FIBK-2015.03.31-10Q

 
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, 2015
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, 2015 – Class A common stock
 
21,596,056

 
 
March 31, 2015 – Class B common stock
 
23,833,412

 
 



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, 2015 and December 31, 2014
3

 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2015 and 2014
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2015 and 2014
5

 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2015 and 2014
6

 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2015 and 2014
7

 
 
 
 
9

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

 
 
 
Item 3.
45

 
 
 
Item 4.
45

 
 
Part II.
 
 
 
 
Item 1.
45

 
 
 
Item 1A .
45

 
 
 
Item  2.
45

 
 
 
Item 3.
46

 
 
 
Item 4.
Mine Safety Disclosures
46

 
 
 
Item 5.
46

 
 
 
Item 6.
46

 
 
48








2

Table of Contents

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

 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Cash and due from banks
$
128,976

 
$
147,894

Federal funds sold
963

 
543

Interest bearing deposits in banks
507,864

 
650,233

Total cash and cash equivalents
637,803

 
798,670

Investment securities:
 
 
 
Available-for-sale
1,777,057

 
1,711,924

Held-to-maturity (estimated fair values of $576,931 and $584,533 at March 31, 2015 and December 31, 2014, respectively)
563,847

 
575,186

Total investment securities
2,340,904

 
2,287,110

Loans held for investment
4,871,548

 
4,856,615

Mortgage loans held for sale
55,758

 
40,828

Total loans
4,927,306

 
4,897,443

Less allowance for loan losses
75,336

 
74,200

Net loans
4,851,970

 
4,823,243

Goodwill
204,375

 
205,574

Premises and equipment, net of accumulated depreciation
192,748

 
195,212

Company-owned life insurance
154,741

 
153,821

Other real estate owned (“OREO”)
15,134

 
13,554

Accrued interest receivable
27,242

 
27,063

Core deposit intangibles, net of accumulated amortization
12,428

 
13,282

Mortgage servicing rights, net of accumulated amortization and impairment reserve
14,093

 
14,038

Deferred tax asset, net
—

 
4,874

Other assets
77,104

 
73,495

Total assets
$
8,528,542

 
$
8,609,936

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,757,664

 
$
1,791,364

Interest bearing
5,210,495

 
5,214,848

Total deposits
6,968,159

 
7,006,212

Securities sold under repurchase agreements
462,073

 
502,250

Accounts payable and accrued expenses
49,665

 
66,164

Accrued interest payable
5,113

 
5,833

Deferred tax liability
3,553

 
—

Long-term debt
43,048

 
38,067

Other borrowed funds
4

 
9

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,614,092

 
7,701,012

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of March 31, 2015 or December 31, 2014
—

 
—

Common stock
310,544

 
323,596

Retained earnings
599,727

 
587,862

Accumulated other comprehensive income (loss), net
4,179

 
(2,534
)
Total stockholders’ equity
914,450

 
908,924

Total liabilities and stockholders’ equity
$
8,528,542

 
$
8,609,936

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,
 
2015
 
2014
Interest income:
 
 
 
Interest and fees on loans
$
59,371

 
$
53,718

Interest and dividends on investment securities:
 
 
 
Taxable
7,971

 
7,640

Exempt from federal taxes
1,059

 
1,097

Interest on deposits in banks
389

 
231

Interest on federal funds sold
2

 
1

Total interest income
68,792

 
62,687

Interest expense:
 
 
 
Interest on deposits
3,309

 
3,424

Interest on securities sold under repurchase agreements
54

 
66

Interest on long-term debt
515

 
473

Interest on subordinated debentures held by subsidiary trusts
589

 
588

Total interest expense
4,467

 
4,551

Net interest income
64,325

 
58,136

Provision for loan losses
1,095

 
(5,000
)
Net interest income after provision for loan losses
63,230

 
63,136

Non-interest income:
 
 
 
Other service charges, commissions and fees
9,867

 
9,156

Income from the origination and sale of loans
5,906

 
4,660

Wealth management revenues
4,937

 
4,455

Service charges on deposit accounts
3,944

 
3,875

Investment securities gains (losses), net
6

 
71

Other income
3,122

 
1,889

Total non-interest income
27,782

 
24,106

Non-interest expense:
 
 
 
Salaries and wages
25,349

 
22,411

Employee benefits
7,780

 
8,313

Occupancy, net
4,492

 
4,239

Furniture and equipment
3,793

 
3,201

Outsourced technology services
2,463

 
2,300

OREO expense, net of income
(61
)
 
