Edgar Filing: FIRST INTERSTATE BANCSYSTEM INC

FIBK-2014.06.30-10Q

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 June 30, 2014


¨	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:



	June 30, 2014 – Class A common stock		20,269,171
	June 30, 2014 – Class B common stock		23,985,841

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 - June 30, 2014 and December 31, 2013	3

	Consolidated Statements of Income - Three and Six Months Ended June 30, 2014 and 2013	4

	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2014 and 2013	5

	Consolidated Statements of Changes in Stockholders’ Equity - Six Months Ended June 30, 2014 and 2013	6

	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

Part II.	Other Information

Item 1.	Legal Proceedings	46

Item 1A .	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	47

Signatures		49

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)

	June 30, 2014			December 31, 2013
Assets
Cash and due from banks	$	168,600		$	141,663
Federal funds sold	3,512			672
Interest bearing deposits in banks	331,536			392,492
Total cash and cash equivalents	503,648			534,827
Investment securities:
Available-for-sale	1,506,996			1,947,706
Held-to-maturity (estimated fair values of $592,682 and $205,926 at June 30, 2014 and December 31, 2013, respectively)	586,989			203,837
Total investment securities	2,093,985			2,151,543
Loans held for investment	4,449,699			4,303,992
Mortgage loans held for sale	56,663			40,861
Total loans	4,506,362			4,344,853
Less allowance for loan losses	78,266			85,339
Net loans	4,428,096			4,259,514
Goodwill	183,673			183,673
Premises and equipment, net of accumulated depreciation	180,341			179,690
Company-owned life insurance	138,899			122,175
Other real estate owned (“OREO”)	16,425			15,504
Accrued interest receivable	26,497			26,450
Mortgage servicing rights, net of accumulated amortization and impairment reserve	13,443			13,546
Deferred tax asset, net	—			12,154
Core deposit intangibles, net of accumulated amortization	3,811			4,519
Other assets	62,561			61,056
Total assets	$	7,651,379		$	7,564,651
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	1,533,484		$	1,491,683
Interest bearing	4,645,558			4,642,067
Total deposits	6,179,042			6,133,750
Securities sold under repurchase agreements	462,985			457,437
Accounts payable and accrued expenses	42,693			47,523
Accrued interest payable	5,316			4,963
Deferred tax liability	3,427			—
Long-term debt	36,893			36,917
Other borrowed funds	20			3
Subordinated debentures held by subsidiary trusts	82,477			82,477
Total liabilities	6,812,853			6,763,070
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of June 30, 2014 or December 31, 2013	—			—
Common stock	283,697			285,535
Retained earnings	560,469			532,087
Accumulated other comprehensive loss, net	(5,640		)	(16,041		)
Total stockholders’ equity	838,526			801,581
Total liabilities and stockholders’ equity	$	7,651,379		$	7,564,651

