Edgar Filing: FIRST INTERSTATE BANCSYSTEM INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

¨	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 x 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 x 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:


September 30, 2011 – Class A common stock			16,336,108
September 30, 2011 – Class B common stock			26,643,624

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 September 30, 2011 and December 31, 2010		3

		Consolidated Statements of Income Three and nine months ended September 30, 2011 and 2010		4

		Consolidated Statements of Changes in Stockholders’ Equity Nine months ended September 30, 2011 and 2010		5

		Consolidated Statements of Cash Flows Nine months ended September 30, 2011 and 2010		6

		Notes to Unaudited Consolidated Financial Statements		8

	Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

	Item 3 –	Quantitative and Qualitative Disclosures about Market Risk		44

	Item 4 –	Controls and Procedures		44

Part II. Other Information

	Item 1 –	Legal Proceedings		45

	Item 1A –	Risk Factors		45

	Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds		45

	Item 3 –	Defaults Upon Senior Securities		45

	Item 4 –	(Removed and Reserved)		45

	Item 5 –	Other Information		45

	Item 6 –	Exhibits		45

Signatures				47

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)


	September 30, 2011		December 31, 2010
Assets
Cash and due from banks	$	135,229	$	107,035
Federal funds sold		2,119		2,114
Interest bearing deposits in banks		366,879		576,469

Total cash and cash equivalents		504,227		685,618

Investment securities:
Available-for-sale		1,896,385		1,786,335
Held-to-maturity (estimated fair values of $157,639 as of September 30, 2011 and $146,508 as of December 31, 2010)		149,411		147,068

Total investment securities		2,045,796		1,933,403

Loans held for investment		4,223,229		4,321,501
Mortgage loans held for sale		52,488		46,408

Total loans		4,275,717		4,367,909

Less allowance for loan losses		120,303		120,480

Net loans		4,155,414		4,247,429

Premises and equipment, net of accumulated depreciation		185,742		188,138
Goodwill		183,673		183,673
Company-owned life insurance		74,362		73,056
Accrued interest receivable		34,994		33,628
Other real estate owned (“OREO”), net of write-downs		25,080		33,632
Mortgage servicing rights, net of accumulated amortization and impairment reserve		11,909		13,191
Deferred tax asset		8,393		18,472
Core deposit intangibles, net of accumulated amortization		7,719		8,803
Other assets		69,845		81,927

Total assets	$	7,307,154	$	7,500,970

Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	1,243,703	$	1,063,869
Interest bearing		4,607,616		4,861,844

Total deposits		5,851,319		5,925,713

Securities sold under repurchase agreements		475,522		620,154
Accounts payable and accrued expenses		37,266		38,915
Accrued interest payable		8,786		13,178
Long-term debt		37,469		37,502
Other borrowed funds		5,122		4,991
Subordinated debentures held by subsidiary trusts		123,715		123,715

Total liabilities		6,539,199		6,764,168

Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; issued and outstanding 5,000 shares as of September 30, 2011 and December 31, 2010		50,000		50,000
Common stock		266,317		264,174
Retained earnings		427,556		413,253
Accumulated other comprehensive income, net		24,082		9,375

Total stockholders’ equity		767,955		736,802

Total liabilities and stockholders’ equity	$	7,307,154	$	7,500,970

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
Interest income:
Interest and fees on loans	$	61,372	$	67,033	$	185,238	$	201,428
Interest and dividends on investment securities:
Taxable		10,721		10,540		31,281		32,673
Exempt from federal taxes		1,188		1,137		3,553		3,476
Interest on deposits in banks		200		252		794		733
Interest on federal funds sold		2		3		11		21

Total interest income		73,483		78,965		220,877		238,331

Interest expense:
Interest on deposits		7,905		12,973		26,679		42,747
Interest on securities sold under repurchase agreements		137		209		545		632
Interest on other borrowed funds		—		1		—		3
Interest on long-term debt		498		512		1,482		1,940
Interest on subordinated debentures held by subsidiary trusts		1,451		1,526		4,354		4,420

Total interest expense		9,991		15,221		33,060		49,742

Net interest income		63,492		63,744		187,817		188,589
Provision for loan losses		14,000		18,000		44,400		49,400

Net interest income after provision for loan losses		49,492		45,744		143,417		139,189

Non-interest income:
Other service charges, commissions and fees		8,479		7,821		23,627		22,073
Service charges on deposit accounts		4,609		4,497		13,104		13,854
Income from origination and sale of loans		5,512		7,355		13,066		14,841
Wealth managment revenues		3,202		3,091		9,980		9,304
Investment securities gains, net		38		66		56		108
Other income		1,285		2,025		5,042		5,220

