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 September 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:
 
September 30, 2016 – Class A common stock
 
21,459,481

 
 
September 30, 2016 – Class B common stock
 
23,420,517

 
 



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, 2016 and December 31, 2015
3

 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2016 and 2015
4

 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and 2015
5

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

 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and 2015
7

 
 
 
 
9

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
42

 
 
 
Item 3.
58

 
 
 
Item 4.
59

 
 
Part II.
 
 
 
 
Item 1.
59

 
 
 
Item 1A .
59

 
 
 
Item  2.
59

 
 
 
Item 3.
60

 
 
 
Item 4.
Mine Safety Disclosures
60

 
 
 
Item 5.
60

 
 
 
Item 6.
60

 
 
61








2

Table of Contents

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

 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Cash and due from banks
$
148,690

 
$
132,595

Interest bearing deposits in banks
550,531

 
647,299

Federal funds sold
2,146

 
563

Total cash and cash equivalents
701,367

 
780,457

Investment securities:
 
 
 
Available-for-sale
1,533,221

 
1,456,840

Held-to-maturity (estimated fair values of $554,048 and $607,550 at September 30, 2016 and December 31, 2015, respectively)
539,052

 
600,665

Total investment securities
2,072,273

 
2,057,505

Loans held for investment
5,462,936

 
5,193,321

Mortgage loans held for sale
67,979

 
52,875

Total loans
5,530,915

 
5,246,196

Less allowance for loan losses
81,235

 
76,817

Net loans
5,449,680

 
5,169,379

Goodwill
212,820

 
204,523

Company-owned life insurance
197,070

 
187,253

Premises and equipment, net of accumulated depreciation
191,064

 
190,812

Accrued interest receivable
31,002

 
27,729

Mortgage servicing rights, net of accumulated amortization and impairment reserve
17,322

 
15,621

Core deposit intangibles, net of accumulated amortization
10,546

 
10,589

Other real estate owned (“OREO”)
9,447

 
6,254

Other assets
81,256

 
78,074

Total assets
$
8,973,847

 
$
8,728,196

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,965,872

 
$
1,823,716

Interest bearing
5,362,709

 
5,265,221

Total deposits
7,328,581

 
7,088,937

Securities sold under repurchase agreements
476,768

 
510,635

Accounts payable and accrued expenses
55,050

 
53,042

Accrued interest payable
5,622

 
4,960

Deferred tax liability
14,888

 
9,765

Long-term debt
27,949

 
27,885

Other borrowed funds
8

 
2

Subordinated debentures held by subsidiary trusts
82,477

 
82,477

Total liabilities
7,991,343

 
7,777,703

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

 
—

Common stock
293,960

 
311,720

Retained earnings
679,722

 
638,367

Accumulated other comprehensive income, net
8,822

 
406

Total stockholders’ equity
982,504

 
950,493

Total liabilities and stockholders’ equity
$
8,973,847

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
65,626

 
$
62,062

 
$
191,076

 
$
181,835

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
7,878

 
7,410

 
23,898

 
23,381

Exempt from federal taxes
820

 
962

 
2,557

 
3,061

Interest on deposits in banks
607

 
342

 
1,734

 
1,002

Interest on federal funds sold
4

 
4

 
9

 
11

Total interest income
74,935

 
70,780

 
219,274

 
209,290

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
3,099

 
3,241

 
9,435

 
9,789

Interest on securities sold under repurchase agreements
100

 
55

 
282

 
162

Interest on long-term debt
457

 
544

 
1,357

 
1,596

Interest on subordinated debentures held by subsidiary trusts
698

 
610

 
2,036

 
1,800

Total interest expense
4,354

 
4,450

 
13,110

 
13,347

Net interest income
70,581

 
66,330

 
206,164

 
195,943

Provision for loan losses
2,363

 
1,098

 
8,913

 
3,533

Net interest income after provision for loan losses
68,218

 
65,232

 
197,251

 
192,410

Non-interest income:
 
 
 
 
 
 
 
