FIRST INTERSTATE BANCSYSTEM INC - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________________________________________________________________________________________________

FORM 10-Q

_____________________________________________________________________________________________________________________________________________________


ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

COMMISSION FILE NUMBER 001-34653

________________________________________________________________________________________________________

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________________________



Montana		81-0331430
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

401 North 31st Street, Billings, MT		59116-0918
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 406/255-5390

_________________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” , “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:



	June 30, 2017 – Class A common stock		33,260,710
	June 30, 2017 – Class B common stock		23,184,557

FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q Index

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets - June 30, 2017 and December 31, 2016	3

	Consolidated Statements of Income - Three and Six Months Ended June 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2017 and 2016	5

	Consolidated Statements of Changes in Stockholders’ Equity - Six Months Ended June 30, 2017 and 2016	6

	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and 2016	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58

Item 4.	Controls and Procedures	58

Part II.	Other Information

Item 1.	Legal Proceedings	59

Item 1A .	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults Upon Senior Securities	70

Item 4.	Mine Safety Disclosures	70

Item 5.	Other Information	70

Item 6.	Exhibits	70

Signatures		71

Exhibit Index		72

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

	June 30, 2017		December 31, 2016
Assets
Cash and due from banks	$	223,880	$	146,779
Interest bearing deposits in banks	695,476		635,149
Federal funds sold	419		95
Total cash and cash equivalents	919,775		782,023
Investment securities:
Available-for-sale	2,080,194		1,611,698
Held-to-maturity (estimated fair values of $535,145 and $513,273 at June 30, 2017 and December 31, 2016, respectively)	529,442		512,770
Total investment securities	2,609,636		2,124,468
Loans held for investment	7,525,590		5,416,750
Mortgage loans held for sale	30,383		61,794
Total loans	7,555,973		5,478,544
Less allowance for loan losses	75,701		76,214
Net loans	7,480,272		5,402,330
Goodwill	444,327		212,820
Company-owned life insurance	257,538		198,116
Premises and equipment, net of accumulated depreciation	243,152		194,457
Accrued interest receivable	35,830		29,852
Mortgage servicing rights, net of accumulated amortization and impairment reserve	23,715		18,457
Core deposit intangibles, net of accumulated amortization	52,837		9,648
Other real estate owned (“OREO”)	11,286		10,019
Deferred tax asset, net	9,406		—
Other assets	148,568		81,705
Total assets	$	12,236,342	$	9,063,895
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	2,897,813	$	1,906,257
Interest bearing	7,122,187		5,469,853
Total deposits	10,020,000		7,376,110
Securities sold under repurchase agreements	579,772		537,556
Accounts payable and accrued expenses	96,762		44,923
Accrued interest payable	8,917		5,421
Deferred tax liability	—		6,839
Long-term debt	28,017		27,970
Other borrowed funds	15,019		6
Subordinated debentures held by subsidiary trusts	82,477		82,477
Total liabilities	10,830,964		8,081,302
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of June 30, 2017 or December 31, 2016	—		—
Common stock	685,289		296,071
Retained earnings	718,093		694,650
Accumulated other comprehensive income (loss), net	1,996		(8,128		)
Total stockholders’ equity	1,405,378		982,593
Total liabilities and stockholders’ equity	$	12,236,342	$	9,063,895

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Interest income:
Interest and fees on loans	$	73,895		$	62,634		$	137,624		$	125,450
Interest and dividends on investment securities:
Taxable	9,783			7,982			18,505			16,020
Exempt from federal taxes	855			858			1,647			1,737
Interest on deposits in banks	1,333			482			2,545			1,127
Interest on federal funds sold	3			3			5			5
Total interest income	85,869			71,959			160,326			144,339
Interest expense:
Interest on deposits	5,011			3,108			9,129			6,336
Interest on securities sold under repurchase agreements	272			92			520			182
Interest on long-term debt	481			451			934			900
Interest on subordinated debentures held by subsidiary trusts	782			675			1,527			1,338
Total interest expense	6,546			4,326			12,110			8,756
Net interest income	79,323			67,633			148,216			135,583
Provision for loan losses	2,355			2,550			4,085			6,550
Net interest income after provision for loan losses	76,968			65,083			144,131			129,033
Non-interest income:
Payment services revenues	10,225			8,648			18,670			16,639
Mortgage banking revenues	7,643			9,409			14,191			15,550
Wealth management revenues	5,084			5,166			10,097			9,741
Service charges on deposit accounts	5,060			4,626			9,410			9,089
Other service charges, commissions and fees	3,358			2,845			6,034			5,453
Investment securities gains (losses), net	5			108			7			87
Other income	5,805			2,457			7,878			4,750
Non-recurring litigation recovery	—			3,750			—			3,750
Total non-interest income	37,180			37,009			66,287			65,059
Non-interest expense:
Salaries and wages	28,037			26,707			53,778			51,389
Employee benefits	9,811			8,066			19,427			17,675
Outsourced technology services	6,000			4,800			11,300			9,632
Occupancy, net	5,180			4,284			9,969			8,948
Furniture and equipment	2,739			2,460			5,012			4,716
OREO expense, net of income	34			140			(14		)	101
Professional fees	1,795			1,136			2,824			2,444
FDIC insurance premiums	786			1,198			1,661			2,456
Mortgage servicing rights amortization	707			722			1,319			1,356
Mortgage servicing rights impairment (recovery)	(2		)	(20		)	(72		)	(5		)
Core deposit intangibles amortization	1,062			827			1,692			1,654
Other expenses	14,117			12,575			26,358			24,198
Acquisition expenses	10,133			—			10,838			—
Total non-interest expense	80,399			62,895			144,092			124,564
Income before income tax expense	33,749			39,197			66,326			69,528
Income tax expense	11,881			13,643			21,332			23,850
Net income	$	21,868		$	25,554		$	44,994		$	45,678

Basic earnings per common share	$	0.46		$	0.58		$	0.97		$	1.03
Diluted earnings per common share	$	0.45		$	0.57		$	0.96		$	1.02

See accompanying notes to unaudited consolidated financial statements.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income	$	21,868		$	25,554		$	44,994		$	45,678
Other comprehensive income, before tax:
Investment securities available-for sale:
Change in net unrealized gains during period	8,006			10,043			17,365			18,671
Reclassification adjustment for net (gains) losses included in income	(5		)	(108		)	(7		)	(87		)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity	464			452			929			904
Unrealized (gain) loss on derivatives	(486		)	(804		)	(437		)	(3,002		)
Defined benefit post-retirement benefits plans:
Change in net actuarial (gain) loss	(176		)	13			(914		)	28
Other comprehensive income, before tax	7,803			9,596			16,936			16,514
Deferred tax expense related to other comprehensive income	(3,214		)	(3,775		)	(6,812		)	(6,498		)
Other comprehensive income, net of tax	4,589			5,821			10,124			10,016
Comprehensive income, net of tax	$	26,457		$	31,375		$	55,118		$	55,694

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share and per share data) (Unaudited)

	Common stock			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity
Balance at December 31, 2016	$	296,071		$	694,650		$	(8,128	)	$	982,593
Net income	—			44,994			—			44,994
Other comprehensive income, net of tax expense	—			—			10,124			10,124
Common stock transactions:
21,454 common shares purchased and retired	(891		)	—			—			(891		)
11,267,676 common shares issued	385,969			—			—			385,969
134,044 non-vested common shares issued	—			—			—			—
16,712 non-vested common shares forfeited	—			—			—			—
155,537 stock options exercised, net of 50,689 shares tendered in payment of option price and income tax withholding amounts	1,672			—			—			1,672
Stock-based compensation expense	2,468			—			—			2,468
Common cash dividend declared ($0.48 per share)	—			(21,551		)	—			(21,551		)
Balance at June 30, 2017	$	685,289		$	718,093		$	1,996		$	1,405,378

Balance at December 31, 2015	$	311,720		$	638,367		$	406		$	950,493
Net income	—			45,678			—			45,678
Other comprehensive income, net of tax expense	—			—			10,016			10,016
Common stock transactions:
995,600 common shares purchased and retired	(26,042		)	—			—			(26,042		)
16,085 common shares issued	—			—			—			—
189,624 non-vested common shares issued	—			—			—			—
21,397 non-vested common shares forfeited	—			—			—			—
186,430 stock options exercised, net of 57,153 shares tendered in payment of option price and income tax withholding amounts	1,684			—			—			1,684
Tax benefit of stock-based compensation	619			—			—			619
Stock-based compensation expense	2,385			—			—			2,385
Common cash dividend declared ($0.44 per share)	—			(19,708		)	—			(19,708		)
Balance at June 30, 2016	$	290,366		$	664,337		$	10,422		$	965,125

See accompanying notes to unaudited consolidated financial statements.

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

	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	44,994		$	45,678
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	4,085			6,550
Net loss on disposal of premises and equipment	76			188
Depreciation and amortization	9,665			9,491
Net premium amortization on investment securities	5,710			6,347
Net gain on investment securities transactions	(7		)	(87		)
Realized and unrealized net gains on mortgage banking activities	(9,898		)	(10,544		)
Net gain on sale of OREO	(217		)	(636		)
Write-downs of OREO and other assets pending disposal	60			621
Net (gain) on sale of Health Savings Accounts	(3,431		)	—
Mortgage servicing rights recovery	(72		)	(5		)
Deferred income tax benefit (expense)	(15,828		)	321
Net increase in cash surrender value of company-owned life insurance	(2,587		)	(2,271		)
Stock-based compensation expense	2,468			2,385
Tax benefits from stock-based compensation expense	—			619
Excess tax benefits from stock-based compensation expense	—			(495		)
Originations of mortgage loans held for sale	(428,286		)	(468,560		)
Proceeds from sales of mortgage loans held for sale	478,239			457,132
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in interest receivable	(5,978		)	281
Decrease (increase) in other assets	26,231			(14,551		)
Increase in accrued interest payable	3,496			687
Increase (decrease) in accounts payable and accrued expenses	(20,170		)	3,701
Net cash provided by operating activities	88,550			36,852
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity	(2,948		)	(9,883		)
Available-for-sale	(201,806		)	(459,569		)
Proceeds from maturities and pay-downs of investment securities:
Held-to-maturity	43,545			53,977
Available-for-sale	170,237			424,458
Purchases of company-owned life insurance	—			—
Extensions of credit to customers, net of repayments	(38,468		)	(159,410		)
Recoveries of loans charged-off	3,566			4,717
Proceeds from sale of OREO	1,712			2,398
Acquisition of intangible assets	(28,013		)	—
Proceeds from the sale of Health Savings Accounts	6,500			—
Proceeds from sale of loan production office	—			932
Acquisition of bank and bank holding company, net of cash and cash equivalents received	91,775			—
Capital expenditures, net of sales	(7,548		)	(3,638		)

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

	Six Months Ended June 30,
	2017			2016
Net cash used in investing activities	$	38,552		$	(146,018	)
Cash flows from financing activities:
Net increase (decrease) in deposits	$	(25,086	)	$	(107,489	)
Net increase (decrease) in securities sold under repurchase agreements	42,216			(44,236		)
Net increase in other borrowed funds	15,013			13
Repayments of long-term debt	(34		)	(32		)
Advances on long-term debt	81			75
Proceeds from issuance of common stock	902			1,684
Excess tax benefits from stock-based compensation expense	—			495
Purchase and retirement of common stock	(891		)	(26,042		)
Dividends paid to common stockholders	(21,551		)	(19,708		)
Net cash used in financing activities	10,650			(195,240		)
Net increases (decrease) in cash and cash equivalents	137,752			(304,406		)
Cash and cash equivalents at beginning of period	782,023			780,457
Cash and cash equivalents at end of period	$	919,775		$	476,051

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	14,379		$	27,566
Cash paid during the period for interest expense	8,614			8,069

Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	5,805			26
Transfer of loans to other real estate owned	1,554			4,019
Capitalization of internally originated mortgage servicing rights	2,727			1,768

Supplemental schedule of noncash investing activities from acquisitions:
Investment securities available for sale	$	424,302		$	—
Investment securities held to maturity	57,307			—
Loans held for sale	10,253			—
Loans	2,080,083			—
Premises and equipment	47,869			—
Goodwill	231,507			—
Core deposit intangible	47,950			—
Mortgage servicing rights	3,491			—
Other real estate owned	1,268			—
Other Assets	121,698			—
Total noncash assets acquired	3,025,728			—

Liabilities assumed:
Deposits	$	2,668,976		$	—
Accounts payable and accrued expenses	62,558			—
Total liabilities assumed	2,731,534			—

See accompanying notes to unaudited consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)


(1)	Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries (the “Company”) contain all adjustments (all of which are of a normal recurring nature) necessary to present fairly the financial position of the Company at June 30, 2017 and December 31, 2016, the results of operations for each of the three and six month periods ended June 30, 2017 and 2016, and cash flows and changes in stockholders' equity for each of the six month periods ended June 30, 2017 and 2016, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2016 is derived from audited consolidated financial statements. Certain reclassifications, none of which were material, have been made to conform prior year financial statements to the June 30, 2017 presentation. These reclassifications did not change previously reported net income or stockholders’ equity.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.


(2)	Acquisitions

Cascade Bancorp. On November 17, 2016, the Company entered into an agreement and plan of merger (the “Agreement”) to acquire all of the outstanding stock of Cascade Bancorp (“Cascade”), parent company of Bank of the Cascades, an Oregon-based community bank with 46 banking offices across Oregon, Idaho, and Washington. This transaction solidifies the Company's ability to strategically expand its community banking footprint in the Northwest corridor of the United States. The merger was completed on May 30, 2017. Holders of each share of Cascade common stock received 0.14864 shares of First Interstate Class A common stock and $1.91 in cash, without interest, for each share of Cascade common stock. In connection with the merger, the Company issued approximately 11.3 million shares of First Interstate Class A common stock, which was valued at $34.30 per share, which was the closing price of First Interstate Class A common stock on the acquisition date. Cash paid by First Interstate was approximately $155.0 million, which included the cash portion of the merger consideration and the cash in lieu of fractional shares that Cascade Bancorp shareholders would have otherwise been entitled to receive. Total consideration exchanged in connection with the merger amounted to $541.0 million.

All “in-the-money” Cascade options and all Cascade restricted stock units outstanding immediately prior to the transaction close were canceled in exchange for the right to receive a cash payment as provided in the merger agreement. The Company paid approximately $9.3 million in cash related to Cascade options and restricted stock units, which is included in consideration.

Unvested Cascade restricted stock awards outstanding immediately prior to the transaction close were canceled in exchange for the right to receive a cash payment and Company shares as provided in the merger agreement. The Company paid a total of approximately $2.2 million in cash and issued approximately 168 thousand Company shares, valued at $34.30 per share, related to Cascade restricted stock awards. Of the cash paid and shares issued related to Cascade restricted stock awards, approximately $2.4 million was allocated to expense and excluded from consideration due to the acceleration of award vesting at the Company’s discretion. The remaining balance of approximately $5.5 million related to Cascade restricted stock awards is included in consideration.

The assets and liabilities of Cascade were recorded in the Company's consolidated financial statements on a provisional basis at their estimated fair values as of the acquisition date and will be finalized in the coming months. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as provisional goodwill. The preliminary purchase price allocation resulted in goodwill of $231.5 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company's one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Cascade and the Company.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table summarizes the consideration paid, fair values of the Cascade assets acquired and liabilities assumed, and the resulting goodwill. Due to the recent close of the transaction, all amounts reported are provisional pending the review of valuations obtained from third parties.