Total non-interest income		23,125		24,855		64,875		65,400

Non-interest expense:
Salaries, wages and employee benefits		26,888		27,994		82,479		83,451
Occupancy, net		4,180		3,939		12,408		12,044
Furniture and equipment		3,018		3,411		9,367		10,108
Outsourced technology services		2,235		2,402		6,688		7,100
FDIC insurance premiums		1,631		2,337		5,726		7,460
OREO expense, net of income		2,878		2,608		6,631		6,129
Mortgage servicing rights amortization		807		1,221		2,285		3,469
Mortgage servicing rights impairment		1,168		1,991		848		2,212
Core deposit intangibles amortization		362		437		1,085		1,316
Other expenses		11,874		11,670		34,674		32,892

Total non-interest expense		55,041		58,010		162,191		166,181

Income before income tax expense		17,576		12,589		46,101		38,408
Income tax expense		5,655		3,860		14,820		11,890

Net income		11,921		8,729		31,281		26,518
Preferred stock dividends		862		862		2,559		2,559

Net income available to common stockholders	$	11,059	$	7,867	$	28,722	$	23,959

Basic earnings per common share	$	0.26	$	0.18	$	0.67	$	0.61

Diluted earnings per common share	$	0.26	$	0.18	$	0.67	$	0.61

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share and per share data)

(Unaudited)


	Preferred stock		Common stock			Retained earnings			Accumulated other comprehensive income		Total stockholders’ equity
Balance at December 31, 2010	$	50,000	$	264,174		$	413,253		$	9,375	$	736,802
Comprehensive income:
Net income		—		—			31,281			—		31,281
Other comprehensive income, net of tax		—		—			—			14,707		14,707

Total comprehensive income												45,988

Common stock transactions:
14,464 common shares purchased and retired		—		(197	)		—			—		(197	)
15,440 common shares issued		—		205			—			—		205
130,904 non-vested common shares issued		—		—			—			—		—
20,039 non-vested common shares forfeited		—		(101	)		—			—		(101	)
Non-vested liability awards vesting during period		—		195			—			—		195
67,197 stock options exercised, net of 114,211 shares tendered in payment of option price and income tax withholding amounts		—		272			—			—		272
Tax benefit of stock-based compensation		—		204			—			—		204
Stock-based compensation expense		—		1,565			—			—		1,565
Cash dividends declared:
Common ($0.3375 per share)		—		—			(14,419	)		—		(14,419	)
Preferred (6.75% per share)		—		—			(2,559	)		—		(2,559	)

Balance at September 30, 2011	$	50,000	$	266,317		$	427,556		$	24,082	$	767,955

Balance at December 31, 2009	$	50,000	$	112,135		$	397,224		$	15,075	$	574,434
Comprehensive income:
Net income		—		—			26,518			—		26,518
Other comprehensive income, net of tax		—		—			—			7,873		7,873

Total comprehensive income												34,391

Common stock transactions:
246,596 common shares purchased and retired		—		(3,699	)		—			—		(3,699	)
11,506,503 common shares issued		—		153,120			—			—		153,120
117,140 non-vested common shares issued		—		—			—			—		—
14,724 non-vested common shares forfeited		—		(80	)		—			—		(80	)
Non-vested liability awards vesting during period				59								59
86,129 stock options exercised, net of 69,363 shares tendered in payment of option price and income tax withholding amounts		—		650			—			—		650
Tax benefit of stock-based compensation		—		234			—			—		234
Stock-based compensation expense		—		1,300			—			—		1,300
Cash dividends declared:
Common ($0.3375 per share)		—		—			(13,147	)		—		(13,147	)
Preferred (6.75% per share)		—		—			(2,559	)		—		(2,559	)

Balance at September 30, 2010	$	50,000	$	263,719		$	408,036		$	22,948	$	744,703

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	For the nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	31,281		$	26,518
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		44,400			49,400
Net loss on disposal of property and equipment		28			408
Depreciation and amortization		12,997			15,172
Net premium amortization on investment securities		7,373			4,103
Net gains on investment securities transactions		(56	)		(108	)
Net gains on sales of mortgage loans held for sale		(8,730	)		(9,561	)
Net gain on sale of student loan portfolio		—			(249	)
Write-down of OREO, equipment pending disposal and investments		5,972			5,643
Net impairment on mortgage servicing rights		848			2,212
Loss on early extinguishment of debt		—			306
Deferred income tax expense (benefit)		400			(2,981	)
Net increase in cash surrender value of company-owned life insurance policies		(1,306	)		(1,493	)
Stock-based compensation expense		1,648			1,390
Tax benefits from stock-based compensation expense		204			234
Excess tax benefits from stock-based compensation		(129	)		(220	)
Changes in operating assets and liabilities:
Decrease (increase) in mortgage loans held for sale		799			(10,591	)
Increase in interest receivable		(1,366	)		(128	)
Decrease in other assets		10,840			7,266
Decrease in accrued interest payable		(4,392	)		(2,344	)
Decrease in accounts payable and accrued expenses		(1,404	)		(2,941	)