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Interest income:
Interest and fees on loans	$	55,565		$	54,853		$	109,283		$	110,346
Interest and dividends on investment securities:
Taxable	7,309			7,671			14,949			15,717
Exempt from federal taxes	1,083			1,215			2,180			2,441
Interest on deposits in banks	225			212			456			510
Interest on federal funds sold	3			5			4			9
Total interest income	64,185			63,956			126,872			129,023
Interest expense:
Interest on deposits	3,327			4,038			6,751			8,393
Interest on securities sold under repurchase agreements	63			74			129			174
Interest on long-term debt	476			483			949			963
Interest on preferred stock pending redemption	—			—			—			159
Interest on subordinated debentures held by subsidiary trusts	592			601			1,180			1,297
Total interest expense	4,458			5,196			9,009			10,986
Net interest income	59,727			58,760			117,863			118,037
Provision for loan losses	(2,001		)	375			(7,001		)	875
Net interest income after provision for loan losses	61,728			58,385			124,864			117,162
Non-interest income:
Other service charges, commissions and fees	9,699			8,977			18,855			17,233
Income from the origination and sale of loans	6,380			10,043			11,040			20,718
Wealth management revenues	4,609			4,020			9,064			8,154
Service charges on deposit accounts	3,929			4,323			7,804			8,391
Investment securities gains, net	17			(12		)	88			(4		)
Other income	1,937			2,228			3,826			3,906
Total non-interest income	26,571			29,579			50,677			58,398
Non-interest expense:
Salaries and wages	24,440			23,535			46,882			46,977
Employee benefits	7,164			7,546			15,477			15,721
Occupancy, net	4,253			4,063			8,492			8,089
Furniture and equipment	3,157			3,163			6,358			6,215
Outsourced technology services	2,309			2,195			4,609			4,352
OREO expense, net of income	(134		)	(915		)	(153		)	981
FDIC insurance premiums	1,093			1,356			2,209			2,733
Professional fees	1,278			1,136			2,648			2,263
Mortgage servicing rights amortization	583			719			1,183			1,558
Mortgage servicing rights impairment recovery	(11		)	(11		)	(56		)	(59		)
Core deposit intangibles amortization	354			355			708			709
Other expenses	10,837			11,878			21,304			22,166
Non-core acquisition expenses	597			—			597			—
Total non-interest expense	55,920			55,020			110,258			111,705
Income before income tax expense	32,379			32,944			65,283			63,855
Income tax expense	11,302			11,439			22,813			22,306
Net income	$	21,077		$	21,505		$	42,470		$	41,549

Basic earnings per common share	$	0.48		$	0.49		$	0.96		$	0.96
Diluted earnings per common share	$	0.47		$	0.49		$	0.95		$	0.95

See accompanying notes to unaudited consolidated financial statements.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	21,077		$	21,505		$	42,470		$	41,549
Other comprehensive income (loss), before tax:
Investment securities available-for sale:
Change in net unrealized gains/losses during period	2,816			(35,625		)	17,167			(41,342		)
Reclassification adjustment for net (gains) losses included in income	(17		)	12			(88		)	4
Defined benefit post-retirement benefits plans:
Change in net actuarial loss	35			35			70			70
Other comprehensive income (loss), before tax	2,834			(35,578		)	17,149			(41,268		)
Deferred tax benefit (expense) related to other comprehensive income/loss	(1,115		)	13,999			(6,748		)	16,238
Other comprehensive income (loss), net of tax	1,719			(21,579		)	10,401			(25,030		)
Comprehensive income (loss), net of tax	$	22,796		$	(74	)	$	52,871		$	16,519

See accompanying notes to unaudited consolidated financial statements.

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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	—			42,470			—			42,470
Other comprehensive income, net of tax expense	—			—			10,401			10,401
Common stock transactions:
349,930 common shares purchased and retired	(8,764		)	—			—			(8,764		)
24,581 common shares issued	—			—			—			—
147,876 non-vested common shares issued	—			—			—			—
8,647 non-vested common shares forfeited	—			—			—			—
286,069 stock options exercised, net of 160,377 shares tendered in payment of option price and income tax withholding amounts	3,547			—			—			3,547
Tax benefit of stock-based compensation	1,225			—			—			1,225
Stock-based compensation expense	2,154			—			—			2,154
Common cash dividend declared ($0.32 per share)	—			(14,088		)	—			(14,088		)
Balance at June 30, 2014	$	283,697		$	560,469		$	(5,640	)	$	838,526

Balance at December 31, 2012	$	271,335		$	463,860		$	15,991		$	751,186
Net income	—			41,549			—			41,549
Other comprehensive loss, net of tax benefit	—			—			(25,030		)	(25,030		)
Common stock transactions:
25,667 common shares purchased and retired	(448		)	—			—			(448		)
26,096 common shares issued	—			—			—			—
108,873 non-vested common shares issued	—			—			—			—
10,138 non-vested common shares forfeited	—			—			—			—
446,404 stock options exercised, net of 150,290 shares tendered in payment of option price and income tax withholding amounts	5,799			—			—			5,799
Tax benefit of stock-based compensation	524			—			—			524
Stock-based compensation expense	2,022			—			—			2,022
Cash dividends declared:
Common ($0.13 per share)	—			(5,648		)	—			(5,648		)
Balance at June 30, 2013	$	279,232		$	499,761		$	(9,039	)	$	769,954

See accompanying notes to unaudited consolidated financial statements.