Payment services revenues
9,019

 
8,574

 
25,658

 
24,383

Mortgage banking revenues
8,013

 
7,983

 
20,347

 
22,691

Wealth management revenues
4,995

 
5,233

 
14,736

 
15,067

Service charges on deposit accounts
4,692

 
4,379

 
13,781

 
12,376

Other service charges, commissions and fees
2,628

 
2,521

 
8,081

 
7,752

Investment securities gains, net
225

 
23

 
312

 
75

Other income
2,299

 
2,465

 
7,049

 
8,515

Non-recurring litigation recovery
—

 
—

 
3,750

 
—

Total non-interest income
31,871

 
31,178

 
93,714

 
90,859

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
23,618

 
25,460

 
71,791

 
76,902

Employee benefits
8,610

 
8,008

 
26,285

 
23,987

Outsourced technology services
5,211

 
2,520

 
14,843

 
7,576

Occupancy, net
4,413

 
4,413

 
13,361

 
13,434

Furniture and equipment
2,398

 
3,849

 
7,114

 
11,345

OREO expense, net of income
8

 
(720
)
 
109

 
(1,604
)
Professional fees
1,191

 
1,916

 
3,635

 
4,731

FDIC insurance premiums
1,212

 
1,190

 
3,668

 
3,636

Mortgage servicing rights amortization
854

 
617

 
2,210

 
1,863

Mortgage servicing rights impairment recovery
(16
)
 
(76
)
 
(21
)
 
(147
)
Core deposit intangibles amortization
875

 
842

 
2,529

 
2,551

Other expenses
12,542

 
12,613

 
36,740

 
37,994

Loss contingency expenses
—

 
5,000

 
—

 
5,000

Acquisition expenses
1,197

 
566

 
1,197

 
629

Total non-interest expense
62,113

 
66,198

 
183,461

 
187,897

Income before income tax expense
37,976

 
30,212

 
107,504

 
95,372

Income tax expense
12,783

 
10,050

 
36,633

 
32,008

Net income
$
25,193

 
$
20,162

 
$
70,871

 
$
63,364

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.57

 
$
0.45

 
$
1.59

 
$
1.40

Diluted earnings per common share
$
0.56

 
$
0.44

 
$
1.58

 
$
1.39

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,
 
2016
2015
 
2016
2015
Net income
$
25,193

$
20,162

 
$
70,871

$
63,364

Other comprehensive income, before tax:
 
 
 
 
 
Investment securities available-for sale:
 
 
 
 
 
Change in net unrealized gains during period
(3,430
)
10,855

 
15,241

12,264

Reclassification adjustment for net gains included in income
(225
)
(23
)
 
(312
)
(75
)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity
490

448

 
1,394

1,353

Unrealized loss on derivatives
512

(436
)
 
(2,490
)
(436
)
Defined benefit post-retirement benefits plans:
 
 
 
 
 
Change in net actuarial loss
15

15

 
43

43

Other comprehensive income (loss), before tax
(2,638
)
10,859

 
13,876

13,149

Deferred tax benefit (expense) related to other comprehensive income
1,038

(4,273
)
 
(5,460
)
(5,174
)
Other comprehensive income (loss), net of tax
(1,600
)
6,586

 
8,416

7,975

Comprehensive income, net of tax
$
23,593

$
26,748

 
$
79,287

$
71,339

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
—

 
70,871

 
—

 
70,871

Other comprehensive income, net of tax expense
—

 
—

 
8,416

 
8,416

Common stock transactions:
 
 
 
 
 
 
 
998,135 common shares purchased and retired
(26,119
)
 
—

 
—

 
(26,119
)
 16,085 common shares issued
—

 
—

 
—

 
—

189,624 non-vested common shares issued
—

 
—

 
—

 
—

25,984 non-vested common shares forfeited
—

 
—

 
—

 
—

270,183 stock options exercised, net of 94,902 shares tendered in payment of option price and income tax withholding amounts
3,657

 
—

 
—

 
3,657

Tax benefit of stock-based compensation
1,352

 
—

 
—

 
1,352

Stock-based compensation expense
3,350

 
—

 
—

 
3,350

Common cash dividend declared ($0.66 per share)
—

 
(29,516
)
 
