10-Q

 
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, 2015
OR
 
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   
COMMISSION FILE NUMBER 001-34653
________________________________________________________________________________________________________ 
First Interstate BancSystem, Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________ 
Montana
 
81-0331430
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
401 North 31st Street, Billings, MT
 
59116-0918
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 406/255-5390
______________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
  
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:
 
September 30, 2015 – Class A common stock
 
21,583,324

 
 
September 30, 2015 – Class B common stock
 
23,761,683

 
 



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, 2015 and December 31, 2014
3

 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2015 and 2014
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2015 and 2014
5

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

 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2015 and 2014
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
37

 
 
 
Item 3.
53

 
 
 
Item 4.
53

 
 
Part II.
 
 
 
 
Item 1.
53

 
 
 
Item 1A .
54

 
 
 
Item  2.
54

 
 
 
Item 3.
54

 
 
 
Item 4.
Mine Safety Disclosures
54

 
 
 
Item 5.
54

 
 
 
Item 6.
54

 
 
56








2

Table of Contents

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

 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Cash and due from banks
$
139,879

 
$
147,894

Federal funds sold
2,263

 
543

Interest bearing deposits in banks
566,153

 
650,233

Total cash and cash equivalents
708,295

 
798,670

Investment securities:
 
 
 
Available-for-sale
1,545,093

 
1,711,924

Held-to-maturity (estimated fair values of $534,633 and $584,533 at September 30, 2015 and December 31, 2014, respectively)
522,543

 
575,186

Total investment securities
2,067,636

 
2,287,110

Loans held for investment
5,120,794

 
4,856,615

Mortgage loans held for sale
55,686

 
40,828

Total loans
5,176,480

 
4,897,443

Less allowance for loan losses
74,256

 
74,200

Net loans
5,102,224

 
4,823,243

Goodwill
204,409

 
205,574

Premises and equipment, net of accumulated depreciation
190,386

 
195,212

Company-owned life insurance
185,990

 
153,821

Other real estate owned (“OREO”)
8,031

 
13,554

Accrued interest receivable
31,590

 
27,063

Core deposit intangibles, net of accumulated amortization
11,425

 
13,282

Mortgage servicing rights, net of accumulated amortization and impairment reserve
15,336

 
14,038

Deferred tax asset, net
—

 
4,874

Other assets
79,208

 
73,495

Total assets
$
8,604,530

 
$
8,609,936

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,832,535

 
$
1,791,364

Interest bearing
5,203,259

 
5,214,848

Total deposits
7,035,794

 
7,006,212

Securities sold under repurchase agreements
437,533

 
502,250

Accounts payable and accrued expenses
48,698

 
66,164

Accrued interest payable
5,327

 
5,833

Deferred tax liability
13,027

 
—

Long-term debt
43,089

 
38,067

Other borrowed funds
10

 
9

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,665,955

 
7,701,012

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

 
—

Common stock
309,167

 
323,596

Retained earnings
623,967

 
587,862

Accumulated other comprehensive income (loss), net
5,441

 
(2,534
)
Total stockholders’ equity
938,575

 
908,924

Total liabilities and stockholders’ equity
$
8,604,530

 
$
8,609,936

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
62,062

 
$
61,007

 
$
181,835

 
$
170,290

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
7,410

 
7,259

 
23,381

 
22,208

Exempt from federal taxes
962

 
1,085

 
3,061

 
3,265

Interest on deposits in banks
342

 
374

 
1,002

 
830

Interest on federal funds sold
4

 
3

 
11

 
7

Total interest income
70,780

 
69,728

 
209,290

 
196,600

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,241

 
3,487

 
9,789

 
10,238

Interest on securities sold under repurchase agreements
55

 
52

 
162

 
181

Interest on other borrowed funds
—

 
27

 
—

 
27

Interest on long-term debt
544

 
482

 
1,596

 
1,431

Interest on subordinated debentures held by subsidiary trusts
610

 
598

 
1,800

 
1,778

Total interest expense
4,450

 
4,646

 
13,347

 
13,655

Net interest income
66,330

 
65,082

 
195,943

 
182,945

Provision for loan losses
1,098

 
261

 
3,533

 
(6,740
)
Net interest income after provision for loan losses
65,232

 
64,821

 
192,410

 
189,685

Non-interest income:
 
 
 
 
 
 
 
Other service charges, commissions and fees
11,095

 
10,458

 
32,135

 
29,313

Income from the origination and sale of loans
7,983

 
7,346

 
22,691

 
18,386

Wealth management revenues
5,233

 
5,157

 
15,067

 
14,221

Service charges on deposit accounts
4,379

 
4,331

 
12,376

 
12,135

Investment securities gains (losses), net
23

 
(8
)
 
75

 
80

Other income
1,769

 
2,079

 
7,690

 
5,905

Total non-interest income
30,482

 
29,363

 
90,034

 
80,040

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
25,460

 
25,914

 
76,902

 
72,796

Employee benefits
7,312

 
7,841

 
23,162

 
23,318

Occupancy, net
4,413

 
4,534

 
13,434

 
13,026

Furniture and equipment
3,849

 
3,338

 
11,345

 
9,696

Outsourced technology services
2,520

 
2,346

 
7,576

 
6,955

OREO expense, net of income
(720
)
 
(58
)
 
(1,604
)
 
(211
)
Professional fees
1,916

 
1,233

 
4,731

 
3,881

FDIC insurance premiums
1,190

 
1,172

 
3,636

 
3,381

Mortgage servicing rights amortization
617

 
591

 
1,863

 
1,774

Mortgage servicing rights impairment recovery
(76
)
 
(61
)
 
(147
)
 
(117
)
Core deposit intangibles amortization
842

 
688

 
2,551

 
1,396

Other expenses
12,613

 
12,368

 
37,994

 
33,672

Loss contingency expenses
5,000

 
4,000

 
5,000

 
4,000

Acquisition expenses
566

 
1,052

 
629

 
1,649

Total non-interest expense
65,502

 
64,958

 
187,072

 
175,216

Income before income tax expense
30,212

 
29,226

 
95,372

 
94,509

Income tax expense
10,050

 
10,071

 
32,008

 
32,884

Net income
$
20,162

 
$
19,155

 
$
63,364

 
$
61,625

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.45

 
$
0.43

 
$
1.40

 
$
1.39

Diluted earnings per common share
$
0.44

 
$
0.42

 
$
1.39

 
$
1.37

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,
 
2015
2014
 
2015
2014
Net income
$
20,162

$
19,155

 
$
63,364

$
61,625

Other comprehensive income, before tax:
 
 
 
 
 
Investment securities available-for sale:
 
 
 
 
 
Change in net unrealized gains (losses) during period
10,855

(3,773
)
 
12,264

12,942

Reclassification adjustment for net (gains) losses included in income
(23
)
8

 
(75
)
(80
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
448

451

 
1,353

902

Unrealized loss on derivatives
(436
)
—

 
(436
)
—

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

33

 
43

103

Other comprehensive income (loss), before tax
10,859

(3,281
)
 
13,149

13,867

Deferred tax benefit (expense) related to other comprehensive income
(4,273
)
1,291

 
(5,174
)
(5,456
)
Other comprehensive income (loss), net of tax
6,586

(1,990
)
 
7,975

8,411

Comprehensive income, net of tax
$
26,748

$
17,165

 
$
71,339

$
70,036

See accompanying notes to unaudited consolidated financial statements.


5

Table of Contents

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

 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at December 31, 2014
$
323,596

 
$
587,862

 
$
(2,534
)
 
$
908,924

Net income
—

 
63,364

 
—

 
63,364

Other comprehensive income, net of tax expense
—

 
—

 
7,975

 
7,975

Common stock transactions:
 
 
 
 
 
 
 
789,743 common shares purchased and retired
(20,548
)
 
—

 
—

 
(20,548
)
21,414 common shares issued
—

 
—

 
—

 
—

169,577 non-vested common shares issued
—

 
—

 
—

 
—

3,484 non-vested common shares forfeited
—

 
—

 
—

 
—

158,828 stock options exercised, net of 58,996 shares tendered in payment of option price and income tax withholding amounts
1,909

 
—

 
—

 
1,909

Tax benefit of stock-based compensation
979

 
—

 
—

 
979

Stock-based compensation expense
3,231

 
—

 
—

 
3,231

Common cash dividend declared ($0.60 per share)
—

 
(27,259
)
 
—

 
(27,259
)
Balance at September 30, 2015
$
309,167

 
$
623,967

 
$
5,441

 
$
938,575

 
 
 
 
 
 
 
 
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

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,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
63,364

 
$
61,625

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,533

 
(6,740
)
Net gain on disposal of premises and equipment
(822
)
 
(68
)
Depreciation and amortization
13,702

 
12,168

Net premium amortization on investment securities
11,527

 
10,784

Net gain on investment securities transactions
(75
)
 
(80
)
Net gain on sale of mortgage loans held for sale
(16,397
)
 
(12,947
)
Net gain on sale of OREO
(2,862
)
 
(551
)
Write-downs of OREO and other assets pending disposal
985

 
87

Net reversal of impairment of mortgage servicing rights
(147
)
 
(117
)
Deferred income tax expense
12,975

 
8,537

Net increase in cash surrender value of company-owned life insurance
(9,669
)
 
(2,540
)
Stock-based compensation expense
3,231

 
2,906

Tax benefits from stock-based compensation expense
979

 
1,541

Excess tax benefits from stock-based compensation expense
(884
)
 
(1,503
)
Originations of mortgage loans held for sale
(856,384
)
 
(682,011
)
Proceeds from sales of mortgage loans held for sale
865,833

 
676,061

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(3,962
)
 
(2,749
)
Increase in other assets
(4,766
)
 
(1,585
)
Increase (decrease) in accrued interest payable
(639
)
 
22

Increase (decrease) in accounts payable and accrued expenses
(17,583
)
 
1,321

Net cash provided by operating activities
61,939

 
64,161

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(28,745
)
 
(10,431
)
Available-for-sale
(253,049
)
 
(322,838
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
80,759

 
29,432

Available-for-sale
450,462

 
398,383

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

 
266

Extensions of credit to customers, net of repayments
(251,450
)
 
(148,854
)
Recoveries of loans charged-off
4,439

 
7,323

Proceeds from sales of OREO
13,586

 
5,877

Acquisition of bank and bank holding company, net of cash and cash equivalents received
(1,636
)
 
35,556

Capital expenditures, net of sales
(2,236
)
 
(6,599
)
Net cash used in investing activities
$
(10,370
)
 
$
(26,885
)

7

Table of Contents

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

 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
(33,983
)
 
$
310,370

Net decrease in securities sold under repurchase agreements
(66,717
)
 
(25,880
)
Net increase (decrease) in other borrowed funds
1

 
(11,926
)
Repayments of long-term debt
(1,297
)
 
(35
)
Advances on long-term debt
5,066

 
—

Proceeds from issuance of common stock
1,909

 
4,914

Excess tax benefits from stock-based compensation expense
884

 
1,503

Purchase and retirement of common stock
(20,548
)
 
(9,736
)
Dividends paid to common stockholders
(27,259
)
 
(21,350
)
Net cash provided by (used in) financing activities
(141,944
)
 
247,860

Net increase (decrease) in cash and cash equivalents
(90,375
)
 
285,136

Cash and cash equivalents at beginning of period
798,670

 
534,827

Cash and cash equivalents at end of period
$
708,295

 
$
819,963

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
27,335

 
$
21,100

Cash paid during the period for interest expense
13,853

 
13,049

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, 2015 and December 31, 2014, 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, 2015 and 2014 in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2014 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the September 30, 2015 presentation. These reclassifications did not change previously reported net income or stockholders’ equity.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

(2)
Acquisitions

Absarokee Bancorporation, Inc. On March 26, 2015, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Absarokee Bancorporation, Inc. ("Absarokee"), a Montana-based bank holding company that operated one subsidiary bank, United Bank, with branches located in three Montana communities adjacent to the Company's existing market areas. The acquisition was completed on July 24, 2015 for cash consideration of $7,234. Immediately subsequent to the acquisition, United Bank was merged with and into the Company's existing bank subsidiary, First Interstate Bank ("FIB"). As of the date of the acquisition, Absarokee had total assets of $73,460, loans of $37,520 and deposits of $63,565.

The assets and liabilities of Absarokee 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.

The following table summarizes the consideration paid, fair values of the Absarokee assets acquired and liabilities assumed and the resulting goodwill. All amounts reported are provisional pending completion of management review.
 