Net cash provided by operating activities		99,407			82,036

Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity		(11,626	)		(19,339	)
Available-for-sale		(704,619	)		(972,742	)
Proceeds from maturities and paydowns of investment securities:
Held-to-maturity		8,940			11,482
Available-for-sale		611,918			606,461
Proceeds from sales of mortgage servicing rights, net of acquisitions		596			597
Proceeds from sale of student loan portfolio		—			24,829
Extensions of credit to customers, net of repayments		40,278			16,832
Recoveries of loans charged-off		4,269			2,100
Proceeds from sales of OREO		12,247			15,640
Capital expenditures, net of sales		(7,099	)		(7,761	)

Net cash used in investing activities	$	(45,096	)	$	(321,901	)

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (continued)

(In thousands)

(Unaudited)


	For the nine months ended September 30,
	2011			2010
Cash flows from financing activities:
Net (decrease) increase in deposits	$	(74,394	)	$	78,125
Net decrease in repurchase agreements		(144,632	)		(18,280	)
Net increase in short-term borrowings		131			251
Repayments of long-term debt		(33	)		(35,840	)
Common stock issuance costs		—			(13,733	)
Proceeds from issuance of common stock		272			167,400
Excess tax benefits from stock-based compensation		129			220
Purchase and retirement of common stock		(197	)		(3,699	)
Dividends paid to common stockholders		(14,419	)		(13,147	)
Dividends paid to preferred stockholders		(2,559	)		(2,559	)

Net cash (used in) provided by financing activities		(235,702	)		158,738

Net decrease in cash and cash equivalents		(181,391	)		(81,127	)
Cash and cash equivalents at beginning of period		685,618			623,482

Cash and cash equivalents at end of period	$	504,227		$	542,355

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	12,420		$	15,300
Cash paid during the period for interest expense	$	37,452		$	52,086

See accompanying notes to unaudited consolidated financial statements.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(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 September 30, 2011 and December 31, 2010, the results of operations for each of the three and nine month periods ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2010 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 September 30, 2011 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, 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

(2) Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:


Available-for-Sale September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Obligations of U.S. government agencies	$	1,006,051	$	7,112	$	(71	)	$	1,013,092
U.S. agency residential mortgage-backed securities		848,075		34,535		(100	)		882,510
Private residential mortgage-backed securities		797		8		(22	)		783

Total	$	1,854,923	$	41,655	$	(193	)	$	1,896,385


Held-to-Maturity September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
State, county and municipal securities	$	149,235	$	8,269	$	(41	)	$	157,463
Other securities		176		—		—			176

Total	$	149,411	$	8,269	$	(41	)	$	157,639


Available-for-Sale December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Obligations of U.S. government agencies	$	956,017	$	3,337	$	(5,934	)	$	953,420
U.S. agency residential mortgage-backed securities		812,372		24,107		(4,619	)		831,860
Private residential mortgage-backed securities		1,057		10		(12	)		1,055

Total	$	1,769,446	$	27,454	$	(10,565	)	$	1,786,335


Held-to-Maturity December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
State, county and municipal securities	$	146,850	$	1,375	$	(1,935	)	$	146,290
Other securities		218		—		—			218

Total	$	147,068	$	1,375	$	(1,935	)	$	146,508

Gross gains of $38 and $69 were realized on the disposition of available-for-sale investment securities during the three months ended September 30, 2011 and 2010, respectively. Gross gains of $56 and $111 were realized on the disposition of available-for-sale investment securities during the nine months ended September 30, 2011 and 2010, respectively. Gross losses of $0 and $3 were realized on the disposition of available-for-sale investment securities during the three and nine months ended September 30, 2011 or 2010, respectively.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

The following table shows 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 September 30, 2011 and December 31, 2010.


	Less than 12 Months					12 Months or More					Total
September 30, 2011	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale
Obligations of U.S. government agencies	$	46,896	$	(71	)	$	—	$	—		$	46,896	$	(71	)
U.S. agency residential mortgage-backed securities		17,300		(100	)		—		—			17,300		(100	)
Private residential mortgage-backed securities		250		(14	)		187		(8	)		437		(22	)

Total	$	64,446	$	(185	)	$	187	$	(8	)	$	64,633	$	(193	)


	Less than 12 Months					12 Months or More					Total
September 30, 2011	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized L.osses
Held-to-Maturity
State, county and municipal securities	$	—	$	—		$	3,517	$	(41	)	$	3,517	$	(41	)


	Less than 12 Months					12 Months or More					Total
December 31, 2010	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale
Obligations of U.S. government agencies	$	498,344	$	(5,934	)	$	—	$	—		$	498,344	$	(5,934	)
U.S. agency residential mortgage-backed securities		160,161		(4,619	)		—		—			160,161		(4,619	)
Private residential mortgage-backed securities		—		—			249		(12	)		249		(12	)

