FIBK-2015.06.30-10Q

 
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, 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:
 
June 30, 2015 – Class A common stock
 
21,720,287

 
 
June 30, 2015 – Class B common stock
 
23,786,296

 
 



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, 2015 and December 31, 2014
3

 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2015 and 2014
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2015 and 2014
5

 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity - Six Months Ended June 30, 2015 and 2014
6

 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2015 and 2014
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
35

 
 
 
Item 3.
51

 
 
 
Item 4.
51

 
 
Part II.
 
 
 
 
Item 1.
51

 
 
 
Item 1A .
51

 
 
 
Item  2.
51

 
 
 
Item 3.
52

 
 
 
Item 4.
Mine Safety Disclosures
52

 
 
 
Item 5.
52

 
 
 
Item 6.
52

 
 
54








2

Table of Contents

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

 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Cash and due from banks
$
163,057

 
$
147,894

Federal funds sold
2,763

 
543

Interest bearing deposits in banks
340,614

 
650,233

Total cash and cash equivalents
506,434

 
798,670

Investment securities:
 
 
 
Available-for-sale
1,592,743

 
1,711,924

Held-to-maturity (estimated fair values of $553,323 and $584,533 at June 30, 2015 and December 31, 2014, respectively)
546,690

 
575,186

Total investment securities
2,139,433

 
2,287,110

Loans held for investment
5,028,624

 
4,856,615

Mortgage loans held for sale
75,322

 
40,828

Total loans
5,103,946

 
4,897,443

Less allowance for loan losses
76,552

 
74,200

Net loans
5,027,394

 
4,823,243

Goodwill
204,375

 
205,574

Premises and equipment, net of accumulated depreciation
189,488

 
195,212

Company-owned life insurance
177,625

 
153,821

Other real estate owned (“OREO”)
11,773

 
13,554

Accrued interest receivable
29,008

 
27,063

Core deposit intangibles, net of accumulated amortization
11,573

 
13,282

Mortgage servicing rights, net of accumulated amortization and impairment reserve
14,654

 
14,038

Deferred tax asset, net
—

 
4,874

Other assets
74,461

 
73,495

Total assets
$
8,386,218

 
$
8,609,936

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,757,641

 
$
1,791,364

Interest bearing
5,046,760

 
5,214,848

Total deposits
6,804,401

 
7,006,212

Securities sold under repurchase agreements
469,145

 
502,250

Accounts payable and accrued expenses
53,879

 
66,164

Accrued interest payable
5,366

 
5,833

Deferred tax liability
3,024

 
—

Long-term debt
43,068

 
38,067

Other borrowed funds
3

 
9

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,461,363

 
7,701,012

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of June 30, 2015 or December 31, 2014
—

 
—

Common stock
313,125

 
323,596

Retained earnings
612,875

 
587,862

Accumulated other comprehensive loss, net
(1,145
)
 
(2,534
)
Total stockholders’ equity
924,855

 
908,924

Total liabilities and stockholders’ equity
$
8,386,218

 
$
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
60,402

 
$
55,565

 
$
119,773

 
$
109,283

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
8,000

 
7,309

 
15,971

 
14,949

Exempt from federal taxes
1,040

 
1,083

 
2,099

 
2,180

Interest on deposits in banks
271

 
225

 
660

 
456

Interest on federal funds sold
5

 
3

 
7

 
4

Total interest income
69,718

 
64,185

 
138,510

 
126,872

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,239

 
3,327

 
6,548

 
6,751

Interest on securities sold under repurchase agreements
53

 
63

 
107

 
129

Interest on long-term debt
538

 
476

 
1,052

 
949

Interest on subordinated debentures held by subsidiary trusts
600

 
592

 
1,190

 
1,180

Total interest expense
4,430

 
4,458

 
8,897

 
9,009

Net interest income
65,288

 
59,727

 
129,613

 
117,863

Provision for loan losses
1,340

 
(2,001
)
 
2,435

 
(7,001
)
Net interest income after provision for loan losses
63,948

 
61,728

 
127,178

 
124,864

Non-interest income:
 