(19
)
Professional fees
1,301

 
1,370

FDIC insurance premiums
1,142

 
1,116

Mortgage servicing rights amortization
619

 
600

Mortgage servicing rights impairment recovery
(15
)
 
(45
)
Core deposit intangibles amortization
855

 
354

Other expenses
11,804

 
10,498

Acquisition expenses
70

 
—

Total non-interest expense
59,592

 
54,338

Income before income tax expense
31,420

 
32,904

Income tax expense
10,440

 
11,511

Net income
$
20,980

 
$
21,393

 
 
 
 
Basic earnings per common share
$
0.46

 
$
0.49

Diluted earnings per common share
$
0.46

 
$
0.48

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,
 
2015
2014
Net income
$
20,980

$
21,393

Other comprehensive income, before tax:
 
 
Investment securities available-for sale:
 
 
Change in net unrealized gains/losses during period
10,608

14,351

Reclassification adjustment for net gains included in income
(6
)
(71
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
451

—

Defined benefit post-retirement benefits plans:
 
 
Change in net actuarial loss
15

35

Other comprehensive income, before tax
11,068

14,315

Deferred tax expense related to other comprehensive income
(4,355
)
(5,633
)
Other comprehensive income, net of tax
6,713

8,682

Comprehensive income, net of tax
$
27,693

$
30,075

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, 2014
$
323,596

 
$
587,862

 
$
(2,534
)
 
$
908,924

Net income
—

 
20,980

 
—

 
20,980

Other comprehensive income, net of tax expense
—

 
—

 
6,713

 
6,713

Common stock transactions:
 
 
 
 
 
 
 
588,409 common shares purchased and retired
(15,264
)
 
—

 
—

 
(15,264
)
156,956 non-vested common shares issued
—

 
—

 
—

 
—

838 non-vested common shares forfeited
—

 
—

 
—

 
—

73,344 stock options exercised, net of 22,042 shares tendered in payment of option price and income tax withholding amounts
900

 
—

 
—

 
900

Tax benefit of stock-based compensation
480

 
—

 
—

 
480

Stock-based compensation expense
832

 
—

 
—

 
832

Common cash dividend declared ($0.20 per share)
—

 
(9,115
)
 
—

 
(9,115
)
Balance at March 31, 2015
$
310,544

 
$
599,727

 
$
4,179

 
$
914,450

 
 
 
 
 
 
 
 
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

Cash dividends declared:
 
 
 
 
 
 
 
Common ($0.16 per share)
—

 
(7,036
)
 
—

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

 
$
546,444

 
$
(7,359
)
 
$
825,638

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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
20,980

 
$
21,393

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Provision for loan losses
1,095

 
(5,000
)
Net gain on disposal of premises and equipment
(204
)
 
(13
)
Depreciation and amortization
4,544

 
3,896

Net premium amortization on investment securities
3,684

 
3,371

Net gain on investment securities transactions
(6
)
 
(71
)
Net gain on sale of mortgage loans held for sale
(4,321
)
 
(3,323
)
Net gain on sale of OREO
(750
)
 
(435
)
Write-downs of OREO and other assets pending disposal
106

 
—

Net reversal of impairment of mortgage servicing rights
(15
)
 
(45
)
Deferred income tax expense
4,914

 
2,630

Net increase in cash surrender value of company-owned life insurance
(920
)
 
(852
)
Stock-based compensation expense
832

 
712

Tax benefits from stock-based compensation expense
480

 
989

Excess tax benefits from stock-based compensation expense
(292
)
 
(982
)
Originations of mortgage loans held for sale
(239,527
)
 
(151,911
)
Proceeds from sales of mortgage loans held for sale
228,259

 
157,141

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(179
)
 
(685
)
Increase in other assets
(3,630
)
 
(1,083
)
Decrease in accrued interest payable
(720
)
 
(10
)
Decrease in accounts payable and accrued expenses
(15,682
)
 
(3,694
)
Net cash provided by (used in) operating activities
(1,352
)
 
22,028

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(11,733
)
 
—

Available-for-sale
(153,953
)
 
(95,077
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
22,826

 
2,185

Available-for-sale
95,996

 
160,337

Purchases of company-owned life insurance
—

 
(15,000
)
Proceeds from sales of mortgage servicing rights
—

 
266

Extensions of credit to customers, net of repayments
(20,050
)
 
(28,580
)
Recoveries of loans charged-off
1,901

 
3,822

Proceeds from sales of OREO
2,321

 
2,760

Capital expenditures, net of sales
(382
)
 
(3,142
)
Net cash provided by (used in) investing activities
$
(63,074
)
 
$
27,571


7

Table of Contents

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

 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
(38,053
)
 
$
1,387

Net increase (decrease) in securities sold under repurchase agreements
(40,177
)
 
31,461

Net increase (decrease) in other borrowed funds
(5
)
 
6

Repayments of long-term debt
(15
)
 
(12
)
Advances on long-term debt
4,996

 
—

Proceeds from issuance of common stock
900

 
2,476

Excess tax benefits from stock-based compensation expense
292

 
982

Purchase and retirement of common stock
(15,264
)
 
(3,159
)
Dividends paid to common stockholders
(9,115
)
 
(7,036
)
Net cash provided by (used in) financing activities
(96,441
)
 
26,105

Net increase (decrease) in cash and cash equivalents
(160,867
)
 
75,704

Cash and cash equivalents at beginning of period
798,670

 
534,827

Cash and cash equivalents at end of period
$
637,803

 
$
610,531

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
5,100

 
$
—

Cash paid during the period for interest expense
5,187

 
4,561

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, 2015 and December 31, 2014, and the results of operations for each of the three month periods ended and cash flows for each of the three month periods ended March 31, 2015 and 2014 in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2014 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, 2015 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, 2014. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

(2)
Acquisitions

Absarokee Bancorporation, Inc. On March 26, 2015, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Absarokee Bancorporation, Inc. ("Absarokee"), a Montana-based bank holding company that operates one subsidiary bank, United Bank, with branches located in three Montana communities adjacent to the Company's existing market areas. As of March 31, 2015, Absarokee has total assets of approximately $74 million, net loans of approximately $37 million and deposits of approximately $64 million.

Under the terms of the agreement and plan of merger, the Company will pay cash consideration of approximately $7,234, subject to certain financial performance and other adjustments, the amount of which will be determined prior to the closing date of the transaction. The merger is expected to be completed during third quarter 2015. Subject to regulatory approval, the Company anticipates United Bank will be merged with and into its bank subsidiary, First Interstate Bank ("FIB"), immediately subsequent to the merger.

Mountain West Financial Corp. On July 31, 2014, the Company acquired all of the outstanding stock of Mountain West Financial Corp ("MWFC"), a Montana-based bank holding company operating one subsidiary bank, Mountain West Bank, NA ("MWB"). MWB was merged with and into FIB in October 2014. During March 2015, the Company completed its review of MWFC tax items and finalized the fair value of acquired deferred tax assets. Finalization of provisional estimates resulted in a $1,199 decrease in goodwill.


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)


(3)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
March 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
769,260

$
2,015

$
(1,820
)
$
769,455

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
993,459

15,702

(1,861
)
1,007,300

Private mortgage-backed securities
300

4

(2
)
302

Total
$
1,763,019

$
17,721

$
(3,683
)
$
1,777,057

March 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
188,386

$
6,613

$
(190
)
$
194,809

Corporate securities
39,531

150

(17
)
39,664

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
335,474

8,762

(2,235
)
342,001

Other investments
456

1

—

457

Total
$
563,847

$
15,526

$
(2,442
)
$
576,931

December 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
725,408

$
895

$
(5,370
)
$
720,933

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
982,764

11,526

(3,624
)
990,666

Private mortgage-backed securities
322

5

(2
)
325

Total
$
1,708,494

$
12,426

$
(8,996
)
$
1,711,924

December 31, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
188,941

$
5,949

$
(386
)
$
194,504

Corporate securities
32,565

54

(75
)
32,544

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
353,176

5,563

(1,758
)
356,981

Other Investments
504

—

—

504

Total
$
575,186

$
11,566

$
(2,219
)
$
584,533


Gross realized gains and losses from the disposition of investment securities are summarized in the following table:
    
 
Three Months Ended March 31,
 
2015
 
2014
Gross realized gains
$
6

 
$
225

Gross realized losses
—

 
154

 



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)



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, 2015 and December 31, 2014.
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
76,190

$
(185
)
 
$
277,320

$
(1,635
)
 
$
353,510

$
(1,820
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
23,948

(56
)
 
142,213

(1,805
)
 
166,161

(1,861
)
Private mortgage-backed securities
—

—

 
84

(2
)
 
84

(2
)
Total
$
100,138

$
(241
)
 
$
419,617

$
(3,442
)
 
$
519,755

$
(3,683
)
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
1,778

$
(10
)
 