	As Recorded			Fair Value				As Recorded
As of May 30, 2017	by Cascade			Adjustments				by the Company

Assets acquired:
Cash and cash equivalents	$	246,804		$	—			$	246,804
Investment securities	476,733			4,876			(1)	481,609
Loans held for investment	2,111,786			(31,703		)	(2)	2,080,083
Mortgage loans held for sale	10,253			—				10,253
Allowance for loan loss	(23,974		)	23,974			(3)	—
Premises and equipment	46,554			1,315			(4)	47,869
Other real estate owned ("OREO")	1,268			—				1,268
Core deposit intangible	—			47,950			(5)	47,950
Deferred tax assets	32,232			(22,336		)	(6)	9,896
Other assets	113,915			1,378			(7)	115,293
Total assets acquired	3,015,571			25,454				3,041,025

Liabilities assumed:
Deposits	2,669,910			(934		)	(8)	2,668,976
Accounts Payable and Accrued Expense	62,150			408			(9)	62,558
Total liabilities assumed	2,732,060			(526		)		2,731,534

Net assets acquired	$	283,511		$	24,928			309,491

Consideration paid:
Cash								155,029
Class A common stock								385,969
Total consideration paid								540,998

Goodwill								$	231,507

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



Explanation of fair value adjustments:
(1)	Write up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)	Write down of the book value of loans to their estimated fair values. Shared National Credits (SNC) were recorded at quoted sales prices where available. The fair value of the remaining loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of each loan's underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3)	Adjustment to remove the Cascade allowance for loan losses at acquisition date, as the credit risk is accounted for in the fair value adjustment for loans receivable described in (2) above.
(4)	Write up of the book value of premises and equipment to their estimated fair values on the date of acquisition based upon appraisals obtained from an independent third party appraiser or broker's opinion of value.
(5)	Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an independent accounting and advisory firm.
(6)	Adjustment consists of the write-off of pre-existing deferred tax assets as a result of the acquisition.
(7)	Adjustment consists of mortgage servicing rights assets as a result of the acquisition.
(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 based upon valuation from an independent accounting and advisory firm.
(9)	Increase in fair value due to credit card incentive program and swap liability offset.

The core deposit intangible asset of $47,950 is being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years.

In accordance with Accounting Standards Codification ("ASC") Topic 805-740 "Business Combinations - Income Taxes," the Company reviewed its valuation allowance for deferred tax assets as a result of the Cascade acquisition. As part of evaluating whether or not the acquired deferred tax assets were realizable, the Company wrote-off state and local net operating losses to the balance that the Company determined would be realizable in future periods. The valuation allowance from Bank of the Cascades at the date of the acquisition related entirely to state and local net operating losses. As such, the Company reduced its valuation allowance for deferred tax assets to $0.

The Company recorded $10,133 and $10,838 in pre-tax merger related expenses for the three and six months ended June 30, 2017, respectively, including professional and legal fees of $5,926 and $6,542, respectively, to directly consummate the merger. The remainder of expenses primarily relate to retention and severance compensation costs and service contract termination costs. These costs are incorporated in non-interest expenses in the Company’s consolidated statements of operations.

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Information regarding acquired credit-impaired loans as of the May 30, 2017 acquisition date is as follows:



Contractually required principal and interest payments	$	48,041
Contractual cash flows not expected to be collected ("non-accretable discount")	23,376
Cash flows expected to be collected	24,665
Interest component of cash flows expected to be collected ("accretable discount")	1,901
Fair value of acquired credit-impaired loans	$	22,764

Information regarding acquired loans not deemed credit-impaired at the acquisition date is as follows:



Contractually required principal and interest payments	$	2,098,155
Contractual cash flows not expected to be collected due to projected prepayment	23,387
Fair value at acquisition	2,067,572

The accompanying consolidated statements of income include the results of operations of the acquired entity from the May 30, 2017 acquisition date. For the period from May 30, 2017 to June 30, 2017, Cascade reported revenues of $12.9 million and net income of $3.0 million. The acquired entity will continue to operate as Bank of the Cascades until August 11, 2017 at which point the operations will be integrated with the Company's operations and Bank of the Cascades will merge with First Interstate Bank.

The following table presents unaudited supplemental pro forma consolidated revenues and net income as if the acquisition had occurred as of January 1, 2016.



	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Interest income	$	103,248	$	94,698	$	203,326	$	189,772
Non-interest income	41,314		44,780		77,897		78,286
Total revenues	$	144,562	$	139,478	$	281,223	$	268,058

Net income	$	29,409	$	29,534	$	58,709	$	23,716

EPS - basic	$	0.50	$	0.53	$	1.02	$	0.43
EPS - diluted	0.50		0.53		1.01		0.42

The unaudited supplemental pro forma net income presented in the table above for 2017 was adjusted to exclude acquisition-related costs, including change in control expenses related to employee benefit plans and legal and professional expenses of $11,195, net of tax. Pro forma net income presented in the table above for 2016 was adjusted to include the aforementioned acquisition-related costs. The unaudited supplemental pro forma net income presented in the table above for 2017 and 2016 includes adjustments for scheduled amortization of core deposit intangible assets acquired in the acquisition. The unaudited supplemental pro forma net income presented in the table above for 2017 and 2016 does not capture operating costs savings and other business synergies expected as a result of the acquisition.


(3)	Goodwill and Intangibles

The Company recorded $231.5 million of provisional goodwill in connection with the Cascade merger. In accordance with the Intangibles - Goodwill and Other topic of the Financial Accounting Standards Board (“FASB”) ASC 350, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis and between annual tests in certain circumstances, such as upon material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an impairment assessment as of July 1, 2016 and 2015 and concluded that there was no impairment to goodwill.

Core deposit intangibles (“CDI”) are evaluated for impairment if events and circumstances indicate a possible impairment. The CDI are amortized using an accelerated method based on the estimated weighted average useful lives of the related deposits, which is ten years. The following table sets forth activity for CDI for the three and six months ended June 30, 2017 and 2016:



	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016
CDI, net, beginning of period	9,018		9,762		9,648		10,589
Established through acquisitions	47,950		—		47,950		—
Reductions due to sale of accounts	(3,069	)	—		(3,069	)	—
CDI current period amortization	(1,062	)	(827	)	(1,692	)	(1,654	)
Total CDI, net, at June 30	52,837		8,935		52,837		8,935

Subsequent to the acquisition of Cascade, the Company sold the custodial rights to the all of its Health Savings Account (HSA) portfolio, including HSA acquired from Cascade. The Company recognized no gain or loss on the sale of the acquired HSA as the excess of consideration received over HSA book value was recorded as reduction to CDI at the acquisition of Cascade.

The following table provides the estimated future CDI amortization expense:



Years Ending December 31,
2017 remaining			2,597
2018			5,093
2019			4,994
2020			4,872
2021			4,729
Thereafter			22,164


(4)	Investment Securities

The amortized cost and approximate fair values of investment securities are summarized as follows:



June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury notes	$	3,607	$	2	$	(2	)	$	3,607
Obligations of U.S. government agencies	676,485		1,647		(2,814		)	675,318
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	1,217,701		10,001		(4,765		)	1,222,937
Private mortgage-backed securities	108,577		212		(304		)	108,485
Corporate securities	66,793		97		(6		)	66,884
Other investments	2,951		12		—			2,963
Total	$	2,076,114	$	11,971	$	(7,891	)	$	2,080,194

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(Dollars in thousands, except share and per share data)



June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	188,486	$	4,172	$	(141	)	$	192,517
U.S agency residential mortgage-backed securities & collateralized mortgage obligations	268,218		10,714		(9,360		)	269,572
Obligations of U.S. government agencies	19,737		28		(5		)	19,760
Corporate securities	52,804		333		(39		)	53,098
Other investments	197		1		—			198
Total	$	529,442	$	15,248	$	(9,545	)	$	535,145



December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury notes	$	3,608	$	5	$	(1	)	$	3,612
Obligations of U.S. government agencies	397,411		343		(6,457		)	391,297
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	1,220,890		6,412		(13,601		)	1,213,701
Private mortgage-backed securities	116		1		(1		)	116
Other investments	2,951		21		—			2,972
Total	$	1,624,976	$	6,782	$	(20,060	)	$	1,611,698



December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	160,192	$	2,723	$	(542	)	$	162,373
Obligations of U.S. government agencies	19,737		—		(162		)	19,575
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	279,578		7,804		(9,249		)	278,133
Corporate securities	53,032		139		(211		)	52,960
Other investments	231		1		—			232
Total	$	512,770	$	10,667	$	(10,164	)	$	513,273

Gross realized gains and losses from the disposition of investment securities are summarized in the following table:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Gross realized gains	$	5	$	108	$	7	$	165
Gross realized losses	—		—		—		(78		)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following tables show the gross unrealized losses and fair values of investment securities, aggregated by investment category, and the length of time individual investment securities have been in a continuous unrealized loss position, as of June 30, 2017 and December 31, 2016:



	Less than 12 Months					12 Months or More					Total
June 30, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale:
U.S. Treasury notes	$	1,797	$	(2	)	$	—	$	—		$	1,797	$	(2	)
Obligations of U.S. government agencies	359,889		(2,804		)	9,989		(10		)	369,878		(2,814		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	599,643		(4,346		)	21,848		(419		)	621,491		(4,765		)
Private mortgage-backed securities	1,484		(303		)	42		(1		)	1,526		(304		)
Corporate securities	8,100		(6		)	—		—			8,100		(6		)
Total	$	970,913	$	(7,461	)	$	31,879	$	(430	)	$	1,002,792	$	(7,891	)



	Less than 12 Months					12 Months or More					Total
June 30, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity:
State, county and municipal securities	$	21,331	$	(139	)	$	884	$	(2	)	$	22,215	$	(141	)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	42,109		(8,069		)	17,766		(1,291		)	59,875		(9,360		)
Obligations of U.S. government agencies	9,985		(5		)	—		—			9,985		(5		)
Corporate securities	15,074		(39		)	—		—			15,074		(39		)
Total	$	88,499	$	(8,252	)	$	18,650	$	(1,293	)	$	107,149	$	(9,545	)



	Less than 12 Months					12 Months or More					Total
December 31, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale:
U.S. Treasury notes	$	598	$	(1	)	$	—	$	—		$	598	$	(1	)
Obligations of U.S. government agencies	316,511		(6,457		)	—		—			316,511		(6,457		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	746,265		(13,102		)	15,801		(499		)	762,066		(13,601		)
Private mortgage-backed securities	—		—			48		(1		)	48		(1		)
Total	$	1,063,374	$	(19,560	)	$	15,849	$	(500	)	$	1,079,223	$	(20,060	)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



	Less than 12 Months					12 Months or More					Total
December 31, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity:
State, county and municipal securities	$	42,518	$	(533	)	$	2,831	$	(9	)	$	45,349	$	(542	)
Obligations of U.S. government agencies	19,575		(162		)	—		—			19,575		(162		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	108,857		(7,973		)	19,986		(1,276		)	128,843		(9,249		)
Corporate securities	32,474		(211		)	—		—			32,474		(211		)
Total	$	203,424	$	(8,879	)	$	22,817	$	(1,285	)	$	226,241	$	(10,164	)

The investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 337 and 396 individual investment securities that were in an unrealized loss position as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, the Company had the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. Furthermore, the Company does not have the intent to sell any of the available-for-sale securities in the above table and it is more likely than not that the Company will not have to sell any securities before a recovery in cost. No impairment losses were recorded during three or six months ended June 30, 2017 or 2016.

Maturities of investment securities at June 30, 2017 are shown below. Maturities of mortgage-backed securities have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. All other investment securities maturities are shown at contractual maturity dates.



	Available-for-Sale				Held-to-Maturity
June 30, 2017	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	371,218	$	372,541	$	75,748	$	74,416
After one year but within five years	1,227,734		1,229,254		268,855		280,504
After five years but within ten years	228,192		228,561		133,245		134,858
After ten years	248,970		249,838		51,594		45,367
Total	$	2,076,114	$	2,080,194	$	529,442	$	535,145

As of June 30, 2017, the Company had investment securities callable within one year with amortized costs and estimated fair values of $63,743 and $63,933, respectively. These investment securities are primarily included in the after one year but within five years category in the table above. As of June 30, 2017, the Company did not have any callable structured notes.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)


(5)	Loans

The following tables present the Company's recorded investment and contractual aging of the Company's recorded investment in loans by class as of the dates indicated. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.



							Total Loans
	30 - 59		60 - 89		> 90		30 or More
	Days		Days		Days		Days		Current		Non-accrual		Total
As of June 30, 2017	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	4,522	$	419	$	978	$	5,919	$	2,780,010	$	30,597	$	2,816,526
Construction:
Land acquisition & development	1,880		42		52		1,974		333,247		4,663		339,884
Residential	1,124		508		—		1,632		217,914		210		219,756
Commercial	—		—		—		—		117,287		4,318		121,605
Total construction loans	3,004		550		52		3,606		668,448		9,191		681,245
Residential	14,136		2,583		3,583		20,302		1,441,507		4,205		1,466,014
Agricultural	1,371		661		1,900		3,932		156,898		2,345		163,175
Total real estate loans	23,033		4,213		6,513		33,759		5,046,863		46,338		5,126,960
Consumer:
Indirect consumer	6,430		1,648		159		8,237		769,361		1,428		779,026
Other consumer	1,246		301		87		1,634		173,713		390		175,737
Credit card	488		355		487		1,330		74,300		1		75,631
Total consumer loans	8,164		2,304		733		11,201		1,017,374		1,819		1,030,394
Commercial	3,487		1,248		1,684		6,419		1,178,688		25,762		1,210,869
Agricultural	1,618		487		432		2,537		143,824		2,768		149,129
Other, including overdrafts	—		—		—		—		8,238		—		8,238
Loans held for investment	36,302		8,252		9,362		53,916		7,394,987		76,687		7,525,590
Mortgage loans originated for sale	—		—		—		—		30,383		—		30,383
Total loans	$	36,302	$	8,252	$	9,362	$	53,916	$	7,425,370	$	76,687	$	7,555,973

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



							Total Loans
	30 - 59		60 - 89		> 90		30 or More
	Days		Days		Days		Days		Current		Non-accrual		Total
As of December 31, 2016	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	7,307	$	1,099	$	303	$	8,709	$	1,799,525	$	26,211	$	1,834,445
Construction:
Land acquisition & development	633		352		279		1,264		202,223		5,025		208,512
Residential	931		264		—		1,195		146,245		456		147,896
Commercial	—		—		—		—		124,827		762		125,589
Total construction loans	1,564		616		279		2,459		473,295		6,243		481,997
Residential	3,986		1,280		702		5,968		1,014,990		6,435		1,027,393
Agricultural	341		287		—		628		165,293		4,327		170,248
Total real estate loans	13,198		3,282		1,284		17,764		3,453,103		43,216		3,514,083
Consumer:
Indirect consumer	8,425		2,329		712		11,466		740,163		780		752,409
Other consumer	1,322		235		167		1,724		146,006		357		148,087
Credit card	504		333		567		1,404		68,366		—		69,770
Total consumer loans	10,251		2,897		1,446		14,594		954,535		1,137		970,266
Commercial	3,171		727		734		4,632		767,878		25,432		797,942
Agricultural	1,518		362		14		1,894		127,956		3,008		132,858
Other, including overdrafts	—		1		311		312		1,289		—		1,601
Loans held for investment	28,138		7,269		3,789		39,196		5,304,761		72,793		5,416,750
Mortgage loans originated for sale	—		—		—		—		61,794		—		61,794
Total loans	$	28,138	$	7,269	$	3,789	$	39,196	$	5,366,555	$	72,793	$	5,478,544

Loans from business combinations included in the tables above include certain loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

The following table displays the outstanding unpaid balances and accrual status of loans acquired with credit impairment as of June 30, 2017 and 2016:



As of June 30,	2017		2016

Outstanding balance	$	60,195	$	31,979

Carrying value
Loans on accrual status	39,359		20,140
Total carrying value	$	39,359	$	20,140

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table summarizes changes in the accretable yield for loans acquired credit impaired for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016

Beginning balance	$	6,432		$	6,678		$	6,803		$	6,713
Additions	1,929			—			1,929			—
Accretion income	(668		)	(615		)	(1,273		)	(1,229		)
Reductions due to exit events	(418		)	(158		)	(988		)	(305		)
Reclassifications from nonaccretable differences	375			—			1,179			726
Ending balance	$	7,650		$	5,905		$	7,650		$	5,905

Acquired loans that met the criteria for nonaccrual of interest prior to acquisition were considered performing upon acquisition. If interest on non-accrual loans had been accrued, such income would have been approximately $919 and $821 for the three months ended June 30, 2017 and 2016, respectively, and approximately $1,772 and $1,690 for the six months ended June 30, 2017, and 2016, respectively.

The Company considers impaired loans to include all originated loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings, and all loans acquired with evidence of deterioration in credit quality and for which it was probable, at acquisition, that the Company would be unable to collect all contractual amounts owed. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:



As of June 30, 2017	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	53,576	$	22,751	$	20,380	$	43,131	$	5,158
Construction:
Land acquisition & development	11,281		3,639		1,718		5,357		741
Residential	312		209		—		209		—
Commercial	4,728		226		4,204		4,430		2,828
Total construction loans	16,321		4,074		5,922		9,996		3,569
Residential	7,636		4,472		2,022		6,494		170
Agricultural	2,752		2,549		153		2,702		9
Total real estate loans	80,285		33,846		28,477		62,323		8,906
Consumer	28		—		25		25		—
Commercial	39,587		13,021		18,882		31,903		6,882
Agricultural	3,001		2,040		940		2,980		528
Total	$	122,901	$	48,907	$	48,324	$	97,231	$	16,316

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



As of December 31, 2016	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	57,017	$	24,410	$	21,420	$	45,830	$	2,847
Construction:
Land acquisition & development	12,084		4,330		1,813		6,143		826
Residential	1,555		219		619		838		1
Commercial	4,786		3,940		647		4,587		657
Total construction loans	18,425		8,489		3,079		11,568		1,484
Residential	8,222		4,074		2,470		6,544		253
Agricultural	5,069		4,509		181		4,690		4
Total real estate loans	88,733		41,482		27,150		68,632		4,588
Commercial	40,314		13,230		19,167		32,397		9,254
Agricultural	3,738		3,280		382		3,662		112
Total	$	132,785	$	57,992	$	46,699	$	104,691	$	13,954

The following table presents the average recorded investment in and income recognized on impaired loans for the periods indicated:



	Three Months Ended June 30,
	2017				2016
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	43,871	$	102	$	34,576	$	105
Construction:
Land acquisition & development	5,411		4		7,096		12
Residential	212		—		277		—
Commercial	4,463		1		1,421		2
Total construction loans	10,086		5		8,794		14
Residential	6,574		4		3,067		2
Agricultural	2,389		—		5,857		—
Total real estate loans	62,920		111		52,294		121
Consumer	13		—		—		—
Commercial	32,491		60		28,074		41
Agricultural	2,068		—		753		—
Total	$	97,492	$	171	$	81,121	$	162

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



	Six Months Ended June 30,
	2017				2016
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	44,481	$	227	$	36,342	$	141
Construction:
Land acquisition & development	5,750		8		7,277		19
Residential	524		—		282		—
Commercial	4,509		44		1,433		2
Total construction loans	10,783		52		8,992		21
Residential	6,519		8		4,138		3
Agricultural	3,696		—		5,671		1
Total real estate loans	65,479		287		55,143		166
Consumer	13		—		—		—
Commercial	32,150		109		28,133		56
Agricultural	3,321		2		846		—
Total	$	100,963	$	398	$	84,122	$	222

The amount of interest income recognized by the Company within the period that the loans were impaired was primarily related to loans modified in a troubled debt restructuring that remained on accrual status. Interest payments received on non-accrual impaired loans are applied to principal. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. If interest on impaired loans had been accrued, interest income on impaired loans would have been approximately $919 and $964 for the three months ended June 30, 2017 and 2016, respectively, and approximately $1,772 and $2,020 for the six months ended June 30, 2017 and 2016, respectively.

Collateralized impaired loans are generally recorded at the fair value of the underlying collateral using discounted cash flows, independent appraisals and management estimates based upon current market conditions. For loans measured under the present value of cash flows method, the change in present value attributable to the passage of time, if applicable, is recognized in the provision for loan losses and thus no interest income is recognized.

Modifications of performing loans are made in the ordinary course of business and are completed on a case-by-case basis as negotiated with the borrower. Loan modifications typically include interest rate changes, interest only periods of less than twelve months, short-term payment deferrals and extension of amortization periods to provide payment relief. A loan modification is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and the Company, for economic or legal reasons, grants a concession to the borrower that it would not otherwise consider. Certain troubled debt restructurings are on non-accrual status at the time of restructuring and may be returned to accrual status after considering the borrower's sustained repayment performance in accordance with the restructuring agreement for a period of at least six months and management is reasonably assured of future performance. If the troubled debt restructuring meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status and the accrual of interest will resume, although they continue to be individually evaluated for impairment and disclosed as impaired loans.

The Company had loans renegotiated in troubled debt restructurings of $52,351 as of June 30, 2017, of which $37,395 were included in non-accrual loans and $14,956 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $49,652 as of December 31, 2016, of which $27,309 were included in non-accrual loans and $22,343 were on accrual status.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table presents information on the Company's troubled debt restructurings that occurred during the three and six months ended June 30, 2017:



	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Three Months Ended June 30, 2017	Number of Notes	Interest only period		Extension of term or amortization schedule		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	1	$	—	$	226	$	—	$	—	$	226
Commercial	2	16		—		—		465		481
Total loans restructured during period	3	$	16	$	226	$	—	$	465	$	707
(1) Other includes concessions that reduce or defer payments for a specified period of time and/or concessions that do not fit into other designated categories.




	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Six Months Ended June 30, 2017	Number of Notes	Interest only period		Extension of terms or maturity		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	5	$	1,475	$	388	$	—	$	909	$	2,772
Commercial	15	511		1,968		—		5,446		7,925
Total loans restructured during period	20	$	1,986	$	2,356	$	—	$	6,355	$	10,697
(1) Other includes concessions that reduce or defer payments for a specified period of time and/or do not fit into other designated categories.

For troubled debt restructurings that were on non-accrual status or otherwise deemed impaired before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company continues to evaluate all troubled debt restructurings for possible impairment and recognizes impairment through the allowance. Additionally these loans continue to work their way through the credit cycle through charge-off, pay-off or foreclosure. Financial effects of modifications of troubled debt restructurings may include principal loan forgiveness or other charge-offs directly related to the restructuring. The Company had no charge-offs directly related to modifying troubled debt restructurings during the three or six months ended June 30, 2017 or 2016.

The following table presents information on the Company's troubled debt restructurings during the previous 12 months for which there was a payment default during the three and six months ended June 30, 2017. The Company considers a payment default to occur on troubled debt restructurings when the loan is 90 days or more past due or was placed on non-accrual status after the modification.




	Three Months Ended June 30, 2017			Six Months Ended June 30, 2017
	Number of Notes	Balance		Number of Notes	Balance
Commercial real estate	3	$	2,763	3	$	2,763
Commercial construction	1	3,575		1	3,575
Total	4	$	6,338	4	$	6,338

At June 30, 2017, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.

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(Dollars in thousands, except share and per share data)

As part of the on-going and continuous monitoring of the credit quality of the Company’s loan portfolio, management tracks internally assigned risk classifications of loans. The Company adheres to a Uniform Classification System developed jointly by the various bank regulatory agencies to internally risk rate loans. The Uniform Classification System defines three broad categories of criticized assets, which the Company uses as credit quality indicators:

Other Assets Especially Mentioned — includes loans that exhibit weaknesses in financial condition, loan structure or documentation, which if not promptly corrected, may lead to the development of abnormal risk elements.

Substandard — includes loans that are inadequately protected by the current sound worth and paying capacity of the borrower. Although the primary source of repayment for a substandard loan is not currently sufficient, collateral or other sources of repayment are sufficient to satisfy the debt. Continuance of a substandard loan is not warranted unless positive steps are taken to improve the worthiness of the credit.

Doubtful — includes loans that exhibit pronounced weaknesses to a point where collection or liquidation in full, on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Doubtful loans are required to be placed on non-accrual status and are assigned specific loss exposure.

Company management undertakes the same process for assigning risk ratings to acquired loans as it does for originated loans. Acquired loans rated as substandard or lower or that were on non-accrual status or designated as troubled debt restructurings at the time of acquisition are deemed to be acquired credit impaired loans accounted for under ASC Topic 310-30, regardless of whether they are classified as performing or non-performing loans.

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 June 30, 2017	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	89,093	$	105,050	$	14,265	$	208,408
Construction:
Land acquisition & development	17,516		6,785		1,383		25,684
Residential	2,609		2,503		548		5,660
Commercial	1,520		3,844		4,221		9,585
Total construction loans	21,645		13,132		6,152		40,929
Residential	4,831		11,754		874		17,459
Agricultural	1,319		16,016		—		17,335
Total real estate loans	116,888		145,952		21,291		284,131
Consumer:
Indirect consumer	707		2,096		126		2,929
Other consumer	609		835		135		1,579
Credit card	—		185		—		185
Total consumer loans	1,316		3,116		261		4,693
Commercial	39,346		57,731		21,310		118,387
Agricultural	5,526		15,612		1,327		22,465
Total	$	163,076	$	222,411	$	44,189	$	429,676

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



As of December 31, 2016	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	85,292	$	85,293	$	10,842	$	181,427
Construction:
Land acquisition & development	13,414		6,214		1,401		21,029
Residential	412		1,621		656		2,689
Commercial	1,555		6,344		664		8,563
Total construction loans	15,381		14,179		2,721		32,281
Residential	5,038		12,472		764		18,274
Agricultural	3,831		17,813		—		21,644
Total real estate loans	109,542		129,757		14,327		253,626
Consumer:
Indirect consumer	778		1,527		101		2,406
Other consumer	681		1,036		264		1,981
Total consumer loans	1,459		2,563		365		4,387
Commercial	46,402		29,281		21,240		96,923
Agricultural	6,178		10,724		404		17,306
Total	$	163,581	$	172,325	$	36,336	$	372,242

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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)


(6)	Allowance for Loan Losses

The following tables present a summary of changes in the allowance for loan losses by portfolio segment for the periods indicated:



Three Months Ended June 30, 2017	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	33,092		$	8,368		$	33,562		$	1,209		$	—	$	76,231
Provision charged to operating expense	1,078			489			453			335			—		2,355
Less loans charged-off	(980		)	(2,412		)	(1,049		)	(48		)	—		(4,489		)
Add back recoveries of loans previously charged-off	308			1,109			158			29			—		1,604
Ending balance	$	33,498		$	7,554		$	33,124		$	1,525		$	—	$	75,701

Six Months Ended June 30, 2017	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	28,625		$	7,711		$	38,092		$	1,786		$	—	$	76,214
Provision charged to operating expense	5,465			2,537			(3,675		)	(242		)	—		4,085
Less loans charged-off	(1,243		)	(5,008		)	(1,841		)	(70		)	—		(8,162		)
Add back recoveries of loans previously charged-off	651			2,314			548			51			—		3,564
Ending balance	$	33,498		$	7,554		$	33,124		$	1,525		$	—	$	75,701

As of June 30, 2017	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	8,898		$	8		$	6,882		$	528		$	—	$	16,316
Loans collectively evaluated for impairment	24,600			7,546			26,242			997			—		59,385
Allowance for loan losses	$	33,498		$	7,554		$	33,124		$	1,525		$	—	$	75,701

Loans held for investment:
Individually evaluated for impairment	$	62,323		$	25		$	31,903		$	2,980		$	—	$	97,231
Collectively evaluated for impairment	5,064,637			1,030,369			1,178,966			146,149			8,238		7,428,359
Total loans	$	5,126,960		$	1,030,394		$	1,210,869		$	149,129		$	8,238	$	7,525,590



Three Months Ended June 30, 2016	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	36,652		$	5,256		$	36,252		$	1,764		$	—	$	79,924
Provision charged to operating expense	(4,059		)	2,123			4,313			173			—		2,550
Less loans charged-off	(523		)	(1,712		)	(1,018		)	(188		)	—		(3,441		)
Add back recoveries of loans previously charged-off	211			648			448			—			—		1,307
Ending balance	$	32,281		$	6,315		$	39,995		$	1,749		$	—	$	80,340

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



Six Months Ended June 30, 2016	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	52,296		$	5,144		$	18,775		$	602		$	—	$	76,817
Provision charged to operating expense	(20,140		)	3,352			22,003			1,335			—		6,550
Less loans charged-off	(2,445		)	(3,604		)	(1,506		)	(188		)	—		(7,743		)
Add back recoveries of loans previously charged-off	2,570			1,423			723			—			—		4,716
Ending balance	$	32,281		$	6,315		$	39,995		$	1,749		$	—	$	80,340

As of December 31, 2016	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	4,588		$	—		$	9,254		$	112		$	—	$	13,954
Loans collectively evaluated for impairment	24,037			7,711			28,838			1,674			—		62,260
Allowance for loan losses	$	28,625		$	7,711		$	38,092		$	1,786		$	—	$	76,214

Loans held for investment:
Individually evaluated for impairment	$	68,632		$	—		$	32,397		$	3,662		$	—	$	104,691
Collectively evaluated for impairment	3,445,451			970,266			765,545			129,196			1,601		5,312,059
Total loans	$	3,514,083		$	970,266		$	797,942		$	132,858		$	1,601	$	5,416,750

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 economic 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 conditions and the estimated impact of these factors 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 June 30, 2017 and December 31, 2016, the Company's allowance for loan losses included $701 and $427, respectively, related to loans acquired credit impaired.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)


(7)	Other Real Estate Owned

Information with respect to the Company's other real estate owned follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Beginning balance	$	9,428		$	9,257		$	10,019		$	6,254
OREO acquired through acquisition	1,055			—			1,055			—
Additions	1,395			792			1,763			4,019
Valuation adjustments	(9		)	(586		)	(56		)	(603		)
Dispositions	(583		)	(1,555		)	(1,495		)	(1,762		)
Ending balance	$	11,286		$	7,908		$	11,286		$	7,908

The carrying values of foreclosed residential real estate properties included in other real estate owned were $2,686 and $2,282 as of June 30, 2017 and December 31, 2016, respectively. The Company did not have any consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of June 30, 2017 or December 31, 2016.


(8)	Derivatives and Hedging Activities

For asset and liability management purposes, the Company has entered into an interest rate swap contract to hedge against changes in forecasted cash flows due to interest rate exposures. The swap agreement is a derivative instrument and converts a portion of the Company’s forecasted variable rate debt to a fixed rate (i.e., cash flow hedge) over the payment term of the interest rate swap. The effective portion of the gain or loss on cash flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period during which the transaction affects earnings. The ineffective portion of the gain or loss on derivative instruments, if any, is recognized in earnings. The Company does not enter into interest rate swap agreements for trading or speculative purposes.

The Company also enters into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with a third party financial institution. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations.