 
 
 
 
 
 
Other service charges, commissions and fees
11,173

 
9,699

 
21,040

 
18,855

Income from the origination and sale of loans
8,802

 
6,380

 
14,708

 
11,040

Wealth management revenues
4,897

 
4,609

 
9,834

 
9,064

Service charges on deposit accounts
4,053

 
3,929

 
7,997

 
7,804

Investment securities gains, net
46

 
17

 
52

 
88

Other income
2,799

 
1,937

 
5,921

 
3,826

Total non-interest income
31,770

 
26,571

 
59,552

 
50,677

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
26,093

 
24,440

 
51,442

 
46,882

Employee benefits
8,070

 
7,164

 
15,850

 
15,477

Occupancy, net
4,529

 
4,253

 
9,021

 
8,492

Furniture and equipment
3,703

 
3,157

 
7,496

 
6,358

Outsourced technology services
2,593

 
2,309

 
5,056

 
4,609

OREO expense, net of income
(823
)
 
(134
)
 
(884
)
 
(153
)
Professional fees
1,514

 
1,278

 
2,815

 
2,648

FDIC insurance premiums
1,304

 
1,093

 
2,446

 
2,209

Mortgage servicing rights amortization
627

 
583

 
1,246

 
1,183

Mortgage servicing rights impairment recovery
(56
)
 
(11
)
 
(71
)
 
(56
)
Core deposit intangibles amortization
854

 
354

 
1,709

 
708

Other expenses
13,577

 
10,837

 
25,381

 
21,304

Acquisition expenses
(7
)
 
597

 
63

 
597

Total non-interest expense
61,978

 
55,920

 
121,570

 
110,258

Income before income tax expense
33,740

 
32,379

 
65,160

 
65,283

Income tax expense
11,518

 
11,302

 
21,958

 
22,813

Net income
$
22,222

 
$
21,077

 
$
43,202

 
$
42,470

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.49

 
$
0.48

 
$
0.95

 
$
0.96

Diluted earnings per common share
$
0.49

 
$
0.47

 
$
0.94

 
$
0.95

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 June 30,
 
Six Months Ended June 30,
 
2015
2014
 
2015
2014
Net income
$
22,222

$
21,077

 
$
43,202

$
42,470

Other comprehensive income, before tax:
 
 
 
 
 
Investment securities available-for sale:
 
 
 
 
 
Change in net unrealized gains (losses) during period
(9,196
)
2,816

 
1,412

17,167

Reclassification adjustment for net gains included in income
(46
)
(17
)
 
(52
)
(88
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
451

—

 
902

—

Defined benefit post-retirement benefits plans:
 
 
 
 
 
Change in net actuarial loss
13

35

 
28

70

Other comprehensive income (loss), before tax
(8,778
)
2,834

 
2,290

17,149

Deferred tax benefit (expense) related to other comprehensive income
3,454

(1,115
)
 
(901
)
(6,748
)
Other comprehensive income (loss), net of tax
(5,324
)
1,719

 
1,389

10,401

Comprehensive income, net of tax
$
16,898

$
22,796

 
$
44,591

$
52,871

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
—

 
43,202

 
—

 
43,202

Other comprehensive income, net of tax expense
—

 
—

 
1,389

 
1,389

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

 
—

 
(15,264
)
21,414 common shares issued
—

 
—

 
—

 
—

156,956 non-vested common shares issued
—

 
—

 
—

 
—

1,678 non-vested common shares forfeited
—

 
—

 
—

 
—

129,885 stock options exercised, net of 37,357 shares tendered in payment of option price and income tax withholding amounts
1,670

 
—

 
—

 
1,670

Tax benefit of stock-based compensation
804

 
—

 
—

 
804

Stock-based compensation expense
2,319

 
—

 
—

 
2,319

Common cash dividend declared ($0.40 per share)
—

 
(18,189
)
 
—

 
(18,189
)
Balance at June 30, 2015
$
313,125

 
$
612,875

 
$
(1,145
)
 
$
924,855

 
 
 
 