Total	$	658,505	$	(10,553	)	$	249	$	(12	)	$	658,754	$	(10,565	)


	Less than 12 Months					12 Months or More					Total
December 31, 2010	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity
State, county and municipal securities	$	42,178	$	(1,814	)	$	3,023	$	(121	)	$	45,201	$	(1,935	)

The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 13 and 128 individual investment securities that were in an unrealized loss position as of September 30, 2011 and December 31, 2010, respectively. Unrealized losses as of September 30, 2011 and December 31, 2010 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 more likely than not that the Company will not be required to sell any such securities before a recovery of cost. No impairment losses were recorded during the three or nine months ended September 30, 2011 or 2010.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

Maturities of investment securities at September 30, 2011 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
September 30, 2011	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	334,816	$	343,657	$	5,509	$	5,226
After one year but within five years		1,241,788		1,264,013		26,447		27,270
After five years but within ten years		181,081		187,534		55,712		59,282
After ten years		97,238		101,181		61,567		65,685

Total		1,854,923		1,896,385		149,235		157,463
Investments with no stated maturity		—		—		176		176

Total	$	1,854,923	$	1,896,385	$	149,411	$	157,639

(3) Loans

The following table presents loans by class as of the dates indicated.


	September 30, 2011		December 31, 2010
Real estate loans:
Commercial	$	1,561,788	$	1,565,665
Construction:
Land acquisition & development		296,407		329,720
Commercial		67,261		98,542
Residential		64,098		99,196

Total construction loans		427,766		527,458

Residential		586,425		549,604
Agricultural		177,121		182,794

Total real estate loans		2,753,100		2,825,521

Consumer loans:
Indirect consumer loans		415,245		423,552
Other consumer loans		151,611		162,137
Credit card loans		60,283		60,891

Total consumer loans		627,139		646,580

Commercial		703,010		730,471
Agricultural		136,728		116,546
Other loans, including overdrafts		3,252		2,383

Loans held for investment		4,223,229		4,321,501

Mortgage loans held for sale		52,488		46,408

Total loans	$	4,275,717	$	4,367,909

Commercial real estate includes loans aggregating $883,501 and $867,510 as of September 30, 2011 and December 31, 2010, respectively, that are owner occupied.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(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.


As of September 30, 2011	30 - 59 Days Past Due		60 - 89 Days Past Due		> 90 Due Days Due		Total Loans 30 or More Days Past Due		Current Loans		Total Loans		> 90 Days Past Due and Accruing
Real estate
Commercial	$	25,436	$	5,176	$	26,879	$	57,491	$	1,504,297	$	1,561,788	$	393
Construction:
Land acquisition & development		8,961		5,284		19,285		33,530		262,877		296,407		1,001
Commercial		30		1,149		6,126		7,305		59,956		67,261		—
Residential		848		477		396		1,721		62,377		64,098		—

Total construction loans		9,839		6,910		25,807		42,556		385,210		427,766		1,001

Residential		7,850		515		1,011		9,376		577,049		586,425		284
Agricultural		1,508		59		1,261		2,828		174,293		177,121		—

Total real estate loans		44,633		12,660		54,958		112,251		2,640,849		2,753,100		1,678

Consumer:
Indirect consumer loans		2,868		225		90		3,183		412,062		415,245		3
Other consumer loans		1,300		215		196		1,711		149,900		151,611		98
Credit card loans		574		348		511		1,433		58,850		60,283		511

Total consumer loans		4,742		788		797		6,327		620,812		627,139		612

Commercial		13,233		2,040		3,958		19,231		683,779		703,010		711
Agricultural		656		17		40		713		136,015		136,728		—
Other loans, including overdrafts		—		—		—		—		3,252		3,252		—

Loans held for investment		63,264		15,505		59,753		138,522		4,084,707		4,223,229		3,001

Mortgage loans originated for sale		—		—		—		—		52,488		52,488		—

Total loans	$	63,264	$	15,505	$	59,753	$	138,522	$	4,137,195	$	4,275,717	$	3,001

As of December 31, 2010	30 - 59 Days Past Due		60 - 89 Days Past Due		> 90 Days Past Due		Total Loans 30 or More Days Past Due		Current Loans		Total Loans		> 90 Days Past Due and Accruing
Real estate
Commercial	$	18,743	$	6,798	$	13,047	$	38,588	$	1,527,077	$	1,565,665	$	—
Construction:
Land acquisition & development		7,225		3,942		7,462		18,629		311,091		329,720		—
Commercial		3,870		137		3,376		7,383		91,159		98,542		—
Residential		3,142		239		992		4,373		94,823		99,196		—

Total construction loans		14,237		4,318		11,830		30,385		497,073		527,458		—

Residential		1,370		982		359		2,711		546,893		549,604		—
Agricultural		3,492		1,770		392		5,654		177,140		182,794		—

Total real estate loans		37,842		13,868		25,628		77,338		2,748,183		2,825,521		—

Consumer:
Indirect consumer loans		3,419		379		63		3,861		419,691		423,552		—
Other consumer loans		1,391		248		583		2,222		159,915		162,137		15
Credit card loans		613		392		759		1,764		59,127		60,891		759

Total consumer loans		5,423		1,019		1,405		7,847		638,733		646,580		774

Commercial		5,701		3,112		9,664		18,477		711,994		730,471		957
Agricultural		697		1,417		142		2,256		114,290		116,546		117
Other loans, including overdrafts		—		123		4		127		2,256		2,383		4

Loans held for investment		49,663		19,539		36,843		106,045		4,215,456		4,321,501		1,852

Mortgage loans originated for sale		—		—		—		—		46,408		46,408		—

Total loans	$	49,663	$	19,539	$	36,843	$	106,045	$	4,261,864	$	4,367,909	$	1,852

Included in total loans 30 or more days past due in the table above are loans aggregating $73,356 and $47,182 that were on non-accrual status as of September 30, 2011 and December 31, 2011, respectively. Included in current loans in the table above are loans aggregating $150,605 and $148,160 that were on non-accrual status as of September 30, 2011 and December 31, 2010, respectively.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

The following table presents the Company’s recorded investment in non-accrual loans by class as of the dates indicated:


	September 30, 2011		December 31, 2010
Real estate
Commercial	$	77,017	$	68,948
Construction:
Land acquisition & development		63,347		41,547
Commercial		21,189		16,589
Residential		12,503		16,679

Total construction loans		97,039		74,815

Residential		13,689		15,222
Agricultural		4,491		2,497

Total real estate loans		192,236		161,482

Consumer:
Indirect consumer loans		463		564
Other consumer loans		838		1,337
Credit card loans		27		30

Total consumer loans		1,328		1,931

Commercial		29,517		30,953
Agricultural		880		976

Total	$	223,961	$	195,342

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 table presents information on the Company’s recorded investment in impaired loans as of dates indicated:


	As of September 30, 2011
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	101,963	$	61,672	$	28,817	$	90,489	$	6,829
Construction:
Land acquisition & development		74,808		16,153		48,039		64,192		14,469
Commercial		23,078		13,593		7,596		21,189		1,864
Residential		16,370		5,104		10,016		15,120		2,031

Total construction loans		114,256		34,850		65,651		100,501		18,364

Residential		23,671		13,225		10,356		23,581		2,126
Agricultural		9,363		7,824		991		8,815		25

Total real estate loans		249,253		117,571		105,815		223,386		27,344

Commercial		38,298		11,038		20,432		31,470		9,422
Agricultural		880		550		330		880		239

Total	$	288,431	$	129,159	$	126,577	$	255,736	$	37,005

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)


	As of December 31, 2010
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	79,193	$	31,925	$	41,703	$	73,628	$	10,315
Construction:
Land acquisition & development		48,371		24,120		20,440		44,560		8,064
Commercial		17,458		2,976		13,578		16,554		3,877
Residential		18,632		2,993		13,721		16,714		3,431

Total construction loans		84,461		30,089		47,739		77,828		15,372

Residential		8,951		1,741		7,110		8,851		1,266
Agricultural		3,045		1,065		1,432		2,497		128

Total real estate loans		175,650		64,820		97,984		162,804		27,081

Commercial		36,251		11,354		24,168		35,522		14,892
Agricultural		976		498		478		976		253

Total	$	212,877	$	76,672	$	122,630	$	199,302	$	42,226

The following table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:


	Three months ended September 30, 2011				Nine months ended September 30, 2011				Year Ended December 31, 2010
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized		Average Recorded Investment
Real estate:
Commercial	$	86,347	$	188	$	83,479	$	390	$	49,713
Construction:
Land acquisition & development		66,470		3		54,494		90		34,871
Commercial		23,441		—		20,371		—		21,086
Residential		17,627		18		17,248		55		15,097

Total construction loans		107,538		21		92,113		145		71,054

Residential		22,972		160		19,101		257		10,889
Agricultural		7,694		56		6,392		98		1,737

Total real estate loans		224,551		425		201,085		890		133,393

Commercial		33,634		31		32,634		96		22,017
Agricultural		885		—		925		—		974

Total	$	259,070	$	456	$	234,644	$	986	$	156,384

For the three and nine months ended September 30, 2011, 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 principle. Interest income is subsequently recognized only to the extent cash payments are received in excess of principle due. If interest on all impaired loans had been accrued, interest income on impaired loans during the three and nine months ended September 30, 2011 would have been approximately $3,729 and $10,214, respectively. If interest on all impaired loans had been accrued, interest income on impaired loans during the three and nine months ended September 30, 2010 would have been approximately $2,675 and $6,882, respectively.

