March 31, 2014 or 2013.
    
The Company considers a payment default to occur on troubled debt restructurings when the loan is 90 days or more past due or was placed on non-accrual status after the modification. The Company had no troubled debt restructurings during the previous 12 months for which there was a payment default during the three months ended March 31, 2014.
 
 
 
 
At March 31, 2014, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.
    
As part of the on-going and continuous monitoring of the credit quality of the Company’s loan portfolio, management tracks internally assigned risk classifications of loans. The Company adheres to a Uniform Classification System developed jointly by the various bank regulatory agencies to internally risk rate loans. The Uniform Classification System defines three broad categories of criticized assets, which the Company uses as credit quality indicators:
    
Other Assets Especially Mentioned — includes loans that exhibit weaknesses in financial condition, loan structure or documentation, which if not promptly corrected, may lead to the development of abnormal risk elements.
    
Substandard — includes loans that are inadequately protected by the current sound worth and paying capacity of the borrower. Although the primary source of repayment for a Substandard loan is not currently sufficient; collateral or other sources of repayment are sufficient to satisfy the debt. Continuance of a Substandard loan is not warranted unless positive steps are taken to improve the worthiness of the credit.
    
Doubtful — includes loans that exhibit pronounced weaknesses to a point where collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Doubtful loans are required to be placed on non-accrual status and are assigned specific loss exposure.


17

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


The following tables present the Company’s recorded investment in criticized loans by class and credit quality indicator based on the most recent analysis performed as of the dates indicated:
As of March 31, 2014
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
85,017

$
83,404

$
18,834

$
187,255

Construction:
 
 
 
 
Land acquisition & development
12,249

19,994

2,966

35,209

Residential
2,386

1,594

—

3,980

Commercial
272

461

82

815

Total construction loans
14,907

22,049

3,048

40,004

Residential
10,586

10,498

1,137

22,221

Agricultural
13,717

10,865

2,316

26,898

Total real estate loans
124,227

126,816

25,335

276,378

Consumer:
 
 
 
 
Indirect consumer
949

1,654

112

2,715

Other consumer
504

804

377

1,685

Credit card


239

1,671

1,910

Total consumer loans
1,453

2,697

2,160

6,310

Commercial
37,291

29,513

3,853

70,657

Agricultural
11,863

2,077

324

14,264

Total
$
174,834

$
161,103

$
31,672

$
367,609

As of December 31, 2013
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
79,747

$
86,426

$
24,840

$
191,013

Construction:
 
 
 
 
Land acquisition & development
13,211

19,677

7,329

40,217

Residential
1,859

1,649

277

3,785

Commercial
—

409

84

493

Total construction loans
15,070

21,735

7,690

44,495

Residential
7,500

7,188

4,184

18,872

Agricultural
13,597

10,245

2,370

26,212

Total real estate loans
115,914

125,594

39,084

280,592

Consumer:
 
 
 
 
Indirect consumer
875

1,524

115

2,514

Other consumer
573

969

268

1,810

Credit card
—

392

2,010

2,402

Total consumer loans
1,448

2,885

2,393

6,726

Commercial
33,318

23,833

3,745

60,896

Agricultural
8,401

1,788

86

10,275

Total
$
159,081

$
154,100

$
45,308

$
358,489



18

Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)


The Company maintains a credit review function, which is independent of the credit approval process, to assess assigned internal risk classifications and monitor compliance with internal lending policies and procedures. Written action plans with firm target dates for resolution of identified problems are maintained and reviewed on a quarterly basis for all categories of criticized loans.

(4)
Allowance For Loan Losses
    
The following tables present a summary of changes in the allowance for loan losses by portfolio segment for the periods indicated. 
Three Months Ended March 31, 2014
Real Estate
Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
 
 
 
 
 
 
Beginning balance
$
63,923

$
6,193

$
14,747

$
476

$
—

$
85,339

Provision charged to operating expense
(3,375
)
(578
)
(1,072
)
25

—

(5,000
)
Less loans charged-off
(1,085
)
(846
)
(796
)
(64
)
—

(2,791
)
Add back recoveries of loans previously
   charged-off
367

608

2,822

26

—

3,823

Ending balance
$
59,830

$
5,377

$
15,701

$
463

$
—

$
81,371

 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
5,952

$
—

$
1,458

$
84

$
—

$
7,494

Loans collectively evaluated for impairment
53,878

5,377

14,243

379

—

73,877

Allowance for loan losses
$
59,830

$
5,377

$
15,701

$
463

$
—

$
81,371

 
 
 
 
 
 
 
Total loans:
 
 
 
 
 
 
Individually evaluated for impairment
$
86,772

$
—

$
14,464

$
693

$
—

$
101,929

Collectively evaluated for impairment
2,788,421

670,406

692,773

107,683

3,626

4,262,909

Total loans
$
2,875,193

$
670,406

$
707,237

$
108,376

$
3,626

$
4,364,838

Three Months Ended March 31, 2013
Real Estate
Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
 

 

 

 

 

 

Beginning balance
$
75,782

$
7,140

$
17,085

$
504

$
—

$
100,511

Provision charged to operating expense
(1,035
)
537

1,021

(23
)
—

500

Less loans charged-off
(4,143
)
(1,062
)
(811
)
(4
)
—

(6,020
)
Add back recoveries of loans previously
   charged-off
1,062

473

1,375

3

—

2,913

Ending balance
$
71,666

$
7,088

$
18,670

$
480

$
—

$
97,904

Allowance for loan losses:
 
 
 
 
 
 
Loans individually evaluated for impairment
$
8,367

$
—

$
3,725

$
25
</