In the normal course of business, the Company enters into interest rate lock commitments to finance residential mortgage loans that are not designated as accounting hedges. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Loan commitments related to residential mortgage loans intended to be sold are considered derivatives and are marked to market through earnings. In addition to the effects of the change in market interest rate, the fair value measurement of the derivative also contemplates the expected cash flows to be received from the counterparty from the future sale of the loan.

The Company sells residential mortgage loans on either a best efforts or mandatory delivery basis. The Company mitigates the effect of the interest rate risk inherent in providing interest rate lock commitments by entering into forward loan sales contracts. During the interest rate lock commitment period, these forward loan sales contracts are marked to market through earnings and are not designated as accounting hedges. Exclusive of the fair value component associated with the projected cash flows from the loan delivery to the investor, the changes in fair value related to movements in market rates of the interest rate lock commitments and the forward loan sales contracts generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period is generally inconsequential. When the loan is funded to the borrower, the interest rate lock commitment derivative expires and the Company records a loan held for sale. The forward loan sales contracts act as a hedge against the variability in

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

the market value of mortgage loans held for sale. The changes in measurement of the estimated fair values of the interest rate lock commitments and forward loan sales contracts are included in mortgage banking revenues in the accompanying consolidated statements of income.

The notional amounts and estimated fair values of the Company's derivatives are presented in the following table. Fair value estimates are obtained from third parties and are based on pricing models.



	June 30, 2017				December 31, 2016
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Derivative Assets (included in other assets):
Non-hedging interest rate derivatives:
Interest rate swap contracts	$	320,809	$	9,001	$	53,593	$	1,332
Interest rate lock commitments	64,673		1,301		73,422		1,131
Forward loan sales contracts	82,589		297		126,836		286
Total derivative assets	$	468,071	$	10,599	$	253,851	$	2,749

Derivative Liabilities (included in accounts payable and accrued expenses):
Derivatives designated as hedges:
Interest rate swap contracts	$	100,000	$	470	$	100,000	$	33

Non-hedging interest rate derivatives:
Interest rate swap contracts	320,809		9,327		53,593		1,281
Total derivative liabilities	$	420,809	$	9,797	$	153,593	$	1,314

On September 22, 2015, the Company entered into an interest rate swap contract with a notional amount of $100,000 that was designated as a cash flow hedge. Under the terms of the interest rate swap contract, the Company pays a fixed interest rate of 1.94% and the counterparty pays to the Company a variable interest rate equal to the three-month LIBOR. No cash is exchanged until the effective date, which begins on September 15, 2017 and ends on September 15, 2020.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2017, the Company did not record any hedge ineffectiveness.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting arrangements. Master netting arrangements allow the Company to settle all contracts held with a single counterparty on a net basis and to offset net contract position with related collateral where applicable.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table illustrates the potential effect of the Company's master netting arrangements, by type of financial instrument, on the Company's consolidated balance sheets as of June 30, 2017 and December 31, 2016:



	June 30, 2017
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts in the Balance Sheet		Financial Instruments		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Financial Assets
Interest rate swap contracts	$	9,001	$	—	$	9,001	$	1,547	$	—	$	7,454
Mortgage related derivatives	1,598		—		1,598		—		—		1,598
Total derivatives	10,599		—		10,599		1,547		—		9,052
Total assets	$	10,599	$	—	$	10,599	$	1,547	$	—	$	9,052

Financial Liabilities
Interest rate swap contracts	$	9,797	$	—	$	9,797	$	1,547	$	8,250	$	—
Total derivatives	9,797		—		9,797		1,547		8,250		—
Repurchase agreements	579,772		—		579,772		—		579,772		—
Total liabilities	$	589,569	$	—	$	589,569	$	1,547	$	588,022	$	—



	December 31, 2016
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts in the Balance Sheet		Financial Instruments		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Financial Assets
Interest rate swap contracts	$	1,332	$	—	$	1,332	$	479	$	—	$	853
Mortgage related derivatives	1,417		—		1,417		—		—		1,417
Total derivatives	2,749		—		2,749		479		—		2,270
Total assets	$	2,749	$	—	$	2,749	$	479	$	—	$	2,270

Financial Liabilities
Interest rate swap contracts	$	1,314	$	—	$	1,314	$	479	$	—	$	835
Total derivatives	1,314		—		1,314		479		—		835
Repurchase agreements	537,556		—		537,556		—		537,556		—
Total liabilities	$	538,870	$	—	$	538,870	$	479	$	537,556	$	835

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that $372 will be reclassified as an increase to interest expense.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table presents the pre-tax gains or losses related to derivative contracts that were recorded in accumulated other comprehensive income and other non-interest income in the Company's statements of income for the periods indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Derivatives designated as hedges:
Amount of loss recognized in other comprehensive income (effective portion)	$	(486	)	$	(804	)	$	(437	)	$	(3,002	)
Non-hedging interest rate derivatives:
Amount of gain (loss) recognized in other non-interest income	70			(50		)	31			(79		)
Amount of net fee expense recognized in other non-interest income	321			245			279			245
Amount of net gains recognized in mortgage banking revenues	290			523			181			1,218


(9)	Capital Stock

The Company had 33,260,710 shares of Class A common stock and 23,184,557 shares of Class B common stock outstanding as of June 30, 2017. The Company had 21,613,885 shares of Class A common stock and 23,312,291 shares of Class B common stock outstanding as of December 31, 2016.

On May 30, 2017, the Company issued 11,252,750 shares of its Class A common stock with an aggregate value of $385,969 as partial consideration for the acquisition of Cascade Bancorp. In addition, during the six months ended June 30, 2017, the Company issued 14,926 shares of its Class A common stock to directors for their annual service on the Company's board of directors. The aggregate value of the shares issued to directors of $522 is included in stock-based compensation expense in the accompanying consolidated statements of changes in stockholders' equity.

During the six months ended June 30, 2017, the Company did not repurchase any shares of its Class A common stock. During the six months ended June 30, 2016, the Company repurchased and retired 975,877 shares of its Class A common stock in open market transactions at an aggregate purchase price of $25,525. All repurchases were made pursuant to stock repurchase programs approved by the Company's Board of Directors. Under the terms of the current stock repurchase program, the Company may repurchase up to an additional 24,123 shares of its Class A common stock. All other stock repurchases during the six months ended June 30, 2017 and 2016 were redemptions of vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by participants in the Company's equity compensation plans.


(10)	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.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table sets forth the computation of basic and diluted earnings per share for the six month periods ended June 30, 2017 and 2016:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Net income	$	21,868	$	25,554	$	44,994	$	45,678
Weighted average common shares outstanding for basic earnings per share computation	47,612,971		44,268,985		46,170,500		44,494,102
Dilutive effects of stock-based compensation	461,480		376,190		510,875		385,513
Weighted average common shares outstanding for diluted earnings per common share computation	48,074,451		44,645,175		46,681,375		44,879,615

Basic earnings per common share	$	0.46	$	0.58	$	0.97	$	1.03
Diluted earnings per common share	$	0.45	$	0.57	$	0.96	$	1.02

Anti-dilutive unvested time restricted stock	96,262		96,726		92,626		96,726

The Company had 182,835 and 221,322 shares of unvested restricted stock as of June 30, 2017 and 2016, respectively, that were not included in the computation of diluted earnings per common share because performance conditions for vesting had not been met.


(11)	Regulatory Capital

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, ("Basel III"). Basel III includes a more stringent definition of capital and introduces a new common equity tier 1, or CET1, capital requirement, sets forth a comprehensive methodology for calculating risk-weighted assets, introduces a conservation buffer and sets out minimum capital ratios and overall capital adequacy standards. Under Basel III, certain deductions and adjustments to regulatory capital began to phase in starting January 1, 2015 and will be fully implemented on January 1, 2018. The capital conservation buffer required under Basel III began to phase in starting January 1, 2016 and will be fully implemented on January 1, 2019.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

As of June 30, 2017 and December 31, 2016, the Company exceeded all capital adequacy requirements to which it is subject. Actual capital amounts and ratios for the Company and its bank subsidiary, as of June 30, 2017 and December 31, 2016 are presented in the following tables:



	Actual				Adequately Capitalized Basel III Phase-In Schedule				Adequately Capitalized Basel III Fully Phased-In				Well Capitalized (1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2017
Total risk-based capital:
Consolidated	$	1,086,842	12.56	%	$	800,182	9.25	%	$	908,314	10.50	%	$	865,061	10.00	%
FIB	824,454		13.00		586,642		9.25		665,918		10.50		634,208		10.00
BOTC	240,391		10.53		211,145		9.25		239,678		10.50		228,265		10.00
Tier 1 risk-based capital:
Consolidated	1,011,141		11.69		627,169		7.25		735,302		8.50		692,049		8.00
FIB	748,753		11.81		459,801		7.25		539,077		8.50		507,366		8.00
BOTC	240,391		10.53		165,492		7.25		194,025		8.50		182,612		8.00
Common equity tier 1 risk-based capital:
Consolidated	931,675		10.77		497,410		5.75		605,543		7.00		562,290		6.50
FIB	748,753		11.81		364,669		5.75		443,945		7.00		412,235		6.50
BOTC	240,391		10.53		131,252		5.75		159,786		7.00		148,372		6.50
Leverage capital ratio:
Consolidated	1,011,141		10.65		379,616		4.00		379,616		4.00		474,519		5.00
FIB	748,753		8.67		345,442		4.00		345,442		4.00		431,803		5.00
BOTC	240,391		8.12		118,476		4.00		118,476		4.00		148,095		5.00



	Actual				Adequately Capitalized Basel III Phase-In Schedule				Adequately Capitalized Basel III Fully Phased-In				Well Capitalized (1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2016
Total risk-based capital:
Consolidated	$	974,488	15.13	%	$	555,665	8.63	%	$	676,070	10.50	%	$	643,876	10.00	%
FIB	841,967		13.13		553,459		8.63		673,386		10.50		641,320		10.00
Tier 1 risk-based capital:
Consolidated	894,273		13.89		426,890		6.63		547,295		8.50		$	515,101	8.00
FIB	765,753		11.94		425,195		6.63		545,122		8.50		513,056		8.00
Common equity tier 1 risk-based capital:
Consolidated	814,273		12.65		330,308		5.13		450,713		7.00		$	418,519	6.50
FIB	765,753		11.94		328,997		5.13		448,924		7.00		416,858		6.50
Leverage capital ratio:
Consolidated	894,273		10.11		353,838		4.00		353,838		4.00		$	442,297	5.00
FIB	765,753		8.69		352,283		4.00		352,283		4.00		440,353		5.00

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

(1) The ratios for the well capitalized requirement are only applicable to FIB and BOTC. However, the Company manages its capital position as if the requirement applies to the consolidated entity and has presented the ratios as if they also applied on a consolidated basis.


(12)	Commitments and Contingencies

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 of all other claims and litigation is not expected to have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

As of June 30, 2017, the Company had a commitment under a forward starting interest rate swap contract with a notional amount of $100,000. For additional information about the forward starting interest rate swap contract, see Note 8 — Derivatives and Hedging Activity.

As of June 30, 2017, the Company had commitments under construction contracts of $1,374.

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 $999 of sold residential mortgage loans with recourse provisions still in effect as of June 30, 2017.


(13)	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. 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At June 30, 2017, commitments to extend credit to existing and new borrowers approximated $2,250,387, which included $673,280 on unused credit card lines and $874,134 with commitment maturities beyond one year.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At June 30, 2017, the Company had outstanding standby letters of credit of $54,241. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in other liabilities in the Company’s consolidated balance sheet.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)


(14)	Other Comprehensive Income/Loss

The gross amounts of each component of other comprehensive income and the related tax effects are as follows:



	Pre-tax						Tax Expense (Benefit)						Net of Tax
Three Months Ended June 30,	2017			2016			2017			2016			2017			2016
Investment securities available-for sale:
Change in net unrealized gains during period	$	8,006		$	10,043		$	3,298		$	3,947		$	4,708		$	6,096
Reclassification adjustment for net (gains) losses included in net income	(5		)	(108		)	(2		)	(42		)	(3		)	(66		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	464			452			191			170			273			282
Unrealized (gain) loss on derivatives	(486		)	(804		)	(201		)	(305		)	(285		)	(499		)
Defined benefits post-retirement benefit plan:
Change in net actuarial (gain) loss	(176		)	13			(72		)	5			(104		)	8
Total other comprehensive income	$	7,803		$	9,596		$	3,214		$	3,775		$	4,589		$	5,821




	Pre-tax						Tax Expense (Benefit)						Net of Tax
Six Months Ended June 30,	2017			2016			2017			2016			2017			2016
Investment securities available-for sale:
Change in net unrealized gains during period	$	17,365		$	18,671		$	6,985		$	7,322		$	10,380		$	11,349
Reclassification adjustment for net gains included in net income	(7		)	(87		)	(3		)	(34		)	(4		)	(53		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	929			904			374			340			555			564
Unrealized loss on derivatives	(437		)	(3,002		)	(176		)	(1,141		)	(261		)	(1,861		)
Defined benefits post-retirement benefit plan:
Change in net actuarial loss	(914		)	28			(368		)	11			(546		)	17
Total other comprehensive income	$	16,936		$	16,514		$	6,812		$	6,498		$	10,124		$	10,016

The components of accumulated other comprehensive loss, net of related tax effects, are as follows:



	June 30, 2017			December 31, 2016
Net unrealized gain (loss) on investment securities available-for-sale	$	947		$	(10,143	)
Net realized gain (loss) on derivatives	(434		)	(23		)
Net actuarial gain (loss) on defined benefit post-retirement benefit plans	1,483			2,038
Net accumulated other comprehensive gain (loss)	$	1,996		$	(8,128	)


(15)	Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The three levels of inputs that may be used to measure fair value are as follows:

•Level 1 - Quoted prices in active markets for identical assets or liabilities

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

•Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities

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, and therefore are classified within Level 2 of the valuation hierarchy. There were no transfers between fair value hierarchy levels during the three and six months ended June 30, 2017 and 2016.

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 Company obtains fair value measurements for investment securities from an independent pricing service. 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. 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. If needed, a broker may be utilized to determine the reported fair value of investment securities.

Loans Held for Sale. Fair value measurements for loans held for sale are obtained from an independent pricing service. The fair value measurements consider observable data that may include binding contracts or quotes or bids from third party investors as well as loan level pricing adjustments.

Interest Rate Swap Contracts. Fair values for derivative interest rate swap contracts are based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be corroborated by observable market data. The inputs used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the federal funds effective swap rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. The change in the value of derivative assets attributable to basis risk, or the risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other, was not significant in the reported periods. The Company also obtains and compares the reasonableness of the pricing from an independent third party.

Interest Rate Lock Commitments. Fair value measurements for interest rate lock commitments are obtained from an independent pricing service. The fair value measurements consider observable data that may include prices available from secondary market investors taking into consideration various characteristics of the loan, including the loan amount, interest rate, value of the servicing and loan to value ratio, among other things. Observable data is then adjusted to reflect changes in interest rates, the Company's estimated pull-through rate and estimated direct costs necessary to complete the commitment into a closed loan net of origination and processing fees collected from the borrower.

Forward Loan Sales Contracts. The fair value measurements for forward loan sales contracts are obtained from an independent pricing service. The fair value measurements consider observable data that includes sales of similar loans.