Collateralized impaired loans are recorded at the fair value of the underlying collateral using independent appraisals and management estimates of current market conditions. 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.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(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 reasonable 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.

The Company had troubled debt restructurings of $119,574 as of September 30, 2011, of which $83,958 were included in non-accrual loans and $35,616 were on accrual status. The Company had troubled debt restructurings of $53,700 as of December 31, 2010, of which $40,210 were included in non-accrual loans and $13,490 were on accrual status.

The following tables present information on the Company’s troubled debt restructurings during the periods indicated:



			Pre-Modification Investment
Three months ended September 30, 2011	Number of Notes		Interest rate adjustment		Interest only period		Other		Total		Post- Modification Investment
Real estate
Commercial		23	$	516	$	6,685	$	2,510	$	9,711	$	9,703
Construction:
Land acquisition & development		3		—		380		408		788		788
Residential		2		—		7,749		—		7,749		7,732

Total construction loans		5		0		8,129		408		8,537		8,520

Residential		1		—		—		54		54		53
Agricultural		2		189		1,970		—		2,159		2,159

Total real estate loans		31		705		16,784		2,972		20,461		20,435

Consumer:
Other consumer loans		1		—		—		50		50		50

Total consumer loans		1		—		—		50		50		50

Commercial		8		165		3,387		1,298		4,850		4,844

Total		40	$	870	$	20,171	$	4,320	$	25,361	$	25,329

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)



	Number of Notes		Pre-Modification Investment								Post- Modification Investment
Nine months ended September 30, 2011	Number of Notes		Interest rate adjustment		Interest only period		Other		Total		Post- Modification Investment
Real estate
Commercial		55	$	3,031	$	23,569	$	6,897	$	33,497	$	33,200
Construction:
Land acquisition & development		9		680		995		4,532		6,207		6,194
Residential		5		234		7,749		878		8,861		8,835

Total construction loans		14		914		8,744		5,410		15,068		15,029

Residential		6		223		9,771		954		10,948		10,886
Agricultural		6		189		3,594		517		4,300		4,298

Total real estate loans		81		4,357		45,678		13,778		63,813		63,413

Consumer:
Indirect consumer loans		2		—		—		29		29		29
Other consumer loans		3		—		17		61		78		76

Total consumer loans		5		0		17		90		107		105

Commercial		37		662		11,727		2,789		15,178		8,959
Agricultural		5		—		—		187		187		148

Total		128	$	5,019	$	57,422	$	16,844	$	79,285	$	72,625

For troubled debt restructurings that were on non-accrual status 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. Financial effects of modifications of troubled debt restructurings may include principle loan forgiveness or other charge-offs. The Company had no charge-offs related to modifying troubled debt restructurings for the three and nine months ended September 30, 2011.

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. All troubled debt restructurings with payment defaults in the following table are on non-accrual status.


	Three months ended September 30, 2011				Nine months ended September 30, 2011
	Number of Notes		Recorded Investment		Number of Notes		Recorded Investment
Real estate
Commercial		2	$	1,032		6	$	2,432
Construction:
Land acquisition & development		—		—		2		1,338
Residential		—		—		1		302

Total construction loans		—		—		3		1,640

Agricultural		—		—		2		152

Total real estate loans		2		1,032		11		4,224

Commercial		1		14		4		161
Agricultural		—		—		3		37

Total		3	$	1,046		18	$	4,422

At September 30, 2011, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

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 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 a specific valuation allowance.

The following table presents the Company’s recorded investment in criticized loans by class and credit quality indicator based on the most recent analyses performed as of the dates indicated.


As of September 30, 2011	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	137,983	$	157,208	$	30,283	$	325,474
Construction:
Land acquisition & development		44,414		29,622		48,295		122,331
Commercial		—		21,231		8,797		30,028
Residential		7,650		5,214		10,016		22,880

Total construction loans		52,064		56,067		67,108		175,239

Residential		12,581		25,322		10,257		48,160
Agricultural		12,435		22,740		801		35,976

Total real estate loans		215,063		261,337		108,449		584,849

Consumer:
Indirect consumer loans		1,082		1,721		371		3,174
Other consumer loans		778		1,499		557		2,834
Credit card loans		—		448		2,788		3,236

Total consumer loans		1,860		3,668		3,716		9,244

Commercial		38,465		34,949		21,872		95,286
Agricultural		6,113		5,191		330		11,634

Total	$	261,501	$	305,145	$	134,367	$	701,013

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)


As of December 31, 2010	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	133,700	$	149,604	$	41,662	$	324,966
Construction:
Land acquisition & development		73,151		36,552		21,795		131,498
Commercial		9,025		18,611		13,598		41,234
Residential		9,083		9,842		13,721		32,646

Total construction loans		91,259		65,005		49,114		205,378

Residential		13,889		18,725		11,474		44,088
Agricultural		12,683		20,885		1,432		35,000

Total real estate loans		251,531		254,219		103,682		609,432

Consumer:
Indirect consumer loans		768		1,964		315		3,047
Other consumer loans		903		1,499		1,131		3,533
Credit card loans		—		571		3,467		4,038

Total consumer loans		1,671		4,034		4,913		10,618

Commercial		47,307		39,145		24,280		110,732
Agricultural		5,416		6,255		478		12,149

Total	$	305,925	$	303,653	$	133,353	$	742,931

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 prepared and reviewed on a quarterly basis for all criticized loans.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

(4)

Allowance For Loan Losses

The following tables present a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2011.


Three months ended September 30, 2011	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	90,243		$	8,526		$	24,434		$	1,376		$	—	$	124,579
Provision charged to operating expense		9,984			1,676			2,206			134			—		14,000
Less loans charged-off		(12,210	)		(1,682	)		(6,498	)		(15	)		—		(20,405	)
Add back recoveries of loans previously charged-off		1,386			453			287			3			—		2,129

Ending balance	$	89,403		$	8,973		$	20,429		$	1,498		$	—	$	120,303


Nine months ended September 30, 2011	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	84,181		$	9,332		$	25,354		$	1,613		$	—	$	120,480
Provision charged to operating expense		33,080			2,927			8,461			(68	)		—		44,400
Less loans charged-off		(29,598	)		(4,641	)		(14,547	)		(60	)		—		(48,846	)
Add back recoveries of loans previously charged-off		1,740			1,355			1,161			13			—		4,269

Ending balance	$	89,403		$	8,973		$	20,429		$	1,498		$	—	$	120,303


As of September 30, 2011	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Individually evaluated for impairment	$	27,344		$	—		$	9,422		$	239		$	—	$	37,005
Collectively evaluated for impairment		62,059			8,973			11,007			1,259			—		83,298

Ending balance	$	89,403		$	8,973		$	20,429		$	1,498		$	—	$	120,303

Loans individually evaluated for impairment	$	223,386		$	—		$	31,470		$	880		$	—	$	255,736
Loans collectively evaluated for impairment		2,582,202			627,139			671,540			135,848			3,252		4,019,981

Total loans	$	2,805,588		$	627,139		$	703,010		$	136,728		$	3,252	$	4,275,717

The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with generally accepted accounting principles. The methodology used to assess the adequacy is consistently applied to the Company’s loan portfolio and consists of three elements: (1) specific valuation allowances based on probable losses on impaired loans; (2) historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends; and (3) general valuation allowances determined based on changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, general economic conditions and other qualitative risk factors both internal and external to the Company.

Specific allowances are established for loans where management has determined that probability of a loss exists by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies and any relevant qualitative or environmental factors impacting the loan. Historical valuation allowances are determined by applying percentage loss factors to the credit exposures from outstanding loans. For commercial, agricultural and real estate loans, loss factors are applied based on the internal risk classifications of these loans. For consumer loans, loss factors are applied on a portfolio basis. For commercial, agriculture and real estate loans, loss factor percentages are based on a migration analysis of our historical loss experience. For consumer loans, loss factor percentages are based on a one-year loss history. General valuation allowances are determined by evaluating, on a quarterly basis, changes in the nature and volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic and regulatory factors and the estimated impact of current economic, environmental and regulatory conditions on historical loss rates.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

The following table presents a summary of changes in the allowance for loan losses for the three and nine months ended September 30, 2010:


	Three months ended September 30, 2010			Nine months ended September 30, 2010
Beginning balance	$	114,328		$	103,030
Provision charged to operating expense		18,000			49,400
Less loans charged-off		(12,789	)		(34,294	)
Add back recoveries of loans previously charged-off		697			2,100

Ending balance	$	120,236		$	120,236

(5)

Common Stock

The Company had 16,336,108 and 15,598,632 shares of Class A common stock outstanding as of September 30, 2011 and December 31, 2010, respectively.

The Company had 26,643,624 and 27,202,062 shares of Class B common stock outstanding as of September 30, 2011 and December 31, 2010, respectively.

(6)

Earnings per Common Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2011 and 2010.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net income	$	11,921	$	8,729	$	31,281	$	26,518
Less preferred stock dividends		862		862		2,559		2,559

Net income available to common stockholders, basic and diluted	$	11,059	$	7,867	$	28,722	$	23,959

Weighted average common shares outstanding		42,774,259		42,634,283		42,737,986		38,986,458
Weighted average common shares issuable upon exercise of stock options and non-vested stock awards		67,404		150,587		111,368		216,219

Weighted average common and common equivalent shares outstanding		42,841,663		42,784,870		42,849,354		39,202,677

Basic earnings per common share	$	0.26	$	0.18	$	0.67	$	0.61

Diluted earnings per common share	$	0.26	$	0.18	$	0.67	$	0.61

The Company had 2,918,480 and 2,888,192 stock options outstanding for the three and nine months ended September 30, 2011, respectively, that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive. The Company had 2,725,188 and 2,315,166 stock options outstanding for the three and nine months ended September 30, 2010, respectively, that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

(7)

Regulatory Capital

The Company is subject to the regulatory capital requirements administered by federal banking regulators and the Federal Reserve. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, as defined in the regulations. As of September 30, 2011 and December 31, 2010, the Company exceeded all capital adequacy requirements to which it is subject.

Actual capital amounts and ratios and selected minimum regulatory thresholds for the Company and its bank subsidiary, First Interstate Bank (“FIB”), as of September 30, 2011 and December 31, 2010 are presented in the following table:


	Actual					Adequately Capitalized					Well Capitalized
As of September 30, 2011:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital:
Consolidated	$	791,403		16.3	%	$	389,318		8.0	%		NA		NA
FIB		654,062		13.5			387,292		8.0		$	484,115		10.0	%
Tier 1 risk-based capital:
Consolidated		694,838		14.3			194,659		4.0			NA		NA
FIB		577,809		11.9			193,646		4.0		$	290,469		6.0
Leverage capital ratio:
Consolidated		694,838		9.8			284,492		4.0			NA		NA
FIB		577,809		8.2			283,580		4.0		$	354,475		5.0


	Actual					Adequately Capitalized					Well Capitalized
As of December 31, 2010:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital:
Consolidated	$	772,337		15.5	%	$	398,720		8.0	%		NA		NA
FIB		634,976		12.8			396,754		8.0		$	495,943		10.0	%
Tier 1 risk-based capital:
Consolidated		674,319		13.5			199,360		4.0			NA		NA
FIB		557,261		11.2			198,377		4.0		$	297,566		6.0
Leverage capital ratio:
Consolidated		674,319		9.3			291,023		4.0			NA		NA
FIB		557,261		7.7			290,071		4.0		$	362,589		5.0

(8)

Commitments and Contingencies

In the normal course of business, the Company is involved in various claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof is not expected to have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

The Company had commitments under construction contracts of $4,507 as of September 30, 2011.

The Company had commitments to purchase held-to-maturity municipal investment securities of $415 as of September 30, 2011.

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

(9)

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2011, commitments to extend credit to existing and new borrowers approximated $1,012,708, which includes $280,563 on unused credit card lines and $241,060 with commitment maturities beyond one year.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At September 30, 2011, the Company had outstanding standby letters of credit of $74,086. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in other liabilities in the Company’s consolidated balance sheet.

(10)

Supplemental Disclosures to Consolidated Statement of Cash Flows

The Company transferred loans of $9,148 and $17,203 to OREO during the nine months ended September 30, 2011 and 2010, respectively.

The Company transferred premises and equipment pending disposal of $1,513 to other assets during the nine months ended September 30, 2010.

The Company transferred accrued liabilities of $195 and $59 to common stock in conjunction with the vesting of liability-classified non-vested stock awards during the nine months ended September 30, 2011 and 2010, respectively.

The Company transferred internally originated mortgage servicing rights of $1,850 and $2,680 from loans to mortgage servicing assets during the nine months ended September 30, 2011 and 2010, respectively.

(11)

Other Comprehensive Income

Total other comprehensive income for the nine months ended September 30, 2011 and 2010 is reported in the accompanying statements of changes in stockholders’ equity. Total other comprehensive income for the three months ended September 30, 2011 and 2010 was $13,606 and $10,385, respectively.

Information related to net other comprehensive income is as follows:


For the nine months ended September 30,	2011			2010
Other comprehensive income:
Investment securities available-for-sale:
Change in net unrealized gain during the period	$	24,200		$	13,017
Reclassification adjustment for gains included in income		(56	)		(108	)
Change in the net actuarial loss on defined benefit post-retirement benefit plans		104			72

Total other comprehensive income		24,248			12,981
Deferred tax expense		9,541			5,108

Net other comprehensive income	$	14,707		$	7,873

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(In thousands, except share and per share data)

The components of accumulated other comprehensive income, net of income taxes, are as follows:


	September 30, 2011			December 31, 2010
Net unrealized gain on investment securities available-for-sale	$	25,603		$	10,959
Net actuarial loss on defined benefit post-retirement benefit plans		(1,521	)		(1,584	)

Net accumulated other comprehensive income	$	24,082		$	9,375

(12)

Fair Value Measurements

Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:


	Fair Value Measurements at Reporting Date Using
As of September 30, 2011	Balance as of 9/30/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level3)
Investment securities available-for-sale:
Obligations of U.S. government agencies	$	1,013,092	$	—	$	1,013,092	$	—
U.S. agency residential mortgage-backed securities		882,510		—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company