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Section 1: 10-Q (10-Q)

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 March 31, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
  
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, no par value
FIBK
NASDAQ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
March 31, 2019 – Class A common stock
38,461,948

March 31, 2019 – Class B common stock
22,374,171

 





Quarterly Report on Form 10-Q

 
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
 
 
Index
 
 
March 31, 2019
 
 
 
Page Nos.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 


2


Table of Contents



FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and due from banks
$
213.6

 
$
244.1

Interest bearing deposits in banks
741.5

 
577.8

Federal funds sold
0.1

 
0.1

Total cash and cash equivalents
955.2

 
822.0

Investment securities:
 
 
 
Available-for-sale
2,572.0

 
2,270.7

Held-to-maturity (estimated fair values of $118.0 and $400.7 at March 31, 2019 and December 31, 2018, respectively)
117.0

 
406.8

Total investment securities
2,689.0

 
2,677.5

Loans held for investment
8,459.2

 
8,470.4

Mortgage loans held for sale
34.0

 
33.3

Total loans
8,493.2

 
8,503.7

Less allowance for loan losses
72.4

 
73.0

Net loans
8,420.8

 
8,430.7

Goodwill
546.3

 
546.7

Company-owned life insurance
275.8

 
275.1

Premises and equipment, net of accumulated depreciation
298.2

 
245.2

Core deposit intangibles, net of accumulated amortization
54.6

 
56.9

Accrued interest receivable
46.5

 
44.9

Mortgage servicing rights, net of accumulated amortization and impairment reserve
27.9

 
27.7

Other real estate owned (“OREO”)
21.1

 
14.4

Other assets
162.8

 
159.1

Total assets
$
13,498.2

 
$
13,300.2

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
3,158.7

 
$
3,158.3

Interest bearing
7,656.0

 
7,522.4

Total deposits
10,814.7

 
10,680.7

Securities sold under repurchase agreements
672.6

 
712.4

Accounts payable and accrued expenses
142.6

 
94.1

Accrued interest payable
10.0

 
7.8

Deferred tax liability, net
18.7

 
8.6

Long-term debt
15.8

 
15.8

Subordinated debentures held by subsidiary trusts
86.9

 
86.9

Total liabilities
11,761.3

 
11,606.3

Stockholders’ equity:
 
 
 
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of March 31, 2019 or December 31, 2018

 

Common stock
866.6

 
866.7

Retained earnings
874.7

 
851.8

Accumulated other comprehensive loss, net
(4.4
)
 
(24.6
)
Total stockholders’ equity
1,736.9

 
1,693.9

Total liabilities and stockholders’ equity
$
13,498.2

 
$
13,300.2

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Interest income:
 
 
 
Interest and fees on loans
$
111.4

 
$
91.7

Interest and dividends on investment securities:
 
 
 
Taxable
15.1

 
13.2

Exempt from federal taxes
0.5

 
0.6

Interest on deposits in banks
3.6

 
2.1

Total interest income
130.6

 
107.6

Interest expense:
 
 
 
Interest on deposits
12.1

 
6.2

Interest on securities sold under repurchase agreements
1.0

 
0.4

Interest on other borrowed funds

 
0.1

Interest on other debt
0.3

 
0.2

Interest on subordinated debentures held by subsidiary trusts
1.2

 
0.9

Total interest expense
14.6

 
7.8

Net interest income
116.0

 
99.8

Provision for loan losses
3.7

 
2.1

Net interest income after provision for loan losses
112.3

 
97.7

Non-interest income:
 
 
 
Payment services revenues
9.4

 
10.5

Mortgage banking revenues
5.4

 
5.4

Wealth management revenues
6.1

 
5.9

Service charges on deposit accounts
5.0

 
5.6

Other service charges, commissions and fees
4.3

 
3.9

Investment securities gains (losses), net

 

Other income
4.3

 
3.9

Total non-interest income
34.5

 
35.2

Non-interest expense:
 
 
 
Salaries and wages
36.1

 
34.6

Employee benefits
14.4

 
11.3

Outsourced technology services
7.9

 
7.0

Occupancy, net
7.0

 
6.3

Furniture and equipment
3.5

 
3.1

OREO expense, net of income
0.1

 
0.2

Professional fees
1.9

 
1.2

FDIC insurance premiums
1.5

 
1.5

Mortgage servicing rights amortization
0.9

 
0.8

Core deposit intangibles amortization
2.3

 
1.8

Other expenses
15.9

 
15.8

Acquisition related expenses
2.3

 
2.3

Total non-interest expense
93.8

 
85.9

Income before income tax expense
53.0

 
47.0

Income tax expense
11.4

 
10.3

Net income
$
41.6

 
$
36.7

 
 
 
 
Earnings per common share (Basic)
$
0.69

 
$
0.65

Earnings per common share (Diluted)
$
0.69

 
$
0.65

Weighted average common shares outstanding (Basic)
60,311,171

 
56,241,201

Weighted average common shares outstanding (Diluted)
60,598,070

 
56,652,178

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
41.6

 
$
36.7

Other comprehensive income (loss), before tax:
 
 
 
Investment securities available-for sale:
 
 
 
Change in net unrealized gains (losses) during period
33.6

 
(23.7
)
Reclassification adjustment for securities transferred from held-to-maturity to available-for-sale
(6.0
)
 

Change in unamortized loss on available-for-sale securities transferred into held-to-maturity

 
0.5

Defined benefit post-retirement benefits plans:
 
 
 
Change in net actuarial gain
(0.2
)
 
(0.1
)
Other comprehensive income (loss), before tax
27.4

 
(23.3
)
Deferred tax (expense) benefit related to other comprehensive income
(7.2
)
 
6.1

Other comprehensive income (loss), net of tax
20.2

 
(17.2
)
Comprehensive income, net of tax
$
61.8

 
$
19.5

See accompanying notes to unaudited consolidated financial statements.


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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share data)
(Unaudited)
 
Common
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balance at December 31, 2018
$
866.7

 
$
851.8

 
$
(24.6
)
 
$
1,693.9

Net income

 
41.6

 

 
41.6

Other comprehensive income, net of tax expense

 

 
20.2

 
20.2

Common stock transactions:
 
 
 
 
 
 


38,753 common shares purchased and retired
(2.4
)
 

 

 
(2.4
)
200,028 non-vested common shares issued

 

 

 

5,385 non-vested common shares forfeited or canceled

 

 

 

56,982 stock options exercised, net of 19,004 shares tendered in payment of option price and income tax withholding amounts
0.4

 

 

 
0.4

Stock-based compensation expense
1.9

 

 

 
1.9

Common cash dividends declared ($0.31 per share)

 
(18.7
)
 

 
(18.7
)
Balance at March 31, 2019
$
866.6

 
$
874.7

 
$
(4.4
)
 
$
1,736.9

 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
687.0

 
$
752.6

 
$
(12.0
)
 
$
1,427.6

Net income

 
36.7

 

 
36.7

Reclassification of the income tax effects of the Tax Cut and Jobs Act from AOCI

 
3.1

 
(3.1
)
 

Other comprehensive loss, net of tax expense

 

 
(17.2
)
 
(17.2
)
Common stock transactions:
 
 
 
 
 
 
 
21,700 common shares purchased and retired
(0.9
)
 

 

 
(0.9
)
204,991 non-vested common shares issued

 

 

 

16,581 non-vested common shares forfeited or canceled

 

 

 

67,146 stock options exercised, net of 20,469 shares tendered in payment of option price and income tax withholding amounts
0.8

 

 

 
0.8

Stock-based compensation expense
1.1

 

 

 
1.1

Common cash dividends declared ($0.28 per share)

 
(15.7
)
 

 
(15.7
)
Balance at March 31, 2018
$
688.0

 
$
776.7

 
$
(32.3
)
 
$
1,432.4

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
41.6

 
$
36.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3.7

 
2.1

Depreciation and amortization
7.5

 
6.6

Net premium amortization on investment securities
2.0

 
2.8

Realized and unrealized net gains on mortgage banking activities
(4.7
)
 
(1.6
)
Net loss (gain) on sale of OREO
(0.4
)
 

Write-downs of OREO and other assets pending disposal
0.3

 

Deferred income tax expense
2.7

 
10.1

Net increase in cash surrender value of company-owned life insurance
(0.7
)
 
(1.3
)
Stock-based compensation expense
1.9

 
1.1

Originations of mortgage loans held for sale
(129.8
)
 
(204.1
)
Proceeds from sales of mortgage loans held for sale
132.7

 
218.8

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Increase in interest receivable
(1.6
)
 
(0.9
)
(Increase) decrease in other assets
(3.7
)
 
3.9

Increase in accrued interest payable
2.2

 
0.1

Decrease in accounts payable and accrued expenses
(6.1
)
 
(10.9
)
Net cash provided by operating activities
47.6

 
63.4

Cash flows from investing activities:
 
 
 
Purchases of investment securities:
 
 
 
Available-for-sale
(161.3
)
 
(212.9
)
Proceeds from maturities and pay-downs of investment securities:
 
 
 
Held-to-maturity
11.3

 
22.2

Available-for-sale
164.0

 
114.9

Extensions of credit to customers, net of repayments
(3.2
)
 
(53.3
)
Recoveries of loans charged-off
1.7

 
4.5

Proceeds from sale of OREO
1.8

 
0.3

Capital expenditures, net of sales
(2.2
)
 
