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 March 31, 2016
OR
 
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   
COMMISSION FILE NUMBER 001-34653
________________________________________________________________________________________________________ 
First Interstate BancSystem, Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________ 
Montana
 
81-0331430
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
401 North 31st Street, Billings, MT
 
59116-0918
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 406/255-5390
______________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
  
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:
 
March 31, 2016 – Class A common stock
 
21,007,483

 
 
March 31, 2016 – Class B common stock
 
23,700,002

 
 



FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
Index
 
 
Page
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets - March 31, 2016 and December 31, 2015
3

 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2015
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2015
5

 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2016 and 2015
6

 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015
7

 
 
 
 
9

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

 
 
 
Item 3.
49

 
 
 
Item 4.
49

 
 
Part II.
 
 
 
 
Item 1.
49

 
 
 
Item 1A .
49

 
 
 
Item  2.
50

 
 
 
Item 3.
50

 
 
 
Item 4.
Mine Safety Disclosures
50

 
 
 
Item 5.
50

 
 
 
Item 6.
50

 
 
52








2

Table of Contents

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

 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Cash and due from banks
$
113,755

 
$
132,595

Interest bearing deposits in banks
541,577

 
647,299

Federal funds sold
196

 
563

Total cash and cash equivalents
655,528

 
780,457

Investment securities:
 
 
 
Available-for-sale
1,563,350

 
1,456,840

Held-to-maturity (estimated fair values of $593,904 and $607,550 at March 31, 2016 and December 31, 2015, respectively)
581,390

 
600,665

Total investment securities
2,144,740

 
2,057,505

Loans held for investment
5,191,469

 
5,193,321

Mortgage loans held for sale
52,989

 
52,875

Total loans
5,244,458

 
5,246,196

Less allowance for loan losses
79,924

 
76,817

Net loans
5,164,534

 
5,169,379

Goodwill
204,481

 
204,523

Premises and equipment, net of accumulated depreciation
188,714

 
190,812

Company-owned life insurance
188,396

 
187,253

Accrued interest receivable
26,907

 
27,729

Mortgage servicing rights, net of accumulated amortization and impairment reserve
15,574

 
15,621

Core deposit intangibles, net of accumulated amortization
9,762

 
10,589

Other real estate owned (“OREO”)
9,257

 
6,254

Other assets
82,787

 
78,074

Total assets
$
8,690,680

 
$
8,728,196

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,860,472

 
$
1,823,716

Interest bearing
5,246,991

 
5,265,221

Total deposits
7,107,463

 
7,088,937

Securities sold under repurchase agreements
465,523

 
510,635

Accounts payable and accrued expenses
48,102

 
53,042

Accrued interest payable
5,184

 
4,960

Deferred tax liability
11,977

 
9,765

Long-term debt
27,907

 
27,885

Other borrowed funds
33

 
2

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,748,666

 
7,777,703

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of March 31, 2016 or December 31, 2015
—

 
—

Common stock
288,782

 
311,720

Retained earnings
648,631

 
638,367

Accumulated other comprehensive income, net
4,601

 
406

Total stockholders’ equity
942,014

 
950,493

Total liabilities and stockholders’ equity
$
8,690,680

 
$
8,728,196

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
2016
 
2015
Interest income:
 
 
 
Interest and fees on loans
$
62,816

 
$
59,371

Interest and dividends on investment securities:
 
 
 
Taxable
8,038

 
7,971

Exempt from federal taxes
879

 
1,059

Interest on deposits in banks
645

 
389

Interest on federal funds sold
2

 
2

Total interest income
72,380

 
68,792

Interest expense:
 
 
 
Interest on deposits
3,228

 
3,309

Interest on securities sold under repurchase agreements
90

 
54

Interest on long-term debt
449

 
515

Interest on subordinated debentures held by subsidiary trusts
663

 
589

Total interest expense
4,430

 
4,467

Net interest income
67,950

 
64,325

Provision for loan losses
4,000

 
1,095

Net interest income after provision for loan losses
63,950

 
63,230

Non-interest income:
 
 
 
Payment services revenues
7,991

 
7,372

Mortgage banking revenues
6,141

 
5,906

Wealth management revenues
4,575

 
4,937

Service charges on deposit accounts
4,463

 
3,944

Other service charges, commissions and fees
2,608

 
2,495

Investment securities gains (losses), net
(21
)
 
6

Other income
1,486

 
3,122

Total non-interest income
27,243

 
27,782

Non-interest expense:
 
 
 
Salaries and wages
24,682

 
25,349

Employee benefits
8,802

 
7,780

Occupancy, net
4,664

 
4,492

Furniture and equipment
2,256

 
3,793

Outsourced technology services
4,832

 
2,463

OREO expense, net of income
(39
)
 
(61
)
Professional fees
1,308

 
1,301

FDIC insurance premiums
1,258

 
1,142

Mortgage servicing rights amortization
634

 
619

Mortgage servicing rights impairment (recovery)
15

 
(15
)
Core deposit intangibles amortization
827

 
855

Other expenses
11,623

 
11,804

Acquisition expenses
—

 
70

Total non-interest expense
60,862

 
59,592

Income before income tax expense
30,331

 
31,420

Income tax expense
10,207

 
10,440

Net income
$
20,124

 
$
20,980

 
 
 
 
Basic earnings per common share
$
0.45

 
$
0.46

Diluted earnings per common share
$
0.45

 
$
0.46

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

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

 
Three Months Ended March 31,
 
2016
2015
Net income
$
20,124

$
20,980

Other comprehensive income, before tax:
 
 
Investment securities available-for sale:
 
 
Change in net unrealized gains during period
8,613

10,608

Reclassification adjustment for net (gains) losses included in income
21

(6
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
465

451

Unrealized loss on derivatives
(2,197
)
—

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

15

Other comprehensive income, before tax
6,917

11,068

Deferred tax expense related to other comprehensive income
(2,722
)
(4,355
)
Other comprehensive income, net of tax
4,195

6,713

Comprehensive income, net of tax
$
24,319

$
27,693

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, 2015
$
311,720

 
$
638,367

 
$
406

 
$
950,493

Net income
—

 
20,124

 
—

 
20,124

Other comprehensive income, net of tax expense
—

 
—

 
4,195

 
4,195

Common stock transactions:
 
 
 
 
 
 
 
 967,965 common shares purchased and retired
(25,309
)
 
—

 
—

 
(25,309
)
182,544 non-vested common shares issued
—

 
—

 
—

 
—

12,347 non-vested common shares forfeited
—

 
—

 
—

 
—

77,028 stock options exercised, net of 34,816 shares tendered in payment of option price and income tax withholding amounts
996

 
—

 
—

 
996

Tax benefit of stock-based compensation
420

 
—

 
—

 
420

Stock-based compensation expense
955

 
—

 
—

 
955

Common cash dividend declared ($0.22 per share)
—

 
(9,860
)
 
—

 
(9,860
)
Balance at March 31, 2016
$
288,782

 
$
648,631

 
$
4,601

 
$
942,014

 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
323,596

 
$
587,862

 
$
(2,534
)
 
$
908,924

Net income
—

 
20,980

 
—

 
20,980

Other comprehensive income, net of tax expense
—

 
—

 
6,713

 
6,713

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

 
—

 
(15,264
)
156,956 common shares issued
—

 
—

 
—

 
—

838 non-vested common shares forfeited
—

 
—

 
—

 
—

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

 
—

 
—

 
900

Tax benefit of stock-based compensation
480

 
—

 
—

 
480

Stock-based compensation expense
832

 
—

 
—

 
832

Common cash dividend declared ($0.20 per share)
—

 
(9,115
)
 
—

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

 
$
599,727

 
$
4,179

 
$
914,450

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

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

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
20,124

 
$
20,980

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
4,000

 
1,095

Net (gain) loss on disposal of premises and equipment
142

 
(204
)
Depreciation and amortization
4,679

 
4,544

Net premium amortization on investment securities
3,238

 
3,684

Net (gain) loss on investment securities transactions
21

 
(6
)
Realized and unrealized net gains on mortgage banking activities
(4,588
)
 
(4,321
)
Net gain on sale of OREO
(102
)
 
(750
)
Write-downs of OREO and other assets pending disposal
17

 
106

Mortgage servicing rights impairment (charge) reversal
15

 
(15
)
Deferred income tax (benefit) expense
(517
)
 
4,914

Net increase in cash surrender value of company-owned life insurance
(1,143
)
 
(920
)
Stock-based compensation expense
955

 
832

Tax benefits from stock-based compensation expense
420

 
480

Excess tax benefits from stock-based compensation expense
(307
)
 
(292
)
Originations of mortgage loans held for sale
(195,444
)
 
(239,527
)
Proceeds from sales of mortgage loans held for sale
199,316

 
228,259

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in interest receivable
822

 
(179
)
Increase in other assets
(4,567
)
 
(3,630
)
Increase (decrease) in accrued interest payable
224

 
(720
)
Decrease in accounts payable and accrued expenses
(7,128
)
 
(15,682
)
Net cash provided by (used in) operating activities
20,177

 
(1,352
)
Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(4,870
)
 
(11,733
)
Available-for-sale
(254,098
)
 
(153,953
)
Proceeds from maturities, pay-downs and sales of investment securities:
 
 
 
Held-to-maturity
23,925

 
22,826

Available-for-sale
153,703

 
95,996

Extensions of credit to customers, net of repayments
(5,677
)
 
(20,050
)
Recoveries of loans charged-off
3,409

 
1,901

Proceeds from sales of OREO
309

 
2,321

Capital expenditures, net of sales
(1,408
)
 
(382
)
Net cash used in investing activities
$
(84,707
)
 
$
(63,074
)

7

Table of Contents

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

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
18,526

 
$
(38,053
)
Net decrease in securities sold under repurchase agreements
(45,112
)
 
(40,177
)
Net increase (decrease) in other borrowed funds
31

 
(5
)
Repayments of long-term debt
(15
)
 
(15
)
Advances on long-term debt
37

 
4,996

Proceeds from issuance of common stock
996

 
900

Excess tax benefits from stock-based compensation expense
307

 
292

Purchase and retirement of common stock
(25,309
)
 
(15,264
)
Dividends paid to common stockholders
(9,860
)
 
(9,115
)
Net cash used in financing activities
(60,399
)
 
(96,441
)
Net decrease in cash and cash equivalents
(124,929
)
 
(160,867
)
Cash and cash equivalents at beginning of period
780,457

 
798,670

Cash and cash equivalents at end of period
$
655,528

 
$
637,803

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
4,206

 
$
5,100

Cash paid during the period for interest expense
15,390

 
5,187

 
 
 
 
Supplemental disclosures of noncash investing and financing activities:
 
 
 
Transfer of loans to other real estate owned
3,227

 
3,257

Capitalization of internally originated mortgage servicing rights
602

 
659

See accompanying notes to unaudited consolidated financial statements.


8

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


(1)
Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at March 31, 2016 and December 31, 2015, and the results of operations and cash flows for each of the three month periods ended March 31, 2016 and 2015 in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2015 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the March 31, 2016 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, 2015. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

(2)
Acquisitions

Flathead Bank. On April 6, 2016, the Company's bank subsidiary, First Interstate Bank, entered into a stock purchase agreement to acquire all of the outstanding stock of Flathead Bank of Bigfork ("Flathead Bank"), a Montana-based bank wholly owned by Flathead Holding Company. With total assets of $231,574 as of December 31, 2015, Flathead Bank operates seven branches in western and northwestern Montana. Upon closing of the transaction, which is expected to occur during the third quarter of 2016 subject to regulatory approval, all Flathead Bank branches will become branches of First Interstate Bank. Pursuant to the Purchase Agreement, First Interstate Bank will pay cash consideration of approximately $34,237 for the stock, subject to certain financial performance and other adjustments, the amount of which will be determined prior to the closing date of the transaction.

Absarokee Bancorporation, Inc. On July 24, 2015, the Company acquired all of the outstanding stock of Absarokee Bancorporation, Inc. ("Absarokee"), a Montana-based bank holding company that operated one subsidiary bank, United Bank. The Company merged United Bank with and into First Interstate Bank immediately subsequent to the acquisition. During March 2016, the Company completed its review of Absarokee's tax items and finalized the fair value of the acquired deferred tax asset. Finalization of provisional estimates resulted in a $42 decrease in goodwill.

(3)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
March 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
3,911

$
24

$
—

$
3,935

Obligations of U.S. government agencies
530,037

1,719

(324
)
531,432

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,010,675

14,550

(862
)
1,024,363

Private mortgage-backed securities
144

1

(2
)
143

Other investments
3,450

27

—

3,477

Total
$
1,548,217

$
16,321

$
(1,188
)
$
1,563,350


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)


March 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
167,975

$
5,553

$
(14
)
$
173,514

Corporate securities
51,918

292

(61
)
52,149

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
341,434

11,640

(5,145
)
347,929

Obligations of U.S. government agencies
19,737

248

—

19,985

Other investments
326

1

—

327

Total
$
581,390

$
17,734

$
(5,220
)
$
593,904

December 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
3,912

$
3

$
(4
)
$
3,911

Obligations of U.S. government agencies
521,079

712

(1,610
)
520,181

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
921,699

9,448

(2,101
)
929,046

Private mortgage-backed securities
156

1

(1
)
156

Other investments
3,550

5

(9
)
3,546

Total
$
1,450,396

$
10,169

$
(3,725
)
$
1,456,840

December 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
173,785

$
5,103

$
(227
)
$
178,661

Corporate securities
50,046

64

(220
)
49,890

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
356,742

7,686

(5,420
)
359,008

Obligations of U.S. government agencies
19,738

—

(102
)
19,636

Other investments
354

1

—

355

Total
$
600,665

$
12,854

$
(5,969
)
$
607,550

    
Gross realized gains and losses from the disposition of investment securities are summarized in the following table:
 
Three Months Ended March 31,
 
2016
 
2015
Gross realized gains
$
57

 
$
6

Gross realized losses
(78
)
 
—

    

10

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


The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of March 31, 2016 and December 31, 2015.
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2016
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
118,698

$
(226
)
 
$
35,355

$
(98
)
 
$
154,053

$
(324
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
146,840

(586
)
 
25,708

(276
)
 
172,548

(862
)
Private mortgage-backed securities
—

—

 
57

(2
)
 
57

(2
)
Other investments
—

—

 
—

—

 
—

—

Total
$
265,538

$
(812
)
 
$
61,120

$
(376
)
 
$
326,658

$
(1,188
)
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2016
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
3,379

$
(7
)
 
$
3,606

$
(7
)
 
$
6,985

$
(14
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
13,801

(4,364
)
 
24,049

(781
)
 
37,850

(5,145
)
Corporate securities
10,049

(61
)
 
—

—

 
10,049

(61
)
Total
$
27,229

$
(4,432
)
 
$
27,655

$
(788
)
 
$
54,884

$
(5,220
)

 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
U.S. Treasury notes
$
2,092

$
(4
)
 
$
—

$
—

 
$
2,092

$
(4
)
Obligations of U.S. government agencies
209,631

(1,077
)
 
54,619

(533
)
 
264,250

(1,610
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
343,875

(1,577
)
 
28,010

(524
)
 
371,885

(2,101
)
Private mortgage-backed securities
—

—

 
61

(1
)
 
61

(1
)
Other investments
1,225

(9
)
 
—

—

 
1,225

(9
)
Total
$
556,823

$
(2,667
)

$
82,690

$
(1,058
)

$
639,513

$
(3,725
)


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
December 31, 2015
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
10,182

$
(39
)
 
$
9,476

$
(188
)
 
$
19,658

$
(227
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
67,295

(4,288
)
 
69,539

(1,132
)
 
136,834

(5,420
)
Obligations of U.S. government agencies
19,738

(102
)
 
—

—

 
19,738

(102
)
Corporate securities
31,135

(220
)
 
—

—

 
31,135

(220
)
Total
$
128,350

$
(4,649
)
 
$
79,015

$
(1,320
)
 
$
207,365

$
(5,969
)
        
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 109 and 198 individual investment securities that were in an unrealized loss position as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, the Company had the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. Furthermore, 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 have to sell any securities before a recovery in cost. No impairment losses were recorded during three months ended March 31, 2016 and 2015.

Maturities of investment securities at March 31, 2016 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment securities maturities are shown at contractual maturity dates.
 
Available-for-Sale
 
Held-to-Maturity
March 31, 2016
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
317,502

$
320,927

 
$
87,930

$
90,154

After one year but within five years
1,089,290

1,099,333

 
328,090

333,231

After five years but within ten years
70,534

71,242

 
125,412

128,977

After ten years
70,891

71,848

 
39,958

41,542

Total
$
1,548,217

$
1,563,350

 
$
581,390

$
593,904

    
As of March 31, 2016, the Company had investment securities callable within one year with amortized costs and estimated fair values of $277,491 and $277,837, respectively, including callable structured notes with amortized costs and estimated fair values of $10,000 and $10,000, respectively. These investment securities are primarily included in the after one year but within five years category in the table above.
    

12

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


(4)
Loans
    
The following table presents loans by class as of the dates indicated:
 
March 31,
2016
 
December 31,
2015
Real estate loans:
 
 
 
Commercial
$
1,764,492

 
$
1,793,258

Construction:
 
 
 
Land acquisition & development
219,450

 
224,066

Residential
113,317

 
111,763

Commercial
102,382

 
94,890

Total construction loans
435,149

 
430,719

Residential
1,021,443

 
1,032,851

Agricultural
153,054

 
156,234

Total real estate loans
3,374,138

 
3,413,062

Consumer:
 
 
 
Indirect consumer
651,057

 
622,529

Other consumer
150,774

 
153,717

Credit card
63,624

 
68,107

Total consumer loans
865,455

 
844,353

Commercial
825,043

 
792,416

Agricultural
126,290

 
142,151

Other, including overdrafts
543

 
1,339

Loans held for investment
5,191,469

 
5,193,321

Mortgage loans held for sale
52,989

 
52,875

Total loans
$
5,244,458

 
$
5,246,196

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

The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of March 31, 2016 and 2015:    
As of March 31,
2016
 
2015
 
 
 
 
Outstanding balance
$
33,175

 
$
32,445

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
21,064

 
23,909

Loans on non-accrual status
—

 
—

Total carrying value
$
21,064

 
$
23,909

    

13

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


The following table summarizes changes in the accretable yield for loans acquired credit impaired for the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
 
2016
2015
 
 
 
Beginning balance
$
6,713

$
5,781

Accretion income
(614
)
(548
)
Reductions due to exit events
(147
)
(396
)
Reclassifications from nonaccretable differences
726

2,143

Ending balance
$
6,678

$
6,980

    
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following tables present the contractual aging of the Company’s recorded investment in past due loans by class as of the dates indicated:
 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of March 31, 2016
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
2,302

$
2,975

$
5

$
5,282

$
1,736,374

$
22,836

$
1,764,492

Construction:
 
 
 
 
 
 

 

Land acquisition & development
951

351

857

2,159

210,994

6,297

219,450

Residential
96

—

—

96

112,166

1,055

113,317

Commercial
184

—

—

184

101,915

283

102,382

Total construction loans
1,231

351

857

2,439

425,075

7,635

435,149

Residential
4,804

985

1,750

7,539

1,010,803

3,101

1,021,443

Agricultural
27

—

—

27

147,423

5,604

153,054

Total real estate loans
8,364

4,311

2,612

15,287

3,319,675

39,176

3,374,138

Consumer:
 
 
 
 
 
 
 

Indirect consumer
4,448

1,075

188

5,711

644,517

829

651,057

Other consumer
613

226

38

877

149,419

478

150,774

Credit card
412

346

529

1,287

62,325

12

63,624

Total consumer loans
5,473

1,647

755

7,875

856,261

1,319

865,455

Commercial
2,144

763

232

3,139

799,325

22,579

825,043

Agricultural
1,972

322

451

2,745

122,782

763

126,290

Other, including overdrafts
—

5

312

317

226

—

543

Loans held for investment
17,953

7,048

4,362

29,363

5,098,269

63,837

5,191,469

Mortgage loans originated for sale
—

—

—

—

52,989

—

52,989

Total loans
$
17,953

$
7,048

$
4,362

$
29,363

$
5,151,258

$
63,837

$
5,244,458


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, 2015
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
6,051

$
724

$
418

$
7,193

$
1,762,294

$
23,771

$
1,793,258

Construction:
 
 
 
 
 
 

 

Land acquisition & development
3,190

163

1,325

4,678

212,757

6,631

224,066

Residential
1,288

—

—

1,288

110,182

293

111,763

Commercial
3,232

—

—

3,232

90,703

955

94,890

Total construction loans
7,710

163

1,325

9,198

413,642

7,879

430,719

Residential
5,991

1,196

2,063

9,250

1,018,359

5,242

1,032,851

Agricultural
176

17

—

193

150,686

5,355

156,234

Total real estate loans
19,928

2,100

3,806

25,834

3,344,981

42,247

3,413,062

Consumer:
 
 
 
 
 
 
 

Indirect consumer
6,675

1,089

210

7,974

614,029

526

622,529

Other consumer
1,312

331

34

1,677

151,381

659

153,717

Credit card
533

317

477

1,327

66,768

12

68,107

Total consumer loans
8,520

1,737

721

10,978

832,178

1,197

844,353

Commercial
8,493

1,060

699

10,252

759,851

22,313

792,416

Agricultural
879

152

62

1,093

140,430

628

142,151

Other, including overdrafts
—

—

314

314

1,025

—

1,339

Loans held for investment
37,820

5,049

5,602

48,471

5,078,465

66,385

5,193,321

Mortgage loans originated for sale
—

—

—

—

52,875

—

52,875

Total loans
$
37,820

$
5,049

$
5,602

$
48,471

$
5,131,340

$
66,385

$
5,246,196


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 $790 and $832 for the three months ended March 31, 2016 and 2015.
        

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 originated and acquired loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:
As of March 31, 2016
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
55,222

$
25,759

$
18,117

$
43,876

$
4,526

Construction:
 
 
 
 
 
Land acquisition & development
15,252

7,742

322

8,064

150

Residential
988

282

—

282

—

Commercial
1,370

446

731

1,177

739

Total construction loans
17,610

8,470

1,053

9,523

889

Residential
5,664

3,019

1,152

4,171

160

Agricultural
6,685

5,816

201

6,017

7

Total real estate loans
85,181

43,064

20,523

63,587

5,582

Commercial
28,782

8,113

16,150

24,263

8,176

Agricultural
908

250

544

794

189

Total
$
114,871

$
51,427

$
37,217

$
88,644

$
13,947


As of December 31, 2015
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
58,179

$
27,882

$
17,614

$
45,496

$
3,401

Construction:
 
 
 
 
 
Land acquisition & development
15,503

7,245

778

8,023

282

Residential
992

293

—

293

—

Commercial
1,264

340

739

1,079

739

Total construction loans
17,759

7,878

1,517

9,395

1,021

Residential
7,073

3,547

2,317

5,864

367

Agricultural
6,434

5,563

198

5,761

5

Total real estate loans
89,445

44,870

21,646

66,516

4,794

Commercial
29,593

10,744

13,727

24,471

6,487

Agricultural
1,349

622

356

978

294

Total
$
120,387

$
56,236

$
35,729

$
91,965

$
11,575



16

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


The following table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
33,483

 
$
36

 
$
42,077

 
$
150

Construction:
 
 
 
 
 
 
 
Land acquisition & development
7,508

 
7

 
8,930

 
10

Residential
288

 
—

 
308

 
—

Commercial
1,067

 
—

 
3,055

 
2

Total construction loans
8,863

 
7

 
12,293

 
12

Residential
4,206

 
1

 
3,127

 
1

Agricultural
5,748

 
1

 
8,655

 
22

Total real estate loans
52,300

 
45

 
66,152

 
185

Commercial
23,379

 
15

 
17,533

 
8

Agricultural
856

 
—

 
914

 
5

Total
$
76,535

 
$
60

 
$
84,599

 
$
198

 
 
 
 
 
 
 
 
The amount of interest income recognized by the Company within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring that remained on accrual status. Interest payments received on non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. If interest on impaired loans had been accrued, interest income on impaired loans would have been approximately $929 and $1,035 for the three months ended March 31, 2016 and 2015.
    
Collateralized impaired loans are generally recorded at the fair value of the underlying collateral using discounted cash flows, independent appraisals and management estimates based upon current market conditions. For loans measured under the present value of cash flows method, the change in present value attributable to the passage of time, if applicable, is recognized in the provision for loan losses and thus no interest income is recognized.

Modifications of performing loans are made in the ordinary course of business and are completed on a case-by-case basis as negotiated with the borrower. Loan modifications typically include interest rate concessions, interest only periods of less than twelve months, short-term payment deferrals and extension of amortization periods to provide payment relief. A loan modification is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and the Company, for economic or legal reasons, grants a concession to the borrower that it would not otherwise consider. Certain troubled debt restructurings are on non-accrual status at the time of restructuring and are typically returned to accrual status after considering the borrower's sustained repayment performance in accordance with the restructuring agreement for a period of at least six months and management is reasonably assured of future performance. If the troubled debt restructuring meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status and the accrual of interest will resume.
    
The Company had loans renegotiated in troubled debt restructurings of $34,344 as of March 31, 2016, of which $22,274 were included in non-accrual loans and $12,070 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $40,330 as of December 31, 2015, of which $24,911 were included in non-accrual loans and $15,419 were on accrual status.

17

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


The following table presents information on the Company's troubled debt restructurings that occurred during the three months ended March 31, 2016.
 
 
Number of Notes
 
Type of Concession
Principal Balance at Restructure Date
Three Months Ended March 31, 2016
 
 
Interest only period
Extension of terms or maturity
Commercial Real Estate
 
3
 
$
576

$
204

$
780

Total loans restructured during period
 
3
 
$
576

$
204

$
780

 
 
 
 
 
 
 
 
 
For troubled debt restructurings that were on non-accrual status or otherwise deemed impaired before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company continues to evaluate all troubled debt restructurings for possible impairment and recognizes impairment through the allowance. Additionally these loans continue to work their way through the credit cycle through charge-off, pay-off or foreclosure. Financial effects of modifications of troubled debt restructurings may include principal loan forgiveness or other charge-offs directly related to the restructuring. The Company had no charge-offs directly related to modifying troubled debt restructurings during the three months ended March 31, 2016 or 2015.
    
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 three months ended March 31, 2016. The Company considers a payment default to occur on troubled debt restructurings when the loan is 90 days or more past due or was placed on non-accrual status after the modification.
 
Three Months Ended March 31, 2016
 
Number of Notes
 
Balance
Commercial Real Estate
1
 
$
203

Total
1
 
$
203


At March 31, 2016, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.
    
As part of the on-going and continuous monitoring of the credit quality of the Company’s loan portfolio, management tracks internally assigned risk classifications of loans. The Company adheres to a Uniform Classification System developed jointly by the various bank regulatory agencies to internally risk rate loans. The Uniform Classification System defines three broad categories of criticized assets, which the Company uses as credit quality indicators:
    
Other Assets Especially Mentioned — includes loans that exhibit weaknesses in financial condition, loan structure or documentation, which if not promptly corrected, may lead to the development of abnormal risk elements.
    
Substandard — includes loans that are inadequately protected by the current sound worth and paying capacity of the borrower. Although the primary source of repayment for a substandard loan is not currently sufficient, collateral or other sources of repayment are sufficient to satisfy the debt. Continuance of a substandard loan is not warranted unless positive steps are taken to improve the worthiness of the credit.
    
Doubtful — includes loans that exhibit pronounced weaknesses to a point where collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Doubtful loans are required to be placed on non-accrual status and are assigned specific loss exposure.

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


18

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


The following tables present the Company’s recorded investment in criticized loans by class and credit quality indicator based on the most recent analysis performed as of the dates indicated:
As of March 31, 2016
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
77,147

$
82,536

$
14,311

$
173,994

Construction:
 
 
 
 
Land acquisition & development
11,854

11,226

1,515

24,595

Residential
2,003

389

—

2,392

Commercial
4,056

429

748

5,233

Total construction loans
17,913

12,044

2,263

32,220

Residential
5,681

10,107

477

16,265

Agricultural
7,519

18,920

—

26,439

Total real estate loans
108,260

123,607

17,051

248,918

Consumer:
 
 
 
 
Indirect consumer
704

1,446

144

2,294

Other consumer
1,024

914

211

2,149

Total consumer loans
1,728

2,360

355

4,443

Commercial
31,392

34,039

16,629

82,060

Agricultural
3,613

7,820

543

11,976

Total
$
144,993

$
167,826

$
34,578

$
347,397

As of December 31, 2015
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
Real estate:
 
 
 
 
Commercial
$
61,787

$
84,556

$
10,609

$
156,952

Construction:
 
 
 
 
Land acquisition & development
16,593

12,482

591

29,666

Residential
1,640

1,886

—

3,526

Commercial
166

323

756

1,245

Total construction loans
18,399

14,691

1,347

34,437

Residential
4,453

9,661

2,540

16,654

Agricultural
6,114

16,529

—

22,643

Total real estate loans
90,753

125,437

14,496

230,686

Consumer:
 
 
 
 
Indirect consumer
644

1,131

154

1,929

Other consumer
651

1,130

198

1,979

Total consumer loans
1,295

2,261

352

3,908

Commercial
32,975

27,982

15,085

76,042

Agricultural
2,247

7,105

417

9,769

Total
$
127,270

$
162,785

$
30,350

$
320,405

    
The Company maintains a credit review function, which is independent of the credit approval process, to assess assigned internal risk classifications and monitor compliance with internal lending policies and procedures.

Written action plans with firm target dates for resolution of identified problems are maintained and reviewed on a quarterly basis for all categories of criticized loans.



19

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


(5)
Allowance for Loan Losses
    
The following tables present a summary of changes in the allowance for loan losses by portfolio segment for the periods indicated. 
Three Months Ended March 31, 2016
Real Estate
Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
 
 
 
 
 
 
Beginning balance
$
52,296

$
5,144

$
18,775

$
602

$
—

$
76,817

Provision charged to operating expense
(16,081
)
1,229

17,690

1,162

—