Deferred Compensation Plan Assets and Liabilities. The fair values of deferred compensation plan assets 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. These investments are in the same funds and purchased in the same amounts as the participants’ selected investments, which represent the underlying liabilities to plan participants. Deferred compensation plan liabilities are recorded at amounts due to participants, based on the fair value of participants’ selected investments.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:



			Fair Value Measurements at Reporting Date Using
As of June 30, 2017	Balance		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:
U.S. Treasury Notes	$	3,607	$	—	$	3,607	$	—
Obligations of U.S. government agencies	675,318			—	675,318			—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	1,222,937			—	1,222,937			—
Private mortgage-backed securities	108,485			—	108,485			—
Corporate securities	66,884			—	66,884
Other investments	2,963			—	2,963			—
Loans held for sale	30,383			—	30,383			—
Derivative assets:
Interest rate swap contracts	9,001			—	9,001			—
Interest rate lock commitments	1,301			—	1,301			—
Forward loan sale contracts	297			—	297			—
Derivative liabilities:
Interest rate swap contracts	9,797			—	9,797			—
Deferred compensation plan assets	11,598			—	11,598			—
Deferred compensation plan liabilities	11,598			—	11,598			—



			Fair Value Measurements at Reporting Date Using
As of December 31, 2016	Balance		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:
U.S. Treasury notes	$	3,612	$	—	$	3,612	$	—
Obligations of U.S. government agencies	391,297			—	391,297			—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	1,213,701			—	1,213,701			—
Private mortgage-backed securities	116			—	116			—
Other investments	2,972			—	2,972			—
Loans held for sale	61,794			—	61,794			—
Derivative assets:
Interest rate swap contracts	1,332			—	1,332			—
Interest rate lock commitments	1,131			—	1,131			—
Forward loan sales contracts	286			—	286			—
Derivative liabilities
Interest rate swap contracts	1,314			—	1,314			—
Deferred compensation plan assets	10,627			—	10,627			—
Deferred compensation plan liabilities	10,627			—	10,627			—

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

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

due to impairment. The following table presents information about the Company’s assets and liabilities measured at fair value on a non-recurring basis:



				Fair Value Measurements at Reporting Date Using
As of June 30, 2017	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	34,975	$	—	$	—	$	34,975
Other real estate owned	1,422			—		—	1,422
Long-lived assets to be disposed of by sale	356			—		—	356

				Fair Value Measurements at Reporting Date Using
As of December 31, 2016	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	39,344	$	—	$	—	$	39,344
Other real estate owned	2,110			—		—	2,110
Long-lived assets to be disposed of by sale	1,335			—		—	1,335

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 June 30, 2017, certain impaired loans with a carrying value of $61,122 were reduced by specific valuation allowance allocations of $15,614 and partial loan charge-offs of $10,533 resulting in a reported fair value of $34,975. As of December 31, 2016, certain impaired loans with a carrying value of $65,238 were reduced by specific valuation allowance allocations of $13,954 and partial loan charge-offs of $11,941 resulting in a reported fair value of $39,344.

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. Write-downs of $56 during the six months ended June 30, 2017 included $25 directly related to receipt of updated appraisals and $31 based on management estimates of the current fair value of properties. Write downs of $603 during the six months ended June 30, 2016 included $550 directly related to receipt of updated appraisals and $53 based on management estimates of the current fair value of properties.

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 June 30, 2017, the Company had a long-lived asset to be disposed of by sale with a carrying value of $565 that was reduced by write-downs of $209, resulting in a fair value of $356. As of December 31, 2016, the Company had long-lived assets to be disposed of by sale with carrying values aggregating $2,363 that were reduced by write-downs of $1,028 resulting in an aggregate fair value of $1,335.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following table presents 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:



	Fair Value As of
	June 30, 2017		December 31, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	34,975	$	39,344	Appraisal	Appraisal adjustment	0%	-	66%	(31%)
Other real estate owned	1,422		2,110		Appraisal	Appraisal adjustment	8%	-	96%	(18%)
Long-lived assets to be disposed of by sale	356		1,335		Appraisal	Appraisal adjustment	0%	-	9%	(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.

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 fair values of derivative liabilities are obtained from an independent pricing service, which considers observable data that may include the three-month LIBOR forward curve, the federal funds effective swap rate and cash flows, among other things. 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 fixed and floating rate subordinated debentures, floating rate subordinated term loan, notes payable to the FHLB, fixed rate subordinated term debt, and capital lease obligation are estimated by discounting future cash flows using current rates for advances with similar characteristics.

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.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The estimated fair values of financial instruments that are reported in the Company's consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows:



					Fair Value Measurements at Reporting Date Using
As of June 30, 2017	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)
Financial assets:
Cash and cash equivalents	$	919,775	$	919,775	$	919,775	$	—	$	—
Investment securities available-for-sale	2,080,194		2,080,194		—		2,080,194		—
Investment securities held-to-maturity	529,442		535,145		—		535,145		—
Accrued interest receivable	35,830		35,830		—		35,830		—
Mortgage servicing rights, net	23,715		34,580		—		34,580		—
Loans held for sale	30,383		30,383		—		30,383		—
Net loans held for investment	7,449,889		7,325,012		—		7,290,037		34,975
Derivative assets	10,599		10,599		—		10,599		—
Deferred compensation plan assets	11,598		11,598		—		11,598		—
Total financial assets	$	11,091,425	$	10,983,116	$	919,775	$	10,028,366	$	34,975

Financial liabilities:
Total deposits, excluding time deposits	$	8,817,211	$	8,817,211	$	8,817,211	$	—	$	—
Time deposits	1,202,789		1,195,454		—		1,195,454		—
Securities sold under repurchase agreements	579,772		579,772		—		579,772		—
Other borrowed funds	15,019		15,019		—		15,019		—
Accrued interest payable	8,917		8,917		—		8,917		—
Long-term debt	28,017		28,240		—		28,240		—
Subordinated debentures held by subsidiary trusts	82,477		91,519		—		91,519		—
Derivative liabilities	9,797		9,797		—		9,797		—
Deferred compensation plan liabilities	11,598		11,598		—		11,598		—
Total financial liabilities	$	10,755,597	$	10,757,527	$	8,817,211	$	1,940,316	$	—

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)



					Fair Value Measurements at Reporting Date Using
As of December 31, 2016	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)
Financial assets:
Cash and cash equivalents	$	782,023	$	782,023	$	782,023	$	—	$	—
Investment securities available-for-sale	1,611,698		1,611,698		—		1,611,698		—
Investment securities held-to-maturity	512,770		513,273		—		513,273		—
Accrued interest receivable	29,852		29,852		—		29,852		—
Mortgage servicing rights, net	18,457		35,656		—		35,656		—
Loans held for sale	61,794		61,794		—		61,794
Net loans held for investment	5,340,536		5,248,127		—		5,208,783		39,344
Derivative assets	2,749		2,749		—		2,749		—
Deferred compensation plan assets	10,627		10,627		—		10,627		—
Total financial assets	$	8,370,506	$	8,295,799	$	782,023	$	7,474,432	$	39,344

Financial liabilities:
Total deposits, excluding time deposits	$	6,324,512	$	6,324,512	$	6,324,512	$	—	$	—
Time deposits	1,051,598		1,044,670		—		1,044,670		—
Securities sold under repurchase agreements	537,556		537,556		—		537,556		—
Other borrowed funds	6		6		—		6		—
Accrued interest payable	5,421		5,421		—		5,421		—
Long-term debt	27,970		27,477		—		27,477		—
Subordinated debentures held by subsidiary trusts	82,477		73,554		—		73,554		—
Derivative liabilities	1,314		1,314		—		1,314		—
Deferred compensation plan liabilities	10,627		10,627		—		10,627		—
Total financial liabilities	$	8,041,481	$	8,025,137	$	6,324,512	$	1,700,625	$	—


(16)	Recent Authoritative Accounting Guidance

ASU 2014-09 "Revenue from Contracts with Customers." In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 introduced 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. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date" was released in August of 2015 deferring the effective date of ASU 2014-09 for all entities by one year until January 1, 2018.

In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal vs Agent Considerations (Reporting Revenue Gross versus Net)." The amendments in ASU 2016-08 were issued to clarify certain principal versus agent considerations within the implementation guidance of ASC Topic 606, “Revenue from Contracts with Customers.” The effective date and transition of ASU 2016-08 is the same as the effective date and transition of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed above.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." The amendments in ASU 2016-10 were issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed above.

While the assessment of the aforementioned provisions of ASU 2014-09 is not complete, the timing of the Company's revenue recognition is not expected to materially change. The Company will continue to evaluate any impact as additional guidance is issued and our internal assessment progresses.

ASU 2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." In January 2016, the FASB issued ASU 2016-10, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in ASU 2016-1, among other things, (i) require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale investment securities. The amendments in ASU 2016-1 will be effective for the Company on January 1, 2018, and are not expected to have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2016-02 "Leases (Topic 842)." In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Under the new guidance, lessees will be required to recognize a lease liability and a right of use asset for all leases (with the exception of short-term leases) at the commencement date of the lease and disclose key information about leasing arrangements. Accounting by lessors is largely unchanged. ASU 2016-02 will be effective for the Company on January 1, 2019 and will be applied using a modified retrospective approach. The Company is evaluating the new guidance to determine the impact ASU 2016-02 will have on its consolidated financial statements, results of operations or liquidity.

ASU 2016-05 "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships." The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require redesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in ASU 2016-05 became effective for the Company on January 1, 2017, and did not impact the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2016-07 "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." The amendments in ASU 2016-07 eliminate the requirement that when an investment qualified for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investments, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in ASU 2016-07 also simplify the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. The amendments in ASU 2016-07 became effective for the Company on January 1, 2017, and did not impact the Company’s consolidated financial statements, results of operations or liquidity.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

ASU 2016-09 "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." Under the amendments in ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share excludes the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits are classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. The amendments in ASU 2016-09 also provide that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur. The amendments in ASU 2016-09 change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The amendments in ASU 2016-09 became effective for the Company on January 1, 2017, and resulted in a $2,154 reduction in income tax expense during the six months ended June 30, 2017, of which $1,703 was due to the the recognition of excess tax benefits related to outstanding stock option awards exercised during the period and $451 was due to the recognition of excess tax benefits related to the vesting of restricted stock.

ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in ASU 2016-13 require a financial asset or group of financial assets measured at amortized cost basis to be presented on a company's financial statements at the net amount expected to be collected based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 requires a company's income statement to reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. The amendments in ASU 2016-13 require that the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination be measured at amortized cost basis with the initial allowance for credit losses added to the purchase price rather than being reported as a credit loss expense. ASU 2016-13 also requires that credit losses relating to available-for-sale debt securities be recorded through an allowance for credit losses. The amendments in ASU 2016-13 are effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period. A prospective transition approach is required for debt securities for which other-than-temporary impairment was recognized before the effective date. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvement in cash flows expected to be collected will continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recorded in earnings when received. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements, results of operations and liquidity.

ASU No. 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The amendments in ASU 2016-15 are intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 are effective for the Company on January 1, 2018. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. The amendments in ASU 2016-15 only affect the classification of certain items within the statement of cash flows, and are not expected to have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business,

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As we approach the effective date, we will consult the framework to determine the impact on the Company's consolidated financial statements, results of operations or liquidity.

ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in ASU 2017-04 remove Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The amendments in ASU 2017-04 are not expected to have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 750): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in ASU 2017-07 requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost are required to be presented in the income separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in ASU 2017-07 also allow only the service cost component to be eligible for capitalization. ASU No. 2017-07 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in ASU 2017-07 are applied retrospectively for the presentation of the service cost and other components of net periodic benefit cost in the income statement and prospectively for the capitalization of the service cost in other assets. ASU 2017-07 allows the use of a practical expedient that permits an employer to use the amounts disclosed in its pension and other post-retirement benefits plan footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Adoption of the amendments in ASU 2017-07 will not have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in ASU 2017-08 shorten the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company currently amortizes premiums on callable debt securities to the earliest call date. As such, the amendments in ASU 2017-08 will not impact the Company's consolidated financial statements, results of operations and liquidity.

ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." In May 2017, the FASB issued ASU 2017-09, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if there is no change to the award's fair value, vesting conditions and classification as an equity or liability instrument. The guidance is effective prospectively for all companies for annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact the standard may have on its consolidated financial statements, results of operations and liquidity.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

(17) Subsequent Events

Subsequent events have been evaluated for potential recognition and disclosure through the date financial statements were filed with the SEC. On July 20, 2017, the Company declared a quarterly dividend to common shareholders of $0.24 per share, to be paid on August 11, 2017 to shareholders of record as of August 2, 2017.

No other events requiring recognition or disclosure were identified.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, including the audited financial statements contained therein, filed with the Securities and Exchange Commission, or SEC.

When we refer to “we,” “our,” and “us” in this report, we mean First Interstate BancSystem, Inc. and our consolidated subsidiaries, Bank of the Cascades ("BOTC") and First Interstate Bank ("FIB"), collectively referred to as the "Banks", unless the context indicates that we refer only to the parent company, First Interstate BancSystem, Inc (the "Company").

Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results

“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: a decline in business and economic conditions, in particular adverse conditions affecting Montana, Wyoming, South Dakota, Oregon, Idaho, and Washington, lending risks, changes in interest rates, failure to integrate or profitably operate acquired businesses (including BOTC), inadequate allowance for loan losses, additional regulatory requirements due to our asset size exceeding $10 billion, loss of access to low-cost funding sources, declining oil and gas prices and declining demand for coal, impairment of goodwill, changes in accounting standards, dependence on the Company’s management team, ability to attract and retain qualified employees, increased governmental regulation and changes in regulatory, tax and accounting rules and interpretations, stringent capital requirements, dependence on our information technology and telecommunications systems, cyber-security, liquidity risks, inability to grow organically or through acquisitions, environmental remediation and other costs associated with repossessed properties, ineffective internal operating controls, competition, reliance on external vendors, unfavorable resolution of litigation, failure to effectively implement technology-driven products and services, soundness of other financial institutions, ability to address enhanced regulatory requirements affecting our mortgage business, occurrences of catastrophic events or natural disasters, volatility of Class A and Class B common stock, changes in dividend policy, the uninsured nature of any investment in Class A or Class B common stock, voting control of Class B stockholders, anti-takeover provisions, controlled company status, dilution as a result of future equity issuances, and subordination of common stock to Company debt.

A more detailed discussion of each of the foregoing risks is included in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. These factors and the other risk factors described in the Company's periodic and current reports filed with the SEC from time to time, however, are not necessarily all of the important factors that could cause the Company's actual results, performance or achievements to differ materially from those expressed in or implied by any of the Company's forward-looking statements. Other unknown or unpredictable factors also could harm the Company's results. Investors and others are encouraged to read the more detailed discussion of the Company's risks contained in Part II, Item 1A of this Quarterly Report on this Form 10-Q for the quarter ended June 30, 2017.

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.

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Executive Overview

We are a financial holding company headquartered in Billings, Montana. As of June 30, 2017, we had consolidated assets of $12,236 million, deposits of $10,020 million, loans of $7,556 million and total stockholders’ equity of $1,405 million. We currently operate 126 banking offices, including detached drive-up facilities, in communities across Montana, Wyoming, South Dakota, Oregon, Idaho, and Washington. Through our bank subsidiaries, FIB and BOTC, 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, tourism, agriculture, healthcare, professional services, education, governmental services, construction, mining, retail and wholesale trade.

Our Business

Our principal business activity is lending to and accepting deposits from 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 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.

Recent Developments

On May 30, 2017, we acquired all of the outstanding stock of Cascade Bancorp, parent company of Bank of the Cascades, an Oregon-based community bank with 46 banking offices across Oregon, Idaho and Washington. Each outstanding share of Cascade Bancorp converted into the right to receive 0.14864 shares of our Class A common stock and $1.91 in cash. The merger consideration represented an aggregate purchase price of $541.0 million. With the completion of the merger, we have become a regional community bank with over $12 billion in total assets and a geographic footprint that spans Montana, Wyoming, South Dakota, Oregon, Idaho, and Washington.