As Recorded
Fair Value
 
As Recorded
As of July 24, 2015
by Absarokee
Adjustments
 
by the Company
 
 
 
 
 
Assets acquired:
 
 
 
 
Cash and cash equivalents
$
5,598

$
—

 
$
5,598

Investment securities
27,574

—

 
27,574

Loans
37,520

(876
)
(1)
36,644

Allowance for loan losses
(899
)
899

(2)
—

Premises and equipment
2,851

277

(3)
3,128

Core deposit intangible assets
—

695

(4)
695

Other assets
816

82

(5)
898

Total assets acquired
73,460

1,077

 
74,537

Liabilities assumed:
 
 
 
 
Deposits
63,565

—

 
63,565

Repurchase agreements
2,000

—

 
2,000

Long term debt
1,222

31

(6)
1,253

Other liabilities
79

440

(7)
519

Total liabilities assumed
66,866

471

 
67,337

Net assets acquired
$
6,594

$
606

 
7,200

Cash consideration paid
 
 
 
7,234

Goodwill
 
 
 
$
34

 
 
 
 
 

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)


Explanation of fair value adjustments:
(1)
Write down of the book value of loans to their estimated fair values. 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.
(2)
Adjustment to remove the Absarokee allowance for loan losses at acquisition date as the credit risk is accounted for in the fair value adjustment for loans receivable described in (1) above.
(3)
Write up of the book value of premises and equipment to their estimated fair values based upon fair value estimates developed internally based upon comparable in-market transactions.
(4)
Adjustment represents the value of the core deposit base assumed in the acquisition based upon an internal valuation based on analysis of recent acquisitions.
(5)
Adjustment consists of a reduction in the value of accrued interest receivable, the write-off of pre-existing goodwill and recording the value of mortgage servicing assets acquired.
(6)
Adjustment represents increase in the book value of a Federal Home Loan Bank borrowing to its estimated fair market value based upon interest interest rates of similar advances with similar characteristics on the date of acquisition.
(7)
Adjustment represents the net deferred tax liability resulting from fair value adjustments related to acquired assets, assumed liabilities, core deposit intangible assets and other purchase accounting adjustments.

The core deposit intangible asset of $695 is being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years.

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

The Company recorded third party acquisition-related costs of $566 and $1,052 during the three months ended September 30, 2015 and 2014, respectively. The Company recorded third party acquisition-related costs of $629 and $1,649 during the nine months ended September 30, 2015 and 2014, respectively. These costs are included in acquisition expenses in the Company's consolidated statements of income.

(3)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
September 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
3,913

$
28

$
—

$
3,941

Obligations of U.S. government agencies
604,198

2,196

(350
)
606,044

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
917,025

15,314

(1,284
)
931,055

Private mortgage-backed securities
257

3

(2
)
258

Other investments
3,795

—

—

3,795

Total
$
1,529,188

$
17,541

$
(1,636
)
$
1,545,093


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)


September 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
176,569

$
5,471

$
(200
)
$
181,840

Corporate securities
50,178

186

(49
)
50,315

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
295,418

10,346

(3,665
)
302,099

Other investments
378

1

—

379

Total
$
522,543

$
16,004

$
(3,914
)
$
534,633

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

$
895

$
(5,370
)
$
720,933

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

11,526

(3,624
)
990,666

Private mortgage-backed securities
322

5

(2
)
325

Total
$
1,708,494

$
12,426

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

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

$
5,949

$
(386
)
$
194,504

Corporate securities
32,565

54

(75
)
32,544

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

5,563

(1,758
)
356,981

Other Investments
504

—

—

504

Total
$
575,186

$
11,566

$
(2,219
)
$
584,533

    
Gross realized gains and losses from the disposition of investment securities are summarized in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Gross realized gains
$
23

 
$
—

 
$
75

 
$
243

Gross realized losses
—

 
(8
)
 
—

 
(163
)
    
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, 2015 and December 31, 2014.
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
106,516

$
(85
)
 
$
131,365

$
(265
)
 
$
237,881

$
(350
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
25,664

(106
)
 
80,116

(1,178
)
 
105,780

(1,284
)
Private mortgage-backed securities
—

—

 
71

(2
)
 
71

(2
)
Total
$
132,180

$
(191
)
 
$
211,552

$
(1,445
)
 
$
343,732

$
(1,636
)

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)


 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
6,398

$
(26
)
 
$
10,493

$
(174
)
 
$
16,891

$
(200
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
14,834

(3,081
)
 
27,344

(584
)
 
42,178

(3,665
)
Corporate securities
15,042

(49
)
 
—

—

 
15,042

(49
)
Total
$
36,274

$
(3,156
)
 
$
37,837

$
(758
)
 
$
74,111

$
(3,914
)

 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
135,888

$
(702
)
 
$
309,283

$
(4,668
)
 
$
445,171

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

(887
)
 
151,380

(2,737
)
 
370,594

(3,624
)
Private mortgage-backed securities
—

—

 
90

(2
)
 
90

(2
)
Total
$
355,102

$
(1,589
)
 