$
13,831

$
(180
)
 
$
15,609

$
(190
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
45,264

(2,235
)
 
—

—

 
45,264

(2,235
)
Corporate Securities
10,046

(17
)
 
—

—

 
10,046

(17
)
Total
$
57,088

$
(2,262
)
 
$
13,831

$
(180
)
 
$
70,919

$
(2,442
)

 
Less than 12 Months
 
12 Months or More
 
Total
December 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
$
135,888

$
(702
)
 
$
309,283

$
(4,668
)
 
$
445,171

$
(5,370
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
219,214

(887
)
 
151,380

(2,737
)
 
370,594

(3,624
)
Private mortgage-backed securities
—

—

 
90

(2
)
 
90

(2
)
Total
$
355,102

$
(1,589
)
 
$
460,753

$
(7,407
)
 
$
815,855

$
(8,996
)
 
Less than 12 Months
 
12 Months or More
 
Total
December 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
$
7,979

$
(13
)
 
$
20,097

$
(373
)
 
$
28,076

$
(386
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
61,201

(1,758
)
 
—

—

 
61,201

(1,758
)
Corporate securities
14,755

(75
)
 
—

—

 
14,755

(75
)
Total
$
83,935

$
(1,846
)
 
$
20,097

$
(373
)
 
$
104,032

$
(2,219
)
    

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)


The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 100 and 154 individual investment securities that were in an unrealized loss position as of March 31, 2015 and December 31, 2014, respectively. Unrealized losses as of March 31, 2015 and December 31, 2014 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, 2015 or 2014.

Maturities of investment securities at March 31, 2015 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, 2015
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
288,960

$
292,432

 
$
79,106

$
80,955

After one year but within five years
1,316,177

1,325,048

 
286,575

292,101

After five years but within ten years
126,241

127,514

 
133,958

137,489

After ten years
31,641

32,063

 
64,208

66,386

Total
$
1,763,019

$
1,777,057

 
$
563,847

$
576,931

    
As of March 31, 2015, the Company had investment securities callable within one year with amortized costs and estimated fair values of $166,196 and $166,636, respectively, including callable structured notes with amortized costs and estimated fair values of $29,996 and $30,030, 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.


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)


(4)
Loans
    
The following table presents loans by class as of the dates indicated:
 
March 31,
2015
 
December 31, 2014
Real estate loans:
 
 
 
Commercial
$
1,670,829

 
$
1,639,422

Construction:
 
 
 
Land acquisition & development
209,033

 
220,443

Residential
101,689

 
96,580

Commercial
95,583

 
101,246

Total construction loans
406,305

 
418,269

Residential
997,123

 
999,903

Agricultural
156,734

 
167,659

Total real estate loans
3,230,991

 
3,225,253

Consumer:
 
 
 
Indirect consumer
566,225

 
552,863

Other consumer
140,529

 
144,141

Credit card
61,708

 
65,467

Total consumer loans
768,462

 
762,471

Commercial
754,149

 
740,073

Agricultural
117,569

 
124,859

Other, including overdrafts
377

 
3,959

Loans held for investment
4,871,548

 
4,856,615

Mortgage loans held for sale
55,758

 
40,828

Total loans
$
4,927,306

 
$
4,897,443

    
Loans from business combinations included in the table above include certain loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of March 31, 2015 and 2014:    
As of March 31,
2015
 
2014
 
 
 
 
Outstanding balance
$
32,445

 
$
—

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
23,909

 
—

Loans on non-accrual status
—

 
—

Total carrying value
$
23,909

 
$
—

    

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)


The following table summarizes changes in the accretable yield for loans acquired credit impaired for the three months ended March 31, 2015 and 2014:
Three Months Ended March 31,
2015
 
2014
 
 
 
 
Beginning balance
$
5,781

 
$
—

Accretion income
(548
)
 
—

Reductions due to exit events
(396
)
 
—

Reclassifications from (to) nonaccretable differences
2,143

 
—

Ending balance
$
6,980

 
$
—

    
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, 2015
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
17,049

$
550

$
859

$
18,458

$
1,622,470

$
29,901

$
1,670,829

Construction:
 
 
 
 
 
 

 

Land acquisition & development
4,756

207

45

5,008

195,864

8,161

209,033

Residential
500

—

325

825

100,520

344

101,689

Commercial
165

—

—

165

92,134

3,284

95,583

Total construction loans
5,421

207

370

5,998

388,518

11,789

406,305

Residential
3,876

830

2,363

7,069

986,670

3,384

997,123

Agricultural
2,630

—

883

3,513

146,498

6,723

156,734

Total real estate loans
28,976

1,587

4,475

35,038

3,144,156

51,797

3,230,991

Consumer:
 
 
 
 
 
 
 

Indirect consumer
2,460

336

9

2,805

563,049

371

566,225

Other consumer
659

51

1

711

139,378

440

140,529

Credit card
312

207

322

841

60,853

14

61,708

Total consumer loans
3,431

594

332

4,357

763,280

825

768,462

Commercial
4,049

567

388

5,004

728,564

20,581

754,149

Agricultural
1,508

32

—

1,540

115,291

738

117,569

Other, including overdrafts
—

—

2

2

375

—

377

Loans held for investment
37,964

2,780

5,197

45,941

4,751,666

73,941

4,871,548

Mortgage loans originated for sale
—

—

—

—

55,758

—

55,758

Total loans
$
37,964

$
2,780

$
5,197

$
45,941

$
4,807,424

$
73,941

$
4,927,306





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)


 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of December 31, 2014
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
4,692

$
1,609

$
331

$
6,632

$
1,605,421

$
27,369

$
1,639,422

Construction:
 
 
 
 
 
 

 

Land acquisition & development
839

383

—

1,222

210,969

8,252

220,443

Residential
—

475

—

475

95,833

272

96,580

Commercial
100

—

—

100

98,582

2,564

101,246

Total construction loans
939

858

—

1,797

405,384

11,088

418,269

Residential
6,969

645

1,762

9,376

987,735

2,792

999,903

Agricultural
1,624

236

—

1,860

158,957

6,842

167,659

Total real estate loans
14,224

3,348

2,093

19,665

3,157,497

48,091

3,225,253

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,235

482

6

3,723

548,757

383

552,863

Other consumer
988

140

32

1,160

142,432

549

144,141

Credit card
369

284

315

968

64,484

15

65,467

Total consumer loans
4,592

906

353

5,851

755,673

947

762,471

Commercial
3,659

994

147

4,800

722,575

12,698

740,073

Agricultural
1,125

—

—

1,125

123,288

446

124,859

Other, including overdrafts
—

—

—

—

3,959

—

3,959

Loans held for investment
23,600

5,248

2,593

31,441

4,762,992

62,182

4,856,615

Mortgage loans originated for sale
—

—

—

—

40,828

—

40,828

Total loans
$
23,600

$
5,248

$
2,593

$
31,441

$
4,803,820

$
62,182

$
4,897,443


Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition were considered performing upon acquisition. If interest on non-accrual loans had been accrued, such income would have been approximately $832 and $1,121 for the three months ended March 31, 2015 and 2014, respectively.
        

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 Company considers impaired loans to include all loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:
As of March 31, 2015
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
40,258

$
33,591

$
4,748

$
38,339

$
1,641

Construction:
 
 
 
 
 
Land acquisition & development
12,400

6,854

1,882

8,736

569

Residential
387

344

—

344

—

Commercial
3,447

250

3,165

3,415

902

Total construction loans
16,234

7,448

5,047

12,495

1,471

Residential
3,495

3,230

154

3,384

127

Agricultural
8,562

7,949

613

8,562

719

Total real estate loans
68,549

52,218

10,562

62,780

3,958

Commercial
23,570

10,486

10,706

21,192

2,905

Agricultural
1,113

326

735

1,061

605

Total
$
93,232

$
63,030

$
22,003

$
85,033

$
7,468

As of December 31, 2014
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
41,603

$
28,143

$
11,246

$
39,389

$
1,608

Construction:
 
 
 
 
 
Land acquisition & development
12,511

7,262

1,615

8,877

574

Residential
459

272

—

272

—

Commercial
2,729

253

2,442

2,695

904

Total construction loans
15,699

7,787

4,057

11,844

1,478

Residential
2,959

2,452

341

2,793

143

Agricultural
8,844

6,444

2,305

8,749

732

Total real estate loans
69,105

44,826

17,949

62,775

3,961

Commercial
16,904

11,882

2,644

14,526

1,190

Agricultural
1,231

342

837

1,179

641

Total
$
87,240

$
57,050

$
21,430

$
78,480

$
5,792



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 table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended March 31,
 
2015
 
2014
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
42,077

 
$
150

 
$
62,312

 
$
216

Construction:
 
 
 
 
 
 
 
Land acquisition & development
8,930

 
10

 
15,553

 
11

Residential
308

 
—

 
1,320

 
—

Commercial
3,055

 
2

 
360

 
2

Total construction loans
12,293

 
12

 
17,233

 
13

Residential
3,127

 
1

 
6,128

 
2

Agricultural
8,655

 
22

 
9,233

 
4

Total real estate loans
66,152

 
185

 
94,906

 
235

Commercial
17,533

 
8

 
14,268

 
14

Agricultural
914

 
5

 
288

 
6

Total
$
84,599

 
$
198

 
$
109,462

 
$
255

 
 
 
 
 
 
 
 
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 $1,035 and $1,111 for the three months ended March 31, 2015 and 2014, 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 $39,645 as of March 31, 2015, of which $23,575 were included in non-accrual loans and $16,070 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $44,227 as of December 31, 2014, of which $23,275 were included in non-accrual loans and $20,952 were on accrual status.


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 table presents information on the Company's troubled debt restructurings that occurred during the three months ended March 31, 2015:    
 
 
Number of Notes
 
Type of Concession
Principal Balance at Restructure Date
Three Months Ended March 31, 2015
 
 
Interest only period
Extension of terms or maturity
Interest rate adjustment
Other (1)
Commercial
 
1
 
$
—

$
10

$
—

$
—

$
10

Total loans restructured during period
 
1
 
$
—

$
10

$
—

$
—

$
10

(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, 2015 or 2014.
    
The following table presents information on the Company's troubled 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 March 31, 2015
 
Number of Notes
 
Balance
Commercial Real Estate
1
 
$
1,822


At March 31, 2015, 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.

Company management undertakes the same process for assigning risk ratings to acquired loans as it does for originated loans. Acquired loans rated as substandard or lower or that were on non-accrual status or designated as troubled debt restructurings at the time of acquisition are deemed to be acquired credit impaired loans accounted for under ASC Topic 310-30, regardless of whether they are classified as performing or non-performing loans.


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 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, 2015
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
76,271

$
82,814

$
12,896

$
171,981

Construction:
 
 
 
 
Land acquisition & development
10,929

14,475

2,417

27,821

Residential
1,245

2,797

—

4,042

Commercial
—

249

3,164

3,413

Total construction loans
12,174

17,521

5,581

35,276

Residential
9,374

8,381

1,027

18,782

Agricultural
10,094

14,712

613

25,419

Total real estate loans
107,913

123,428

20,117

251,458

Consumer:
 
 
 
 
Indirect consumer
832

1,415

179

2,426

Other consumer
538

877

389

1,804

Credit card
—

416

1,179

1,595

Total consumer loans
1,370

2,708

1,747

5,825

Commercial
28,390

24,008

14,877

67,275

Agricultural
2,819

6,743

735

10,297

Total
$
140,492

$
156,887

$
37,476

$
334,855

As of December 31, 2014
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
84,533

$
83,448

$
15,246

$
183,227

Construction:
 
 
 
 
Land acquisition & development
11,826

15,016

2,507

29,349

Residential
2,029

2,666

—

4,695

Commercial
39

253

2,442

2,734

Total construction loans
13,894

17,935

4,949

36,778

Residential
10,473

10,848

1,121

22,442

Agricultural
10,122

12,328

612

23,062

Total real estate loans
119,022

124,559

21,928

265,509

Consumer:
 
 
 
 
Indirect consumer
916

1,590

121

2,627

Other consumer
553

1,085

432

2,070

Credit card
—

348

1,263

1,611

Total consumer loans
1,469

3,023

1,816

6,308

Commercial
25,766

32,433

10,273

68,472

Agricultural
7,827

3,660

837

12,324

Total
$
154,084

$
163,675

$
34,854

$
352,613



19

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.

(5)
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, 2015
Real Estate
Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
 
 
 
 
 
 
Beginning balance
$
53,884

$
5,035

$
14,307

$
974

$
—

$
74,200

Provision charged to operating expense
(1,031
)
1,125

993

8

—

1,095

Less loans charged-off
(186
)
(1,301
)
(374
)
—

—

(1,861
)
Add back recoveries of loans previously
   charged-off
992

640

270

—

—

1,902

Ending balance
$
53,659

$
5,499

$
15,196

$
982

$
—

$
75,336

 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
3,958

$
—

$
2,905

$
605

$
—

$
7,468

Loans collectively evaluated for impairment
49,701

5,499

12,291

377

—

67,868

Allowance for loan losses
$
53,659

$
5,499

$
15,196

$