On June 30, 2017, we sold the custodial rights to our Health Savings Account (HSA) portfolio to HealthEquity, Inc. for $6.5 million. $3.1 million was attributable to BOTC and considered a fair market value purchase accounting adjustment. The remainder is recognized as a one-time gain of $3.4 million on the sale of the custodial rights to all the Company's HSA accounts held by First Interstate Bank.

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 and 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 equity, 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

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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.

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.

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. The most significant accounting policies we follow are summarized in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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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. Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 describes 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."

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. Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 describes our accounting policy with regard to goodwill.

Our annual goodwill impairment test is performed each year as of July 1^st. Upon completion of the most recent evaluation, the estimated fair value of net assets was greater than the carrying value of the Company. We will continue to monitor our performance and evaluate our goodwill for impairment annually or more frequently as needed.

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

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foreclosure and disposition of the collateral. Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 describes our accounting policy with regard to acquired loans.

Results of Operations

The following discussion and analysis is intended to provide greater details of the results of our operations and financial condition.

Net Interest Income. 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.

The following tables present, 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)	Three Months Ended June 30,
	2017							2016
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	6,128,867	$	74,502		4.88	%	$	5,324,812	$	63,248		4.78	%
Investment securities (2)	2,285,759		11,086			1.95		2,095,347		9,335			1.79
Interest bearing deposits in banks	547,769		1,333			0.98		359,807		482			0.54
Federal funds sold	1,232		3			0.98		1,888		3			0.64
Total interest earnings assets	8,963,627		86,924			3.89		7,781,854		73,068			3.78
Non-earning assets	1,012,197							756,723
Total assets	$	9,975,824						$	8,538,577
Interest bearing liabilities:
Demand deposits	$	2,434,668	$	1,318		0.22	%	$	2,133,509	$	514		0.10	%
Savings deposits	2,463,514		1,872			0.30		1,983,262		652			0.13
Time deposits	1,061,495		1,821			0.69		1,097,448		1,942			0.71
Repurchase agreements	565,696		272			0.19		470,264		92			0.08
Other borrowed funds	31		—			—		12		—			—
Long-term debt	28,148		481			6.85		27,896		451			6.50
Subordinated debentures held by subsidiary trusts	82,477		782			3.80		82,477		675			3.29
Total interest bearing liabilities	6,636,029		6,546			0.40		5,794,868		4,326			0.30
Non-interest bearing deposits	2,131,080							1,738,008
Other non-interest bearing liabilities	67,288							56,864
Stockholders’ equity	1,141,427							948,837
Total liabilities and stockholders’ equity	$	9,975,824						$	8,538,577
Net FTE interest income			80,378							68,742
Less FTE adjustments (2)			(1,055		)					(1,109		)
Net interest income from consolidated statements of income			$	79,323						$	67,633
Interest rate spread						3.49	%						3.48	%
Net FTE interest margin (3)						3.60	%						3.55	%
Cost of funds, including non-interest bearing demand deposits (4)						0.30	%						0.23	%


(1)	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.


(2)	Interest income and average rates for tax exempt loans and securities are presented on an FTE basis.


(3)	Net FTE interest margin during the period equals (i) the difference between annualized interest income on interest earning assets and the annualized interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.


(4)	Calculated by dividing total annualized interest on interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.

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Average Balance Sheets, Yields and Rates
(Dollars in thousands)	Six Months Ended June 30,
	2017							2016
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	5,776,514	$	138,831		4.85	%	$	5,273,859	$	126,618		4.83	%
Investment securities (2)	2,197,319		21,057			1.93		2,101,662		18,760			1.80
Interest bearing deposits in banks	572,203		2,545			0.90		433,323		1,127			0.52
Federal funds sold	957		5			1.05		1,590		5			0.63
Total interest earnings assets	8,546,993		162,438			3.83		7,810,434		146,510			3.77
Non-earning assets	910,761							755,849
Total assets	$	9,457,754						$	8,566,283
Interest bearing liabilities:
Demand deposits	$	2,333,551	$	2,316		0.20	%	$	2,140,520	$	1,072		0.10	%
Savings deposits	2,316,191		3,170			0.28		1,984,247		1,302			0.13
Time deposits	1,043,772		3,643			0.70		1,107,748		3,962			0.72
Repurchase agreements	562,686		520			0.19		473,736		182			0.08
Other borrowed funds	19		—			—		10		—			—
Long-term debt	28,055		934			6.71		28,513		900			6.35
Subordinated debentures held by subsidiary trusts	82,477		1,527			3.73		82,477		1,338			3.26
Total interest bearing liabilities	6,366,751		12,110			0.38		5,817,251		8,756			0.30
Non-interest bearing deposits	1,967,644							1,746,762
Other non-interest bearing liabilities	57,703							57,004
Stockholders’ equity	1,065,656							945,266
Total liabilities and stockholders’ equity	$	9,457,754						$	8,566,283
Net FTE interest income			150,328							137,754
Less FTE adjustments (2)			(2,112		)					(2,171		)
Net interest income from consolidated statements of income			$	148,216						$	135,583
Interest rate spread						3.45	%						3.47	%
Net FTE interest margin (3)						3.55	%						3.55	%
Cost of funds, including non-interest bearing demand deposits (4)						0.29	%						0.23	%


(1)	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.


(2)	Interest income and average rates for tax exempt loans and securities are presented on an FTE basis.


(3)	Net FTE interest margin during the period equals (i) the difference between annualized interest income on interest earning assets and the annualized interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

(4) Calculated by dividing total annualized interest on interest bearing liabilities by the sum of total interest bearing liabilities plus non-interest bearing deposits.

Net Interest Income. Our net interest income on a fully taxable equivalent, or FTE, basis increased $11.6 million, or 16.9%, to $80.4 million during the three months ended June 30, 2017, as compared to $68.7 million for the same period in 2016, and $12.6 million, or 9.1%, to $150.3 million during the six months ended June 30, 2017, as compared to $137.8 million for the same period in 2016. These increases were primarily attributable to higher outstanding loan balances as a result of the BOTC acquisition, along with organic loan growth. Additionally, FTE interest income was positively impacted by higher yields on loans, investment securities and interest bearing deposits in banks, which were partially offset by a higher cost of funds, primarily influenced by the increases in the Federal Fund rate.

Also positively impacting our net FTE interest income during the three and six months ended June 30, 2017, as compared to the same periods in the prior year, was interest accretion related to the fair valuation of acquired loans. Interest accretion related to the fair valuation of acquired loans was $1.7 million during the three months ended June 30, 2017, of which $330 thousand was the result of early loan payoffs, and $2.9 million during the six months ended June 30, 2017, of which $747 thousand was the result of early loan payoffs. This compares to $1.7 million during the three months ended June 30, 2016, of

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which $779 thousand was the result of early loan payoffs, and $3.3 million during the six months ended June 30, 2016, of which $1.3 million was the result of early loan payoffs.

Recoveries of charged-off interest also impacted net FTE interest income. Charged-off interest recoveries were $2.1 million and $2.5 million during the three and six months ended June 30, 2017, as compared to $133 thousand and $397 thousand during the same respective periods in 2016.

Our net interest margin ratio increased 5 basis points to 3.60% for the three months ended June 30, 2017, as compared to 3.55% for the same period in 2016, and was unchanged from 3.55% for the six months ended June 30, 2017, as compared to the same period in 2016. Increases in net FTE interest margin ratio during the three months ended June 30, 2017, as compared to the same period in 2016, were primarily due to increases in average outstanding loans, higher yields on interest earning assets, offset by a 7 basis point increase in funding costs. The net FTE interest margin ratio of 3.55% remained stable during the six months ended June 30, 2017, as compared to the same period in 2016, as higher yields on increased levels of interest earning assets were offset by a higher cost of funds on increased levels of interest bearing liabilities.

Exclusive of the impact of interest accretion on acquired loans and recoveries of previously charged-off interest, our net interest margin ratio was 3.43% during the three months ended June 30, 2017, as compared to 3.46% for the same period in 2016, and 3.42% during the six months ended June 30, 2017, as compared to 3.45% during the same period in 2016.

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)	Three Months Ended June 30, 2017 compared with Three Months Ended June 30, 2016									Six Months Ended June 30, 2017 compared with Six Months Ended June 30, 2016
	Volume			Rate			Net			Volume			Rate			Net
Interest earning assets:
Loans (1)	$	9,551		$	1,703		$	11,254		$	12,068		$	145		$	12,213
Investment securities (1)	848			903			1,751			854			1,443			2,297
Interest bearing deposits in banks	252			599			851			361			1,057			1,418
Federal funds sold	(1		)	1			—			(2		)	2			—
Total change	10,650			3,206			13,856			13,281			2,647			15,928
Interest bearing liabilities:
Demand deposits	73			731			804			97			1,147			1,244
Savings deposits	158			1,062			1,220			319			1,549			1,868
Time deposits	(64		)	(57		)	(121		)	(229		)	(90		)	(319		)
Repurchase agreements	19			160			179			34			304			338
Other borrowed funds	—			—			—			—			—			—
Long-term debt	4			26			30			(14		)	48			34
Subordinated debentures held by subsidiary trusts	—			108			108			—			189			189
Total change	190			2,030			2,220			207			3,147			3,354
Increase in FTE net interest income	$	10,460		$	1,176		$	11,636		$	13,074		$	(500	)	$	12,574

(1)Interest income for tax exempt loans and securities are presented on an FTE basis.

Provision for Loan Losses. Fluctuations in the provision for loan losses reflect management's estimate of possible loan losses based upon composition of our loan portfolio, 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. The Company recorded a provision for loan losses of $2.4 million during the three months ended June 30, 2017, as compared to $2.6 million during same period in 2016.

During the six months ended June 30, 2017, we recorded a provision for loan losses of $4.1 million, as compared to $6.6 million during the same period in 2016. The year-over-year decrease in provision for loan loss is reflective of a decline in specific reserves along with improving allocation rates for current economic conditions, policies and procedures.

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For information regarding our non-performing loans, see “Non-Performing Assets” included herein. For more information on our allowance for loan losses, see "Allowance for Loan Losses" included herein.

Non-interest Income. Our principal sources of non-interest income primarily include fee-based revenues such as payment services, mortgage banking and wealth management revenues, service charges on deposit accounts and other service charges, commissions and fees. Total non-interest income increased $171 thousand to $37.2 million for the three months ended June 30, 2017, as compared to $37.0 million for the same period in 2016, and $1.2 million, or 1.9%, to $66.3 million for the six months ended June 30, 2017, as compared to $65.1 million during the same period in 2016.

Non-interest income for the three months ended June 30, 2017, includes a one-time gain of $3.4 million recognized on the sale of the custodial rights to all of the Company's health savings accounts held by FIB. In total, the Company sold the custodial rights to HealthEquity for $6.5 million, of which $3.1 million was attributable to BOTC and reduced the core deposit intangible recorded in the acquisition.

Exclusive of the $3.4 million non-recurring gain recognized in the three months ended June 30, 2017 as well as the $3.8 million non-recurring litigation recovery recognized in the three months ended June 30, 2016, total non-interest income increased $0.6 million and $1.6 million during the three months and six months ended June 30, 2017 when compared to the same periods in 2016. Significant components of this increase are discussed below.

Payment services revenues consist of interchange fees that merchants pay for processing electronic payment transactions and ATM service fees. Payment services revenues increased $1.6 million, or 18.2%, to $10.2 million during the three months ended June 30, 2017, as compared to $8.6 million during the same period in 2016. $1.1 million, or 60%, of this growth was directly attributable to BOTC. Exclusive of the impact from BOTC, payment services revenues increased by $0.5 million attributable to increased debit card and credit card volume. For the six months ended June 30, 2017, payment services revenue increased $2.0 million when compared to the same period in 2016.

Mortgage banking revenues decreased $1.8 million, or 18.8%, to $7.6 million and $1.4 million, or 8.8% to $14.2 million during the three and six months ended June 30, 2017, as compared to $9.4 million and $15.6 million during the same periods in 2016 as refinance volume decreased across our markets. During the second quarter of 2017, our overall loan production for originated home purchases was approximately 79% of production and 70% for the three and six months ended June 30, 2017 compared to 67% and 64% for the same periods in 2016.

Non-interest Expense. Non-interest expense increased $17.5 million, or 27.8%, to $80.4 million during the three months ended June 30, 2017 as compared to the same period in 2016. Included in non-interest expenses are $10.1 million of expenses related to the acquisition, including legal fees, consulting fees, investment banking fees, and retention and severance compensation costs. For the six months ended June 30, 2017, non-interest expense increased $19.5 million, or 15.7%, to $144.1 million when compared to the same period in 2016. Included in non-interest expenses are $10.8 million of expenses related to the acquisition.

Salaries and wages expense increased $1.3 million, or 5.0%, to $28.0 million during the three months ended June 30, 2017, as compared to $26.7 million during the same period in 2016, primarily due to the acquisition of BOTC. Salaries and wages expense increased $2.4 million, or 4.7%, to $53.8 million during the six months ended June 30, 2017, as compared to $51.4 million during the same period in 2016, due to the impact of Cascade and Flathead acquisitions, which were offset by staffing efficiencies.

Core deposit intangible amortization expense increased $235 thousand, or 28.4%, to $1.1 million during the three months ended June 30, 2017 as compared to $827 thousand in the same period of 2016 entirely attributable to the BOTC acquisition. For the six months ended June 30, 2017 core deposit amortization expense increased $38 thousand as compared to the same period of 2016 as decreasing amortization on previous acquisition related core deposit intangibles were partially offset by the increase from acquisition of BOTC.

Other expenses increased $1.5 million, or 12.3%, to $14.1 million during the three months ended June 30, 2017, as compared to $12.6 million during the same period in 2016, primarily due to normal fluctuations in operating expenses and the acquisition of BOTC. For the six months ended June 30, 2017, other expenses increased $2.2 million, or 8.9%, to $26.4 million as compared to the same period in 2016 due to the acquisition, which were partially offset by efficiencies from the continued scalability initiatives of the Company.

The remaining increase in non-interest expenses is largely due the impact of both the Cascade and Flathead Bank acquisitions.

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Acquisition expenses of $10.1 million and $10.8 million recorded during the three and six months ended June 30, 2017, included travel, legal, and professional fees related to the acquisition of BOTC. For additional information regarding acquisitions, see "Recent Developments" included herein and “Note 2 – Acquisitions” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

Income Tax Expense. With the addition of Cascade, we will have a slightly higher state tax rate and a higher ratio of taxable to tax-exempt income. As a result, our effective tax rate rose to 35.2% for the three months ended June 30, 2017 compared to 34.8% for the three months ended June 30, 2016. As a result of the January 1, 2017 adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)," our income tax expense for the six months ended June 30, 2017 includes a tax benefit of $2.0 million related to the exercise of outstanding stock option awards and the vesting of restricted shares. Exclusive of the effect of this tax benefit, our effective tax rate for the six months ended June 30, 2017 was 35.2% compared to 34.3% in the same period 2016.

Financial Condition

Total Assets. Total assets increased $3.2 billion, or 35.0% to $12.2 billion as of June 30, 2017, from $9.1 billion as of December 31, 2016, primarily as a result of the acquisition of Cascade. Significant fluctuations in balance sheet accounts are discussed below.

Total Loans. Total loans increased $2.1 billion, or 37.9%, to $7.6 billion as of June 30, 2017, as compared to $5.5 billion as of December 31, 2016 primarily as a result of the recent acquisition of BOTC. Exclusive of the acquisition and the disposition of $31.7 million of shared national credits acquired from BOTC, total loans grew organically $17.4 million or 0.3% from December 31, 2016.

