FIBK-2014.09.30-10Q

 
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 September 30, 2014
OR
 
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   
COMMISSION FILE NUMBER 001-34653
________________________________________________________________________________________________________ 
First Interstate BancSystem, Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________ 
Montana
 
81-0331430
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
401 North 31st Street, Billings, MT
 
59116-0918
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 406/255-5390
______________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
  
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:
 
September 30, 2014 – Class A common stock
 
21,747,983

 
 
September 30, 2014 – Class B common stock
 
23,924,939

 
 



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, 2014 and December 31, 2013
3

 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2014 and 2013
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2014 and 2013
5

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

 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2014 and 2013
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
36

 
 
 
Item 3.
51

 
 
 
Item 4.
51

 
 
Part II.
 
 
 
 
Item 1.
51

 
 
 
Item 1A .
52

 
 
 
Item  2.
52

 
 
 
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)

 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and due from banks
$
142,119

 
$
141,663

Federal funds sold
737

 
672

Interest bearing deposits in banks
677,107

 
392,492

Total cash and cash equivalents
819,963

 
534,827

Investment securities:
 
 
 
Available-for-sale
1,586,503

 
1,947,706

Held-to-maturity (estimated fair values of $588,032 and $205,926 at September 30, 2014 and December 31, 2013, respectively)
583,271

 
203,837

Total investment securities
2,169,774

 
2,151,543

Loans held for investment
4,791,444

 
4,303,992

Mortgage loans held for sale
62,938

 
40,861

Total loans
4,854,382

 
4,344,853

Less allowance for loan losses
74,231

 
85,339

Net loans
4,780,151

 
4,259,514

Goodwill
204,646

 
183,673

Premises and equipment, net of accumulated depreciation
207,181

 
179,690

Company-owned life insurance
152,761

 
122,175

Other real estate owned (“OREO”)
18,496

 
15,504

Accrued interest receivable
30,282

 
26,450

Core deposit intangibles, net of accumulated amortization
14,137

 
4,519

Mortgage servicing rights, net of accumulated amortization and impairment reserve
13,894

 
13,546

Deferred tax asset, net
1,347

 
12,154

Other assets
68,720

 
61,056

Total assets
$
8,481,352

 
$
7,564,651

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,637,151

 
$
1,491,683

Interest bearing
5,322,348

 
4,642,067

Total deposits
6,959,499

 
6,133,750

Securities sold under repurchase agreements
432,478

 
457,437

Accounts payable and accrued expenses
56,210

 
47,523

Accrued interest payable
5,569

 
4,963

Long-term debt
36,882

 
36,917

Other borrowed funds
1,934

 
3

Subordinated debentures held by subsidiary trusts
102,916

 
82,477

Total liabilities
7,595,488

 
6,763,070

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of September 30, 2014 or December 31, 2013
—

 
—

Common stock
321,132

 
285,535

Retained earnings
572,362

 
532,087

Accumulated other comprehensive loss, net
(7,630
)
 
(16,041
)
Total stockholders’ equity
885,864

 
801,581

Total liabilities and stockholders’ equity
$
8,481,352

 
$
7,564,651

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
61,007

 
$
54,901

 
$
170,290

 
$
165,247

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
7,259

 
7,660

 
22,208

 
23,377

Exempt from federal taxes
1,085

 
1,153

 
3,265

 
3,594

Interest on deposits in banks
374

 
207

 
830

 
717

Interest on federal funds sold
3

 
8

 
7

 
17

Total interest income
69,728

 
63,929

 
196,600

 
192,952

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,487

 
3,821

 
10,238

 
12,214

Interest on securities sold under repurchase agreements
52

 
58

 
181

 
232

Interest on other borrowed funds
27

 
—

 
27

 
—

Interest on long-term debt
482

 
487

 
1,431

 
1,450

Interest on preferred stock pending redemption
—

 
—

 
—

 
159

Interest on subordinated debentures held by subsidiary trusts
598

 
607

 
1,778

 
1,904

Total interest expense
4,646

 
4,973

 
13,655

 
15,959

Net interest income
65,082

 
58,956

 
182,945

 
176,993

Provision for loan losses
261

 
(3,000
)
 
(6,740
)
 
(2,125
)
Net interest income after provision for loan losses
64,821

 
61,956

 
189,685

 
179,118

Non-interest income:
 
 
 
 
 
 
 
Other service charges, commissions and fees
10,458

 
9,286

 
29,313

 
26,519

Income from the origination and sale of loans
7,346

 
7,934

 
18,386

 
28,652

Wealth management revenues
5,157

 
4,581

 
14,221

 
12,735

Service charges on deposit accounts
4,331

 
4,360

 
12,135

 
12,751

Investment securities gains (losses), net
(8
)
 
30

 
80

 
26

Other income
2,079

 
1,416

 
5,905

 
5,322

Total non-interest income
29,363

 
27,607

 
80,040

 
86,005

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
25,914

 
22,806

 
72,796

 
69,681

Employee benefits
7,841

 
7,328

 
23,318

 
23,049

Occupancy, net
4,534

 
4,292

 
13,026

 
12,381

Furniture and equipment
3,338

 
3,147

 
9,696

 
9,362

Outsourced technology services
2,346

 
2,295

 
6,955

 
6,647

OREO expense, net of income
(58
)
 
18

 
(211
)
 
999

Professional fees
1,233

 
1,135

 
3,881

 
3,398

FDIC insurance premiums
1,172

 
1,205

 
3,381

 
3,938

Mortgage servicing rights amortization
591

 
629

 
1,774

 
2,187

Mortgage servicing rights impairment recovery
(61
)
 
(62
)
 
(117
)
 
(121
)
Core deposit intangibles amortization
688

 
355

 
1,396

 
1,064

Other expenses
12,368

 
9,431

 
33,672

 
31,699

Non-core expenses
5,052

 
—

 
5,649

 
—

Total non-interest expense
64,958

 
52,579

 
175,216

 
164,284

Income before income tax expense
29,226

 
36,984

 
94,509

 
100,839

Income tax expense
10,071

 
13,172

 
32,884

 
35,478

Net income
$
19,155

 
$
23,812

 
$
61,625

 
$
65,361

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.43

 
$
0.54

 
$
1.39

 
$
1.50

Diluted earnings per common share
$
0.42

 
$
0.54

 
$
1.37

 
$
1.49

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 September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Net income
$
19,155

$
23,812

 
$
61,625

$
65,361

Other comprehensive income (loss), before tax:
 
 
 
 
 
Investment securities available-for sale:
 
 
 
 
 
Change in net unrealized gains/losses during period
(3,322
)
1,794

 
13,844

(39,547
)
Reclassification adjustment for net (gains) losses included in
 income
8

(30
)
 
(80
)
(26
)
Defined benefit post-retirement benefits plans:
 
 
 
 
 
Change in net actuarial loss
33

33

 
103

102

Other comprehensive income (loss), before tax
(3,281
)
1,797

 
13,867

(39,471
)
Deferred tax benefit (expense) related to other comprehensive
 income/loss
1,291

(707
)
 
(5,456
)
15,532

Other comprehensive income (loss), net of tax
(1,990
)
1,090

 
8,411

(23,939
)
Comprehensive income, net of tax
$
17,165

$
24,902

 
$
70,036

$
41,422

See accompanying notes to unaudited consolidated financial statements.


5

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
(Unaudited)

 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at December 31, 2013
$
285,535

 
$
532,087

 
$
(16,041
)
 
$
801,581

Net income
—

 
61,625

 
—

 
61,625

Other comprehensive income, net of tax expense
—

 
—

 
8,411

 
8,411

Common stock transactions:
 
 
 
 
 
 
 
387,967 common shares purchased and retired
(9,736
)
 
—

 
—

 
(9,736
)
1,402,811 common shares issued
35,972

 
—

 
—

 
35,972

147,876 non-vested common shares issued
—

 
—

 
—

 
—

17,741 non-vested common shares forfeited
—

 
—

 
—

 
—

372,880 stock options exercised, net of 166,780 shares tendered in payment of option price and income tax withholding amounts
4,914

 
—

 
—

 
4,914

Tax benefit of stock-based compensation
1,541

 
—

 
—

 
1,541

Stock-based compensation expense
2,906

 
—

 
—

 
2,906

Common cash dividend declared ($0.48 per share)
—

 
(21,350
)
 
—

 
(21,350
)
Balance at September 30, 2014
$
321,132

 
$
572,362

 
$
(7,630
)
 
$
885,864

 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
271,335

 
$
463,860

 
$
15,991

 
$
751,186

Net income
—

 
65,361

 
—

 
65,361

Other comprehensive loss, net of tax benefit
—

 
—

 
(23,939
)
 