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

	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	42,470		$	41,549
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	(7,001		)	875
Net gain on disposal of property and equipment	(79		)	(16		)
Depreciation and amortization	7,786			8,298
Net premium amortization on investment securities	7,088			7,902
Net (gain) loss on investment securities transactions	(88		)	4
Net gain on sale of mortgage loans held for sale	(7,601		)	(14,984		)
Net gain on sale of OREO	(766		)	(2,671		)
Write-downs of OREO and other assets pending disposal	10			3,180
Net reversal of impairment of mortgage servicing rights	(56		)	(59		)
Deferred income tax expense	3,760			3,456
Net increase in cash surrender value of company-owned life insurance	(1,724		)	(873		)
Stock-based compensation expense	2,154			2,022
Tax benefits from stock-based compensation expense	1,225			524
Excess tax benefits from stock-based compensation expense	(1,211		)	(468		)
Originations of mortgage loans held for sale	(412,050		)	(734,657		)
Proceeds from sales of mortgage loans held for sale	402,825			739,648
Changes in operating assets and liabilities:
Increase in interest receivable	(47		)	(403		)
Decrease (increase) in other assets	(1,929		)	7,004
Increase (decrease) in accrued interest payable	353			(266		)
Decrease in accounts payable and accrued expenses	(4,788		)	(4,112		)
Net cash provided by operating activities	30,331			55,953
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity	(4,141		)	(13,755		)
Available-for-sale	(175,823		)	(430,395		)
Proceeds from maturities, pay-downs and sales of investment securities:
Held-to-maturity	9,347			5,807
Available-for-sale	243,355			453,678
Purchases of company-owned life insurance	(15,000		)	—
Proceeds from sales of mortgage servicing rights	266			470
Extensions of credit to customers, net of repayments	(155,523		)	(84,078		)
Recoveries of loans charged-off	5,345			7,057
Proceeds from sales of OREO	4,234			18,464
Capital expenditures, net of sales	(6,309		)	(1,886		)
Net cash used in investing activities	$	(94,249	)	$	(44,638	)

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) (Unaudited)

	Six Months Ended June 30,
	2014			2013
Cash flows from financing activities:
Net increase (decrease) in deposits	$	45,292		$	(310,079	)
Net increase (decrease) in repurchase agreements	5,548			(84,471		)
Net increase (decrease) in other borrowed funds	17			(30		)
Repayments of long-term debt	(24		)	(21		)
Redemption of preferred stock	—			(50,000		)
Proceeds from issuance of common stock	3,547			5,799
Excess tax benefits from stock-based compensation expense	1,211			468
Purchase and retirement of common stock	(8,764		)	(448		)
Dividends paid to common stockholders	(14,088		)	(5,648		)
Net cash provided by (used in) financing activities	32,739			(444,430		)
Net decrease in cash and cash equivalents	(31,179		)	(433,115		)
Cash and cash equivalents at beginning of period	534,827			801,332
Cash and cash equivalents at end of period	$	503,648		$	368,217

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	16,190		$	20,838
Cash paid during the period for interest expense	8,656			11,252

See accompanying notes to unaudited consolidated financial statements.

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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 June 30, 2014 and December 31, 2013, and the results of operations for each of the three and six month periods ended and cash flows for each of the six month periods ended June 30, 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 June 30, 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 and six months ended June 30, 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:



June 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
Obligations of U.S. government agencies	$	722,034	$	1,707	$	(5,174	)	$	718,567
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	778,641		12,806		(3,383		)	788,064
Private mortgage-backed securities	361		6		(2		)	365
Total	$	1,501,036	$	14,519	$	(8,559	)	$	1,506,996



June 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	179,131	$	6,159	$	(600	)	$	184,690
Corporate securities	17,908		116		—			18,024
U.S agency residential mortgage-backed securities & collateralized mortgage obligations	389,950		18		—			389,968
Total	$	586,989	$	6,293	$	(600	)	$	592,682



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

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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 June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Gross realized gains	$	18	$	4	$	243	$	12
Gross realized losses	1		16		155		16

On June 27, 2014, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations with amortized costs and fair values of $396,640 and $388,808, respectively, into the held-to-maturity category. Unrealized net losses of $7,832 included in accumulated other comprehensive income at the time of the transfer are being amortized to yield over the remaining expected lives of the transferred securities of 4.3 years.

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 June 30, 2014 and December 31, 2013.



	Less than 12 Months					12 Months or More					Total
June 30, 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	$	61,265	$	(185	)	$	353,997	$	(4,989	)	$	415,262	$	(5,174	)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	47,884		(146		)	203,157		(3,237		)	251,041		(3,383		)
Private mortgage-backed securities	—		—			95		(2		)	95		(2		)
Total	$	109,149	$	(331	)	$	557,249	$	(8,228	)	$	666,398	$	(8,559	)



	Less than 12 Months					12 Months or More					Total
June 30, 2014	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity:
State, county and municipal securities	$	267	$	(1	)	$	28,986	$	(599	)	$	29,253	$	(600	)
Total	$	267	$	(1	)	$	28,986	$	(599	)	$	29,253	$	(600	)

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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
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	)



	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 106 and 229 individual investment securities that were in an unrealized loss position as of June 30, 2014 and December 31, 2013, respectively. Unrealized losses as of June 30, 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 and six months ended June 30, 2014 and 2013.

Maturities of investment securities at June 30, 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
June 30, 2014	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	235,880	$	238,377	$	75,137	$	75,805
After one year but within five years	1,046,202		1,050,653		262,721		265,277
After five years but within ten years	203,374		202,197		174,980		176,267
After ten years	15,580		15,769		74,151		75,333
Total	$	1,501,036	$	1,506,996	$	586,989	$	592,682

As of June 30, 2014, the Company had investment securities callable within one year with amortized costs and estimated fair values of $208,708 and $208,188, respectively, including callable structured notes with amortized costs and estimated fair values of $94,473 and $94,487, 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.

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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:



	June 30, 2014		December 31, 2013
Real estate loans:
Commercial	$	1,464,947	$	1,449,174
Construction:
Land acquisition & development	192,289		205,911
Residential	82,121		76,488
Commercial	86,599		69,236
Total construction loans	361,009		351,635
Residential	894,502		867,912
Agricultural	162,428		173,534
Total real estate loans	2,882,886		2,842,255
Consumer:
Indirect consumer	512,063		476,012
Other consumer	133,604		133,039
Credit card	61,368		62,536
Total consumer loans	707,035		671,587
Commercial	727,482		676,544
Agricultural	130,280		111,872
Other, including overdrafts	2,016		1,734
Loans held for investment	4,449,699		4,303,992
Mortgage loans held for sale	56,663		40,861
Total loans	$	4,506,362	$	4,344,853

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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 June 30, 2014	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	5,343	$	2,540	$	40	$	7,923	$	1,418,602	$	38,422	$	1,464,947
Construction:
Land acquisition & development	782		123		—		905		180,094		11,290		192,289
Residential	90		1,226		—		1,316		80,152		653		82,121
Commercial	—		—		—		—		84,019		2,580		86,599
Total construction loans	872		1,349		—		2,221		344,265		14,523		361,009
Residential	3,493		823		665		4,981		884,261		5,260		894,502
Agricultural	29		72		—		101		155,228		7,099		162,428
Total real estate loans	9,737		4,784		705		15,226		2,802,356		65,304		2,882,886
Consumer:
Indirect consumer	2,467		404		15		2,886		508,777		400		512,063
Other consumer	780		210		16		1,006		131,864		734		133,604
Credit card	281		239		335		855		60,496		17		61,368
Total consumer loans	3,528		853		366		4,747		701,137		1,151		707,035
Commercial	3,223		718		325		4,266		710,886		12,330		727,482
Agricultural	1,390		17		125		1,532		128,367		381		130,280
Other, including overdrafts	—		—		1		1		2,015		—		2,016
Loans held for investment	17,878		6,372		1,522		25,772		4,344,761		79,166		4,449,699
Mortgage loans originated for sale	—		—		—		—		56,663		—		56,663
Total loans	$	17,878	$	6,372	$	1,522	$	25,772	$	4,401,424	$	79,166	$	4,506,362