Loans Held for Investment. Loans held for investment accounted for the majority of the increase in total loans in large part due to the acquisition of BOTC. Exclusive of the acquisition and the disposition of $31.7 million of shared national credits acquired from BOTC, total loans grew organically $48.8 million or 0.9% from December 31, 2016. Significant contributing portfolios are discussed in greater detail below:

Total real estate loans increased $1.6 billion, or 45.9%, to $5.1 billion as of June 30, 2017. Included in this portfolio, commercial real estate loans increased $982 million, or 53.5%, to $2.8 billion as of June 30, 2017. Exclusive of the acquisition, total commercial real estate loans increased organically $24.0 million, or 1.3% from December 31, 2016. Construction loans increased $199.2 million, or 41.3%, to $681.2 million as of June 30, 2017, from $482.0 million as of December 31, 2016. Exclusive of acquired BOTC loans, construction loans decreased $38.1 million, or 8.5%, from December 31, 2016.

Indirect consumer loans increased $26.6 million, or 3.5%, to $779.0 million as of June 30 2017, from $752.4 million as of December 31, 2016, with all of the increase attributable to organic growth. The BOTC acquisition will provide the Company with the opportunity to expand this portfolio to clients in Washington, Oregon and Idaho.

Commercial loans increased $412.9 million, or 51.7%, to $1.2 billion as of June 30, 2017. Exclusive of the acquisition and the disposition of $31.7 million of shared national credits acquired from BOTC, total commercial loans increased organically $53.7 million, or 6.7% from December 31, 2016.

Loans Held for Sale. Loans held for sale consist of residential mortgage loans pending sale to investors in the secondary market. Loans held for sale decreased $31.4 million, or 50.8%, to $30.4 million as of June 30, 2017, from $61.8 million as of December 31, 2016. The lower balance, relative to last year, is attributable to a softening in the refinance market, given where we are in the interest rate cycle.

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Non-performing Assets. Non-performing assets include non-accrual loans, loans contractually past due by 90 days or more and still accruing interest, and OREO. The following table sets forth information regarding non-performing assets as of the dates indicated.



Nonperforming Assets and Troubled Debt Restructurings
(Dollars in thousands)	June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016
Non-performing loans:
Non-accrual loans	$	76,687		$	74,580		$	72,793		$	71,469		$	74,311
Accruing loans past due 90 days or more	9,362			4,527			3,789			8,131			4,454

Total non-performing loans	86,049			79,107			76,582			79,600			78,765
OREO	11,286			9,428			10,019			9,447			7,908

Total non-performing assets	$	97,335		$	88,535		$	86,601		$	89,047		$	86,673

Troubled debt restructurings not included above	$	14,956		$	16,379		$	22,343		$	17,163		$	16,408

Non-performing loans to total loans	1.14		%	1.47		%	1.40		%	1.44		%	1.46		%
Non-performing assets to total loans and OREO	1.29		%	1.64		%	1.58		%	1.61		%	1.60		%
Non-performing assets to total assets	0.80		%	0.98		%	0.96		%	0.99		%	1.01		%

Non-performing loans. Non-performing loans include non-accrual loans and loans contractually past due 90 days or more. We monitor and evaluate collateral values on non-performing loans quarterly. Appraisals are required on all non-performing loans every 18-24 months, or sooner as conditions necessitate. We update valuations on collateral underlying oil and gas credits based on recent market-based oil price forecasts provided by an independent third party. We also 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 collateral valuation is then compared to the loan balance and any resulting shortfall is recorded in the allowance for loan losses as a specific valuation allowance. Provisions for loan losses are impacted by changes in the specific valuation allowances and historical or general valuation elements of the allowance for loan losses.

The following table sets forth the allocation of our non-performing loans among our various loan categories as of the dates indicated.



Non-Performing Loans by Loan Type
(Dollars in thousands)	June 30, 2017		Percent of Total		December 31, 2016		Percent of Total
Real estate:
Commercial	$	31,575	36.7	%	$	26,514	34.6	%
Construction:			.
Land acquisition and development	4,715		5.6	%	5,304		6.9	%
Commercial	4,318		5.0	%	762		1.0	%
Residential	210		0.2	%	456		0.6	%
Total construction	9,243		10.7	%	6,522		8.5	%
Residential	7,788		9.1	%	7,137		9.3	%
Agricultural	4,245		4.9	%	4,327		5.7	%
Total real estate	52,851		61.4	%	44,500		58.1	%
Consumer	2,552		3.0	%	2,894		3.8	%
Commercial	27,446		31.9	%	26,166		34.2	%
Agricultural	3,200		3.7	%	3,022		3.9	%
Total non-performing loans	$	86,049	100.0	%	$	76,582	100.0	%

Non-accrual loans. We generally place loans, excluding acquired credit impaired loans, on non-accrual status 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. If all loans on non-accrual status had been current in accordance with their original terms, gross income of approximately $1.8 million and $1.7 million would have been accrued for the six months ended June 30, 2017 and 2016, respectively. Non-accrual loans increased approximately $3.9 million,

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to $76.7 million as of June 30, 2017, from $72.8 million as of December 31, 2016 primarily due to the loans of four commercial real estate borrowers and one commercial borrower that were placed on non-accrual status during the period. This increase was partially offset by repayment of the loans of one agricultural borrower. Accruing loans past due 90 days or more increased $5.6 million, or over 100%, of which $3.2 million was due to the BOTC acquisition. The decline in the percentage of non-performing ratios was a result of higher loan balances from BOTC acquired loans and increase in total assets from the BOTC acquisition. Other real estate owned increased $1.3 million primarily as a result of a commercial property acquired from BOTC.

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."

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. 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 June 30, 2017, management determined that an allowance for loan losses related to acquired loans of $701 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 or (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.

The following table sets forth information regarding our allowance for loan losses as of and for the periods indicated.



Allowance for Loan Losses
(Dollars in thousands)	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
	2017			2017			2016			2016			2016
Balance at beginning of period	$	76,231		$	76,214		$	81,235		$	80,340		$	79,924
Provision charged to operating expense	2,355			1,730			1,078			2,363			2,550
Charge offs:
Real estate
Commercial	527			18			2,382			173			257
Construction	(7		)	259			—			72			26
Residential	444			167						135			240
Agricultural	21			—			8			—			—
Consumer	2,412			2,596			2,846			2,157			1,712
Commercial	1,044			793			3,754			578			1,018
Agricultural	49			22			(5		)	—			188
Total charge-offs	4,490			3,855			8,985			3,115			3,441
Recoveries:
Real estate
Commercial	290			371			38			83			45
Construction	25			96			313			31			51
Residential	—			53			113			103			93
Agricultural	(6		)	4			4			4			21
Consumer	1,109			1,205			615			742			649
Commercial	158			391			1,802			680			448
Agricultural	29			22			1			4			—
Total recoveries	1,605			2,142			2,886			1,647			1,307
Net charge-offs	2,885			1,713			6,099			1,468			2,134
Balance at end of period	$	75,701		$	76,231		$	76,214		$	81,235		$	80,340

Period end loans	$	7,555,973		$	5,399,779		$	5,478,544		$	5,530,915		$	5,413,242
Average loans	6,128,867			5,420,245			5,493,911			5,469,294			5,324,812
Net loans charged-off to average loans, annualized	0.19		%	0.13		%	0.45		%	0.11		%	0.16		%
Allowance to period end loans	1.00		%	1.41		%	1.39		%	1.47		%	1.48		%

Our allowance for loan losses was $75.7 million, or 1.00% of period end loans, as of June 30, 2017, as compared to $76.2 million, or 1.39% of period end loans, as of December 31, 2016. The decline in the percentage of allowance for loan losses to period end loans was a result of higher loan balances from BOTC acquired loans, which were recorded at fair value in accordance with purchase accounting, and no corresponding allowance for loan losses. Although we have established our allowance for loan losses in accordance with accounting principles generally accepted in the United States and we believe that our allowance for loan losses is adequate to provide for known and inherent losses in the portfolio at all times, 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.

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. Investment securities increased $485 million, or 22.8%, to $2,609 million, or 21.3% of total assets, as of June 30, 2017, from $2,124 million, or 23.4% of total assets, as of December 31, 2016. The increase is attributable to the acquisition of BOTC. As of June 30, 2017, the estimated duration of our investment portfolio was 2.6 years, as compared to 3.0 years as of December 31, 2016.

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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 June 30, 2017, we had investment securities with fair values aggregating $51 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities of $1.7 million as of June 30, 2017 were attributable to changes in interest rates. No impairment losses were recorded during the three and six months ended June 30, 2017 or 2016.

Cash and Cash Equivalents. Cash and cash equivalents increased $138 million, or 17.6%, to $920 million as of June 30, 2017, from $782 million as of December 31, 2016. During the first six months of 2017, cash and cash equivalents increased as a result of the acquisition of Cascade, which were partially offset by loan growth funded through available funds.

Goodwill and Other Intangible Assets. Goodwill increased $231.5 million, from $212.8 million as of December 31, 2016, to $444.3 million as of June 30, 2017. The increase is attributable to provisional goodwill recorded in conjunction with the acquisition of Cascade.

Other Assets. Other assets increased $66.9 million, or 81.8%, to $148.6 million as of June 30, 2017, from $82 million as of December 31, 2016. The increase was primarily due to the acquisition of BOTC. For additional information regarding the acquisition, see "Recent Developments" included herein.

Deferred Tax Asset / Liability. Our net deferred tax asset increased to $9.4 million as of June 30, 2017, from a net deferred tax liability of $7 million as of December 31, 2016, primarily as a result of increases in net deferred tax assets resulting from the acquisition of Cascade, and decreases in unrealized losses on available-for-sale investment securities.

Deposits. Our deposits consist of non-interest bearing and interest bearing demand, savings, individual retirement and time deposit accounts. Total deposits increased $2,644 million, or 35.8%, to $10,020 million as of June 30, 2017, from $7,376 million as of December 31, 2016, as a result of deposits acquired in the acquisition of Cascade. The following table summarizes our deposits as of the dates indicated:



Deposits
(Dollars in thousands)	June 30, 2017		Percent of Total		December 31, 2016		Percent of Total
Non-interest bearing demand	$	2,897,813	28.9	%	$	1,906,257	25.8	%
Interest bearing:
Demand	2,853,362		28.5		2,276,494		30.9
Savings	3,066,036		30.6		2,141,761		29.0
Time, $100 and over	469,556		4.7		461,368		6.3
Time, other (1)	733,233		7.3		590,230		8.0
Total interest bearing	7,122,187		71.1		5,469,853		74.2
Total deposits	$	10,020,000	100.0	%	$	7,376,110	100.0	%


(1)	Included in Time, other are Certificate of Deposit Account Registry Service, or CDAR, deposits of $76.1 million as of June 30, 2017 and $32 million as of December 31, 2016.

Capital Resources and Liquidity Management

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 $422.8 million, or 43.0%, to $1,405 million as of June 30, 2017, from $983 million as of December 31, 2016, due to the retention of earnings, increases in unrealized holding gains, net of taxes, on available-for-sale investment securities, proceeds from stock option exercises, and the issuance of additional shares of Class A Class A common stock with an aggregate value of $385,969 as partial consideration for the acquisition of Cascade.

On July 20, 2017, the Company's board of directors declared a quarterly dividend of $0.24 per common share, payable on August 11, 2017, to owners of record as of August 2, 2017. The dividend equates to a 2.56% annual yield based on the $37.54 average closing price of the Company's common stock during the second quarter of 2017.

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 ("Basel III"). Under Basel III, certain deductions and adjustments to regulatory capital began phasing in starting January 1, 2015 and will be fully implemented on Janua

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ry 1, 2018. The capital conservation buffer, which began to phase in on January 1, 2016, will be fully implemented on January 1, 2019. As of June 30, 2017 and December 31, 2016, we had capital levels that, in all cases, exceeded the well-capitalized guidelines. For additional information regarding our capital levels, see "Note 10 – Regulatory Capital” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in 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.

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 the unaudited “Consolidated Statements of Cash Flows,” included in Part I, Item 1.

As a holding company, we are a corporation separate and apart from our subsidiary Banks 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 Banks to pay dividends to us. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.

Management continuously monitors our liquidity position and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Our management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, our management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on us.

Recent Accounting Pronouncements

See “Note 16 – Recent Authoritative Accounting Guidance” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

As of June 30, 2017, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As of June 30, 2017, an evaluation was performed, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of 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 June 30, 2017 were effective in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is r

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ecorded, 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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, such control.

Limitations on Controls and Procedures

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, 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, projections of any evaluation of effectiveness to future periods are subject to the risk that 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 disclosure controls and procedures or internal control over financial reporting 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.

PART II.

OTHER INFORMATION


Item 1.	Legal Proceedings

There have been no material changes in legal proceedings as described in our Annual Report on Form 10-K for the year ended December 31, 2016.


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. You 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

A decline in economic conditions could reduce demand for our products and services, which could have an adverse effect on our results of operations.

Our customers are located predominantly in Montana, Wyoming, South Dakota, Oregon, Idaho, and Washington. Our profitability largely depends on the general economic conditions in these areas.

Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:


•	demand for our products and services may decline;


•	loan delinquencies, problem assets, and foreclosures may increase;


•	collateral for loans, especially real estate, may decline in value;


•	future borrowing power of our customers may be reduced;


•	the value of our securities portfolio may decline; and


•	the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Additionally, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment, or other economic and geopolitical factors beyond our control, could further impact these local economic conditions and negatively affect our business and results of operations.

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Deflationary pressures, while possibly lowering our operating costs, could also have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our business, financial condition, and results of operations.

We are subject to lending risks.

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.

While our loan portfolio is diversified across business sectors, it is concentrated in commercial real estate and commercial business loans. As of June 30, 2017, we had $4.0 billion of commercial loans, including $2.8 billion of commercial real estate loans, representing approximately 53% of our total loan portfolio. These loans may 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. 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, as well as the collateral that is generally less readily-marketable, losses incurred on commercial loans could have a material adverse impact on our business, financial condition, and results of operations.

In addition, at June 30, 2017, we had $2.3 billion of agricultural, construction, residential and other real estate loans, representing approximately 31% 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 also 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.

Changes in interest rates could negatively impact our net interest income, 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 Open Market Committee. 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 securities and collateralized mortgage obligations portfolios. 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. 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.

Our acquisitions, including our recent acquisition of Cascade Bancorp, and the integration of acquired businesses subject us to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations.

We have in the past, and may in the future, seek to grow our business by acquiring other businesses. On May 30, 2017, we completed our acquisition of Cascade Bancorp, and will begin the systems conversion and integration of Bank of the Cascades branches after the close of business of August 11, 2017. There is risk that our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.

Acquisitions may also result in business disruptions that could cause customers to remove their accounts from us and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in

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the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, customers, and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business. Acquisition and integration efforts could divert management attention and resources, which could have an adverse effect on our financial condition and results of operations. Additionally, the operation of the acquired branches may adversely affect our existing profitability, and we may not be able to achieve results in the future similar to those achieved by the existing banking business or manage growth resulting from the acquisition effectively.

If we experience loan losses in excess of estimated amounts, our earnings could be adversely affected.

The risk of credit losses on loans varies with, among other things, general economic conditions, the composition of our loan portfolio, 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, delinquency trends, 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 banking authorities or regulations require us to increase the allowance for loan losses, our net income may be adversely affected. As a result, an increase in loan losses could have a material adverse effect on our earnings, financial condition, results of operations and prospects.