(23,939
)
Common stock transactions:
 
 
 
 
 
 
 
25,667 common shares purchased and retired
(448
)
 
—

 
—

 
(448
)
26,096 common shares issued
543

 
—

 
—

 
543

120,873 non-vested common shares issued
—

 
—

 
—

 
—

10,517 non-vested common shares forfeited
—

 
—

 
—

 
—

688,864 stock options exercised, net of 336,442 shares tendered in payment of option price and income tax withholding amounts
8,137

 
—

 
—

 
8,137

Tax benefit of stock-based compensation
1,578

 
—

 
—

 
1,578

Stock-based compensation expense
2,207

 
—

 
—

 
2,207

Cash dividends declared:
 
 
 
 
 
 
 
Common ($0.27 per share)
—

 
(11,765
)
 
—

 
(11,765
)
Balance at September 30, 2013
$
283,352

 
$
517,456

 
$
(7,948
)
 
$
792,860

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)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
61,625

 
$
65,361

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
(6,740
)
 
(2,125
)
Net gain on disposal of premises and equipment
(68
)
 
(224
)
Depreciation and amortization
12,168

 
12,293

Net premium amortization on investment securities
10,784

 
11,426

Net gain on investment securities transactions
(80
)
 
(26
)
Net gain on sale of mortgage loans held for sale
(12,947
)
 
(20,376
)
Net gain on sale of OREO
(551
)
 
(3,195
)
Write-downs of OREO and other assets pending disposal
87

 
3,180

Net reversal of impairment of mortgage servicing rights
(117
)
 
(121
)
Deferred income tax expense
8,537

 
6,302

Net (increase) decrease in cash surrender value of company-owned life insurance
(2,540
)
 
28

Stock-based compensation expense
2,906

 
2,207

Tax benefits from stock-based compensation expense
1,541

 
1,578

Excess tax benefits from stock-based compensation expense
(1,503
)
 
(1,488
)
Originations of mortgage loans held for sale
(682,011
)
 
(1,387,785
)
Proceeds from sales of mortgage loans held for sale
676,061

 
1,419,539

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(2,749
)
 
(1,515
)
Decrease (increase) in other assets
(1,585
)
 
9,434

Increase (decrease) in accrued interest payable
22

 
(1,135
)
Increase (decrease) in accounts payable and accrued expenses
1,321

 
(2,622
)
Net cash provided by operating activities
64,161

 
110,736

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(10,431
)
 
(13,915
)
Available-for-sale
(322,838
)
 
(564,448
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
29,432

 
15,818

Available-for-sale
398,383

 
569,606

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

Proceeds from sales of mortgage servicing rights
266

 
470

Extensions of credit to customers, net of repayments
(148,854
)
 
(147,826
)
Recoveries of loans charged-off
7,323

 
9,434

Proceeds from sales of OREO
5,877

 
25,185

Acquisition of bank and bank holding company, net of cash and cash equivalents received
35,556

 
—

Capital expenditures, net of sales
(6,599
)
 
(2,489
)
Net cash used in investing activities
$
(26,885
)
 
$
(108,165
)

7

Table of Contents

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

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
310,370

 
$
(131,786
)
Net decrease in repurchase agreements
(25,880
)
 
(77,675
)
Net decrease in other borrowed funds
(11,926
)
 
(22
)
Repayments of long-term debt
(35
)
 
(32
)
Redemption of preferred stock
—

 
(50,000
)
Proceeds from issuance of common stock
4,914

 
8,680

Excess tax benefits from stock-based compensation expense
1,503

 
1,488

Purchase and retirement of common stock
(9,736
)
 
(448
)
Dividends paid to common stockholders
(21,350
)
 
(11,765
)
Net cash provided by (used in) financing activities
247,860

 
(261,560
)
Net increase (decrease) in cash and cash equivalents
285,136

 
(258,989
)
Cash and cash equivalents at beginning of period
534,827

 
801,332

Cash and cash equivalents at end of period
$
819,963

 
$
542,343

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
21,100

 
$
30,529

Cash paid during the period for interest expense
13,049

 
17,094

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 September 30, 2014 and December 31, 2013, and the results of operations for each of the three and nine month periods ended and cash flows for each of the nine month periods ended September 30, 2014 and 2013 in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2013 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the September 30, 2014 presentation. These reclassifications did not change previously reported net income or stockholders’ equity.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

(2)
Acquisition

On February 10, 2014, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Mountain West Financial Corp ("MWFC"), a Montana-based bank holding company that operates one wholly-owned subsidiary bank, Mountain West Bank, NA ("MWB"), with branches located in five of the Company's current market areas in Montana. The acquisition was completed on July 31, 2014, and the Company merged MWB with its existing bank subsidiary, First Interstate Bank ("FIB"), on October 17, 2014. The acquisition allowed the Company to gain market share in several of its current market areas. The Company also expects to benefit from future cost savings related to the merger of MWB with FIB.

Under the terms of the agreement and plan of merger, each outstanding share of Mountain West common stock was canceled and converted into the right to receive 0.2552 shares of the Company's Class A common stock plus $7.125 in cash, or, at the stockholder's election, an amount in all cash or all stock intended to be substantially equal in value to the combination of stock and cash merger consideration described above. Consideration for the acquisition of $74,451 consisted of cash of $38,479 and the issuance of 1,378,230 shares of the Company's Class A common stock valued at $26.10 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. The acquisition was accounted for using the acquisition method with the cash portion of the purchase price funded from cash on hand.

The assets and liabilities of MWFC were recorded in the Company's consolidated financial statements at their estimated fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as goodwill. This acquisition was accounted for as a tax-free exchange; therefore, goodwill recorded in conjunction with this acquisition is not deductible for income tax purposes.


9

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


The following table summarized the consideration paid, fair values of MWFC assets acquired and liabilities assumed and the resulting goodwill. All amounts reported are provisional pending completion of review of valuations obtained from third parties.
 
As Recorded
Fair Value
 
As Recorded
As of July 31, 2014
by MWFC
Adjustments
 
by the Company
 
 
 
 
 
Assets acquired:
 
 
 
 
Cash and cash equivalents
$
74,035

$
—

 
$
74,035

Investment securities
104,945

(34
)
(1)
104,911

Loans
378,558

(18,286
)
(2)
360,272

Allowance for loan losses
(11,598
)
11,598

(3)
—

Premises and equipment
35,283

(5,685
)
(4)
29,598

Company-owned life insurance
13,046

—

 
13,046

Deferred tax asset, net
6,491

1,461

(5)
7,952

Core deposit intangible
—

11,014

(6)
11,014

Other assets
16,559

(5,300
)
(7)
11,259

Total assets acquired
617,319

(5,232
)
 
612,087

 
 
 
 
 
Liabilities assumed:
 
 
 
 
Deposits
515,538

(159
)
(8)
515,379

Other liabilities
20,501

2,290

(9)
22,791

Subordinated debentures held by subsidiary trusts
20,439

—

(10)
20,439

Total liabilities assumed
556,478

2,131

 
558,609

 
 
 
 
 
Net assets acquired
$
60,841

$
(7,363
)
 
53,478

 
 
 
 
 
Consideration paid:
 
 
 
 
Cash
 
 
 
38,479

Class A common stock
 
 
 
35,972

Total consideration
 
 
 
74,451

 
 
 
 
 
Goodwill
 
 
 
$
20,973

 
 
 
 
 
Explanation of fair value adjustments:
(1)
Write down of the book value of investment securities to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)
Write down of the book value of loans to their estimated fair values. Except for collateral dependent loans acquired with deteriorated credit quality, the fair value of loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of the each loan's underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3)
Adjustment to remove the MWB allowance for loan losses at acquisition date as the credit risk is accounted for in the fair value adjustment for loans receivable described in (2) above.
(4)
Write down of the book value of premises and equipment to their estimated fair values based upon appraisals obtained from an independent third party appraiser.
(5)
Adjustment represents the net deferred tax assets resulting from fair value adjustments related to acquired assets, assumed liabilities, core deposit intangible assets and other purchase accounting adjustments.


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)


(6)
Adjustment represents the value of the core deposit base assumed in the acquisition based upon a valuation obtained from an independent third party valuation expert.
(7)
Adjustment consists of a reduction in the value of equity method investments and accrued interest receivable and the write-off of federal and state income taxes receivable, pre-existing goodwill and computer software costs.
(8)
Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition.
(9)
Adjustment represents decrease in the book value of Federal Home Loan Bank borrowings to their estimated fair market values based upon interest interest rates of similar advances with similar characteristics on the date of acquisition.
(10)
Recorded value of junior subordinated debentures held by subsidiary trusts approximates fair value as of the acquisition date due to the short-term nature of the instruments. The Company intends to redeem these debentures in December 2014.
    