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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 $1,061 and $1,299 for the three months ended June 30, 2014 and 2013, respectively, and approximately $2,182 and $2,651 for the six months ended June 30, 2014 and 2013, respectively.

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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 June 30, 2014	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	52,690	$	24,961	$	25,622	$	50,583	$	3,566
Construction:
Land acquisition & development	15,601		8,098		3,869		11,967		647
Residential	1,096		653		—		653		—
Commercial	2,749		269		2,446		2,715		908
Total construction loans	19,446		9,020		6,315		15,335		1,555
Residential	7,222		4,885		375		5,260		301
Agricultural	9,191		6,656		2,439		9,095		133
Total real estate loans	88,549		45,522		34,751		80,273		5,555
Commercial	14,752		10,709		2,679		13,388		1,176
Agricultural	792		419		322		741		221
Total	$	104,093	$	56,650	$	37,752	$	94,402	$	6,952



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

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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 June 30,
	2014				2013
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	57,588	$	241	$	67,605	$	272
Construction:
Land acquisition & development	13,563		11		19,007		15
Residential	785		—		1,569		—
Commercial	1,471		2		6,346		—
Total construction loans	15,819		13		26,922		15
Residential	5,852		1		8,311		5
Agricultural	9,747		25		8,255		4
Total real estate loans	89,006		280		111,093		296
Commercial	14,162		14		16,087		18
Agricultural	742		6		373		4
Total	$	103,910	$	300	$	127,553	$	318



	Six Months Ended June 30,
	2014				2013
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	60,870	$	457	$	67,192	$	610
Construction:
Land acquisition & development	14,554		22		20,123		456
Residential	1,051		—		2,040		—
Commercial	918		4		7,118		—
Total construction loans	16,523		26		29,281		456
Residential	5,969		3		9,429		9
Agricultural	9,830		29		6,611		8
Total real estate loans	93,192		515		112,513		1,083
Commercial	14,231		28		14,484		36
Agricultural	538		12		502		8
Total	$	107,961	$	555	$	127,499	$	1,127

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 $1,301 and $1,577 for the three months ended June 30, 2014 and 2013, respectively and approximately $2,412 and $2,912 for the six months ended June 30, 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.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

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 $57,835 as of June 30, 2014, of which $34,304 were included in non-accrual loans and $23,531 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.

The following tables present information on the Company's troubled debt restructurings that occurred during the three months ended June 30, 2014:



	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Three Months Ended June 30, 2014	Number of Notes	Interest only period		Extension of terms or maturity		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	4	$	458	$	226	$	—	$	679	$	1,363
Commercial	2	72		—		—		—		72
Total loans restructured during period	6	$	530	$	226	$	—	$	679	$	1,435
(1) Other includes concessions that reduce or defer payments for a specified period of time and/or do not fit into other designated categories.



	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Six Months Ended June 30, 2014	Number of Notes	Interest only period		Extension of terms or maturity		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	8	$	—	$	226	$	—	$	921	$	1,147
Commercial	4	299		2,931		—		30		3,260
Total loans restructured during period	12	$	299	$	3,157	$	—	$	951	$	4,407
(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 or six months ended June 30, 2014 or 2013.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table presents information on the Company's trouble debt restructurings during the previous 12 months for which there was a payment default during the periods indicated. 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.



	Three Months Ended June 30, 2014		Six Months Ended June 30, 2014
	Number of Notes	Balance	Number of Notes	Balance
Commercial	2	72	2	72
Total	2	72	2	72

At June 30, 2014, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.