Additional regulatory requirements imposed upon us as a result of our assets exceeding $10 billion could have an adverse effect on our financial condition or results of operations.

The Dodd-Frank Act and its implementing regulations impose additional requirements on banks and bank holding companies with $10 billion or more in total consolidated assets, including compliance with specific sections of the Federal Reserve’s prudential oversight requirements and annual stress testing requirements. As of June 30, 2017, we had over $12.2 billion in total consolidated assets, thus are subject to the heightened regulatory requirements as outlined in the Dodd-Frank Act. Many provisions of the Dodd-Frank Act could have a direct effect on our performance and adversely affect our financial condition. Examples of these provisions include, but are not limited to:

•

Creation of the Consumer Financial Protection Bureau (“CFPB”). The CFPB has broad rule-making authority to implement new consumer protection rules and regulations, including the authority to prohibit “unfair, deceptive or abusive acts and practices.” The CFPB has examination and enforcement authority over all banks and bank holding companies with more than $10 billion in total consolidated assets, and accordingly, assumes examination and enforcement authority over us.


•	The Durbin Amendment. Passed as part of the Dodd-Frank Act, the Durbin Amendment limits the interchange fees for electronic debt transactions by a payment card issuer. As a result, we can expect our future interchange revenue to decline.

•

Changes to deposit insurance assessments. The Dodd-Frank Act broadened the base for FDIC insurance assessments and assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. In addition, the Dodd-Frank Act established 1.35% as the minimum DIF reserve ratio and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35% by September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the former statutory minimum of 1.15%. Due to our asset size, we will no longer be entitled to benefit from the offset. Any additional future premium increases or special assessments could have a material adverse effect on our business, financial condition, and results of operations.


•	Establishment of a Risk Committee. We are required to establish and maintain a risk committee responsible for oversight of enterprise-wide risk management practices, which must be commensurate with our structure, risk profile, complexity, activities and size.

•

Annual stress tests. We will be required to conduct annual stress tests to determine whether our capital planning assessment of our capital adequacy and our risk management practices adequately protect us and our affiliates in the event of an economic downturn. The results of the annual stress tests are reported to the Federal Reserve Board, and must be considered as part of the Company’s capital planning and risk management practices. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may be misinterpreted by the market generally or our customers and, as a result, may adversely affect our stock price, ability to retain our customers, or compete for new business opportunities.

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•	Mortgage Origination Requirements. Regulation of lending and the requirements for Qualified Mortgages, Qualified Residential Mortgages, and the assessment of “ability-to-repay” requirements.

It is difficult to predict the overall cost of complying with the Dodd-Frank Act and the additional regulations that we are subject to as a result of our increased asset size. Compliance with the Dodd-Frank Act requirements may necessitate that we hire additional compliance or other personnel, design and implement additional internal controls, engage external consultants or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations.

We may not continue to have access to low-cost funding sources.

We depend on checking and savings, negotiable order of withdrawal (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. Additionally, the availability of internet banking products has increased the mobility of customer deposits. If customers move money out of bank deposits and into other investments or internet banking products, we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income.

We may be adversely affected by declining oil and gas prices, and declining demand for coal.

Oil and gas drilling and production in Wyoming and in the Bakken Formation in Montana and North Dakota have been important contributors to our region's economic growth over the years. As of June 30, 2017, our direct exposure to the oil and gas industry was approximately $65 million in outstanding loans, including approximately $14.7 million advanced to oil and gas service companies. As of June 30, 2017, we also had commitments to lend an additional $18.1 million to oil and gas borrowers. These borrowers may be significantly affected by volatility in oil and gas prices and declines in the level of drilling and production activity. A prolonged period of low oil and gas prices or other events that result in a decline in drilling activity could have a negative impact on the economies of our market areas and on our customers. We carefully monitor the impact of volatility in oil and gas prices on our loan portfolio. As of June 30, 2017, 77.5% of our outstanding oil and gas loans were criticized.

Additionally, adverse developments in the demand for coal due to tightening environmental regulations, the suspension of new coal leasing on federal lands, slower growth in electricity demand and fuel competition from low natural gas prices, may impact the economies of the Powder River Basin in Montana and Wyoming.

Adverse developments in the energy sector could have spillover effects on the broader economies of our market areas, including commercial and residential real estate values and the general level of economic activity. The State of Wyoming derives a significant portion of its operating budget from energy extraction and related industries. As such, reductions in oil, gas and coal related revenues may have additional negative economic implications for the State of Wyoming. There is no assurance that our business, financial condition, results of operations and cash flows will not be adversely impacted by increases in non-performing oil and gas loans, or by the direct and indirect effects of current and future conditions in the energy industry.

Our goodwill may become impaired, which may adversely impact our results of operations and financial condition.

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 non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition and results of operations. As of June 30, 2017, we had goodwill of $444 million, or 31% of our total stockholders' equity.

We are a legal entity separate and distinct from our subsidiary Banks. Since we are a holding company with no significant assets other than the capital stock of our subsidiaries, we depend upon dividends from our Banks for a substantial part of our revenue. Accordingly, our ability to pay dividends, cover operating expenses and acquire other institutions depends primarily upon the receipt of dividends or other capital distributions from the Banks. The ability of our Banks to pay dividends to us is subject to, among other things, their earnings, financial condition and need for funds, as well as federal and state governmental policies and regulations applicable to us and the Banks, which limit the amount that may be paid as dividends without prior approval.

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Changes in accounting standards could materially impact our financial statements.

From time to time, the Financial Accounting Standards Board ("FASB"), and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. The FASB proposed amendments to its guidance on the credit impairment of financial instruments. The proposed amendments, which will be effective for our first fiscal year after December 15, 2019, would introduce a new impairment model based on current expected credit losses, or CECL rather than incurred losses. The CECL model would apply to most debt instruments, including loan receivables and loan commitments.

Unlike the incurred loss models in existing generally accepted accounting principles, the CECL model does not specify a threshold for the recognition of an impairment allowance. Rather, we would recognize an impairment allowance equal to our current estimate of expected credit losses for financial instruments as of the end of the reporting period. This will change the current method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

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, other than an employment agreement with our president and chief executive officer, Kevin P. Riley. The unanticipated loss or unavailability of key employees could harm our ability to operate our business or execute our business strategy. We may not 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.

As a result of low unemployment rates in our historical footprint and the Northwest region, there is substantial competition for qualified personnel in our markets. It may be difficult for us 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 may lead to significant increases in salaries, wages and employee benefits expenses as we compete for qualified and 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. 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. In this regard, government authorities, including the bank regulatory agencies, often pursue 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.

We are subject to more stringent capital requirements.

In July 2013, the FDIC and the federal banking agencies approved a new rule that substantially amended the regulatory risk-based capital rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

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The final rule included minimum risk-based capital and leverage ratios, which became effective for us on January 1, 2015, and refined the definition of what constitutes “capital” for calculating these ratios. The minimum capital requirements are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6.0% (an increase from 4.0%);(3) a total capital ratio of 8.0% (unchanged from prior rules). The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%.

The final rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. The final rule also established a “capital conservation buffer” of 2.5%, that, when fully phased in, will result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%; (2) a Tier 1 to risk-based assets capital ratio of 8.5%; and (3) a total capital ratio of 10.5%. These minimum ratios plus the capital conservation buffer, once fully phased in, will exceed the prompt corrective action "well-capitalized" thresholds. (According to the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution is "well-capitalized" if it has a total risk-based capital ratio of 10% or greater; a Tier 1 risk-based capital ratio of 8.0% or greater; a Tier 1 leverage ratio of 5.0% or greater; a common equity Tier 1 capital ratio of 6.5% or greater; and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure).

Phase in of the new capital conservation buffer requirement began in January 2016 and will increase each year until fully implemented by January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

The application of more stringent capital requirements could, among other things, result in lower returns on equity and require us to raise additional capital. If we are unable to comply with such requirements, we may be subject to regulatory action including, but not limited to, constraints on our payment of dividends or repurchase of shares.

A failure in our information technology and telecommunications systems or those of our third-party servicers could disrupt business, damage our reputation, and lead to losses.

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 the failures or disruptions mentioned above, could negatively impact our financial condition, results of operations, cash flows, and prospects.

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, malware, cyber-attacks, and other means.

In addition, we provide our customers with the ability to bank remotely, including online, through their mobile device 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.

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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 to 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 our business, financial condition, results of operations, and prospects.

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 and hold overnight funds 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 brokered deposits, the issuance of additional collateralized borrowings such as Federal Home Loan Bank advances, the issuance of debt or 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 regulatory standing, business, financial condition, and results of operations.

Inability to grow organically or through acquisitions.

Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions were to become challenging, the Company may be unable to grow organically or successfully complete or integrate potential future acquisitions. The Company has historically used its strong stock currency to complete acquisitions. Downturns in the stock market and the Company’s stock could have an impact on future acquisitions. Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to regulatory review and approval.

Costs associated with repossessed properties, including environmental remediation, may 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 serving as collateral for certain loans. There are significant costs associated with our ownership of these properties including, but not limited to, personnel costs, taxes and insurance, completion and repair costs, and valuation adjustments. Additionally, we may experience unfavorable pricing in connection with our disposition of foreclosed properties. These costs, along with unfavorable pricing upon disposition, may adversely affect our cash flows, financial condition and results of operations.

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

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fraud. Moreover, controls may become inadequate because of changes in conditions or processes 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, 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 and regional banks within the various markets we serve, particularly in the Northwest region. We also face competition from many other types of financial institutions, including, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies, financial technology firms 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, some competitors may offer a broader range of products and services as well as better pricing for those products and services than we can.

Our ability to compete successfully depends on a number of factors, including, among other things:


•	the ability to develop, maintain and build upon 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 evolving 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, and results of operations.

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. 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.

The resolution of 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.

Additionally, 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, financial condition, and results of operations.

We may not effectively implement new technology-driven products and services or be successful in marketing these

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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 enables financial institutions to better serve customers and to perform more efficiently. Our future success depends, in part, upon our ability to use technology to provide products and services that will satisfy customers' demands for convenience, 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.

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 be adversely affected by our ability to address enhanced regulatory requirements affecting our mortgage business.

The CFPB has issued a rule designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the CFPB’s rule, a “qualified mortgage” loan must not contain certain specified features, including:


•	excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);


•	interest-only payments;


•	negative-amortization; and


•	terms longer than 30 years.

Also, to qualify as a “qualified mortgage,” a borrower’s total debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. Should we underwrite a mortgage loan that does not meet the CFPB's ability-to-repay standard, we may be subject to enforcement actions or fines and penalties, which could negatively affect our business and financial condition. Additionally, the CFPB’s rule on qualified mortgages could limit our ability or desire to make certain types of loans, or could make it more expensive/and or time consuming to make these loans, which could limit our mortgage business's growth or profitability.

Our business is subject to the risks of earthquakes, tsunamis, floods, fires, and other natural catastrophic events.

A major catastrophe, such as an earthquake, tsunami, flood, fire, or other natural disaster could result in a prolonged interruption of our business. We have 46 branch locations in the Northwest, a geographical region that has been or may be affected by earthquake, tsunami and flooding activity. The occurrence of any of these natural disasters could negatively impact our performance by disrupting our operations or the operations of our customers, which could have a material adverse effect on our financial condition, results of operations, and prospects.

Risks Relating to Our Common Stock

Our 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;

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•	our historical performance and capital structure;


•	estimates of our business potential and earnings prospects;


•	an overall assessment of our management;


•	conversion by our Class B shareholders of their shares into Class A common stock to liquidate their holdings;


•	our performance relative to our peers;


•	market demand for our shares;


•	perceptions of the banking industry in general;


•	political influences on investor sentiment; and,


•	consumer confidence.

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. Further, because our Class B common stock is convertible on a share-for-share basis into Class A common stock and the share price of our Class B common stock is based upon the share price of our Class A common stock, our Class B stock price is similarly impacted by the factors listed above.

In addition, 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.

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 may declare out of funds legally available for such payments. The amount of any dividend declaration is subject to our evaluation of our strategic plans, growth initiatives, capital availability, projected liquidity needs and other factors.

An investment in our common stock is not an insured deposit.

Our Class A and Class B 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.

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 a majority 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 or pursuant to our articles of incorporation), 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 have the ability to elect all of our directors they are able to control our policies and operations, including the appointment of management, the payments of dividends on our common stock, and entering into extraordinary transactions, and their interests may not in all cases be aligned with the interests of all stockholders. 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 limits stockholders' 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

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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 Class A and Class B 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 and Class B 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.

We qualify as a “controlled company” under the NASDAQ Marketplace Rules and may rely on exemptions from certain corporate governance requirements.

Due to the combined voting power of the members of the Scott family, we qualify as a “controlled company” under the NASDAQ Marketplace Rules. As a "controlled company" we are exempt from certain NASDAQ corporate governance requirements,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, our future compensation and governance and nominating committees may not consist entirely of independent directors. As long as we choose to rely on these exemptions from NASDAQ Marketplace Rules, stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

Future equity issuances could result in dilution, which could cause our common stock price to decline.

We may issue additional Class A common stock in the future pursuant to current or future employee equity compensation 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 and Class B common stock and could have a material negative effect on the market price of our Class A common stock.

The common stock is equity and is subordinate to our existing and future indebtedness.

Shares of our Class A and Class B common stock are equity interests and do not constitute indebtedness. As such, shares of our Class A and Class B common stock rank junior to all our indebtedness, including any subordinated term loans, subordinated debentures held by trusts that have issued trust preferred securities other non-equity claims on us with respect to assets available to satisfy claims on us. In the future, we may make additional offerings of debt or equity securities or, we may issue additional debt or equity securities as consideration for future mergers and acquisitions.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

(a) There were no unregistered sales of equity securities during the three months ended June 30, 2017.

(b) Not applicable.

(c) 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 June 30, 2017.



				Total Number of	Maximum Number
				Shares Purchased	of Shares That
	Total Number	Average		as Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced Plans	Purchased Under the
Period	Purchased (1)	Per Share		or Programs	Plans or Programs
April 2017	781	$	39.15	—	24,123
May 2017	52	36.05		—	24,123
June 2017	—	—		—	24,123
Total	833	$	37.60	—	24,123


(1)	Stock repurchases 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.


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

As previously announced, the Company’s shareholders approved at the annual meeting of shareholders of the Company held on May 24, 2017, amended and restated articles of incorporation and bylaws of the Company, conformed copies of which are filed as exhibits with this quarterly report on Form 10-Q. A description of the approved amendments to these documents is included in the Company’s joint proxy statement/prospectus (Registration No. 333-215749) filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) in connection with its annual meeting of shareholders.

Item 6. Exhibits



Exhibit Number		Description

3.1*		Second Amended and Restated Articles of Incorporation dated May 30, 2017.

3.2*		Third Amended and Restated Bylaws dated May 24, 2017.

31.1*		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2*		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32**		18 U.S.C. Section 1350 Certifications.

101*		Interactive data file

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements 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.

Date:	August 9, 2017	By:	/S/ KEVIN P. RILEY
			Kevin P. Riley
			President and Chief Executive Officer

Date:	August 9, 2017	By:	/S/ MARCY D. MUTCH
			Marcy D. Mutch
			Executive Vice President and Chief Financial Officer

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Exhibit Index



Exhibit Number		Description

3.1*		Second Amended and Restated Articles of Incorporation dated May 30, 2017.

3.2*		Third Amended and Restated Bylaws dated May 24, 2017.

31.1*		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2*		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32**		18 U.S.C. Section 1350 Certifications.

101*		Interactive data file

* Filed herewith.

** Furnished herewith.