The core deposit intangible asset of $11,014 is being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years.
    
The Company recorded third party acquisition-related costs of $1,053 and $1,649 during the three and nine months ended September 30, 2014. These costs are included in non-core expenses in the Company's consolidated statements of income.
    
The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition, measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since origination for which is it probable, at acquisition, the Company will be unable to collect all contractual amounts owned. For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest amounts collected, and (iii) indices used to fair value variable rate loans. Information regarding acquired credit-impaired loans as of the July 31, 2014 acquisition date is as follows:
Contractually required principal and interest payments
$
112,882

Contractual cash flows not expected to be collected ("non-accretable discount")
74,760

Cash flows expected to be collected
38,122

Interest component of cash flows expected to be collected ("accretable discount")
5,233

Fair value of acquired credit-impaired loans
$
32,889

The accompanying consolidated statements of income for the three and nine months ended September 30, 2014 include the results of operations of the acquired entity from the July 31, 2014 acquisition date. Had the acquisition been completed as of January 1, 2014, the Company's consolidated revenues and net income, on a pro forma basis, would have been $101,369 and $18,730, respectively, for the three months ended September 30, 2014, and $293,258 and $62,913, respectively, for the nine months ended September 30, 2014. Change in control expenses related to employee benefit plans, stock option cancellation fees and legal and professional expenses related to the acquisition activities of the acquired entity aggregating $2,441, net of income taxes, have been excluded from pro forma net income.


11

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


(3)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
September 30, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
Obligations of U.S. government agencies
$
733,144

$
1,193

$
(5,840
)
$
728,497

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
851,119

11,152

(4,609
)
857,662

Private mortgage-backed securities
340

5

(1
)
344

Total
$
1,584,603

$
12,350

$
(10,450
)
$
1,586,503

September 30, 2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
189,919

$
6,260

$
(454
)
$
195,725

Corporate securities
21,860

82

—

21,942

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
370,933

1,081

(2,208
)
369,806

Other investments
559

—

—

559

Total
$
583,271

$
7,423

$
(2,662
)
$
588,032

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

$
1,432

$
(12,249
)
$
763,238

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

11,905

(25,147
)
1,184,053

Private mortgage-backed securities
407

9

(1
)
415

Total
$
1,971,757

$
13,346

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

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

$
4,043

$
(2,049
)
$
187,812

Corporate securities
18,019

103

(8
)
18,114

Total
$
203,837

$
4,146

$
(2,057
)
$
205,926


Gross realized gains and losses from the disposition of investment securities are summarized in the following table:
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Gross realized gains
$
—

 
$
30

 
$
243

 
$
42

Gross realized losses
(8
)
 
—

 
(163
)
 
(16
)
 
On June 27, 2014, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations with amortized costs and fair values of $396,640 and $388,808, respectively, into the held-to-maturity category. Unrealized net losses of $7,832 included in accumulated other comprehensive income at the time of the transfer are being amortized to yield over the remaining expected lives of the transferred securities of 4.3 years.

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)



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 September 30, 2014 and December 31, 2013.
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
29,552

$
(209
)
 
$
388,327

$
(5,631
)
 
$
417,879

$
(5,840
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
102,237

(428
)
 
197,313

(4,181
)
 
299,550

(4,609
)
Private mortgage-backed securities
—

—

 
91

(1
)
 
91

(1
)
Total
$
131,789

$
(637
)
 
$
585,731

$
(9,813
)
 
$
717,520

$
(10,450
)
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
—

$
—

 
$
20,586

$
(454
)
 
$
20,586

$
(454
)
Private mortgage-backed securities
240,262

(2,208
)
 
—

—

 
240,262

(2,208
)
Total
$
240,262

$
(2,208
)
 
$
20,586

$
(454
)
 
$
260,848

$
(2,662
)

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

$
(10,355
)
 
$
59,362

$
(1,894
)
 
$
517,747

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

(17,273
)
 
166,930

(7,874
)
 
801,129

(25,147
)
Private mortgage-backed securities
—

—

 
104

(1
)
 
104

(1
)
Total
$
1,092,584

$
(27,628
)
 
$
226,396

$
(9,769
)
 
$
1,318,980

$
(37,397
)
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2013
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
37,550

$
(1,319
)
 
$
14,296

$
(730
)
 
$
51,846

$
(2,049
)
Corporate securities
7,294

(8
)
 
—

—

 
7,294

(8
)
Total
$
44,844

$
(1,327
)
 
$
14,296

$
(730
)
 
$
59,140

$
(2,057
)
    
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 174 and 229 individual investment securities that were in an unrealized loss position as of September 30, 2014 and December 31, 2013, respectively. Unrealized losses as of September 30, 2014 and December 31, 2013 related primarily to fluctuations in the current interest rates. The Company does not have the intent to sell any of the available-for-sale securities in the above table and it is not likely that the Company will have to sell any such securities before a recovery in cost. No impairment losses were recorded during the three and nine months ended September 30, 2014 and 2013.


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)


Maturities of investment securities at September 30, 2014 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment securities maturities are shown at contractual maturity dates.
 
Available-for-Sale
 
Held-to-Maturity
September 30, 2014
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
261,829

$
263,597

 
$
88,305

$
88,490

After one year but within five years
1,074,666

1,075,712

 
285,622

286,860

After five years but within ten years
181,258

179,828

 
144,409

146,353

After ten years
66,850

67,366

 
64,935

66,329

Total
$
1,584,603

$
1,586,503

 
$
583,271

$
588,032

    
As of September 30, 2014, the Company had investment securities callable within one year with amortized costs and estimated fair values of $178,937 and $178,814, respectively, including callable structured notes with amortized costs and estimated fair values of $69,967 and $69,997, 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.

(4)
Loans
    
The following table presents loans by class as of the dates indicated:
 
September 30, 2014
 
December 31, 2013
Real estate loans:
 
 
 
Commercial
$
1,686,509

 
$
1,449,174

Construction:
 
 
 
Land acquisition & development
194,138

 
205,911

Residential
88,179

 
76,488

Commercial
85,103

 
69,236

Total construction loans
367,420

 
351,635

Residential
957,282

 
867,912

Agricultural
158,940

 
173,534

Total real estate loans
3,170,151

 
2,842,255

Consumer:
 
 
 
Indirect consumer
537,765

 
476,012

Other consumer
145,076

 
133,039

Credit card
62,641

 
62,536

Total consumer loans
745,482

 
671,587

Commercial
736,908

 
676,544

Agricultural
136,587

 
111,872

Other, including overdrafts
2,316

 
1,734

Loans held for investment
4,791,444

 
4,303,992

Mortgage loans held for sale
62,938

 
40,861

Total loans
$
4,854,382

 
$
4,344,853

    
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.


14

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


The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of September 30, 2014.    
As of September 30, 2014
 
 
 
Outstanding balance
$
42,627

 
 
Carrying value
 
Loans on accrual status
32,350

Loans on non-accrual status
—

Total carrying value
$
32,350

    
The following table summarizes changes in the accretable yield for loans acquired credit impaired for the three and nine months ended September 30, 2014:
 
Three Months Ended September 30, 2014
Nine Months Ended September 30, 2014
 
 
 
Beginning balance
$
—

$
—

Acquisition
5,233

5,233

Accretion income
(289
)
(289
)
Reductions due to exit events
(16
)
(16
)
Ending balance
$
4,928

$
4,928

    
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 September 30, 2014
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
4,290

$
3,173

$
199

$
7,662

$
1,643,243

$
35,604

$
1,686,509

Construction:
 
 
 
 
 
 

 

Land acquisition & development
4,674

941

—

5,615

178,608

9,915

194,138

Residential
1,798

311

—

2,109

85,832

238

88,179

Commercial
—

—

—

—

82,534

2,569

85,103

Total construction loans
6,472

1,252

—

7,724

346,974

12,722

367,420

Residential
5,054

542

766

6,362

948,412

2,508

957,282

Agricultural
909

154

—

1,063

151,028

6,849

158,940

Total real estate loans
16,725

5,121

965

22,811

3,089,657

57,683

3,170,151

Consumer:
 
 
 
 
 
 
 

Indirect consumer
2,728

278

2

3,008

534,344

413

537,765

Other consumer
976

154

39

1,169

143,320

587

145,076

Credit card
340

261

235

836

61,789

16

62,641

Total consumer loans
4,044

693

276

5,013

739,453

1,016

745,482

Commercial
10,716

1,077

113

11,906

712,261

12,741

736,908

Agricultural
23

—

—

23

136,089

475

136,587

Other, including overdrafts
—

—

—

—

2,316

—

2,316

Loans held for investment
31,508

6,891

1,354

39,753

4,679,776

71,915

4,791,444

Mortgage loans originated for sale
—

—

—

—

62,938

—

62,938

Total loans
$
31,508

$
6,891

$
1,354

$
39,753

$
4,742,714

$
71,915

$
4,854,382



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)




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

$
2,472

$
22

$
8,418

$
1,391,823

$
48,933

$
1,449,174

Construction:
 
 
 
 
 
 

 

Land acquisition & development
1,062

468

38

1,568

188,074

16,269

205,911

Residential
933

250

—

1,183

73,933

1,372

76,488

Commercial
584

—

—

584

68,427

225

69,236

Total construction loans
2,579

718

38

3,335

330,434

17,866

351,635

Residential
3,630

206

1,162

4,998

856,800

6,114

867,912

Agricultural
328

646

—

974

163,986

8,574

173,534

Total real estate loans
12,461

4,042

1,222

17,725

2,743,043

81,487

2,842,255

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,303

430

9

3,742

471,906

364

476,012

Other consumer
925

130

1

1,056

131,508

475

133,039

Credit card
364

187

515

1,066

61,451

19

62,536

Total consumer loans
4,592

747

525

5,864

664,865

858

671,587

Commercial
2,791

1,186

563

4,540

660,035

11,969

676,544

Agricultural
453

672

—

1,125

110,622

125

111,872

Other, including overdrafts
—

—

—

—

1,734

—

1,734

Loans held for investment
20,297

6,647

2,310

29,254

4,180,299

94,439

4,303,992

Mortgage loans originated for sale
—

—

—

—

40,861

—

40,861

Total loans
$
20,297

$
6,647

$
2,310

$
29,254

$
4,221,160

$
94,439

$
4,344,853


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 $992 and $1,216 for the three months ended September 30, 2014 and 2013, respectively, and approximately $3,176 and $3,877 for the nine months ended September 30, 2014 and 2013, respectively.
        

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 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 September 30, 2014
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
47,675

$
24,184

$
21,603

$
45,787

$
2,993

Construction:
 
 
 
 
 
Land acquisition & development
14,162

7,162

3,366

10,528

590

Residential
382

238

—

238

—

Commercial
2,736

258

2,444

2,702

906

Total construction loans
17,280

7,658

5,810

13,468

1,496

Residential
2,621

2,083

371

2,454

124

Agricultural
8,942

7,074

1,772

8,846

192

Total real estate loans
76,518

40,999

29,556

70,555

4,805

Commercial
16,174

9,560

4,109

13,669

1,445

Agricultural
886

379

455

834

320

Total
$
93,578

$
50,938

$
34,120

$
85,058

$
6,570

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

$
29,216

$
33,937

$
63,153

$
5,210

Construction:
 
 
 
 
 
Land acquisition & development
23,906

9,901

7,226

17,127

1,434

Residential
1,816

1,095

277

1,372

26

Commercial
397

279

84

363

85

Total construction loans
26,119

11,275

7,587

18,862

1,545

Residential
9,448

5,081

967

6,048

249

Agricultural
8,895

6,429

2,370

8,799

335

Total real estate loans
109,242

52,001

44,861

96,862

7,339

Commercial
15,448

10,684

2,901

13,585

1,504

Agricultural
177

39

86

125

86

Total
$
124,867

$
62,724

$
47,848

$
110,572

$
8,929



17

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


The following tables present the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended September 30,
 
2014
 
2013
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
53,492

 
$
211

 
$
62,208

 
$
239

Construction:
 
 
 
 
 
 
 
Land acquisition & development
11,611

 
11

 
17,614

 
19

Residential
304

 
—

 
1,513

 
—

Commercial
2,709

 
2

 
1,174

 
2

Total construction loans
14,624

 
13

 
20,301

 
21

Residential
4,773

 
1

 
7,770

 
6

Agricultural
9,031

 
25

 
9,995

 
—

Total real estate loans
81,920

 
250

 
100,274

 
266

Commercial
14,252

 
14

 
16,245

 
16

Agricultural
906

 
6

 
240

 
4

Total
$
97,078

 
$
270

 
$
116,759