—

 
(29,516
)
Balance at September 30, 2016
$
293,960

 
$
679,722

 
$
8,822

 
$
982,504

 
 
 
 
 
 
 
 
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

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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
70,871

 
$
63,364

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
8,913

 
3,533

Net (gain) loss on disposal of premises and equipment
492

 
(822
)
Depreciation and amortization
14,482

 
13,702

Net premium amortization on investment securities
9,423

 
11,527

Net gain on investment securities transactions
(312
)
 
(75
)
Realized and unrealized net gains on mortgage banking activities
(15,126
)
 
(16,397
)
Net gain on sale of OREO
(693
)
 
(2,862
)
Write-downs of OREO and other assets pending disposal
621

 
985

Mortgage servicing rights impairment recovery
(21
)
 
(147
)
Deferred income tax benefit (expense)
(344
)
 
12,975

Net increase in cash surrender value of company-owned life insurance
(3,431
)
 
(2,169
)
Stock-based compensation expense
3,350

 
3,231

Tax benefits from stock-based compensation expense
1,352

 
979

Excess tax benefits from stock-based compensation expense
(1,126
)
 
(884
)
Originations of mortgage loans held for sale
(799,445
)
 
(856,384
)
Proceeds from sales of mortgage loans held for sale
795,527

 
865,833

Changes in operating assets and liabilities:
 
 
 
Increase in interest receivable
(2,203
)
 
(3,962
)
Increase in other assets
(2,644
)
 
(4,766
)
Increase (decrease) in accrued interest payable
646

 
(639
)
Decrease in accounts payable and accrued expenses
(1,278
)
 
(17,583
)
Net cash provided by operating activities
79,054

 
69,439

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(18,170
)
 
(28,745
)
Available-for-sale
(626,574
)
 
(253,049
)
Proceeds from maturities and pay-downs of investment securities:
 
 
 
Held-to-maturity
86,306

 
80,759

Available-for-sale
652,064

 
450,462

Purchases of company-owned life insurance
—

 
(30,000
)
Extensions of credit to customers, net of repayments
(203,216
)
 
(251,450
)
Recoveries of loans charged-off
6,363

 
4,439

Proceeds from sale of OREO
3,352

 
13,586

Acquisition of banks and bank holding companies, net of cash and cash equivalents received
18,554

 
(1,636
)
Proceeds from sale of loan production office
932

 
—

Capital expenditures, net of sales
(5,113
)
 
(2,236
)
Net cash used in investing activities
$
(85,502
)
 
$
(17,870
)

7

Table of Contents

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

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
30,057

 
$
(33,983
)
Net decrease in securities sold under repurchase agreements
(51,917
)
 
(66,717
)
Net increase in other borrowed funds
6

 
1

Repayments of long-term debt
(49
)
 
(1,297
)
Advances on long-term debt
113

 
5,066

Proceeds from issuance of common stock
3,657

 
1,909

Excess tax benefits from stock-based compensation expense
1,126

 
884

Purchase and retirement of common stock
(26,119
)
 
(20,548
)
Dividends paid to common stockholders
(29,516
)
 
(27,259
)
Net cash used in financing activities
(72,642
)
 
(141,944
)
Net decrease in cash and cash equivalents
(79,090
)
 
(90,375
)
Cash and cash equivalents at beginning of period
780,457

 
798,670

Cash and cash equivalents at end of period
$
701,367

 
$
708,295

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
40,416

 
$
27,335

Cash paid during the period for interest expense
12,448

 
13,853

 
 
 
 
Supplemental disclosures of noncash investing and financing activities:
 
 
 
