XNAS:FIBK First Interstate Bancsystem Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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FIBK-2012.03.31-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________ 
FORM 10-Q
________________________________________________________________________________________________________ 
ý
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012
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, 2012 – Class A common stock
 
16,758,066

 
 
March 31, 2012 – Class B common stock
 
26,432,909

 
 




FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
Index
 
 
Page
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
3

 
 
 
 
4

 
 
 
 
5

 
 
 
 
6

 
 
 
 
7

 
 
 
 
9

 
 
 
Item 2.
30

 
 
 
Item 3.
44

 
 
 
Item 4.
44

 
 
Part II.
 
 
 
 
Item 1.
44

 
 
 
Item 1A .
44

 
 
 
Item  2.
44

 
 
 
Item 3.
45

 
 
 
Item 4.
Mine Safety Disclosures
45

 
 
 
Item 5.
45

 
 
 
Item 6.
45

 
 
47








2


FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Cash and due from banks
$
128,341

 
$
142,502

Federal funds sold
304

 
309

Interest bearing deposits in banks
494,279

 
329,636

Total cash and cash equivalents
622,924

 
472,447

Investment securities:
 
 
 
Available-for-sale
1,955,436

 
2,016,864

Held-to-maturity (estimated fair values of $166,932 and $161,877 at March 31, 2012 and December 31, 2011, respectively)
158,070

 
152,781

Total investment securities
2,113,506

 
2,169,645

Loans held for investment
4,099,936

 
4,133,028

Mortgage loans held for sale
58,680

 
53,521

Total loans
4,158,616

 
4,186,549

Less allowance for loan losses
115,902

 
112,581

Net loans
4,042,714

 
4,073,968

Premises and equipment, net of accumulated depreciation
185,230

 
184,771

Goodwill
183,673

 
183,673

Company-owned life insurance
75,342

 
74,880

Other real estate owned (“OREO”)
44,756

 
37,452

Accrued interest receivable
30,407

 
31,974

Mortgage servicing rights, net of accumulated amortization and impairment reserve
11,833

 
11,555

Deferred tax asset, net
9,571

 
9,628

Core deposit intangibles, net of accumulated amortization
7,002

 
7,357

Other assets
67,348

 
68,177

Total assets
$
7,394,306

 
$
7,325,527

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
1,284,823

 
$
1,271,709

Interest bearing
4,626,011

 
4,555,262

Total deposits
5,910,834

 
5,826,971

Securities sold under repurchase agreements
491,058

 
516,243

Accounts payable and accrued expenses
43,972

 
42,248

Accrued interest payable
8,255

 
8,123

Long-term debt
37,191

 
37,200

Other borrowed funds
6

 
7

Subordinated debentures held by subsidiary trusts
123,715

 
123,715

Total liabilities
6,615,031

 
6,554,507

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; issued and outstanding 5,000 shares as of March 31, 2012 and December 31, 2011
50,000

 
50,000

Common stock
268,411

 
266,842

Retained earnings
441,370

 
435,144

Accumulated other comprehensive income, net
19,494

 
19,034

Total stockholders’ equity
779,275

 
771,020

Total liabilities and stockholders’ equity
$
7,394,306

 
$
7,325,527

See accompanying notes to unaudited consolidated financial statements.

3


FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
For the three months
ended March 31,
 
2012
 
2011
Interest income:
 
 
 
Interest and fees on loans
$
57,910

 
$
62,391

Interest and dividends on investment securities:
 
 
 
Taxable
9,705

 
9,911

Exempt from federal taxes
1,204

 
1,171

Interest on deposits in banks
237

 
367

Interest on federal funds sold
1

 
3

Total interest income
69,057

 
73,843

Interest expense:
 
 
 
Interest on deposits
6,262

 
9,871

Interest on securities sold under repurchase agreements
156

 
237

Interest on long-term debt
498

 
489

Interest on subordinated debentures held by subsidiary trusts
1,507

 
1,448

Total interest expense
8,423

 
12,045

Net interest income
60,634

 
61,798

Provision for loan losses
11,250

 
15,000

Net interest income after provision for loan losses
49,384

 
46,798

Non-interest income:
 
 
 
Other service charges, commissions and fees
8,424

 
7,380

Income from the origination and sale of loans
8,384

 
3,445

Service charges on deposit accounts
4,161

 
4,110

Wealth management revenues
3,283

 
3,295

Investment securities gains, net
31

 
2

Other income
2,099

 
1,927

Total non-interest income
26,382

 
20,159

Non-interest expense:
 
 
 
Salaries and wages
21,564

 
20,203

Employee benefits
8,966

 
7,499

Occupancy, net
3,988

 
4,215

Furniture and equipment
3,138

 
3,220

Outsourced technology services
2,266

 
2,241

FDIC insurance premiums
1,595

 
2,466

OREO expense, net of income
1,105

 
1,711

Mortgage servicing rights amortization
895

 
807

Mortgage servicing rights impairment recovery
(868
)
 
(347
)
Core deposit intangibles amortization
355

 
362

Other expenses
14,436

 
10,581

Total non-interest expense
57,440

 
52,958

Income before income tax expense
18,326

 
13,999

Income tax expense
6,112

 
4,493

Net income
12,214

 
9,506

Preferred stock dividends
853

 
844

Net income available to common shareholders
$
11,361

 
$
8,662

Basic earnings per common share
$
0.26

 
$
0.20

Diluted earnings per common share
$
0.26

 
$
0.20

See accompanying notes to unaudited consolidated financial statements.

4


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

 
For the three months ended March 31,
 
2012
 
2011
Net income
$
12,214

 
$
9,506

Other comprehensive income, before tax:
 
 
 
Investment securities available-for sale:
 
 
 
Change in net unrealized gain during period
755

 
417

Reclassification adjustment for gains included in income
(31
)
 
(2
)
Defined benefit post-retirement benefits plans:
 
 
 
Change in net actuarial loss
33

 
35

Other comprehensive income, before tax
757

 
450

Deferred tax expense related to other comprehensive income
297

 
177

Other comprehensive income, net of tax
460

 
273

Comprehensive income, net of tax
$
12,674

 
$
9,779

See accompanying notes to unaudited consolidated financial statements.


5


FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
(Unaudited)
 
Preferred
stock
 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Total
stockholders’
equity
Balance at December 31, 2011
$
50,000

 
$
266,842

 
$
435,144

 
$
19,034

 
$
771,020

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
12,214

 

 
12,214

Other comprehensive income, net of tax

 

 

 
460

 
460

Common stock transactions:
 
 
 
 
 
 
 
 
 
17,904 common shares purchased and retired

 
(256
)
 

 

 
(256
)
2,358 common shares issued

 

 

 

 

122,912 non-vested common shares issued

 

 

 

 

1,556 non-vested common shares forfeited

 

 

 

 

100,991 stock options exercised, net of 37,397 shares tendered in payment of option price and income tax withholding amounts

 
1,068

 

 

 
1,068

Tax benefit of stock-based compensation

 
114

 

 

 
114

Stock-based compensation expense

 
643

 

 

 
643

Cash dividends declared:
 
 
 
 
 
 
 
 
 
Common ($0.12 per share)

 

 
(5,135
)
 

 
(5,135
)
Preferred (6.75% per share)

 

 
(853
)
 

 
(853
)
Balance at March 31, 2012
$
50,000

 
$
268,411

 
$
441,370

 
$
19,494

 
$
779,275

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
50,000

 
$
264,174

 
$
413,253

 
$
9,375

 
$
736,802

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income

 

 
9,506

 

 
9,506

Other comprehensive income, net of tax

 

 

 
273

 
273

Common stock transactions:
 
 
 
 
 
 
 
 
 
12,056 common shares purchased and retired

 
(164
)
 

 

 
(164
)
130,904 non-vested common shares issued

 

 

 

 

1,911 non-vested common shares forfeited

 
(7
)
 

 

 
(7
)
Non-vested liability awards vesting during period

 
195

 

 

 
195

43,622 stock options exercised, net of 104,050 shares tendered in payment of option price and income tax withholding amounts

 
37

 

 

 
37

Tax benefit of stock-based compensation

 
257

 

 

 
257

Stock-based compensation expense

 
440

 

 

 
440

Cash dividends declared:
 
 
 
 
 
 
 
 
 
Common ($0.1125 per share)

 

 
(4,798
)
 

 
(4,798
)
Preferred (6.75% per share)

 

 
(844
)
 

 
(844
)
Balance at March 31, 2011
$
50,000

 
$
264,932

 
$
417,117

 
$
9,648

 
$
741,697

See accompanying notes to unaudited consolidated financial statements.

6


FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
For the three months
ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
12,214

 
$
9,506

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
11,250

 
15,000

Net loss on disposal of property and equipment
42

 
3

Depreciation and amortization
4,302

 
4,436

Net premium amortization on investment securities
2,678

 
2,598

Net gains on investment securities transactions
(31
)
 
(2
)
Net gains on sales of mortgage loans held for sale
(5,927
)
 
(2,260
)
Net loss (gain) on sale of OREO
74

 
(156
)
Write-down of OREO
578

 
1,552

Net reversal of impairment of mortgage servicing rights
(868
)
 
(347
)
Net gain on sale of mortgage servicing rights
(19
)
 

Deferred income tax benefit
(282
)
 
(859
)
Net increase in cash surrender value of company-owned life insurance policies
(462
)
 
(489
)
Stock-based compensation expense
643

 
411

Tax benefits from stock-based compensation expense
114

 
257

Excess tax benefits from stock-based compensation
(94
)
 
(192
)
Originations of mortgage loans held for sale, net of sales
(272
)
 
27,123

Changes in operating assets and liabilities:
 
 
 
Decrease in interest receivable
1,567

 
1,248

Decrease in other assets
907

 
7,828

Increase (decrease) in accrued interest payable
132

 
(1,016
)
Increase in accounts payable and accrued expenses
1,744

 
1,702

Net cash provided by operating activities
28,290

 
66,343

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Held-to-maturity
(7,592
)
 
(1,868
)
Available-for-sale
(222,413
)
 
(193,791
)
Proceeds from maturities and paydowns of investment securities:
 
 
 
Held-to-maturity
2,193

 
2,720

Available-for-sale
282,083

 
136,839

Proceeds from sales of mortgage servicing rights
907

 

Extensions of credit to customers, net of repayments
10,027

 
64,419

Recoveries of loans charged-off
1,158

 
1,305

Proceeds from sales of OREO
5,691

 
3,160

Capital expenditures, net of sales
(3,453
)
 
(1,639
)
Net cash provided by investing activities
$
68,601

 
$
11,145

Cash flows from financing activities:
 
 
 

7


FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)
 
For the three months
ended March 31,
 
2012
 
2011
Net increase in deposits
$
83,863

 
$
5,471

Net decrease in repurchase agreements
(25,185
)
 
(83,199
)
Net increase (decrease) in short-term borrowings
(1
)
 
531

Repayments of long-term debt
(9
)
 
(11
)
Proceeds from issuance of common stock
1,068

 
37

Excess tax benefits from stock-based compensation
94

 
192

Purchase and retirement of common stock
(256
)
 
(164
)
Dividends paid to common stockholders
(5,135
)
 
(4,798
)
Dividends paid to preferred stockholders
(853
)
 
(844
)
Net cash provided by (used in) financing activities
53,586

 
(82,785
)
Net increase (decrease) in cash and cash equivalents
150,477

 
(5,297
)
Cash and cash equivalents at beginning of period
472,447

 
685,618

Cash and cash equivalents at end of period
$
622,924

 
$
680,321

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

 
$

Cash paid during the period for interest expense
$
8,291

 
$
13,061

See accompanying notes to unaudited consolidated financial statements.


8


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, 2012 and December 31, 2011 and the results of operations and cash flows for each of the three month periods ended March 31, 2012 and 2011, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2011 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, 2012 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, 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

(2)
Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
March 31, 2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale
 
 
 
 
Obligations of U.S. government agencies
$
1,085,140

$
3,993

$
(687
)
$
1,088,446

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
835,494

30,820

(34
)
866,280

Private mortgage-backed securities
704

11

(5
)
710

Total
$
1,921,338

$
34,824

$
(726
)
$
1,955,436

March 31, 2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to Maturity
 
 
 
 
State, county and municipal securities
$
157,921

$
9,020

$
(158
)
$
166,783

Other securities
149



149

Total
$
158,070

$
9,020

$
(158
)
$
166,932

December 31, 2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale
 
 
 
 
Obligations of U.S. government agencies
$
1,134,427

$
4,353

$
(662
)
$
1,138,118

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
848,444

29,567

(14
)
877,997

Private mortgage-backed securities
758

7

(16
)
749

Total
$
1,983,629

$
33,927

$
(692
)
$
2,016,864

December 31, 2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to Maturity
 
 
 
 
State, county and municipal securities
$
152,619

$
9,113

$
(17
)
$
161,715

Other securities
162



162

Total
$
152,781

$
9,113

$
(17
)
$
161,877


9


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


Gross gains of $31 and $2 were realized on the disposition of available-for-sale securities during the three months ended March 31, 2012 and 2011, respectively. No gross losses were realized on the disposition of available-for-sale investment securities during the three months ended March 31, 2012 or 2011.

The following table shows 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, 2012 and December 31, 2011.
 
Less than 12 Months
12 Months or More
Total
March 31, 2012
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale
 
 
 
 
 
 
Obligations of U.S. government agencies
$
177,078

$
(687
)
$

$

$
177,078

$
(687
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
3,617

(34
)


3,617

(34
)
Private mortgage-backed securities


167

(5
)
167

(5
)
Total
$
180,695

$
(721
)
$
167

$
(5
)
$
180,862

$
(726
)
 
Less than 12 Months
12 Months or More
Total
March 31, 2012
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity
 
 
 
 
 
 
State, county and municipal securities
$
5,501

$
(134
)
$
733

$
(24
)
$
6,234

$
(158
)
 
Less than 12 Months
12 Months or More
Total
December 31, 2011
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale
 
 
 
 
 
 
Obligations of U.S. government agencies
$
287,404

$
(662
)
$

$

$
287,404

$
(662
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
45,694

(14
)


45,694

(14
)
Private mortgage-backed securities
246

(10
)
177

(6
)
423

(16
)
Total
$
333,344

$
(686
)
$
177

$
(6
)
$
333,521

$
(692
)
 
Less than 12 Months
12 Months or More
Total
December 31, 2011
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity
 
 
 
 
 
 
State, county and municipal securities
$

$

$
773

$
(17
)
$
773

$
(17
)

The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 27 and 24 individual investment securities that were in an unrealized loss position as of March 31, 2012 and December 31, 2011, respectively. Unrealized losses as of March 31, 2012 and December 31, 2011 related primarily to fluctuations in the current interest rates. The Company does not have the intent to sell any of the available-for-sale securities in the above table and it is more likely than not that the Company will not have to sell any such securities before a recovery in cost. No impairment losses were recorded during the three months ended March 31, 2012 or 2011.


10


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


Maturities of investment securities at March 31, 2012 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, 2012
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
385,624

$
395,736

 
$
7,023

$
6,799

After one year but within five years
1,312,315

1,328,373

 
22,288

23,096

After five years but within ten years
146,006

151,084

 
66,498

70,529

After ten years
77,393

80,243

 
62,112

66,359

Total
1,921,338

1,955,436

 
157,921

166,783

Investments with no stated maturity


 
149

149

Total
$
1,921,338

$
1,955,436

 
$
158,070

$
166,932


As of March 31, 2012, the Company had investment securities callable within one year with amortized costs and estimated fair values of $634,320 and $635,629, respectively, including callable structured notes with amortized costs and estimated fair values of $195,257 and $195,899, respectively. These investment securities are primarily classified as available-for-sale and included in the after one year but within five years category in the table above.

(3)
Loans

The following table presents loans by class as of the dates indicated:
 
March 31,
2012
 
December 31,
2011
Real estate loans:
 
 
 
Commercial
$
1,533,624

 
$
1,553,155

Construction:
 
 
 
Land acquisition & development
272,874

 
278,613

Residential
50,332

 
61,106

Commercial
65,196

 
61,054

Total construction loans
388,402

 
400,773

Residential
562,588

 
571,943

Agricultural
171,685

 
175,302

Total real estate loans
2,656,299

 
2,701,173

Consumer:
 
 
 
Indirect consumer
407,389

 
407,651

Other consumer
142,144

 
147,487

Credit card
56,540

 
60,933

Total consumer loans
606,073

 
616,071

Commercial
708,397

 
693,261

Agricultural
128,599

 
119,710

Other, including overdrafts
568

 
2,813

Loans held for investment
4,099,936

 
4,133,028

Mortgage loans held for sale
58,680

 
53,521

Total loans
$
4,158,616

 
$
4,186,549

    

11


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 period indicated:
 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of March 31, 2012
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
18,492

$
2,956

$
1,044

$
22,492

$
1,450,034

$
61,098

$
1,533,624

Construction:
 
 
 
 
 
 

 

Land acquisition & development
3,445

290

402

4,137

210,261

58,476

272,874

Residential

1,185

137

1,322

45,047

3,963

50,332

Commercial
1,556

150


1,706

41,198

22,292

65,196

Total construction loans
5,001

1,625

539

7,165

296,506

84,731

388,402

Residential
2,995

1,079

1,919

5,993

541,219

15,376

562,588

Agricultural
6,007

435


6,442

160,573

4,670

171,685

Total real estate loans
32,495

6,095

3,502

42,092

2,448,332

165,875

2,656,299

Consumer:
 
 
 
 


 
 

Indirect consumer
2,024

128


2,152

404,831

406

407,389

Other consumer
722

157

128

1,007

140,243

894

142,144

Credit card
507

194

660

1,361

55,154

25

56,540

Total consumer loans
3,253

479

788

4,520

600,228

1,325

606,073

Commercial
13,709

1,460

629

15,798

680,391

12,208

708,397

Agricultural
1,026

13

366

1,405

125,692

1,502

128,599

Other, including overdrafts




568


568

Loans held for investment
50,483

8,047

5,285

63,815

3,855,211

180,910

4,099,936

Mortgage loans originated for sale




58,680


58,680

Total loans
$
50,483

$
8,047

$
5,285

$
63,815

$
3,913,891

$
180,910

$
4,158,616



12


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, 2011
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
22,124

$
7,871

$
630

$
30,625

$
1,455,139

$
67,391

$
1,553,155

Construction:
 
 
 
 
 
 

 

Land acquisition & development
5,251

2,448

867

8,566

208,134

61,913

278,613

Residential
415



415

56,219

4,472

61,106

Commercial
1,698



1,698

34,820

24,536

61,054

Total construction loans
7,364

2,448

867

10,679

299,173

90,921

400,773

Residential
4,669

973

1,798

7,440

546,278

18,225

571,943

Agricultural
4,103

1,831


5,934

166,119

3,249

175,302

Total real estate loans
38,260

13,123

3,295

54,678

2,466,709

179,786

2,701,173

Consumer:
 
 
 
 


 
 

Indirect consumer
3,078

370

45

3,493

403,695

463

407,651

Other consumer
1,479

436

60

1,975

144,625

887

147,487

Credit card
604

375

585

1,564

59,343

26

60,933

Total consumer loans
5,161

1,181

690

7,032

607,663

1,376

616,071

Commercial
13,721

3,464

405

17,590

657,609

18,062

693,261

Agricultural
476

215

110

801

118,150

759

119,710

Other, including overdrafts

2


2

2,811


2,813

Loans held for investment
57,618

17,985

4,500

80,103

3,852,942

199,983

4,133,028

Mortgage loans originated for sale




53,521


53,521

Total loans
$
57,618

$
17,985

$
4,500

$
80,103

$
3,906,463

$
199,983

$
4,186,549


If interest on non-accrual loans had been accrued, such income would have approximated $2,702 and $2,838 for the three months ended March 31, 2012 and 2011, respectively.
        

13


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


The Company considers impaired loans to include all loans risk rated doubtful, loans placed on non-accrual status and loans renegotiated in troubled debt restructurings with the exception of consumer loans. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:
 
As of March 31, 2012
 
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
99,746

$
64,702

$
23,742

$
88,444

$
7,083

Construction:
 
 
 
 
 
Land acquisition & development
72,504

23,982

36,379

60,361

12,632

Residential
5,212

2,203

1,760

3,963

276

Commercial
24,403

11,218

11,074

22,292

3,978

Total construction loans
102,119

37,403

49,213

86,616

16,886

Residential
17,272

8,318

7,627

15,945

2,451

Agricultural
7,526

7,028


7,028


Total real estate loans
226,663

117,451

80,582

198,033

26,420

Commercial
20,200

5,737

7,822

13,559

4,122

Agricultural
1,566

1,028

486

1,514

491

Total
$
248,429

$
124,216

$
88,890

$
213,106

$
31,033


 
As of December 31, 2011
 
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
97,745

$
62,769

$
23,218

$
85,987

$
6,741

Construction:
 
 
 
 
 
Land acquisition & development
73,258

22,300

39,131

61,431

12,084

Residential
13,721

10,427

2,044

12,471

312

Commercial
26,647

3,510

21,026

24,536

5,042

Total construction loans
113,626

36,237

62,201

98,438

17,438

Residential
18,305

2,678

15,626

18,304

3,844

Agricultural
8,018

7,470


7,470


Total real estate loans
237,694

109,154

101,045

210,199

28,023

Commercial
26,348

7,354

12,284

19,638

4,664

Agricultural
759

496

263

759

151

Total
$
264,801

$
117,004

$
113,592

$
230,596

$
32,838





14


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, 2012
 
Three months ended
March 31, 2011
 
 Average
 
 
 
 Average
 
 
 
 Recorded
 
 Income
 
 Recorded
 
 Income
 
 Investment
 
 Recognized
 
 Investment
 
 Recognized
Real estate:
 
 
 
 
 
 
 
Commercial
$
88,657

 
$
351

 
74,768

 
$
92

Construction:
 
 
 
 
 
 
 
Land acquisition & development
62,227

 
16

 
45,552

 
45

Residential
9,208

 

 
18,121

 
19

Commercial
24,265

 

 
19,321

 

Total construction loans
95,700

 
16

 
82,994

 
64

Residential
18,072

 
9

 
21,070

 

Agricultural
7,268

 
32

 
3,677

 
2

Total real estate loans
209,697

 
408

 
182,509

 
158

Commercial
17,885

 
22

 
34,397

 
42

Agricultural
1,234

 
4

 
920

 

Total
$
228,816

 
$
434

 
217,826

 
$
200

    
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 principle. Interest income is subsequently recognized only to the extent cash payments are received in excess of principle due. If interest on impaired loans had been accrued, interest income on impaired loans would have been approximately $2,683 and $2,810 for the three months ended March 31, 2012 and 2011, respectively.
    
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.
    

15


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


The Company had loans renegotiated in troubled debt restructurings of $88,949 as of March 31, 2012, of which $52,111 were included in non-accrual loans and $36,838 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $94,827 as of December 31, 2011, of which $57,451 were included in non-accrual loans and $37,376 were on accrual status.

The following table presents information on the Company's troubled debt restructurings that occurred during the three months ended March 31, 2012:
 
 
Number of Notes
 
Type of Concession
Principle Balance at Restructure Date
 
 
 
Interest only period
Extension of terms or maturity
Interest rate adjustment
Other (1)
Real estate:
 
 
 
 
 
 
 
 
Commercial
 
9

 
$

$

$
1,089

$
8,463

$
9,552

Construction:
 
 
 
 
 
 
 
 
Land acquisition & development
 
2

 



623

623

Commercial
 
1

 



3,155

3,155

Total construction loans
 
3

 



3,778

3,778

Residential
 
2

 
568

25



593

Total real estate loans
 
14

 
568

25

1,089

12,241

13,923

Commercial
 
5

 
13

98


80

191

Total
 
19

 
$
581

$
123

$
1,089

$
12,321

$
14,114

    
(1)
Other includes concessions that reduce or defer payments for a specified period of time and/or extend amortization schedules.

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 principle 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, 2012.

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 month period ended March 31, 2012. 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. Four of the five troubled debt restructurings with payment defaults in the following table are on non-accrual status.
 
As of March 31, 2012
 
Number of Notes
 
Balance
Real estate:
 
 
 
Land acquisition & development
1

 
505

Total construction loans
1

 
505

Agriculture
2

 
1,624

Total real estate loans
3

 
2,129

Agricultural
2

 
328

Total
5

 
$
2,457


At March 31, 2012, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.

16


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



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 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.

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:
 
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
As of March 31, 2012
 
 
 
 
Real estate:
 
 
 
 
Commercial
$
117,979

$
149,852

$
25,252

$
293,083

Construction:
 
 
 
 
Land acquisition & development
34,909

34,806

35,878

105,593

Residential
1,536

5,428

1,760

8,724

Commercial
55

11,061

11,234

22,350

Total construction loans
36,500

51,295

48,872

136,667

Residential
8,963

18,587

7,141

34,691

Agricultural
22,993

16,128

395

39,516

Total real estate loans
186,435

235,862

81,660

503,957

Consumer:
 
 
 
 
Indirect consumer
1,033

1,755

202

2,990

Other consumer
825

1,461

585

2,871

Credit card

558

2,757

3,315

Total consumer loans
1,858

3,774

3,544

9,176

Commercial
45,730

33,714

7,906

87,350

Agricultural
8,048

2,815

486

11,349

Total
$
242,071

$
276,165

$
93,596

$
611,832



17


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


 
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
As of December 31, 2011
 
 
 
 
Real estate:
 
 
 
 
Commercial
$
129,046

$
153,320

$
25,087

$
307,453

Construction:
 
 
 
 
Land acquisition & development
37,294

31,873

38,761

107,928

Residential
9,448

5,528

2,044

17,020

Commercial

2,620

21,916

24,536

Total construction loans
46,742

40,021

62,721

149,484

Residential
8,149

15,706

15,140

38,995

Agricultural
16,037

18,498

395

34,930

Total real estate loans
199,974

227,545

103,343

530,862

Consumer:
 
 
 
 
Indirect consumer
1,141

1,729

247

3,117

Other consumer
745

1,361

674

2,780

Credit card

486

2,789

3,275

Total consumer loans
1,886

3,576

3,710

9,172

Commercial
34,698

33,478

12,849

81,025

Agricultural
4,345

5,195

263

9,803

Total
$
240,903

$
269,794

$
120,165

$
630,862


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.

18


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



(4)
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, 2012
Real Estate
Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses: