FIBK 10-K 12/31/2014
Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
þ
o
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
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
(State or other jurisdiction of incorporation or organization)
81-0331430
(IRS Employer Identification No.)
401 North 31st Street
Billings, Montana
(Address of principal executive offices)
59116
(Zip Code)
(406) 255-5390
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock
(Title of each class)
NASDAQ Stock Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Class B common stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was
required to submit and post such files). þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 the definitions
of “ large accelerated filer,” “ accelerated filer” and “ smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer
þ Accelerated filer
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act.) o Yes þ No
The aggregate market value of voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was
$614,072,224.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2015:
Class A common stock
Class B common sock
21,947,201
23,859,483
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held May 20, 2015. The information required by
Part III of this Form 10-K is incorporated by reference from such Proxy Statement.
Documents Incorporated by Reference
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32
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PART I
Item 1. Business
The disclosures set forth in this report are qualified by Item 1A. Risk Factors included herein and the section captioned “Cautionary Note
Regarding Forward-Looking Statements and Factors that Could Affect Future Results” included in Part II, Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations. When we refer to “we,” “our,” “us” or the “Company” in this annual report, we
mean First Interstate BancSystem, Inc. and our consolidated subsidiaries, including our wholly-owned subsidiary, First Interstate Bank, unless
the context indicates that we refer only to the parent company, First Interstate BancSystem, Inc. When we refer to the “Bank” in this annual
report, we mean First Interstate Bank.
Our Company
We are a financial and bank holding company incorporated as a Montana corporation in 1971. We are headquartered in Billings, Montana. As of
December 31, 2014, we had consolidated assets of $8.6 billion, deposits of $7.0 billion, loans of $4.9 billion and total stockholders’ equity of $909
million. We currently operate 79 banking offices, including detached drive-up facilities, in 41 communities located in Montana, Wyoming and
western South Dakota. We also offer internet and mobile banking services. Through our wholly-owned subsidiary, First Interstate Bank, we deliver
a comprehensive range of banking products and services to individuals, businesses, municipalities and other entities throughout our market areas.
Our customers participate in a wide variety of industries, including energy, healthcare and professional services, education and governmental
services, construction, mining, agriculture, retail and wholesale trade and tourism. Our principal markets range in size from 23,000 to 150,000 people,
have diversified economic characteristics and favorable population growth prospects and usually serve as trade centers for larger rural areas.
We are the licensee under a perpetual trademark license agreement granting us an exclusive, nontransferable license to use the “First Interstate”
name and logo in Montana, Wyoming and the six neighboring states of Idaho, Utah, Colorado, Nebraska, South Dakota and North Dakota.
We have grown our business by adhering to a set of guiding principles and a long-term disciplined perspective that emphasizes our
commitment to providing high-quality financial products and services, delivering quality customer service, effecting business leadership through
professional and dedicated managers and employees, assisting our communities through socially responsible leadership and cultivating a strong
and positive corporate culture. In the future, we intend to remain a leader in our markets by continuing to adhere to the core principles and values
that have contributed to our growth and success and by continuing to follow our community banking model. In addition, we plan to continue to
expand our business in a disciplined and prudent manner, including organic growth in our existing market areas and expansion into new and
complementary markets when appropriate opportunities arise.
Mountain West Acquisition
On July 31, 2014, we completed the acquisition of all of the outstanding stock of Mountain West Financial Corp., a Montana-based bank holding
company operating one wholly-owned subsidiary bank, Mountain West Bank, NA, with branches located in five of our current market areas in
Montana. Mountain West Bank, NA was merged with First Interstate Bank, our existing bank subsidiary, on October 17, 2014. Consideration for the
acquisition of $74.5 million consisted of cash of $38.5 million and the issuance of 1,378,230 shares of our Class A common stock valued at $26.10 per
share, the closing price of the shares as quoted on the NASDAQ stock market on the acquisition date. As of the acquisition date, Mountain West
Financial Corp. had consolidated total assets with fair values of $612 million, consolidated total loans with fair values of $360 million and
consolidated total deposits with fair values of $515 million.
For additional information regarding the acquisition, see “Managements’ Discussion and Analysis — Recent Trends and Developments”
included in Part II, Item 7 and “Notes to Consolidated Financial Statements — Acquisition” and “Notes to Consolidated Financial Statements —
Capital Stock and Dividend Restrictions” included in Part IV, Item 15.
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Community Banking
Community banking encompasses commercial and consumer banking services provided through our Bank, primarily the acceptance of deposits;
extensions of credit; mortgage loan origination and servicing; and trust, employee benefit, investment and insurance services. Our community
banking philosophy emphasizes providing customers with commercial and consumer banking products and services locally using a personalized
service approach while strengthening the communities in our market areas through community service activities. We grant our banking offices
significant authority in delivering and pricing products in response to local market considerations and customer needs. This authority enables our
banking offices to remain competitive by responding quickly to local market conditions and enhances their relationships with the customers they
serve by tailoring our products and price points to each individual customer’s needs. We also require accountability by having company-wide
standards and established limits on the authority and discretion of each banking office. This combination of authority and accountability allows our
banking offices to provide personalized customer service and be in close contact with our communities, while at the same time promoting strong
performance at the branch level and remaining focused on our overall financial performance.
Lending Activities
We offer short and long-term real estate, consumer, commercial, agricultural and other loans to individuals and businesses in our market areas.
We have comprehensive credit policies establishing company-wide underwriting and documentation standards to assist management in the lending
process and to limit our risk. Each loan must meet minimum underwriting standards specified in our credit policies. Minimum underwriting standards
generally specify that loans (i) are made to borrowers located within a designated geographical lending area with the exception of participation
loans and loans to national accounts; (ii) are made only for identified legal purposes; (iii) have specifically identified sources of repayment; (iv)
mature within designated maximum maturity periods that coincide with repayment sources; (v) are appropriately collateralized whenever possible,
(vi) are supported by current credit information; (vii) do not exceed the Bank's legal lending limit; (viii) with fixed interest rates are adjusted within
designated time frames; and (ix) require a flood determination prior to closing. In addition, our minimum underwriting standards include lending
limitations to prevent concentrations of credit in agricultural, commercial, real estate or consumer loans. Further, each minimum underwriting
standard must be documented as part of the loan approval process.
While each loan must meet minimum underwriting standards established in our credit policies, lending officers are granted certain levels of
authority in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community needs in each
market area. Lending authorities are established at individual, branch and market levels. Branch and market lending authorities are assigned
annually by the Company's chief executive officer and chief credit officer based on the size of the branch or market's loan portfolio and the branch
or market's historical credit performance. Individual loan officer lending limits are approved annually by branch or market management and are based
on the lending experience of each individual loan officer. Branch and market lending limits and aggregate lending relationships in excess of
established limits, ranging from $10 million to $15 million depending on the risk characteristics of the relationship, are approved by the Bank's board
of directors after review by the Credit Committee of the Company's board of directors.
Deposit Products
We offer traditional depository products including checking, savings and time deposits. Deposits at the Bank are insured by the Federal
Deposit Insurance Corporation, or FDIC, up to statutory limits. We also offer repurchase agreements primarily to commercial and municipal
depositors. Under repurchase agreements, we sell investment securities held by the Bank to our customers under an agreement to repurchase the
investment securities at a specified time or on demand. All outstanding repurchase agreements are due in one business day.
Wealth Management
We provide a wide range of trust, employee benefit, investment management, insurance, agency and custodial services to individuals,
businesses and nonprofit organizations. These services include the administration of estates and personal trusts; management of investment
accounts for individuals, employee benefit plans and charitable foundations; and insurance planning. As of December 31, 2014, the estimated fair
value of trust assets held in a fiduciary or agent capacity was in excess of $4 billion.
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Centralized Services
We have centralized certain operational activities to provide consistent service levels to our customers company-wide, to gain efficiency in
management of those activities and to ensure regulatory compliance. Centralized operational activities generally support our banking offices in the
delivery of products and services to customers and include marketing; credit review; credit cards; mortgage loan sales and servicing; indirect
consumer loan purchasing and processing; loan collections and, other operational activities. Additionally, specialized staff support services have
been centralized to enable our branches to serve their markets more efficiently. These services include credit administration, finance, accounting,
human resource management, internal audit, technology, risk management, compliance and other support services.
Competition
There is significant competition among commercial banks in our market areas. We also compete with other providers of financial services, such
as savings and loan associations, credit unions, internet banks, consumer finance companies, brokerage firms, mortgage banking companies,
insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing
various types of loans and other financial services. Some of our competitors have greater resources and, as such, may have higher lending limits
and may offer other services that we do not provide. We generally compete on the basis of customer service and responsiveness to customer
needs, available loan and deposit products, rates of interest charged on loans, rates of interest paid for deposits, and the availability and pricing of
trust, employee benefit, investment and insurance services.
Employees
At December 31, 2014, we employed 1,705 full-time equivalent employees, none of whom are represented by a collective bargaining agreement.
We strive to be the employer of choice in the markets we serve and consider our employee relations to be good.
Regulation and Supervision
Regulatory Authorities
We are subject to extensive regulation under federal and state laws. A description of certain material laws and regulations applicable to us is
summarized below. This description is not intended to include a summary of all laws and regulations applicable to us. In addition to laws and
regulations, state and federal banking regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable
to us. Those issuances may affect the conduct of our business or impose additional regulatory obligations.
As a financial and bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended, or the Bank
Holding Company Act, and to supervision, regulation and regular examination by the Federal Reserve. Because we are a public company, we are
also subject to the disclosure and regulatory requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, as administered by
the Securities and Exchange Commission, or SEC.
The Bank is subject to supervision and regular examination by its primary banking regulators, the Federal Reserve and the State of Montana,
Department of Administration, Division of Banking and Financial Institutions, with respect to its activities in Wyoming the State of Wyoming,
Department of Audit, and with respect to its activities in South Dakota, the State of South Dakota Department of Revenue & Regulation, Division of
Banking.
The Bank's deposits are insured by the deposit insurance fund of the FDIC in the manner and to the extent provided by law. The Bank is subject
to the Federal Deposit Insurance Act, or FDIA, and FDIC regulations relating to deposit insurance and may also be subject to supervision and
examination by the FDIC.
The extensive regulation of the Bank limits both the activities in which the Bank may engage and the conduct of its permitted activities. Further,
the laws and regulations impose reporting and information collection obligations on the Bank. The Bank incurs significant costs relating to
compliance with various laws and regulations and the collection and retention of information.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, enacts significant changes in federal statutes
governing banks and bank holding companies generally as well as other entities. Although many of the significant changes are already in effect,
additional significant changes will become effective in the near-term and other significant changes require action by federal banking agencies,
including the Federal Reserve, the principal federal regulator of the Company. Except as otherwise noted, the following discussion assumes that
provisions of the Dodd-Frank Act applicable to banks and bank holding companies to become effective in the near-term are currently in effect.
Financial and Bank Holding Company
The Company is a bank holding company and has registered as a financial holding company under regulations issued by the Federal Reserve.
Under federal law, including the Dodd-Frank Act, the Company is required to serve as a source of financial and managerial strength to the Bank,
which may include providing financial assistance to the Bank if the Bank experiences financial distress. The federal banking agencies are required
under the Dodd-Frank Act to issue joint rules to carry out the source of strength requirements. Under existing Federal Reserve source of strength
policies, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. The Federal Reserve
may also determine that the bank holding company is engaging in unsafe and unsound practices if it fails to commit resources to such a subsidiary
bank.
We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to acquiring, directly or indirectly, ownership or
control of voting shares of any bank, if, after such acquisition, we would own or control more than 5% of its voting stock. Under the Dodd-Frank
Act, when acting on an application for approval the Federal Reserve is required to consider whether the transaction would result in greater or more
concentrated risks to the United States banking or financial system. Under federal law and regulations, including the Dodd-Frank Act, a bank
holding company may acquire banks in states other than its home state if the bank holding company is both 'well-capitalized' and 'well-managed'
both before and after the acquisition. The interstate acquisitions are subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or
following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the
acquisition is the bank holding company's initial entry into the state, more than 30% of such deposits in the state, or such lesser or greater amount
set by state law of such deposits in that state.
With additional changes made to federal statutes under the Dodd-Frank Act, banks are also permitted to establish new branches in a state if a
bank located in that state could establish a new branch at the proposed location without regard to state laws limiting interstate de novo branching.
Branch offices may not be established outside of a bank's home state primarily for the purpose of deposit production which is determined based on
a state-by-state test. The prohibition and regulatory test may limit the Company's ability to establish de novo branches in states other than
Montana.
Banks may also merge across state lines. A state can prohibit interstate mergers entirely or prohibit them if the continuing bank would control
insured bank deposits in excess of a specified percentage of total insured bank deposits in the state, provided such prohibition does not
discriminate against out-of-state banks. For example, under Montana law, banks, bank holding companies and their respective subsidiaries, whether
located in Montana or otherwise, cannot acquire control of a bank located in Montana if, after the acquisition, the acquiring institution and its
affiliates would directly or indirectly control, in the aggregate, more than 22% of the total deposits of insured depository institutions located in
Montana. As of December 31, 2014, the Bank controlled approximately 18% of the total deposits of all insured depository institutions located in
Montana. The state limitation may limit the ability of the Company to directly or indirectly acquire additional banks located in Montana.
We have voluntarily registered with the Federal Reserve as a financial holding company. As a financial holding company, we may engage in
certain business activities that are determined by the Federal Reserve to be financial in nature or incidental to financial activities as well as all
activities authorized to bank holding companies generally. In most circumstances, we must notify the Federal Reserve of our financial activities
within a specified time period following our initial engagement in each business or activity. If the type of proposed business or activity has not
been previously determined by the Federal Reserve to be financially related or incidental to financial activities, we must receive the prior approval of
the Federal Reserve before engaging in the activity.
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We may engage in authorized financial activities, such as providing investment services, provided that we remain a financial holding company
and meet certain regulatory standards of being “well capitalized” and “well managed.” If we fail to meet the “well capitalized” or “well managed”
regulatory standards, we may be required to cease our financial holding company activities or, in certain circumstances, to divest of the Bank. We
do not currently engage in significant financial holding company businesses or activities not otherwise permitted for bank holding companies
generally. Should we engage in certain financial activities currently authorized to financial holding companies, we may become subject to additional
laws, regulations, supervision and examination by regulatory agencies.
In order to assess the financial strength of the bank holding company, the Federal Reserve and the State of Montana also conduct throughout
the year periodic onsite and offsite inspections and credit reviews. The federal banking agencies, including the Federal Reserve, may also require
additional information and reports from us. In addition, the Federal Reserve may examine, and require reports and information regarding, any entity
that we control, including entities other than banks or entities engaged in financial activities. In certain circumstances, the Federal Reserve may
require us to divest of non-bank entities or limit the activities of those entities even if the activities are otherwise permitted to bank holding
companies under governing law.
With limited exceptions and subject to certain limitations and requirements, banks and their affiliates are not permitted to engage in proprietary
trading, or invest in, or serve as an advisor to, hedge funds or private equity funds. We have not historically engaged in any of those activities.
Restrictions on Transfers of Funds to Us and the Bank
Dividends from the Bank are the primary source of funds for the payment of our operating expenses and for the payment of dividends. Under
both state and federal law, the amount of dividends that may be paid by the Bank from time to time is limited. In general, the Bank is limited to
paying dividends that do not exceed the current year net profits together with retained earnings from the two preceding calendar years unless the
prior consents of the Montana and federal banking regulators are obtained.
A state or federal banking regulator may impose, by regulatory order or agreement of the Bank, specific dividend limitations or prohibitions in
certain circumstances. The Bank is not currently subject to a specific regulatory dividend limitation other than generally applicable limitations.
In general, banks are also prohibited from making capital distributions, including dividends and are prohibited from paying management fees to
control persons if it would be “undercapitalized” under the regulatory framework for corrective action after making such payments. See “Capital
Standards and Prompt Corrective Action.”
Also, under Montana corporate law, a dividend may not be paid if, after giving effect to the dividend: (1) the company would not be able to pay
its debts as they become due in the usual course of business; or (2) the company's total assets would be less than the sum of its total liabilities plus
the amount that would be needed, if the company were to be dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution
of shareholders whose preferential rights are superior to those receiving the dividend.
Furthermore, because we are a legal entity separate and distinct from the Bank, our right to participate in the distribution of assets of the Bank
upon its liquidation or reorganization will be subject to the prior claims of the Bank's creditors. In the event of such a liquidation or other resolution,
the claims of depositors and other general or subordinated creditors of the Bank are entitled to a priority of payment of the claims of holders of any
obligation of the Bank to its shareholders, including us, or our shareholders or creditors.
Restrictions on Transactions with Affiliates, Directors and Officers
Under the Federal Reserve Act, the Bank may not lend funds to our affiliates, except on specified types and amounts of collateral and other
terms required by state and federal law. The limitation on lending may limit our ability to obtain funds from the Bank for our cash needs, including
funds for payment of dividends, interest and operational expenses.
The Federal Reserve also has authority to define and limit the transactions between banks and their affiliates. The Federal Reserve's
Regulation W and relevant federal statutes, among other things, impose significant additional limitations on transactions in which the Bank may
engage with us, with each other, or with other affiliates.
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Federal Reserve Regulation O restricts loans to the Bank and Company insiders, which includes directors, officers and principal stockholders
and their respective related interests. All extensions of credit to the insiders and their related interests must be on the same terms as, and subject to
the same loan underwriting requirements as, loans to persons who are not insiders. In addition, Regulation O imposes lending limits on loans to
insiders and their related interests and imposes, in certain circumstances, requirements for prior approval of the loans by the Bank board of
directors.
Capital Standards and Prompt Corrective Action
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities
and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weighting and other factors.
Currently, the Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banks
similar in asset size to the Bank. The guidelines are intended to ensure that banks have adequate capital given the risk levels of assets and off-
balance sheet financial instruments.
The federal banking regulators, including the Federal Reserve Board, adopted significant revisions to the regulatory capital requirements that
apply to the Bank beginning on January 1, 2015, with some requirements phasing in between January 1, 2015 and January 1, 2019. Among other
things, the revised capital requirements modify previous minimum ratios requirements for tier 1 capital and total capital to risk-weighted assets. In
addition, the revised capital requirements impose both a new common equity tier 1 capital ratio requirement and a capital buffer requirement both
measured against risk-weighted assets. When completely phased in, the minimum capital requirements plus the capital buffer requirement will
exceed the regulatory ‘well-capitalized’ threshholds.
Consistent with prior law, if the Bank fails to meet the regulatory capital requirements, its business activities may be limited and the amount of
distributions it may pay to us may be reduced or eliminated. In addition, if the Bank or we fail to meet the regulatory capital requirements, the
amount of distributions we may pay to our shareholders, and bonuses to executive officers, may be limited.
The regulations also implement changes to the definition of capital and require deductions from capital for regulatory purposes be made from
common equity tier 1 capital.
For purposes of calculating the ratios, a banking organization's assets and some of its specified off-balance sheet commitments and obligations
are assigned to various risk categories. Generally, under the applicable guidelines, a financial institution's capital is divided into three tiers. These
tiers are:
Common Equity Tier 1. Common equity tier 1 capital includes common stock plus related surplus, retained earnings plus limited amounts
of minority interests in the form of common stock and is reduced by substantially all of the regulatory deductions including items such as
goodwill and other intangibles and certain deferred tax assets.
Core Capital (Tier 1). Tier 1 capital includes common equity, noncumulative perpetual preferred stock meeting eligibility requirements,
limited minority interests in equity accounts of consolidated subsidiaries and portions of grandfathered cumulative preferred stock and
grandfathered trust preferred securities, less both goodwill and other intangible assets and certain deferred tax assets, among other
regulatory deductions.
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt and the allowance for loan and lease losses, subject to certain
limitations and otherwise meeting regulatory requirements.
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The Dodd-Frank Act provisions and the new regulatory capital requirements relating to required minimum capital also limit, in certain
circumstances, the use of hybrid capital instruments in meeting regulatory capital requirements, including instruments similar to those which we
currently have issued and outstanding. However, because our total consolidated assets are substantially less than $15 billion, the limitations on use
of existing hybrid capital instruments are not expected to apply to us in the immediate future.
We are required under current guidelines to maintain tier 1 capital and total capital (the sum of tier 1 and tier 2 capital) equal to at least 4.0% and
8.0%, respectively, of our total risk-weighted assets. In addition, we are required to maintain a minimum common equity tier 1 capital ratio to risk-
weighted assets of 4.5% and, when fully phased in, a capital conservation buffer of 2.5% of risk weighted assets. For a depository institution to be
considered “well capitalized” under the regulatory framework in effect on January 1, 2015 for prompt corrective action its minimum common equity
tier 1 capital, tier 1 and total capital ratios must be at least 4.5%, 6.0% and 8.0% on a risk-adjusted basis, respectively. As of January 1, 2015 the
required capital conservation buffer is 0% and will phase in at 0.625% each January 1st until reaching 2.5% on January 1, 2019. We currently meet
the ‘well-capitalized’ ratio requirements on all measures including requirements to be phased in through January 1, 2019. However, there can be no
assurance that we will meet the requirements in the future.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a
banking organization's tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). All financial holding
companies and banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory
authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage
ratio must be at least 5.0%.
The capital guidelines also provide that banking organizations experiencing significant internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the bank regulators provide that concentration of credit risks, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing an organization's overall capital adequacy. The Federal Reserve has
not advised us of any specific minimum leverage ratio applicable to us or the Bank.
The FDIA requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions
that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution's capital tier will depend upon how its
capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures
are the common equity tier 1 capital ratio, total capital ratio, the tier 1 capital ratio and the leverage ratio.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any
management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are
subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining,
among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (1) an amount equal to
5.0% of the depository institution's total assets at the time it became undercapitalized and (2) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to
comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including mandated capital
raising activities such as orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, restrictions
for interest rates paid, removal of management and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized”
institutions are subject to the appointment of a receiver or conservator.
A bank that is not “well-capitalized” as defined by applicable regulations may, among other regulatory requirements or limitations, be prohibited
under federal law and regulation from accepting or renewing brokered deposits.
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In 2013 and 2014, the Federal Reserve issued several new rules and proposed rules applicable to advanced approaches companies, certain
complex bank holding companies and holding companies with consolidated assets in excess of $10 billion. Because the Company has consolidated
assets of less than $10 billion and has not been designated a complex holding company, the recently issued rules do not generally apply to us.
The capital stock of banks organized under Montana law, such as the Bank, may be subject to assessment upon the direction of the Montana
Department of Administration under the Montana Bank Act. Under the Montana Bank Act, if the Department of Administration determines an
impairment of a bank's capital exists, it may notify the bank's board of directors of the impairment and require the impairment be made good by an
assessment on the bank stock. If the bank fails to make good the impairment, the Department of Administration may, among other things, take
charge of the bank and proceed to liquidate the bank.
Under the FDIA, the appropriate federal banking agency may take certain actions with respect to significantly or critically undercapitalized
institutions. The actions may include requiring the sale of additional shares of the institution's stock or other actions deemed appropriate by the
federal banking agency, which could include assessment on the institution's stock.
Safety and Soundness Standards and Other Enforcement Mechanisms
The federal banking agencies have adopted guidelines establishing standards for safety and soundness, asset quality and earnings, internal
controls and audit systems, among others, as required by the Federal Deposit Insurance Corporation Improvement Act, or FDICIA. These
standards are designed to identify potential concerns and ensure that action is taken to address those concerns before they pose a risk to the
deposit insurance fund, or DIF. If a federal banking agency determines that an institution fails to meet any of these standards, the agency may
require the institution to submit an acceptable plan to achieve compliance with the standard. If the institution fails to submit an acceptable plan
within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the
institution to correct the deficiency.
Federal banking agencies possess broad enforcement powers to take corrective and other supervisory action on an insured bank and its
holding company. Moreover, federal laws require each federal banking agency to take prompt corrective action to resolve the problems of insured
banks. Bank holding companies and insured banks are subject to a wide range of potential enforcement actions by federal regulators for violation of
any law, rule, regulation, standard, condition imposed in writing by the regulator, or term of a written agreement with the regulator.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings
institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the
DIF up to prescribed limits for each depositor. The maximum deposit insurance amount is $250,000 per depositor. The amount of FDIC assessments
paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.
Currently, the Bank meets the ‘well-capitalized’ standards imposed by the FDIC in 2014 for purposes of determining FDIC assessments.
All FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing
Corporation, or FICO, an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates are
set at 0.00165% of total assets and will continue until the FICO bonds mature in 2017.
The FDIC is also required to set its designated reserve ratio for each year at 1.35% of estimated insured deposits and take actions necessary to
reach a reserve ratio of 1.35% of total estimated insured deposits by September 30, 2020. The FDIC may be required to increase deposit insurance
premium assessments to meet the reserve ratio requirements. However, under the Dodd-Frank Act, the effects of any increases in deposit insurance
premium assessments are to be offset for the benefit of depository institutions with total consolidated assets of less than $10 billion. The Bank
currently has total consolidated assets of less than $10 billion.
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Insolvency of an Insured Depository Institution
If the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC
has the power, among other things: (1) to transfer any of the depository institution's assets and liabilities to a new obligor without the approval of
the depository institution's creditors; (2) to enforce the terms of the depository institution's contracts pursuant to their terms; or (3) to repudiate or
disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome
and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the
institution, including the claims of the FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC as a
receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and
uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank
holding company, with respect to any extensions of credit they have made to such insured depository institution.
Customer Privacy and Other Consumer Protections
Federal law imposes customer privacy requirements on any company engaged in financial activities, including the Bank and us. Under these
requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. In addition, for
customers who obtain a financial product such as a loan for personal, family or household purposes, a financial holding company is required to
disclose its privacy policy to the customer at the time the relationship is established and annually thereafter. The financial company must also
disclose its policies concerning the sharing of the customer's nonpublic personal information with affiliates and third parties. Finally, a financial
company is prohibited from disclosing an account number or similar item to a third party for use in telemarketing, direct mail marketing or marketing
through electronic mail.
The Bank is subject to a variety of federal and state laws, regulations and reporting obligations aimed at protecting consumers and Bank
customers. Failure to comply with these laws and regulations may, among other things, impair the collection of loans made in violation of the laws
and regulations, provide borrowers or other customers certain rights and remedies or result in the imposition of penalties on the Bank.
The Equal Credit Opportunity Act generally prohibits discrimination in credit transactions on, among other things, the basis of race, color,
religion, national origin, sex, marital status or age and, in certain circumstances, limits the Bank's ability to require co-obligors or guarantors as a
condition to the extension of credit to an individual.
The Real Estate Settlement Procedures Act, or RESPA, requires certain disclosures be provided to borrowers in real estate loan closings or other
real estate settlements. In addition, RESPA limits or prohibits certain settlement practices, fee sharing, kickbacks and similar practices that are
considered to be abusive.
The Truth in Lending Act, or TILA, and Regulation Z require disclosures to borrowers and other parties in consumer loans including, among
other things, disclosures relating to interest rates and other finance charges, payments and payment schedules and annual percentage rates. TILA
provides remedies to borrowers upon certain failures in compliance by a lender.
The Fair Housing Act regulates, among other things, lending practices in residential lending and prohibits discrimination in housing related
lending activities on the basis of race, color, religion, national origin, sex, handicap, disability or familial status.
The Home Mortgage Disclosure Act requires certain lenders and other firms engaged in the home mortgage industry to collect and report
information relating to applicants, borrowers and home mortgage lending activities in which they engage in their market areas or communities. The
information is used for, among other purposes, evaluation of discrimination or other impermissible acts in home mortgage lending.
The Home Ownership and Equity Protection Act regulates terms and disclosures of certain closed end home mortgage loans that are not
purchase money loans and includes loans classified as “high cost loans.”
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The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, generally limits lenders and other financial firms in
their collection, use or dissemination of customer credit information, gives customers some access to, and control over, their credit information and
requires financial firms to establish policies and procedures intended to deter identity theft and related frauds.
The Fair Debt Collection Practices Act regulates actions that may be taken in the collection of consumer debts and provides consumers with
certain rights of access to information related to collection actions.
The Electronic Fund Transfer Act regulates fees and other terms on electronic funds transactions.
The Federal Reserve issued regulations relating to fees and charges in debit card transactions intended to implement provisions of the Dodd-
Frank Act. Card issuers with consolidated assets of less than $10 billion are exempt from the interchange fee standards but are subject to other rules
addressing exclusivity and other requirements. The Bank is not subject to the interchange fee standards as its consolidated assets, together with
affiliates, are less than $10 billion.
Federal consumer protection laws have been expanded by the Dodd-Frank Act, pursuant to which a Consumer Financial Protection Bureau has
been created with authority to regulate consumer financial products and services and to implement and enforce federal consumer financial laws.
Although the Bureau is accorded examination and enforcement authority, the Bureau's authority does not generally extend to depository
institutions with total assets of less than $10 billion. The Bank currently has total assets of less than $10 billion.
The Community Reinvestment Act, or CRA, generally requires the federal banking agencies to evaluate the record of a financial institution in
meeting the credit needs of its local communities, including low and moderate income neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of fair lending laws, the federal banking agencies may take compliance with such laws and
the CRA into account when regulating and supervising our other activities or in authorizing new activities.
In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of “outstanding,”
“satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank received an “outstanding” rating on its most recent published
examination. Although the Bank's policies and procedures are designed to achieve compliance with all fair lending and CRA requirements, instances
of non-compliance are occasionally identified through normal operational activities. Management responds proactively to correct all instances of
non-compliance and implement procedures to prevent further violations from occurring.
USA PATRIOT Act
The USA PATRIOT Act of 2001 amended the Bank Secrecy Act of 1970 and the Money Laundering Control Act of 1986 and adopted additional
measures requiring insured depository institutions, broker-dealers and certain other financial institutions to have policies, procedures and controls
to detect, prevent and report money laundering and terrorist financing. The USA PATRIOT Act includes the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001 and also amends laws relating to currency control and regulation. The laws and related
regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well
as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company
acquisition or merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. Failure of a
financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and
reputational consequences for the institution.
Office of Foreign Asset Control
The United States Treasury Office of Foreign Asset Control enforces economic and trade sanctions imposed by the United States on foreign
persons and governments. Among other authorities, the Office of Foreign Asset Control may require United States financial institutions to block or
“freeze” assets of identified foreign persons or governments which come within the control of the financial institution. Financial institutions are
required to adopt procedures for identification of new and existing deposit accounts and other relationships with persons or governments identified
by the Office of Foreign Asset Control and to timely report the accounts or relationships to the Office of Foreign Asset Control.
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Website Access to SEC Filings
All of our reports and statements filed or furnished electronically with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and Proxy Statements, as well as amendments to these reports and statements filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, are accessible at no cost through our website at www.FIBK.com as soon as reasonably practicable
after they have been filed with the SEC. These reports are also accessible on the SEC’s website at www.sec.gov. The public may read and copy
materials we file with the SEC at the public reference facilities maintained by the SEC at Room 1580, 100 F Street N.E., Washington, DC 20549. The
public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our website and the information
contained therein or connected thereto is not intended to be incorporated into this report and should not be considered a part of this report.
Item 1A. Risk Factors
Like other financial and bank holding companies, we are subject to a number of risks, many of which are outside of our control. If any of the
events or circumstances described in the following risk factors actually occurs, our business, financial condition, results of operations and
prospects could be harmed. These risks are not the only ones that we may face. Other risks of which we are not aware, including those which
relate to the banking and financial services industry in general and us in particular, or those which we do not currently believe are material,
may harm our future business, financial condition, results of operations and prospects. Readers should consider carefully the following
important factors in evaluating us, our business and an investment in our securities.
Risks Relating to the Market and Our Business
Continued or worsening general business and economic conditions could materially and adversely affect us.
In recent years, the U.S. economy has faced a severe economic crisis including a major recession from which it is slowly recovering. Business
activity across a wide range of industries and regions in the U.S. remains reduced and local governments and many businesses continue to
experience financial difficulty. While reflecting some improvement, unemployment levels remain elevated nationwide. There can be no assurance
that these conditions will continue to improve and these conditions could worsen. In addition, on-going federal budget negotiations, the
implementation of the Patient Protection and Affordable Care Act and the level of U.S. debt may have a destabilizing effect on financial markets.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the
business environment in the markets where we operate in Montana, Wyoming and South Dakota and in the United States as a whole. A favorable
business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low
unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions
can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in
the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other
factors.
Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and
worldwide. While economic conditions in Montana, Wyoming and South Dakota, the United States and worldwide have improved since the
recession, there can be no assurance that this improvement will continue. Economic pressure on consumers and uncertainty regarding continuing
economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Such conditions could adversely
affect the credit quality of our loans and our business, financial condition and results of operations.
We may incur significant credit losses, particularly in light of recent and existing market conditions.
We take on credit risk by virtue of making loans and extending loan commitments and letters of credit. Our credit standards, procedures and
policies may not prevent us from incurring substantial credit losses, particularly in light of market developments in recent years. Weakening
economic conditions, increasing unemployment rates and/or deterioration of housing markets could exert pressure on our loan customers resulting
in higher delinquencies, repossession and losses, which would have an adverse impact on our business, financial condition, results of operations
and prospects.
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Adverse economic conditions affecting Montana, Wyoming and western South Dakota could harm our business.
Our customers are located predominantly in Montana, Wyoming and western South Dakota. Because of the concentration of loans and deposits
in these states, existing or future adverse economic conditions in Montana, Wyoming or western South Dakota could cause us to experience higher
rates of loss and delinquency on our loans than if the loans were more geographically diversified. Adverse economic conditions, including inflation,
recession and unemployment and other factors, such as regulatory or business developments, natural disasters, environmental contamination and
other unfavorable conditions and events that affect these states, could reduce demand for credit or fee-based products and may delay or prevent
borrowers from repaying their loans. Adverse conditions and other factors identified above could also negatively affect real estate and other
collateral values, interest rate levels and the availability of credit to refinance loans at or prior to maturity. These results could adversely impact our
business, financial condition, results of operations and cash flows.
Much of the economic improvement in our market areas is due to the oil and gas drilling and production in the Bakken Formation. Decreased
market oil prices have compressed margins for oil producers as well as oilfield service providers, energy equipment manufacturers and
transportation suppliers, among others. A prolonged period of low oil prices or other events that may result in a decline in drilling activity could
have a negative impact on the economies of our market areas and on our customers, which could could adversely impact our business, financial
condition and results of operations.
We are subject to lending risk.
There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates
and changes in the economic conditions in the markets where we operate as well as those across Montana, Wyoming, western South Dakota and
the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay
outstanding loans or the value of the collateral securing these loans. We are also subject to various laws and regulations that affect our lending
activities. Failure to comply with applicable laws and regulations could subject us to regulatory enforcement action that could result in the
assessment of significant civil money penalties against us.
At December 31, 2014, we had $2.4 billion of commercial loans, including $1.6 billion of commercial real estate loans, representing approximately
49% of our total loan portfolio. These loans are often larger and involve greater risks than other types of lending. Because payments on such loans
are often dependent on the successful operation or development of the property or business involved, repayment of such loans is more sensitive
than other types of loans to adverse conditions in the real estate market or the general economy. Unlike residential mortgage loans, which generally
are made on the basis of the borrowers' ability to make repayment from their employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers' ability to make repayment
from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be
impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as the collateral
which is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our
business, financial condition and results of operations.
In addition, at December 31, 2014, we had $1.6 billion of agricultural, construction, residential and other real estate loans, representing
approximately 32% of our total loan portfolio. Deterioration in economic conditions or in the real estate market could result in increased
delinquencies and foreclosures and could have an adverse effect on the collateral value for many of these loans and on the repayment ability of
many of our borrowers. Deterioration in economic conditions or in the real estate market could reduce the number of loans we make to businesses in
the construction and real estate industry, which could negatively impact our interest income and results of operations. Similarly, the occurrence of a
natural or manmade disaster in our market areas could impair the value of the collateral we hold for real estate secured loans. Any one or a
combination of the factors identified above could negatively impact our business, financial condition, results of operations and prospects.
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If we experience loan losses in excess of estimated amounts, our earnings will be adversely affected.
The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the
loan. We maintain an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and
regular reviews of loan portfolio quality. Based upon such factors, our management makes various assumptions and judgments about the ultimate
collectability of our loan portfolio and provides an allowance for loan losses. These assumptions and judgments are complex and difficult to
determine given the significant uncertainty surrounding future conditions in the general economy and banking industry. If management's
assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate, or if the banking authorities or regulations
require us to increase the allowance for loan losses, our earnings, financial condition, results of operations and prospects could be significantly and
adversely affected.
Our goodwill may become impaired, which may adversely impact our results of operations and financial condition and may limit our
Bank's ability to pay dividends to us, thereby causing liquidity issues.
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an
interim basis if an event or circumstance indicates that it is likely impairment has occurred. In testing for impairment, the fair value of net assets is
estimated based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of
goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in
impairment of goodwill, which is recorded as a noncash adjustment to income. An impairment of goodwill could have a material adverse effect on
our business, financial condition and results of operations. As of December 31, 2014, we had goodwill of $206 million, or 23% of our total
stockholders' equity. Furthermore, an impairment of goodwill could cause our Bank to be unable to pay dividends to us. If our Bank is unable to pay
dividends to us, our cash flow and liquidity would be reduced. See below “Our Bank's ability to pay dividends to us is subject to regulatory
limitations, which, to the extent we are not able to receive such dividends, may impair our ability to grow, pay dividends, cover operating expenses
and meet debt service requirements.”
We may be unable to manage our growth due to acquisitions, which could have an adverse effect on our financial condition or results of
operations.
Acquisitions of other banks and financial institutions involve risks of changes in results of operations or cash flows, unforeseen liabilities
relating to the acquired institution or arising out of the acquisition, asset quality problems of the acquired entity and other conditions not within our
control, such as adverse employee relations, loss of customers because of change of identity, deterioration in local economic conditions and other
risks affecting the acquired institution. In addition, the process of integrating acquired entities will divert significant management time and
resources. We may not be able to integrate successfully or operate profitably any financial institutions we may acquire. We may experience
disruption and incur unexpected expenses in integrating acquisitions. There can be no assurance that any such acquisitions will enhance our cash
flows, business, financial condition, results of operations or prospects and such acquisitions may have an adverse effect on our results of
operations, particularly during periods in which the acquisitions are being integrated into our operations.
We may not continue to have access to low-cost funding sources.
We depend on checking and savings, negotiable order of withdrawal, or NOW, and money market deposit account balances and other forms of
customer deposits as our primary source of funding. Such account and deposit balances can decrease when customers perceive alternative
investments, such as the stock market, as providing a better risk/return trade-off. If customers move money out of bank deposits and into other
investments, we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Changes in interest rates could negatively impact our net interest income, may weaken demand for our products and services or harm our
results of operations and cash flows.
Our earnings and cash flows are largely dependent upon net interest income, which is the difference between interest income earned on interest-
earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental
and regulatory agencies, particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only
the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also
adversely affect (1) our ability to originate loans and obtain deposits, (2) the fair value of our financial assets and liabilities, including mortgage
servicing rights, (3) our ability to realize gains on the sale of assets and (4) the average duration of our mortgage-backed investment securities
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portfolio. An increase in interest rates may reduce customers' desire to borrow money from us as it increases their borrowing costs and may
adversely affect the ability of borrowers to pay the principal or interest on loans which may lead to an increase in non-performing assets and a
reduction of income recognized, which could harm our results of operations and cash flows. Further, because many of our variable rate loans
contain interest rate floors, as market interest rates begin to rise, the interest rates on these loans may not increase correspondingly. In contrast,
decreasing interest rates have the effect of causing customers to refinance mortgage loans faster than anticipated. This causes the value of assets
related to the servicing rights on mortgage loans sold to be lower than originally recognized. If this happens, we may need to write down our
mortgage servicing rights assets faster, which would accelerate expense and lower our earnings. Any substantial, unexpected or prolonged change
in market interest rates could have a material adverse effect on our cash flows, financial condition and results of operations. If the current low
interest rate environment continues for a prolonged period, our interest income could decrease, adversely impacting our financial condition, results
of operations and cash flows.
We are dependent upon the services of our management team and directors.
Our future success and profitability is substantially dependent upon the management skills of our executive officers and directors, many of
whom have held officer and director positions with us for many years. We do not currently have employment agreements or non-competition
agreements with any of our key executives. The unanticipated loss or unavailability of key employees could harm our ability to operate our
business or execute our business strategy. We cannot assure you that we will be successful in retaining these key employees or finding and
integrating suitable successors in the event of their loss or unavailability.
We may not be able to attract and retain qualified employees to operate our business effectively.
There is substantial competition for qualified personnel in our markets. Although unemployment rates have been declining in Montana and
Wyoming, and the surrounding region, it may still be difficult to attract and retain qualified employees at all management and staffing levels. Failure
to attract and retain employees and maintain adequate staffing of qualified personnel could adversely impact our operations and our ability to
execute our business strategy. Furthermore, relatively low unemployment rates in certain of our markets, compared with national unemployment
rates, may lead to significant increases in salaries, wages and employee benefits expenses as we compete for qualified, skilled employees, which
could negatively impact our results of operations and prospects.
We are subject to significant governmental regulation and new or changes in existing regulatory, tax and accounting rules and
interpretations could significantly harm our business.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit
insurance funds and consumers, not to benefit a financial company's stockholders. These regulations may impose significant limitations on
operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Regulation and
Supervision.” These regulations, along with the currently existing tax, accounting, securities, insurance, employment, monetary and other laws and
regulations, rules, standards, policies and interpretations control the methods by which we conduct business, implement strategic initiatives and tax
compliance and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are undergoing
significant review and changes, particularly given the recent market developments in the banking and financial services industries and the
enactment of the Dodd-Frank Act in July 2010.
Other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation of
statutes, regulations, policies, or supervisory guidance, could affect us in substantial and unpredictable ways. Such changes could subject us to
additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement
and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking
charter, other sanctions by regulatory agencies, civil money penalties and/or reputation damage. In this regard, government authorities, including
the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial
activities, which heightens the risks associated with actual and perceived compliance failures. Any of the foregoing could have a material adverse
effect on our business, financial condition and results of operations.
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We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures or
interruptions could have a material adverse effect on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications
systems and third-party servicers. We outsource many of our major systems, such as certain data processing, loan servicing and deposit
processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these
systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend
on third-party systems, we could experience disruptions if demand for such services exceeds capacity or such third-party systems fail or experience
interruptions. If significant, sustained or repeated, a system failure or disruption could compromise our ability to operate effectively, damage our
reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which
could have a material adverse effect on us, our financial condition, results of operations and cash flows.
We are exposed to risks related to cyber-security.
Our computer systems and network infrastructure could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist
activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their
websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential
information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-
attacks and other means.
In addition, we provide our customers with the ability to bank remotely, including online, mobile and over the telephone. The secure
transmission of confidential information over the internet and other remote channels is a critical element of remote banking. Our network could be
vulnerable to unauthorized access, computer viruses, phishing schemes and other internal and external security breaches. We may be required to
spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems
caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of
confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.
Despite efforts to ensure the integrity of our systems, cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such
attacks, nor may we be able to implement guaranteed preventive measures against such security breaches. The techniques used by cyber criminals
change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as
external service providers. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product
offerings and expand our internal usage of web-based products and applications.
Further, targeted social engineering attacks may be sophisticated and difficult to prevent and our employees, customers or other users of our
systems may be fraudulently induced to disclose sensitive information, allowing cyber criminals to gain access to our data or data of our customers.
A successful penetration or circumvention of system security could cause us serious negative consequences, including significant disruption
of operations, misappropriation of confidential information, or damage to our computers or systems or those of our customers and counterparties. A
successful security breach could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of
confidence in our security measures, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on
us.
The resolution of pending litigation, if unfavorable, could have a material adverse effect on our results of operations for a particular
period.
We face legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory
proceedings against financial institutions remains high. Legal liability against us could have material adverse financial effects or cause harm to our
reputation, which in turn could adversely impact our business prospects.
The status of recent lender liability litigation is included in "Notes to Consolidated Financial Statements—Commitments and Contingencies,"
included in Part IV, Item 15 of this report. Although we maintain litigation reserves related to this case, the ultimate resolution of the matter, if
unfavorable, may be material to our results of operations for a particular reporting period.
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We are subject to liquidity risks.
Liquidity is the ability to meet current and future cash flow needs on a timely basis at a reasonable cost. Our liquidity is used to make loans and
to repay deposit liabilities as they become due or are demanded by customers. Potential alternative sources of liquidity include federal funds
purchased and securities sold under repurchase agreements. We maintain a portfolio of investment securities that may be used as a secondary
source of liquidity to the extent the securities are not pledged for collateral. Other potential sources of liquidity include the sale of loans, the
utilization of available government and regulatory assistance programs, the ability to acquire national market, non-core deposits, the issuance of
additional collateralized borrowings such as Federal Home Loan Bank, or FHLB, advances, the issuance of debt securities, issuance of equity
securities and borrowings through the Federal Reserve's discount window. Without sufficient liquidity from these potential sources, we may not be
able to meet the cash flow requirements of our depositors and borrowers.
Additionally, our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired
by factors specific to us, the financial services industry or the economy in general. Factors that could reduce our access to liquidity sources include
a downturn in our local or national economies, difficult or illiquid credit markets or adverse regulatory actions against us. A failure to maintain
adequate liquidity could have a material adverse effect on our business, financial condition or results of operations.
We may become liable for environmental remediation and other costs on repossessed properties, which could adversely impact our results of
operations, cash flows and financial condition.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title
to properties securing certain loans. If hazardous or toxic substances are found on these properties, we may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected
property's value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement
policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on our cash flows, financial condition and results of operations.
Our systems of internal operating controls may not be effective.
We establish and maintain systems of internal operational controls that provide us with critical information used to manage our business. These
systems are subject to various inherent limitations, including cost, judgments used in decision-making, assumptions about the likelihood of future
events, the soundness of our systems, the possibility of human error and the risk of fraud. Moreover, controls may become inadequate because of
changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations,
any system of internal operating controls may not be successful in preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management. From time to time, control deficiencies and losses from operational malfunctions or fraud
have occurred and may occur in the future. Any future deficiencies, weaknesses or losses related to internal operating control systems could have
an adverse effect on our business and, in turn, on our financial condition, results of operations and prospects.
We face significant competition from other financial institutions and financial services providers.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have
more financial resources, higher lending limits and larger branch networks. Such competitors primarily include national, regional and community
banks within the various markets we serve. We also face competition from many other types of financial institutions, including, without limitation,
savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.
Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions and the
conversion of certain investment banks to bank holding companies may adversely affect our ability to market our products and services. Also,
technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as
automatic funds transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for those
products and services than we can.
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Our ability to compete successfully depends on a number of factors, including, among other things:
•
•
•
•
•
•
the ability to develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and
safe, sound assets;
the ability to expand our market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and
profitability, which, in turn, could harm our business, financial condition, results of operations and cash flows.
Our operations rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations. In addition, we
are subject to certain long-term vendor contracts that limit our flexibility and increase our dependence on third party vendors. Failure of certain
external vendors to perform in accordance with contractual arrangements could be disruptive to our operations and limit our ability to provide
certain products and services demanded by our customers, which could have material adverse impact on our financial condition or results of
operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many
different industries and counterparties. For example, we execute transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about,
one or more financial services companies or the financial services industry generally, have led to market-wide liquidity problems and could lead to
losses or defaults by us or by other institutions. Many of these transactions expose us to increased credit risk in the event of default of a
counterparty or client.
We may not effectively implement new technology-driven products and services or be successful in marketing these products and services to
our customers.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven
products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to
reduce costs. Our future success depends, in part, upon our ability to use technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in
technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial
services industry could have a material adverse impact on our business and, in turn, on our financial condition, results of operations and prospects.
Our Bank's ability to pay dividends to us is subject to regulatory limitations, which, to the extent we are not able to receive such dividends,
may impair our ability to grow, pay dividends, cover operating expenses and meet debt service requirements.
We are a legal entity separate and distinct from the Bank, our only bank subsidiary. Since we are a holding company with no significant assets
other than the capital stock of our subsidiaries, we depend upon dividends from the Bank for a substantial part of our revenue. Accordingly, our
ability to grow, pay dividends, cover operating expenses and meet debt service requirements depends primarily upon the receipt of dividends or
other capital distributions from the Bank. The Bank's ability to pay dividends to us is subject to, among other things, its earnings, financial
condition and need for funds, as well as federal and state governmental policies and regulations applicable to us and the Bank, which limit the
amount that may be paid as dividends without prior approval. For example, in general, the Bank is limited to paying dividends that do not exceed the
current year net profits together with retained earnings from the two preceding calendar years unless the prior consents of the Montana and federal
banking regulators are obtained.
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New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing
and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the
introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may
not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact
the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or
service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results
of operations and financial condition.
We may be subject to claims and litigation pertaining to our fiduciary responsibilities.
Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our customers and others. From time
to time, third parties make claims and take legal action against us pertaining to the performance of our fiduciary responsibilities. If these claims and
legal actions are not resolved in a manner favorable to us, we may be exposed to significant financial liability and/or our reputation could be
damaged. Either of these results may adversely impact demand for our products and services or otherwise have a harmful effect on our business
and, in turn, on our financial condition, results of operations and prospects.
Risks Relating to Our Common Stock
Our dividend policy may change.
Although we have historically paid dividends to our stockholders, we have no obligation to continue doing so and may change our dividend
policy at any time without notice to our stockholders. Holders of our common stock are only entitled to receive such cash dividends as our board of
directors, or Board, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth
initiatives, capital availability, projected liquidity needs and other factors, we have made and adopted and will continue to make and adopt, capital
management decisions and policies that could adversely impact the amount of dividends paid to our stockholders.
An investment in our Class A common stock is not an insured deposit.
Our Class A common stock is not a bank savings account or deposit and, therefore, is not insured against loss by the FDIC, any other deposit
insurance fund or any other public or private entity. As a result, holders of our common stock could lose some or all of their investment.
Our Class A common stock share price could be volatile and could decline.
The market price of our Class A common stock is volatile and could be subject to wide fluctuations in price in response to various factors, some
of which are beyond our control. These factors include:
•
•
•
•
•
•
prevailing market conditions;
our historical performance and capital structure;
estimates of our business potential and earnings prospects;
an overall assessment of our management;
our Class B shareholders may convert their shares into Class A common stock and liquidate their holdings; and
the consideration of these factors in relation to market valuation of companies in related businesses.
At times the stock markets, including the NASDAQ Stock Market, on which our Class A common stock is listed, may experience significant price
and volume fluctuations. As a result, the market price of our Class A common stock is likely to be similarly volatile and investors in our Class A
common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. In
addition, in the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action
litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion
of our management's attention and resources.
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Holders of the Class B common stock have voting control of our company and are able to determine virtually all matters submitted to
stockholders, including potential change in control transactions.
Members of the Scott family control in excess of 79% of the voting power of our outstanding common stock. Due to their holdings of common
stock, members of the Scott family are able to determine the outcome of virtually all matters submitted to stockholders for approval, including the
election of directors, amendment of our articles of incorporation (except when a class vote is required by law), any merger or consolidation requiring
common stockholder approval and the sale of all or substantially all of our assets. Accordingly, such holders have the ability to prevent change in
control transactions as long as they maintain voting control of the company.
In addition, because these holders will have the ability to elect all of our directors they will be able to control our policies and operations,
including the appointment of management, future issuances of our common stock or other securities, the payments of dividends on our common
stock and entering into extraordinary transactions, and their interests may not in all cases be aligned with your interests. Further, because of our
dual class structure, members of the Scott family will continue to be able to control all matters submitted to our stockholders for approval even if
they come to own less than 50% of the total outstanding shares of our common stock. The Scott family members have entered into a stockholder
agreement giving family members a right of first refusal to purchase shares of Class B common stock that are intended to be sold or transferred,
subject to certain exceptions, by other family members. This agreement may have the effect of continuing ownership of the Class B common stock
and control within the Scott family. This concentrated control will limit your ability to influence corporate matters. As a result, the market price of
our Class A common stock could be adversely affected.
“Anti-takeover” provisions and the regulations to which we are subject also may make it more difficult for a third party to acquire control
of us, even if the change in control would be beneficial to stockholders.
We are a financial and bank holding company incorporated in the State of Montana. Anti-takeover provisions in Montana law and our articles of
incorporation and bylaws, as well as regulatory approvals that would be required under federal law, could make it more difficult for a third party to
acquire control of us and may prevent stockholders from receiving a premium for their shares of our Class A common stock. These provisions could
adversely affect the market price of our Class A common stock and could reduce the amount that stockholders might receive if we are sold.
Our articles of incorporation provide that our Board may issue up to 100,000 shares of preferred stock, in one or more series, without stockholder
approval and with such terms, conditions, rights, privileges and preferences as the Board may deem appropriate. In addition, our articles of
incorporation provide for staggered terms for our Board and limitations on persons authorized to call a special meeting of stockholders. In addition,
certain provisions of Montana law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of
control under circumstances that otherwise could provide the holders of our Class A common stock with the opportunity to realize a premium over
the then-prevailing market price of such Class A common stock.
Further, the acquisition of specified amounts of our common stock (in some cases, the acquisition or control of more than 5% of our voting
stock) may require certain regulatory approvals, including the approval of the Federal Reserve and one or more of our state banking regulatory
agencies. The filing of applications with these agencies and the accompanying review process can take several months. Additionally, as discussed
above, the holders of the Class B common stock will have voting control of our company. This and the other factors described above may hinder or
even prevent a change in control of us, even if a change in control would be beneficial to our stockholders.
Future equity issuances could result in dilution, which could cause our Class A common stock price to decline.
We are not restricted from issuing additional Class A common stock, including any securities that are convertible into or exchangeable for, or
that represent the right to receive, Class A common stock. We may issue additional Class A common stock in the future pursuant to current or
future employee stock option plans or in connection with future acquisitions or financings. Should we choose to raise capital by selling shares of
Class A common stock for any reason, the issuance would have a dilutive effect on the holders of our Class A common stock and could have a
material negative effect on the market price of our Class A common stock.
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We qualify as a “controlled company” under the NASDAQ Marketplace Rules and may rely on exemptions from certain corporate
governance requirements.
As a result of the combined voting power of the members of the Scott family described above, we qualify as a “controlled company” under the
NASDAQ Marketplace Rules. As a controlled company, we may rely on exemptions from certain NASDAQ corporate governance standards that
are available to controlled companies, including the requirements that:
•
•
•
a majority of the board of directors consist of independent directors;
the compensation of officers be determined, or recommended to the board of directors for determination, by a majority of the
independent directors or a compensation committee comprised solely of independent directors; and
director nominees be selected, or recommended for the board of directors' selection, by a majority of the independent directors or a
nominating committee comprised solely of independent directors with a written charter or board resolution addressing the nomination
process.
As a result, in the future, our compensation and governance & nominating committees may not consist entirely of independent directors. As
long as we choose to rely on these exemptions from NASDAQ Marketplace Rules in the future, you will not have the same protections afforded to
stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.
The Class A common stock is equity and is subordinate to our existing and future indebtedness.
Shares of our Class A common stock are equity interests and do not constitute indebtedness. As such, shares of our Class A common stock
rank junior to all our indebtedness, including our subordinated term loans, the subordinated debentures held by trusts that have issued trust
preferred securities and other non-equity claims on us with respect to assets available to satisfy claims on us. Additionally, holders of our Class A
common stock are subject to the prior dividend and liquidation rights of any holders of Series A preferred stock then outstanding.
In the future, we may make additional offerings of debt or equity securities, including medium-term notes, trust preferred securities, senior or
subordinated notes and preferred stock. Or, we may issue additional debt or equity securities as consideration for future mergers and acquisitions.
Such additional debt and equity offerings may place restrictions on our ability to pay dividends on or repurchase our common stock, dilute the
holdings of our existing stockholders or reduce the market price of our Class A common stock. Furthermore, acquisitions typically involve the
payment of a premium over book and market values and therefore, some dilution of our tangible book value and net income per common share may
occur in connection with any future transaction. Holders of our Class A common stock are not entitled to preemptive rights or other protections
against dilution.
None.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal executive offices and one of our banking offices are anchor tenants in an eighteen story commercial building located in Billings,
Montana. The building is owned by a joint venture partnership in which the Bank is one of two partners, owning a 50% interest in the partnership.
We lease approximately 103,295 square feet of office space in the building. We also own a 65,226 square foot building that houses our operations
center in Billings, Montana. We provide banking services at an additional 78 locations in Montana, Wyoming and western South Dakota, of which
19 properties are leased from independent third parties and 59 properties are owned by us. We believe each of our facilities is suitable and adequate
to meet our current operational needs.
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following
consultation with legal counsel, does not expect the ultimate disposition of one or a combination of these matters to have a material adverse effect
on our business.
Item 3. Legal Proceedings
Not applicable.
Item 4. Mine Safety Disclosures
20
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Description of Our Capital Stock
Our articles provide for two classes of common stock: Class A common stock, which has one vote per share, and Class B common stock, which
has five votes per share. Class B common stock is convertible into Class A common stock as described below. Our common stock is uncertificated.
Our authorized capital stock consists of 200,100,000 shares, each with no par value per share, of which:
•
•
•
100,000,000 shares are designated as Class A common stock;
100,000,000 shares are designated as Class B common stock; and
100,000 shares are designated as preferred stock.
At December 31, 2014, we had issued and outstanding 21,928,932 shares of Class A common stock and 23,859,483 shares of Class B common
stock. At December 31, 2014, we also had outstanding stock options to purchase an aggregate of 836,940 shares of our Class A common stock and
911,092 shares of our Class B common stock.
Members of the Scott family control in excess of 79% of the voting power of our outstanding common stock. The Scott family members have
entered into a stockholder agreement giving family members a right of first refusal to purchase shares of Class B common stock that are intended to
be sold or transferred, subject to certain exceptions, by other family members. This agreement may have the effect of continuing ownership of the
Class B common stock and control of our Company within the Scott family.
Due to the ownership and control of our Company by members of the Scott family, we are a “controlled company” as that term is used under the
NASDAQ Marketplace Rules. As a “controlled company,” we may rely on exemptions from certain NASDAQ corporate governance requirements,
including those regarding independent director requirements for the Board and committees of the Board.
Preferred Stock
Our Board is authorized, without approval of the holders of Class A common stock or Class B common stock, to provide for the issuance of
preferred stock from time to time in one or more series in such number and with such designations, preferences, powers and other special rights as
may be stated in the resolution or resolutions providing for such preferred stock. Our Board may cause us to issue preferred stock with voting,
conversion and other rights that could adversely affect the holders of Class A common stock or Class B common stock or make it more difficult to
effect a change in control.
Common Stock
The holders of our Class A common stock are entitled to one vote per share and the holders of our Class B common stock are entitled to five
votes per share on any matter to be voted upon by the stockholders. Holders of Class A common stock and Class B common stock vote together as
a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law.
The holders of common stock are not entitled to cumulative voting rights with respect to the election of directors, which means that the holders
of a majority of the shares voted can elect all of the directors then standing for election. Directors are elected by a majority of the voting power
present in person or represented by proxy at a shareholder meeting rather than by a plurality vote.
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The holders of our Class A common stock and Class B common stock are entitled to share equally in any dividends that our Board may declare
from time to time from legally available funds and assets, subject to limitations under Montana law and the preferential rights of holders of any
outstanding shares of preferred stock. If a dividend is paid in the form of shares of common stock or rights to acquire shares of common stock, the
holders of Class A common stock will be entitled to receive Class A common stock, or rights to acquire Class A common stock, as the case may be
and the holders of Class B common stock will be entitled to receive Class B common stock, or rights to acquire Class B common stock, as the case
may be
Upon any voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of our company, the holders of our Class A
common stock and Class B common stock are entitled to share equally, on a per share basis, in all our assets available for distribution, after payment
to creditors and subject to any prior distribution rights granted to holders of any outstanding shares of preferred stock.
Our Class A common stock is not convertible into any other shares of our capital stock. Any holder of Class B common stock may at any time
convert his or her shares into shares of Class A common stock on a share-for-share basis. The shares of Class B common stock will automatically
convert into shares of Class A common stock on a share-for-share basis:
• when the aggregate number of shares of our Class B common stock is less than 20% of the aggregate number of shares of our Class A
common stock and Class B common stock then outstanding; or
•
upon any transfer, whether or not for value, except for transfers to the holder’s spouse, certain of the holder’s relatives, the trustees of
certain trusts established for their benefit, corporations and partnerships wholly-owned by the holders and their relatives, the holder’s
estate and other holders of Class B common stock.
Once converted into Class A common stock, the Class B common stock cannot be reissued. No class of common stock may be subdivided or
combined unless the other class of common stock concurrently is subdivided or combined in the same proportion and in the same manner.
Other than in connection with dividends and distributions, subdivisions or combinations, or certain other circumstances, we are not authorized
to issue additional shares of Class B common stock.
Class A and Class B common stock do not have any preemptive rights.
The Class B common stock is not and will not be listed on the NASDAQ Stock Market or any other exchange. Therefore, no trading market is
expected to develop in the Class B common stock. Class A common stock is listed on the NASDAQ Stock Market under the symbol “FIBK.”
The table below sets forth, for each quarter in the past two years, the quarterly high and low closing sales prices per share of the Class A
common stock, as reported by the NASDAQ Stock Market.
Quarter Ended
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
High
$19.34
20.82
24.81
29.21
28.90
28.63
28.34
29.53
Low
$15.69
18.00
20.72
23.25
24.53
24.30
25.37
26.25
As of December 31, 2014, we had 714 record shareholders, including the Wealth Management division of First Interstate Bank as trustee for
1,123,520 shares of Class A common stock held on behalf of 867 individual participants in the Savings and Profit Sharing Plan for Employees of First
Interstate BancSystem, Inc., or the Savings Plan. The Savings Plan Trustee votes the shares based on the instructions of each participant. In the
event the participant does not provide the Savings Plan Trustee with instructions, the Savings Plan Trustee votes those shares in accordance with
voting instructions received from a majority of the participants in the plan.
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Table of Contents
Dividends
It is our policy to pay a dividend to all common shareholders quarterly. We currently intend to continue paying quarterly dividends; however,
the Board may change or eliminate the payment of future dividends.
Recent quarterly dividends follow:
Dividend Payment
Fourth quarter 2012 - accelerated
Second quarter 2013
Third quarter 2013
Fourth quarter 2013
First quarter 2014
Second quarter 2014
Third quarter 2014
Fourth quarter 2014
Dividend Restrictions
Amount
Per Share
$0.13
0.13
0.14
0.14
0.16
0.16
0.16
0.16
Total Cash
Dividends
$5,597,747
5,647,175
6,117,594
6,144,825
7,035,389
7,052,081
7,262,359
7,276,144
For a description of restrictions on the payment of dividends, see Part I, Item 1, “Business — Regulation and Supervision — Restrictions on
Transfers of Funds to Us and the Bank,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital
Resources and Liquidity Management” included in Part II, Item 7 herein.
Sales of Unregistered Securities
There were no issuances of unregistered securities during the three months ended December 31, 2014.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to purchases made by or on behalf of us or any "affiliated purchasers" (as defined in Rule
10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended December 31, 2014.
Period
October 2014
November 2014
December 2014
Total
Total Number
of Shares
Purchased
—
—
134
134
Average
Price Paid
Per Share
$
$
—
—
27.88
27.88
23
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
—
—
—
—
Maximum Number
of Shares That
May Yet Be
Purchased Under the
Plans or Programs
—
—
—
—
Table of Contents
Performance Graph
The performance graph below compares the cumulative total shareholder return on our Class A common stock since our Class A common stock
began trading on the Nasdaq Global Select Market on March 23, 2010, as compared with the cumulative total return on equity securities of
companies included in the Nasdaq Composite Index and the Nasdaq Bank Index over the same period. The Nasdaq Bank Index is a comparative peer
index comprised of financial companies, including banks, savings institutions and related holding companies that perform banking-related
functions, listed on the Nasdaq Stock Market. The Nasdaq Composite Index is a comparative broad market index comprised of all domestic and
international common stocks listed on the Nasdaq Stock Market. This graph assumes a $100 investment in our common stock on the first day of
trading, and reinvestment of dividends on the date of payment without commissions. The plot points on the graph were provided by SNL Financial
LC, Charlottesville, VA. The performance graph represents past performance, which may not be indicative of the future performance of our common
stock.
Index
3/23/10
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
First Interstate BancSystem, Inc.
$
NASDAQ Composite
NASDAQ Bank
100.00
100.00
100.00
108.27
110.78
98.86
95.89
109.92
8.48
117.38
129.43
105.02
219.74
181.43
148.83
220.82
208.33
156.15
Period Ending
24
Table of Contents
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial position as of December 31, 2014 and 2013, and the
results of our operations for the fiscal years ended December 31, 2014, 2013 and 2012, has been derived from our audited consolidated financial
statements included in Part IV, Item 15. This data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and such consolidated financial statements, including the notes thereto. The selected consolidated
financial data with respect to our consolidated financial position as of December 31, 2012, 2011 and 2010, and the results of our operations for the
fiscal years ended December 31, 2011 and 2010, has been derived from our audited consolidated financial statements not included herein.
Five Year Summary
(Dollars in thousands except share and per share data)
As of or for the year ended December 31,
2014
2013
2012
2011
2010
Selected Balance Sheet Data:
Net loans
Investment securities
Total assets
Deposits
Securities sold under repurchase agreements
Long-term debt
Preferred stock pending redemption (1)
Subordinated debentures held by subsidiary trusts
Preferred stockholders’ equity (1)
Common stockholders’ equity
Selected Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Common Share Data:
Earnings per share:
Basic
Diluted
Dividends per share
Book value per share (2)
Tangible book value per share (3)
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
4,823,243 $
2,287,110
8,609,936
7,006,212
502,250
38,067
—
82,477
—
908,924
4,259,514 $
2,151,543
7,564,651
6,133,750
457,437
36,917
—
82,477
—
801,581
4,123,401 $
2,203,481
7,721,761
6,240,411
505,785
37,160
50,000
82,477
—
751,186
4,073,968 $
2,169,645
7,325,527
5,826,971
516,243
37,200
—
123,715
50,000
721,020
4,247,429
1,933,403
7,500,970
5,925,713
620,154
37,502
—
123,715
50,000
686,802
267,067 $
18,606
248,461
(6,622 )
255,083
111,401
236,869
129,615
45,214
84,401
—
84,401 $
257,662 $
20,695
236,967
(6,125 )
243,092
111,679
222,069
132,702
46,566
86,136
—
86,136 $
273,900 $
30,114
243,786
40,750
203,036
114,861
229,635
88,262
30,038
58,224
3,300
54,924 $
292,883 $
42,031
250,852
58,151
192,701
91,872
218,412
66,161
21,615
44,546
3,422
41,124 $
1.89 $
1.87
0.64
19.85
15.07
1.98 $
1.96
0.41
18.15
13.89
1.28 $
1.27
0.61
17.35
12.97
0.96 $
0.96
0.45
16.77
12.33
314,546
63,107
251,439
66,900
184,539
90,911
221,004
54,446
17,090
37,356
3,422
33,934
0.85
0.85
0.45
16.05
11.55
44,615,060
45,210,561
43,566,681
44,044,602
42,965,987
43,092,978
42,749,526
42,847,196
39,907,640
40,127,365
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Five Year Summary (continued)
(Dollars in thousands except share and per share data)
As of or for the year ended December 31,
2014
2013
2012
2011
2010
Financial Ratios:
Return on average assets
Return on average common equity
Return on average tangible common equity (4)
Average stockholders’ equity to average assets
Yield on average earning assets
Cost of average interest bearing liabilities
Interest rate spread
Net interest margin (5)
Efficiency ratio (6)
Common stock dividend payout ratio (7)
Loan to deposit ratio
Asset Quality Ratios
1.06 %
9.86
12.88
10.77
3.75
0.34
3.41
3.49
65.82
33.83
69.90
1.16 %
11.05
14.59
10.49
3.84
0.40
3.44
3.54
63.69
20.71
70.84
0.79 %
7.46
10.07
10.57
4.10
0.58
3.52
3.66
64.03
47.66
67.69
0.61 %
5.86
8.06
10.25
4.43
0.78
3.65
3.80
63.73
46.88
71.85
0.52 %
5.22
7.43
9.67
4.85
1.15
3.70
3.89
64.55
52.94
73.71
Non-performing loans to total loans (8)
1.32 %
2.22 %
2.61 %
4.87 %
4.51 %
Non-performing assets to total loans and other real estate owned
(OREO) (9)
Non-performing assets to total assets
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Net charge-offs to average loans
Capital Ratios:
Tangible common equity to tangible assets (10)
Net tangible common equity to tangible assets (11)
Tier 1 common capital to total risk weighted assets (12)
Leverage ratio
Tier 1 risk-based capital
Total risk-based capital
1.59
0.91
1.52
114.58
0.10
8.22 %
8.94
13.08
9.61
14.52
16.15
2.57
1.48
1.96
88.28
0.21
8.32 %
9.14
13.31
10.08
14.93
16.75
3.35
1.85
2.38
91.31
1.26
7.46 %
8.26
11.94
8.81
13.60
15.59
5.72
3.30
2.69
55.16
1.54
7.43 %
8.28
11.04
9.84
14.55
16.54
5.24
3.08
2.76
61.10
1.10
6.76 %
7.59
10.12
9.27
13.53
15.50
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
On December 18, 2012, we provided notice to preferred stockholders of our intention to redeem the preferred stock on January 18, 2013. Upon notice to
holders of the redemption, all preferred stock outstanding was reclassified from stockholder's equity to a liability.
For purposes of computing book value per share, book value equals common stockholders’ equity.
Tangible book value per share is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes of computing tangible
book value per share, tangible book value equals common stockholders’ equity less goodwill, core deposit intangibles and other intangible assets (except
mortgage servicing rights). Tangible book value per share is calculated as tangible common stockholders’ equity divided by common shares outstanding, and
its most directly comparable GAAP financial measure is book value per share. See below our reconciliation of non-GAAP financial measures to their most
directly comparable GAAP financial measures under the caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
Return on average tangible common equity is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes of
computing return on average tangible common equity, average tangible common equity equals average stockholders' equity less average goodwill, average
core deposit intangibles and average other intangible assets (except mortgage servicing rights). Return on average tangible common equity is calculated as net
income available to common shareholders divided by average tangible common equity, and its most comparable GAAP financial measure is return on average
common stockholders' equity. See below our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures
under the caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
Net interest margin ratio is presented on a fully taxable equivalent, or FTE, basis.
Efficiency ratio represents non-interest expense, excluding loan loss provision, divided by the aggregate of net interest income and non-interest income.
Common stock dividend payout ratio represents dividends per common share divided by basic earnings per common share.
Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing interest.
Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest and OREO.
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(10) Tangible common equity to tangible assets is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes of
computing tangible common equity to tangible assets, tangible common equity is calculated as common stockholders’ equity less goodwill and other
intangible assets (except mortgage servicing assets), and tangible assets is calculated as total assets less goodwill and other intangible assets (except mortgage
servicing rights). See below our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the
caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
(11) Net tangible common equity to tangible assets is a non-GAAP financial measure that management uses to evaluate our capital adequacy. For purposes of
computing net tangible common equity to tangible assets, net tangible common equity is calculated as common stockholders’ equity less goodwill (adjusted
for associated deferred tax liability) and other intangible assets (except mortgage servicing assets), and tangible assets is calculated as total assets less
goodwill and other intangible assets (except mortgage servicing rights). See below our reconciliation of non-GAAP financial measures to their most directly
comparable GAAP financial measures under the caption “—Non-GAAP Financial Measures” in this Part II, Item 6.
(12) For purposes of computing tier 1 common capital to total risk-weighted assets, tier 1 common capital excludes preferred stock and trust preferred securities.
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principals in the United States of America, or GAAP, this
annual report contains the following non-GAAP financial measures that management uses to evaluate our capital adequacy: return on average
tangible common equity, tangible book value per share, tangible common equity to tangible assets and net tangible common equity to tangible
assets. Return on average tangible equity is calculated as net income available to common shareholders divided by average tangible common
stockholders' equity. Tangible book value per share is calculated as tangible common stockholders’ equity divided by common shares outstanding.
Tangible assets is calculated as total assets less goodwill and other intangible assets (excluding mortgage servicing assets). Tangible common
equity to tangible assets is calculated as tangible common stockholders’ equity divided by tangible assets. Net tangible common equity to tangible
assets is calculated as net tangible common stockholders’ equity divided by tangible assets. These non-GAAP financial measures may not be
comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the
same manner. They also should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP.
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Table of Contents
The following table shows a reconciliation from ending stockholders’ equity (GAAP) to ending tangible common stockholders’ equity (non-
GAAP) and ending net tangible common stockholders’ equity (non-GAAP) and ending assets (GAAP) to ending tangible assets (non-GAAP), their
most directly comparable GAAP financial measures, in each instance as of the periods presented.
Non-GAAP Financial Measures - Five Year Summary
(Dollars in thousands except share and per share data)
As of December 31,
2014
2013
2012
2011
2010
Total common stockholders' equity (GAAP)
$
908,924 $
801,581 $
751,186 $
721,020 $
686,802
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
Tangible common stockholders' equity
(Non-GAAP)
Add deferred tax liability for deductible
goodwill
Net tangible common stockholders' equity
(Non-GAAP)
Total Assets (GAAP)
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
Tangible assets (Non-GAAP)
Average Balances:
Total common stockholders' equity (GAAP)
Less goodwill and other intangible assets
(excluding mortgage servicing rights)
Average tangible common stockholders' equity (Non-
GAAP)
Common shares outstanding
Net income available to common shareholders
Book value per common share (GAAP)
Tangible book value per common share
(Non-GAAP)
Tangible common equity to tangible assets (Non-GAAP)
Net tangible common equity to tangible assets (Non-GAAP)
Return on average common tangible equity (Non-GAAP)
218,870
188,214
189,637
191,065
192,518
690,054
613,367
561,549
529,955
494,284
60,499
60,499
60,499
60,499
60,499
750,553 $
673,866 $
622,048 $
590,454 $
554,783
8,609,936 $
7,564,651 $
7,721,761 $
7,325,527 $
7,500,970
218,870
8,391,066 $
188,214
7,376,437 $
189,637
7,532,124 $
191,065
7,134,462 $
192,518
7,308,452
855,862 $
779,530 $
735,984 $
702,321 $
650,405
200,740
188,954
190,381
191,823
193,429
655,122 $
590,576 $
545,603 $
510,498 $
456,976
45,788,415
44,155,063
43,290,323
42,981,174
84,401 $
19.85 $
86,136 $
18.15 $
54,924 $
17.35 $
41,124 $
16.77 $
42,800,694
33,934
16.05
$
$
$
$
$
$
$
13.89
8.32 %
9.14
14.59
12.97
7.46 %
8.26
10.07
12.33
7.43 %
8.28
8.06
11.55
6.76 %
7.59
7.43
15.07
8.22 %
8.94
12.88
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175
promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve
inherent risks and uncertainties. Any statements about our plans, objectives, expectations, strategies, beliefs, or future performance or events
constitute forward-looking statements. Such statements are identified as those that include words or phrases such as “believes,” “expects,”
“anticipates,” “plans,” “trend,” “objective,” “continue” or similar expressions or future or conditional verbs such as “will,” “would,” “should,”
“could,” “might,” “may” or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, assumptions,
estimates and other important factors that could cause actual results to differ materially from any results, performance or events expressed or
implied by such forward-looking statements.
The following factors, among others, may cause actual results to differ materially from current expectations in the forward-looking statements,
including those set forth in this report:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
continuing or worsening business and economic conditions;
credit losses;
adverse economic conditions affecting Montana, Wyoming and western South Dakota;
lending risk;
adequacy of the allowance for loan losses;
impairment of goodwill;
failure to manage growth;
access to low-cost funding sources;
changes in interest rates;
dependence on the Company’s management team;
ability to attract and retain qualified employees;
governmental regulation and changes in regulatory, tax and accounting rules and interpretations;
failure of technology;
cyber-security;
unfavorable resolution of pending litigation;
inability to meet liquidity requirements;
environmental remediation and other costs;
ineffective internal operational controls;
competition;
reliance on external vendors;
implementation of new lines of business or new product or service offerings;
soundness of other financial institutions;
failure to effectively implement technology-driven products and services;
inability of our bank subsidiary to pay dividends;
litigation pertaining to fiduciary responsibilities;
change in dividend policy;
uninsured nature of any investment in Class A common stock;
volatility of Class A common stock;
decline in market price of Class A common stock;
voting control of Class B stockholders;
anti-takeover provisions;
dilution as a result of future equity issuances;
controlled company status; and,
subordination of common stock to Company debt.
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These factors are not necessarily all of the factors that could cause our actual results, performance or achievements to differ materially from
those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements set forth above. Forward-looking statements speak only as of the date they are made and we do not undertake or assume any obligation
to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other
factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements,
no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Executive Overview
We are a financial and bank holding company headquartered in Billings, Montana. As of December 31, 2014, we had consolidated assets of $8.6
billion, deposits of $7.0 billion, loans of $4.9 billion and total stockholders’ equity of $909 million. We currently operate 79 banking offices, including
detached drive-up facilities, in 41 communities located in Montana, Wyoming and western South Dakota. Through the Bank, we deliver a
comprehensive range of banking products and services to individuals, businesses, municipalities and other entities throughout our market areas.
We also offer internet and mobile banking services. Our customers participate in a wide variety of industries, including energy, tourism, agriculture,
healthcare, professional services, education, governmental services, construction, mining, retail and wholesale trade.
Our Business
Our principal business activity is lending to, accepting deposits from and conducting financial transaction for individuals, businesses,
municipalities and other entities. We derive our income principally from interest charged on loans and, to a lesser extent, from interest and dividends
earned on investments. We also derive income from non-interest sources such as fees received in connection with various lending and deposit
services; trust, employee benefit, investment and insurance services; mortgage loan originations, sales and servicing; merchant and electronic
banking services; and from time to time, gains on sales of assets. Our principal expenses include interest expense on deposits and borrowings,
operating expenses, provisions for loan losses and income tax expense.
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed and variable rate loans. Our
real estate loans comprise commercial real estate, construction (including residential, commercial and land development loans), residential,
agricultural and other real estate loans. Fluctuations in the loan portfolio are directly related to the economies of the communities we serve. While
each loan originated generally must meet minimum underwriting standards established in our credit policies, lending officers are granted discretion
within pre-approved limits in approving and pricing loans to assure that the banking offices are responsive to competitive issues and community
needs in each market area. We fund our loan portfolio primarily with the core deposits from our customers, generally without utilizing brokered
deposits and with minimal reliance on wholesale funding sources. For additional information about our underwriting standards and loan approval
process, see "Business—Lending Activities," included in Part I, Item 1 of this report.
Recent Trends and Developments
On February 10, 2014, we entered into an agreement and plan of merger to acquire all of the outstanding stock of Mountain West Financial
Corp., or MWFC, a Montana-based bank holding company that operated one wholly-owned subsidiary bank, Mountain West Bank, NA,or MWB,
with branches located in five of the Company's current market areas in Montana. The acquisition was completed on July 31, 2014, and we merged
MWB with our existing bank subsidiary, First Interstate Bank, or FIB, on October 17, 2014.
Consideration for the acquisition of $74.5 million consisted of cash of $38.5 million and the issuance of 1,378,230 shares of our Class A common
stock valued at $26.10 per share, the closing price of our Class A common stock as quoted on the NASDAQ stock market on the acquisition date.
As of the acquisition date, MWFC had total assets with fair values of $612 million, total loans with fair values of $360 million and deposits with fair
values of $515 million. In conjunction with the acquisition, we recorded provisional goodwill of $22 million and core deposit intangible assets of $11
million. For additional information regarding the acquisition, see “Notes to Consolidated Financial Statements—Acquisition,” included in Part IV,
Item 15 of this report.
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Primary Factors Used in Evaluating Our Business
As a banking institution, we manage and evaluate various aspects of both our financial condition and our results of operations. We monitor our
financial condition and performance on a monthly basis, at our holding company, at the Bank and at each banking office. We evaluate the levels
and trends of the line items included in our balance sheet and statements of income, as well as various financial ratios that are commonly used in
our industry. We analyze these ratios and financial trends against both our own historical levels and the financial condition and performance of
comparable banking institutions in our region and nationally.
Results of Operations
Principal factors used in managing and evaluating our results of operations include return on average assets, net interest income, non-interest
income, non-interest expense and net income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in
the volume and composition of interest earning assets and interest bearing liabilities. The most significant impact on our net interest income
between periods is derived from the interaction of changes in the rates earned or paid on interest earning assets and interest bearing liabilities,
which we refer to as interest rate spread. The volume of loans, investment securities and other interest earning assets, compared to the volume of
interest bearing deposits and indebtedness, combined with the interest rate spread, produces changes in our net interest income between periods.
Non-interest bearing sources of funds, such as demand deposits and stockholders’ equity, also support earning assets.
The impact of free funding sources is captured in the net interest margin, which is calculated as net interest income divided by average earning
assets. We evaluate our net interest income on factors that include the yields on our loans and other earning assets, the costs of our deposits and
other funding sources, the levels of our net interest spread and net interest margin and the provisions for loan losses required to maintain our
allowance for loan losses at an adequate level.
We seek to increase our non-interest income over time and we evaluate our non-interest income relative to the trends of the individual types of
non-interest income in view of prevailing market conditions.
We manage our non-interest expenses in consideration of growth opportunities and our community banking model that emphasizes customer
service and responsiveness. We evaluate our non-interest expense on factors that include our non-interest expense relative to our average assets,
our efficiency ratio and the trends of the individual categories of non-interest expense.
Finally, we seek to increase our net income and provide favorable shareholder returns over time, and we evaluate our net income relative to the
performance of other bank holding companies on factors that include return on average assets, return on average equity, total shareholder return
and growth in earnings.
Financial Condition
Principal areas of focus in managing and evaluating our financial condition include liquidity, the diversification and quality of our loans, the
adequacy of our allowance for loan losses, the diversification and terms of our deposits and other funding sources, the re-pricing characteristics
and maturities of our assets and liabilities, including potential interest rate exposure and the adequacy of our capital levels. We seek to maintain
sufficient levels of cash and investment securities to meet potential payment and funding obligations, and we evaluate our liquidity on factors that
include the levels of cash and highly liquid assets relative to our liabilities, the quality and maturities of our investment securities, the ratio of loans
to deposits and any reliance on brokered certificates of deposit or other wholesale funding sources.
We seek to maintain a diverse and high quality loan portfolio and evaluate our asset quality on factors that include the allocation of our loans
among loan types, credit exposure to any single borrower or industry type, non-performing assets as a percentage of total loans and OREO, and
loan charge-offs as a percentage of average loans. We seek to maintain our allowance for loan losses at a level adequate to absorb probable losses
inherent in our loan portfolio at each balance sheet date, and we evaluate the level of our allowance for loan losses relative to our overall loan
portfolio and the level of non-performing loans and potential charge-offs.
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We seek to fund our assets primarily using core customer deposits spread among various deposit categories, and we evaluate our deposit and
funding mix on factors that include the allocation of our deposits among deposit types, the level of our non-interest bearing deposits, the ratio of
our core deposits (i.e. excluding time deposits above $100,000) to our total deposits and our reliance on brokered deposits or other wholesale
funding sources, such as borrowings from other banks or agencies. We seek to manage the mix, maturities and re-pricing characteristics of our
assets and liabilities to maintain relative stability of our net interest rate margin in a changing interest rate environment, and we evaluate our asset-
liability management using models to evaluate the changes to our net interest income under different interest rate scenarios.
Finally, we seek to maintain adequate capital levels to absorb unforeseen operating losses and to help support the growth of our balance sheet.
We evaluate our capital adequacy using the regulatory and financial capital ratios including leverage capital ratio, tier 1 risk-based capital ratio, total
risk-based capital ratio, tangible common equity to tangible assets and tier 1 common capital to total risk-weighted assets.
Critical Accounting Estimates and Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow
general practices within the industries in which we operate. Application of these principles requires management to make estimates, assumptions
and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Our significant accounting
policies are summarized in “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” included in financial
statements included Part IV, Item 15 of this report.
Our critical accounting estimates are summarized below. Management considers an accounting estimate to be critical if: (1) the accounting
estimate requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and (2)
changes in the estimate that are reasonably likely to occur from period to period, or the use of different estimates that management could have
reasonably used in the current period, would have a material impact on our consolidated financial statements, results of operations or liquidity.
Allowance for Loan Losses
The provision for loan losses creates an allowance for loan losses known and inherent in the loan portfolio at each balance sheet date. The
allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio.
We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant loan with identified
weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the allowance for loan losses at appropriate levels. In
determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and
reasonably determined. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of subjective measurements, including management’s assessment of the internal risk classifications of loans,
historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends and the
impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are
possible and may have a material impact on our allowance, and therefore our consolidated financial statements or results of operations. The
allowance for loan losses is maintained at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio at each
balance sheet date, and fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for
loan losses. Management monitors qualitative and quantitative trends in the loan portfolio, including changes in the levels of past due, internally
classified and non-performing loans. See “Notes to Consolidated Financial Statements — Summary of Significant Accounting Policies” for a
description of the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the
allowance for loan losses is included herein under the heading “—Financial Condition—Allowance for Loan Losses.” See also Part I, Item 1A, “Risk
Factors—Risks Relating to the Market and Our Business.”
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Goodwill
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an
interim basis if an event or circumstance indicates that it is likely impairment has occurred. In any given year, the Company may elect to perform a
qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If it is
not more likely than not that the fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the qualitative
assessment, a two-step quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of net assets is
estimated based on an analysis of our market value, discounted cash flows and peer values. Determining the fair value of goodwill is considered a
critical accounting estimate because of its sensitivity to market-based economics. In addition, any allocation of the fair value of goodwill to assets
and liabilities requires significant management judgment and the use of subjective measurements. Variability in market conditions and key
assumptions or subjective measurements used to estimate and allocate fair value are reasonably possible and could have a material impact on our
consolidated financial statements or results of operations.
Our annual goodwill impairment test is performed each year as of July 1st. Upon completion of this year's test, the estimated fair value of net
assets was greater than carrying value of the Company. We will continue to monitor our performance and evaluate our goodwill for impairment
annually or more frequently as needed.
For additional information regarding goodwill, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies,”
included in Part IV, Item 15 of this report and “Risk Factors—Risks Relating to the Market and Our Business,” included in Part I, Item 1A of this
report.
Fair Values of Loans Acquired in Business Combinations
Loans acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses.
Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be
collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to
evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may
result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered
impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the
loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with
the foreclosure and disposition of the collateral.
For additional information regarding acquired loans, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting
Policies” and “Notes to Consolidated Financial Statements—Acquisition,” included in Part IV, Item 15 of this report.
Results of Operations
The following discussion of our results of operations compares the years ended December 31, 2014 to December 31, 2013 and the years ended
December 31, 2013 to December 31, 2012.
Net Interest Income
Net interest income, the largest source of our operating income, is derived from interest, dividends and fees received on interest earning assets,
less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest
bearing liabilities include deposits and various forms of indebtedness. Net interest income is affected by the level of interest rates, changes in
interest rates and changes in the composition of interest earning assets and interest bearing liabilities.
The most significant impact on our net interest income between periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest earning assets and interest bearing liabilities. The volume of loans, investment
securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the interest rate
spread, produces changes in the net interest income between periods.
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The following table presents, for the periods indicated, condensed average balance sheet information, together with interest income and yields
earned on average interest earning assets and interest expense and rates paid on average interest bearing liabilities.
Average Balance Sheets, Yields and Rates
(Dollars in thousands)
Average
Balance
2014
Interest
Average
Rate
Average
Balance
2013
Interest
Average
Rate
Average
Balance
2012
Interest
Average
Rate
Year Ended December 31,
Interest earning assets:
Loans (1) (2)
Investment securities (2)
Federal funds sold
Interest bearing deposits in banks
Total interest earnings assets
Non-earning assets
Total assets
Interest bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Repurchase agreements
Other borrowed funds (3)
Long-term debt
Preferred stock pending
redemption
Subordinated debentures held by by
subsidiary trusts
Total interest bearing liabilities
Non-interest bearing deposits
Other non-interest bearing liabilities
Stockholders’ equity
Total liabilities and stockholders’
$ 4,602,907 $ 233,273
36,755
7
1,334
271,369
2,122,587
1,391
506,067
7,232,952
715,846
$ 7,948,798
$ 1,992,565 $
1,723,073
1,198,053
454,265
8
37,442
2,094
2,444
9,241
237
—
2,016
—
—
2,574
18,606
88,304
5,493,710
1,543,079
56,147
855,862
5.07 % $ 4,281,673 $ 222,450
38,695
2,151,495
1.73
18
2,852
0.50
992
391,515
0.26
262,155
6,827,535
3.75
5.20 % $ 4,176,439 $ 232,724
44,613
2,123,231
1.80
13
2,341
0.63
1,235
486,203
0.25
278,585
6,788,214
3.84
600,919
$ 7,428,454
627,498
$ 7,415,712
0.11 % $ 1,751,990 $
0.14
0.77
0.05
—
5.38
1,566,211
1,289,108
456,840
10
37,102
1,963
2,445
11,392
294
—
1,936
0.11 % $ 1,624,687 $
0.16
0.88
0.06
—
5.22
1,496,254
1,473,501
501,192
16
37,185
2,390
3,562
16,354
579
—
1,981
—
2.91
0.34
2,329
159
2,506
20,695
82,477
5,186,067
1,411,270
51,587
779,530
6.83
3.04
0.40
1,913
131
5,117
30,114
102,307
5,237,055
1,346,787
47,799
784,071
equity
$ 7,948,798
$ 7,428,454
$ 7,415,712
Net FTE interest income
Less FTE adjustments (2)
Net interest income from
consolidated statements of
income
Interest rate spread
Net FTE interest margin (4)
Cost of funds, including non-interest
bearing demand deposits (5)
$ 252,763
(4,302 )
$ 241,460
(4,493 )
$ 248,471
(4,685 )
$ 248,461
$ 236,967
$ 243,786
3.41 %
3.49 %
0.26 %
3.44 %
3.54 %
0.31 %
5.57 %
2.10
0.56
0.25
4.10
0.15 %
0.24
1.11
0.12
—
5.33
6.85
5.00
0.58
3.53 %
3.66 %
0.46 %
(1)
(2)
(3)
(4)
(5)
Average loan balances include non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan
costs, which is not material.
Interest income and average rates for tax exempt loans and securities are presented on a fully taxable equivalent, or FTE, basis.
Includes interest on federal funds purchased and other borrowed funds. Excludes long-term debt.
Net FTE interest margin during the period equals (i) the difference between interest income on interest earning assets and the interest
expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
Cost of funds including non-interest bearing demand deposits equals (i) interest expense on interest bearing liabilities, divided by (ii) the
sum of average interest bearing liabilities and average non-interest bearing demand deposits.
34
Table of Contents
During 2014, deposit growth combined with corresponding increases in interest earning assets and a 5 basis point reduction in our funding
costs resulted in an increase in our net interest income on a fully taxable equivalent, or FTE, basis. Our FTE net interest income increased $11.3
million, or 4.7%, to $252.8 million in 2014, compared to $241.5 million in 2013. Interest accretion related to the fair valuation of acquired loans
contributed $2.6 million of interest income during 2014, $1.0 million of which was the result of early loan pay-offs. Net FTE interest income was also
positively impacted by recoveries of previously charged-off interest of $3.6 million in 2014, as compared to $1.4 million in 2013. Despite increases in
our net FTE interest income, our net interest margin ratio decreased 5 basis points to 3.49% in 2014, compared to 3.54% in 2013. Declines in yields
earned on the Company's loan and investment portfolios were partially offset by increases in average outstanding loans, reductions in funding
costs and lower average outstanding time deposits. Exclusive of the accelerated interest accretion related to early payoffs of acquired loans and the
impact of recoveries of charged-off interest, our net interest margin ratio was 3.43% during 2014 and 3.52% during 2013.
Our FTE net interest income decreased $7.0 million, or 2.8%, to $241.5 million in 2013, compared to $248.5 million in 2012, and our net interest
margin ratio decreased 12 basis points to 3.54% in 2013, as compared to 3.66% in 2012. The decrease in net FTE interest income was primarily due to
lower yields earned on our loan and investment portfolios. Declines in yields earned on our loan and investment portfolios during 2013, as
compared to 2012, were partially offset by increases in average outstanding loans and investment securities, reductions in the cost of interest
bearing liabilities and lower average outstanding time deposits. Also offsetting the impact of lower asset yields in 2013, as compared to 2012, was
the December 2012 contractual repricing of $46 million of junior subordinated debentures from a weighted average fixed interest rate of 7.07% to
variable interest rates averaging 2.60% over LIBOR, or 3.11% during 2013.
The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from estimated
changes in average asset and liability balances (volume) and estimated changes in average interest rates (rate). Changes which are not due solely to
volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they
compare to each other.
Analysis of Interest Changes Due To Volume and Rates
(Dollars in thousands)
Interest earning assets:
Loans (1)
Investment Securities (1)
Federal funds sold
Interest bearing deposits in banks
Total change
Interest bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Repurchase agreements
Borrowings (2)
Long-term debt
Preferred stock pending redemption
Subordinated debentures held by
subsidiary trusts
Total change
Increase (decrease) in FTE net interest
income (1)
Year Ended December 31, 2014
compared with
December 31, 2013
Year Ended December 31, 2013
compared with
December 31, 2012
Year Ended December 31, 2012
compared with
December 31, 2011
Volume
Rate
Net
Volume
Rate
Net
Volume
Rate
Net
$
16,689 $
(520 )
(5,866 ) $
(1,420 )
(9 )
(2 )
$
10,823
(1,940 )
(11 )
290
16,450
52
(7,236 )
342
9,214
5,864 $ (16,138 ) $ (10,274 ) $
(5,713 ) $
(9,055 ) $ (14,768 )
594
3
(241 )
6,220
(6,512 )
(5,918 )
2
(2 )
5
(243 )
(22,650 )
(16,430 )
2,846
1
182
(2,684 )
(7,028 )
(4,182 )
(1 )
3
(16,081 )
—
185
(18,765 )
270
245
(805 )
(2 )
—
18
(159 )
177
(256 )
(139 )
(246 )
(1,346 )
(55 )
—
62
—
131
(1 )
(2,151 )
(57 )
—
80
(159 )
187
167
(2,047 )
(614 )
(1,284 )
(2,915 )
(51 )
(234 )
—
(4 )
28
—
(41 )
—
(427 )
(1,117 )
(4,962 )
(285 )
—
(45 )
28
855
(820 )
(1,522 )
(667 )
(2,066 )
(2,886 )
(3,650 )
(4,024 )
(7,674 )
—
—
(14 )
131
(116 )
(116 )
—
20
—
—
6
131
(109 )
(1,833 )
68
(2,089 )
(992 )
(1,619 )
(2,712 )
(6,707 )
(2,611 )
(9,419 )
(1,008 )
(4,506 )
297
(7,411 )
(711 )
(11,917 )
$
16,706 $
(5,403 ) $
11,303
$
8,932 $ (15,943 ) $
(7,011 ) $
1,822 $
(8,670 ) $
(6,848 )
(1)
(2)
Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.
Includes interest on federal funds purchased and other borrowed funds.
35
Table of Contents
Provision for Loan Losses
The provision for loan losses supports the allowance for loan losses known and inherent in the loan portfolio at each balance sheet date. We
perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant loan with identified
weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the allowance for loan losses at appropriate levels. In
determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and
reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss
rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors
and the estimated impact of current economic conditions on certain historical loan loss rates. Fluctuations in the provision for loan losses result
from management’s assessment of the adequacy of the allowance for loan losses. Ultimate loan losses may vary from current estimates. For
additional information concerning the provision for loan losses, see “—Critical Accounting Estimates and Significant Accounting Policies”
included herein.
Fluctuations in the provision for loan losses reflect management's estimate of possible loan losses based upon evaluation of the borrowers'
ability to repay, collateral value underlying loans, loan loss trends and estimated effects of current economic conditions on our loan portfolio.
Reductions in specific reserves on impaired loans and lower general reserves are reflective of continued improvement in economic conditions in our
market areas during 2014, combined with improvement in loss history trends used to estimate required reserves and decreases in the level of
criticized real estate and construction loans, which typically require higher reserves based on loss history, resulted in a reversal of provision for
loan losses of $6.6 million during 2014. During 2013, declining levels of non-performing assets and criticized loans indicative of improvement in and
stabilization of our credit quality, combined with our assessment of the adequacy of our allowance for loan losses resulted in a reversal of provision
for loan losses of $6.1 million, compared to recording provisions of $40.8 million during 2012. For additional information concerning non-performing
assets, see “—Financial Condition—Non-Performing Assets” herein.
Non-interest Income
Our principal sources of non-interest income include other service charges, commissions and fees; income from the origination and sale of
loans; wealth management revenues; and, service charges on deposit accounts. Non-interest income decreased $278 thousand, or less than 1.0%,
to $111.4 million in 2014, as compared to $111.7 million in 2013 and decreased $3.2 million, or 2.8%, to $111.7 million in 2013, as compared to $114.9
million in 2012. Significant components of these decreases are discussed below.
Other service charges, commissions and fees primarily include debit and credit card interchange income, mortgage servicing fees, insurance and
other commissions and ATM service charge revenues. Other service charges, commissions and fees increased $4.8 million, or 13.2%, to $40.7 million
in 2014, as compared to $36.0 million in 2013, and increased $1.8 million, or 5.1%, to $36.0 million in 2013, as compared to $34.2 million in 2012,
primarily due to increases in interchange revenue due to higher debit and credit card transaction volumes and increases in mortgage loan servicing
fee income resulting from an increase in the number of loans serviced.
Income from the origination and sale of loans includes origination and processing fees on residential real estate loans held for sale and gains on
residential real estate loans sold to third parties. Fluctuations in market interest rates have a significant impact on revenues generated from the
origination and sale of loans. Higher interest rates can reduce the demand for home loans and loans to refinance existing mortgages. Conversely,
lower interest rates generally stimulate refinancing and home loan origination. Income from the origination and sale of loans decreased $10.3 million,
or 30.1%, to $23.9 million during 2014, as compared to $34.3 million during 2013, due to the combined impacts of lower demand for refinancing loans
in our market areas and increased retention of select mortgage loan production in our residential real estate loan portfolio. Our mortgage loan
production volume decreased 18% during 2014, as compared to 2013, with refinancing loan production volume declining by 55%.
During 2013, mortgage interest rates increased from record low rates experienced in 2012, resulting in lower loan demand primarily for refinancing
loans. Our mortgage loan production volume decreased 23% in 2013, as compared to 2012, with refinancing loan production volumes declining by
45%. Driven by lower production volume, our income from the origination and sale of loans decreased $7.5 million, or 18.0%, to $34.3 million in 2013,
as compared to $41.8 million in 2012.
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Table of Contents
Wealth management revenues are principally comprised of fees earned for management of trust assets and investment services revenues.
Wealth management revenues increased $1.9 million, or 11.2%, to $19.0 million in 2014, as compared to $17.1 million in 2013, and increased $2.8
million, or 19.4%, to $17.1 million in 2013, as compared to $14.3 million in 2012, primarily due to the addition of new wealth management customers
and increases in the market values of new and existing assets under management. Also contributing to the increase in wealth management revenues
in 2013 as compared to 2012, were revenues from the sale of two multi-million dollar life insurance policies aggregating $370 thousand recorded
during third quarter 2013.
Other income primarily includes company-owned life insurance revenues, net gains or losses on securities held under deferred compensation
plans, check printing income, agency stock dividends and gains on sales of miscellaneous assets. Other income increased $3.6 million, or 47.4%, to
$11.1 million in 2014, as compared to $7.5 million in 2013. Income from life insurance increased $2.2 million in 2014, as compared to 2013, due to a full
year of earnings on $60.0 million of life insurance purchased in December 2013 and January 2014, additional earnings on $13 million on company-
owned life insurance acquired in the MWFC acquisition and the receipt of death benefits of $921. In addition, during fourth quarter 2014, we
recorded net gains of $1.2 million related to the sale of two FIB bank buildings and received a $616 thousand volume bonus from our card payment
network. These increases in other income in 2014, as compared to 2013, were partially offset by a decrease of $911 thousand related to market value
adjustments for securities held under deferred compensation plans.
Other income increased $754 thousand, or 11.1%, to $7.5 million in 2013, as compared to $6.8 million in 2012, primarily due to increases of $697
thousand in earnings on securities held under deferred compensation plans and $680 thousand in income from life insurance policies. These
increases were partially offset by a gain of $581 thousand on the sale of a bank building recorded in 2012.
Non-interest Expense
Non-interest expense increased $14.8 million, or 6.7%, to $236.9 million in 2014, from $222.1 million in 2013. Non-interest expense for 2014
includes $8.0 million of acquisition and loss contingency expenses. Exclusive of these acquisition and loss contingency expenses, non-interest
expense increased $6.8 million, or 3.1%, in 2014, as compared to 2013, primarily due to the additional operating costs of MWFC. Non-interest
expense decreased $7.6 million, or 3.3%, to $222.1 million in 2013, as compared to $229.6 million in 2012. Significant components of these fluctuations
are discussed in more detail below.
Salaries and wages increased $2.5 million, or 2.7%, to $96.5 million in 2014, from $94.0 million in 2013, primarily due to increased personnel costs
associated with the MWFC acquisition and inflationary wage increases. These increases were partially offset by a decrease of $2.8 million in
incentive bonus accruals reflective of the addition of new performance metrics and changes in the weighting of metrics used in determining
incentives payable under our short-term incentive program. Salaries and wages increased $4.2 million, or 4.6%, to $94.0 million in 2013, as compared
to $89.8 million in 2012, primarily due to higher incentive compensation resulting from our improved financial performance.
Employee benefits decreased $208 thousand, or less than 1.0%, to $30.1 million in 2014, as compared to $30.3 million in 2013, primarily due to
decreases in the market value of securities held under deferred compensation plans, which were partially offset by higher payroll taxes. Employee
benefits increased $993 thousand, or 3.4%, to $30.3 million in 2013, as compared to $29.3 million in 2012, primarily due to the combined effects of
increases in the market value of securities held under deferred compensation plans, higher stock-based compensation expense and increases in
group health insurance expense.
Furniture and equipment expense increased $1.3 million, or 10.1%, to $13.8 million in 2014, as compared to $12.6 million in 2013, primarily due to
due to the addition of facilities in conjunction with the acquisition of MWFC and additional software costs associated with the implementation of
new systems to assist in accounting for acquired loans, process mortgage loans and automate certain reconciliation functions. Furniture and
equipment expense decreased $305 thousand, or 2.4%, to $12.6 million in 2013, as compared to $12.9 million in 2012.
FDIC insurance premiums decreased $449 thousand, or 8.9%, to $4.6 million in 2014, from $5.1 million in 2013, and $1.4 million, or 21.8%, to $5.1
million in 2013, as compared to $6.5 million in 2012, primarily due to lower assessment rates reflective of improved credit quality combined with a
lower assessment base.
37
Table of Contents
OREO expense is recorded net of OREO income. Variations in net OREO expense between periods are primarily due to fluctuations in write-
downs of the estimated fair value of OREO properties, net gains and losses recorded on the sale of OREO properties and carrying costs and/or
operating expenses of OREO properties. During 2014, we recorded net OREO income of $272 thousand, as compared to net OREO expense of $2.3
million in 2013. During 2014, we recorded gains on the sale of OREO properties of $1.8 million, wrote-down the fair value of OREO properties by $224
thousand and recorded net operating expenses of $1.4 million. This compares to net gains on the sale of OREO properties of $3.2 million, wrote-
down the value of OREO properties by $3.5 million and recorded net operating expenses of $2.0 million in 2013.
Net OREO expense decreased $7.1 million, or 75.6%, to $2.3 million in 2013, as compared to $9.4 million in 2012, primarily due to a reduction in the
number of OREO properties held resulting in a decrease in net operating expense of $1.7 million and a decrease in write-downs in the value of OREO
properties of $3.2 million. Also contributing to the decrease in net OREO expense in 2013, as compared to 2012, were increases of $2.2 million in net
gains on the sale of OREO properties.
Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. Mortgage servicing rights
amortization expense decreased $426 thousand, or 15.3%, to $2.4 million in 2014, as compared to $2.8 million in 2013, and decreased $714 thousand,
or 20.4%, to $2.8 million in 2013, as compared to $3.5 million in 2012, primarily due to declines in prepayment rates and the resulting extension in the
estimated period over which net servicing income is expected to be received.
Mortgage servicing rights are evaluated quarterly for impairment based on the fair value of the mortgage servicing rights. The fair value of
mortgage servicing rights is estimated by discounting the expected future cash flows, taking into consideration the estimated level of prepayments
based on current industry expectations and the predominant risk characteristics of the underlying loans. Impairment adjustments are recorded
through a valuation allowance. The valuation allowance is adjusted for changes in impairment through a charge to current period earnings.
Fluctuations in the fair value of mortgage servicing rights are primarily due to changes in assumptions regarding prepayments of the underlying
mortgage loans, which typically correspond with changes in market interest rates. During 2014, we reversed previously recorded impairment of $136
thousand, compared to the reversal of reversed previously recorded impairment of $99 thousand in 2013, and the reversal of previously recorded
impairment of $771 thousand in 2012.
Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed and are amortized
based on the estimated useful lives of the related deposits. We recorded core deposit intangible assets of $11 million in conjunction with the
acquisition of MWFC. These intangibles are being amortized using an accelerated method over the estimated useful lives of the related deposits of
ten years. Accordingly, core deposit intangible amortization expense increased $833 thousand, or 58.7%, to $2.3 million during 2014, as compared to
$1.4 million during 2013 and 2012.
Other expenses primarily include advertising and public relations costs; office supply, postage, freight, telephone and travel expenses;
donations expense; debit and credit card expenses; board of director fees; and other losses. Other expenses increased $4.2 million, or 9.6%, to $47.5
million in 2014, as compared to $43.3 million in 2013, primarily due to additional expenses associated with the acquisition of MWFC.
Other expense decreased $2.6 million, or 5.6%, to $43.3 million in 2013, as compared to $45.9 million in 2012. During 2012, we recorded $1.5 million
of donations expense in conjunction with the sale of a bank building to a charitable organization and $428 thousand of unamortized issuance costs
associated with the redemption of junior subordinated debentures.
During 2014, we recorded loss contingency expense of $4.0 million related to a non-final judgment entered against us in an on-going lender
liability lawsuit. For additional information regarding this pending litigation, see “Notes to Consolidated Financial Statements—Commitments and
Contingencies,” included in Part IV, Item 15 of this report. During 2012, we recorded loss contingency expense of $3.0 million for estimated loan
collection and settlement costs related to a lender liability lawsuit.
During 2014, we recorded $4.0 of acquisition expenses, including legal and professional fees, employee retention payments and travel expenses,
related to the MWFC acquisition in July 2014. For additional information regarding the acquisition, see "Recent Developments" included herein and
“Notes to Consolidated Financial Statements—Acquisition,” included in Part IV, Item 15 of this report.
38
Table of Contents
Income Tax Expense
Our effective federal tax rate was 31.6% for the year ended December 31, 2014, 30.8% for the year ended December 31, 2013 and 29.6% for the
year ended December 31, 2012. Increases in effective federal income tax rates are primarily due to higher levels of taxable income without a
proportional increase in tax exempt interest income on loan and investment securities.
State income tax applies primarily to pretax earnings generated within Montana and South Dakota. Our effective state tax rate was 3.2% for the
year ended December 31, 2014, 4.3% for the year ended December 31, 2013 and 4.4% for the year ended December 31, 2012.
Net Income Available to Common Shareholders
Net income available to common shareholders was $84.4 million, or $1.87 per diluted share, in 2014, compared to $86.1 million, or $1.96 per diluted
share, in 2013 and $54.9 million, or $1.27 per diluted share, in 2012.
Summary of Quarterly Results
The following table presents unaudited quarterly results of operations for the fiscal years ended December 31, 2014 and 2013.
Quarterly Results
(Dollars in thousands except per share data)
Year Ended December 31, 2014:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends paid per common share
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
64,185 $
4,458
59,727
(2,001)
61,728
26,571
55,920
32,379
11,302
21,077 $
0.48 $
0.47
0.16
69,728 $
4,646
65,082
261
64,821
29,363
64,958
29,226
10,071
19,155 $
0.43 $
0.42
0.16
70,467 $
4,951
65,516
118
65,398
31,361
61,653
35,106
12,330
22,776 $
0.50 $
0.49
0.16
267,067
18,606
248,461
(6,622)
255,083
111,401
236,869
129,615
45,214
84,401
1.89
1.87
0.64
62,687 $
4,551
58,136
(5,000)
63,136
24,106
54,338
32,904
11,511
21,393 $
0.49 $
0.48
0.16
39
Table of Contents
Quarterly Results (continued)
(Dollars in thousands except per share data)
Year Ended December 31, 2013:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends paid per common share
Financial Condition
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
$
$
$
65,067 $
5,790
59,277
500
58,777
28,819
56,685
30,911
10,867
20,044 $
0.46 $
0.46
—
63,956 $
5,196
58,760
375
58,385
29,579
55,020
32,944
11,439
21,505 $
0.49 $
0.49
0.13
63,929 $
4,973
58,956
(3,000)
61,956
27,607
52,579
36,984
13,172
23,812 $
0.54 $
0.54
0.14
64,710 $
4,736
59,974
(4,000)
63,974
25,674
57,785
31,863
11,088
20,775 $
0.47 $
0.47
0.14
257,662
20,695
236,967
(6,125)
243,092
111,679
222,069
132,702
46,566
86,136
1.98
1.96
0.41
Total assets increased $1,045 million, or 13.8%, to $8,610 million as of December 31, 2014, from $7,565 million as of December 31, 2013, with
approximately $612 million of the increase attributable to the MWFC acquisition. Exclusive of the acquired MWFC assets, total assets increased
$433 million, or 5.7%, compared to December 31, 2013, primarily due to organic deposit growth. Total assets decreased $157 million, or 2.0%, to
$7,565 million as of December 31, 2013, from $7,722 million as of December 31, 2012, due to lower outstanding funding sources, including deposits
and repurchase agreements.
Loans
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and other loans, including fixed and variable rate loans.
Fluctuations in the loan portfolio are directly related to the economies of the communities we serve. While each loan originated generally must meet
minimum underwriting standards established in our credit policies, lending officers are granted certain levels of authority in approving and pricing
loans to assure that the banking offices are responsive to competitive issues and community needs in each market area. For additional information
regarding our underwriting standards and loan approval policies, see "Community Banking—Lending Activities", included in Part I, Item I of this
report.
Total loans increased $553 million, or 12.7%, to $4,897 million as of December 31, 2014, from $4,345 million as of December 31, 2013, with
approximately $360 million of the increase attributable to the MWFC acquisition. Exclusive of the acquired MWFC loans, total loans increased $193
million, or 4.4%, compared to December 31, 2013, with the most notable organic growth occurring in residential real estate and consumer loans. Total
loans increased $121 million, or 2.9%, to $4,345 million as of December 31, 2013, from $4,224 million as of December 31, 2012, primarily due to growth
in residential real estate loans.
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The following table presents the composition of our loan portfolio as of the dates indicated:
Loans Outstanding
(Dollars in thousands)
Loans
Real estate:
Commercial
$
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Other loans
Mortgage loans held
for sale
Total loans
Less allowance for loan
losses
Net loans
Ratio of allowance to
total loans
2014
Percent
2013
Percent
2012
Percent
2011
Percent
2010
Percent
As of December 31,
1,639,422
418,269
999,903
167,659
762,471
740,073
124,859
3,959
33.5% $
8.5
20.4
3.4
15.6
15.1
2.6
0.1
1,449,174
351,635
867,912
173,534
671,587
676,544
111,872
1,734
33.3% $
8.1
20.0
4.0
15.5
15.6
2.6
—
1,497,272
334,529
708,339
177,244
636,794
688,753
113,627
912
35.4% $
7.9
16.8
4.2
15.1
16.3
2.8
—
1,553,155
400,773
571,943
175,302
616,071
693,261
119,710
2,813
37.1% $
9.6
13.7
4.2
14.7
16.6
2.8
—
1,565,665
527,458
549,604
182,794
646,580
730,471
116,546
2,383
35.8%
12.1
12.6
4.2
14.8
16.7
2.7
0.1
40,828
4,897,443
0.8
100.0%
40,861
4,344,853
0.9
100.0%
66,442
4,223,912
1.3
100.0%
53,521
4,186,549
1.3
100.0%
46,408
4,367,909
1.0
100.0%
74,200
4,823,243
$
85,339
4,259,514
$
100,511
4,123,401
$
112,581
4,073,968
$
120,480
4,247,429
$
1.52%
1.96%
2.38%
2.69%
2.76%
Real Estate Loans. We provide interim construction and permanent financing for both single-family and multi-unit properties, medium-term
loans for commercial, agricultural and industrial property and/or buildings and equity lines of credit secured by real estate.
Commercial real estate loans. Commercial real estate loans include loans for property and improvements used commercially by the borrower or
for lease to others for the production of goods or services. Approximately 51% and 53% of our commercial real estate loans were owner occupied as
of December 31, 2014 and 2013, respectively. Commercial real estate loans increased $190 million, or 13.1%, to $1,639 million as of December 31, 2014,
from $1,449 million as of December 31, 2013. Exclusive of the MWFC acquired loans, commercial real estate loans decreased $25 million, or 1.7%,
from December 31, 2013, and decreased $48 million, or 3.2%, to $1,449 million as of December 31, 2013, from $1,497 million as of December 31, 2012.
Management attributes these decreases to weak loan demand combined with the movement of loans out of the portfolio through charge-off, pay-off
and foreclosure.
Construction loans. Construction loans are primarily to commercial builders for residential lot development and the construction of single-family
residences and commercial real estate properties. Construction loans are generally underwritten pursuant to pre-approved permanent financing.
During the construction phase the borrower pays interest only. As of December 31, 2014, our construction loan portfolio was divided among the
following categories: approximately $97 million, or 23.1%, residential construction; approximately $101 million, or 24.2%, commercial construction;
and, approximately $220 million, or 52.7%, land acquisition and development. As of December 31, 2013, our construction loan portfolio was divided
among the following categories: approximately $77 million, or 21.9%, residential construction; approximately $69 million, or 19.6%, commercial
construction; and, approximately $206 million, or 58.5%, land acquisition and development.
Construction loans grew $67 million, or 18.9%, to $418 million as of December 31, 2014, from $352 million as of December 31, 2013. Exclusive of
the of the MWFC acquired loans, construction loans increased $37 million, or 10.4%, from December 31, 2013, and increased $17 million, or 5.1%, to
$352 million as of December 31, 2013, from $335 million as of December 31, 2012, primarily due to increased housing demand in our market areas
during 2014 and 2013.
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Residential real estate loans. Residential real estate loans grew $132 million, or 15.2%, to $1,000 million as of December 31, 2014, from $868 million
as of December 31, 2013, with approximately $48 million of the increase attributable to the MWFC acquisition. Exclusive of the MWFC acquired
loans, residential real estate loans grew $84 million, or 9.6%, from December 31, 2013, and increased $160 million, or 22.5%, to $868 million as of
December 31, 2013, from $708 million as of December 31, 2012, due to retention of certain residential loans in our portfolio and increased housing
demand in our market areas. Retained residential real estate loans are typically secured by first liens on the financed property and generally mature
in less than fifteen years. Included in residential real estate loans were home equity loans and lines of credit of $299 million as of December 31, 2014
and $272 million as of December 31, 2013.
Consumer Loans. Our consumer loans include direct personal loans, credit card loans and lines of credit; and indirect loans created when we
purchase consumer loan contracts advanced for the purchase of automobiles, boats and other consumer goods from the consumer product dealer
network within the market areas we serve. Personal loans and indirect dealer loans are generally secured by automobiles, recreational vehicles,
boats and other types of personal property and are made on an installment basis. Credit cards are offered to customers in our market areas. Lines of
credit are generally floating rate loans that are unsecured or secured by personal property. Approximately 72.5% and 70.9% of our consumer loans
as of December 31, 2014 and 2013, respectively, were indirect consumer loans.
Consumer loans increased $91 million, or 13.5%, to $762 million as of December 31, 2014, from $672 million as of December 31, 2013, with
approximately $9 million of increase attributable to the MWFC acquisition. Exclusive of the MWFC acquisition, consumer loans grew organically
$82 million, or 12.2%, from December 31, 2013, due to expansion of our indirect lending program within our existing market areas and increases in the
average loan amounts advanced in 2014. Consumer loans increased $35 million, or 5.5%, to $672 million as of December 31, 2013, from $637 million as
of December 31, 2012, due to expansion of our indirect lending program within our existing market areas.
Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small and medium-sized
manufacturing, wholesale, retail and service businesses for working capital needs and business expansions. Commercial loans generally include
lines of credit, business credit cards and loans with maturities of five years or less. The loans are generally made with business operations as the
primary source of repayment, but also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees.
Commercial loans increased $64 million, or 9.4%, to $740 million as of December 31, 2014, from $677 million as of December 31, 2013, with
approximately $48 million of increase attributable to the MWFC acquisition. Exclusive of the MWFC acquisition, commercial loans grew organically
$15 million, or 2.2%, from December 31, 2013. Commercial loans decreased $12 million, or 1.8%, to $677 million as of December 31, 2013, from $689
million as of December 31, 2012, due to weak loan demand combined with the movement of lower quality loans out of the loan portfolio through
charge-off, pay-off or foreclosure.
Agricultural Loans. Our agricultural loans generally consist of short and medium-term loans and lines of credit that are primarily used for crops,
livestock, equipment and general operations. Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid from
the operations of the farm or ranch. Agricultural loans generally have maturities of five years or less, with operating lines for one production
season. Agricultural loans increased $13 million, or 11.6%, to $125 million as of December 31, 2014, from $112 million as of December 31, 2013, with
approximately $2 million of increase attributable to the MWFC acquisition. Exclusive of the acquired loans, agricultural loans increased $11 million,
or 10.0%, from December 31, 2013. Agricultural loans decreased $2 million, or 1.5%, to $112 million as of December 31, 2013, from $114 million as of
December 31, 2012.
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The following table presents the maturity distribution of our loan portfolio and the sensitivity of the loans to changes in interest rates as of
December 31, 2014:
Maturities and Interest Rate Sensitivities
(Dollars in thousands)
Real estate
Consumer
Commercial
Agricultural
Other
Mortgage loans held for sale
Total loans
Loans at fixed interest rates
Loans at variable interest rates
Non-accrual loans
Total loans
Non-Performing Assets
Within
One Year
One Year to
Five Years
After
Five Years
$
$
$
$
1,028,758 $
248,153
410,395
101,971
3,959
40,828
1,834,064 $
1,114,968 $
719,096
—
1,834,064 $
1,405,558 $
453,505
255,096
21,292
—
—
2,135,451 $
1,382,040 $
753,411
—
2,135,451 $
790,937 $
60,813
74,582
1,596
—
—
927,928 $
258,942 $
606,804
62,182
927,928 $
Total
3,225,253
762,471
740,073
124,859
3,959
40,828
4,897,443
2,755,950
2,079,311
62,182
4,897,443
Non-performing assets include non-performing loans and OREO. The following table sets forth information regarding non-performing assets as
of the dates indicated:
Non-Performing Assets and Troubled Debt Restructurings
(Dollars in thousands)
As of December 31,
Non-performing loans:
Nonaccrual loans
Accruing loans past due 90 days or more
Total non-performing loans
OREO
Total non-performing assets
Troubled debt restructurings not included above (1)
Non-performing loans to total loans (2)
Non-performing assets to total loans and OREO (3)
Non-performing assets to total assets (4)
Allowance for loan losses to non-performing loans (5)
2014
2013
2012
2011
2010
$
$
$
62,182 $
2,576
64,758
13,554
78,312 $
94,439 $
2,232
96,671
15,504
112,175 $
107,799 $
2,277
110,076
32,571
142,647 $
199,983 $
4,111
204,094
37,452
241,546 $
195,342
1,852
197,194
33,632
230,826
20,952 $
21,780 $
31,932 $
37,376 $
13,490
1.32%
1.59
0.91
114.58
2.22%
2.57
1.48
88.28
2.61%
3.35
1.85
91.31
4.87%
5.72
3.30
55.16
4.51%
5.24
3.08
61.10
(1) Accruing loans modified in troubled debt restructurings are not considered non-performing loans. While still considered impaired under
applicable accounting guidance, these loans are performing as agreed under their modified terms and management expects performance to
continue.
(2)Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing loans to total loans would be 1.75%, 2.73%,
3.36%, 5.77%, and 4.82% as of December 31, 2014, 2013, 2012, 2011, and 2010, respectively.
(3)Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to total loans and OREO would be
2.02%, 3.07%, 4.10%, 6.60%, 5.55% and 3.57% as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
(4)Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to total assets would be 1.15%,
1.77%, 2.26%, 3.81%, and 3.26% as of December 31, 2014, 2013, 2012, 2011, and 2010, respectively.
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(5) Including accruing troubled debt restructurings described in footnote 1, the ratio of allowance for loan losses to non-performing loans would
be 86.57%, 72.05%, 70.78%, 46.62%, and 57.19% as of December 31, 2014, 2013, 2012, 2011, and 2010, respectively.
Non-performing loans. Non-performing loans include non-accrual loans and loans contractually past due 90 days or more and still accruing
interest. Impaired loans 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. We monitor and evaluate collateral values on impaired loans quarterly. Appraisals are required
on all impaired loans every 18-24 months, or sooner as conditions necessitate. We monitor real estate values by market for our larger market areas.
Based on trends in real estate values, adjustments may be made to the appraised value based on time elapsed between the appraisal date and the
impairment analysis or a new appraisal may be ordered. Appraised values in our smaller market areas may be adjusted based on trends identified
through discussions with local realtors and appraisers. Appraisals are also adjusted for selling costs. The adjusted appraised value is then
compared to the loan balance and any resulting shortfall is recorded in the allowance for loan losses as a specific valuation allowance. Overall
increases in specific valuation allowances will result in higher provisions for loan losses. Provisions for loan losses are also impacted by changes in
the historical or general valuation elements of the allowance for loan losses as well.
The following table sets forth the allocation of our non-performing loans among our different types of loans as of the dates indicated.
Non-Performing Loans by Loan Type
(Dollars in thousands)
As of December 31,
Real estate
Consumer
Commercial
Agricultural
Total non-performing loans
2014
2013
2012
2011
2010
$
$
50,184 $
1,282
12,846
446
64,758 $
82,709 $
1,350
12,487
125
96,671 $
97,005 $
1,727
10,819
525
110,076 $
182,709 $
2,054
18,462
869
204,094 $
161,484
2,705
31,912
1,093
197,194
As of December 31, 2014, our non-performing real estate loans were divided among the following categories: $8 million, or 16.4%, land and land
development; $28 million, or 55.2%, commercial; $3 million, or 5.1% other construction; $272 thousand or 0.6% residential construction; $4 million, or
9.1%, residential; and, $7 million, or 13.6%, agricultural.
As of December 31, 2013, our non-performing real estate loans were divided among the following categories: $16 million, or 19.7%, land and land
development; $49 million, or 59.2%, commercial; $2 million, or 1.9% residential construction; $7 million, or 8.8%, residential; and, $9 million, or 10.4%,
agricultural.
Total non-performing loans decreased $32 million, or 33.0%, to $65 million as of December 31, 2014, from $97 million as of December 31, 2013, and
$13 million, or 12.2%, to $97 million as of December 31, 2013, from $110 million as of December 31, 2012. Non-accrual loans, the largest component of
non-performing loans, decreased $32 million, or 34.2%, to $62 million as of December 31, 2014, from $94 million as of December 31, 2013, primarily due
to pay-downs and the return of performing loans to accrual status. Non-accrual loans decreased $14 million, or 12.4%, to $94 million as of December
31, 2013, from $108 million as of December 31, 2012, primarily due to movement of lower quality loans out of the loan portfolio through charge-off,
pay-off or foreclosure. As of December 31, 2014, approximately 44% of our non-accrual loans were commercial real estate loans and approximately
13% were land acquisition and development loans.
We generally place loans on non-accrual when they become 90 days past due, unless they are well secured and in the process of collection.
When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. Approximately $4.0 million,
$4.6 million and $8.5 million of gross interest income would have been accrued if all loans on non-accrual had been current in accordance with their
original terms for the years ended December 31, 2014, 2013 and 2012, respectively.
Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and when, in the opinion of
management, the loans are estimated to be fully collectible as to both principal and interest. Loans returned to accrual status are no longer
considered impaired.
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For additional information regarding non-performing loans, see “Notes to Consolidated Financial Statements—Loans” included in financial
statements included Part IV, Item 15 of this report.
OREO. OREO consists of real property acquired through foreclosure on the collateral underlying defaulted loans. We initially record OREO at
fair value less estimated selling costs. Any excess of loan carrying value over the fair value of the real estate acquired is recorded as charge against
the allowance for loan losses. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings in the
period in which they are identified. The fair values of OREO properties are estimated using appraisals and management estimates of current market
conditions. OREO properties are appraised every 18-24 months unless deterioration in local market conditions indicates the need to obtain new
appraisals sooner. OREO properties are evaluated by management quarterly to determine if additional write-downs are appropriate or necessary
based on current market conditions. Quarterly evaluations include a review of the most recent appraisal of the property and reviews of recent
appraisals and comparable sales data for similar properties in the same or adjacent market areas. Commercial and agricultural OREO properties are
listed with unrelated third party professional real estate agents or brokers local to the areas where the marketed properties are located. Residential
properties are typically listed with local realtors, after any redemption period has expired. We rely on these local real estate agents and/or brokers to
list the properties on the local multiple listing system, to provide marketing materials and advertisements for the properties and to conduct open
houses.
OREO decreased $2 million, or 12.6%, to $14 million as of December 31, 2014, from $16 million as of December 31, 2013. During 2014, we recorded
additions to OREO of $9 million, $4 million of which were acquired in conjunction with the MWFC acquisition, wrote down the fair value of OREO
properties by $224 thousand and sold OREO with a book value of $11 million. As of December 31, 2014, 44% of our OREO balance related to land
and land development properties, 34% to commercial properties, 20% to residential real estate properties and 2% to agricultural real estate
properties.
OREO decreased $17 million, or 52.4%, to $16 million as of December 31, 2013, from $33 million as of December 31, 2012. During 2013,we recorded
additions to OREO of $12 million, wrote down the fair value of OREO properties by $4 million and sold OREO with a book value of $25 million.
Approximately 39% of OREO sales in 2013 were of residential real estate and approximately 33% were commercial properties. As of December 31,
2013, 59% of our OREO balance related to land and land development properties, 25% to commercial properties, 15% to residential real estate
properties and 1% to agricultural real estate properties.
Troubled Debt Restructurings. 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, 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 we, for economic or legal reasons, grant a concession to the borrower that we would not
otherwise consider. Those modifications deemed to be troubled debt restructurings are monitored centrally to ensure proper classification as a
troubled debt restructuring and if or when the loan may be placed on accrual status.
As of December 31, 2014, we had loans renegotiated in troubled debt restructurings of $44 million, of which $23 million were reported as non-
accrual loans in the non-performing asset and troubled debt restructurings and non-performing loan tables above. The remaining $21 million were
on accrual status and are reported as troubled debt restructurings in the non-performing asset and troubled debt restructurings table above.
As of December 31, 2013, we had loans renegotiated in troubled debt restructurings of $60 million, of which $38 million were reported as non-
accrual loans in the non-performing asset and troubled debt restructuring and non-performing loan tables above. The remaining $22 million were on
accrual status and are reported as troubled debt restructurings in the non-performing asset and troubled debt restructurings table above.
For additional information regarding loans modified in troubled debt restructurings, see “Notes to Consolidated Financial Statements—Loans”
included in financial statements included Part IV, Item 15 of this report.
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Allowance for Loan Losses
The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with generally accepted
accounting principles. The methodology used to assess the adequacy is consistently applied to the Company's loan portfolio. The allowance for
loan losses is established through a provision for loan losses based on our evaluation of known and inherent risk in our loan portfolio at each
balance sheet date. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss
can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of
loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends,
current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. See the discussion under
“Critical Accounting Estimates and Significant Accounting Policies — Allowance for Loan Losses” above.
The allowance for loan losses is increased by provisions charged against earnings and net recoveries of charged-off loans and is reduced by
negative provisions credited to earnings and net loan charge-offs. Loans, or portions thereof, are charged-off when management believes that the
collectibility of the principal is unlikely or, with respect to consumer installment and credit card loans, according to established delinquency
schedules.
The allowance for loan losses consists of three elements:
(1) Specific valuation allowances associated with impaired loans. Specific valuation allowances are determined based on assessment of the fair
value of the collateral underlying the loans as determined through independent appraisals, the present value of future cash flows,
observable market prices and any relevant qualitative or environmental factors impacting the loan. No specific valuation allowances are
recorded for impaired loans that are adequately secured.
(2) Historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends. Historical valuation
allowances are determined by applying percentage loss factors to the credit exposures from outstanding loans. For commercial, agricultural
and real estate loans, loss factors are applied based on the internal risk classifications of these loans. For consumer loans, loss factors are
applied on a portfolio basis. For commercial, agriculture and real estate loans, loss factor percentages are based on a migration analysis of
our historical loss experience, designed to account for credit deterioration. For consumer loans, loss factor percentages are based on a
one-year loss history.
(3) General valuation allowances determined based on changes in the nature of the loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, general economic conditions and other qualitative risk factors both internal and external to us.
Based on the assessment of the adequacy of the allowance for loan losses, management records provisions for loan losses to maintain the
allowance for loan losses at appropriate levels.
Loans acquired in business combinations are recorded at fair value with no allowance for loan losses on the date of acquisition. Subsequent to
the acquisition date, an allowance for loan loss is recorded for the emergence of new probable and estimable losses on loans acquired without
evidence of credit impairment. Loans acquired with evidence of credit impairment are regularly monitored and to the extent that the performance has
deteriorated from management's expectations at the date of acquisition, an allowance for loan losses is established. As of December 31, 2014,
management determined that an allowance for loan losses related to acquired loans of $287 thousand was required under generally accepted
accounting principles.
Loans, or portions thereof, are charged-off against the allowance for loan losses when management believes that the collectability of the
principal is unlikely, or, with respect to consumer installment loans, according to an established delinquency schedule. Generally, loans are charged-
off when (1) there has been no material principal reduction within the previous 90 days and there is no pending sale of collateral or other assets, (2)
there is no significant or pending event which will result in principal reduction within the upcoming 90 days, (3) it is clear that we will not be able to
collect all or a portion of the loan, (4) payments on the loan are sporadic, will result in an excessive amortization or are not consistent with the
collateral held and (5) foreclosure or repossession actions are pending. Loan charge-offs do not directly correspond with the receipt of independent
appraisals or the use of observable market data if the collateral value is determined to be sufficient to repay the principal balance of the loan.
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If the impaired loan is adequately collateralized, a specific valuation allowance is not recorded. As such, significant changes in impaired and
non-performing loans do not necessarily correspond proportionally with changes in the specific valuation component of the allowance for loan
losses. Additionally, management expects the timing of charge-offs will vary between quarters and will not necessarily correspond proportionally to
changes in the allowance for loan losses or changes in non-performing or impaired loans due to timing differences among the initial identification of
an impaired loan, recording of a specific valuation allowance for the impaired loan and any resulting charge-off of uncollectible principal.
Based on declines in national, regional and local economies which began in 2008, we recorded additional general valuation allowances based
on management's estimation of the probable impact that the declines would have on our loan portfolio. Accordingly, we recorded significantly
higher provisions for loan losses in 2010 and the first half of 2011 to maintain the allowance for loan losses at appropriate levels. Impaired and non-
performing loans peaked in mid-2011 and our provision for loan losses, which began decreasing during the last half of 2011, continued to decrease
through 2014, with negative provisions recorded during the last half of 2013 and the first half of 2014. Management expects that non-performing and
impaired loans will continue to decline as previously identified problem loans make their way through the credit cycle and the volume of newly
identified non-performing and impaired loans decreases as economic conditions in our market areas continue to improve.
The following table sets forth information concerning our allowance for loan losses as of the dates and for the periods indicated.
Allowance for Loan Losses
(Dollars in thousands)
As of and for the year ended December 31,
2014
2013
Balance at the beginning of period
Charge-offs:
Real estate
$
85,339 $
100,511 $
2012
112,581 $
2011
2010
120,480 $
103,030
Commercial
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Total charge-offs
Recoveries:
Real estate
Commercial
Construction
Residential
Agricultural
Consumer
Commercial
Agricultural
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Period end loans
Average loans
Net charge-offs to average loans
Allowance to period-end loans
4,430
3,515
2,177
102
4,612
5,672
5
20,513
13,014
25,510
4,879
103
5,320
11,990
120
60,936
13,227
26,125
6,199
213
6,043
19,332
142
71,281
3,644
2,010
424
9
2,059
3,293
27
11,466
9,047
(6,125)
85,339 $
4,344,853 $
4,281,673
0.21%
1.96
907
2,022
310
2
1,945
2,905
25
8,116
52,820
40,750
100,511 $
4,223,912 $
4,176,439
1.26%
2.38
293
1,641
201
—
1,739
1,344
13
5,231
66,050
58,151
112,581 $
4,186,549 $
4,275,128
1.54%
2.69
8,980
19,989
3,511
2,238
7,577
10,023
21
52,339
34
213
132
—
2,053
436
21
2,889
49,450
66,900
120,480
4,367,909
4,482,218
1.10%
2.76
2,042
328
637
7
4,887
6,030
64
13,995
953
2,009
358
3
2,347
3,781
27
9,478
4,517
(6,622)
74,200 $
4,897,443 $
4,602,907
0.10%
1.52
47
$
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The allowance for loan losses was $74 million, or 1.52% of period-end loans, at December 31, 2014, compared to $85 million, or 1.96% of period-
end loans, at December 31, 2013, and $101 million, or 2.38% of period-end loans, at December 31, 2012. Decreases in the allowance for loan losses as
a percentage of total loans as of December 31, 2014, compared to December 31, 2013, were largely due to the acquisition of MWFC loans, which
were initially recorded at fair value with no carryover of the related allowance for loan losses. The decreases in the allowance for loan losses as a
percentage of total loans as of December 31, 2013, as compared to December 31, 2012, were primarily due to decreases in specific reserves on
impaired loans and lower general reserves reflective of decreases in past due, non-performing and internally risk classified loans.
Net charge-offs in 2014 decreased $4 million, or 50.1%, to $5 million, or 0.10% of average loans in 2014, as compared to $9 million, or 0.21% of
average loans in 2013. Net charge-offs in 2013 decreased $44 million, or 82.9%, to $9 million, or 0.21% of average loans in 2013, from $53 million, or
1.26% of average loans in 2012.
Although we believe that we have established our allowance for loan losses in accordance with accounting principles generally accepted in the
United States and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times during the
five-year period ended December 31, 2014, future provisions will be subject to on-going evaluations of the risks in the loan portfolio. If the economy
declines or asset quality deteriorates, material additional provisions could be required.
The allowance for loan losses is allocated to loan categories based on the relative risk characteristics, asset classifications and actual loss
experience of the loan portfolio. The following table provides a summary of the allocation of the allowance for loan losses for specific loan
categories as of the dates indicated. The allocations presented should not be interpreted as an indication that charges to the allowance for loan
losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total
amount available for future losses that may occur within these categories. The unallocated portion of the allowance for loan losses and the total
allowance are applicable to the entire loan portfolio.
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
As of December 31,
2014
2013
2012
2011
2010
Real estate
Consumer
Commercial
Agricultural
Other loans
Mortgage loans
held for sale
Unallocated
Totals
$
$
Allocated
Reserves
53,884
5,035
14,307
974
—
—
—
74,200
% of
Loan
Category
to Total
Loans
65.9% $
15.6
15.1
2.5
0.1
0.8
N/A
100.0% $
Allocated
Reserves
63,923
6,193
14,747
476
—
—
—
85,339
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
% of
Loan
Category
to Total
Loans
Allocated
Reserves
% of
Loan
Category
to Total
Loans
Allocated
Reserves
65.4% $
15.5
15.6
2.6
—
75,782
7,141
17,085
503
—
64.3% $
15.1
16.3
2.7
—
87,396
8,594
15,325
1,266
—
64.6% $
14.7
16.6
2.8
—
84,181
9,332
25,354
1,613
—
0.9
N/A
100.0% $
—
—
100,511
1.6
N/A
100.0% $
—
—
112,581
1.3
N/A
100.0% $
—
—
120,480
64.7%
14.8
16.7
2.7
0.1
1.0
N/A
100.0%
The allowance for loan losses allocated to real estate loans decreased 15.7% to $54 million as of December 31, 2014, from $64 million as of
December 31, 2013, and decreased 15.6% to $64 million as of December 31 2013, from $76 million as of December 31, 2012, primarily due to
improvement in real estate values and housing demand in our market areas. The allowance for loan losses allocated to real estate loans decreased
13.3% to $76 million as of December 31, 2012, from $87 million as of December 31, 2011, and the allowance for loan losses allocated to commercial
loans decreased 39.6% to $15 million as of December 31, 2011, from $25 million as of December 31, 2010, primarily due to the charge-off of non-
performing loans.
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Investment Securities
We manage our investment portfolio to obtain the highest yield possible, while meeting our risk tolerance and liquidity guidelines and
satisfying the pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. Our portfolio
principally comprises U.S. government agency residential mortgage-backed securities and collateralized mortgage obligations, U.S. government
agency securities and tax exempt securities. Federal funds sold and interest bearing deposits in bank are additional investments that are classified
as cash equivalents rather than as investment securities. Investment securities classified as available-for-sale are recorded at fair value, while
investment securities classified as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the deferred tax effect, on
available-for-sale securities are reported as increases or decreases in accumulated other comprehensive income or loss, a component of
stockholders’ equity.
Investment securities increased $136 million, or 6.3%, to $2,287 million as of December 31, 2014, from $2,152 million as of December 31, 2013. In
conjunction with the MWFC acquisition, we acquired investment securities with fair values aggregating $105 million. Approximately $68 million of
these securities were immediately sold. Investment securities decreased $52 million, or 2.4%, to $2,152 million as of December 31, 2013, from $2,203
million as of December 31, 2012.
On June 27, 2014, we transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations
with amortized costs and fair values of $397 million and $389 million, respectively, into the held-to-maturity category. Net unrealized losses of $8
million included in accumulated other comprehensive income at the time of the transfer are being amortized to yield over the remaining expected
lives of the transferred securities of 4.3 years.
As of December 31, 2014, the estimated duration of our investment portfolio was 3.0 years, as compared to 3.7 years as of December 31, 2013.
The weighted average yield on investment securities decreased 7 basis points to 1.73% in 2014, from 1.80% in 2013, and 30 basis points to 1.80% in
2013, from 2.10% in 2012.
As of December 31, 2014, investment securities with amortized costs and fair values of $1,352 million and $1,356 million, respectively, were
pledged to secure public deposits and securities sold under repurchase agreements, as compared to $1,289 million and $1,279 million, respectively,
as of December 31, 2013. For additional information concerning securities sold under repurchase agreements, see “—Securities Sold Under
Repurchase Agreements” included herein.
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The following table sets forth the book value, percentage of total investment securities and weighted average yields on investment securities as
of December 31, 2014. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 35%.
Securities Maturities and Yield
(Dollars in thousands)
U.S. Government agency securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Mark-to-market adjustments on securities available-for-sale
Total
Mortgage-backed securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Mark-to-market adjustments on securities available-for-sale
Total
Tax exempt securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Mark-to-market adjustments on securities available-for-sale
Total
Corporate securities
Maturing within one year
Maturing in one to five years
Mark-to-market adjustments on securities available-for-sale
Total
Other securities
Maturing in five to ten years
Mark-to-market adjustments on securities available-for-sale
Total
Total
Book
Value
% of Total
Investment
Securities
Weighted
Average
FTE Yield
$
36,398
608,629
80,381
(4,475)
720,933
286,493
816,854
165,756
67,159
7,905
1,344,167
7,500
51,132
92,480
37,829
NA
188,941
8,037
24,528
NA
32,565
1.59 %
26.61
3.51
(0.20)
31.52
12.53
35.72
7.25
2.94
0.35
58.77
0.33
2.24
4.04
1.65
NA
8.26
0.35
1.07
NA
1.42
0.95%
1.15
1.68
NA
1.20
2.71
1.64
2.41
3.32
NA
2.15
3.55
3.56
4.88
4.70
NA
4.43
1.35
1.69
NA
1.60
504
NA
504
2,287,110
$
0.02
NA
0.02
100.00 %
7.67
NA
7.67
1.97%
Maturities of U.S. government agency securities noted above reflect $176 million of investment securities at their final maturities although they
have call provisions within the next year. Based on current market interest rates, management expects approximately $146 million of these securities
will be called in 2015.
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Mortgage-backed securities, and to a limited extent other securities, have uncertain cash flow characteristics that present additional interest rate
risk in the form of prepayment or extension risk primarily caused by changes in market interest rates. This additional risk is generally rewarded in the
form of higher yields. Maturities of mortgage-backed securities presented above have been adjusted to reflect shorter maturities based upon
estimated prepayments of principal. As of December 31, 2014, the carrying value of our investments in non-agency mortgage-backed securities
totaled $322 thousand. All other mortgage-backed securities included in the table above were issued by U.S. government agencies and
corporations. As of December 31, 2014, there were no significant concentrations of investments (greater than 10% of stockholders’ equity) in any
individual security issuer, except for U.S. government or agency-backed securities.
As of December 31, 2014, approximately 70% of our tax-exempt securities were general obligation securities, of which 52% were issued by
political subdivisions or agencies within the states of Montana, Wyoming and South Dakota.
As of December 31, 2013, we had U.S. government agency securities with carrying values of $763 million and a weighted average yield of 1.10%;
mortgage-backed securities with carrying values of $1,184 million and a weighted average yield of 2.15%; tax exempt securities with carrying values
of $186 million and a weighted average tax equivalent yield of 4.65%; and, corporate securities with carrying values of $18 million and a weighted
average yield of 1.20%.
As of December 31, 2012, we had U.S. government agency securities with carrying values of $755 million and a weighted average yield of 0.92%;
mortgage-backed securities with carrying values of $1,240 million and a weighted average yield of 2.32%; tax exempt securities with carrying values
of $193 million and a weighted average tax equivalent yield of 4.89%; corporate securities with carrying values of $15 million and a weighted average
yield of 1.20%; and, other securities with carrying values of $373 thousand with no weighted average yield.
We evaluate our investment portfolio quarterly for other-than-temporary declines in the market value of individual investment securities. This
evaluation includes monitoring credit ratings; market, industry and corporate news; volatility in market prices; and, determining whether the market
value of a security has been below its cost for an extended period of time. As of December 31, 2014, we had investment securities with fair values of
$481 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities totaled $8 million as
of December 31, 2014, and were primarily attributable to changes in interest rates. No impairment losses were recorded during 2014, 2013 or 2012.
For additional information concerning investment securities, see “Notes to Consolidated Financial Statements — Investment Securities”
included in Part IV, Item 15.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold for one day periods and interest bearing deposits
in banks with original maturities of less than three months. Cash and cash equivalents increased $264 million, or 49.3%, to $799 million as of
December 31, 2014, from $535 million as of December 31, 2013, and decreased $267 million, or 33.3%, to $535 million as of December 31, 2013, from
$801 million as of December 31, 2012. Fluctuations in cash and cash equivalents occurred during the normal course of business and are not
reflective of changes in business plan or strategy.
Premises and Equipment
Premises and equipment increased $16 million, or 8.6%, to $195 million as of December 31, 2014, from $180 million as of December 31, 2013, and
decreased $8 million, or 4.2%, to $180 million as of December 31, 2013, from $188 million as of December 31, 2012. In conjunction with the MWFC
acquisition, we acquired premises and equipment with fair values aggregating $29 million. Subsequently, we sold $8 million of the vacated MWFC
premises and equipment at carrying value. In addition, during fourth quarter 2014, we sold two FIB bank buildings with carrying values of $2 million
at a net gain of $1.2 million.
Company-Owned Life Insurance
Company-owned life insurance increased $32 million, or 25.9% to $154 million as of December 31, 2014, from $122 million as of December 31, 2013.
In conjunction with the MWFC acquisition, we obtained group life insurance policies covering certain key employees of MWB. The net cash
surrender value of these policies was $13 million at December 31, 2014. In addition, in January 2014, we purchased an additional $15 million of life
insurance covering select officers of our bank subsidiary. For additional information regarding our company-owned life insurance, see “Notes to
Consolidated Financial Statements — Company-Owned Life Insurance” included in Part IV, Item 15.
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Deferred Tax Asset/Liability
Our net deferred tax asset decreased $7 million, or 59.9%, to $5 million as of December, 31, 2014, from $12 million as of December 31, 2013,
Increases in net deferred tax assets resulting from the MWFC acquisition were more than offset by decreases related to unrealized losses on
available-for-sale investment securities, reductions in temporary timing differences associated with our allowance for loan losses and increases in
deferred tax liabilities related to tax deductible goodwill from previous acquisitions.
Our net deferred tax asset increased $10 million, or 368.0%, to $12 million as of December 31, 2013, from $3 million as of December 31, 2012,
primarily due to increases in deferred tax assets related to net unrealized losses on available-for-sale investment securities.
Other Assets
Other assets increased $12 million, or 20.4%, to $73 million as of December 31, 2014, from $61 million as of December 31, 2013, primarily due to
other assets acquired in and increases in Federal Home Loan Bank and Federal Reserve Bank stock holding requirements resulting from the MWFC
acquisition. Other assets decreased $2 million, or 3.0%, to $61 million as of December 31, 2013, from $63 million as of December 31, 2012.
Deposits
We emphasize developing relationships with our customers in order to increase our core deposit base, which is our primary funding source. Our
deposits consist of non-interest bearing and interest bearing demand, savings, individual retirement and time deposit accounts.
The following table summarizes our deposits as of the dates indicated:
Deposits
(Dollars in thousands)
As of December 31,
2014
Percent
2013
Percent
2012
Percent
2011
Percent
2010
Percent
Non-interest bearing demand $ 1,791,364
Interest bearing:
25.5%
$ 1,491,683
24.3%
$ 1,495,309
24.0%
$ 1,271,709
21.8%
$ 1,063,869
18.0%
Demand
Savings
Time, $100 or more
Time, other
Total interest bearing
Total deposits
2,133,273
1,843,355
520,125
718,095
5,214,848
$ 7,006,212
30.5
26.3
7.4
10.2
74.5
100.0%
1,848,806
1,602,544
492,051
698,666
4,642,067
$ 6,133,750
30.2
26.1
8.0
11.4
75.7
100.0%
1,811,905
1,547,713
594,712
790,772
4,745,102
$ 6,240,411
29.0
24.8
9.5
12.7
76.0
100.0%
1,306,509
1,691,413
681,047
876,293
4,555,262
$ 5,826,971
22.4
29.0
11.7
15.1
78.2
100.0%
1,218,078
1,718,521
908,044
1,017,201
4,861,844
$ 5,925,713
20.5
29.0
15.3
17.2
82.0
100.0%
Total deposits increased $872 million, or 14.2%, to $7,006 million as of December 31, 2014, from $6,134 million as of December 31, 2013. We
acquired approximately $515 million of deposits in connection with the acquisition of MWFC, including approximately $67 million of non-interest
bearing demand deposits, $178 million of interest bearing demand deposits, $111 million of savings deposits, $68 million of time deposits of $100,000
or more, and $91 million of other time deposits. During 2014, the mix of deposits continued to shift from higher-costing time deposits to lower-
costing savings and demand deposits. Management attributes this shift to the continued low interest rate environment experienced during recent
years as many customers appear to have become less inclined to invest their funds for extended periods.
Total deposits decreased $107 million, or 1.7%, to $6,134 million as of December 31, 2013, from $6,240 million as of December 31, 2012. Total
deposits, which were at a historically high level as of December 31, 2012, returned to a more normalized level of $6,134 million as of December 31,
2013.
Non-Interest Bearing Demand. Non-interest bearing demand deposits increased $300 million, or 20.1%, to $1,791 million as of December 31, 2014,
from $1,492 million as of December 31, 2013. Exclusive of acquired MWFC deposits, non-interest bearing demand deposits increased $233 million, or
15.6%, compared to December 31, 2013, due to organic growth attributable to changes in customer liquidity combined with continued low interest
rates offered on alternative interest earning deposit products. Non-interest bearing demand deposits decreased $4 million, or less than 1.0%, to
$1,492 million as of December 31 2013, from $1,495 million as of December 31, 2012.
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Interest Bearing Demand. Interest bearing demand deposits increased $284 million, or 15.4%, to $2,133 million as of December 31, 2014, from
$1,849 million as of December 31, 2013. Exclusive of acquired MWFC deposits, interest bearing demand deposits increased $106 million, or 5.7%,
compared to December 31, 2013, due to organic growth attributable to changes in customer liquidity combined with continued low interest rates
offered on alternative interest earning deposit products. Interest bearing demand deposits increased $37 million, or 2.0%, to $1,849 million as of
December 31, 2013, from $1,812 million as of December 31, 2012.
Savings Deposits. Savings deposits increased $241 million, or 15.0%, to $1,843 million as of December 31, 2014, from $1,603 million as of
December 31, 2013. Exclusive of acquired MWFC deposits, savings deposits increased $130 million, or 8.1%, compared to December 31, 2013, due to
organic growth. Savings deposits increased $55 million, or 3.5%, to $1,603 million as of December 31, 2013, from $1,548 million as of December 31,
2012.
Time deposits of $100,000 or more. Time deposits of $100,000 or more increased $28 million, or 5.7% to $520 million as of December 31, 2014, from
$492 million as of December 31, 2013. Exclusive of deposits acquired in the MWFC acquisition, time deposits of $100,000 or more decreased
approximately $40 million, or 8.0%, from December 31, 2013, and decreased $103 million, or 17.3%, to $492 million as of December 31, 2013, from $595
million as of December 31, 2012, with the largest decreases occurring in time deposits maturing in over twelve months. Management attributes these
decreases to the impact of a continued low interest rate environment as many customers appear to have become less inclined to invest their funds
for extended periods. As of December 31, 2014 and 2013, we had no certificates of deposit issued in brokered transactions.
The following table presents the maturities of time deposits of $100,000 or more as of December 31, 2014.
Maturities of Time Deposits of $100,000 or More
(Dollars in thousands)
Maturing in 3 months or less
Maturing in 3-6 months
Maturing in 6-12 months
Maturing in over 12 months
Total time deposits of $100,000 or more
$
$
106,692
85,899
144,813
182,721
520,125
Other time deposits. Other time deposits increased $19 million, or 2.8%, to $718 million as of December 31, 2014, from $699 million as of December
31, 2013. Exclusive of deposits acquired in the MWFC acquisition, other time deposits decreased $72 million, or 10.3%, from December 31, 2013, and
decreased $92 million, or 11.6%, to $699 million as of December 31, 2013, from $791 million as of December 31, 2012. Management attributes these
decreases to the impact of a continued low interest rate environment as many customers appear to have become less inclined to invest their funds
for extended periods. We had Certificate of Deposit Account Registry Service, or CDARS, deposits of $40 million as of December 31, 2014, and $52
million as of December 31, 2013.
For additional information concerning customer deposits, including the use of repurchase agreements, see “Business—Community Banking—
Deposit Products,” included in Part I, Item 1 and “Notes to Consolidated Financial Statements—Deposits,” included in Part IV, Item 15 of this
report.
Securities Sold Under Repurchase Agreements
Under repurchase agreements with commercial and municipal depositors, customer deposit balances are invested in short-term U.S. government
agency securities overnight and are then repurchased the following day. All outstanding repurchase agreements are due in one day. Repurchase
agreement balances increased $45 million, or 9.8%, to $502 million as of December 31, 2014, from $457 million as of December 31, 2013, and decreased
$48 million, or 9.6%, to $457 million as of December 31, 2013, from $506 million as of December 31, 2012. Fluctuations in repurchase agreement
balances correspond with fluctuations in the liquidity of our customers.
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The following table sets forth certain information regarding securities sold under repurchase agreements as of the dates indicated:
Securities Sold Under Repurchase Agreements
(Dollars in thousands)
As of and for the year ended December 31,
Securities sold under repurchase agreements:
Balance at period end
Average balance
Maximum amount outstanding at any month-end
Average interest rate:
During the year
At period end
Preferred Stock Redemption
2014
2013
2012
$
502,250 $
454,265
547,153
457,437 $
456,840
533,965
505,785
501,192
541,032
0.05%
0.10
0.06%
0.07
0.12%
0.09
On January 18, 2013, we redeemed our perpetual preferred stock at an aggregate redemption price of $50 million, which represented par value of
the preferred stock plus unpaid and accrued dividends to the redemption date. Upon notice to holders of the redemption, which occurred in
December 2012, the preferred stock was reclassified from stockholder's equity to a liability in accordance with generally accepted accounting
principles.
Subordinated Debentures Held by Subsidiary Trusts
Subordinated debentures held by subsidiary trusts remained flat at $82 million as of December 31, 2014 and 2013. In conjunction with the
acquisition of MWFC, we assumed $20 million of subordinated debentures held by two business trusts, Mountain West Statutory Trust III and
Mountain West Statutory Trust IV (collectively, the “Mountain West Trusts”). On December 15, 2014, we redeemed $14 million of the Mountain
West Subordinated Debentures bearing a cumulative floating interest rate equal to LIBOR plus 1.85% per annum, and on December 26, 2014, we
redeemed the remaining $6 million of the Mountain West Subordinated Debentures bearing a cumulative floating interest rate equal to LIBOR plus
3.10% per annum. The redemption price of the Mountain West Subordinated Debentures was equal to the $1 liquidation amount of each debenture
plus all accrued and unpaid distributions to the date of redemption. The redemption of the Mountain West Subordinated Debentures caused a
mandatory redemption of $20 million of Mountain West Trust Preferred Securities and $614 thousand of common equity securities. For additional
information regarding the Subordinated Debentures, see “Notes to Consolidated Financial Statements—Subordinated Debentures Held by
Subsidiary Trusts,” included in Part IV, Item 15 of this report.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses increased $19 million, or 39.2%, to $66 million as of December 31, 2014, from $48 million as of December
31, 2013 , primarily due to the timing and amounts of corporate tax payments. Accounts payable and accrued expenses remained flat at $48 million as
of December 31, 2013 and 2012.
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Contractual Obligations
Contractual obligations as of December 31, 2014 are summarized in the following table.
Contractual Obligations
(Dollars in thousands)
Deposits without a stated maturity
Time deposits
Securities sold under repurchase agreements
Other borrowed funds (1)
Long-term debt obligations (2)
Capital lease obligations
Operating lease obligations
Purchase obligations (3)
Subordinated debentures held by subsidiary trusts (4)
Total contractual obligations
Within
One Year
One Year to
Three Years
Three Years
to Five Years
After
Five Years
Payments Due
$
$
5,767,992 $
803,986
502,250
9
225
60
2,808
20,887
—
7,098,217 $
— $
336,559
—
—
—
136
5,139
—
—
341,834 $
— $
97,661
—
—
35,000
160
3,212
—
—
136,033 $
— $
14
—
—
1,199
1,287
9,941
—
82,477
94,918 $
Total
5,767,992
1,238,220
502,250
9
36,424
1,643
21,100
20,887
82,477
7,671,002
(1)
(2)
(3)
(4)
Included in other borrowed funds are tax deposits made by customers pending subsequent withdrawal by the federal government. For
additional information concerning other borrowed funds, see “Notes to Consolidated Financial Statements — Long Term Debt and Other
Borrowed Funds” included in Part IV, Item 15.
Long-term debt obligations consists of a fixed rate note payable to FHLB bearing interest of 4.86% and maturing on October 31, 2015; fixed
rate note payable bearing interest of 6.24% and maturing on September 1, 2032; a fixed rate subordinated term loan bearing interest of
6.81% and maturing January 9, 2018; and a variable rate subordinated term loan maturing February 28, 2018. For additional information
concerning long-term debt, see “Notes to Consolidated Financial Statements — Long Term Debt and Other Borrowed Funds” included in
Part IV, Item 15.
Purchase obligations relate to obligations under construction contracts to build or renovate banking offices of $4 million and obligations
to purchase available-for-sale residential mortgage-backed securities of $17 million.
The subordinated debentures are unsecured, with various interest rates and maturities from December 15, 2037 through April 1, 2038.
Interest distributions are payable quarterly; however, we may defer interest payments at any time for a period not exceeding 20
consecutive quarters. For additional information concerning the subordinated debentures, see “Notes to Consolidated Financial
Statements — Subordinated Debentures Held by Subsidiary Trusts” included in Part IV, Item 15.
We also have obligations under a postretirement healthcare benefit plan. These obligations represent actuarially determined future benefit
payments to eligible plan participants. See “Notes to Consolidated Financial Statements — Employee Benefit Plans” included in Part IV, Item 15.
Off-Balance Sheet Arrangements
We have entered into various arrangements not reflected on the consolidated balance sheet that have or are reasonably likely to have a current
or future effect on our financial condition, results of operations or liquidity. These include guarantees, commitments to extend credit and standby
letters of credit.
We guarantee the distributions and payments for redemption or liquidation of capital trust preferred securities issued by our wholly-owned
subsidiary business trusts to the extent of funds held by the trusts. Although the guarantees are not separately recorded, the obligations
underlying the guarantees are fully reflected on our consolidated balance sheets as subordinated debentures held by subsidiary trusts. The
subordinated debentures currently qualify as tier 1 capital under the Federal Reserve capital adequacy guidelines. For additional information
regarding the subordinated debentures, see “Notes to Consolidated Financial Statements — Subordinated Debentures Held by Subsidiary Trusts”
included in Part IV, Item 15.
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We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit and standby letters of credit. For additional information regarding our
off-balance sheet arrangements, see “Notes to Consolidated Financial Statements — Financial Instruments with Off-Balance Sheet Risk” included in
Part IV, Item 15.
Capital Resources and Liquidity Management
Capital Resources
Stockholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and changes in the unrealized
holding gains or losses, net of taxes, on available-for-sale investment securities. Stockholders’ equity increased $107 million, or 13.4%, to
$909 million as of December 31, 2014 from $802 million as of December 31, 2013, due primarily to the retention of earnings, the issuance of 1,378,230
shares of Class A common stock with an aggregate value of $36 million as partial consideration for the acquisition of MWFC and decreases in net
unrealized losses on available-for-sale investment securities. We paid aggregate cash dividends of $28.6 million to common shareholders during
2014. On January 22, 2015, we declared a quarterly dividend to common stockholders of $0.20 per share, which was paid on February 13, 2015 to
shareholders of record as of February 2, 2015.
During 2014, we repurchased and retired 362,121 of our shares of Class A common stock in a combination of privately negotiated and open
market transactions at an aggregate purchase price of $9.1 million. The repurchases were made pursuant to a stock repurchase program approved by
our Board of Directors in November 2013, authorizing the repurchase of up to 2 million shares of our Class A common stock in open market or
privately negotiated transactions through November 14, 2014. On January 22, 2015, our Board of Directors approved the repurchase, from time to
time, of up to 1 million additional shares of our outstanding Class A common stock in open market or privately negotiated transactions. For
additional information regarding the repurchase, see “Notes to Consolidated Financial Statements — Capital Stock and Dividend Restrictions”
included in Part IV, Item 15 of this report.
On January 24, 2014, we filed a Registration Statement on Form S-8 to register an additional 1,500,000 shares of Class A common stock to be
issued pursuant to our 2006 Equity Compensation Plan, as amended and restated.
On May 24, 2013, we filed a shelf registration statement on Form S-3, which was subsequently declared effective by the SEC. The registration
statement permits us to offer and sell up to $160 million of our Class A common shares in one or more future public offerings. At the present time,
we have no specific plans to offer any of the securities covered by the registration statement.
Stockholders’ equity increased $50 million, or 6.7%, to $802 million as of December 31, 2013 from $751 million as of December 31, 2012, due
primarily to the retention of earnings, which was partially offset by increases in net unrealized losses on available-for-sale investment securities. We
paid aggregate cash dividends of $17.9 million to common shareholders during 2013.
Pursuant to the FDICIA, the Federal Reserve and FDIC have adopted regulations setting forth a five-tier system for measuring the capital
adequacy of the financial institutions they supervise. At December 31, 2014 and 2013, our Bank had capital levels that, in all cases, exceeded the
well capitalized guidelines. For additional information concerning our capital levels, see “Notes to Consolidated Financial Statements—Regulatory
Capital” contained in Part IV, Item 15 of this report.
On July 2, 2013, the Board of Governors of the Federal Reserve Bank, or the Federal Reserve Board, issued a final rule implementing a revised
regulatory capital framework for U.S. banks in accordance with the Basel III international accord and satisfying related mandates under the Dodd-
Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum capital requirements will increase for both quantity and
quality of capital held by banking organizations. The final rule includes a new common equity tier 1 minimum capital requirement of 4.5% of risk-
weighted assets and increases the minimum tier 1 capital requirement from 4.0% to 6.0% of risk-weighted assets. The minimum total risk-based
capital remains unchanged at 8.0% of total risk-weighted assets. In addition to the minimum common equity tier 1, tier 1 and total risk-based capital
requirements, the final rule requires banking organizations to hold a buffer of common equity tier 1 capital in an amount above 2.5% of total risk-
weighted assets to avoid restrictions on capital distributions and discretionary bonus payments to executive officers. The minimum regulatory
capital requirements and compliance with a standardized approach for determining risk-weighted assets of the final rule became effective for us on
January 1, 2015. The capital conservation buffer framework transition period begins January 1, 2016, with full implementation effective January 1,
2019.
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Our calculations indicate that as of December 31, 2014, we would meet all fully phased-in Basel III capital adequacy requirements. For additional
information regarding the impact of this final rule, see "Regulation and Supervision — Capital Standards and Prompt Corrective Action" included in
Part I, Item 1 of this report.
Liquidity
Liquidity measures our ability to meet current and future cash flow needs on a timely basis and at a reasonable cost. We manage our liquidity
position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return
on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and liabilities and access to
alternative sources of funds. Liquid assets include cash, interest bearing deposits in banks, federal funds sold, available-for-sale investment
securities and maturing or prepaying balances in our held-to-maturity investment and loan portfolios. Liquid liabilities include core deposits, federal
funds purchased, securities sold under repurchase agreements and borrowings. Other sources of liquidity include the sale of loans, the ability to
acquire additional national market funds through non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances,
the issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the issuance of preferred or common
securities. We do not engage in derivatives or hedging activities to support our liquidity position.
Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and
debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash
flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in
customer deposits. For additional information regarding our operating, investing and financing cash flows, see “Consolidated Financial
Statements—Consolidated Statements of Cash Flows,” included in Part IV, Item 15 of this report.
As a holding company, we are a corporation separate and apart from our subsidiary Bank and, therefore, we provide for our own liquidity. Our
main sources of funding include management fees and dividends declared and paid by our subsidiaries and access to capital markets. There are
statutory, regulatory and debt covenant limitations that affect the ability of our Bank to pay dividends to us. Management believes that such
limitations will not impact our ability to meet our ongoing short-term cash obligations. For additional information regarding dividend restrictions,
see “—Financial Condition—Capital Resources and Liquidity Management” above and “Business—Regulation and Supervision—Restrictions on
Transfers of Funds to Us and the Bank” and “Risk Factors—Our Bank’s ability to pay dividends to us is subject to regulatory limitations, which, to
the extent we are not able to receive such dividends, may impair our ability to grow, pay dividends, cover operating expenses and meet debt service
requirements.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk. Our business and the composition of our balance sheet consists of investments in interest
earning assets (principally loans and investment securities) which are primarily funded by interest bearing liabilities (deposits and indebtedness).
Such financial instruments have varying levels of sensitivity to changes in market interest rates. Interest rate risk results when, due to different
maturity dates and repricing intervals, interest rate indices for interest earning assets fluctuate adversely relative to interest bearing liabilities,
thereby creating a risk of decreased net earnings and cash flow.
Although we characterize some of our interest-sensitive assets as securities available-for-sale, such securities are not purchased with a view to
sell in the near term. Rather, such securities may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk.
See “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” included in Part IV, Item 15 of this report.
Asset Liability Management
The goal of asset liability management is the prudent control of market risk, liquidity and capital. Asset liability management is governed by
policies, goals and objectives adopted and reviewed by the Bank’s board of directors. Development of asset liability management strategies is the
responsibility of the Asset Liability Committee, or ALCO, which is composed of members of senior management.
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Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or long-term value due to changes in interest rates. Our primary source of earnings is the
net interest margin, which is affected by changes in interest rates, the relationship between rates on interest bearing assets and liabilities, the impact
of interest rate fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.
The ability to optimize the net interest margin is largely dependent upon the achievement of an interest rate spread that can be managed during
periods of fluctuating interest rates. Interest sensitivity is a measure of the extent to which net interest income will be affected by market interest
rates over a period of time. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest bearing
liabilities which either reprice or mature within a given period of time. The difference is known as interest rate sensitivity gap.
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio for different intervals as of December 31, 2014. The
information presented in the table is based on our mix of interest earning assets and interest bearing liabilities and historical experience regarding
their interest rate sensitivity.
Interest Rate Sensitivity Gaps
(Dollars in thousands)
Interest earning assets:
Loans (1)
Investment securities (2)
Interest bearing deposits in banks
Federal funds sold
Total interest earning assets
Interest bearing liabilities:
Interest bearing demand accounts (3)
Savings deposits (3)
Time deposits, $100 or more
Other time deposits
Securities sold under repurchase agreements
Other borrowed funds
Long-term debt
Subordinated debentures held by subsidiary trusts
Total interest bearing liabilities
Rate gap
Cumulative rate gap
Cumulative rate gap as a percentage of total interest
earning assets
Projected Maturity or Repricing
Three
Months
or Less
Three
Months to
One Year
One
Year to
Five Years
After
Five Years
$
$
$
$
$
1,492,364
159,574
650,233
543
2,302,714
576,092
911,685
106,692
205,753
502,250
9
15,015
82,477
2,399,973
$
$
$
$
(97,259) $
(97,259)
925,388
357,077
—
—
1,282,465
359,000
358,678
230,712
260,829
—
—
46
—
1,209,265
73,200
(24,059)
$
$
$
$
$
2,098,727 $
1,466,794
—
—
3,565,521 $
1,198,181 $
572,992
182,721
251,499
—
—
20,611
—
2,226,004 $
1,339,517 $
1,315,458
318,782 $
303,665
—
—
622,447 $
— $
—
—
14
—
—
2,395
—
2,409 $
620,038 $
1,935,496
Total
4,835,261
2,287,110
650,233
543
7,773,147
2,133,273
1,843,355
520,125
718,095
502,250
9
38,067
82,477
5,837,651
1,935,496
-1.25 %
-0.31 %
16.92%
24.90%
24.90%
(1)
(2)
Does not include non-accrual loans of $62 million. Variable rate loans are included in the three months or less category in the above table
although certain of these loans have reached interest rate floors and may not immediately reprice.
Adjusted to reflect: (a) expected shorter maturities based upon our historical experience of early prepayments of principal, and (b) the
redemption of callable securities on their next call date.
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(3)
Interest bearing demand and savings deposits, while technically subject to immediate withdrawal, actually display sensitivity
characteristics that generally fall within one to five years. Their allocation is presented based on those sensitivity characteristics. If these
deposits were included in the three month or less category, the above table would reflect a negative three month gap of $2.6 million, a
negative cumulative one year gap of $1.8 million and a positive cumulative one to five year gap of $1.3 million.
Net Interest Income Sensitivity
We believe net interest income sensitivity provides the best perspective of how day-to-day decisions affect our interest rate risk profile. We
monitor net interest margin sensitivity by utilizing an income simulation model to subject twelve month net interest income to various rate
movements. Simulations modeled quarterly include scenarios where market rates change suddenly up or down in a parallel manner and scenarios
where market rates gradually change up resulting in a change in the slope of the yield curve. Estimates produced by our income simulation model
are based on numerous assumptions including, but not limited to, the nature and timing of changes in interest rates, prepayments of loans and
investment securities, volume of loans originated, level and composition of deposits, ability of borrowers to repay adjustable or variable rate loans
and reinvestment opportunities for cash flows. Given these various assumptions, the actual effect of interest rate changes on our net interest
margin may be materially different than estimated.
We target a mix of interest earning assets and interest bearing liabilities such that no more than 5% of the net interest margin will be at risk over
a one-year period should interest rates shift up or down 2%. As of December 31, 2014, our income simulation model predicted net interest income
would decrease $1.6 million, or less than 1.0%, assuming a 0.5% increase in interest rates during each of the next four consecutive quarters. This
scenario predicts that our interest bearing liabilities reprice slightly faster than our interest earning assets. We have not engaged in significant
derivative or balance sheet hedging activities to manage our interest rate risk.
We did not simulate a decrease in interest rates due to the extremely low rate environment as of December 31, 2014. Prime rate has historically
been set at a rate of 300 basis points over the targeted federal funds rate, which is currently set between 0 and 25 basis points. Our income
simulation model has an assumption that prime will continue to be set at a rate of 300 basis points over the targeted federal funds rate. Additionally,
rates that are currently below 2% are modeled not to fall below 0% with an overall decrease of 2% in interest rates. Although we did not simulate a
decrease in interest rates due to the extremely low rate environment as of December 31, 2014, a further decline in interest rates would result in an
acceleration of the compression of our net interest margin.
The preceding interest rate sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected
operating results. In addition, if the actual prime rate falls below a 300 basis point spread to targeted federal funds rates, we could experience a
continued decrease in net interest income as a result of falling yields on earning assets tied to prime rate.
Recent Accounting Pronouncements
The expected impact of accounting standards recently issued but not yet adopted are discussed in “Notes to Consolidated Financial
Statements—Authoritative Accounting Guidance” included in Part IV, Item 15 of this report.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries are contained in Part IV, Item 15 of this
report and are incorporated herein by reference.
Report of McGladrey LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2014 and 2013
Consolidated Statements of Income — Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income — Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows — Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As
of December 31, 2014, our management evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of December 31, 2014, were effective in ensuring that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods required by the SEC’s rules and forms and is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal
control over financial reporting within the meaning of Rules 13a-15(f) and 15d-15(f) of the Exchange Act is designed to provide reasonable
assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements in
accordance with U.S. generally accepted accounting principles. Our management, including the Chief Executive Officer and the Chief Financial
Officer, assessed the effectiveness of our system of internal control over financial reporting as of December 31, 2014. In making this assessment, we
used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework. Based on our assessment, we believe that, as of December 31, 2014, our system of internal control over financial reporting was effective
to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
McGladrey LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual
Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2014.
The report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2014, is
included below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
We have audited First Interstate BancSystem Inc. and subsidiaries' internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. First Interstate BancSystem, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
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A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Interstate BancSystem, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of
income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 and our
report dated February 27, 2015 expressed an unqualified opinion.
/s/ MCGLADREY LLP
Des Moines, Iowa
February 27, 2015
There were no items required to be disclosed in a report on Form 8-K during the fourth quarter of 2014 that were not reported.
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning “Directors, Executive Officers and Corporate Governance” is set forth under the heading “Directors and Executive
Officers” in our Proxy Statement relating to our 2015 annual meeting of shareholders and is herein incorporated by reference.
Information concerning “Compliance With Section 16(a) of the Securities Exchange Act of 1934” is set forth under the heading “Section 16(a)
Beneficial Ownership Reporting Compliance” in our Proxy Statement relating to our 2015 annual meeting of shareholders and is herein incorporated
by reference.
Item 11. Executive Compensation
Information concerning “Executive Compensation” is set forth under the headings “Compensation of Executive Officers Compensation
Discussion and Analysis” and “Compensation of Executive Officers and Directors” in our Proxy Statement relating to our 2015 annual meeting of
shareholders and is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” is set forth
under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity
Compensation Plans” in our Proxy Statement relating to our 2015 annual meeting of shareholders and is herein incorporated by reference.
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Item 13. Certain Relationships and Related Transactions and Director Independence
Information concerning “Certain Relationships and Related Transactions and Director Independence” is set forth under the headings “Directors
and Executive Officers” and “Certain Relationships and Related Transactions” in our Proxy Statement relating to our 2015 annual meeting of
shareholders and is herein incorporated by reference. In addition, see “Notes to Consolidated Financial Statements — Related Party Transactions”
included in Part IV, Item 15.
Information concerning “Principal Accountant Fees and Services” is set forth under the heading “Directors and Executive Officers — Principal
Accounting Fees and Services” in our Proxy Statement relating to our 2015 annual meeting of shareholders and is herein incorporated by reference.
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Our audited consolidated financial statements follow.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc. and subsidiaries as of December 31, 2014
and 2013, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First
Interstate BancSystem, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Interstate
BancSystem, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated
February 27, 2015 expressed an unqualified opinion on the effectiveness of First Interstate BancSystem Inc. and subsidiaries’ internal control over
financial reporting.
/s/ MCGLADREY LLP
Des Moines, Iowa
February 27, 2015
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
Assets
Cash and due from banks
Federal funds sold
Interest bearing deposits in banks
Total cash and cash equivalents
Investment securities:
Available-for-sale
Held-to-maturity (estimated fair values of $584,533 and $205,926 at December 31, 2014 and 2013,
respectively)
Total investment securities
Loans held for investment
Mortgage loans held for sale
Total loans
Less allowance for loan losses
Net loans
Premises and equipment, net of accumulated depreciation
Goodwill
Company-owned life insurance
Other real estate owned (“OREO”)
Accrued interest receivable
Mortgage servicing rights, net of accumulated amortization and impairment reserve
Deferred tax asset, net
Core deposit intangibles, net of accumulated amortization
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Securities sold under repurchase agreements
Accounts payable and accrued expenses
Accrued interest payable
Long-term debt
Other borrowed funds
Subordinated debentures held by subsidiary trusts
Total liabilities
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued or
outstanding as of December 31, 2014 and 2013
Common stock
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
2014
2013
147,894 $
543
650,233
798,670
141,663
672
392,492
534,827
1,711,924
1,947,706
575,186
2,287,110
4,856,615
40,828
4,897,443
74,200
4,823,243
195,212
205,574
153,821
13,554
27,063
14,038
4,874
13,282
73,495
8,609,936 $
1,791,364 $
5,214,848
7,006,212
502,250
66,164
5,833
38,067
9
82,477
7,701,012
203,837
2,151,543
4,303,992
40,861
4,344,853
85,339
4,259,514
179,690
183,673
122,175
15,504
26,450
13,546
12,154
4,519
61,056
7,564,651
1,491,683
4,642,067
6,133,750
457,437
47,523
4,963
36,917
3
82,477
6,763,070
—
323,596
587,862
(2,534)
908,924
8,609,936 $
—
285,535
532,087
(16,041)
801,581
7,564,651
$
$
$
$
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
Interest income:
Interest and fees on loans
Interest and dividends on investment securities:
Taxable
Exempt from federal taxes
Interest on deposits in banks
Interest on federal funds sold
Total interest income
Interest expense:
Interest on deposits
Interest on securities sold under repurchase agreements
Interest on long-term debt
Interest on preferred stock pending redemption
Interest on subordinated debentures held by subsidiary trusts
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Other service charges, commissions and fees
Income from the origination and sale of loans
Wealth management revenues
Service charges on deposit accounts
Investment securities gains, net
Other income
Total non-interest income
Non-interest expense:
Salaries and wages
Employee benefits
Occupancy, net
Furniture and equipment
Outsourced technology services
FDIC insurance premiums
Professional fees
OREO expense, net of income
Mortgage servicing rights amortization
Mortgage servicing rights impairment recovery
Core deposit intangibles amortization
Other expenses
Loss contingency expense
Acquisition expenses
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
$
2014
2013
2012
$
231,469 $
220,687
$
230,882
29,900
4,357
1,334
7
267,067
13,779
237
2,016
—
2,574
18,606
248,461
(6,622)
255,083
40,742
23,940
18,996
16,567
61
11,095
111,401
96,513
30,130
17,796
13,816
9,423
4,608
4,882
(272)
2,361
(136)
2,251
47,480
4,000
4,017
236,869
129,615
45,214
84,401
—
84,401 $
31,237
4,728
992
18
257,662
15,800
294
1,936
159
2,506
20,695
236,967
(6,125)
243,092
35,977
34,254
17,085
16,837
1
7,525
111,679
94,002
30,338
16,587
12,554
9,029
5,057
4,773
2,291
2,787
(99)
1,418
43,332
—
—
222,069
132,702
46,566
86,136
—
86,136
$
36,847
4,923
1,235
13
273,900
22,306
579
1,981
131
5,117
30,114
243,786
40,750
203,036
34,226
41,790
14,314
17,412
348
6,771
114,861
89,833
29,345
15,786
12,859
8,826
6,470
4,044
9,400
3,501
(771)
1,420
45,922
3,000
—
229,635
88,262
30,038
58,224
3,300
54,924
Basic earnings per common share
Diluted earnings per common share
See accompanying notes to consolidated financial statements.
65
$
1.89 $
1.87
$
1.98
1.96
1.28
1.27
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year ended December 31,
Net income
Other comprehensive income (loss) before tax:
Investment securities available-for-sale:
Change in net unrealized gains (losses) during the period
Reclassification adjustment for net gains included in income
Change in unamortized gain (loss) on available-for-sale investment securities transferred
into held-to-maturity
Defined benefit post-retirement benefit plans:
Change in net actuarial loss
Other comprehensive income (loss), before tax
Deferred tax benefit (expense) related to other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying notes to consolidated financial statements.
66
2014
2013
2012
$
84,401
$
86,136
$
58,224
21,147
(61)
(52,949)
(1)
(548)
—
1,731
22,269
(8,762)
13,507
97,908
$
137
(52,813)
20,781
(32,032)
54,104
$
$
(4,648)
(348)
56
(77)
(5,017)
1,974
(3,043)
55,181
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$
$
50,000
—
—
$
266,842
—
—
$
435,144
58,224
—
19,034 $
—
(3,043)
771,020
58,224
(3,043)
Balance at December 31, 2011
Net income
Other comprehensive income, net of tax
Common stock transactions:
18,351 common shares purchased and retired
23,991 common shares issued
122,912 non-vested common shares issued
15,232 non-vested common shares forfeited or canceled
192,829 stock options exercised, net of 183,805 shares tendered
in payment of option price and income tax withholding
amounts
Tax benefit of stock-based compensation
Stock-based compensation expense
Preferred stock transactions:
—
—
—
—
—
—
—
5,000 preferred shares called for redemption
(50,000)
Cash dividends declared:
Common ($0.61 per share)
Preferred (6.75% per share)
Balance at December 31, 2012
Net income
Other comprehensive loss, net of tax
Common stock transactions:
25,677 common shares purchased and retired
26,096 common shares issued
120,873 non-vested common shares issued
30,648 non-vested common shares forfeited or canceled
774,096 stock options exercised, net of 392,411 shares tendered
in payment of option price and income tax withholding
amounts
Tax benefit of stock-based compensation
Stock-based compensation expense
Cash dividends declared:
Common ($0.41 per share)
Balance at December 31, 2013
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
67
(263)
299
—
—
1,612
360
2,485
—
—
—
271,335
—
—
(448)
543
—
—
9,271
1,898
2,936
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(26,208)
(3,300)
463,860
86,136
—
—
—
15,991
—
(32,032)
—
—
—
—
—
—
—
(17,909)
—
—
—
—
—
—
—
—
—
285,535
$
$
532,087
$
(16,041)
$
(263)
299
—
—
1,612
360
2,485
(50,000)
(26,208)
(3,300)
751,186
86,136
(32,032)
(448)
543
—
—
9,271
1,898
2,936
(17,909)
801,581
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share data)
Balance at December 31, 2013
Net income
Other comprehensive income, net of tax
Common stock transactions:
388,101 common shares purchased and retired
1,402,811 common shares issued
148,278 non-vested common shares issued
29,261 non-vested common shares forfeited or canceled
499,625 stock options exercised, net of 239,665 shares tendered
in payment of option price and income tax withholding
amounts
Tax benefit of stock-based compensation
Stock-based compensation expense
Cash dividends declared:
Common ($0.64 per share)
Balance at December 31, 2014
$
$
See accompanying notes to consolidated financial statements.
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$
$
285,535
—
—
532,087
84,401
—
$
(16,041) $
—
13,507
(9,739)
36,294
—
—
6,299
2,193
3,014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
801,581
84,401
13,507
(9,739)
36,294
—
—
6,299
2,193
3,014
(28,626)
$
323,596
$
587,862
$
—
(2,534) $
(28,626)
908,924
—
—
—
—
—
—
—
—
—
—
—
—
68
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Cash flows from operating activities:
2014
2013
2012
Net income
Adjustments to reconcile net income from operations to net cash provided by operating
$
84,401 $
86,136
$
58,224
activities:
Provision for loan losses
Net gain on disposal of property and equipment
Depreciation and amortization
Net premium amortization on investment securities
Net gain on investment securities transactions
Net gain on sale of mortgage loans held for sale
Net gain on sale of OREO
Write-down of OREO and other assets pending disposal
Mortgage servicing rights impairment recovery
Deferred income tax expense
Net increase in cash surrender value of company-owned life insurance policies
Stock-based compensation expense
Tax benefits from stock-based compensation
Excess tax benefits from stock-based compensation
Originations of loans held for sale
Proceeds from sale of loans held for sale
Changes in operating assets and liabilities:
Decrease in accrued interest receivable
Decrease (increase) in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity
Available-for-sale
Proceeds from maturities, paydowns, calls and sales of investment securities:
Held-to-maturity
Available-for-sale
Purchase of company-owned life insurance
Proceeds from sales of mortgage servicing rights
Extensions of credit to customers, net of repayments
Recoveries of loans charged-off
Proceeds from sales of OREO
Capital contribution to equity method investment
Capital distribution from unconsolidated subsidiary
Acquisition of bank and bank holding company, net of cash and cash equivalents,
received
Capital expenditures, net of proceeds from sales
Net cash used in investing activities
69
(6,622)
(1,256)
16,855
14,690
(61)
(17,475)
(1,849)
326
(136)
5,345
(3,600)
3,014
2,193
(2,205)
(903,373)
923,350
470
(6,956)
286
13,991
121,388
(6,125)
(217)
16,245
14,655
(1)
(24,482)
(3,232)
3,512
(99)
11,276
(446)
2,936
1,898
(2,031)
(1,557,288)
1,603,770
2,419
3,440
(1,539)
(602)
150,225
40,750
(424)
17,112
11,700
(348)
(29,606)
(1,041)
6,724
(771)
8,762
(1,849)
2,485
360
(273)
(1,197,744)
1,209,866
3,105
4,498
(1,621)
5,913
135,822
(21,627)
(664,821)
(16,370)
(741,579)
(68,305)
(1,246,068)
47,784
613,930
(15,000)
266
(216,730)
9,478
12,381
—
—
35,556
2,941
(195,842) $
$
19,465
722,447
(45,000)
470
(178,580)
11,466
28,397
—
—
—
(5,653)
12,192
1,252,266
—
907
(128,919)
8,116
42,814
(900)
1,238
—
(14,420)
(204,937) $
(141,079)
Table of Contents
INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year Ended December 31,
2014
2013
2012
Cash flows from financing activities:
Net increase (decrease) in deposits
Net increase (decrease) in repurchase agreements
Net increase (decrease) in short-term borrowings
Borrowings of long-term debt
Repayments of long-term debt
Redemption of preferred stock
Repayment of junior subordinated debentures held by subsidiary trusts
Proceeds from issuance of common stock
Common stock issuance costs
Excess tax benefits from stock-based compensation
Purchase and retirement of common stock
Dividends paid to common stockholders
Dividends paid to preferred stockholders
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes
Cash paid during the year for interest expense
See accompanying notes to consolidated financial statements.
70
$
$
$
357,083 $
43,892
(12,720)
68
(48)
—
(20,439)
6,919
(298)
2,205
(9,739)
(28,626)
—
338,297
263,843
534,827
798,670 $
(106,661) $
(48,348)
(29)
—
(243)
(50,000)
—
9,814
—
2,031
(448)
(17,909)
—
(211,793)
(266,505)
801,332
534,827
$
413,440
(10,458)
25
—
(40)
—
(41,238)
1,911
—
273
(263)
(26,208)
(3,300)
334,142
328,885
472,447
801,332
26,650 $
17,736
$
39,879
22,234
17,540
31,735
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. First Interstate BancSystem, Inc. (the “Parent Company” and collectively with its subsidiaries, the “Company”) is a financial and
bank holding company that, through the branch offices of its bank subsidiary, provides a comprehensive range of banking products and
services to individuals, businesses, municipalities and other entities throughout Montana, Wyoming and western South Dakota. In addition
to its primary emphasis on commercial and consumer banking services, the Company also offers trust, employee benefit, investment and
insurance services through its bank subsidiary. The Company is subject to competition from other financial institutions and nonbank
financial companies, and is also subject to the regulations of various government agencies and undergoes periodic examinations by those
regulatory authorities.
Basis of Presentation. The Company’s consolidated financial statements include the accounts of the Parent Company and its operating
subsidiaries. As of December 31, 2014, the Company had one significant subsidiary, First Interstate Bank (“FIB”). All significant
intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications, none of which were material, have
been made in the consolidated financial statements for 2013 and 2012 to conform to the 2014 presentation. These reclassifications did not
change previously reported net income or stockholders’ equity.
Equity Method Investments. The Company has investments in real estate joint ventures that are not consolidated because the Company does
not own a majority voting interest, control the operations or receive a majority of the losses or earnings of the joint venture. These joint
ventures are accounted for using the equity method of accounting whereby the Company initially records its investment at cost (or fair value
at the date of acquisition) and then subsequently adjusts the carrying value for the Company’s proportionate share of distributions and
earnings or losses of the joint ventures.
Variable Interest Entities. The Company’s wholly-owned business trusts, FI Statutory Trust I (“Trust I”), FI Capital Trust II (“Trust II”), FI
Statutory Trust III (“Trust III”), FI Capital Trust IV (“Trust IV”), FI Statutory Trust V (“Trust V”) and FI Statutory Trust VI (“Trust VI”) are
variable interest entities for which the Company is not a primary beneficiary. Accordingly, the accounts of Trust I, Trust II, Trust III, Trust
IV, Trust V and Trust VI are not included in the accompanying consolidated financial statements, and are instead accounted for using the
equity method of accounting.
The Company has equity investments in variable interest Certified Development Entities (“CDEs”) which have received allocations under the
New Markets Tax Credits Program. The underlying activities of the CDEs are community development projects designed primarily to promote
community welfare, such as economic rehabilitation and development of low-income areas by providing housing, services, or jobs for
residents. The maximum exposure to loss in the CDEs is the amount of equity invested and credit extended by the Company. The Company
has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. As the primary beneficiary of these
variable interest entities, the Company’s consolidated financial statements include the assets, liabilities, and results of operations of the
CDEs. The primary activities of the CDEs are recognized in interest and fees on loans, other non-interest income and long-term debt interest
expense on the Company’s statements of operations. Related cash flows are recognized in loans originated, principal collected on loans and
advances or repayments of long-term debt.
Assets Held in Fiduciary or Agency Capacity. The Company holds certain trust assets in a fiduciary or agency capacity. The Company also
purchases and sells federal funds as an agent. These and other assets held in an agency or fiduciary capacity are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial statements.
71
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses, the valuation of goodwill, fair valuations of investment securities and other financial
instruments and the status of loss contingencies.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, federal funds sold for one day periods and interest bearing deposits in banks with original maturities of less than three months. As of
December 31, 2014 and 2013, the Company had cash of $631,562 and $392,413, respectively, on deposit with the Federal Reserve Bank. In
addition, the Company maintained compensating balances with the Federal Reserve Bank of approximately $7,507 and $1,412 as of
December 31, 2014 and 2013, respectively, to reduce service charges for check clearing services.
Investment Securities. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified
as held-to-maturity and carried at amortized cost. Investments in debt securities that may be sold in response to or in anticipation of changes
in interest rates and resulting prepayment risk, or other factors, and marketable equity securities are classified as available-for-sale and
carried at fair value. The unrealized gains and losses on these securities are reported, net of applicable income taxes, as a separate component
of stockholders’ equity and comprehensive income. Management determines the appropriate classification of securities at the time of
purchase and at each reporting date management reassesses the appropriateness of the classification.
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for accretion of discounts to maturity and
amortization of premiums over the estimated average life of the security, or in the case of callable securities, through the first call date, using
the effective yield method. Such amortization and accretion is included in interest income. Realized gains and losses are included in
investment securities gains (losses). Declines in the fair value of securities below their cost that are judged to be other-than-temporary are
included in other expenses if the decline is related to credit losses. Other-than-temporary impairment losses related to other factors are
recognized in other comprehensive income, net of income taxes. In estimating other-than-temporary impairment losses, the Company
considers, among other things, the length of time and the extent to which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. The cost of securities sold is based on the specific identification method.
The Company invests in securities on behalf of certain officers and directors of the Company who have elected to participate in the
Company’s deferred compensation plans. These securities are included in other assets and are carried at their fair value based on quoted
market prices. Net realized and unrealized holding gains and losses are included in other non-interest income and employee benefits expense.
Loans. Loans are reported at the principal amount outstanding. Interest income on loans is calculated using the simple interest method on
the daily balance of the principal amount outstanding. Loan origination fees and certain direct origination costs are deferred, and the net
amount is amortized as an adjustment of the related loan’s yield using a level yield method over the expected lives of the related loans.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as
they become due or when a loan becomes contractually past due ninety days or more with respect to interest or principal, unless such past
due loan is well secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed
against current period interest income. Interest income is subsequently recognized only to the extent cash payments are received in excess of
principal due. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and when, in
the opinion of management, the loans are estimated to be fully collectible as to both principal and interest.
72
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect, on
a timely basis, all amounts due according to the contractual terms of the loan’s original agreement. The amount of the impairment is measured
using cash flows discounted at the loan’s effective interest rate, except when it is determined that the primary source of repayment for the
loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by anticipated
selling costs, is used to measure impairment. The Company considers impaired loans to include all loans, except consumer loans, that are risk
rated as doubtful or on which interest accrual has been discontinued or that have been renegotiated in a troubled debt restructuring. Interest
payments received on impaired loans are applied based on whether they are on accrual or non-accrual status. Interest income recognized by
the Company on impaired loans primarily relates to loans modified in troubled debt restructurings that remain on accrual status. Interest
payments received on non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due.
Loans acquired through the completion of a transfer, including loans acquired in business combinations, that have evidence of deterioration
of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually
required payments receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no
valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the recorded fair value of the loan, or
the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for
interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized
as a yield adjustment, a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are
recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized
as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
A loan is considered a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the
loan and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may
include rate reductions, principal forgiveness, extension of maturity date and other actions to minimize potential losses. Certain troubled debt
restructurings are on non-accrual status at the time of restructuring and are returned to accrual status only after considering the borrower's
sustained repayment performance in accordance with the restructuring agreement for a reasonable 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 no longer be disclosed as a troubled debt restructuring although they continue to be
individually evaluated for impairment and disclosed as impaired loans.
Included in loans are certain residential mortgage loans originated for sale. These loans are carried at the lower of aggregate cost or estimated
market value. Market value is estimated based on binding contracts or quotes or bids from third party investors. Residential mortgages held
for sale were $40,828 and $40,861 as of December 31, 2014 and 2013, respectively. Gains and losses on sales of mortgage loans are determined
using the specific identification method and are included in income from the origination and sale of loans.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses which is charged to expense.
Loans, or portions thereof, are charged against the allowance for loan losses when management believes that the collectibility of the principal
is unlikely or, with respect to consumer installment and credit card loans, according to established delinquency schedules. The allowance
balance is an amount that management believes will be adequate to absorb known and inherent losses in the loan portfolio based upon
quarterly analyses of the current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss
experience, industry concentrations and current economic factors and the estimated impact of current economic and environmental
conditions on historical loss rates.
73
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Loans acquired in business combinations are recorded at their estimated fair values on the date of acquisition. Accordingly, no allowance for
loan losses related to these loans is recorded at the date of transfer. An allowance for loan losses is recorded for credit deterioration
occurring subsequent to the transfer date, if any.
Goodwill. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least
annually and on an interim basis if an event or circumstance indicates that it is likely impairment has occurred. Goodwill impairment is
determined by comparing the fair value of a reporting unit to its carrying amount. In any given year the Company may elect to perform a
qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If
it is not more likely than not that the fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the
qualitative assessment, a two-step quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of
net assets is estimated based on analyses of the Company's market value, discounted cash flows and peer values. The determination of
goodwill impairment is sensitive to market-based economics and other key assumptions used in determining or allocating fair value.
Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may
have a material impact on our consolidated financial statements or results of operations.
Core Deposit Intangibles. Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities
assumed and are amortized using an accelerated method based on the estimated weighted average useful lives of the related deposits.
Accumulated core deposit intangibles amortization was $24,652 as of December 31, 2014 and $22,401 as of December 31, 2013. Amortization
expense related to core deposit intangibles recorded as of December 31, 2014 is expected to total $3,336, $3,099, $1,825, $1,318, 1,118, and
2,587 in 2015, 2016, 2017, 2018, 2019, and thereafter, respectively.
Mortgage Servicing Rights. The Company recognizes the rights to service mortgage loans for others, whether acquired or internally
originated. Mortgage servicing rights are initially recorded at fair value based on comparable market data and are amortized in proportion to
and over the period of estimated net servicing income. Mortgage servicing rights are evaluated quarterly for impairment by discounting the
expected future cash flows, taking into consideration the estimated level of prepayments based on current industry expectations and the
predominant risk characteristics of the underlying loans including loan type, note rate and loan term. Impairment adjustments, if any, are
recorded through a valuation allowance.
Premises and Equipment. Buildings, furniture and equipment are stated at cost less accumulated depreciation. Depreciation expense is
computed using straight-line methods over estimated useful lives of 5 to 45 years for buildings and improvements and 4 to 15 years for
furniture and equipment. Leasehold improvements and assets acquired under capital lease are amortized over the shorter of their estimated
useful lives or the terms of the related leases. Land is recorded at cost.
Company-Owned Life Insurance. Key executive and group life insurance policies are recorded at their cash surrender value. Separate
account group life insurance policies are subject to a stable value contract that offsets the impact of interest rate fluctuations on the market
value of the policies and are recorded at the stabilized investment value. Increases in the cash surrender or stabilized investment value of
insurance policies, as well as insurance proceeds received, are recorded as other non-interest income, and are not subject to income taxes.
Impairment of Long-Lived Assets. Long-lived assets, including premises and equipment and certain identifiable intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The amount of
the impairment loss, if any, is based on the asset’s fair value. Impairment losses of $102, $616 and $70 were recognized in other non-interest
expense in 2014, 2013 and 2012, respectively.
74
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Other Real Estate Owned. Real estate acquired in satisfaction of loans is initially carried at current fair value less estimated selling costs.
Any excess of loan carrying value over the fair value of the real estate acquired is recorded as a charge to the allowance for loan losses.
Subsequent declines in fair value less estimated selling costs are included in OREO expense. Subsequent increases in fair value less
estimated selling costs are recorded as a reduction in OREO expense to the extent of recognized losses. Operating expenses, net of related
income, and gains or losses on sales are included in OREO expense. Write-downs of $224, $3,512 and $6,724 were recorded in 2014, 2013 and
2012, respectively.
Restricted Equity Securities. The Company, as a member of the Federal Reserve Bank and the Federal Home Loan Bank (“FHLB”), is
required to maintain investments in each of the organization’s capital stock. As of December 31, 2014, restricted equity securities of the
Federal Reserve Bank and the Federal Home Loan Bank of $16,187 and $10,662, respectively, were included in other assets at cost. As of
December 31, 2013, restricted equity securities of the Federal Reserve Bank and the Federal Home Loan Bank were $13,357 and $7,003,
respectively. No ready market exists for these restricted equity securities, and they have no quoted market values. Restricted equity
securities are periodically reviewed for impairment based on ultimate recovery of par value. The determination of whether a decline affects the
ultimate recovery of par value is influenced by the significance of the decline compared to the cost basis of the restricted equity securities,
the length of time a decline has persisted, the impact of legislative and regulatory changes on the issuing organizations and the liquidity
positions of the issuing organizations. Based on management’s assessment, no impairment losses were recorded on restricted equity
securities during 2014, 2013 or 2012.
Derivatives and Hedging Activities. During 2014, the Company entered into derivative interest rate swap agreements as part of its interest
rate risk management strategy. The interest rate swaps are recognized as assets or liabilities on the Company's balance sheet at fair value.
Fair value estimations are obtained from third parties and are based on pricing models. Currently, none of the Company’s derivatives are
designated in qualifying hedging relationships. As such, all changes in the fair value of the Company’s derivatives are recognized directly in
earnings. As of December 31, 2014, interest rate swap derivative assets of $61 were included in other assets and interest rate swap derivative
liabilities of $59 were included in other liabilities on the Company's consolidated balance sheet. During 2014, the Company recorded
insignificant amounts of non-interest income related to changes in the fair value of derivatives. The Company does not enter into derivative
agreements for trading or speculative purposes.
Income from Fiduciary Activities. Consistent with industry practice, income for trust services is recognized on the basis of cash received.
However, use of this method in lieu of accrual basis accounting does not materially affect reported earnings.
Earnings Per Common Share. Basic and diluted earnings per common share are calculated using a two-class method. Under the two-class
method, basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the period, excluding outstanding participating securities. Participating securities include non-
vested time restricted stock awards and non-vested performance restricted stock awards granted prior to 2014. Diluted earnings per common
share is calculated by dividing net income available to common shareholders by the weighted average number of common shares
outstanding determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasury stock
method.
Income Taxes. The Parent Company and its subsidiaries have elected to be included in a consolidated federal income tax return. For state
income tax purposes, the combined taxable income of the Parent Company and its subsidiaries is apportioned among the states in which
operations take place. Federal and state income taxes attributable to the subsidiaries, computed on a separate return basis, are paid to or
received from the Parent Company.
The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are
determined based on enacted income tax rates which will be in effect when the differences between the financial statement carrying values
and tax bases of existing assets and liabilities are expected to be reported in taxable income.
75
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions
are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company
provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is
recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company
claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the income
statement. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for years before
2011. The Company had no accrued interest or penalties as of December 31, 2014, 2013 or 2012.
Comprehensive Income. Comprehensive income includes net income, as well as other changes in stockholders’ equity that result from
transactions and economic events other than those with shareholders. In addition to net income, the Company’s comprehensive income
includes the after tax effect of changes in unrealized gains and losses on available-for-sale investment securities, changes in the unamortized
gain or loss on available-for-sale investment securities transferred to held-to-maturity and changes in net actuarial gains and losses on
defined benefit post-retirement benefits plans.
Segment Reporting. An operating segment is defined as a component of a business for which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. The Company
has one operating segment, community banking, which encompasses commercial and consumer banking services offered to individuals,
businesses, municipalities and other entities.
Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was $3,734, $3,532, and $3,555 in 2014, 2013 and 2012,
respectively.
Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company; the transferee obtains
the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets; and, the
Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Stock-Based Compensation. Compensation cost for all stock-based awards is measured at fair value on the date of grant and is recognized
over the requisite service period for awards expected to vest. Stock-based compensation expense of $3,014, $2,936 and $2,485 for the years
ended December 31, 2014, 2013 and 2012, respectively, is included in benefits expense in the Company’s consolidated statements of income.
Related income tax benefits recognized for the years ended December 31, 2014, 2013 and 2012 were $1,153, $1,122 and $950, respectively. All
compensation cost for stock-based awards is expensed at the Parent Company.
Fair Value Measurements. In general, fair value measurements are based upon quoted market prices, where available. If quoted market prices
are not available, fair value measurements are estimated using relevant market information and other assumptions. Fair value estimates
involve uncertainties and require some degree of judgment regarding interest rates, credit risk, prepayments and other factors. The use of
different assumptions or estimation techniques may have a significant effect on the fair value amounts reported.
(2)
ACQUISITION
On February 10, 2014, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Mountain West
Financial Corp ("MWFC"), a Montana-based bank holding company that operated one wholly-owned subsidiary bank, Mountain West
Bank, NA ("MWB"), with branches located in five of the Company's current market areas in Montana. The acquisition was completed on
July 31, 2014, and the Company merged MWB with its existing bank subsidiary, First Interstate Bank ("FIB"), on October 17, 2014. The
acquisition allowed the Company to gain market share in several of its current market areas. The Company also benefited from cost savings
related to the merger of MWB with FIB.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Under the terms of the agreement and plan of merger, each outstanding share of Mountain West common stock was canceled and converted
into the right to receive 0.2552 shares of the Company's Class A common stock plus $7.125 in cash, or, at the stockholder's election, an
amount in all cash or all stock intended to be substantially equal in value to the combination of stock and cash merger consideration
described above. Consideration for the acquisition of $74,451 consisted of cash of $38,479 and the issuance of 1,378,230 shares of the
Company's Class A common stock valued at $26.10 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 acquisition was accounted for using the acquisition method with the cash portion of the
purchase price funded from cash on hand. In conjunction with the acquisition, the Company recognized acquisition costs of $4,017.
The assets and liabilities of MWFC were recorded in the Company's consolidated financial statements at their estimated fair values as of the
acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed was recorded as
goodwill. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the
operations of MWFC and the Company. This acquisition was accounted for as a tax-free exchange; therefore, goodwill recorded in
conjunction with this acquisition is not deductible for income tax purposes.
The following table summarizes the consideration paid, fair values of MWFC assets acquired and liabilities assumed and the resulting
goodwill. The amount reported below for net deferred tax asset is provisional pending completion of the Company's review of tax items.
As of July 31, 2014
Assets acquired:
Cash and cash equivalents
Investment securities
Loans
Allowance for loan losses
Premises and equipment
Company-owned life insurance
Deferred tax asset, net
Core deposit intangible
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Other liabilities
Subordinated debentures held by subsidiary trusts
Total liabilities assumed
Net assets acquired
Consideration paid:
Cash
Class A common stock
Total consideration
Goodwill
As Recorded
Fair Value
As Recorded
by MWFC
Adjustments
by the Company
$
74,035 $
104,945
378,558
(11,598)
35,283
13,046
6,491
—
16,559
617,319
515,538
20,501
20,439
556,478
—
(34)
(1)
$
(18,286)
11,598
(5,847)
(2)
(3)
(4)
—
1,135
11,014
(5,300)
(5)
(6)
(7)
(5,720)
(8)
(9)
(10)
(159)
2,730
—
2,571
$
60,841 $
(8,291)
77
$
74,035
104,911
360,272
—
29,436
13,046
7,626
11,014
11,259
611,599
515,379
23,231
20,439
559,049
52,550
38,479
35,972
74,451
21,901
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Explanation of fair value adjustments:
(1) Write down of the book value of investment securities to their estimated fair values on the date of acquisition based upon
quotes obtained from an independent third party pricing service.
(2) Write down of the book value of loans to their estimated fair values. Except for collateral dependent loans acquired with
deteriorated credit quality, the fair value of loans was estimated using cash flow projections based on the remaining maturity
and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-
adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was
estimated based on the Company's analysis of the fair value of the each loan's underlying collateral, discounted using market-
derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of
the collateral.
(3) Adjustment to remove the MWB allowance for loan losses at acquisition date as the credit risk is accounted for in the fair value
adjustment for loans receivable described in (2) above.
(4) Write down of the book value of premises and equipment to their estimated fair values based upon appraisals obtained from an
independent third party appraiser.
(5) Adjustment represents the net deferred tax assets resulting from fair value adjustments related to acquired assets, assumed
liabilities, core deposit intangible assets and other purchase accounting adjustments.
(6) Adjustment represents the value of the core deposit base assumed in the acquisition based upon a valuation obtained from an
independent third party valuation expert.
(7) Adjustment consists of a reduction in the value of equity method investments, accrued interest receivable and accrued net
income taxes receivable, and the write-off of pre-existing goodwill and computer software costs.
(8) Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with
similar terms on the date of acquisition.
(9) Adjustment represents increases in the book values of other liabilities to their estimated fair values at the acquisition date. The
adjustment primarily consists of a $2,000 increase to an acquired operating lease obligation and a $473 increase to Federal Home
Loan Bank borrowings based upon interest interest rates of similar obligations with similar characteristics on the date of
acquisition.
(10) Recorded value of junior subordinated debentures held by subsidiary trusts approximated fair value as of the acquisition date
due to the short-term nature of the instruments. These debentures were redeemed at par value in December 2014.
Fair values of assets acquired and liabilities assumed as part of the MWFC acquisition were estimated using relevant market information and
significant other inputs and generally fall within Levels 2 and 3 of the fair value hierarchy.
The core deposit intangible asset of $11,014 is being amortized using an accelerated method over the estimated useful lives of the related
deposits of ten 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 is it probable, at acquisition, the Company will
be unable to collect all contractual amounts owned. 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.
78
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Information regarding acquired credit-impaired loans as of the July 31, 2014 acquisition date is as follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected ("non-accretable discount")
Cash flows expected to be collected
Interest component of cash flows expected to be collected ("accretable discount")
Fair value of acquired credit-impaired loans
Information regarding acquired loans not deemed credit-impaired at the acquisition date is as follows:
Contractually required principal and interest payments
Contractual cash flows not expected to be collected
Fair value at acquisition
$
$
$
112,882
74,760
38,122
5,233
32,889
445,345
(15,090)
327,383
The accompanying consolidated statements of income include the results of operations of the acquired entity from the July 31, 2014
acquisition date. Operations of the acquired entity were immediately integrated with the Company's operations and the acquired bank was
merged with the Company's existing banking subsidiary in October 2014. Post-acquisition revenues and net income of the acquired entity
were not captured separately subsequent to the merger. As such, the Company has determined it is not practical to report the post-
acquisition date revenues and net income of the acquired entity that were included in the Company's consolidated income statement for the
year ended December 31, 2014.
The following table presents unaudited pro forma consolidated revenues and net income as if the acquisition had occurred as of January 1,
2013.
Year ended December 31, (unaudited)
2014
2013
Interest income
Non-interest income
Total revenues
Net income
$
$
$
280,102 $
114,984
395,086 $
87,129 $
280,455
120,005
400,460
84,264
The unaudited pro forma net income presented in the table above for 2014 was adjusted to exclude acquisition-related costs, including
change in control expenses related to employee benefit plans, stock option cancellation fees and legal and professional expenses, of $5,052,
net of tax. Pro forma net income presented in the table above for 2013 was adjusted to include the aforementioned acquisition-related costs.
The unaudited pro forma net income presented in the table above for 2014 and 2013 includes adjustments for scheduled amortization of core
deposit intangible assets acquired in the acquisition. No adjustments were made for operating costs savings and other business synergies
expected as a result of the acquisition, or accretion or amortization of fair value adjustments other than core deposit intangible assets.
79
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(3)
INVESTMENT SECURITIES
The amortized cost and approximate fair values of investment securities are summarized as follows:
December 31, 2014
Available-for-Sale
Obligations of U.S. government agencies
U.S. agency residential mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Total
December 31, 2014
Held-to Maturity
State, county and municipal securities
Corporate securities
U.S agency residential mortgage-backed securities &
collateralized mortgage obligations
Other investments
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
725,408 $
895 $
(5,370) $
720,933
982,764
322
11,526
5
1,708,494 $
12,426 $
(3,624)
(2)
(8,996) $
990,666
325
1,711,924
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
188,941 $
32,565
353,176
504
575,186 $
5,949 $
54
5,563
—
11,566 $
(386) $
(75)
(1,758)
—
(2,219) $
194,504
32,544
356,981
504
584,533
$
$
$
$
Gross gains of $274 and gross losses of $213 were realized on the disposition of available-for-sale securities in 2014.
December 31, 2013
Available-for-Sale
Obligations of U.S. government agencies
U.S. agency residential mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
Total
December 31, 2013
Held-to Maturity
State, county and municipal securities
Corporate securities
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
774,055 $
1,432 $
(12,249) $
763,238
1,197,295
407
11,905
9
(25,147)
(1)
1,971,757 $
13,346 $
(37,397) $
1,184,053
415
1,947,706
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
185,818 $
18,019
203,837 $
4,043 $
103
4,146 $
(2,049) $
(8) $
(2,057) $
187,812
18,114
205,926
$
$
$
$
Gross gains of $49 and $351 were realized on the disposition of available-for-sale securities in 2013 and 2012, respectively. Gross losses of
$48 and $3 were realized on the disposition of available-for-sale securities in 2013 and 2012, respectively.
As of December 31, 2014, the Company had general obligation securities with amortized costs of $131,845 included in state, county and
municipal securities, of which $68,927 were issued by political subdivisions or agencies within the states of Montana, Wyoming and South
Dakota.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
On June 27, 2014, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage
obligations with amortized costs and fair values of $396,640 and $388,808, respectively, into the held-to-maturity category. Unrealized net
losses of $7,832 included in accumulated other comprehensive income at the time of the transfer are being amortized to yield over the
remaining expected lives of the transferred securities of 4.3 years.
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 December 31, 2014 and 2013.
December 31, 2014
Available-for-Sale
Less than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Obligations of U.S. government agencies
$
135,888 $
(702) $
309,283 $
(4,668) $
445,171 $
(5,370)
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Private mortgage-backed securities
Total
219,214
—
$
355,102 $
(887)
—
(1,589) $
151,380
90
(2,737)
(2)
370,594
90
460,753 $
(7,407) $
815,855 $
(3,624)
(2)
(8,996)
December 31, 2014
Held-to-Maturity
State, county and municipal securities
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Corporate securities
Total
$
$
December 31, 2013
Available-for-Sale
Less than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
7,979 $
(13) $
20,097 $
(373) $
28,076 $
(386)
61,201
14,755
83,935 $
(1,758)
(75)
(1,846) $
—
—
20,097 $
—
—
(373) $
61,201
14,755
104,032 $
(1,758)
(75)
(2,219)
Less than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Obligations of U.S. government agencies
$
458,385 $
(10,355) $
59,362 $
(1,894) $
517,747 $
(12,249)
U.S. agency residential mortgage-backed
securities & collateralized mortgage
obligations
Private mortgage-backed securities
Total
634,199
—
$
1,092,584 $
(17,273)
—
(27,628) $
166,930
104
226,396 $
(7,874)
(1)
801,129
104
(25,147)
(1)
(9,769) $
1,318,980 $
(37,397)
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
December 31, 2013
Held-to-Maturity
Less than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
State, county and municipal securities
Corporate securities
Total
$
$
37,550 $
7,294
44,844 $
(1,319) $
(8)
(1,327) $
14,296 $
—
14,296 $
(730) $
—
(730) $
51,846 $
7,294
59,140 $
(2,049)
(8)
(2,057)
The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security.
Consideration is given to the length of time and the extent to which the fair value has been less than cost; the financial condition and near
term prospects of the issuer; and, the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value. As of December 31, 2014, the Company had 154 individual investment securities that were in
an unrealized loss position. As of December 31, 2013, the Company had 229 individual investment securities that were in an unrealized loss
position. Unrealized losses as of December 31, 2014 and 2013 related primarily to fluctuations in the current interest rates. The fair value of
these investment securities is expected to recover as the securities approach their maturity or repricing date or if market yields for such
investments decline. As of December 31, 2014, 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 such securities before a recovery in cost.
No impairment losses were recorded during 2014, 2013 or 2012.
Maturities of investment securities at December 31, 2014 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.
December 31, 2014
Within one year
After one year but within five years
After five years but within ten years
After ten years
Total
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
$
252,677 $
1,218,143
188,520
49,154
1,708,494 $
254,560 $
1,219,799
188,015
49,550
1,711,924 $
85,751 $
283,000
150,601
55,834
575,186 $
86,983
286,783
153,287
57,480
584,533
At December 31, 2014, the Company had investment securities callable within one year with amortized costs and estimated fair values of
$176,023 and $175,892, 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.
At December 31, 2014, the Company had callable structured notes with amortized costs and estimated fair values of $29,995 and $30,012,
respectively. These callable structured notes, which are classified as available-for-sale and included in the after one year but within five years
category in the table above, have fixed interest rates that increase at various intervals as market rates increase.
Maturities of securities do not reflect rate repricing opportunities present in adjustable rate mortgage-backed securities. At December 31,
2014 and 2013, the Company had variable rate mortgage-backed securities with amortized costs of $40,666 and $46,315, respectively,
classified as available-for-sale in the table above.
There are no significant concentrations of investments at December 31, 2014, (greater than 10 percent of stockholders’ equity) in any
individual security issuer, except for U.S. government or agency-backed securities.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Investment securities with amortized cost of $1,351,787 and $1,288,750 at December 31, 2014 and 2013, respectively, were pledged to secure
public deposits and securities sold under repurchase agreements. The approximate fair value of securities pledged at December 31, 2014 and
2013 was $1,356,341 and $1,278,663, respectively. All securities sold under repurchase agreements are with customers and mature on the next
banking day. The Company retains possession of the underlying securities sold under repurchase agreements.
(4)
LOANS
The following table presents loans by class as of the dates indicated:
December 31,
Real estate loans:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans held for sale
Total loans
2014
2013
$
1,639,422 $
1,449,174
220,443
96,580
101,246
418,269
999,903
167,659
3,225,253
552,863
144,141
65,467
762,471
740,073
124,859
3,959
4,856,615
40,828
4,897,443 $
205,911
76,488
69,236
351,635
867,912
173,534
2,842,255
476,012
133,039
62,536
671,587
676,544
111,872
1,734
4,303,992
40,861
4,344,853
$
The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.
Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by
providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and
internally risk-classified loans.
Real estate loans include construction and permanent financing for both single-family and multi-unit properties, term loans for commercial,
agricultural and industrial property and/or buildings and home equity loans and lines of credit secured by real estate. Longer-term residential
real estate loans are generally sold in the secondary market. Those residential real estate loans not sold are typically secured by first liens on
the financed property and generally mature in less than fifteen years. Home equity loans and lines of credit are typically secured by first or
second liens on residential real estate and generally do not exceed a loan to value ratio of 80%. The Company had home equity loans and
lines of credit of $298,692 and $272,415 as of December 31, 2014 and 2013, respectively. Commercial and agricultural real estate loans are
generally secured by first liens on income-producing real estate and generally mature in less than 5 years.
Construction loans are primarily to commercial builders for residential lot development and the construction of single-family residences and
commercial real estate properties. Construction loans are generally underwritten pursuant to pre-approved permanent financing. During the
construction phase the borrower pays interest only.
83
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Consumer loans include direct personal loans, credit card loans and lines of credit; and indirect dealer loans for the purchase of automobiles,
recreational vehicles, boats and other consumer goods. Personal loans and indirect dealer loans are generally secured by automobiles, boats
and other types of personal property and are made on an installment basis. Credit cards are offered to individuals in our market areas. Lines
of credit are generally floating rate loans that are unsecured or secured by personal property.
Commercial loans include a mix of variable and fixed rate loans made to small and medium-sized manufacturing, wholesale, retail and service
businesses for working capital needs and business expansions. Commercial loans generally include lines of credit, business credit cards and
loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but
also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees.
Agricultural loans generally consist of short and medium-term loans and lines of credit that are primarily used for crops, livestock, equipment
and general operations. Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid from the operations
of the farm or ranch. Agricultural loans generally have maturities of five years or less, with operating lines for one production season.
Included in the loan table above, are loans acquired in business combinations including certain loans that had evidence of deterioration in
credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.
The following table displays the outstanding unpaid principal balance, accrued interest receivable and accrual status of loans acquired with
credit impairment as of December 31, 2014 and 2013.
December 31,
Outstanding balance
Carrying value
Loans on accrual status
Loans on non-accrual status
Total carrying value
2014
2013
$
$
41,910 $
31,870
—
31,870 $
—
—
—
—
The following table summarizes changes in the accretable yield for loans acquired credit impaired for year ended December 31, 2014 and 2013:
Year Ended December 31,
2014
2013
Beginning balance
Acquisition
Accretion income
Reductions due to exit events
Reclassifications from (to) nonaccretable differences
Ending balance
$
$
— $
5,233
(735)
(201)
1,484
5,781 $
—
—
—
—
—
—
84
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO 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:
30 - 59
Days
60 - 89
Days
> 90
Days
Total Loans
30 or More
Days
Current
Non-accrual
As of December 31, 2014
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Total
Loans
$
4,692 $
1,609 $
331 $
6,632 $
1,605,421 $
27,369 $
1,639,422
Real estate
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans originated for sale
Total loans
$
839
—
100
939
6,969
1,624
14,224
3,235
988
369
4,592
3,659
1,125
—
23,600
—
23,600 $
—
—
—
—
1,762
—
2,093
6
32
315
353
147
—
—
2,593
—
2,593 $
383
475
—
858
645
236
3,348
482
140
284
906
994
—
—
5,248
—
5,248 $
85
1,222
475
100
1,797
9,376
1,860
19,665
3,723
1,160
968
5,851
4,800
1,125
—
31,441
—
31,441 $
210,969
95,833
98,582
405,384
987,735
158,957
3,157,497
548,757
142,432
64,484
755,673
722,575
123,288
3,959
4,762,992
40,828
4,803,820 $
8,252
272
2,564
11,088
2,792
6,842
48,091
383
549
15
947
12,698
446
—
62,182
—
62,182 $
220,443
96,580
101,246
418,269
999,903
167,659
3,225,253
552,863
144,141
65,467
762,471
740,073
124,859
3,959
4,856,615
40,828
4,897,443
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
30 - 59
Days
60 - 89
Days
> 90
Days
Total Loans
30 or More
Days
Current
Non-accrual
As of December 31, 2013
Past Due
Past Due
Past Due
Past Due
Loans
Loans
Total
Loans
Real estate
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Other, including overdrafts
Loans held for investment
Mortgage loans originated for sale
Total loans
$
$
5,924 $
2,472 $
22 $
8,418 $
1,391,823 $
48,933 $
1,449,174
1,062
933
584
2,579
3,630
328
12,461
3,303
925
364
4,592
2,791
453
—
20,297
—
20,297 $
468
250
—
718
206
646
4,042
430
130
187
747
1,186
672
—
6,647
—
6,647 $
38
—
—
38
1,162
—
1,222
9
1
515
525
563
—
—
2,310
—
2,310 $
1,568
1,183
584
3,335
4,998
974
17,725
3,742
1,056
1,066
5,864
4,540
1,125
—
29,254
—
29,254 $
188,074
73,933
68,427
330,434
856,800
163,986
2,743,043
471,906
131,508
61,451
664,865
660,035
110,622
1,734
4,180,299
40,861
4,221,160 $
16,269
1,372
225
17,866
6,114
8,574
81,487
364
475
19
858
11,969
125
—
94,439
—
94,439 $
205,911
76,488
69,236
351,635
867,912
173,534
2,842,255
476,012
133,039
62,536
671,587
676,544
111,872
1,734
4,303,992
40,861
4,344,853
Acquired loans that meet the criteria for non-accrual of interest prior to the acquisition were considered performing upon acquisition. If
interest on non-accrual loans had been accrued, such income would have approximated $3,970, $4,630 and $8,537 during the years ended
December 31, 2014, 2013 and 2012, respectively.
86
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company considers impaired loans to include all loans, except consumer loans, that are risk rated as doubtful, or have been placed on
non-accrual status or renegotiated in troubled debt restructurings. The following tables present information on the Company’s recorded
investment in impaired loans as of dates indicated:
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
December 31, 2014
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
41,603 $
28,143 $
11,246 $
39,389 $
12,511
459
2,729
15,699
2,959
8,844
69,105
16,904
1,231
87,240 $
7,262
272
253
7,787
2,452
6,444
44,826
11,882
342
57,050 $
1,615
—
2,442
4,057
341
2,305
17,949
2,644
837
21,430 $
8,877
272
2,695
11,844
2,793
8,749
62,775
14,526
1,179
78,480 $
$
1,608
574
—
904
1,478
143
732
3,961
1,190
641
5,792
December 31, 2013
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
64,780 $
29,216 $
33,937 $
63,153 $
23,906
1,816
397
26,119
9,448
8,895
109,242
15,448
177
124,867 $
87
$
9,901
1,095
279
11,275
5,081
6,429
52,001
10,684
39
62,724 $
7,226
277
84
7,587
967
2,370
44,861
2,901
86
47,848 $
17,127
1,372
363
18,862
6,048
8,799
96,862
13,585
125
110,572 $
5,210
1,434
26
85
1,545
249
335
7,339
1,504
86
8,929
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
December 31, 2012
Unpaid
Total
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
$
84,300 $
39,049 $
34,774 $
73,823 $
4,112
28,558
3,018
10,447
42,023
13,271
5,559
145,153
12,770
589
158,512 $
$
15,891
1,976
7,785
25,652
6,152
1,834
72,687
9,036
509
82,232 $
7,173
710
340
8,223
4,495
3,227
50,719
3,206
28
53,953 $
23,064
2,686
8,125
33,875
10,647
5,061
123,406
12,242
537
136,185 $
1,457
251
69
1,777
1,677
784
8,350
1,919
28
10,297
The following tables present the average recorded investment in and income recognized on impaired loans for the periods indicated:
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Commercial
Agricultural
Total
Year Ended December 31,
2014
2013
2012
Average
Recorded
Investment
Income
Recognized
Average
Recorded
Investment
Income
Recognized
Average
Recorded
Investment
Income
Recognized
$
54,701 $
876 $
66,330 $
1,092 $
78,670 $
1,339
13,056
822
1,529
15,407
4,537
8,774
83,419
13,789
447
97,655 $
$
43
—
8
51
5
78
1,010
50
23
1,083 $
19,523
1,893
3,936
25,352
8,104
8,230
108,016
15,047
313
123,376 $
487
—
4
491
17
8
1,608
68
16
1,692 $
44,457
8,431
16,401
69,289
13,703
6,936
168,598
15,741
942
185,281 $
110
4
—
114
26
41
1,520
84
27
1,631
The amount of interest income recognized by the Company within the period that the loans were impaired was primarily related to loans
modified in troubled debt restructurings that remained on accrual status. Interest payments received on non-accrual impaired loans are
applied to principal. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. If
interest on impaired loans had been accrued, interest income on impaired loans during 2014, 2013 and 2012 would have been approximately
$4,951, $5,786 and $8,463, respectively.
88
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Collateral dependent impaired loans are recorded at the fair value of the underlying collateral determined 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 $44,227 as of December 31, 2014, of which $23,275 were included in
non-accrual loans and $20,952 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $59,792 as of
December 31, 2013, of which $38,011 were included in non-accrual loans and $21,781 were on accrual status.
The following table presents information on the Company's troubled debt restructurings that occurred during the periods indicated:
Year Ended December 31, 2014
Real estate:
Commercial
Residential
Total real estate loans
Consumer
Commercial
Total
Type of Concession
Number
of Notes
Interest only
period
Extension of
terms or
maturity
Interest rate
adjustment
Other
Principal
Balance at
Restructure
Date
13 $
1
14
1
5
20 $
4,753 $
—
4,753
—
476
5,229 $
89
672 $
—
672
113
—
785 $
84 $
—
84
—
—
84 $
1,047 $
15
1,062
—
30
1,092 $
6,556
15
6,571
113
506
7,190
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Year ended December 31, 2013
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Total construction loans
Residential
Agriculture
Total real estate loans
Consumer
Commercial
Total
Year ended December 31, 2012
Real estate:
Commercial
Construction:
Commercial
Land acquisition & development
Residential
Total construction loans
Residential
Agriculture
Total real estate loans
Consumer
Commercial
Total
Type of Concession
Number
of Notes
Interest only
period
Extension of
terms or
maturity
Interest rate
adjustment
Other
Principal
Balance at
Restructure
Date
19 $
8
3
11
5
1
36
1
6
43 $
543 $
1,378 $
11,420 $
2,310 $
15,651
528
—
528
—
—
1,071
—
613
1,684 $
7,308
408
7,716
708
—
9,802
—
178
9,980 $
1,952
411
2,363
—
188
13,971
27
265
14,263 $
—
—
—
79
—
2,389
—
87
2,476 $
9,788
819
10,607
787
188
27,233
27
1,143
28,403
Type of Concession
Number
of Notes
Interest only
period
Extension of
terms or
maturity
Interest rate
adjustment
Other
Principal
Balance at
Restructure
Date
16 $
1
5
2
8
2
1
27
1
10
38 $
— $
—
—
—
—
568
—
568
—
387
955 $
959 $
4,504 $
8,611 $
14,074
—
1,000
280
1,280
25
154
2,418
69
217
2,704 $
—
1,757
233
1,990
—
—
6,494
—
—
6,494 $
3,155
623
—
3,778
—
—
12,389
—
218
12,607 $
3,155
3,380
513
7,048
593
154
21,869
69
822
22,760
Other concessions include payment reductions or deferrals for a specified period of time or the extension of amortization schedules. A
specific reserve may have been previously recorded for loans modified in troubled debt restructurings that were on non-accrual status or
otherwise deemed impaired before the modification. In periods subsequent to modification, the Company continues to evaluate all loans
modified in troubled debt restructurings for possible impairment, which is recognized through the allowance for loan losses. Financial effects
of modifications may include principal loan forgiveness or other charge-offs directly related to the restructuring. The Company had no
charge-offs directly related to loans modified in troubled debt restructurings taken at the time of restructuring during 2014, 2013 or 2012.
90
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company considers a payment default to occur on loans modified in troubled debt restructurings when the loan is 90 days or more past
due or was placed on non-accrual status after the modification. As of December 31, 2014, 2013 and 2012, loans modified in troubled debt
restructurings within the previous 12 months for which there was a payment default during the period were not significant. As of
December 31, 2014, and 2013, all of the loans modified in troubled debt restructurings with payment defaults during the previous twelve
months were on non-accrual status.
At December 31, 2014, 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 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.
91
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following tables present the Company’s recorded investment in criticized loans by class and credit quality indicator based on the most
recent analysis performed as of the dates indicated:
As of December 31, 2014
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Total
As of December 31, 2013
Real estate:
Commercial
Construction:
Land acquisition & development
Residential
Commercial
Total construction loans
Residential
Agricultural
Total real estate loans
Consumer:
Indirect consumer
Other consumer
Credit card
Total consumer loans
Commercial
Agricultural
Total
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
$
84,533 $
83,448 $
15,246 $
183,227
11,826
2,029
39
13,894
10,473
10,122
119,022
916
553
—
1,469
25,766
7,827
154,084 $
15,016
2,666
253
17,935
10,848
12,328
124,559
1,590
1,085
348
3,023
32,433
3,660
163,675 $
2,507
—
2,442
4,949
1,121
612
21,928
121
432
1,263
1,816
10,273
837
34,854 $
29,349
4,695
2,734
36,778
22,442
23,062
265,509
2,627
2,070
1,611
6,308
68,472
12,324
352,613
Other Assets
Especially
Mentioned
Substandard
Doubtful
Total
Criticized
Loans
79,747 $
86,426 $
24,840 $
191,013
13,211
1,859
—
15,070
7,500
13,597
115,914
875
573
—
1,448
33,318
8,401
159,081 $
19,677
1,649
409
21,735
7,188
10,245
125,594
1,524
969
392
2,885
23,833
1,788
154,100 $
7,329
277
84
7,690
4,184
2,370
39,084
115
268
2,010
2,393
3,745
86
45,308 $
40,217
3,785
493
44,495
18,872
26,212
280,592
2,514
1,810
2,402
6,726
60,896
10,275
358,489
$
$
$
92
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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.
(5) ALLOWANCE FOR LOAN LOSSES
The following table presents a summary of changes in the allowance for loan losses by portfolio segment:
Year ended December 31, 2014
Real Estate Consumer
Commercial
Agriculture
Other
Total
Year ended December 31, 2013
Real Estate Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans
$
$
$
$
$
$
$
$
$
63,923 $
6,193 $
14,747 $
476 $
— $
85,339
(10,348)
(3,014)
3,323
53,884 $
1,382
(4,887)
2,347
5,035 $
3,961 $
49,923
53,884 $
— $
5,035
5,035 $
1,809
(6,030)
3,781
14,307 $
1,190 $
13,117
14,307 $
535
(64)
27
974 $
641 $
333
974 $
—
—
—
— $
— $
—
— $
(6,622)
(13,995)
9,478
74,200
5,792
68,408
74,200
62,775 $
— $
3,203,306
762,471
$ 3,266,081 $ 762,471 $
14,526 $
725,547
740,073 $
1,179 $
123,680
124,859 $
— $
78,480
3,959
4,818,963
3,959 $ 4,897,443
$
75,782 $
7,141 $
17,085 $
503 $
— $
100,511
(7,722)
(10,224)
6,087
63,923 $
1,605
(4,612)
2,059
6,193 $
7,339 $
56,584
63,923 $
— $
6,193
6,193 $
41
(5,672)
3,293
14,747 $
1,504 $
13,243
14,747 $
(49)
(5)
27
476 $
86 $
390
476 $
—
—
—
— $
— $
—
— $
(6,125)
(20,513)
11,466
85,339
8,929
76,410
85,339
96,862 $
— $
2,786,254
671,587
$ 2,883,116 $ 671,587 $
93
13,585 $
662,959
676,544 $
125 $
111,747
111,872 $
— $
110,572
1,734
4,234,281
1,734 $ 4,344,853
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Year ended December 31, 2012
Real Estate Consumer
Commercial
Agriculture
Other
Total
Allowance for loan losses:
Beginning balance
Provision charged (credited) to operating
expense
Less loans charged-off
Add back recoveries of loans previously charged-off
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
Total loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans
$
$
$
$
$
87,396 $
8,594 $
15,325 $
1,266 $
— $
112,581
28,651
(43,506)
3,241
75,782 $
1,922
(5,320)
1,945
7,141 $
8,350 $
67,432
75,782 $
— $
7,141
7,141 $
10,845
(11,990)
2,905
17,085 $
1,919 $
15,166
17,085 $
(668)
(120)
25
503 $
28 $
475
503 $
—
—
—
— $
— $
—
— $
40,750
(60,936)
8,116
100,511
10,297
90,214
100,511
123,406 $
— $
2,660,420
636,794
$ 2,783,826 $ 636,794 $
12,242 $
676,511
688,753 $
537 $
113,090
113,627 $
136,185
— $
912
4,087,727
912 $ 4,223,912
The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with generally accepted
accounting principles. The methodology used to assess the adequacy is consistently applied to the Company's loan portfolio and consists
of three elements: (1) specific valuation allowances based on probable losses on impaired loans; (2) historical valuation allowances based on
loan loss experience for similar loans with similar characteristics and trends; and (3) general valuation allowances determined based on
changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, general economic
conditions and other qualitative risk factors both internal and external to the Company.
Specific allowances are established for loans where management has determined that probability of a loss exists by analyzing the borrower’s
ability to repay amounts owed, collateral deficiencies and any relevant qualitative or environmental factors impacting the loan. Historical
valuation allowances are determined by applying percentage loss factors to the credit exposures from outstanding loans. For commercial,
agricultural and real estate loans, loss factors are applied based on the internal risk classifications of these loans. For consumer loans, loss
factors are applied on a portfolio basis. For commercial, agriculture and real estate loans, loss factor percentages are based on a migration
analysis of our historical loss experience, designed to account for credit deterioration. For consumer loans, loss factor percentages are based
on a one-year loss history. General valuation allowances are determined by evaluating, on a quarterly basis, changes in the nature and
volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic and regulatory factors and the estimated
impact of current economic, environmental and regulatory conditions on historical loss rates.
An allowance for loan losses is established for loans acquired credit impaired and for which the Company projects a decrease in the expected
cash flows in periods subsequent to the acquisition of such loans. As of December 31, 2014, the Company's allowance for loans losses
included $287 related to acquired credit impaired loans.
94
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
December 31,
Land
Buildings and improvements
Furniture and equipment
Less accumulated depreciation
Premises and equipment, net
2014
2013
40,620 $
209,328
74,959
324,907
(129,695)
195,212 $
37,581
196,950
68,870
303,401
(123,711)
179,690
$
$
The Parent Company and a FIB branch office lease premises from an affiliated partnership. See Note 16—Commitments and Contingencies.
(7)
COMPANY-OWNED LIFE INSURANCE
Company-owned life insurance consists of the following:
December 31,
Key executive, principal shareholder
Key executive split dollar
Group life
Total
2014
2013
3,798 $
4,707
145,316
153,821 $
3,660
4,628
113,887
122,175
$
$
The Company maintains key executive life insurance policies on certain principal shareholders. Under these policies, the Company receives
benefits payable upon the death of the insured. The net cash surrender value of key executive, principal shareholder insurance policies was
$3,798 and $3,660 at December 31, 2014 and 2013, respectively.
The Company also has life insurance policies covering selected other key officers. The net cash surrender value of these policies was $4,707
and $4,628 at December 31, 2014 and 2013, respectively. Under these policies, the Company receives benefits payable upon death of the
insured. An endorsement split dollar agreement has been executed with the selected key officers whereby a portion of the policy death
benefit is payable to their designated beneficiaries. The endorsement split dollar agreement will provide post-retirement coverage for those
selected key officers meeting specified retirement qualifications. The Company expenses the earned portion of the post-employment benefit
through the vesting period.
The Company has group life insurance policies covering selected officers of FIB. The net cash surrender value of these policies was $132,111
and $113,887 at December 31, 2014 and 2013, respectively. Under these policies, the Company receives benefits payable upon death of the
insured. The Company has entered into either an endorsement split dollar agreement or a survivor income benefit agreement with each
insured officer. Under the endorsement split dollar agreements, a portion of the policy death benefit is payable to the insured's designated
beneficiary if the insured is employed by the Company at the time of death. Under the survivor income benefit agreements, the Company
makes a lump-sum payment to the insured's designated beneficiary if the insured is employed by the Company at the time of death.
The Company obtained group life insurance policies covering certain key employees of MWB as part of the MWFC acquisition. The net
cash surrender value of these policies was $13,205 at December 31, 2014. Under these policies, the Company receives all benefits payable
upon death of the insured.
95
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(8)OTHER REAL ESTATE OWNED
Information with respect to the Company’s other real estate owned follows:
Year Ended December 31,
Balance at beginning of year
Acquisitions
Additions
Capitalized improvements
Valuation adjustments
Dispositions
Balance at end of year
2014
2013
2012
15,504 $
3,608
5,198
—
(224)
(10,532)
13,554 $
32,571 $
—
11,545
65
(3,512)
(25,165)
15,504 $
37,452
—
43,541
75
(6,724)
(41,773)
32,571
$
$
Write-downs of $224 during 2014 included adjustments of $93 directly related to receipt of updated appraisals and adjustments of $131 based
on other sources, including management estimates of the current fair value of properties. Write-downs of $3,512 during 2013 included
adjustments of $1,083 directly related to receipt of updated appraisals and adjustments of $2,429 based on other sources, including
management estimates of the current fair value of properties. Write-downs of $6,724 during 2012 included adjustments of $702 directly related
to receipt of updated appraisals and adjustments of $6,022 based on other sources, including management estimates of the current fair value
of properties.
(9) MORTGAGE SERVICING RIGHTS
Information with respect to the Company’s mortgage servicing rights follows:
Year Ended December 31,
Balance at beginning of year
Sales of mortgage servicing rights
Originations of mortgage servicing rights
Amortization expense
Write-off of permanent impairment
Balance at end of year
Less valuation reserve
Balance at end of year
Principal balance of serviced loans underlying mortgage servicing rights
Mortgage servicing rights as a percentage of serviced loans
$
$
$
2014
2013
2012
14,018
—
2,717
(2,361)
—
14,374
(336)
14,038
$
$
13,224
—
3,581
(2,787)
—
14,018
(472)
13,546
$
$
13,450
(735)
4,563
(3,501)
(553)
13,224
(571)
12,653
2,615,311
$
2,416,621
$
2,146,351
0.54%
0.56%
0.59%
At December 31, 2014, the estimated fair value and weighted average remaining life of the Company’s mortgage servicing rights were $21,434
and 6.9 years, respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 9.5% to 21.0% and
monthly prepayment speeds ranging from 0.6% to 2.4% depending upon the risk characteristics of the underlying loans. The Company
reversed impairment of $136, $99 and $771 in 2014, 2013 and 2012, respectively. Permanent impairment of $553 was charged against the
carrying value of mortgage servicing rights in 2012. No permanent impairment was recorded in 2014 or 2013.
During 2012, the Company sold mortgage servicing rights with carrying values aggregating $735. A gain of $19 on the sale was recorded as
other income. In conjunction with the sale, the Company entered into an agreement with the purchaser whereby the Company continues to
sub-service the loans underlying the sold mortgage servicing rights.
96
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(10) DEPOSITS
Deposits are summarized as follows:
December 31,
Non-interest bearing demand
Interest bearing:
Demand
Savings
Time, $100 and over
Time, other
Total interest bearing
Total deposits
2014
1,791,364 $
2013
1,491,683
2,133,273
1,843,355
520,125
718,095
5,214,848
7,006,212 $
1,848,806
1,602,544
492,051
698,666
4,642,067
6,133,750
$
$
The Company had no brokered time deposits as of December 31, 2014 and 2013.
Other time deposits include deposits obtained through the Company’s participation in the Certificate of Deposit Account Registry Service
(“CDARS”). CDARS deposits totaled $40,491 and $51,526 as of December 31, 2014 and 2013, respectively.
As of December 31, 2014 and 2013, the Company had time deposits of $228,410 and $207,504, respectively, that met or exceeded the FDIC
insurance limit of $250.
Maturities of time deposits at December 31, 2014 are as follows:
2015
2016
2017
2018
2019
Thereafter
Total
Time, $100
and Over
Total Time
$
$
337,404 $
90,509
58,387
20,971
12,854
—
520,125 $
803,986
209,192
127,367
62,084
35,577
14
1,238,220
Interest expense on time deposits of $100 or more was $4,003, $4,880 and $6,951 for the years ended December 31, 2014, 2013 and 2012,
respectively.
97
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
December 31,
Parent Company:
6.81% subordinated term loan maturing January 9, 2018, principal due at maturity, interest payable
quarterly
Subsidiaries:
2014
2013
$
20,000 $
20,000
Variable rate subordinated term loan maturing February 28, 2018, principal due at maturity, interest
payable quarterly (rate of 2.24% at December 31, 2014)
4.86% note payable to FHLB, maturing October 31, 2015
8.00% capital lease obligation with term ending October 25, 2029
6.24% note payable maturing September 2032, principal due at maturity, interest payable monthly
Total long-term debt
15,000
225
1,643
1,199
38,067 $
$
Maturities of long-term debt at December 31, 2014 are as follows:
2015
2016
2017
2018
2019
Thereafter
Total
$
$
15,000
225
1,692
—
36,917
285
65
71
35,077
83
2,486
38,067
On January 10, 2008, the Company borrowed $20,000 on a 6.81% unsecured subordinated term loan maturing January 9, 2018, with interest
payable quarterly and principal due at maturity. The unsecured subordinated term loan qualifies as tier 2 capital under regulatory capital
adequacy guidelines.
During February 2008, the Company borrowed $15,000 on a variable rate unsecured subordinated term loan maturing February 28, 2018, with
interest payable quarterly and principal due at maturity. The Company may elect at various dates either prime or LIBOR plus 2.00%. The
interest rate on the subordinated term loan was 2.24% as of December 31, 2014. The unsecured subordinated term loan qualifies as tier 2
capital under regulatory capital adequacy guidelines.
The note payable to FHLB is secured by a blanket assignment of the Company’s qualifying residential and commercial real estate loans. The
Company has available lines of credit with the FHLB of approximately $701,768, subject to collateral availability. As of December 31, 2014 and
2013, FHLB advances of $225 were included in long-term debt. As of December 31, 2014 and 2013 there were no short-term advances
outstanding with the FHLB.
The Company has a capital lease obligation on a banking office. The balance of the obligation was $1,643 and $1,692 as of December 31, 2014
and 2013, respectively. Assets acquired under capital lease, consisting solely of a building and leasehold improvements, are included in
premises and equipment and are subject to depreciation.
In conjunction with the MWFC acquisition, the Company assumed a 6.24% fixed rate note payable maturing in September, 2032, with interest
payable monthly and principal due at maturity. The balance of the obligation was $1,199 as of December 31, 2014.
The Company had other borrowed funds of $9 and $3 as of December 31, 2014 and 2013, respectively, consisting of demand notes issued to
the United States Treasury, secured by investment securities and bearing no interest.
98
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company has federal funds lines of credit with third parties amounting to $115,000, subject to funds availability. These lines are subject
to cancellation without notice. The Company also has a line of credit with the Federal Reserve Bank for borrowings up to $364,205 secured
by a blanket pledge of indirect consumer loans.
(12) SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS
The Company sponsors six wholly-owned business trusts, Trust I, Trust II, Trust III, Trust IV, Trust V and Trust VI (collectively, the
“Trusts”). The Trusts were formed for the exclusive purpose of issuing an aggregate of $80,000 of 30-year floating rate mandatorily
redeemable capital trust preferred securities (“Trust Preferred Securities”) to third-party investors. The Trusts also issued, in aggregate,
$2,477 of common equity securities to the Parent Company. Proceeds from the issuance of the Trust Preferred Securities and common equity
securities were invested in 30-year junior subordinated deferrable interest debentures (“Subordinated Debentures”) issued by the Parent
Company.
A summary of Subordinated Debenture issuances follows:
Issuance
October 2007
November 2007
December 2007
December 2007
January 2008
January 2008
Maturity Date
January 1, 2038
December 15, 2037
December 15, 2037
April 1, 2038
April 1, 2038
April 1, 2038
Total subordinated debentures held by subsidiary trusts
Principal Amount Outstanding
as of December 31,
2014
2013
$
$
10,310
15,464
20,619
15,464
10,310
10,310
82,477
$
$
10,310
15,464
20,619
15,464
10,310
10,310
82,477
In October 2007, the Company issued $10,310 of Subordinated Debentures to Trust II. The Subordinated Debentures bear a cumulative
floating interest rate equal to LIBOR plus 2.25% per annum. As of December 31, 2014 the interest rate on the Subordinated Debentures was
2.49%.
In November 2007, the Company issued $15,464 of Subordinated Debentures to Trust I. The Subordinated Debentures bore interest at a fixed
rate of 7.50% for five years after issuance until December 16, 2012, and thereafter at a variable rate equal to LIBOR plus 2.75% per annum. As
of December 31, 2014, the interest rate on the Subordinated Debentures was 2.99%.
In December 2007, the Company issued $20,619 of Subordinated Debentures to Trust III. The Subordinated Debentures bore interest at a
fixed rate of 6.88% for five years after issuance until December 15, 2012, and thereafter at a variable rate equal to LIBOR plus 2.40% per
annum. As of December 31, 2014, the interest rate on the Subordinated Debentures was 2.64%.
In December 2007, the Company issued $15,464 of Subordinated Debentures to Trust IV. The Subordinated Debentures bear a cumulative
floating interest rate equal to LIBOR plus 2.70% per annum. As of December 31, 2014 the interest rate on the Subordinated Debentures was
2.94%.
In January 2008, the Company issued $10,310 of Subordinated Debentures to Trust V. The Subordinated Debentures bore interest at a fixed
rate of 6.78% for five years after issuance until April 1, 2013, and thereafter at a variable rate equal to LIBOR plus 2.75% per annum. As of
December 31, 2014 the interest rate on the Subordinated Debentures was 2.99%.
99
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In January 2008, the Company issued $10,310 of Subordinated Debentures to Trust VI. The Subordinated Debentures bear a cumulative
floating interest rate equal to LIBOR plus 2.75% per annum. As of December 31, 2014, the interest rate on the Subordinated Debentures was
2.99%.
The Subordinated Debentures are unsecured with interest distributions payable quarterly. The Company may defer the payment of interest at
any time provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the
Trust Preferred Securities will also be deferred and the Company’s ability to pay dividends on its common and preferred shares is restricted.
The Subordinated Debentures may be redeemed, subject to approval by the Federal Reserve Bank, at the Company’s option on or after five
years from the date of issue, or at any time in the event of unfavorable changes in laws or regulations. Debt issuance costs consisting
primarily of underwriting discounts and professional fees were capitalized and are being amortized through maturity to interest expense using
the straight-line method, which approximates level yield.
The terms of the Trust Preferred Securities are identical to those of the Subordinated Debentures. The Trust Preferred Securities are subject
to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity dates or earlier redemption in an amount
equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. The Company guarantees the
payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the
Trusts.
Subject to certain limitations, the Trust Preferred Securities qualify as tier 1 capital of the Parent Company under the Federal Reserve Board’s
capital adequacy guidelines. Proceeds from the issuance of the Trust Preferred Securities were used to fund acquisitions.
In conjunction with the acquisition of MWFC on July 31, 2014, the Company acquired two business trusts, Mountain West Statutory Trust
III and Mountain West Statutory Trust IV (collectively, the “Mountain West Trusts”). The Mountain West Trusts were formed for the
exclusive purpose of issuing an aggregate of $19,825 of 30-year floating rate mandatorily redeemable capital trust preferred securities
(“Mountain West Trust Preferred Securities”) to third-party investors. The Trusts also issued, in aggregate, $614 of common equity
securities to MWFC. Proceeds from the issuance of the Trust Preferred Securities and common equity securities were invested in 30-year
junior subordinated deferrable interest debentures (“Mountain West Subordinated Debentures”) issued by the MWFC.
On December 15, 2014, the Company redeemed $14,433 of Mountain West Subordinated Debentures bearing a cumulative floating interest
rate equal to LIBOR plus 1.85% per annum. The redemption price of $14,433 was equal to the $1 liquidation amount of each debenture plus all
accrued and unpaid distributions to the date of redemption. The redemption of the Mountain West Subordinated Debentures caused a
mandatory redemption of $14,000 of Mountain West trust Preferred Securities and $433 of common equity securities.
On December 26, 2014, the Company redeemed $6,006 of Mountain West Subordinated Debentures bearing a cumulative floating interest rate
equal to LIBOR plus 3.10% per annum. The redemption price of $6,006 was equal to the $1 liquidation amount of each debenture plus all
accrued and unpaid distributions to the date of redemption. The redemption of the Mountain West Subordinated Debentures caused a
mandatory redemption of $5,825 of Mountain West Trust Preferred Securities and $181 of common equity securities.
(13) CAPITAL STOCK AND DIVIDEND RESTRICTIONS
The Company's authorized common stock consists of 200,000,000 shares, of which, 100,000,000 shares are designated as Class A common
stock and 100,000,000 are designated as Class B common stock. The Class A common stock has one vote per share. The Class B common
stock has five votes per share and is convertible to Class A common stock on a share-for-share basis at any time.
The Company had 21,928,932 shares of Class A common stock and 23,859,483 shares of Class B common stock outstanding as of
December 31, 2014. The Company had 19,868,018 shares of Class A common stock and 24,287,045 shares of Class B common stock
outstanding as of December 31, 2013.
100
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
On July 31, 2014, the Company issued 1,378,230 shares of its Class A common stock with an aggregate value of $35,972 as partial
consideration for the acquisition of MWFC. In addition, the Company issued 24,581 shares of its Class A common stock with an aggregate
value of $620 to directors for their service on the Company's board of directors during 2014. The Company issued 26,096 shares of its Class A
common stock with an aggregate value of $543 to directors for their service on the Company's board of directors during 2013.
During 2014, the Company repurchased and retired 362,121 shares of its Class A common stock in a combination of open market and
privately negotiated transactions at an aggregate purchase price of $9,078, or a weighted average price of $25.07 per share. The repurchases
were made pursuant to a stock repurchase program approved by the Company's Board of Directors. All other stock repurchases during 2014
and 2013 were redemptions of vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by
participants of the Company's 2006 Equity Compensation Plan.
On January 24, 2014, the Company filed a Registration Statement on Form S-8 to register an additional 1,500,000 share of Class A common
stock to be issued pursuant to the Company's 2006 Equity Compensation Plan, as amended and restated.
As of December 31, 2012, the Company had 5,000 shares of 6.75% Series A noncumulative redeemable preferred stock (“Series A Preferred
Stock”) issued with an aggregate value of $50,000. The Series A Preferred Stock ranked senior to the Company’s common stock with respect
to dividend and liquidation rights and had no voting rights. Holders of the Series A Preferred Stock were entitled to receive, if and when
declared, noncumulative dividends at an annual rate of $675 per share, based on a 360 day year. The Company redeemed all of the Series A
Preferred Stock on January 18, 2013 at an aggregate redemption price of $50,150, or $10,000 per share plus all accrued and unpaid dividends.
Upon notice to holders of the redemption in December 2012, the Series A Preferred Stock was reclassified from stockholders' equity to a
liability.
The payment of dividends by subsidiary banks is subject to various federal and state regulatory limitations. In general, a bank is limited,
without the prior consent of its regulators, to paying dividends that do not exceed current year net profits together with retained earnings
from the two preceding calendar years. The Company’s debt instruments also include limitations on the payment of dividends.
101
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(14) EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding
during the period presented, excluding unvested restricted stock. Diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares determined for the basic earnings per share computation plus the dilutive effects of stock-based
compensation using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per common share:
Year Ended December 31,
Net income
Less preferred stock dividends
Net income available to common shareholders, basic and diluted
Weighted average common shares outstanding for basic earnings per share
computation
Dilutive effects of stock-based compensation
Weighted average common shares outstanding for diluted earnings per common
share computation
Basic earnings per common share
Diluted earnings per common share
$
$
$
2014
2013
2012
84,401 $
—
84,401 $
86,136 $
—
86,136 $
58,224
3,300
54,924
44,615,060
595,501
43,566,681
477,921
42,965,987
126,991
45,210,561
44,044,602
43,092,978
1.89 $
1.87
1.98 $
1.96
1.28
1.27
The Company had 5,000, 21,372 and 2,427,823 stock options outstanding as of December 31, 2014, 2013 and 2012, respectively, that were not
included in the computation of diluted earnings per common share because their effect would be anti-dilutive. The Company had 88,797,
37,734 and 41,240 shares of unvested restricted stock as of December 31, 2014, 2013 and 2012, respectively, that were not included in the
computation of diluted earnings per common share because performance conditions for vesting had not been met.
(15) REGULATORY CAPITAL
The Company is subject to the regulatory capital requirements administered by federal banking regulators and the Federal Reserve. Failure to
meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the
Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Parent Company,
like all bank holding companies, is not subject to the prompt corrective action provisions. Capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of
total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets, as defined in the regulations. As of December 31, 2014,
the Company exceeded all capital adequacy requirements to which it is subject.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company’s actual capital amounts and ratios and selected minimum regulatory thresholds and prompt corrective action provisions as of
December 31, 2014 and 2013 are presented in the following table:
Actual
Adequately Capitalized
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
December 31, 2014
Total risk-based capital:
Consolidated
FIB
Tier 1 risk-based capital:
Consolidated
FIB
Leverage capital ratio:
Consolidated
FIB
December 31, 2013
Total risk-based capital:
Consolidated
FIB
Tier 1 risk-based capital:
Consolidated
FIB
Leverage capital ratio:
Consolidated
FIB
897,769
832,907
807,229
754,708
807,229
754,708
$
16.2%
15.1
14.5
13.7
9.6
9.2
444,685
442,468
222,343
221,234
335,897
330,006
8.0%
8.0
4.0
4.0
4.0
4.0
Actual
Adequately Capitalized
Amount
Ratio
Amount
Ratio
829,443
723,955
739,246
650,093
739,246
650,093
$
16.7%
14.7
14.9
13.2
10.1
8.9
396,210
394,038
198,105
197,019
293,414
292,199
8.0%
8.0
4.0
4.0
4.0
4.0
NA
NA
553,085
10.0%
NA
NA
331,851
6.0
NA
NA
412,507
5.0
Well Capitalized
Amount
Ratio
NA
NA
492,548
10.0%
NA
NA
295,529
6.0
NA
NA
365,248
5.0
$
$
$
$
$
$
On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised regulatory capital framework
for U.S. banks in accordance with the Basel III international accord and satisfying related mandates under the Dodd-Frank Wall Street Reform
and Consumer Protection Act . The revised regulatory capital framework (the "Basel III Capital Rules") substantially revise the risk-based
capital requirements applicable to bank holding companies and depository institutions by defining the components of capital and addressing
other issues affecting the numerator in banking institutions’ regulatory capital ratios, addressing risk weights and other issues affecting the
denominator in banking institutions’ regulatory capital ratios and replacing the existing risk-weighting approach with a more risk-sensitive
approach. The Basel III Capital Rules are effective for the Company on January 1, 2015, subject to a phase-in period for certain provisions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(16) COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
FIB was a defendant in a lender liability lawsuit, Kelly Logging Inc. v. First Interstate Bank (the “case"), which was tried in in the Montana
Fourth Judicial District, Missoula County in Missoula, Montana (the “court") in August, 2014. On August 14, 2014, a jury awarded damages
to Kelly Logging of $17,047, which included $287 in compensatory damages and $16,760 in punitive damages. On October 1, 2014, a non-final
judgment was entered in this matter in the amount of $17,047 plus reasonable attorney fees and interest. The non-final judgment is subject to
the court's mandatory review of the jury's punitive damages award. The court held oral argument on the punitive damages award and an
evidentiary hearing on Kelly Logging's attorneys' fees and costs. No decisions on the punitive damages award or Kelly Logging’s fees and
costs have been rendered but FIB's other post-trial motions have been deemed denied for failure of the court to rule on them within the time
allowed by the Montana Rules of Civil Procedure.
The Company intends to continue to defend itself vigorously in this litigation and believes it has valid bases in law and fact to appeal the
verdict. The Montana Supreme Court has previously reduced an excessive punitive damage award to an amount within the upper limit of the
federal due process guidelines and such guidelines are expected to be applied by the court and, if necessary, by the Montana Supreme Court
in this case. Although the Company believes it has meritorious defenses and appellate issues for this litigation, these proceedings are
subject to many uncertainties and, given their complexity and scope, the final outcome cannot be predicted and could have a material
adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. During 2014, the Company accrued
$4,000 of litigation-related loss contingency expense, which takes into consideration the federal due process guidelines related to punitive
damage awards and reasonable estimates of the plaintiff's attorneys fees and interest.
In the normal course of business, the Company is involved in various other claims and litigation. In the opinion of management, following
consultation with legal counsel, the ultimate liability or disposition thereof is not expected to have a material adverse effect on the
consolidated financial condition, results of operations or liquidity of the Company.
Other Committments:
The Company had commitments under construction contracts of $4,047 as of December 31, 2014.
The Company had commitments to purchase available-for-sale residential mortgage-backed investment securities of $16,840 as of
December 31, 2014.
The Parent Company and the Billings office of FIB are the anchor tenants in a building owned by a partnership in which FIB is one of two
partners, and has a 50% partnership interest.
The Company leases certain premises and equipment from third parties under operating leases. Total rental expense to third parties was
$1,190 in 2014, $1,403 in 2013 and $1,423 in 2012.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The total future minimum rental commitments, exclusive of maintenance and operating costs, required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year at December 31, 2014, are as follows:
For the year ending December 31:
2015
2016
2017
2018
2019
Thereafter
Total
Third
Parties
Related
Partnership
Total
$
$
2,132 $
2,236
1,728
1,537
1,487
9,941
19,061 $
676 $
676
499
188
—
—
2,039 $
2,808
2,912
2,227
1,725
1,487
9,941
21,100
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially all of the loan
sales agreements require the repurchase of a mortgage loan by the seller in situations such as breach of representation, warranty or
covenant; untimely document delivery; false or misleading statements; failure to obtain certain certificates or insurance; unmarketability; etc.
Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of
days or months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the
specific terms stated in the agreements, the Company had $4,486 and $5,871 of sold residential mortgage loans with recourse provisions still
in effect as of December 31, 2014 and 2013, respectively. The Company did not repurchase any significant amount of loans from secondary
market investors under the terms of loan sales agreements during the years ended December 31, 2014, 2013 and 2012. In the opinion of
management, the risk of recourse and the subsequent requirement of loan repurchase to the Company is not significant, and accordingly no
liabilities have been established related to such. In addition, the Company made various representations and warranties associated with the
sale of loans. The Company has not incurred significant losses resulting from these provisions.
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheet. The Company
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit
evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-
producing commercial properties.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Generally, commitments to extend credit are subject to annual renewal. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to extend credit to
borrowers approximated $1,415,119 at December 31, 2014, which included $476,752 on unused credit card lines and $363,609 with commitment
maturities beyond one year. Commitments to extend credit to borrowers approximated $1,238,269 at December 31, 2013, which included
$401,021 on unused credit card lines and $304,789 with commitment maturities beyond one year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
Most commitments extend for no more than two years and are generally subject to annual renewal. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2014 and 2013, the Company had
outstanding stand-by letters of credit of $58,950 and $53,508, respectively. The estimated fair value of the obligation undertaken by the
Company in issuing standby letters of credit is included in accounts payable and accrued expenses in the Company’s consolidated balance
sheets.
(18)INCOME TAXES
Income tax expense consists of the following:
Year ended December 31,
2014
2013
2012
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
$
$
34,941 $
4,928
39,869
4,870
475
5,345
45,214 $
30,757 $
4,533
35,290
10,056
1,220
11,276
46,566 $
18,458
2,818
21,276
7,697
1,065
8,762
30,038
Total income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35 percent in 2014, 2013 and
2012 to income before income taxes as a result of the following:
Year ended December 31,
Tax expense at the statutory tax rate
Increase (decrease) in tax resulting from:
Tax-exempt income
State income tax, net of federal income tax benefit
Other, net
Tax expense at effective tax rate
2014
2013
2012
45,365 $
46,446 $
30,892
(4,255)
3,541
563
45,214 $
(3,620)
3,741
(1)
46,566 $
(3,498)
2,524
120
30,038
$
$
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The tax effects of temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise
to significant portions of the net deferred tax asset (liability) relate to the following:
December 31,
Deferred tax assets:
Loans, principally due to allowance for loan losses
Lease Costs
Loss Contingencies
Loan Discount
Investment securities, unrealized losses
Employee benefits
Other real estate owned write-downs and carrying costs
Deferred gain on sale of subsidiary
Deferred revenue on contract
Other
Deferred tax assets
Deferred tax liabilities:
Fixed assets, principally differences in bases and depreciation
Investment securities, unrealized gains
Investment in joint venture partnership, principally due to differences in depreciation of partnership
assets
Prepaid amounts
Government agency stock dividends
Goodwill and core deposit intangibles
Mortgage servicing rights
Other
Deferred tax liabilities
Net deferred tax assets
2014
2013
$
28,506 $
719
1,785
7,022
2,728
8,256
2,536
253
481
760
53,046
(569)
(1,351)
(1,053)
(1,385)
(2,407)
(36,732)
(4,144)
(531)
(48,172)
$
4,874 $
30,903
—
—
—
9,473
6,813
4,731
484
545
299
53,248
(4,227)
—
(700)
(1,247)
(1,965)
(28,167)
(4,337)
(451)
(41,094)
12,154
The Company had a current net income tax payable of $4,693 at December 31, 2014 and income tax receivable of $2,968 at December 31, 2013,
which are included in accounts payable and accrued expenses.
(19) STOCK-BASED COMPENSATION
The Company has equity awards outstanding under two stock-based compensation plans; the 2006 Equity Compensation Plan (the “2006
Plan”) and the 2001 Stock Option Plan. These plans were primarily established to enhance the Company’s ability to attract, retain and
motivate employees. The Company’s Board of Directors or, upon delegation, the Compensation Committee of the Board of Directors
(“Compensation Committee”) has exclusive authority to select employees, advisors and others, including directors, to receive awards and to
establish the terms and conditions of each award made pursuant to the Company’s stock-based compensation plans.
The 2006 Plan, approved by the Company’s shareholders in May 2006 and May 2014, was established to consolidate into one plan the
benefits available under the 2001 Stock Option Plan and all other then existing share-based award plans (collectively, the “Previous Plans”).
The Previous Plans continue with respect to awards made prior to May 2006. All shares of common stock available for future grant under the
Previous Plans were transferred into the 2006 Plan. At December 31, 2014, there were 783,007 common shares available for future grant under
the 2006 Plan. All awards granted subsequent to March 29, 2010 are for shares of Class A common stock. All awards granted prior to
March 29, 2010 are for shares of Class B common stock.
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Stock Options. All options granted have an exercise price equal to fair market value, which is currently defined as the closing sales price for
the stock as quoted on the NASDAQ Stock Market for the last market trading day preceding the date that the Company’s Board of Directors
awards the benefit. Options may be subject to vesting as determined by the Company's Board of Directors or Compensation Committee, and
can be exercised for periods of up to ten years from the date of grant.
Compensation expense related to stock option awards of $905, $1,390 and $1,276 was included in benefits on the Company’s consolidated
income statements for the years ended December 31, 2014, 2013 and 2012, respectively. Related income tax benefits recognized for the years
ended December 31, 2014, 2013 and 2012 were $346, $531 and $488, respectively.
The weighted average grant date fair value of options granted was $3.54 and $4.06 during the years ended December 31, 2013 and 2012,
respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. No stock
option awards were granted in 2014. The following table presents the weighted-average assumptions used in the option pricing model for the
periods indicated:
Years ended December 31,
Expected volatility
Expected dividend yield
Risk-free interest rate
Expected life of options (in years)
2013
2012
30.61%
3.00%
0.88%
5.52
37.46%
3.35%
1.99%
7.85
Expected dividend yield is based on the Company’s annualized expected dividends per share divided by the average common stock price.
Risk-free interest rate is based on the U.S. treasury constant maturity yield for treasury securities with maturities approximating the expected
life of the options granted on the date of grant. The expected life of options is based on the Company’s historical exercise and post-vesting
termination behaviors. Beginning in 2013, the Company used its own historical volatility of common stock for the expected volatility
assumption. Prior to that and subsequent to the Company's initial public offering ("IPO"), which concluded on March 29, 2010, the Company
expected the historical volatility of its common stock would not be indicative of future volatility. As such, in 2012 the Company estimated
expected volatility based on the share price volatility of a peer group of publicly-traded regional banks of similar size and performance as the
Company over the expected life of options.
The following table summarizes stock option activity under the Company’s active stock option plans for the year ended December 31, 2014:
Outstanding options, beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding options, end of year
Outstanding options exercisable, end of year
Number of
Shares
2,523,593 $
—
(739,290)
(5,893)
(30,378)
1,748,032 $
1,393,010 $
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contract Life
17.20
—
17.73
12.85
16.20
17.01
17.15
4.43 years
4.12 years
The total intrinsic value of fully-vested stock options outstanding as of December 31, 2014 was $14,879. The total intrinsic value of options
exercised was $7,363, $7,108 and $1,158 during the years ended December 31, 2014, 2013 and 2012, respectively. The actual tax benefit realized
for the tax deduction from option exercises totaled $2,594, $1,963 and $397 for the years ended December 31, 2014, 2013 and 2012,
respectively. The Company received cash of $6,299, $9,271 and $1,612 from stock option exercises during the years ended December 31, 2014,
2013 and 2012, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company redeemed common stock with aggregate values of $6,829, $8,721 and $2,675 tendered in payment for stock option exercises
during the years ended December 31, 2014, 2013 and 2012, respectively.
Information with respect to the Company’s nonvested stock options as of and for the year ended December 31, 2014 follows:
Nonvested stock options, beginning of year
Granted
Vested
Forfeited
Nonvested stock options, end of year
Number of
Shares
733,906 $
—
(348,506)
(30,378)
355,022 $
Weighted-
Average
Grant Date Fair
Value
3.78
3.94
3.70
3.62
As of December 31, 2014, there was $577 of unrecognized compensation cost related to nonvested stock options granted under the
Company’s active stock option plans. That cost is expected to be recognized over a weighted-average period of 0.86 years. The total fair
value of shares vested during 2014 was $1,363.
Restricted Stock Awards. Common stock issued under the Company’s restricted stock plan may not be sold or otherwise transferred until
restrictions have lapsed or performance objectives have been obtained. During the vesting periods, participants have voting rights and
receive dividends on the restricted shares. Upon termination of employment, common shares upon which restrictions have not lapsed must
be returned to the Company.
Based on the substantive terms of each award, restricted shares are classified as equity or liability awards. The fair value of equity-classified
restricted stock awards is being amortized as compensation expense on a straight-line basis over the period restrictions lapse or performance
goals are met. Compensation cost for liability-classified awards is expensed each period from the date of grant to the measurement date based
on the fair value of the Company’s common stock at the end of each period. Compensation expense related to restricted stock awards of
$2,109, $1,546 and $1,209 was included in benefits on the Company’s consolidated statements of income for the years ended December 31,
2014, 2013 and 2012, respectively. Related income tax benefits recognized for the years ended December 31, 2014, 2013 and 2012 were $807,
$591 and $462, respectively.
The following table presents information regarding the Company’s restricted stock as of December 31, 2014:
Restricted stock, beginning of year
Granted
Vested
Forfeited
Canceled
Restricted stock, end of year
Weighted-
Average
Measurement
Date
Fair Value
16.08
24.36
15.54
16.43
21.39
21.16
Number of
Shares
225,525 $
148,278
(96,143)
(27,772)
(1,489)
248,399 $
During 2014, the Company issued 148,278 restricted common shares. The 2014 restricted share awards included 73,938 performance restricted
shares of which 24,646 vest in varying percentages upon achievement of defined return on asset performance goals, 24,646 vest in varying
percentages upon achievement of defined return on equity performance goals and 24,646 vest in varying percentages upon achievement of
defined total return to shareholder goals. Vesting of the performance restricted shares is also contingent on employment as of December 31,
2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Additionally, 74,340 time-restricted shares were issued during 2014 that vest one-third on each annual anniversary of the grant date through
February 15, 2017, contingent on continued employment through the vesting date.
As of December 31, 2014, there was $3,353 of unrecognized compensation cost related to nonvested restricted stock awards expected to be
recognized over a period of 1.60 years.
(20) EMPLOYEE BENEFIT PLANS
Profit Sharing Plan. The Company has a noncontributory profit sharing plan. All employees, other than temporary employees, working 20
hours or more per week are eligible to participate in the profit sharing plan. The Company’s Board of Directors authorize contributions to the
profit sharing plan that are not to exceed, on an individual basis, the lesser of 100% of compensation or $40 annually. Participants become
100% vested upon the completion of three years of vesting service. Accrued contribution expense for this plan of $1,509, $1,555 and $2,063 in
2014, 2013 and 2012, respectively, is included in employee benefits expense in the Company’s consolidated statements of income..
Savings Plan. In addition, the Company has a contributory employee savings plan. Eligibility requirements for this plan are the same as those
for the profit sharing plan discussed in the preceding paragraph. Employee participation in the plan is at the option of the employee. The
Company contributes $1.25 for each $1.00 of employee contributions up to 4% of the participating employee’s compensation. Accrued
contribution expense for this plan of $4,256, $4,067 and $4,034 in 2014, 2013 and 2012, respectively, is included in employee benefits expense
in the Company’s consolidated statements of income.
Postretirement Healthcare Plan. The Company sponsors a contributory defined benefit healthcare plan (the “Plan”) for active employees
and employees and directors retiring from the Company at the age of at least 55 years and with at least 15 years of continuous service.
Retired Plan participants contribute the full cost of benefits based on the average per capita cost of benefit coverage for both active
employees and retired Plan participants.
The Plan’s unfunded benefit obligation of $3,577 and $4,870 as of December 31, 2014 and 2013, respectively, is included in accounts payable
and accrued expenses in the Company’s consolidated balance sheets. Net periodic benefit costs of $400, $571 and $561 for the years ended
December 31, 2014, 2013 and 2012, respectively, are included in employee benefits expense in the Company’s consolidated statements of
income.
Weighted average actuarial assumptions used to determine the postretirement benefit obligation at December 31, 2014 , and the net periodic
benefit costs for the year then ended, included a discount rate of 3.6% and a 5.5% annual increase in the per capita cost of covered
healthcare benefits. Weighted average actuarial assumptions used to determine the postretirement benefit obligation at December 31, 2013,
and the net periodic benefit costs for the year then ended, included a discount rate of 4.3% and a 5.0% annual increase in the per capita cost
of covered healthcare benefits.The estimated effect of a one percent increase or a one percent decrease in the assumed healthcare cost trend
rate would not significantly impact the service and interest cost components of the net periodic benefit cost or the accumulated
postretirement benefit obligation. Future benefit payments are expected to be $158, $163, $194, $219, $254 and $1,496 for 2015, 2016, 2017,
2018, 2019, and 2020 through 2024, respectively.
At December 31, 2014, the Company had accumulated other comprehensive loss related to the Plan of $613, or $413 net of related income tax
benefit, comprised of net actuarial losses of $257 and an unamortized transition asset of $356. The Company estimates $35 will be amortized
from accumulated other comprehensive loss into net period benefit costs in 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(21) OTHER COMPREHENSIVE INCOME
The gross amounts of each component of other comprehensive income and the related tax effects for the periods indicated are as follows:
Year ended December 31, 2014
Investment securities available-for sale:
Change in net unrealized gain during period
Reclassification adjustment for net gains included in net income
Change in unamortized loss on available-for-sale securities transferred into
held-to-maturity
Defined benefits post-retirement benefit plan:
Change in net actuarial loss
Total other comprehensive income
Year ended December 31, 2013
Investment securities available-for sale:
Change in net unrealized loss during period
Reclassification adjustment for net gains included in net income
Defined benefits post-retirement benefit plan:
Change in net actuarial loss
Total other comprehensive loss
Year ended December 31, 2012
Investment securities available-for sale:
Change in net unrealized gain during period
Reclassification adjustment for net gains included in net income
Change in unamortized gain on available-for-sale securities transferred into
held-to-maturity
Defined benefits post-retirement benefit plan:
Change in net actuarial loss
Total other comprehensive loss
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
21,147 $
(61)
8,321 $
(24)
12,826
(37)
(548)
(216)
(332)
1,731
22,269 $
681
8,762 $
1,050
13,507
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
(52,949) $
(1)
137
(52,813) $
(20,835) $
—
54
(20,781) $
(32,114)
(1)
83
(32,032)
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
(4,648) $
(348)
(1,829) $
(137)
56
22
(77)
(5,017) $
(30)
(1,974) $
(2,819)
(211)
34
(47)
(3,043)
$
$
$
$
$
$
The components of accumulated other comprehensive income, net of income taxes, are as follows:
Year ended December 31,
Net unrealized gain on investment securities available-for-sale
Net actuarial loss on defined benefit post-retirement benefit plans
Net accumulated other comprehensive loss
2014
2013
$
$
(2,121) $
(413)
(2,534) $
(14,578)
(1,463)
(16,041)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(22) NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company transferred loans of $5,198, $11,545 and $43,541 to other real estate owned in 2014, 2013 and 2012, respectively.
The Company transferred internally originated mortgage servicing assets of $2,717, $3,581 and $4,563 from loans to mortgage servicing
assets in 2014, 2013 and 2012, respectively.
During 2014, the Company issued 1,378,230 shares of its Class A common stock valued at $35,972 as partial consideration for the acquisition
of MWFC.
The Company transferred real property pending disposal of $1,448 and $566 to other assets in 2013 and 2012, respectively.
The Company reclassified tax credit investments of $429 from held-to-maturity investment securities to other assets during 2013.
During 2012, the Company reclassified $50,000 of perpetual preferred stock pending redemption from equity to a liability.
(23) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate BancSystem, Inc.
December 31,
Condensed balance sheets:
Cash and cash equivalents
Investment in subsidiaries, at equity:
Bank subsidiary
Nonbank subsidiaries
Total investment in subsidiaries
Advances to subsidiaries, net
Other assets
Total assets
Other liabilities
Advances from subsidiaries, net
Long-term debt
Subordinated debentures held by subsidiary trusts
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
112
2014
2013
$
65,483 $
105,274
936,817
1,982
938,799
4,337
29,335
1,037,954 $
26,553 $
—
20,000
82,477
129,030
908,924
1,037,954 $
$
$
$
793,892
1,980
795,872
—
26,809
927,955
17,602
6,295
20,000
82,477
126,374
801,581
927,955
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Years Ended December 31,
2014
2013
2012
Condensed statements of income:
Dividends from subsidiaries
Other interest income
Other income, primarily management fees from subsidiaries
Total income
Salaries and benefits
Interest expense
Acquisition expenses
Other operating expenses, net
Total expenses
Earnings before income tax benefit
Income tax benefit
Income before undistributed earnings of subsidiaries
Undistributed earnings of subsidiaries
Net income
Years Ended December 31,
Condensed statements of cash flows:
Cash flows from operating activities:
$
$
58,900 $
42
12,166
71,108
15,722
4,002
4,017
7,512
31,253
39,855
(6,862)
46,717
37,684
84,401 $
71,400 $
34
12,809
84,243
15,914
4,098
—
7,546
27,558
56,685
(5,703)
62,388
23,748
86,136 $
40,000
92
10,042
50,134
13,205
6,691
—
7,150
27,046
23,088
(6,222)
29,310
28,914
58,224
2014
2013
2012
Net income
$
Adjustments to reconcile net income to cash provided by operating activities:
84,401 $
86,136 $
58,224
Undistributed earnings of subsidiaries
Stock-based compensation expense
Tax benefits from stock-based compensation
Excess tax benefits from stock-based compensation
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures, net of sales
Acquisition of bank holding company, net of cash and cash equivalents
received
(37,684)
3,014
2,193
(2,205)
8,991
58,710
—
(37,891)
Net cash provided by (used in) investing activities
$
(37,891) $
(23,748)
2,936
1,898
(2,031)
(5,804)
59,387
—
—
— $
(28,914)
2,485
360
(273)
3,327
35,209
1
—
1
113
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Years Ended December 31,
Condensed statements of cash flows (continued):
Cash flows from financing activities:
Net (decrease) increase in advances from nonbank subsidiaries
Redemption of preferred stock
Repayment of junior subordinated debentures held by subsidiary trusts
Proceeds from issuance of common stock, net of stock issuance costs
Excess tax benefits from stock-based compensation
Purchase and retirement of common stock
Dividends paid to common stockholders
Dividends paid to preferred stockholders
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2014
2013
2012
$
$
(10,632) $
—
(20,439)
6,621
2,205
(9,739)
(28,626)
—
(60,610)
(39,791)
105,274
65,483 $
6,992 $
(50,000)
—
9,814
2,031
(448)
(17,909)
—
(49,520)
9,867
95,407
105,274 $
(2,838)
—
(41,238)
1,911
273
(263)
(26,208)
(3,300)
(71,663)
(36,453)
131,860
95,407
Noncash Investing and Financing Activities — During 2012, the Company reclassified $50,000 of perpetual preferred stock pending
redemption from equity to a liability.
(24) FAIR VALUE MEASUREMENTS
Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:
As of December 31, 2014
Balance
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Investment securities available-for-sale:
Obligations of U.S. government agencies
U.S. agency mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
$
720,933 $
— $
720,933 $
990,666
325
—
—
990,666
325
As of December 31, 2013
Balance
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Investment securities available-for-sale:
Obligations of U.S. government agencies
U.S. agency mortgage-backed securities &
collateralized mortgage obligations
Private mortgage-backed securities
$
763,238 $
— $
763,238 $
1,184,053
415
114
—
—
1,184,053
415
—
—
—
—
—
—
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The methodologies used by the Company in determining the fair values of each class of financial instruments are based primarily on the use
of independent, market-based data to reflect a value that would be reasonably expected in an orderly transaction between market participants
at the measurement date. The Company obtains fair value measurements for investment securities from an independent pricing service and
evaluates mortgage servicing rights for impairment using an independent valuation service. The vendors chosen by the Company are widely
recognized vendors whose evaluations support the pricing functions of financial institutions, investment and mutual funds, and portfolio
managers. The Company has documented and evaluated the pricing methodologies used by the vendors and maintains internal processes
that regularly test valuations. These internal processes include obtaining and reviewing available reports on internal controls, evaluating the
prices for reasonableness given market changes, obtaining and evaluating the inputs used in the model for a sample of securities,
investigating anomalies and confirming determinations through discussions with the vendor. For investment securities, if needed, a broker
may be utilized to determine the reported fair value. Further details on the methods used to estimate the fair value of each class of financial
instruments above are discussed below:
Investment Securities Available-for-Sale. The fair value measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit
information and the investment's terms and conditions, among other things.
Additionally, from time to time, certain assets are measured at fair value on a non-recurring basis. Adjustments to fair value generally result
from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment.
The following table presents information about the Company’s assets and liabilities measured at fair value on a non-recurring basis.
As of December 31, 2014
Total
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets (Level
1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Gains (Losses)
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
$
30,494 $
4,554
1,083
— $
—
—
— $
—
—
30,494 $
4,554
1,083
(14,552)
(12,665)
(702)
As of December 31, 2013
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
$
Total
57,302 $
8,502
1,186
115
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Gains (Losses)
— $
—
—
— $
—
—
57,302 $
8,502
1,186
(23,224)
(14,441)
(599)
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Impaired Loans. Collateralized impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from
collateral. The impaired loans are reported at fair value through specific valuation allowance allocations. In addition, when it is determined
that the fair value of an impaired loan is less than the recorded investment in the loan, the carrying value of the loan is adjusted to fair value
through a charge to the allowance for loan losses. Collateral values are estimated using independent appraisals and management estimates of
current market conditions. As of December 31, 2014, certain impaired loans with a carrying value of $45,046 were reduced by specific
valuation allowance allocations of $5,792 and partial loan charge-offs of $8,760 resulting in a reported fair value of $30,494. As of
December 31, 2013, certain impaired loans with a carrying value of $80,526 were reduced by specific valuation allowance allocations of $8,929
and partial loan charge-offs of $14,295 resulting in a reported fair value of $57,302.
OREO. The fair values of OREO are estimated using independent appraisals and management estimates of current market conditions. Upon
initial recognition, write-downs based on the foreclosed asset's fair value at foreclosure are reported through charges to the allowance for
loan losses. Periodically, the fair value of foreclosed assets is remeasured with any subsequent write-downs charged to OREO expense in the
period in which they are identified.
Long-lived Assets to be Disposed of by Sale. Long-lived assets to be disposed of by sale are carried at the lower of carrying value or fair
value less estimated costs to sell. The fair values of long-lived assets to be disposed of by sale are based upon observable market data and
management estimates of current market conditions. As of December 31, 2014, long-lived assets to be disposed of by sale with carrying
values of $1,785 that were reduced by write-downs of $702 charged to other expense resulting in a reported fair value of $1,083. As of
December 31, 2013, the Company had long-lived assets to be disposed of by sale of $1,785 that were reduced by write-downs of $599 charged
to other expense resulting in a reported fair value of $1,186.
In addition, mortgage loans held for sale are required to be measured at the lower of cost or fair value. The fair value of mortgage loans held
for sale is based upon binding contracts or quotes or bids from third party investors. As of December 31, 2014 and 2013, all mortgage loans
held for sale were recorded at cost.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which
the Company has utilized Level 3 inputs to determine fair values:
As of December 31, 2014
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
As of December 31, 2013
Impaired loans
Other real estate owned
Long-lived assets to be disposed of by sale
$
$
Fair
Value
30,494
4,554
1,083
Fair
Value
57,302
8,502
1,186
Valuation
Technique
Appraisal
Appraisal
Appraisal
Valuation
Technique
Appraisal
Appraisal
Appraisal
Unobservable
Inputs
Range
(Weighted Average)
Appraisal adjustment
Appraisal adjustment
Appraisal adjustment
0%
0%
0%
- 51%
(19%)
- 50%
(15%)
-
9%
(5%)
Unobservable
Inputs
Range
(Weighted Average)
Appraisal adjustment
Appraisal adjustment
Appraisal adjustment
6%
6%
0%
- 66%
(31%)
- 55%
-
9%
(15%)
(6%)
The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. The methodologies
for estimating the fair value of financial instruments that are measured at fair value on a recurring or non-recurring basis are discussed above.
The methodologies for estimating the fair value of other financial instruments are discussed below. For financial instruments bearing a
variable interest rate where no credit risk exists, it is presumed that recorded book values are reasonable estimates of fair value.
116
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Financial Assets. Carrying values of cash, cash equivalents and accrued interest receivable approximate fair values due to the liquid and/or
short-term nature of these instruments. Fair values for investment securities held-to-maturity are obtained from an independent pricing
service, which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live
trading levels, trade execution data, market consensus prepayment speeds, credit information and the investment’s terms and conditions,
among other things. Fair values of fixed rate loans and variable rate loans that reprice on an infrequent basis are estimated by discounting
future cash flows using current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
Carrying values of variable rate loans that reprice frequently, and with no change in credit risk, approximate the fair values of these
instruments.
Financial Liabilities. The fair values of demand deposits, savings accounts, securities sold under repurchase agreements and accrued
interest payable are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are
estimated using external market rates currently offered for deposits with similar remaining maturities. The carrying values of the interest
bearing demand notes to the United States Treasury are deemed an approximation of fair values due to the frequent repayment and repricing
at market rates. The floating rate subordinated debenture, floating rate subordinated term loan, fixed rate notes payable, fixed rate
subordinated term debt, fixed rate subordinated debentures and capital lease obligation are estimated by discounting future cash flows using
current rates for advances with similar characteristics. The carrying value of the preferred stock pending redemption approximates fair value
due to the short-term nature of this instrument.
Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit,
based on fees currently charged to enter into similar agreements, is not significant.
A summary of the estimated fair values of financial instruments follows:
As of December 31, 2014
Financial assets:
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Accrued interest receivable
Mortgage servicing rights, net
Net loans
Total financial assets
Financial liabilities:
Total deposits, excluding time deposits
Time deposits
Securities sold under repurchase agreements
Other borrowed funds
Accrued interest payable
Long-term debt
Subordinated debentures held by subsidiary
trusts
Total financial liabilities
`
Fair Value Measurements at Reporting Date Using
Carrying Amount
Estimated
Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
798,670 $
1,711,924
575,186
27,063
14,038
4,823,243
7,950,124 $
798,670 $
1,711,924
584,533
27,063
21,434
4,800,725
7,944,349 $
798,670 $
—
—
—
—
—
798,670 $
— $
1,711,924
584,533
27,063
21,434
4,770,231
7,115,185 $
5,767,992 $
1,238,220
502,250
9
5,833
38,067
5,767,992 $
1,244,324
502,250
9
5,833
37,781
82,477
7,634,848 $
75,734
7,633,923 $
117
5,767,992 $
— $
—
—
—
—
—
—
5,767,992 $
1,244,324
502,250
9
5,833
37,781
75,734
1,865,931 $
—
—
—
—
—
30,494
30,494
—
—
—
—
—
—
—
—
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
As of December 31, 2013
Financial assets:
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Accrued interest receivable
Mortgage servicing rights, net
Net loans
Total financial assets
Financial liabilities:
Total deposits, excluding time deposits
Time deposits
Securities sold under repurchase agreements
Other borrowed funds
Accrued interest payable
Long-term debt
Subordinated debentures held by subsidiary
trusts
Total financial liabilities
(25) RELATED PARTY TRANSACTIONS
Carrying Amount
Estimated
Fair Value
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
534,827 $
1,947,706
203,837
26,450
13,546
4,259,514
6,985,880 $
534,827 $
1,947,706
205,926
26,450
25,698
4,246,539
6,987,146 $
4,943,033 $
1,190,717
457,437
3
4,963
36,917
4,943,033 $
1,196,250
457,437
3
4,963
34,508
82,477
6,715,547 $
72,045
6,708,239 $
$
534,827 $
—
—
—
—
—
534,827 $
— $
1,947,706
205,926
26,450
25,698
4,189,237
6,395,017 $
4,943,033 $
— $
—
—
—
—
—
—
4,943,033 $
1,196,250
457,437
3
4,963
34,508
72,045
1,765,206 $
—
—
—
—
—
57,302
57,302
—
—
—
—
—
—
—
—
The Company conducts banking transactions in the ordinary course of business with related parties, including directors, executive officers,
shareholders and their associates, on the same terms as those prevailing at the same time for comparable transactions with unrelated persons
and that do not involve more than a normal risk of collectibility or present other unfavorable features.
Certain executive officers, directors and greater than 5% shareholders of the Company and certain entities and individuals related to such
persons, incurred indebtedness in the form of loans, as customers, of $25,794 and $24,669 at December 31, 2014 and 2013, respectively.
During 2014, new loans and advances on existing loans of $9,519 were funded and loan repayments totaled $9,342. These loans were made on
substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not
related to the Company.
During 2014, the Company repurchased an aggregate of 37,615 shares of its Class A common stock from two directors and one greater than
10% shareholder of the Company at a weighted average price of $24.96 per share. The repurchases were made in privately negotiated
transactions pursuant to a stock repurchase program approved by the Company's Board of Directors in November 2013. For additional
information regarding the Company's stock repurchases, see Note 13 - Capital Stock and Dividend Restrictions.
The Company purchases property, casualty and other insurance through an agency in which a director of the Company, whose term as a
director ended in May 2013, has a controlling ownership interest. The Company paid insurance premiums to the agency of $764 and $839 in
2013 and 2012, respectively.
118
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company leases an aircraft from an entity wholly-owned by the chairman of the Company’s Board of Directors. Under the terms of the
lease, the Company pays a fee for each flight hour plus certain third party operating expenses related to the aircraft. During 2014, 2013 and
2012, the Company paid total fees and operating expenses of $306, $309 and $262, respectively, for its use of the aircraft. In addition, the
Company leases a portion of its hanger and provides pilot services to the related entity. During 2014, 2013 and 2012, the Company received
payments from the related entity of $77, $61 and $47, respectively, for hanger use, pilot fees and reimbursement of certain third party
operating expenses related to the chairman’s personal use of the aircraft.
The Company purchases services from an entity in which one greater than 5% shareholder and six directors of the Company, including the
chairman and executive vice chairman of the Board of Directors, have an aggregate ownership interest of 18%, and in which one director is
the chairman and two directors are members of the board of such entity. Services provided for the Company’s benefit include shareholder
education and communication, strategic enterprise planning and corporate governance consultation. During 2014, 2013 and 2012, the
Company paid $255, $224 and $243, respectively, for these services.
During 2012, the Company entered into a contract with an entity wholly-owned by a director of the Company to provide construction
management and advisory services related to the construction of a bank office building. Under the terms of the agreement, the entity will
receive payments equal to the lesser of a fixed price of $180 or 4% of the actual construction contract price, with an initial payment of $60 due
upon execution of the agreement and the remainder due in two equal installments over a two year period. Under the terms of the contract, the
Company paid the entity $60 during each of 2014, 2013 and 2012.
In conjunction with an acquisition in 2008, the Company assumed certain existing deferred compensatory agreements. Under the terms of one
such agreement, the Company is required to make cash payments to a director of the Company for the promotion of growth and development
of new business through December 31, 2011. The total amount due under the agreement was fixed prior to the acquisition date at $577, with a
portion to be paid over 4 years and the remaining balance due in January 2012. As additional consideration under the agreement, the director
provided, among other things, a covenant not to compete. Under the terms of the agreement, the Company made cash payments of $424
during 2012.
A director of the Company was party to an agreement to guarantee the payment of interest on loans between FIB and an unrelated third
party borrower through December 31, 2012. Under the terms of the interest guaranty agreement, the director made interest payments to FIB
on behalf of the borrower of $815 in 2012. In addition, the director pledged to FIB collateral for the loans of the unrelated third party borrower.
During 2012, the collateral was liquidated and proceeds of $7,998 were applied to the outstanding principal balances of the loans.
(26) AUTHORITATIVE ACCOUNTING GUIDANCE
ASU 2014-01 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing
Projects.” The amendments in ASU 2014-01 permit reporting entities to make an accounting policy election to account for their investments
in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The evaluation of whether
conditions have been met to apply the proportional amortization method is conducted at the time of initial investment and subsequently
reevaluated if there is a change in the nature of the investment or a change in the relationship with the limited liability entity that could result
in the conditions no longer being met. The decision to apply the proportional amortization method of accounting should be applied
consistently to all qualifying affordable housing project investments rather than on an individual investment basis. Under the proportional
amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and
recognizes the net investment performance in the income statement as a component of income tax expense or benefit. The amendments in
ASU 2014-01 are effective for the Company for annual reporting periods and interim reporting periods within those annual periods, beginning
after December 15, 2014, with early adoption permitted.
119
Table of Contents
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company adopted the amendments in ASU 2014-01 effective January 1, 2014. As of December 31, 2014, the Company had four
investments in qualified affordable housing projects with an aggregate carrying value of $5,084 included in other assets on the Company's
consolidated balance sheet. The Company elected to account for these investments using the proportional amortization method. During
2014, income tax benefits associated with these projects of $27 were recognized as a component of income tax expense. The Company has
commitments to invest additional amounts in these projects of $6,943 in 2015, $37 annually in 2016 through 2021, and $26 annually in 2022
and 2023.
ASU 2014-04 “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate
Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in ASU 2014-04 clarify that an in-substance repossession
or foreclosures occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a
foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through
completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in ASU 2014-04 also require interim and
annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in
consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in ASU
2014-04 are effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2014
using either a modified retrospective transition method or a prospective transition method. The Company does not expect the amendments in
ASU 2014-04 to have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.
ASU 2014-09 "Revenue from Contracts with Customers." The amendments in ASU 2014-09 introduce a new five-step revenue recognition
model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires
disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and
changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in ASU 2014-09 are effective for
the Company for fiscal years beginning after December 15, 2016, including interim periods within that reporting period, and may be adopted
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initial adoption recognized at the date
of initial application. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial
statements, results of operations or liquidity.
ASU 2014-11 "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The amendments in ASU 2014-11 expand
secured borrowing treatment for certain repurchase agreements. Under the amendments in ASU 2014-11, repurchase-to-maturity transactions
and repurchase agreements executed as repurchase financing transactions are required to be accounted for as secured borrowings. ASU
2014-11 requires additional disclosures about certain transactions accounted for as a sale in which the transferor retains substantially all of
the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty. ASU 2014-11 also
requires disclosure of the types of collateral pledged and liabilities associated with an entity's repurchase agreements, securities lending
transactions and repurchase-to-maturity transactions accounted for as secured borrowings. The accounting changes included in the
amendments in ASU 2014-11 are effective for the Company on January 1, 2015. The disclosure requirements set forth in the amendment in
ASU 2014-11 are effective for the Company for interim and annual periods beginning after December 31, 2014. Adoption of the amendments
in ASU 2014-11 will not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.
ASU 2014-12 "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be
Achieved after the Requisite Service Period." ASU 2014-12 amends Accounting Standards Codification ("ASC") Topic 718, Compensation-
Stock Compensation, to clarify that a performance target that affects the vesting of a share-based payment award and that could be achieved
after the requisite service period should be treated as a performance condition that affects the vesting of the award. ASU 2014-12 further
clarifies that the requisite service period ends when the employees can cease rendering service and still be eligible to vest in the award if the
performance target is achieved. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual
periods beginning after December 15, 2015. The amendments in ASU 2014-12 may be applied
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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are
outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards
thereafter. The amendments in ASU 2014-12 will not have a material impact on the Company’s consolidated financial statements, results of
operations or liquidity.
ASU 2014-14 "Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure." ASU 2014-14 updates ASC
Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, to require that a mortgage loan be derecognized and that a
separate other receivable be recognized upon foreclosure if (i) the loan has a government guarantee that is not separable from the loan before
foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on
the guarantee, and the creditor has the ability to recover under that claim; and, (iii) any amount of the claim that is determined on the basis of
the fair value of the real estate is fixed at the time of foreclosure. ASU 2014-14 provides that, upon foreclosure, the separate other receivable
should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The
amendments in ASU 2014-14 are effective for the Company for annual periods, and interim periods within those annual periods, beginning
after December 15, 2014 and may adopted using either a prospective transition method or a modified retrospective transition method. The
amendments in ASU 2014-12 will not have a material impact on the Company’s consolidated financial statements, results of operations or
liquidity.
ASU 2014-16 "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to
Debt or to Equity." The amendments in ASU 2014-16 clarify that an entity should consider all relevant terms and features-including the
embedded derivative feature being evaluated for bifurcation-in evaluating the nature of the host contract within a hybrid financial instrument.
The amendments further clarify that no single term or feature would necessarily determine the economic characteristics and risk of the host
contract. Rather, the nature of the host contract depends upon the economic characteristics and risk of the entire hybrid financial instrument.
The amendments in ASU 2014-16 are effective for the Company for annual periods, and interim periods within those annual periods,
beginning after December 15, 2015. The effects of initially adopting the amendments in ASU 2014-16 should be applied on a modified
retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the
amendments are effective. Retrospective application is permitted to all relevant prior periods. The amendments in ASU 2014-16 will not have a
material impact on the Company’s consolidated financial statements, results of operations or liquidity.
(27) SUBSEQUENT EVENTS
Subsequent events have been evaluated for potential recognition and disclosure through the date financial statements were filed with the
Securities and Exchange Commission. On January 22, 2015, the Company declared a quarterly dividend to common shareholders of $0.20 per
share, paid on February 13, 2015 to shareholders of record as of February 2, 2015. On January 22, 2015, the Company's board of directors
approved the repurchase of up to 1,000,000 shares of the Company's outstanding Class A common stock from time to time through open
market or privately negotiated transactions, as market and business conditions permit. Share repurchases will be conducted in a manner
intended to comply with the safe harbor provisions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
Repurchased shares will be returned to authorized but unissued shares of Class A common stock in accordance with Montana law. No other
events requiring recognition or disclosure were identified.
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(a) 2. Financial statement schedules
All other schedules to the consolidated financial statements of the Registrant are omitted since the required information is either not
applicable, deemed immaterial, or is shown in the respective financial statements or in notes thereto.
(a)3. Exhibits
Exhibit
Number
Description
2.1
3.1
3.2
10.1
10.2
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Agreement and Plan of Merger between First Interstate BancSystem, Inc. and Mountain West Financial Corp dated
February 10, 2014 (incorporated herein reference to Exhibit 2.1 of the Company's Registration Statement on Form S-4, No.
333-194050, dated April 2, 2014)
Amended and Restated Articles of Incorporation dated March 5, 2010 (incorporated herein by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K/A filed on March 10, 2010)
Second Amended and Restated Bylaws dated January 27, 2011 (incorporated herein by reference to Exhibit 3.8 of the
Company’s Current Report on Form 8-K filed on February 3, 2011)
Credit Agreement Re: Subordinated Term Note dated as of January 10, 2008, between First Interstate BancSystem, Inc. and
First Midwest Bank (incorporated herein by reference to Exhibit 10.24 of the Company’s Current Report on Form 8-K filed
on January 16, 2008)
Lease Agreement between Billings 401 Joint Venture and First Interstate Bank Montana dated September 20, 1985 and
addendum thereto (incorporated herein by reference to Exhibit 10.4 of the Company’s Post-Effective Amendment No. 3 to
Registration Statement on Form S-1, No. 033-84540, filed on September 29, 1994)
First Interstate BancSystem’s Deferred Compensation Plan dated December 1, 2006 (incorporated herein by reference to
Exhibit 10.9 of the Company’s Pre-Effective Amendment No. 3 to Registration Statement on Form S-1, No. 333-164380, filed
on March 23, 2010)
First Amendment to the First Interstate BancSystem’s Deferred Compensation Plan dated October 24, 2008 (incorporated
herein by reference to Exhibit 10.10 of the Company’s Pre-Effective Amendment No. 3 to Registration Statement on Form S-
1, No. 333-164380, filed on March 23, 2010)
2001 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 4.12 of the Company’s Registration
Statement on Form S-8, No. 333-106495, filed on June 25, 2003)
Second Amendment to 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.6 of the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2010)
First Interstate BancSystem, Inc. 2006 Equity Compensation Plan, amended and restated as of November 21, 2013
(incorporated herein by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8, No. 333-193543, filed
January 24, 2014 )
Form of First Interstate BancSystem, Inc. 2006 Equity Compensation Plan Restricted Stock Agreement (Performance-ROA)
for Certain Executive Officers (incorporated herein by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 2013)
Form of First Interstate BancSystem, Inc. 2006 Equity Compensation Plan Restricted Stock Agreement (Performance-ROE)
for Certain Executive Officers (incorporated herein by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 2013)
10.10†
Form of First Interstate BancSystem, Inc. 2006 Equity Compensation Plan Restricted Stock Agreement (Performance) for
Certain Executive Officers (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed on February 13, 2013)
10.11
Trademark License Agreements between Wells Fargo & Company and First Interstate BancSystem, Inc. (incorporated
herein by reference to Exhibit 10.11 of the Registration Statement on Form S-1, filed on April 22, 1997)
14.1
Code of Ethics for Chief Executive Officer and Senior Financial Officers (incorporated herein by reference to Exhibit 14.1 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010)
122
Table of Contents
Exhibit
Number
Description
21.1*
Subsidiaries of First Interstate BancSystem, Inc.
23.1*
Consent of McGladrey LLP Independent Registered Public Accounting Firm
31.1*
31.2*
Certification of Annual Report on Form 10-K pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive
Officer
Certification of Annual Report on Form 10-K pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial
Officer
32*
Certification of Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101**
Interactive data file
† Management contract or compensatory plan or arrangement.
* Filed herewith.
** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the
Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
(b) Exhibits
See Item 15(a)3 above.
(c) Financial Statements Schedules
See Item 15(a)2 above.
123
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
First Interstate BancSystem, Inc.
By:
/s/ ED GARDING
Ed Garding
President and Chief Executive Officer
February 27, 2015
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ THOMAS W. SCOTT
Thomas W. Scott, Chairman of the Board
By: /s/ JAMES R. SCOTT
James R. Scott, Executive Vice Chairman of the Board
By: /s/ STEVEN J. CORNING
Steven J. Corning, Director
By: /s/ DAVID H. CRUM
David H. Crum, Director
By: /s/ WILLIAM B. EBZERY
William B. Ebzery, Director
By: /s/ DANA L. CRANDALL
Dana L. Crandall, Director
By: /s/ CHARLES E. HART, M.D., M.S.
Charles E. Hart, M.D., M.S., Director
By: /s/ CHARLES M. HEYNEMAN
Charles M. Heyneman, Director
By: /s/ JOHN M. HEYNEMAN, JR.
John M. Heyneman, Jr., Director
By: /s/ DAVID L. JAHNKE
David L. Jahnke, Director
By: /s/ ROSS E. LECKIE
Ross E. Leckie, Director
By: /s/ JONATHAN R. SCOTT
Jonathan R. Scott, Director
By: /s/ RANDALL I. SCOTT
Randall I. Scott, Director
By: /s/ MICHAEL J. SULLIVAN
Michael J. Sullivan, Director
By: /s/ TERESA A. TAYLOR
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Date
February 27, 2015
Teresa A. Taylor, Director
Date
By: /s/ THEODORE H. WILLIAMS
Theodore H. Williams, Director
February 27, 2015
Date
124
Table of Contents
By: /s/ ED GARDING
Ed Garding
President, Chief Executive Officer and Director
(Principal executive officer)
By: /s/ KEVIN P. RILEY
Kevin P. Riley
Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer)
February 27, 2015
Date
February 27, 2015
Date
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125
Section 2: EX-21.1 (SUBSIDIARIES OF FIRST INTERSTATE
BANCSYSTEM, INC.)
Subsidiaries of First Interstate BancSystem, Inc.
Exhibit 21.1
Subsidiary
First Interstate Bank
First Western Data, Inc.
First Interstate Statutory Trust
FI Statutory Trust I
FI Capital Trust II
FI Statutory Trust III
FI Capital Trust IV
FI Statutory Trust V
FI Statutory Trust VI
MWF Statutory Trust III
Commerce Financial, Inc.
First Interstate Insurance Agency, Inc.
FIBCT, LLC
FIB, LLC
State of Incorporation or
Jurisdiction of Organization
Montana
South Dakota
Delaware
Connecticut
Delaware
Delaware
Delaware
Delaware
Delaware
Connecticut
Montana
Montana
Montana
Montana
Business Name
First Interstate Bank
First Western Data, Inc.
First Interstate Statutory Trust
FI Statutory Trust I
FI Capital Trust II
FI Statutory Trust III
FI Capital Trust IV
FI Statutory Trust V
FI Statutory Trust VI
MWF Statutory Trust III
Commerce Financial, Inc.
First Interstate Insurance Agency, Inc.
Crytech
FIB, LLC
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Section 3: EX-23.1 (CONSENT OF INDEPENDENT PUBLIC
ACCOUNTING FIRM)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-106495 and Form S-8 No. 333-69490) pertaining to
the First Interstate BancSystem, Inc. 2001 Stock Option Plan, as amended; Registration Statements (Form S-8 No. 333-133837 and Form S-8 No. 333-
193543) pertaining to the First Interstate BancSystem, Inc. 2006 Equity Compensation Plan, as amended and restated effective November 21, 2013;
and Registration Statement (Form S-3 No. 333-188865) pertaining to a shelf registration, of our reports dated February 27, 2015, relating to our audits
of the consolidated financial statements and internal control over financial reporting which appear in the Annual Report on Form 10-K of First
Interstate BancSystem, Inc. for the year ended December 31, 2014.
/s/ MCGLADREY LLP
Des Moines, Iowa
February 27, 2015
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Section 4: EX-31.1 (CERTIFICATON BY CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302)
CERTIFICATION OF ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Ed Garding, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2014 of First Interstate BancSystem, Inc.,
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes, in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
DATE: February 27, 2015
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/s/ ED GARDING
Ed Garding
President and Chief Executive Officer
Section 5: EX-31.2 (CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302)
CERTIFICATION OF ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Kevin P. Riley, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2014 of First Interstate BancSystem, Inc.,
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes, in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
DATE: February 27, 2015
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/s/ KEVIN P. RILEY
Kevin P. Riley
Executive Vice President and
Chief Financial Officer
Section 6: EX-32 (CERTIFICATION PURSUANT TO SECTION 902)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
The undersigned are the Chief Executive Officer and the Chief Financial Officer of First Interstate BancSystem, Inc. (the “Registrant”). This
Certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies the Annual Report on Form 10-K of
the Registrant for the year ended December 31, 2014.
We certify to the best of our knowledge that such Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of the Registrant for the periods presented therein.
This Certification is executed as of February 27, 2015.
/s/ ED GARDING
Ed Garding
President and Chief Executive Officer
/s/ KEVIN P. RILEY
Kevin P. Riley
Executive Vice President and
Chief Financial Officer
The forgoing certification is being furnished solely pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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