Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________ 
FORM 10-Q
________________________________________________________________________________________________________ 
ý
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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:
 
June 30, 2016 – Class A common stock
 
21,131,759

 
 
June 30, 2016 – Class B common stock
 
23,614,455

 
 



FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
Index
 
 
Page
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Balance Sheets - June 30, 2016 and December 31, 2015
3

 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2016 and 2015
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2016 and 2015
5

 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity - Six Months Ended June 30, 2016 and 2015
6

 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
39

 
 
 
Item 3.
55

 
 
 
Item 4.
55

 
 
Part II.
 
 
 
 
Item 1.
56

 
 
 
Item 1A .
56

 
 
 
Item  2.
56

 
 
 
Item 3.
56

 
 
 
Item 4.
Mine Safety Disclosures
56

 
 
 
Item 5.
56

 
 
 
Item 6.
56

 
 
58








2

Table of Contents

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

 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Cash and due from banks
$
125,995

 
$
132,595

Interest bearing deposits in banks
349,910

 
647,299

Federal funds sold
146

 
563

Total cash and cash equivalents
476,051

 
780,457

Investment securities:
 
 
 
Available-for-sale
1,505,581

 
1,456,840

Held-to-maturity (estimated fair values of $574,482 and $607,550 at June 30, 2016 and December 31, 2015, respectively)
556,247

 
600,665

Total investment securities
2,061,828

 
2,057,505

Loans held for investment
5,340,189

 
5,193,321

Mortgage loans held for sale
73,053

 
52,875

Total loans
5,413,242

 
5,246,196

Less allowance for loan losses
80,340

 
76,817

Net loans
5,332,902

 
5,169,379

Goodwill
204,481

 
204,523

Company-owned life insurance
189,524

 
187,253

Premises and equipment, net of accumulated depreciation
187,538

 
190,812

Accrued interest receivable
27,448

 
27,729

Mortgage servicing rights, net of accumulated amortization and impairment reserve
16,038

 
15,621

Core deposit intangibles, net of accumulated amortization
8,935

 
10,589

Other real estate owned (“OREO”)
7,908

 
6,254

Other assets
92,723

 
78,074

Total assets
$
8,605,376

 
$
8,728,196

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,783,609

 
$
1,823,716

Interest bearing
5,197,839

 
5,265,221

Total deposits
6,981,448

 
7,088,937

Securities sold under repurchase agreements
466,399

 
510,635

Accounts payable and accrued expenses
59,664

 
53,042

Accrued interest payable
5,647

 
4,960

Deferred tax liability
16,673

 
9,765

Long-term debt
27,928

 
27,885

Other borrowed funds
15

 
2

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,640,251

 
7,777,703

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of June 30, 2016 or December 31, 2015
—

 
—

Common stock
290,366

 
311,720

Retained earnings
664,337

 
638,367

Accumulated other comprehensive income, net
10,422

 
406

Total stockholders’ equity
965,125

 
950,493

Total liabilities and stockholders’ equity
$
8,605,376

 
$
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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
62,634

 
$
60,402

 
$
125,450

 
$
119,773

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
7,982

 
8,000

 
16,020

 
15,971

Exempt from federal taxes
858

 
1,040

 
1,737

 
2,099

Interest on deposits in banks
482

 
271

 
1,127

 
660

Interest on federal funds sold
3

 
5

 
5

 
7

Total interest income
71,959

 
69,718

 
144,339

 
138,510

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,108

 
3,239

 
6,336

 
6,548

Interest on securities sold under repurchase agreements
92

 
53

 
182

 
107

Interest on long-term debt
451

 
538

 
900

 
1,052

Interest on subordinated debentures held by subsidiary trusts
675

 
600

 
1,338

 
1,190

Total interest expense
4,326

 
4,430

 
8,756

 
8,897

Net interest income
67,633

 
65,288

 
135,583

 
129,613

Provision for loan losses
2,550

 
1,340

 
6,550

 
2,435

Net interest income after provision for loan losses
65,083

 
63,948

 
129,033

 
127,178

Non-interest income:
 
 
 
 
 
 
 
Payment services revenues
8,648

 
8,437

 
16,639

 
15,809

Mortgage banking revenues
9,409

 
8,802

 
15,550

 
14,708

Wealth management revenues
5,166

 
4,897

 
9,741

 
9,834

Service charges on deposit accounts
4,626

 
4,053

 
9,089

 
7,997

Other service charges, commissions and fees
2,845

 
2,736

 
5,453

 
5,231

Investment securities gains, net
108

 
46

 
87

 
52

Other income
2,457

 
2,792

 
4,750

 
6,050

Non-recurring litigation recovery
3,750

 
—

 
3,750

 
—

Total non-interest income
37,009

 
31,763

 
65,059

 
59,681

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
26,707

 
26,093

 
51,389

 
51,442

Employee benefits
8,066

 
8,063

 
17,675

 
15,979

Outsourced technology services
4,800

 
2,593

 
9,632

 
5,056

Occupancy, net
4,284

 
4,529

 
8,948

 
9,021

Furniture and equipment
2,460

 
3,703

 
4,716

 
7,496

OREO expense, net of income
140

 
(823
)
 
101

 
(884
)
Professional fees
1,136

 
1,514

 
2,444

 
2,815

FDIC insurance premiums
1,198

 
1,304

 
2,456

 
2,446

Mortgage servicing rights amortization
722

 
627

 
1,356

 
1,246

Mortgage servicing rights impairment recovery
(20
)
 
(56
)
 
(5
)
 
(71
)
Core deposit intangibles amortization
827

 
854

 
1,654

 
1,709

Other expenses
12,575

 
13,577

 
24,198

 
25,381

Acquisition expenses
—

 
(7
)
 
—

 
63

Total non-interest expense
62,895

 
61,971

 
124,564

 
121,699

Income before income tax expense
39,197

 
33,740

 
69,528

 
65,160

Income tax expense
13,643

 
11,518

 
23,850

 
21,958

Net income
$
25,554

 
$
22,222

 
$
45,678

 
$
43,202

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.58

 
$
0.49

 
$
1.03

 
$
0.95

Diluted earnings per common share
$
0.57

 
$
0.49

 
$
1.02

 
$
0.94

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
2015
 
2016
2015
Net income
$
25,554

$
22,222

 
$
45,678

$
43,202

Other comprehensive income, before tax:
 
 
 
 
 
Investment securities available-for sale:
 
 
 
 
 
Change in net unrealized gains (losses) during period
10,043

(9,196
)
 
18,671

1,412

Reclassification adjustment for net gains included in income
(108
)
(46
)
 
(87
)
(52
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
452

451

 
904

902

Unrealized loss on derivatives
(804
)
—

 
(3,002
)
—

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

13

 
28

28

Other comprehensive income (loss), before tax
9,596

(8,778
)
 
16,514

2,290

Deferred tax benefit (expense) related to other comprehensive income
(3,775
)
3,454

 
(6,498
)
(901
)
Other comprehensive income (loss), net of tax
5,821

(5,324
)
 
10,016

1,389

Comprehensive income, net of tax
$
31,375

$
16,898

 
$
55,694

$
44,591

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
—

 
45,678

 
—

 
45,678

Other comprehensive income, net of tax expense
—

 
—

 
10,016

 
10,016

Common stock transactions:
 
 
 
 
 
 
 
 995,600 common shares purchased and retired
(26,042
)
 
—

 
—

 
(26,042
)
 16,085 common shares issued
—

 
—

 
—

 
—

189,624 non-vested common shares issued
—

 
—

 
—

 
—

21,397 non-vested common shares forfeited
—

 
—

 
—

 
—

186,430 stock options exercised, net of 57,153 shares tendered in payment of option price and income tax withholding amounts
1,684

 
—

 
—

 
1,684

Tax benefit of stock-based compensation
619

 
—

 
—

 
619

Stock-based compensation expense
2,385

 
—

 
—

 
2,385

Common cash dividend declared ($0.44 per share)
—

 
(19,708
)
 
—

 
(19,708
)
Balance at June 30, 2016
$
290,366

 
$
664,337

 
$
10,422

 
$
965,125

 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
323,596

 
$
587,862

 
$
(2,534
)
 
$
908,924

Net income
—

 
43,202

 
—

 
43,202

Other comprehensive income, net of tax expense
—

 
—

 
1,389

 
1,389

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

 
—

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

 
—

 
—

 
—

156,956 non-vested common shares issued
—

 
—

 
—

 
—

1,678 non-vested common shares forfeited
—

 
—

 
—

 
—

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

 
—

 
—

 
1,670

Tax benefit of stock-based compensation
804

 
—

 
—

 
804

Stock-based compensation expense
2,319

 
—

 
—

 
2,319

Common cash dividend declared ($0.40 per share)
—

 
(18,189
)
 
—

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

 
$
612,875

 
$
(1,145
)
 
$
924,855

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

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

 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
45,678

 
$
43,202

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
6,550

 
2,435

Net (gain) loss on disposal of premises and equipment
188

 
(856
)
Depreciation and amortization
9,491

 
9,090

Net premium amortization on investment securities
6,347

 
7,021

Net gain on investment securities transactions
(87
)
 
(52
)
Realized and unrealized net gains on mortgage banking activities
(10,544
)
 
(10,759
)
Net gain on sale of OREO
(636
)
 
(1,736
)
Write-downs of OREO and other assets pending disposal
621

 
106

Mortgage servicing rights impairment recovery
(5
)
 
(71
)
Deferred income tax expense
321

 
9,108

Net increase in cash surrender value of company-owned life insurance
(2,271
)
 
(1,304
)
Stock-based compensation expense
2,385

 
2,319

Tax benefits from stock-based compensation expense
619

 
804

Excess tax benefits from stock-based compensation expense
(495
)
 
(530
)
Originations of mortgage loans held for sale
(468,560
)
 
(561,779
)
Proceeds from sales of mortgage loans held for sale
457,132

 
546,871

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in interest receivable
281

 
(1,945
)
Increase in other assets
(14,551
)
 
(1,034
)
Increase (decrease) in accrued interest payable
687

 
(467
)
Increase (decrease) in accounts payable and accrued expenses
3,701

 
(12,268
)
Net cash provided by operating activities
36,852

 
28,155

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(9,883
)
 
(27,640
)
Available-for-sale
(459,569
)
 
(223,483
)
Proceeds from maturities and pay-downs of investment securities:
 
 
 
Held-to-maturity
53,977

 
55,654

Available-for-sale
424,458

 
337,538

Purchases of company-owned life insurance
—

 
(22,500
)
Extensions of credit to customers, net of repayments
(159,410
)
 
(190,392
)
Recoveries of loans charged-off
4,717

 
3,285

Proceeds from sale of OREO
2,398

 
7,807

Proceeds from sale of loan production office
932

 
—

Capital expenditures, net of sales
(3,638
)
 
514

Net cash used in investing activities
$
(146,018
)
 
$
(59,217
)

7

Table of Contents

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

 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Net decrease in deposits
$
(107,489
)
 
$
(201,811
)
Net decrease in securities sold under repurchase agreements
(44,236
)
 
(33,105
)
Net increase (decrease) in other borrowed funds
13

 
(6
)
Repayments of long-term debt
(32
)
 
(30
)
Advances on long-term debt
75

 
5,031

Proceeds from issuance of common stock
1,684

 
1,670

Excess tax benefits from stock-based compensation expense
495

 
530

Purchase and retirement of common stock
(26,042
)
 
(15,264
)
Dividends paid to common stockholders
(19,708
)
 
(18,189
)
Net cash used in financing activities
(195,240
)
 
(261,174
)
Net decrease in cash and cash equivalents
(304,406
)
 
(292,236
)
Cash and cash equivalents at beginning of period
780,457

 
798,670

Cash and cash equivalents at end of period
$
476,051

 
$
506,434

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
27,566

 
$
18,450

Cash paid during the period for interest expense
8,069

 
9,364

 
 
 
 
Supplemental disclosures of noncash investing and financing activities:
 
 
 
Transfer of loans to loans held for sale
26

 
10,619

Transfer of loans to other real estate owned
4,019

 
4,396

Capitalization of internally originated mortgage servicing rights
1,768

 
1,792

See accompanying notes to unaudited consolidated financial statements.


8

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


(1)
Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at June 30, 2016 and December 31, 2015, the results of operations for each of the three and six month periods ended June 30, 2016 and 2015, and cash flows each of the six month periods ended June 30, 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 June 30, 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 and six months ended June 30, 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, 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:
June 30, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
3,909

$
44

$
—

$
3,953

Obligations of U.S. government agencies
450,544

2,882

(21
)
453,405

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,022,462

22,252

(117
)
1,044,597

Private mortgage-backed securities
136

1

(2
)
135

Other investments
3,450

41

—

3,491

Total
$
1,480,501

$
25,220

$
(140
)
$
1,505,581


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)


June 30, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
164,334

$
7,024

$
(1
)
$
171,357

Corporate securities
51,262

580

—

51,842

Obligations of U.S. government agencies
19,737

483

—

20,220

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
320,620

15,925

(5,777
)
330,768

Other investments
294

1

—

295

Total
$
556,247

$
24,013

$
(5,778
)
$
574,482

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

Obligations of U.S. government agencies
19,738

—

(102
)
19,636

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

7,686

(5,420
)
359,008

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Gross realized gains
$
108

 
$
46

 
$
165

 
$
52

Gross realized losses
—

 
—

 
(78
)
 
—


On October 30, 2015, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations with amortized costs and fair values of $100,343 and $100,140, respectively, into the held-to-maturity category. Unrealized net losses of $203 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 years.

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 at the time of the transfer are being amortized to yield over the remaining expected lives of the transferred securities of 4.3 years.
    

10

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


The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of June 30, 2016 and December 31, 2015:
 
Less than 12 Months
 
12 Months or More
 
Total
June 30, 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
$
—

$
—

 
$
10,477

$
(21
)
 
$
10,477

$
(21
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
11,097

(41
)
 
18,609

(76
)
 
29,706

(117
)
Private mortgage-backed securities
—

—

 
54

(2
)
 
54

(2
)
Total
$
11,097

$
(41
)
 
$
29,140

$
(99
)
 
$
40,237

$
(140
)
 
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2016
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
625

$
—

 
$
2,233

$
(1
)
 
$
2,858

$
(1
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
5,030

(2,631
)
 
20,683

(3,146
)
 
25,713

(5,777
)
Total
$
5,655

$
(2,631
)
 
$
22,916

$
(3,147
)
 
$
28,571

$
(5,778
)
 
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
)
 
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
)
Obligations of U.S. government agencies
19,738

(102
)
 
—

—

 
19,738

(102
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
67,295

(4,288
)
 
69,539

(1,132
)
 
136,834

(5,420
)
Corporate securities
31,135

(220
)
 
—

—

 
31,135

(220
)
Total
$
128,350

$
(4,649
)
 
$
79,015

$
(1,320
)
 
$
207,365

$
(5,969
)
        

11

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


The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 55 and 198 individual investment securities that were in an unrealized loss position as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 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 or six months ended June 30, 2016 and 2015.
    
Maturities of investment securities at June 30, 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
June 30, 2016
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
352,031

$
358,337

 
$
90,746

$
94,029

After one year but within five years
1,049,286

1,066,900

 
311,641

319,471

After five years but within ten years
58,599

59,317

 
128,607

134,596

After ten years
20,585

21,027

 
25,253

26,386

Total
$
1,480,501

$
1,505,581

 
$
556,247

$
574,482

        
As of June 30, 2016, the Company had investment securities callable within one year with amortized costs and estimated fair values of $231,957 and $232,619, respectively. These investment securities are primarily included in the after one year but within five years category in the table above. As of June 30, 2016, the Company had no callable structured notes.
        
(4)
Loans
    
The following table presents loans by class as of the dates indicated:
 
June 30,
2016
 
December 31,
2015
Real estate loans:
 
 
 
Commercial
$
1,816,813

 
$
1,793,258

Construction:
 
 
 
Land acquisition & development
218,650

 
224,066

Residential
113,944

 
111,763

Commercial
117,643

 
94,890

Total construction loans
450,237

 
430,719

Residential
1,030,593

 
1,032,851

Agricultural
166,872

 
156,234

Total real estate loans
3,464,515

 
3,413,062

Consumer:
 
 
 
Indirect consumer
687,768

 
622,529

Other consumer
153,185

 
153,717

Credit card
66,221

 
68,107

Total consumer loans
907,174

 
844,353

Commercial
824,962

 
792,416

Agricultural
139,892

 
142,151

Other, including overdrafts
3,646

 
1,339

Loans held for investment
5,340,189

 
5,193,321

Mortgage loans held for sale
73,053

 
52,875

Total loans
$
5,413,242

 
$
5,246,196


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)



Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following tables present the contractual aging of the Company’s recorded investment in past due loans by class as of the dates indicated:
 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of June 30, 2016
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
2,707

$
336

$
287

$
3,330

$
1,784,134

$
29,349

$
1,816,813

Construction:
 
 
 
 
 
 

 

Land acquisition & development
305

205

69

579

212,210

5,861

218,650

Residential
619

—

—

619

113,053

272

113,944

Commercial
—

—

—

—

115,975

1,668

117,643

Total construction loans
924

205

69

1,198

441,238

7,801

450,237

Residential
4,526

981

2,138

7,645

1,020,251

2,697

1,030,593

Agricultural
224

103

112

439

160,970

5,463

166,872

Total real estate loans
8,381

1,625

2,606

12,612

3,406,593

45,310

3,464,515

Consumer:
 
 
 
 
 
 
 

Indirect consumer
5,503

1,823

304

7,630

679,558

580

687,768

Other consumer
823

170

35

1,028

151,764

393

153,185

Credit card
488

340

509

1,337

64,884

—

66,221

Total consumer loans
6,814

2,333

848

9,995

896,206

973

907,174

Commercial
4,268

806

592

5,666

792,012

27,284

824,962

Agricultural
578

243

97

918

138,230

744

139,892

Other, including overdrafts
—

—

311

311

3,335

—

3,646

Loans held for investment
20,041

5,007

4,454

29,502

5,236,376

74,311

5,340,189

Mortgage loans originated for sale
—

—

—

—

73,053

—

73,053

Total loans
$
20,041

$
5,007

$
4,454

$
29,502

$
5,309,429

$
74,311

$
5,413,242


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)


 
 
 
 
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


Loans from business combinations included in the tables above include certain loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.
    
The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of June 30, 2016 and 2015:    
As of June 30,
2016
 
2015
 
 
 
 
Outstanding balance
$
31,979

 
$
35,555

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
20,140

 
22,293

Total carrying value
$
20,140

 
$
22,293

    

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 summarizes changes in the accretable yield for loans acquired credit impaired for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
2015
 
2016
2015
 
 
 
 
 
 
Beginning balance
$
6,678

$
6,980

 
$
6,713

$
5,781

Accretion income
(615
)
(807
)
 
(1,229
)
(1,355
)
Reductions due to exit events
(158
)
—

 
(305
)
(396
)
Reclassifications from nonaccretable differences
—

1,309

 
726

3,452

Ending balance
$
5,905

$
7,482

 
$
5,905

$
7,482


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 $821 and $875 for the three months ended June 30, 2016 and 2015, respectively, and approximately $1,690 and $1,613 for the six months ended June 30, 2016 and 2015 respectively.

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 June 30, 2016
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
57,833

$
22,624

$
22,740

$
45,364

$
6,273

Construction:
 
 
 
 
 
Land acquisition & development
13,358

5,267

1,692

6,959

898

Residential
981

272

—

272

—

Commercial
2,037

324

1,464

1,788

872

Total construction loans
16,376

5,863

3,156

9,019

1,770

Residential
5,399

2,835

1,131

3,966

134

Agricultural
6,441

5,662

193

5,855

7

Total real estate loans
86,049

36,984

27,220

64,204

8,184

Commercial
38,622

13,466

20,040

33,506

10,588

Agricultural
961

294

480

774

81

Total
$
125,632

$
50,744

$
47,740

$
98,484

$
18,853



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)


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


The following table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:
 
Three Months Ended June 30,
 
2016
 
2015
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
34,576

 
$
105

 
$
39,513

 
$
211

Construction:
 
 
 
 
 
 
 
Land acquisition & development
7,096

 
12

 
8,664

 
12

Residential
277

 
—

 
338

 
—

Commercial
1,421

 
2

 
3,492

 
—

Total construction loans
8,794

 
14

 
12,494

 
12

Residential
3,067

 
2

 
3,014

 
1

Agricultural
5,857

 
—

 
8,572

 
13

Total real estate loans
52,294

 
121

 
63,593

 
237

Commercial
28,074

 
41

 
21,841

 
112

Agricultural
753

 
—

 
1,004

 
8

Total
$
81,121

 
$
162

 
$
86,438

 
$
357


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)


 
Six Months Ended June 30,
 
2016
 
2015
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
 
 
Real estate:
 
 
 
 
 
 
 
Commercial
$
36,342

 
$
141

 
$
40,652

 
$
361

Construction:
 
 
 
 
 
 
 
Land acquisition & development
7,277

 
19

 
8,720

 
22

Residential
282

 
—

 
302

 
—

Commercial
1,433

 
2

 
3,133

 
2

Total construction loans