 
 
 
 
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

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)

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
43,202

 
$
42,470

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Provision for loan losses
2,435

 
(7,001
)
Net gain on disposal of premises and equipment
(856
)
 
(79
)
Depreciation and amortization
9,090

 
7,786

Net premium amortization on investment securities
7,021

 
7,088

Net gain on investment securities transactions
(52
)
 
(88
)
Net gain on sale of mortgage loans held for sale
(10,759
)
 
(7,601
)
Net gain on sale of OREO
(1,736
)
 
(766
)
Write-downs of OREO and other assets pending disposal
106

 
10

Net reversal of impairment of mortgage servicing rights
(71
)
 
(56
)
Deferred income tax expense
9,108

 
3,760

Net increase in cash surrender value of company-owned life insurance
(1,304
)
 
(1,724
)
Stock-based compensation expense
2,319

 
2,154

Tax benefits from stock-based compensation expense
804

 
1,225

Excess tax benefits from stock-based compensation expense
(530
)
 
(1,211
)
Originations of mortgage loans held for sale
(561,779
)
 
(412,050
)
Proceeds from sales of mortgage loans held for sale
546,871

 
402,825

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(1,945
)
 
(47
)
Increase in other assets
(1,034
)
 
(1,929
)
Increase (decrease) in accrued interest payable
(467
)
 
353

Decrease in accounts payable and accrued expenses
(12,268
)
 
(4,788
)
Net cash provided by operating activities
28,155

 
30,331

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(27,640
)
 
(4,141
)
Available-for-sale
(223,483
)
 
(175,823
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
55,654

 
9,347

Available-for-sale
337,538

 
243,355

Purchases of company-owned life insurance
(22,500
)
 
(15,000
)
Proceeds from sales of mortgage servicing rights
—

 
266

Extensions of credit to customers, net of repayments
(190,392
)
 
(155,523
)
Recoveries of loans charged-off
3,285

 
5,345

Proceeds from sales of OREO
7,807

 
4,234

Capital expenditures, net of sales
514

 
(6,309
)
Net cash used in investing activities
$
(59,217
)
 
$
(94,249
)

7

Table of Contents

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

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
(201,811
)
 
$
45,292

Net increase (decrease) in securities sold under repurchase agreements
(33,105
)
 
5,548

Net increase (decrease) in other borrowed funds
(6
)
 
17

Repayments of long-term debt
(30
)
 
(24
)
Advances on long-term debt
5,031

 
—

Proceeds from issuance of common stock
1,670

 
3,547

Excess tax benefits from stock-based compensation expense
530

 
1,211

Purchase and retirement of common stock
(15,264
)
 
(8,764
)
Dividends paid to common stockholders
(18,189
)
 
(14,088
)
Net cash provided by (used in) financing activities
(261,174
)
 
32,739

Net decrease in cash and cash equivalents
(292,236
)
 
(31,179
)
Cash and cash equivalents at beginning of period
798,670

 
534,827

Cash and cash equivalents at end of period
$
506,434

 
$
503,648

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
18,450

 
$
16,190

Cash paid during the period for interest expense
9,364

 
8,656

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 June 30, 2015 and December 31, 2014, 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, 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 June 30, 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 and six months ended June 30, 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.

The acquisition was completed on July 24, 2015 for cash consideration of $7,234. Immediately subsequent to the acquisition, United Bank was merged with and into the Company's existing bank subsidiary, First Interstate Bank ("FIB"). As of the date of the acquisition, Absarokee has total assets of approximately $73,272, loans of approximately $37,520 and deposits of approximately $63,580.

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.


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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:
June 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
622,237

$
1,087

$
(2,304
)
$
621,020

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
965,430

10,468

(4,463
)
971,435

Private mortgage-backed securities
286

4

(2
)
288

Total
$
1,587,953

$
11,559

$
(6,769
)
$
1,592,743

June 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
181,642

$
4,644

$
(524
)
$
185,762

Corporate securities
50,310

59

(204
)
50,165

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
314,326

5,945

(3,288
)
316,983

Other investments
412

1

—

413

Total
$
546,690

$
10,649

$
(4,016
)
$
553,323

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Gross realized gains
$
46

 
$
18

 
$
52

 
$
243

Gross realized losses
—

 
1

 
—

 
155

 



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 June 30, 2015 and December 31, 2014.
 