Transfer of loans to loans held for sale
50

 
10,619

Transfer of loans to other real estate owned
5,335

 
5,380

Capitalization of internally originated mortgage servicing rights
3,890

 
2,709

Transfer of bank buildings and land pending disposal to other assets
—

 
1,805

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, 2016 and December 31, 2015, the results of operations for each of the three and nine month periods ended September 30, 2016 and 2015, and cash flows and changes in stockholders' equity for each of the nine month periods ended September 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 September 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 nine months ended September 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 ("FIB"), entered into a stock purchase agreement to acquire all of the outstanding stock of Flathead Bank of Bigfork ("Flathead"), a Montana-based bank wholly owned by Flathead Holding Company. The acquisition was completed as of August 12, 2016 for cash consideration of $34,100. The acquisition allowed the Company to gain market share in several of its current market areas and expand its market presence in Montana. The Company also benefited from cost savings related to the merger of Flathead with FIB. The acquisition was accounted for using the acquisition method with the cash purchase price funded from cash on hand. In conjunction with the acquisition, the Company recognized acquisition costs of $1,197.

The assets and liabilities of Flathead 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. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Flathead and the Company.

The following table summarizes the consideration paid, fair values of the Flathead 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 August 12, 2016
by Flathead
Adjustments
 
by the Company
 
 
 
 
 
Assets acquired:
 
 
 
 
Cash and cash equivalents
$
52,653

$
—

 
$
52,653

Investment securities
99,801

1,315

(1)
101,116

Loans
87,181

(3,833
)
(2)
83,348

Allowance for loan losses
(1,567
)
1,567

(3)
—

Premises and equipment
4,529

891

(4)
5,420

Core deposit intangible assets
—

2,486

(5)
2,486

Company-owned life insurance
6,386

—

 
6,386

Other assets
5,200

(2,373
)
(6)
2,827

Total assets acquired
254,183

53

 
254,236

Liabilities assumed:
 
 
 
 
Deposits
209,673

(86
)
(7)
209,587

Repurchase agreements
18,050

—

 
18,050

Other liabilities
838

—

 
838

Total liabilities assumed
228,561

(86
)
 
228,475

Net assets acquired
$
25,622

$
139

 
25,761

Cash consideration paid
 
 
 
34,100

Goodwill
 
 
 
$
8,339

 
 
 
 
 

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 up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)
Write down of the book value of loans to their estimated fair values. The fair value of loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of each loan's underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3)
Adjustment to remove the Flathead allowance for loan losses at acquisition date as the credit risk is accounted for in the fair value adjustment for loans receivable described in (2) above.
(4)
Write up of the book value of premises and equipment to their estimated fair values on the date of acquisition based upon appraisals obtained from an independent third party appraiser or pending buy/sell agreements.
(5)
Adjustment represents the value of the core deposit base assumed in the acquisition based upon an internal valuation using industry averages obtained from an investment banking firm.
(6)
Adjustment consists of the write-off of pre-existing goodwill and prepaid assets.
(7)
Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition.
    
The core deposit intangible asset of $2,486 is being amortized using an accelerated method over the estimated useful lives of the related deposits of nine years.

The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition, measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since origination for which it is probable, at acquisition, the Company will be unable to collect all contractual amounts owed. For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest amounts collected, and (iii) indices used to fair value variable rate loans.
Information regarding acquired credit-impaired loans as of the August 12, 2016 acquisition date is as follows:
Contractually required principal and interest payments
$
19,324

Contractual cash flows not expected to be collected ("non-accretable discount")
10,999

Cash flows expected to be collected
8,325

Interest component of cash flows expected to be collected ("accretable discount")
1,113

Fair value of acquired credit-impaired loans
$
7,212

Information regarding acquired loans not deemed credit-impaired at the acquisition date is as follows:
Contractually required principal and interest payments
$
100,616

Contractual cash flows not expected to be collected
4,702

Fair value at acquisition
76,136

                                                    

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 accompanying consolidated statements of income include the results of operations of the acquired entity from the August 12, 2016 acquisition date. Operations of the acquired entity were immediately integrated with the Company's operations. Post-acquisition revenues and net income of the acquired entity were not captured separately subsequent to the merger. As such, the Company has determined it is not practical to report the post-acquisition date revenues and net income of the acquired entity that were included in the Company's consolidated income statement for the three months and nine months ended September 30, 2016.

The following table presents unaudited pro forma consolidated revenues and net income as if the acquisition had occurred as of January 1, 2015.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
2015
 
2016
2015
Interest income
$
75,736

$
72,605

 
$
223,547

$
207,425

Non-interest income
32,114

31,647

 
95,011

91,218

Total revenues
$
107,850

$
104,252

 
$
318,558

$
298,643

 
 
 
 
 
 
Net income
$
26,207

$
20,783

 
$
72,844

$
64,545


The unaudited pro forma net income presented in the table above for 2016 was adjusted to exclude acquisition-related costs, including change in control expenses related to employee benefit plans and legal and professional expenses of $778, net of tax. Pro forma net income presented in the table above for 2015 was adjusted to include the aforementioned acquisition-related costs. The unaudited pro forma net income presented in the table above for 2016 and 2015 includes adjustments for scheduled amortization of core deposit intangible assets acquired in the acquisition. The unaudited pro forma net income presented in the table above for 2016 and 2015 does not include operating costs savings and other business synergies expected as a result of the acquisition and adjustments for accretion or amortization of fair value adjustments other than core deposit intangible assets.

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 FIB 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:
September 30, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
3,609

$
30

$
—

$
3,639

Obligations of U.S. government agencies
439,488

1,819

(180
)
441,127

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,063,642

20,088

(361
)
1,083,369

Private mortgage-backed securities
124

1

(1
)
124

Other investments
4,920

42

—

4,962

Total
$
1,511,783

$
21,980

$
(542
)
$
1,533,221


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)


September 30, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
165,891

$
6,048

$
(30
)
$
171,909

Corporate securities
53,146

614

(14
)
53,746

Obligations of U.S. government agencies
19,737

315

—

20,052

U.S agency residential mortgage-backed securities &
    collateralized mortgage obligations
300,018

14,643

(6,581
)
308,080

Other investments
260

1

—

261

Total
$
539,052

$
21,621

$
(6,625
)
$
554,048

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Gross realized gains
$
239

 
$
23

 
$
404

 
$
75

Gross realized losses
(14
)
 
—

 
(92
)
 
—


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 4.0 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.

12

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


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

$
—

 
$
103,776

$
(180
)
 
$
103,776

$
(180
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
83,050

(222
)
 
17,419

(139
)
 
100,469

(361
)
Private mortgage-backed securities
—

—

 
50

(1
)
 
50

(1
)
Total
$
83,050

$
(222
)
 
$
121,245

$
(320
)
 
$
204,295

$
(542
)
 
Less than 12 Months
 
12 Months or More
 
Total
September 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
$
7,746

$
(24
)
 
$
2,843

$
(6
)
 
$
10,589

$
(30
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
8,791

(2,721
)
 
18,523

(3,860
)
 
27,314

(6,581
)
Corporate securities
5,056

(14
)
 
—

—

 
5,056

(14
)
Total
$
21,593

$
(2,759
)
 
$
21,366

$
(3,866
)
 
$
42,959

$
(6,625
)
 
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
)
        

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 investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 126 and 198 individual investment securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015, respectively. As of September 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 nine months ended September 30, 2016 and 2015.
    
Maturities of investment securities at September 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
September 30, 2016
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
340,072

$
345,636

 
$
99,864

$
97,362

After one year but within five years
1,030,847

1,045,108

 
290,601

304,804

After five years but within ten years
108,831

109,852

 
117,829

121,191

After ten years
32,033

32,625

 
30,758

30,691

Total
$
1,511,783

$
1,533,221

 
$
539,052

$
554,048

        
As of September 30, 2016, the Company had investment securities callable within one year with amortized costs and estimated fair values of $220,907 and $221,189, respectively. These investment securities are primarily included in the after one year but within five years category in the table above. As of September 30, 2016, the Company had callable structured notes with amortized costs and estimated fair values of $10,095 and $10,100, respectively.
        