(2.4
)
Net cash provided by (used in) investing activities
$
12.1

 
$
(126.7
)

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Table of Contents

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
$
134.0

 
$
91.0

Net (decrease) increase in securities sold under repurchase agreements
(39.8
)
 
(9.2
)
Net decrease in other borrowed funds

 
(20.0
)
Advances on long-term debt

 
2.6

Proceeds from issuance of common stock
0.4

 
0.8

Purchase and retirement of common stock
(2.4
)
 
(0.9
)
Dividends paid to common stockholders
(18.7
)
 
(15.7
)
Net cash provided by financing activities
73.5

 
48.6

Net increase (decrease) in cash and cash equivalents
133.2

 
(14.7
)
Cash and cash equivalents at beginning of period
822.0

 
758.9

Cash and cash equivalents at end of period
$
955.2

 
$
744.2

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

 
$
4.6

Cash paid during the period for interest expense
12.4

 
7.7

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Amortization of unrealized gains and losses on transfers of securities
$

 
$
0.5

Right-of-use assets obtained in exchange for operating lease liabilities
54.6

 

Transfer of loans to other real estate owned
8.4

 
1.2

Capitalization of internally originated mortgage servicing rights
1.1

 
1.3

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 millions, 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., First Interstate Bank (“FIB”), and its other subsidiaries (together, 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, 2019 and December 31, 2018, the results of operations for each of the three month periods ended March 31, 2019 and 2018, and cash flows and changes in stockholders’ equity for each of the three month periods ended March 31, 2019 and 2018, in conformity with U.S. generally accepted accounting principles (“GAAP”). The balance sheet information at December 31, 2018 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, 2019 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, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Leases

We have leased branches and office space and have entered into various other agreements in conducting our business. At inception, we determine whether an agreement represents a lease and at commencement we evaluate each lease agreement to determine whether the lease is an operating or financing lease. Some of our lease agreements have contained renewal options, tenant improvement allowances, rent holidays and rent escalation clauses. As discussed in “Note 16 – Recent Authoritative Accounting Guidance” included in this report, we adopted ASU 2016-02, as of January 1, 2019.

Pursuant to ASU 2016-02, all of our long-term operating leases outstanding on December 31, 2018 continued to be classified as operating leases. Our capital lease outstanding at December 31, 2018 is classified as a financing lease. With the adoption of ASU 2016-02, we recorded an operating lease right-of-use asset, within the Premises and Equipment line item, and an operating lease liability, within the Other Liabilities line item, on our balance sheet. Right-of-use lease assets represent our right to use the underlying asset for the lease term and the lease obligation represents our commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, we have used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use lease asset includes any lease payments made prior to commencement and excludes any lease incentives. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as property taxes are expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Prior to our adoption of ASU 2016-02, when our lease agreements contained renewal options, tenant improvement allowances, rent holidays and rent escalation clauses, we recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. The lease expense related to operating leases was recognized on a straight-line basis in the statements of operations over the term of each lease. In cases where the lessor granted us leasehold improvement allowances that reduced our lease expense, we capitalized the improvements as incurred and recognized deferred rent, which was amortized over the shorter of the lease term or the expected useful life of the improvements.


9


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


(2)
Acquisitions

Idaho Independent Bank. On October 11, 2018, the Company entered into a definitive agreement to acquire all of the outstanding stock of Idaho Independent Bank (“IIBK”), a community bank headquartered in Coeur d' Alene, Idaho with 11 banking offices across Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems will occur in June 2019. Consideration for the acquisition was $157.3 million, consisting of the issuance of 3.871 million shares of the Company's Class A common stock valued at $40.64 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of IIBK common stock received 0.50 shares of First Interstate Class A common stock for each share of IIBK common stock. Previously unvested IIBK restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued and outstanding at acquisition close and included in the consideration.

Community 1st Bank. On October 11, 2018, the Company also entered into a definitive agreement to acquire all of the outstanding stock of Community 1st Bank (“CMYF”), a community bank headquartered in Post Falls, Idaho with three banking offices in North Idaho. The acquisition was completed on April 8, 2019, and conversion of the data processing systems will occur in June 2019. Consideration for the acquisition was $18.8 million, consisting of the issuance of 0.463 million shares of the Company's Class A common stock valued at $40.64 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. Holders of each share of CMYF common stock received 0.3784 shares of First Interstate Class A common stock for each share of CMYF common stock. Previously unvested CMYF restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued and outstanding at acquisition close and included in consideration.

Northwest Bancorporation, Inc. On April 25, 2018, the Company entered into a definitive agreement to acquire all of the outstanding stock of Northwest Bancorporation, Inc. (“Northwest”), the parent company of Inland Northwest Bank (“INB”), a Spokane, Washington based community bank with 20 banking offices across Idaho, Oregon and Washington. The acquisition was completed on August 16, 2018, and the Company merged INB with its existing bank subsidiary, First Interstate Bank, on November 9, 2018.

Consideration for the acquisition was $176.3 million, consisting of the issuance of 3.84 million shares of the Company's Class A common stock valued at $45.15 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. The Company paid approximately $3.0 million in cash related to Northwest warrants, which were included in the consideration paid. Holders of each share of Northwest common stock received 0.516 shares of First Interstate Class A common stock for each share of Northwest common stock. Additionally, all Northwest stock purchase warrants outstanding immediately prior to the close of the transaction were canceled in exchange for the right to receive a cash payment as provided in the Agreement. Previously unvested Northwest restricted stock awards outstanding immediately prior to the close of the transaction vested and were considered issued and outstanding at acquisition close.

The assets and liabilities of Northwest were provisionally recorded in the Company’s consolidated financial statements at their estimated fair values as of the acquisition date and will be finalized in the coming months. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as provisional goodwill. The preliminary purchase price allocation resulted in provisional goodwill of $100.7 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company’s one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Northwest and the Company.

The following table summarizes the consideration paid, fair values of the Northwest assets acquired and liabilities assumed, and the resulting goodwill. The amounts reported for net deferred tax assets and goodwill are provisional pending completion of the Company's review of tax items.

10


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


 
As Recorded
Fair Value
 
As Recorded
As of August 16, 2018
by Northwest
Adjustments
 
by the Company
 
 
 
 
 
Assets acquired:
 
 
 
 
Cash and cash equivalents
$
31.2

$

 
$
31.2

Investment securities
3.1


 
3.1

Loans held for investment
727.9

(14.8
)
(1)
713.1

Allowance for loan loss
(8.0
)
8.0

(2)

Premises and equipment
14.5



14.5

Other real estate owned (“OREO”)
0.3

0.3

 
0.6

Core deposit intangible assets
2.4

13.3

(3)
15.7

Other assets
29.3

(10.0
)
(4)
19.3

Total assets acquired
800.7

(3.2
)
 
797.5

 
 
 
 
 
Liabilities assumed:
 
 
 
 
Deposits
696.1

0.2

(5)
696.3

Accounts payable and accrued expense
8.1

(0.4
)
(6)
7.7

Long term debt
13.0

0.1

 
13.1

Trust preferred securities
5.2

(0.8
)
(7)
4.4

Deferred tax liability, net
(1.2
)
1.6

(8)
0.4

Total liabilities assumed
721.2

0.7

 
721.9

 
 
 
 
 
Net assets acquired
$
79.5

$
(3.9
)
 
$
75.6

 
 
 
 
 
Consideration paid:
 
 
 
 
Cash
 
 
 
$
3.0

Class A common stock
 
 
 
173.3

Total consideration paid
 
 
 
176.3

 
 
 
 
 
Goodwill
 
 
 
$
100.7

 
 
 
 
 
Explanation of fair value adjustments and the removal of previously recorded fair value marks recorded by Northwest. Note adjustments to the marks for deferred tax assets and premises and equipment were made since the prior quarter, none of which were material. The adjustments had no impact on 2018 earnings and a net decrease to goodwill of $0.4 million from the December 31, 2018 reported balances.
(1)
Write down of the book value of loans to their estimated fair values. The fair value of the 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.
(2)
Adjustment to remove the Northwest allowance for loan losses at acquisition date, as the credit risk is included in the fair value adjustment for loans receivable described in (1) above.
(3)
Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an independent accounting and advisory firm.
(4)
Adjustment consists of reductions to the fair value of other items, including the removal of Northwest previously recorded goodwill.
(5)
Increase 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 based upon valuation from an independent accounting and advisory firm.
(6)
Decrease due to the write-off of off balance sheet reserves.
(7)
Write down of the book value of debt to the estimated fair values on the date of acquisition based upon favorable interest rates in the market.
(8)
Adjustment consists of the write-off of pre-existing deferred tax assets and purchase accounting adjustments as a result of the acquisition.

11


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


Core deposit intangible assets of $15.7 million are being amortized using an accelerated method over the estimated useful lives of the related deposits of 10 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 Northwest loans acquired deemed credit-impaired as of the August 16, 2018 acquisition date are as follows:
Contractually required principal and interest payments
$
27.5

Contractual cash flows not expected to be collected (“non-accretable discount”)
4.4

Cash flows expected to be collected
23.1

Interest component of cash flows expected to be collected (“accretable discount”)
3.2

Fair value of acquired credit-impaired loans
$
19.9

Information regarding Northwest acquired loans not deemed credit-impaired at the August 16, 2018 acquisition date are as follows:
Contractually required principal and interest payments
$
894.8

Contractual cash flows not expected to be collected
26.1

Fair value at acquisition
$
693.2

Unaudited pro forma consolidated revenues and net income as if the Northwest acquisition had occurred as of January 1, 2018, are not presented because the effect of this acquisition was not considered significant.

The accompanying consolidated statements of income for the three months ended March 31, 2019, include the results of operations of the acquired entity from the August 16, 2018 acquisition date. The acquired entity continued to operate as INB until November 9, 2018 at which point INB’s operations were integrated with the Company’s operations, and INB merged with FIB.
The Company recorded $2.3 million and $2.3 million in pre-tax acquisition related expenses for the three months ended March 31, 2019 and 2018. These costs are incorporated in non-interest expenses in the Company’s consolidated statements of income.
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
Legal and Professional Fees
 
$
0.3

 
$
0.5

Employee Expenses
 
0.6

 
0.1

Technology Conversion and Contract Termination
 
0.8

 
1.5

Other
 
0.6

 
0.2

Total Acquisition Related Expenses
 
$
2.3

 
$
2.3


12


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


(3)
Goodwill and Core Deposit Intangibles

Management analyzes its goodwill for impairment on an annual basis and between annual tests in certain circumstances, such as upon material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an impairment assessment as of July 1, 2018 and 2017 and concluded that there was no impairment to goodwill.
Goodwill
 
 
As of March 31,
 
 
2019
 
2018
Net carrying value at beginning of three month period
 
$
546.7

 
$
444.7

Measurement period adjustment to previously recorded goodwill
 
(0.4
)
 
0.9

Net carrying value at end of period
 
$
546.3

 
$
445.6


Core deposit intangibles (“CDI”)
 
 
As of March 31,
 
 
2019
 
2018
Gross CDI, beginning of period
 
$
89.7

 
$
74.0

Accumulated amortization
 
(35.1
)
 
(26.7
)
Net CDI, end of period
 
$
54.6

 
$
47.3


The Company recorded $2.3 million and $1.8 million of CDI amortization expense for the three months ended March 31, 2019 and 2018.

CDI are evaluated for impairment if events and circumstances indicate a possible impairment and are amortized using an accelerated method based on the estimated weighted average useful lives of the related deposits, which is generally ten years.

The following table provides the estimated future CDI amortization expense:
Years Ending December 31,
 
 
 
2019 remaining
 
 
$
6.6

2020
 
 
8.1

2021
 
 
7.5

2022
 
 
6.9

2023
 
 
6.3

Thereafter
 
 
19.2

Total
 
 
$
54.6



13


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


(4)     Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:
March 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
4.0

$

$

$
4.0

State, county and municipal securities
77.7

0.8

(0.1
)
78.4

Obligations of U.S. government agencies
601.4

0.3

(4.0
)
597.7

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,735.9

9.4

(12.4
)
1,732.9

Private mortgage-backed securities
66.2


(0.9
)
65.3

Corporate securities
92.1

0.2

(0.3
)
92.0

Other investments
1.7



1.7

Total
$
2,579.0

$
10.7

$
(17.7
)
$
2,572.0

March 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
67.6

$
1.5

$
(0.2
)
$
68.9

Obligations of U.S. government agencies
19.8


(0.2
)
19.6

U.S agency residential mortgage-backed securities & collateralized mortgage obligations
1.3



1.3

Corporate securities
28.2


(0.1
)
28.1

Other investments
0.1



0.1

Total
$
117.0

$
1.5

$
(0.5
)
$
118.0

December 31, 2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available-for-Sale:
 
 
 
 
U.S. Treasury notes
$
2.6

$

$

$
2.6

Obligations of U.S. government agencies
569.3

0.1

(10.2
)
559.2

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
1,566.4

2.5

(24.1
)
1,544.8

Private mortgage-backed securities
72.0


(1.8
)
70.2

Corporate securities
92.9


(1.0
)
91.9

Other investments
2.0



2.0

Total
$
2,305.2

$
2.6

$
(37.1
)
$
2,270.7

December 31, 2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Held-to-Maturity:
 
 
 
 
State, county and municipal securities
$
150.9

$
1.8

$
(0.9
)
$
151.8

Obligations of U.S. government agencies
19.8


(0.3
)
19.5

U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
189.7

0.3

(6.5
)
183.5

Corporate securities
46.3

0.1

(0.6
)
45.8

Other investments
0.1



0.1

Total
$
406.8

$
2.2

$
(8.3
)
$
400.7


14


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



At December 31, 2018, we had $406.8 million of investment securities classified as held to maturity. As a result of the adoption of ASU 2017-12 discussed in “Note 16 – Recent Authoritative Accounting Guidance” included in this report, the Company transferred investment securities classified as held-to-maturity to investment securities available-for-sale. At the time of transfer, the amortized cost and fair value of these securities totaled $281.1 million and $275.0 million, respectively. In addition, the unrealized loss of $6.0 million was recorded in the consolidated statement of comprehensive income.

There were no material gross realized gains and losses from the disposition of available-for-sale investment securities for the three month periods ended March 31, 2019 and 2018.

The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of March 31, 2019 and December 31, 2018:
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2019
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
State, county and municipal securities
$

$

 
$
16.2

$
(0.1
)
 
$
16.2

$
(0.1
)
Obligations of U.S. government agencies
336.8

(2.8
)
 
129.7

(1.2
)
 
466.5

(4.0
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
535.9

(6.9
)
 
450.3

(5.5
)
 
986.2

(12.4
)
Private mortgage-backed securities


 
64.5

(0.9
)
 
64.5

(0.9
)
Corporate securities


 
36.9

(0.3
)
 
36.9

(0.3
)
Total
$
872.7

$
(9.7
)
 
$
697.6

$
(8.0
)
 
$
1,570.3

$
(17.7
)
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2019
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
9.0

$
(0.1
)
 
$
16.6

$
(0.1
)
 
$
25.6

$
(0.2
)
Obligations of U.S. government agencies
19.6

(0.2
)
 


 
19.6

(0.2
)
Corporate securities


 
28.0

(0.1
)
 
28.0

(0.1
)
Total
$
28.6

$
(0.3
)
 
$
44.6

$
(0.2
)
 
$
73.2

$
(0.5
)
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2018
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Available-for-Sale:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies
$
363.1

$
(7.9
)
 
$
154.5

$
(2.3
)
 
$
517.6

$
(10.2
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
735.2

(14.5
)
 
503.7

(9.6
)
 
1,238.9

(24.1
)
Private mortgage-backed securities


 
69.4

(1.8
)
 
69.4

(1.8
)
Corporate securities
24.9

(0.2
)
 
51.4

(0.8
)
 
76.3

(1.0
)
Total
$
1,123.2

$
(22.6
)

$
779.0

$
(14.5
)

$
1,902.2

$
(37.1
)

15


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


 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2018
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Held-to-Maturity:
 
 
 
 
 
 
 
 
State, county and municipal securities
$
25.9

$
(0.3
)
 
$
57.1

$
(0.6
)
 
$
83.0

$
(0.9
)
Obligations of U.S. government agencies
19.5

(0.3
)
 


 
19.5

(0.3
)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations
45.0

(2.2
)
 
120.2

(4.3
)
 
165.2

(6.5
)
Corporate securities


 
39.6

(0.6
)
 
39.6

(0.6
)
Total
$
90.4

$
(2.8
)
 
$
216.9

$
(5.5
)
 
$
307.3

$
(8.3
)
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 551 and 760 individual investment securities that were in an unrealized loss position as of March 31, 2019 and December 31, 2018, respectively, related primarily to fluctuations in the current interest rates. As of March 31, 2019, 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 the three month periods ended March 31, 2019 or 2018.
    
Maturities of investment securities at March 31, 2019 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, 2019
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Within one year
$
497.2

$
496.0

 
$
44.9

$
44.8

After one year but within five years
1,509.8

1,504.9

 
44.2

44.1

After five years but within ten years
395.3

395.5

 
24.3

25.5

After ten years
176.7

175.6

 
3.6

3.6

Total
$
2,579.0

$
2,572.0

 
$
117.0

$
118.0

        
As of March 31, 2019, the Company had investment securities callable within one year with amortized costs and estimated fair values of $121.3 million and $121.5 million, respectively. These investment securities are primarily included in the after one year but within five years category in the table above. As of March 31, 2019, the Company had callable structured notes with amortized costs and estimated fair values of $2.0 million and $2.0 million, respectively. These callable structured notes, which are classified as available-for-sale, are included in the after one year but within five years category in the table above.


16


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


(5)
Loans
    
The following table presents loans by class as of the dates indicated:
 
March 31,
2019
 
December 31,
2018
Real estate loans:
 
 
 
Commercial
$
3,255.8

 
$
3,235.4

Construction:
 
 
 
Land acquisition & development
292.7

 
321.6

Residential
233.1

 
242.8

Commercial
312.1

 
274.3

Total construction loans
837.9

 
838.7

Residential
1,529.5

 
1,542.0

Agricultural
210.4

 
217.4

Total real estate loans
5,833.6

 
5,833.5

Consumer:
 
 
 
Indirect consumer
775.7

 
787.8

Other consumer
194.1

 
200.6

Credit card
77.2

 
81.8

Total consumer loans
1,047.0

 
1,070.2

Commercial
1,342.1

 
1,310.3

Agricultural
234.7

 
254.8

Other, including overdrafts
1.8

 
1.6

Loans held for investment
8,459.2

 
8,470.4

Mortgage loans held for sale
34.0

 
33.3

Total loans
$
8,493.2

 
$
8,503.7




17


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


The following tables present the Company’s recorded investment and contractual aging of the Company’s recorded investment in loans by class as of the dates indicated. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.
 
 
 
 
Total Loans
 
 
 
 
30 - 59
60 - 89
> 90
30 or More
 
 
 
 
Days
Days
Days
Days
Current
Non-accrual
Total
As of March 31, 2019
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
12.6

$
7.2

$
2.5

$
22.3

$
3,222.4

$
11.1

$
3,255.8

Construction:
 
 
 
 
 
 
 
Land acquisition & development
1.2

0.7

0.4

2.3

286.6

3.8

292.7

Residential
2.2



2.2

229.6

1.3

233.1

Commercial




311.9

0.2

312.1

Total construction loans
3.4

0.7

0.4

4.5

828.1

5.3

837.9

Residential
4.6

1.6

0.2

6.4

1,517.2

5.9

1,529.5

Agricultural
4.0

0.9

0.3

5.2

202.8

2.4

210.4

Total real estate loans
24.6

10.4

3.4

38.4

5,770.5

24.7

5,833.6

Consumer:
 
 
 
 
 
 
 
Indirect consumer
6.5

1.1

0.5

8.1

765.6

2.0

775.7

Other consumer
1.4

0.7

0.3

2.4

191.2

0.5

194.1

Credit card
0.6

0.5

0.7

1.8

75.4


77.2

Total consumer loans
8.5

2.3

1.5

12.3

1,032.2

2.5

1,047.0

Commercial
4.0

4.1

1.7

9.8

1,317.0

15.3

1,342.1

Agricultural
1.3

1.3

0.5

3.1

229.0

2.6

234.7

Other, including overdrafts




1.8


1.8

Loans held for investment
38.4

18.1

7.1

63.6

8,350.5

45.1

8,459.2

Mortgage loans originated for sale




34.0


34.0

Total loans
$
38.4

$
18.1

$
7.1

$
63.6

$
8,384.5

$
45.1

$
8,493.2


18


Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, 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, 2018
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Loans
Real estate
 
 
 
 
 
 
 
Commercial
$
10.4

$
1.0

$
0.8

$
12.2

$
3,214.0

$
9.2

$
3,235.4

Construction:
 
 
 
 
 
 
 
Land acquisition & development
1.6

0.1

0.2

1.9

316.0

3.7

321.6

Residential
1.0

0.4


1.4

240.4

1.0

242.8

Commercial
0.4



0.4

273.7

0.2

274.3

Total construction loans
3.0

0.5

0.2

3.7

830.1

4.9

838.7

Residential
8.8

1.1

0.2

10.1

1,525.3

6.6

1,542.0

Agricultural
2.2



2.2

202.6

12.6

217.4

Total real estate loans
24.4

2.6

1.2

28.2

5,772.0

33.3

5,833.5

Consumer:
 
 
 
 
 
 
 
Indirect consumer
6.8

2.1

0.4

9.3

776.8

1.7

787.8

Other consumer
1.4

0.5

0.1

2.0

198.1

0.5

200.6

Credit card
0.9

0.4

0.8

2.1

79.7


81.8

Total consumer loans
9.1

3.0

1.3

13.4

1,054.6

2.2

1,070.2

Commercial
8.3

1.2

1.3

10.8

1,283.7

15.8

1,310.3

Agricultural
2.1

0.3


2.4

249.4

3.0

254.8

Other, including overdrafts




1.6


1.6

Loans held for investment
43.9

7.1

3.8

54.8

8,361.3

54.3

8,470.4

Mortgage loans originated for sale




33.3


33.3

Total loans
$
43.9

$
7.1

$
3.8

$
54.8

$
8,394.6

$
54.3

$
8,503.7


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 balances and accrual status of loans acquired with credit impairment as of the dates indicated:    
 
March 31, 2019
 
December 31, 2018
Outstanding balance
$
40.9

 
$
43.4

Carrying value
 
 
 
Loans on accrual status
28.0

 
30.2

Total carrying value
$
28.0

 
$
30.2

    
The following table summarizes changes in the accretable yield for loans acquired deemed credit impaired for the three month periods ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
2018
Beginning balance
$
8.9

$
7.3

Accretion income
(0.7
)
(0.7
)
Reductions due to exit events
(0.3
)
(0.2
)
Reclassifications from non-accretable differences
0.5

0.8

Ending balance
$
8.4

$
7.2



19


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


Acquired loans that met the criteria for non-accrual 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 $0.6 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively.

The Company considers impaired loans to include all originated loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings, and all loans acquired with evidence of deterioration in credit quality and for which it was probable, at acquisition, that the Company would be unable to collect all contractual amounts owed. The following tables present information on the Company’s recorded investment in impaired loans as of the dates indicated:
As of March 31, 2019
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
27.0

$
10.7

$
10.6

$
21.3

$
0.7

Construction:
 
 
 
 
 
Land acquisition & development
10.0

0.4

3.4

3.8

0.3

Residential
1.5

0.9

0.4

1.3


Commercial
0.6

0.1


0.1


Total construction loans
12.1

1.4

3.8

5.2

0.3

Residential
8.9

4.2

3.3

7.5

0.5

Agricultural
2.7

2.4

0.2

2.6


Total real estate loans
50.7

18.7

17.9

36.6

1.5

Commercial
24.3

5.8

14.0

19.8

5.1

Agricultural
5.0

1.6

3.2

4.8

0.5

Total
$
80.0

$
26.1

$
35.1

$
61.2

$
7.1

As of December 31, 2018
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Real estate:
 
 
 
 
 
Commercial
$
22.2

$
8.6

$
7.7

$
16.3

$
0.7

Construction:
 
 
 
 
 
Land acquisition & development
10.0

0.4

3.5

3.9

0.2

Residential
1.1

0.6

0.4

1.0

0.1

Commercial
0.7

0.2


0.2


Total construction loans
11.8

1.2

3.9

5.1

0.3

Residential
8.8

5.7

2.0

7.7

0.3

Agricultural
12.9

12.5

0.2

12.7


Total real estate loans
55.7

28.0

13.8

41.8

1.3

Commercial
24.1

5.5

14.4

19.9

5.2

Agricultural
3.2

2.5

0.6

3.1

0.3

Total
$
83.0

$
36.0

$
28.8

$
64.8

$
6.8



20


Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, 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,
 
2019
 
2018
 
 Average Recorded Investment
 
 Income Recognized
 
 Average Recorded Investment
 
 Income Recognized
Real estate
$
39.3

 
$

 
$
56.1

 
$

Commercial
19.9

 

 
22.1

 

Agricultural
3.9

 

 
1.5

 

Total
$
63.1

 
$

 
$
79.7

 
$

 
 
 
 
 
 
 
 
Interest payments received on non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. If interest on impaired loans had been accrued, interest income on impaired loans would have been approximately $0.6 million and $0.8 million for the three months ended March 31, 2019 and 2018, 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 changes, 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 may be 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, although they continue to be individually evaluated for impairment and disclosed as impaired loans.
    
The Company had loans renegotiated in troubled debt restructurings of $22.7 million as of March 31, 2019, of which $16.9 million were included in non-accrual loans and $5.8 million were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $23.4 million as of December 31, 2018, of which $17.8 million were included in non-accrual loans and $5.6 million were on accrual status.

The Company had no material troubled debt restructurings that occurred during the three months ended March 31, 2019.
 
 
 
 
 
 
 
 
 
For troubled debt restructurings that were on non-accrual status or otherwise deemed impaired before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company continues to evaluate all troubled debt restructurings for possible impairment and recognizes impairment through the allowance. Additionally these loans continue to work their way through the credit cycle through charge-off, pay-off or foreclosure. Financial effects of modifications of troubled debt restructurings may include principal loan forgiveness or other charge-offs directly related to the restructuring. The Company had no charge-offs directly related to modifying troubled debt restructurings during the three months ended March 31, 2019 or 2018.
    

21


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


The Company had no material troubled debt restructurings during the previous 12 months for which there was a payment default during the three months ended March 31, 2019. 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.
 
 
 
 
 
 
 
 
At March 31, 2019, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.
    
As part of the on-going and continuous monitoring of the credit quality of the Company’s loan portfolio, management tracks internally assigned risk classifications of loans. The Company adheres to a Uniform Classification System developed jointly by the various bank regulatory agencies to internally risk rate loans. The Uniform Classification System defines three broad categories of criticized assets, which the Company uses as credit quality indicators:
    
Other Assets Especially Mentioned — includes loans that exhibit weaknesses in financial condition, loan structure or documentation, which if not promptly corrected, may lead to the development of abnormal risk elements.
    
Substandard — includes loans that are inadequately protected by the current sound worth and paying capacity of the borrower. Although the primary source of repayment for a substandard loan is not currently sufficient, collateral or other sources of repayment are sufficient to satisfy the debt. Continuance of a substandard loan is not warranted unless positive steps are taken to improve the worthiness of the credit.
    
Doubtful — includes loans that exhibit pronounced weaknesses to a point where collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Doubtful loans are required to be placed on non-accrual status and are assigned specific loss exposure.