Less than 12 Months
 
12 Months or More
 
Total
June 30, 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
$
106,516

$
(460
)
 
$
239,339

$
(1,844
)
 
$
345,855

$
(2,304
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
254,399

(1,480
)
 
133,709

(2,983
)
 
388,108

(4,463
)
Private mortgage-backed securities
—

—

 
83

(2
)
 
83

(2
)
Total
$
360,915

$
(1,940
)
 
$
373,131

$
(4,829
)
 
$
734,046

$
(6,769
)
 
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
19,427

$
(165
)
 
$
13,513

$
(359
)
 
$
32,940

$
(524
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
85,286

(3,288
)
 
—

—

 
85,286

(3,288
)
Corporate securities
31,291

(204
)
 
—

—

 
31,291

(204
)
Total
$
136,004

$
(3,657
)
 
$
13,513

$
(359
)
 
$
149,517

$
(4,016
)

 
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 190 and 154 individual investment securities that were in an unrealized loss position as of June 30, 2015 and December 31, 2014, respectively. Unrealized losses as of June 30, 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 and six months ended June 30, 2015 and 2014.

Maturities of investment securities at June 30, 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
June 30, 2015
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
321,079

$
322,976

 
$
97,639

$
98,594

After one year but within five years
1,189,454

1,192,101

 
273,778

276,390

After five years but within ten years
58,106

58,232

 
125,446

127,706

After ten years
19,314

19,434

 
49,827

50,633

Total
$
1,587,953

$
1,592,743

 
$
546,690

$
553,323

    
As of June 30, 2015, the Company had investment securities callable within one year with amortized costs and estimated fair values of $104,832 and $104,923, respectively, including callable structured notes with amortized costs and estimated fair values of $4,996 and $5,004, 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:
 
June 30,
2015
 
December 31,
2014
Real estate loans:
 
 
 
Commercial
$
1,704,073

 
$
1,639,422

Construction:
 
 
 
Land acquisition & development
211,889

 
220,443

Residential
101,023

 
96,580

Commercial
90,316

 
101,246

Total construction loans
403,228

 
418,269

Residential
999,038

 
999,903

Agricultural
158,506

 
167,659

Total real estate loans
3,264,845

 
3,225,253

Consumer:
 
 
 
Indirect consumer
589,479

 
552,863

Other consumer
144,919

 
144,141

Credit card
64,728

 
65,467

Total consumer loans
799,126

 
762,471

Commercial
819,119

 
740,073

Agricultural
142,629

 
124,859

Other, including overdrafts
2,905

 
3,959

Loans held for investment
5,028,624

 
4,856,615

Mortgage loans held for sale
75,322

 
40,828

Total loans
$
5,103,946

 
$
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 June 30, 2015 and 2014:    
As of June 30,
2015
 
2014
 
 
 
 
Outstanding balance
$
35,555

 
$
—

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
22,293

 
—

Loans on non-accrual status
—

 
—

Total carrying value
$
22,293

 
$
—

    

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 and six ended June 30, 2015 and 2014:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
2014
 
2015
2014
 
 
 
 
 
 
Beginning balance
$
6,980

$
—

 
$
5,781

$
—

Accretion income
(807
)
—

 
(1,355
)
—

Reductions due to exit events
—

—

 
(396
)
—

Reclassifications from (to) nonaccretable differences
1,309

—

 
3,452

—

Ending balance
$
7,482

$
—

 
$
7,482

$
—

    
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, 2015
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
5,123

$
2,803

$
111

$
8,037

$
1,669,445

$
26,591

$
1,704,073

Construction:
 
 
 
 
 
 

 