(4)
Loans
    
The following table presents loans by class as of the dates indicated:
 
September 30,
2016
 
December 31,
2015
Real estate loans:
 
 
 
Commercial
$
1,843,120

 
$
1,793,258

Construction:
 
 
 
Land acquisition & development
212,680

 
224,066

Residential
137,014

 
111,763

Commercial
128,154

 
94,890

Total construction loans
477,848

 
430,719

Residential
1,047,150

 
1,032,851

Agricultural
172,949

 
156,234

Total real estate loans
3,541,067

 
3,413,062

Consumer:
 
 
 
Indirect consumer
731,901

 
622,529

Other consumer
153,624

 
153,717

Credit card
66,860

 
68,107

Total consumer loans
952,385

 
844,353

Commercial
814,392

 
792,416

Agricultural
152,800

 
142,151

Other, including overdrafts
2,292

 
1,339

Loans held for investment
5,462,936

 
5,193,321

Mortgage loans held for sale
67,979

 
52,875

Total loans
$
5,530,915

 
$
5,246,196


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)



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, 2016
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
8,023

$
484

$
727

$
9,234

$
1,806,929

$
26,957

$
1,843,120

Construction:
 
 
 
 
 
 

 

Land acquisition & development
500

424

50

974

206,388

5,318

212,680

Residential
592

—

237

829

135,919

266

137,014

Commercial
3,375

57

—

3,432

123,905

817

128,154

Total construction loans
4,467

481

287

5,235

466,212

6,401

477,848

Residential
4,019

1,870

2,837

8,726

1,035,626

2,798

1,047,150

Agricultural
10

—

830

840

168,773

3,336

172,949

Total real estate loans
16,519

2,835

4,681

24,035

3,477,540

39,492

3,541,067

Consumer:
 
 
 
 
 
 
 

Indirect consumer
5,707

1,735

622

8,064

723,048

789

731,901

Other consumer
1,029

329

20

1,378

151,886

360

153,624

Credit card
711

261

565

1,537

65,323

—

66,860

Total consumer loans
7,447

2,325

1,207

10,979

940,257

1,149

952,385

Commercial
2,366

640

1,915

4,921

782,378

27,093

814,392

Agricultural
219

88

17

324

148,741

3,735

152,800

Other, including overdrafts
—

—

311

311

1,981

—

2,292

Loans held for investment
26,551

5,888

8,131

40,570

5,350,897

71,469

5,462,936

Mortgage loans originated for sale
—

—

—

—

67,979

—

67,979

Total loans
$
26,551

$
5,888

$
8,131

$
40,570

$
5,418,876

$
71,469

$
5,530,915


15

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


 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of December 31, 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 September 30, 2016 and 2015:    
As of September 30,
2016
 
2015
 
 
 
 
Outstanding balance
$
38,505

 
$
35,265

 
 
 
 
Carrying value
 
 
 
Loans on accrual status
23,665

 
22,867

Total carrying value
$
23,665

 
$
22,867

    

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 summarizes changes in the accretable yield for loans acquired credit impaired for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
2015
 
2016
2015
 
 
 
 
 
 
Beginning balance
$
5,905

$
7,482

 
$
6,713

$
5,781

Additions
1,114

624

 
1,114

1,073

Accretion income
(670
)
(845
)
 
(1,899
)
(2,200
)
Reductions due to exit events
(595
)
(143
)
 
(900
)
(539
)
Reclassifications from nonaccretable differences
729

347

 
1,455

3,350

Ending balance
$
6,483

$
7,465

 
$
6,483

$
7,465


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 $820 and $828 for the three months ended September 30, 2016 and 2015, respectively, and approximately $2,492 and $2,331 for the nine months ended September 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 September 30, 2016
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
58,137

$
16,518

$
29,451

$
45,969

$
5,868

Construction:
 
 
 
 
 
Land acquisition & development
12,922

4,774

1,785

6,559

828

Residential
977

266

—

266

—

Commercial
1,154

232

703

935

737

Total construction loans
15,053

5,272

2,488

7,760

1,565

Residential
5,229

2,774

1,043

3,817

142

Agricultural
3,988

3,646

26

3,672

1

Total real estate loans
82,407

28,210

33,008

61,218

7,576

Commercial
39,349

15,296

18,893

34,189

10,912

Agricultural
3,925

3,294

441

3,735

77

Total
$
125,681

$
46,800

$
52,342

$
99,142

$
18,565



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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