$
460,753

$
(7,407
)
 
$
815,855

$
(8,996
)

 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2014
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
7,979

$
(13
)
 
$
20,097

$
(373
)
 
$
28,076

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

(1,758
)
 
—

—

 
61,201

(1,758
)
Corporate securities
14,755

(75
)
 
—

—

 
14,755

(75
)
Total
$
83,935

$
(1,846
)
 
$
20,097

$
(373
)
 
$
104,032

$
(2,219
)
        
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 113 and 154 individual investment securities that were in an unrealized loss position as of September 30, 2015 and December 31, 2014, respectively. Unrealized losses as of September 30, 2015 and December 31, 2014 related primarily to fluctuations in the current interest rates. The Company does not have the intent to sell any of the available-for-sale securities in the above table and it is not likely that the Company will have to sell any such securities before a recovery in cost. No impairment losses were recorded during the three and nine months ended September 30, 2015 and 2014.


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)


Maturities of investment securities at September 30, 2015 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment securities maturities are shown at contractual maturity dates.
 
Available-for-Sale
 
Held-to-Maturity
September 30, 2015
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
344,473

$
348,859

 
$
92,096

$
94,244

After one year but within five years
1,119,450

1,130,128

 
266,554

271,638

After five years but within ten years
56,054

56,755

 
120,530

123,839

After ten years
9,211

9,351

 
43,363

44,912

Total
$
1,529,188

$
1,545,093

 
$
522,543

$
534,633

    
As of September 30, 2015, the Company had investment securities callable within one year with amortized costs and estimated fair values of $82,568 and $82,773, respectively, including callable structured notes with amortized costs and estimated fair values of $10,000 and $10,000, 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,
2015
 
December 31,
2014
Real estate loans:
 
 
 
Commercial
$
1,750,797

 
$
1,639,422

Construction:
 
 
 
Land acquisition & development
212,990

 
220,443

Residential
112,495

 
96,580

Commercial
93,775

 
101,246

Total construction loans
419,260

 
418,269

Residential
1,020,445

 
999,903

Agricultural
163,116

 
167,659

Total real estate loans
3,353,618

 
3,225,253

Consumer:
 
 
 
Indirect consumer
616,142

 
552,863

Other consumer
150,170

 
144,141

Credit card
65,649

 
65,467

Total consumer loans
831,961

 
762,471

Commercial
778,648

 
740,073

Agricultural
154,855

 
124,859

Other, including overdrafts
1,712

 
3,959

Loans held for investment
5,120,794

 
4,856,615

Mortgage loans held for sale
55,686

 
40,828

Total loans
$
5,176,480

 
$
4,897,443

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


13

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


The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of September 30, 2015 and 2014:    
As of September 30,
2015
 
2014
 
 
 
 
Outstanding balance
$
35,265

 
$
42,627

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
22,867

 
32,350

Loans on non-accrual status
—

 
—

Total carrying value
$
22,867

 
$
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, 2015 and 2014:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
2014
 
2015
2014
 
 
 
 
 
 
Beginning balance
$
7,482

$
—

 
$
5,781

$
—

Additions
624

5,233

 
1,073

5,233

Accretion income
(845
)
(289
)
 
(2,200
)
(289
)
Reductions due to exit events
(143
)
(16
)
 
(539
)
(16
)
Reclassifications from nonaccretable differences
347

—

 
3,350

—

Ending balance
$
7,465

$
4,928

 
$
7,465

$
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, 2015
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
5,968

$
664

$
398

$
7,030

$
1,720,928

$
22,839

$
1,750,797

Construction:
 
 
 
 
 
 

 

Land acquisition & development
4,495

6,530

44

11,069

192,819

9,102

212,990

Residential
1,011

134

—

1,145

111,021

329

112,495

Commercial
—

—

—

—

92,792

983

93,775

Total construction loans
5,506

6,664

44

12,214

396,632

10,414

419,260

Residential
5,639

2,355

761

8,755

1,009,119

2,571

1,020,445

Agricultural
881

—

—

881

155,443

6,792

163,116

Total real estate loans
17,994

9,683

1,203

28,880

3,282,122

42,616

3,353,618

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,991

683

91

4,765

610,641

736

616,142

Other consumer
1,012

264

25

1,301

148,119

750

150,170

Credit card
402

325

518

1,245

64,391

13

65,649

Total consumer loans
5,405

1,272

634

7,311

823,151

1,499

831,961

Commercial
3,440

717

1,083

5,240

751,769

21,639

778,648

Agricultural
281

—

126

407

153,843

605

154,855

Other, including overdrafts
—

—

311

311

1,401

—

1,712

Loans held for investment
27,120

11,672

3,357

42,149

5,012,286

66,359

5,120,794

Mortgage loans originated for sale
—

—

—

—

55,686

—

55,686

Total loans
$
27,120

$
11,672

$
3,357

$
42,149

$
5,067,972

$
66,359

$
5,176,480


14

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


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

$
1,609

$
331

$
6,632

$
1,605,421

$
27,369

$
1,639,422

Construction:
 
 
 
 
 
 

 

Land acquisition & development
839

383

—

1,222

210,969

8,252

220,443

Residential
—

475

—

475

95,833

272

96,580

Commercial
100

—

—

100

98,582

2,564

101,246

Total construction loans
939

858

—

1,797

405,384

11,088

418,269

Residential
6,969

645

1,762

9,376

987,735

2,792

999,903

Agricultural
1,624

236

—

1,860

158,957

6,842

167,659

Total real estate loans
14,224

3,348

2,093

19,665

3,157,497

48,091

3,225,253

Consumer:
 
 
 
 
 
 
 

Indirect consumer
3,235

482

6

3,723

548,757

383

552,863

Other consumer
988

140

32

1,160

142,432

549

144,141

Credit card
369

284

315

968

64,484

15

65,467

Total consumer loans
4,592

906

353

5,851

755,673

947

762,471

Commercial
3,659

994

147

4,800

722,575

12,698

740,073

Agricultural
1,125

—

—

1,125

123,288

446

124,859

Other, including overdrafts
—

—

—

—

3,959

—

3,959

Loans held for investment
23,600

5,248

2,593

31,441

4,762,992

62,182

4,856,615

Mortgage loans originated for sale
—

—

—

—

40,828

—

40,828

Total loans
$
23,600

$
5,248

$
2,593

$
31,441

$
4,803,820

$
62,182

$
4,897,443


Acquired loans that met the criteria for nonaccrual of interest prior to acquisition were considered performing upon acquisition. If interest on non-accrual loans had been accrued, such income would have been approximately $828 and $992 for the three months ended September 30, 2015 and 2014, respectively, and approximately $2,331 and $3,176 for the nine months ended September 30, 2015 and 2014 respectively.
        

15

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


The Company considers impaired loans to include all loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:
As of September 30, 2015
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
55,910

$
26,265

$
17,131

$
43,396

$
1,451

Construction:
 
 
 
 
 
Land acquisition & development
19,349

9,509

1,212

10,721

254

Residential
1,037

329

—

329

—

Commercial
1,290

369

740

1,109

740

Total construction loans
21,676

10,207

1,952

12,159

994

Residential
3,664

2,186

645

2,831

148

Agricultural
9,043

6,407

2,191

8,598

708

Total real estate loans
90,293

45,065

21,919

66,984

3,301

Commercial
28,653

10,315

13,461

23,776

5,154

Agricultural
2,043

367

1,106

1,473

462

Total
$
120,989

$
55,747

$
36,486

$
92,233

$
8,917


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

$
28,143

$
11,246

$
39,389

$
1,608

Construction:
 
 
 
 
 
Land acquisition & development
12,511

7,262

1,615

8,877

574

Residential
459

272

—

272

—

Commercial
2,729

253

2,442

2,695

904

Total construction loans
15,699

7,787

4,057

11,844

1,478

Residential
2,959

2,452

341

2,793

143

Agricultural
8,844

6,444

2,305

8,749

732

Total real estate loans
69,105

44,826

17,949

62,775

3,961

Commercial
16,904

11,882

2,644

14,526

1,190

Agricultural
1,231

342

837

1,179

641

Total
$
87,240

$
57,050

$
21,430

$
78,480

$
5,792



16

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


The following table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended September 30,
 
2015
 
2014
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
36,075

 
$
226

 
$
53,492

 
$
211

Construction:
 
 
 
 
 
 
 
Land acquisition & development
9,325

 
29

 
11,611

 
11

Residential
330

 
—

 
304

 
—

Commercial
2,339

 
4

 
2,709

 
2

Total construction loans
11,994

 
33

 
14,624

 
13

Residential
2,607

 
4

 
4,773

 
1

Agricultural
8,578

 
27

 
9,031

 
25

Total real estate loans
59,254

 
290

 
81,920

 
250

Commercial
22,483

 
2

 
14,252