Land acquisition & development
1,075

276

156

1,507

202,620

7,762

211,889

Residential
417

—

—

417

100,274

332

101,023

Commercial
—

—

—

—

86,874

3,442

90,316

Total construction loans
1,492

276

156

1,924

389,768

11,536

403,228

Residential
3,563

1,524

929

6,016

990,453

2,569

999,038

Agricultural
875

261

—

1,136

150,586

6,784

158,506

Total real estate loans
11,053

4,864

1,196

17,113

3,200,252

47,480

3,264,845

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,382

507

26

3,915

585,200

364

589,479

Other consumer
785

121

29

935

143,241

743

144,919

Credit card
415

224

391

1,030

63,684

14

64,728

Total consumer loans
4,582

852

446

5,880

792,125

1,121

799,126

Commercial
8,285

812

190

9,287

788,210

21,622

819,119

Agricultural
700

30

10

740

141,264

625

142,629

Other, including overdrafts
—

—

311

311

2,594

—

2,905

Loans held for investment
24,620

6,558

2,153

33,331

4,924,445

70,848

5,028,624

Mortgage loans originated for sale
—

—

—

—

75,322

—

75,322

Total loans
$
24,620

$
6,558

$
2,153

$
33,331

$
4,999,767

$
70,848

$
5,103,946





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 $875 and $1,061 for the three months ended June 30, 2015 and 2014, respectively, and approximately $1,613 and $2,182 for the six months ended June 30, 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 June 30, 2015
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
60,786

$
31,201

$
17,201

$
48,402

$
1,810

Construction:
 
 
 
 
 
Land acquisition & development
22,630

6,452

5,915

12,367

569

Residential
969

332

—

332

—

Commercial
3,796

426

1,590

2,016

1,606

Total construction loans
27,395

7,210

7,505

14,715

2,175

Residential
5,442

2,291

1,429

3,720

127

Agricultural
9,094

6,396

2,202

8,598

712

Total real estate loans
102,717

47,098

28,337

75,435

4,824

Commercial
28,472

11,275

12,298

23,573

3,279

Agricultural
2,110

427

1,058

1,485

618

Total
$
133,299

$
58,800

$
41,693

$
100,493

$
8,721

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 June 30,
 
2015
 
2014
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
39,513

 
$
211

 
$
57,588

 
$
241

Construction:
 
 
 
 
 
 
 
Land acquisition & development
8,664

 
12

 
13,563

 
11

Residential
338

 
—

 
785

 
—

Commercial
3,492

 
—

 
1,471

 
2

Total construction loans
12,494

 
12

 
15,819

 
13

Residential
3,014

 
1

 
5,852

 
1

Agricultural
8,572

 
13

 
9,747

 
25

Total real estate loans
63,593

 
237

 
89,006

 
280

Commercial
21,841

 
112

 
14,162

 
14

Agricultural
1,004

 
8

 
742

 
6

Total
$
86,438

 
$
357

 
$
103,910

 
$
300

 
Six Months Ended June 30,
 
2015
 
2014
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
40,652

 
$
361

 
$
60,870

 
$
457

Construction:
 
 
 
 
 
 
 
Land acquisition & development
8,720

 
22

 
14,554

 
22

Residential
302

 
—

 
1,051

 
—

Commercial
3,133

 
2

 
918

 
4

Total construction loans
12,155

 
24

 
16,523

 
26

Residential
2,719

 
2

 
5,969

 
3

Agricultural
8,666

 
35

 
9,830

 
29

Total real estate loans
64,192

 
422

 
93,192

 
515

Commercial
17,874

 
120

 
14,231

 
28

Agricultural
857

 
13

 
538

 
12

Total
$
82,923

 
$
555

 
$
107,961

 
$
555


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 $1,045 and $1,301 for the three months ended June 30, 2015 and 2014, respectively, and approximately $2,011 and $2,412 for the six months ended June 30, 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.
    

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)


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 $37,363 as of June 30, 2015, of which $22,236 were included in non-accrual loans and $15,127 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.

No troubled debt restructurings occurred during the three months ended June 30, 2015. The following table presents information on the Company's troubled debt restructurings that occurred during the six months ended June 30, 2015: