First Interstate BancSystem - 10-Q quarterly report FY2017 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________________________________________________________________________________________________

FORM 10-Q

_____________________________________________________________________________________________________________________________________________________


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

For the quarterly period ended September 30, 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨		Accelerated filer	ý
Non-accelerated filer	¨	(Do not check if smaller reporting company)	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:



	September 30, 2017 – Class A common stock		33,383,364
	September 30, 2017 – Class B common stock		23,072,524

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

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

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

	Consolidated Statements of Income - Three and Nine Months Ended September 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2017 and 2016	5

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

	Consolidated Statements of Cash Flows - Nine Months Ended September 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	46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62

Item 4.	Controls and Procedures	62

Part II.	Other Information	63

Item 1.	Legal Proceedings	63

Item 1A .	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

Signatures		65

Exhibit Index		66

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

	September 30, 2017		December 31, 2016
Assets
Cash and due from banks	$	201,124	$	146,779
Interest bearing deposits in banks	681,564		635,149
Federal funds sold	146		95
Total cash and cash equivalents	882,834		782,023
Investment securities:
Available-for-sale	2,111,697		1,611,698
Held-to-maturity (estimated fair values of $510,405 and $513,273 at September 30, 2017 and December 31, 2016, respectively)	505,985		512,770
Total investment securities	2,617,682		2,124,468
Loans held for investment	7,502,387		5,416,750
Mortgage loans held for sale	49,729		61,794
Total loans	7,552,116		5,478,544
Less allowance for loan losses	74,572		76,214
Net loans	7,477,544		5,402,330
Goodwill	445,028		212,820
Company-owned life insurance	258,929		198,116
Premises and equipment, net of accumulated depreciation	242,940		194,457
Accrued interest receivable	40,621		29,852
Mortgage servicing rights, net of accumulated amortization and impairment reserve	24,372		18,457
Core deposit intangibles, net of accumulated amortization	50,971		9,648
Other real estate owned (“OREO”)	10,344		10,019
Deferred tax asset, net	5,343		—
Other assets	149,865		81,705
Total assets	$	12,206,473	$	9,063,895
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	2,965,332	$	1,906,257
Interest bearing	6,968,136		5,469,853
Total deposits	9,933,468		7,376,110
Securities sold under repurchase agreements	635,288		537,556
Accounts payable and accrued expenses	92,135		44,923
Accrued interest payable	5,648		5,421
Deferred tax liability	—		6,839
Long-term debt	8,039		27,970
Other borrowed funds	30,008		6
Subordinated debentures held by subsidiary trusts	82,477		82,477
Total liabilities	10,787,063		8,081,302
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of September 30, 2017 or December 31, 2016	—		—
Common stock	686,508		296,071
Retained earnings	731,879		694,650
Accumulated other comprehensive income (loss), net	1,023		(8,128		)
Total stockholders’ equity	1,419,410		982,593
Total liabilities and stockholders’ equity	$	12,206,473	$	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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest income:
Interest and fees on loans	$	94,019		$	65,626		$	231,643		$	191,076
Interest and dividends on investment securities:
Taxable	11,634			7,878			30,139			23,898
Exempt from federal taxes	795			820			2,442			2,557
Interest on deposits in banks	2,314			607			4,859			1,734
Interest on federal funds sold	3			4			8			9
Total interest income	108,765			74,935			269,091			219,274
Interest expense:
Interest on deposits	6,197			3,099			15,326			9,435
Interest on securities sold under repurchase agreements	350			100			870			282
Interest on other debt	608			457			1,542			1,357
Interest on subordinated debentures held by subsidiary trusts	819			698			2,346			2,036
Total interest expense	7,974			4,354			20,084			13,110
Net interest income	100,791			70,581			249,007			206,164
Provision for loan losses	3,443			2,363			7,528			8,913
Net interest income after provision for loan losses	97,348			68,218			241,479			197,251
Non-interest income:
Payment services revenues	12,366			9,019			31,036			25,658
Mortgage banking revenues	8,251			11,303			22,442			28,311
Wealth management revenues	5,544			4,995			15,641			14,736
Service charges on deposit accounts	5,904			4,692			15,314			13,781
Other service charges, commissions and fees	3,584			2,628			9,618			8,081
Loss on termination of interest rate swap	(1,128		)	—			(1,128		)	—
Investment securities gains (losses), net	771			225			778			312
Other income	2,982			2,299			10,860			7,049
Non-recurring litigation recovery	—			—			—			3,750
Total non-interest income	38,274			35,161			104,561			101,678
Non-interest expense:
Salaries and wages	34,662			26,908			88,440			79,755
Employee benefits	10,185			8,610			29,612			26,285
Outsourced technology services	6,569			5,211			17,869			14,843
Occupancy, net	6,059			4,413			16,028			13,361
Furniture and equipment	3,151			2,398			8,163			7,114
OREO expense, net of income	242			8			228			109
Professional fees	1,888			1,191			4,712			3,635
FDIC insurance premiums	1,666			1,212			3,327			3,668
Mortgage servicing rights amortization	816			854			2,135			2,210
Mortgage servicing rights impairment (recovery)	(12		)	(16		)	(84		)	(21		)
Core deposit intangibles amortization	1,885			875			3,577			2,529
Other expenses	14,529			12,542			40,887			36,740
Acquisition related expenses	13,016			1,197			23,854			1,197
Total non-interest expense	94,656			65,403			238,748			191,425
Income before income tax expense	40,966			37,976			107,292			107,504
Income tax expense	13,707			12,783			35,039			36,633
Net income	$	27,259		$	25,193		$	72,253		$	70,871

Basic earnings per common share	$	0.49		$	0.57		$	1.46		$	1.59
Diluted earnings per common share	$	0.48		$	0.56		$	1.45		$	1.58

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	27,259		$	25,193		$	72,253		$	70,871
Other comprehensive income, before tax:
Investment securities available-for sale:
Change in net unrealized (losses) gains during period	(1,812		)	(3,430		)	15,553			15,241
Reclassification adjustment for net (gains) losses included in income	(771		)	(225		)	(778		)	(312		)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity	465			490			1,394			1,394
Unrealized loss (gain) on derivatives	(658		)	512			(1,095		)	(2,490		)
Reclassification adjustment for derivatives net (gains) losses included in income	1,128			—			1,128			—
Defined benefit post-retirement benefits plans:
Change in net actuarial (gain) loss	(176		)	15			(1,090		)	43
Other comprehensive income, before tax	(1,824		)	(2,638		)	15,112			13,876
Deferred tax expense (benefit) related to other comprehensive income	851			1,038			(5,961		)	(5,460		)
Other comprehensive (loss) income, net of tax	(973		)	(1,600		)	9,151			8,416
Comprehensive income, net of tax	$	26,286		$	23,593		$	81,404		$	79,287

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	—			72,253			—			72,253
Other comprehensive income, net of tax expense	—			—			9,151			9,151
Common stock transactions:
22,727 common shares purchased and retired	(938		)	—			—			(938		)
11,267,676 common shares issued	385,969			—			—			385,969
134,044 non-vested common shares issued	—			—			—			—
30,070 non-vested common shares forfeited	—			—			—			—
180,789 stock options exercised, net of 56,082 shares tendered in payment of option price and income tax withholding amounts	1,988			—			—			1,988
Stock-based compensation expense	3,418			—			—			3,418
Common cash dividend declared ($0.72 per share)	—			(35,024		)	—			(35,024		)
Balance at September 30, 2017	$	686,508		$	731,879		$	1,023		$	1,419,410

Balance at December 31, 2015	$	311,720		$	638,367		$	406		$	950,493
Net income	—			70,871			—			70,871
Other comprehensive income, net of tax expense	—			—			8,416			8,416
Common stock transactions:
998,135 common shares purchased and retired	(26,119		)	—			—			(26,119		)
16,085 common shares issued	—			—			—			—
189,624 non-vested common shares issued	—			—			—			—
25,984 non-vested common shares forfeited	—			—			—			—
270,183 stock options exercised, net of 94,902 shares tendered in payment of option price and income tax withholding amounts	3,657			—			—			3,657
Tax benefit of stock-based compensation	1,352			—			—			1,352
Stock-based compensation expense	3,350			—			—			3,350
Common cash dividend declared ($0.66 per share)	—			(29,516		)	—			(29,516		)
Balance at September 30, 2016	$	293,960		$	679,722		$	8,822		$	982,504

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)

	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	72,253		$	70,871
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	7,528			8,913
Net loss on disposal of premises and equipment	—			492
Depreciation and amortization	17,920			14,482
Net premium amortization on investment securities	8,464			9,423
Net gain on investment securities transactions	(778		)	(312		)
Realized and unrealized net gains on mortgage banking activities	(15,353		)	(15,126		)
Net gain on sale of OREO	(375		)	(693		)
Write-downs of OREO and other assets pending disposal	294			621
Net (gain) on sale of Health Savings Accounts	(3,068		)	—
Mortgage servicing rights recovery	(84		)	(21		)
Deferred income tax expense (benefit)	19,771			(344		)
Net increase in cash surrender value of company-owned life insurance	(3,775		)	(3,431		)
Stock-based compensation expense	3,418			3,350
Tax benefits from stock-based compensation expense	—			1,352
Excess tax benefits from stock-based compensation expense	—			(1,126		)
Originations of mortgage loans held for sale	(980,551		)	(799,445		)
Proceeds from sales of mortgage loans held for sale	992,409			795,527
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in interest receivable	(3,164		)	(2,203		)
Decrease (increase) in other assets	(4,784		)	(2,644		)
Increase in accrued interest payable	227			646
Increase (decrease) in accounts payable and accrued expenses	(15,658		)	(1,278		)
Net cash provided by operating activities	94,694			79,054
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity	(12,793		)	(18,170		)
Available-for-sale	(386,527		)	(626,574		)
Proceeds from maturities and pay-downs of investment securities:
Held-to-maturity	76,027			86,306
Available-for-sale	319,958			652,064
Extensions of credit to customers, net of repayments	(20,885		)	(203,216		)
Recoveries of loans charged-off	6,452			6,363
Proceeds from sale of OREO	4,150			3,352
Acquisition of intangible assets	(28,013		)	—
Proceeds from the sale of Health Savings Accounts	6,138			—
Proceeds from sale of loan production office	—			932
Acquisition of bank and bank holding company, net of cash and cash equivalents received	91,775			18,554
Capital expenditures, net of sales	(12,237		)	(5,113		)
Net cash provided by (used in) investing activities	$	44,045		$	(85,502	)

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

	Nine Months Ended September 30,
	2017			2016
Cash flows from financing activities:
Net increase (decrease) in deposits	$	(111,618	)	$	30,057
Net increase (decrease) in securities sold under repurchase agreements	97,732			(51,917		)
Net increase in other borrowed funds	10,000			6
Repayments of long-term debt	(69		)	(49		)
Advances on long-term debt	—			113
Proceeds from issuance of common stock	1,988			3,657
Excess tax benefits from stock-based compensation expense	—			1,126
Purchase and retirement of common stock	(938		)	(26,119		)
Dividends paid to common stockholders	(35,024		)	(29,516		)
Net cash used in financing activities	(37,929		)	(72,642		)
Net increases (decrease) in cash and cash equivalents	100,811			(79,090		)
Cash and cash equivalents at beginning of period	782,023			780,457
Cash and cash equivalents at end of period	$	882,834		$	701,367

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	24,279		$	40,416
Cash paid during the period for interest expense	19,857			12,448

Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	6,270			50
Transfer from long-term debt to other borrowed funds	20,000			—
Transfer of loans to other real estate owned	3,182			5,335
Capitalization of internally originated mortgage servicing rights	4,147			3,890

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	10,259			—
Loans	2,080,374			—
Premises and equipment	46,732			—
Goodwill	232,208			—
Core deposit intangible	47,968			—
Mortgage servicing rights	3,491			—
Interest receivable	7,605			—
Company-owned life insurance	57,038			—
Deferred tax assets	25,992			—
Other real estate owned	1,192			—
Other assets	31,572			—
Total noncash assets acquired	3,026,040			—

Liabilities assumed:
Deposits	$	2,668,976		$	—
Accounts payable and accrued expenses	62,870			—
Total liabilities assumed	2,731,846			—

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 September 30, 2017 and December 31, 2016, the results of operations for each of the three and nine month periods ended September 30, 2017 and 2016, and cash flows and changes in stockholders' equity for each of the nine month periods ended September 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 September 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 nine months ended September 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 Agreement. The Company paid approximately $9.3 million in cash related to Cascade options and restricted stock units, which was included in the consideration paid.

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 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 unvested restricted stock awards. Of the cash paid and shares issued related to Cascade unvested restricted stock awards, approximately $2.4 million was allocated to expense and excluded from consideration paid due to the acceleration of award vesting at the Company’s discretion. The remaining balance of approximately $5.5 million related to unvested Cascade restricted stock awards is included in the consideration paid.

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 provisional goodwill of $232.2 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 closing 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	2,112,077			(31,703		)	(2)	2,080,374
Mortgage loans held for sale	10,253			6			(2)	10,259
Allowance for loan loss	(23,974		)	23,974			(3)	—
Premises and equipment	46,554			178			(4)	46,732
Other real estate owned ("OREO")	1,192			—				1,192
Core deposit intangible	—			47,968			(5)	47,968
Deferred tax assets	47,653			(21,661		)	(6)	25,992
Other assets	98,570			1,136			(7)	99,706
Total assets acquired	3,015,862			24,774				3,040,636

Liabilities assumed:
Deposits	2,669,910			(934		)	(8)	2,668,976
Accounts Payable and Accrued Expense	62,150			720			(9)	62,870
Total liabilities assumed	2,732,060			(214		)		2,731,846

Net assets acquired	$	283,802		$	24,988			$	308,790

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

Goodwill								$	232,208

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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. Note that certain marks have been updated since prior quarter, and certain balances have been reclassified, none of which are material:
(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 various other assets recorded as a result of the acquisition, including mortgage servicing rights, SBA servicing rights, and favorable leases offset by reductions to the fair value of other items.
(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, unfavorable leases, write-off of balance sheet reserve, and swap liability offset.

The core deposit intangible asset of $48.0 million 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 $13.0 million and $23.9 million in pre-tax acquisition related expenses for the three and nine months ended September 30, 2017, respectively, including professional and legal fees of $0 and $6.5 million, respectively, to directly consummate the merger. These costs are incorporated in non-interest expenses in the Company’s consolidated statements of income and are summarized below.



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
Legal and Professional Fees	$	2,498	$	8,995
Employee Expenses	1,755		5,041
Technology Conversion and Contract Termination	7,090		7,779
Other	1,673		2,039
Total Acquisition Related Expenses	$	13,016	$	23,854

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

Information regarding acquired credit-impaired loans as of the 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	$	2,098,452
Contractual cash flows not expected to be collected due to projected prepayment	23,387
Fair value at acquisition	$	2,067,869

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 continued to operate as Bank of the Cascades until August 11, 2017 at which point the operations were integrated with the Company's operations, and Bank of the Cascades merged with First Interstate Bank. Standalone amounts for the Bank of the Cascades were no longer available after that date.

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 September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Interest income	$	108,765	$	99,288	$	312,091	$	289,060
Non-interest income	38,274		39,811		116,171		114,881
Total revenues	$	147,039	$	139,099	$	428,262	$	403,941

Net income	$	34,903	$	28,769	$	94,017	$	44,317

EPS - basic	$	0.52	$	0.52	$	1.55	$	0.79
EPS - diluted	0.51		0.51		1.53		0.79

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

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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)

professional expenses of $19.7 million, 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 $232.2 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 the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an impairment assessment as of July 1, 2017 and 2016 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 nine months ended September 30, 2017 and 2016:



	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
CDI, net, beginning of period	$	52,837		$	8,935		$	9,648		$	10,589
Established through acquisitions or provisional adjustments	19			2,486			47,968			2,486
Reductions due to sale of accounts	—			—			(3,068		)	—
CDI current period amortization	(1,885		)	(875		)	(3,577		)	(2,529		)
Total CDI, net, at September 30	$	50,971		$	10,546		$	50,971		$	10,546

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	$	1,298
2018	5,093
2019	4,994
2020	4,872
2021	4,729
Thereafter	29,985

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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)


(4)	Investment Securities

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



September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury notes	$	3,206	$	1	$	(2	)	$	3,205
Obligations of U.S. government agencies	508,449		338		(3,209		)	505,578
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	1,431,125		8,829		(4,716		)	1,435,238
Private mortgage-backed securities	97,715		313		(190		)	97,838
Corporate securities	66,754		126		(2		)	66,878
Other investments	2,951		9		—			2,960
Total	$	2,110,200	$	9,616	$	(8,119	)	$	2,111,697



September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	180,981	$	3,726	$	(123	)	$	184,584
U.S agency residential mortgage-backed securities & collateralized mortgage obligations	243,380		10,725		(10,172		)	243,933
Obligations of U.S. government agencies	19,737		43		(19		)	19,761
Corporate securities	61,704		272		(33		)	61,943
Other investments	183		1		—			184
Total	$	505,985	$	14,767	$	(10,347	)	$	510,405



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

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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)

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Gross realized gains	$	1,072		$	239		$	1,079		$	404
Gross realized losses	(301		)	(14		)	(301		)	(92		)

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



	Less than 12 Months					12 Months or More					Total
September 30, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale:
U.S. Treasury notes	$	2,201	$	(2	)	$	—	$	—		$	2,201	$	(2	)
Obligations of U.S. government agencies	303,060		(2,458		)	86,718		(751		)	389,778		(3,209		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	556,771		(3,731		)	74,732		(985		)	631,503		(4,716		)
Private mortgage-backed securities	30,518		(189		)	31		(1		)	30,549		(190		)
Corporate securities	6,987		(2		)	—		—			6,987		(2		)
Total	$	899,537	$	(6,382	)	$	161,481	$	(1,737	)	$	1,061,018	$	(8,119	)



	Less than 12 Months					12 Months or More					Total
September 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	$	25,207	$	(97	)	$	4,208	$	(26	)	$	29,415	$	(123	)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	38,712		(8,814		)	18,846		(1,358		)	57,558		(10,172		)
Obligations of U.S. government agencies	9,972		(19		)	—		—			9,972		(19		)
Corporate securities	3,966		—			5,017		(33		)	8,983		(33		)
Total	$	77,857	$	(8,930	)	$	28,071	$	(1,417	)	$	105,928	$	(10,347	)



	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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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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 358 and 396 individual investment securities that were in an unrealized loss position as of September 30, 2017 and December 31, 2016, respectively. As of September 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 nine months ended September 30, 2017 or 2016.

Maturities of investment securities at September 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
September 30, 2017	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	375,199	$	376,264	$	87,077	$	83,899
After one year but within five years	1,287,854		1,288,384		264,417		272,442
After five years but within ten years	278,782		278,277		119,579		121,039
After ten years	168,365		168,772		34,912		33,025
Total	$	2,110,200	$	2,111,697	$	505,985	$	510,405

As of September 30, 2017, the Company had investment securities callable within one year with amortized costs and estimated fair values of $94,461 and $94,348, respectively. These investment securities are primarily included in the after one year but within five years category in the table above. As of September 30, 2017, the Company did not have any callable structured notes.

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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)


(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 September 30, 2017	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	4,582	$	1,160	$	2,502	$	8,244	$	2,722,265	$	28,042	$	2,758,551
Construction:
Land acquisition & development	1,656		493		65		2,214		345,234		4,720		352,168
Residential	1,245		1,598		470		3,313		230,533		205		234,051
Commercial	—		—		—		—		113,173		3,844		117,017
Total construction loans	2,901		2,091		535		5,527		688,940		8,769		703,236
Residential	8,502		6,313		187		15,002		1,478,314		5,711		1,499,027
Agricultural	1,327		8,533		—		9,860		148,219		2,218		160,297
Total real estate loans	17,312		18,097		3,224		38,633		5,037,738		44,740		5,121,111
Consumer:
Indirect consumer	6,840		1,659		347		8,846		778,434		1,505		788,785
Other consumer	1,391		498		68		1,957		175,275		358		177,590
Credit card	1,043		408		671		2,122		70,087		—		72,209
Total consumer loans	9,274		2,565		1,086		12,925		1,023,796		1,863		1,038,584
Commercial	3,308		1,094		1,077		5,479		1,154,196		26,532		1,186,207
Agricultural	1,769		97		278		2,144		149,192		1,345		152,681
Other, including overdrafts	—		—		—		—		3,804		—		3,804
Loans held for investment	31,663		21,853		5,665		59,181		7,368,726		74,480		7,502,387
Mortgage loans originated for sale	—		—		—		—		49,729		—		49,729
Total loans	$	31,663	$	21,853	$	5,665	$	59,181	$	7,418,455	$	74,480	$	7,552,116

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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 September 30, 2017 and 2016:



As of September 30,	2017		2016

Outstanding balance	$	46,199	$	38,505

Carrying value
Loans on accrual status	30,804		23,665
Total carrying value	$	30,804	$	23,665

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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 changes in the accretable yield for loans acquired credit impaired for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Beginning balance	$	7,650		$	5,905		$	6,803		$	6,713
Additions	167			1,114			2,096			1,114
Accretion income	(858		)	(670		)	(2,131		)	(1,899		)
Reductions due to exit events	(143		)	(595		)	(1,131		)	(900		)
Reclassifications from nonaccretable differences	498			729			1,677			1,455
Ending balance	$	7,314		$	6,483		$	7,314		$	6,483

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 $946 and $820 for the three months ended September 30, 2017 and 2016, respectively, and approximately $1,814 and $2,492 for the nine months ended September 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 September 30, 2017	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	47,934	$	21,558	$	16,035	$	37,593	$	3,947
Construction:
Land acquisition & development	11,290		3,694		1,714		5,408		711
Residential	310		205		—		205		—
Commercial	4,725		417		3,537		3,954		2,148
Total construction loans	16,325		4,316		5,251		9,567		2,859
Residential	8,990		5,629		2,122		7,751		218
Agricultural	2,681		2,425		156		2,581		4
Total real estate loans	75,930		33,928		23,564		57,492		7,028
Consumer	27		—		25		25		14
Commercial	36,787		14,623		16,748		31,371		6,426
Agricultural	1,585		951		609		1,560		435
Total	$	114,329	$	49,502	$	40,946	$	90,448	$	13,903

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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 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 September 30,
	2017				2016
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	40,362	$	54	$	33,408	$	100
Construction:
Land acquisition & development	5,383		2		6,797		13
Residential	207		—		274		—
Commercial	4,192		1		1,055		1
Total construction loans	9,782		3		8,126		14
Residential	7,123		4		3,282		4
Agricultural	2,642		—		4,786		2
Total real estate loans	59,909		61		49,602		120
Consumer	25		—		—
Commercial	31,637		47		30,123		72
Agricultural	2,270		—		2,249		—
Total	$	93,841	$	108	$	81,974	$	192

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



	Nine Months Ended September 30,
	2017				2016
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	41,712	$	281	$	35,572	$	241
Construction:
Land acquisition & development	5,776		10		6,992		32
Residential	522		—		279		—
Commercial	4,271		45		1,007		3
Total construction loans	10,569		55		8,278		35
Residential	7,148		12		4,219		7
Agricultural	3,636		—		4,607		3
Total real estate loans	63,065		348		52,676		286
Consumer	13		—		—		—
Commercial	31,884		156		27,781		128
Agricultural	2,611		2		2,341		—
Total	$	97,573	$	506	$	82,798	$	414

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 $946 and $993 for the three months ended September 30, 2017 and 2016, respectively, and approximately $1,814 and $2,994 for the nine months ended September 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 $45,859 as of September 30, 2017, of which $34,997 were included in non-accrual loans and $10,862 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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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 information on the Company's troubled debt restructurings that occurred during the three and nine months ended September 30, 2017:



	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Three Months Ended September 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	1	—		—		—		611		611
Total loans restructured during period	1	$	—	$	—	$	—	$	611	$	611
(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
Nine Months Ended September 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	16	511		1,968		—		6,057		8,536
Total loans restructured during period	21	$	1,986	$	2,356	$	—	$	6,966	$	11,308
(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 nine months ended September 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 nine months ended September 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 September 30, 2017			Nine Months Ended September 30, 2017
	Number of Notes	Balance		Number of Notes	Balance
Commercial real estate	1	$	177	2	$	2,407
Commercial construction	—	—		1	3,528
Commercial	1	1,300		1	1,300
Total	2	$	1,477	4	$	7,235

At September 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.

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:

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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)

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 September 30, 2017	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	79,921	$	107,791	$	12,025	$	199,737
Construction:
Land acquisition & development	5,425		13,818		1,597		20,840
Residential	3,690		2,201		—		5,891
Commercial	2,564		3,842		3,747		10,153
Total construction loans	11,679		19,861		5,344		36,884
Residential	4,607		11,664		1,039		17,310
Agricultural	1,212		23,574		—		24,786
Total real estate loans	97,419		162,890		18,408		278,717
Consumer:
Indirect consumer	660		2,116		120		2,896
Other consumer	458		849		140		1,447
Total consumer loans	1,118		2,965		260		4,343
Commercial	43,365		61,612		16,495		121,472
Agricultural	5,219		11,859		979		18,057
Total	$	147,121	$	239,326	$	36,142	$	422,589

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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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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

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 September 30, 2017	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	33,498		$	7,554		$	33,124		$	1,525		$	—	$	75,701
Provision charged to operating expense	(690		)	2,620			1,530			(17		)	—		3,443
Less loans charged-off	(1,695		)	(3,115		)	(2,609		)	(41		)	—		(7,460		)
Add back recoveries of loans previously charged-off	613			962			1,313			—			—		2,888
Ending balance	$	31,726		$	8,021		$	33,358		$	1,467		$	—	$	74,572

Nine Months Ended September 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	4,775			5,157			(2,145		)	(259		)	—		7,528
Less loans charged-off	(2,938		)	(8,123		)	(4,450		)	(111		)	—		(15,622		)
Add back recoveries of loans previously charged-off	1,264			3,276			1,861			51			—		6,452
Ending balance	$	31,726		$	8,021		$	33,358		$	1,467		$	—	$	74,572

As of September 30, 2017	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	7,028		$	14		$	6,426		$	435		$	—	$	13,903
Loans collectively evaluated for impairment	24,698			8,007			26,932			1,032			—		60,669
Allowance for loan losses	$	31,726		$	8,021		$	33,358		$	1,467		$	—	$	74,572

Loans held for investment:
Individually evaluated for impairment	$	57,492		$	25		$	31,371		$	1,560		$	—	$	90,448
Collectively evaluated for impairment	5,063,619			1,038,559			1,154,836			151,121			3,804		7,411,939
Total loans	$	5,121,111		$	1,038,584		$	1,186,207		$	152,681		$	3,804	$	7,502,387



Three Months Ended September 30, 2016	Real Estate			Consumer			Commercial			Agriculture		Other		Total
Allowance for loan losses:
Beginning balance	$	32,281		$	6,315		$	39,995		$	1,749	$	—	$	80,340
Provision charged to operating expense	(352		)	2,395			265			55		—		2,363
Less loans charged-off	(379		)	(2,157		)	(579		)	—		—		(3,115		)
Add back recoveries of loans previously charged-off	221			742			680			4		—		1,647
Ending balance	$	31,771		$	7,295		$	40,361		$	1,808	$	—	$	81,235

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



Nine Months Ended September 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	(20,492		)	5,747			22,268			1,390			—		8,913
Less loans charged-off	(2,824		)	(5,761		)	(2,085		)	(188		)	—		(10,858		)
Add back recoveries of loans previously charged-off	2,791			2,165			1,403			4			—		6,363
Ending balance	$	31,771		$	7,295		$	40,361		$	1,808		$	—	$	81,235

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 September 30, 2017 and December 31, 2016, the Company's allowance for loan losses included $727 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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Beginning balance	$	11,286		$	7,908		$	10,019		$	6,254
OREO acquired through acquisition	—			1,120			1,192			1,120
Additions	1,419			1,316			3,182			5,335
Valuation adjustments	(238		)	—			(294		)	(603		)
Dispositions	(2,123		)	(897		)	(3,755		)	(2,659		)
Ending balance	$	10,344		$	9,447		$	10,344		$	9,447

The carrying values of foreclosed residential real estate properties included in other real estate owned were $1,083 and $2,282 as of September 30, 2017 and December 31, 2016, respectively. The Company had $481 of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2017 and $0 as of December 31, 2016.


(8)	Derivatives and Hedging Activities

For asset and liability management purposes, the Company had entered into an interest rate swap contract to hedge against changes in forecasted cash flows due to interest rate exposures. During the third quarter, the Company terminated the existing interest rate swap contract. The swap agreement was a derivative instrument which 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 was 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, would be 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

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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)

and the Company records a loan held for sale. The forward loan sales contracts act as a hedge against the variability in 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.



	September 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	$	327,569	$	8,764	$	53,593	$	1,332
Interest rate lock commitments	78,720		1,627		73,422		1,131
Forward loan sales contracts	104,543		330		126,836		286
Total derivative assets	$	510,832	$	10,721	$	253,851	$	2,749

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

Non-hedging interest rate derivatives:
Interest rate swap contracts	327,569		9,099		53,593		1,281
Total derivative liabilities	$	327,569	$	9,099	$	153,593	$	1,314

On September 6, 2017, the Company paid $1.1 million to terminate an existing interest rate swap contract designated as a cash flow hedge, originally entered into on September 22, 2015, with a notional amount of $100,000. Under the terms of the interest rate swap contract, the Company would have paid a fixed interest rate of 1.94% and the counterparty would have paid to the Company a variable interest rate equal to the three-month LIBOR. As the contract was terminated prior to the effective date of September 15, 2017, no cash was exchanged outside of the termination payment.

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 nine months ended September 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.

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 September 30, 2017 and December 31, 2016:

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



	September 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	$	8,764	$	—	$	8,764	$	1,530	$	—	$	7,234
Mortgage related derivatives	1,957		—		1,957		—		—		1,957
Total derivatives	10,721		—		10,721		1,530		—		9,191
Total assets	$	10,721	$	—	$	10,721	$	1,530	$	—	$	9,191

Financial Liabilities
Interest rate swap contracts	$	9,099	$	—	$	9,099	$	1,530	$	7,569	$	—
Total derivatives	9,099		—		9,099		1,530		7,569		—
Repurchase agreements	635,288		—		635,288		—		635,288		—
Total liabilities	$	644,387	$	—	$	644,387	$	1,530	$	642,857	$	—



	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

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:

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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)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Derivatives designated as hedges:
Amount of loss recognized in other comprehensive income (effective portion)	$	(658	)	$	512		$	(1,095	)	$	(2,490	)
Reclassification adjustment for derivatives net (gains) losses included in income	1,128			—			1,128			—
Non-hedging interest rate derivatives:
Amount of gain (loss) recognized in other non-interest income	24			(3		)	(49		)	(82		)
Amount of net fee income recognized in other non-interest income	162			—			441			245
Amount of net gains recognized in mortgage banking revenues	358			752			539			1,970


(9)	Capital Stock

The Company had 33,383,364 shares of Class A common stock and 23,072,524 shares of Class B common stock outstanding as of September 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 nine months ended September 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 nine months ended September 30, 2017, the Company did not repurchase any shares of its Class A common stock. During the nine months ended September 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 nine months ended September 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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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 three and nine month periods ended September 30, 2017 and 2016:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net income	$	27,259	$	25,193	$	72,253	$	70,871
Weighted average common shares outstanding for basic earnings per share computation	56,094,401		44,415,213		49,514,818		44,505,544
Dilutive effects of stock-based compensation	436,467		390,708		486,064		379,368
Weighted average common shares outstanding for diluted earnings per common share computation	56,530,868		44,805,921		50,000,882		44,884,912

Basic earnings per common share	$	0.49	$	0.57	$	1.46	$	1.59
Diluted earnings per common share	$	0.48	$	0.56	$	1.45	$	1.58

Anti-dilutive unvested time restricted stock	—		135		94,210		95,886

The Company had 174,696 and 218,556 shares of unvested restricted stock as of September 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.

As of September 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 September 30, 2017 and December 31, 2016 are presented in the following tables:

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



	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
September 30, 2017
Total risk-based capital:
Consolidated	$	1,100,588	12.76	%	$	797,584	9.25	%	$	905,365	10.50	%	$	862,253	10.00	%
FIB	1,097,287		12.78		793,974		9.25		901,268		10.50		858,350		10.00
Tier 1 risk-based capital:
Consolidated	1,026,016		11.90		625,133		7.25		732,915		8.50		689,802		8.00
FIB	1,022,715		11.91		622,304		7.25		729,598		8.50		686,680		8.00
Common equity tier 1 risk-based capital:
Consolidated	949,821		11.02		495,795		5.75		603,577		7.00		560,464		6.50
FIB	1,022,715		11.91		493,551		5.75		600,845		7.00		557,928		6.50
Leverage capital ratio:
Consolidated	1,026,016		8.71		471,221		4.00		471,221		4.00		589,026		5.00
FIB	1,022,715		8.72		469,107		4.00		469,107		4.00		586,384		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

(1) The ratios for the well capitalized requirement are only applicable to FIB. 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

As of September 6, 2017, the Company terminated 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 Activities.

As of September 30, 2017, the Company had commitments under construction contracts of $731.

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 $875 of sold residential mortgage loans with recourse provisions still in effect as of September 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 September 30, 2017, commitments to extend credit to existing and new borrowers approximated $2.1 billion, which included $618.1 million on unused credit card lines and $721.7 million 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 September 30, 2017, the Company had outstanding standby letters of credit of $52.6 million. 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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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 September 30,	2017			2016			2017			2016			2017			2016
Investment securities available-for sale:
Change in net unrealized gains during period	$	(1,812	)	$	(3,430	)	$	(845	)	$	(1,359	)	$	(967	)	$	(2,071	)
Reclassification adjustment for net gains included in net income	(771		)	(225		)	(360		)	(89		)	(411		)	(136		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	465			490			217			209			248			281
Unrealized (gain) loss on derivatives	(658		)	512			(307		)	195			(351		)	317
Reclassification adjustment for derivatives net (gains) losses included in income	1,128			—			526			—			602			—
Defined benefits post-retirement benefit plan:
Change in net actuarial (gain) loss	(176		)	15			(82		)	6			(94		)	9
Total other comprehensive income	$	(1,824	)	$	(2,638	)	$	(851	)	$	(1,038	)	$	(973	)	$	(1,600	)




	Pre-tax						Tax Expense (Benefit)						Net of Tax
Nine Months Ended September 30,	2017			2016			2017			2016			2017			2016
Investment securities available-for sale:
Change in net unrealized gains during period	$	15,553		$	15,241		$	6,135		$	5,963		$	9,418		$	9,278
Reclassification adjustment for net gains included in net income	(778		)	(312		)	(307		)	(123		)	(471		)	(189		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	1,394			1,394			550			549			844			845
Unrealized loss on derivatives	(1,095		)	(2,490		)	(432		)	(946		)	(663		)	(1,544		)
Reclassification adjustment for derivatives net (gains) losses included in income	1,128			—			445			—			683			—
Defined benefits post-retirement benefit plan:
Change in net actuarial loss	(1,090		)	43			(430		)	17			(660		)	26
Total other comprehensive income	$	15,112		$	13,876		$	5,961		$	5,460		$	9,151		$	8,416

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



	September 30, 2017			December 31, 2016
Net unrealized gain (loss) on investment securities available-for-sale	$	(353	)	$	(10,143	)
Net unrealized gain (loss) on derivatives	—			(23		)
Net actuarial gain (loss) on defined benefit post-retirement benefit plans	1,376			2,038
Net accumulated other comprehensive gain (loss)	$	1,023		$	(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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

•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 nine months ended September 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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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 September 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	$	3,205	$	—	$	3,205	$	—
Obligations of U.S. government agencies	505,578			—	505,578			—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	1,435,238			—	1,435,238			—
Private mortgage-backed securities	97,838			—	97,838			—
Corporate securities	66,878			—	66,878
Other investments	2,960			—	2,960			—
Loans held for sale	49,729			—	49,729			—
Derivative assets:
Interest rate swap contracts	8,764			—	8,764			—
Interest rate lock commitments	1,627			—	1,627			—
Forward loan sale contracts	330			—	330			—
Derivative liabilities:
Interest rate swap contracts	9,099			—	9,099			—
Deferred compensation plan assets	11,632			—	11,632			—
Deferred compensation plan liabilities	11,632			—	11,632			—

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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	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 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 September 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	$	34,489	$	—	$	—	$	34,489
Other real estate owned	1,578			—		—	1,578
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 September 30, 2017, certain impaired loans with a carrying value of $58,523 were reduced by specific valuation allowance allocations of $13,903 and partial loan charge-offs of $10,131 resulting in a reported fair value of $34,489.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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 $290 during the nine months ended September 30, 2017 included $259 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 nine months ended September 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 September 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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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
	September 30, 2017		December 31, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	34,489	$	39,344	Appraisal	Appraisal adjustment	0%	-	66%	(31%)
Other real estate owned	1,578		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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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 September 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	$	882,834	$	882,834	$	882,834	$	—	$	—
Investment securities available-for-sale	2,111,697		2,111,697		—		2,111,697		—
Investment securities held-to-maturity	505,985		510,405		—		510,405		—
Accrued interest receivable	40,621		40,621		—		40,621		—
Mortgage servicing rights, net	24,372		38,142		—		38,142		—
Loans held for sale	49,729		49,729		—		49,729		—
Net loans held for investment	7,427,815		7,163,825		—		7,129,336		34,489
Derivative assets	10,721		10,721		—		10,721		—
Deferred compensation plan assets	11,632		11,632		—		11,632		—
Total financial assets	$	11,065,406	$	10,819,606	$	882,834	$	9,902,283	$	34,489

Financial liabilities:
Total deposits, excluding time deposits	$	8,751,295	$	8,751,295	$	8,751,295	$	—	$	—
Time deposits	1,182,173		1,172,783		—		1,172,783		—
Securities sold under repurchase agreements	635,288		635,288		—		635,288		—
Other borrowed funds	30,008		30,008		—		30,008		—
Accrued interest payable	5,648		5,648		—		5,648		—
Long-term debt	8,039		8,266		—		8,266		—
Subordinated debentures held by subsidiary trusts	82,477		92,303		—		92,303		—
Derivative liabilities	9,099		9,099		—		9,099		—
Deferred compensation plan liabilities	11,632		11,632		—		11,632		—
Total financial liabilities	$	10,715,659	$	10,716,322	$	8,751,295	$	1,965,027	$	—

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(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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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.

The Company will adopt the new revenue recognition standard in the first quarter 2018 using the modified retrospective method of adoption, with a cumulative effect adjustment to the beginning balance of retained earnings, if such an adjustment is deemed significant. The Company's revenue is the sum of net interest income and non-interest income. The scope of the guidance explicitly excludes net interest income, as well as other revenues for financial assets and liabilities, including loans, leases, securities and derivatives. Accordingly, the majority of the Company's revenues will not be affected. The Company expects that ASU 2014-09 will require a change to how certain recurring revenue streams within wealth management and other categories of non-interest income are recognized. However, the Company does not expect these changes to have a significant impact on its results of operations. While the assessment of the aforementioned provisions of ASU 2014-09 is not complete, the Company's accounting policies are not expected to change materially, as the principles of revenue recognition from the updates are largely consistent with existing guidance and current practices. The Company does not anticipate material changes to the timing or amount of revenue recognized, and we will continue to evaluate any impact as additional guidance is issued and internal assessments progress.

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

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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.

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 $2.4 reduction in income tax expense during the nine months ended September 30, 2017, of which $1.9 was due to the recognition of excess tax benefits related to outstanding stock option awards exercised during the period and $0.5 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.

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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, 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

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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.

ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2018. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the beginning balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

(17) Subsequent Events

Subsequent events have been evaluated for potential recognition and disclosure through the date financial statements were filed with the SEC. On October 16, 2017, the Company declared a quarterly dividend to common shareholders of $0.24 per share, to be paid on November 13, 2017 to shareholders of record as of October 31, 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 subsidiary, First Interstate Bank ("FIB"), referred to as the "Bank", 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 the 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 the Quarterly Report on 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.

Executive Overview

We are a financial holding company headquartered in Billings, Montana. As of September 30, 2017, we had consolidated assets of $12.2 billion, deposits of $9.9 billion, loans of $7.6 billion and total stockholders’ equity of $1.4 billion. We currently operate 126 banking offices, including detached drive-up facilities, in communities across Montana, Wyoming, South Dakota,

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Oregon, Idaho, and Washington. Through our bank subsidiary, FIB, 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 ("BOTC"), 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. Integration of BOTC into FIB was completed on August 11, 2017.

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 acquired deposits and considered a fair market value purchase accounting adjustment. The remainder was recognized as a second quarter 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. Due to attrition in the HSA portfolio between the second quarter date of sale and third quarter transfer of balances, we recognized a $0.3 million reduction in gain during the three months ended September 30, 2017. Total health savings accounts of approximately $55.2 million were transferred to HealthEquity during the third quarter of 2017.

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 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.

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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.

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.

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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 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.

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Results of Operations

The financial statements as of September 30, 2017 are inclusive of the effects of the combined results of operations including the BOTC acquisition. Due to the timing of the acquisition, certain comparisons between periods are significantly affected by the transaction.

•Net income for the third quarter 2017 was $27.3 million, or $0.48 per share, compared to $21.9 million, or $0.45 per share, for the second quarter 2017 ("linked quarter") and $25.2 million, or $0.56 per share, for the third quarter 2016.

•Acquisition related expenses were $13.0 million, $10.1 million and $1.2 million for the third quarter and second quarter 2017 and third quarter 2016, respectively. The after-tax impact of acquisition related expenses on earnings per share was $0.15, $0.14 and $0.02 per share for the respective periods.

•Net interest income was $100.8 million for the third quarter, up from $79.3 million in the linked quarter and $70.6 million in the third quarter 2016. Increases over the prior periods were largely a result of the full quarter impact of the BOTC acquisition.

•Net interest margin (“NIM”) improved to 3.71% from 3.60% in the linked quarter and 3.58% in the third quarter 2016. The NIM benefited from a higher yield on elevated levels of earning assets.

•Non-interest income was $38.3 million, as compared to $37.2 million in the linked quarter and $35.2 million in the third quarter 2016. Exclusive of a linked quarter $3.4 million gain on sale related to the custodial rights to the Company's health savings accounts ("HSA"), third quarter 2017 increased $4.5 million, or 13.4%, quarter-over-quarter, primarily resulting from the impact of the acquired non-interest revenue streams.

•Non-interest expense was $94.7 million for the third quarter, as compared to $80.4 million for the linked quarter and $65.4 million for the third quarter 2016. Non-interest expense included $13.0 million, $10.1 million and $1.2 million of acquisition related costs for the third quarter and second quarter 2017 and third quarter 2016, respectively. Elevated levels for non-interest expense, exclusive of acquisition costs, were primarily related to staffing and operating the expanded branch network following the acquisition.

•The third quarter 2017 efficiency ratio was 68.1%, down slightly from 69.0% for the second quarter 2017 and up from 61.9% for the third quarter 2016. Efficiency ratios in all three periods were elevated as a result of acquisition costs incurred in each quarter.

•Gross loan balances at September 30, 2017 were down slightly from the linked quarter and up $2.1 billion from December 31, 2016, primarily as a result of the BOTC acquisition. Yields on average loans for the three and nine months ended September 30, 2017 improved to 4.96% and 4.89%, respectively.

•Asset quality improved in third quarter 2017 compared to the linked quarter, with a $6.8 million decrease in non-performing assets and a $7.1 million decrease in criticized loans.

•Investment securities increased $493.2 million to $2.6 billion from $2.1 billion at December 31, 2016, primarily as a result of the acquisition.

•Deposit balances at September 30, 2017 were $9.9 billion, up 34.7% as compared to the prior year end, primarily as a result of the acquisition.

•The allowance for loan losses at the end of the third quarter was 0.99% of period-end loans, stable as compared to the linked quarter and down from 1.47% at the end of third quarter 2016. The decrease from the third quarter 2016 was primarily a result of higher acquired loan balances from BOTC, which were recorded at fair value in purchase accounting, with no corresponding allowance for loan losses.

•At September 30, 2017, stockholders’ equity increased over the linked quarter to $1.4 billion, primarily due to the net income from the third quarter. Book value per share was $25.14, $24.90 and $21.89 for the current, linked and third quarter 2016, respectively.

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.

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Average Balance Sheets, Yields and Rates
(Dollars in thousands)	Three Months Ended September 30,
	2017							2016
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	7,579,350	$	94,716		4.96	%	$	5,469,294	$	66,291		4.82	%
Investment securities (2)	2,601,781		12,844			1.96		2,038,498		9,191			1.79
Interest bearing deposits in banks	709,815		2,314			1.29		458,415		607			0.53
Federal funds sold	783		3			1.52		2,183		4			0.73
Total interest earnings assets	10,891,729		109,877			4.00		7,968,390		76,093			3.80
Non-earning assets	1,359,476							777,083
Total assets	$	12,251,205						$	8,745,473
Interest bearing liabilities:
Demand deposits	$	2,785,911	$	1,637		0.23	%	$	2,141,892	$	514		0.10	%
Savings deposits	3,209,712		2,286			0.28		2,055,083		647			0.13
Time deposits	1,194,265		2,274			0.76		1,088,261		1,938			0.71
Repurchase agreements	597,629		350			0.23		466,079		100			0.09
Other borrowed funds	20,015		350			6.94		8		—			—
Long-term debt	19,854		258			5.16		27,917		457			6.51
Subordinated debentures held by subsidiary trusts	82,477		819			3.94		82,477		698			3.37
Total interest bearing liabilities	7,909,863		7,974			0.40		5,861,717		4,354			0.30
Non-interest bearing deposits	2,826,522							1,843,800
Other non-interest bearing liabilities	105,009							66,822
Stockholders’ equity	1,409,811							973,134
Total liabilities and stockholders’ equity	$	12,251,205						$	8,745,473
Net FTE interest income			101,903							71,739
Less FTE adjustments (2)			(1,112		)					(1,158		)
Net interest income from consolidated statements of income			$	100,791						$	70,581
Interest rate spread						3.60	%						3.50	%
Net FTE interest margin (3)						3.71	%						3.58	%
Cost of funds, including non-interest bearing demand deposits (4)						0.29	%						0.22	%


(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)	Nine Months Ended September 30,
	2017							2016
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	6,384,064	$	233,547		4.89	%	$	5,339,479	$	192,910		4.83	%
Investment securities (2)	2,333,622		33,902			1.94		2,080,454		27,950			1.79
Interest bearing deposits in banks	620,514		4,859			1.05		441,748		1,734			0.52
Federal funds sold	898		8			1.19		1,789		9			0.67
Total interest earnings assets	9,339,098		272,316			3.90		7,863,470		222,603			3.78
Non-earning assets	1,060,039							762,979
Total assets	$	10,399,137						$	8,626,449
Interest bearing liabilities:
Demand deposits	$	2,485,994	$	3,954		0.21	%	$	2,140,981	$	1,587		0.10	%
Savings deposits	2,617,304		5,455			0.28		2,008,032		1,949			0.13
Time deposits	1,094,488		5,917			0.72		1,101,205		5,899			0.72
Repurchase agreements	574,461		870			0.20		471,165		282			0.08
Other borrowed funds	20,018		1,039			6.94		8		—			—
Long-term debt	12,031		503			5.59		28,313		1,357			6.40
Subordinated debentures held by subsidiary trusts	82,477		2,346			3.80		82,477		2,036			3.30
Total interest bearing liabilities	6,886,773		20,084			0.39		5,832,181		13,110			0.30
Non-interest bearing deposits	2,257,082							1,779,344
Other non-interest bearing liabilities	73,647							60,301
Stockholders’ equity	1,181,635							954,623
Total liabilities and stockholders’ equity	$	10,399,137						$	8,626,449
Net FTE interest income			252,232							209,493
Less FTE adjustments (2)			(3,225		)					(3,329		)
Net interest income from consolidated statements of income			$	249,007						$	206,164
Interest rate spread						3.51	%						3.48	%
Net FTE interest margin (3)						3.61	%						3.56	%
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 $30.2 million, or 42.0%, to $101.9 million during the three months ended September 30, 2017, as compared to $71.7 million for the same period in 2016, and $42.7 million, or 20.4% to $252.2 million during the nine months ended September 30, 2017, as compared to $209.5 million for the same period in 2016. These increases were primarily attributable to higher outstanding loan balances as a result of the BOTC acquisition. 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 nine months ended September 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 $4.0 million during the three months ended September 30, 2017, of which $2.1 million was the result of early loan payoffs, and $6.9 million during the nine months ended September 30, 2017, of which $2.9 million was the result of early loan payoffs. This compares to $1.4 million during the three months ended September 30,

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2016, of which $0.8 million was the result of early loan payoffs, and $4.7 million during the nine months ended September 30, 2016, of which $2.1 million was the result of early loan payoffs.

Recoveries of charged-off interest also impacted net FTE interest income. Charged-off interest recoveries were $2.0 million and $4.6 million during the three and nine months ended September 30, 2017, as compared to $1.8 million and $2.2 million during the same respective periods in 2016.

Our net interest margin ratio increased 13 basis points to 3.71% for the three months ended September 30, 2017, as compared to 3.58% for the same period in 2016. Similarly, our net interest margin ratio increased 5 basis points to 3.61% for the nine months ended September 30, 2017, as compared to 3.56% for the same period in 2016. Increases in net FTE interest margin ratio during the three months ended September 30, 2017, as compared to the same period in 2016, were primarily due to increases in average outstanding loans and higher yields on interest earning assets, offset by a 7 basis point increase in funding costs. The net FTE interest margin ratio of 3.61% improved during the nine months ended September 30, 2017, as compared to the same period in 2016, with higher yields on increased levels of interest earning assets partially 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 3.49% during the three months ended September 30, 2017, as compared to 3.42% for the same period in 2016, and 3.45% during the nine months ended September 30, 2017, as compared to 3.44% 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 September 30, 2017 compared with Three Months Ended September 30, 2016									Nine Months Ended September 30, 2017 compared with Nine Months Ended September 30, 2016
	Volume			Rate			Net			Volume			Rate			Net
Interest earning assets:
Loans (1)	$	25,575		$	2,850		$	28,425		$	37,740		$	2,897		$	40,637
Investment securities (1)	2,540			1,113			3,653			3,401			2,551			5,952
Interest bearing deposits in banks	333			1,374			1,707			702			2,423			3,125
Federal funds sold	(3		)	2			(1		)	(4		)	3			(1		)
Total change	28,445			5,339			33,784			41,839			7,874			49,713
Interest bearing liabilities:
Demand deposits	151			972			1,123			256			2,111			2,367
Savings deposits	356			1,283			1,639			591			2,915			3,506
Time deposits	185			151			336			(36		)	54			18
Repurchase agreements	28			222			250			62			526			588
Other borrowed funds	—			350			350			—			1,039			1,039
Long-term debt	(129		)	(70		)	(199		)	(780		)	(74		)	(854		)
Subordinated debentures held by subsidiary trusts	—			121			121			—			310			310
Total change	591			3,029			3,620			93			6,881			6,974
Increase in FTE net interest income	$	27,854		$	2,310		$	30,164		$	41,746		$	993		$	42,739

(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 $3.4 million during the three months ended September 30, 2017, as compared to $2.4 million during same period in 2016. The increase in provision for loan loss over the third quarter 2016 was primarily a result of a higher level of charge-offs. During the nine months ended September 30, 2017, the Company recorded a provision for loan losses of $7.5 million, as compared to $8.9 million during the same period in 2016. The year-over-year decrease in provision for loan loss is

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reflective of a decline in specific reserves along with improving allocation rates for current economic conditions, policies and procedures.

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.

Non-interest income was as follows for the periods presented below (dollars in thousands):



	Three Months Ended September 30,					% Change		Nine Months Ended September 30,					% Change
	2017			2016		% Change		2017			2016		% Change
Payment services revenues	$	12,366		$	9,019	37.1	%	$	31,036		$	25,658	21.0	%
Mortgage banking revenues	8,251			11,303		(27.0	)	22,442			28,311		(20.7	)
Wealth management revenues	5,544			4,995		11.0		15,641			14,736		6.1
Service charges on deposit accounts	5,904			4,692		25.8		15,314			13,781		11.1
Other service charges, commissions and fees	3,584			2,628		36.4		9,618			8,081		19.0
Loss on termination of interest rate swap	(1,128		)	—		100.0		(1,128		)	—		100.0
Investment securities gains (losses), net	771			225		242.7		778			312		149.4
Other income	2,982			2,299		29.7		10,860			7,049		54.1
Non-recurring litigation recovery	—			—		—		—			3,750		(100.0	)
Total non-interest income	$	38,274		$	35,161	8.9	%	$	104,561		$	101,678	2.8	%

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 $3.1 million, or 8.9%, to $38.3 million for the three months ended September 30, 2017, as compared to $35.2 million for the same period in 2016, and $2.9 million, or 2.8%, to $104.6 million for the nine months ended September 30, 2017, as compared to $101.7 million during the same period in 2016.

Non-interest income for the nine months ended September 30, 2017, includes a one-time net gain of $3.1 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 $6.2 million, of which $3.1 million was attributable to BOTC acquired deposits and reduced the core deposit intangible recorded in the acquisition. Additionally, non-interest income for the nine months ended September 30, 2016 included a $3.8 million non-recurring litigation recovery. Exclusive of these items, total non-interest income increased $3.6 million during the nine months ended September 30, 2017 when compared to the same period in 2016. Significant components of the change in non-interest income between comparable periods 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 $3.3 million, or 37.1%, to $12.4 million during the three months ended September 30, 2017, as compared to $9.0 million during the same period in 2016. Increases are largely a result of the BOTC activity included for the full quarter, as well as normal seasonality experienced in the summer months. For the nine months ended September 30, 2017, payment services revenue increased $5.4 million when compared to the same period in 2016.

Mortgage banking revenues decreased $3.1 million, or 27.0%, to $8.3 million and decreased $5.9 million, or 20.7%, to $22.4 million during the three and nine months ended September 30, 2017, as compared to $11.3 million and $28.3 million during the same periods in 2016. The decreases from the respective periods are mainly attributable to a softening in the refinance market, given where we are in the interest rate cycle. Our overall loan production for originated home purchases was approximately 78.7% and 73.2% of production for the three and nine months ended September 30, 2017, respectively, compared to 56.4% and 60.6% for the same periods in 2016.

Non-interest Expense.

Non-interest expense was as follows for the periods presented below (dollars in thousands):

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	Three Months Ended September 30,						% Change		Nine Months Ended September 30,						% Change
	2017			2016			% Change		2017			2016			% Change
Salaries and wages	$	34,662		$	26,908		28.8	%	$	88,440		$	79,755		10.9	%
Employee benefits	10,185			8,610			18.3		29,612			26,285			12.7
Outsourced technology services	6,569			5,211			26.1		17,869			14,843			20.4
Occupancy, net	6,059			4,413			37.3		16,028			13,361			20.0
Furniture and equipment	3,151			2,398			31.4		8,163			7,114			14.7
OREO expense, net of income	242			8			2,925.0		228			109			109.2
Professional fees	1,888			1,191			58.5		4,712			3,635			29.6
FDIC insurance premiums	1,666			1,212			37.5		3,327			3,668			(9.3	)
Mortgage servicing rights amortization	816			854			(4.4	)	2,135			2,210			(3.4	)
Mortgage servicing rights impairment (recovery)	(12		)	(16		)	(25.0	)	(84		)	(21		)	300.0
Core deposit intangibles amortization	1,885			875			115.4		3,577			2,529			41.4
Other expenses	14,529			12,542			15.8		40,887			36,740			11.3
Acquisition related expenses	13,016			1,197			987.4		23,854			1,197			1,892.8
Total non-interest expense	$	94,656		$	65,403		44.7	%	$	238,748		$	191,425		24.7	%

Non-interest expense increased $29.3 million, or 44.7%, to $94.7 million during the three months ended September 30, 2017 as compared to the same period in 2016. Included in non-interest expenses for the three months ended September 30, 2017 and 2016 are $13.0 million and $1.2 million, respectively, of expenses related to acquisitions, including legal fees, consulting fees, investment banking fees, conversion and contract termination costs, and retention and severance compensation costs. For the nine months ended September 30, 2017, non-interest expense increased $47.3 million, or 24.7%, to $238.7 million when compared to the same period in 2016. Included in non-interest expenses for the nine months ended September 30, 2017 and 2016 are $23.9 million and $1.2 million of acquisition related expenses, respectively. 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.

Salaries and wages expense increased $7.8 million, or 28.8%, to $34.7 million during the three months ended September 30, 2017, as compared to $26.9 million during the same period in 2016, primarily due to the acquisition of BOTC. Salaries and wages expense increased $8.7 million, or 10.9%, to $88.4 million during the nine months ended September 30, 2017, as compared to $79.8 million during the same period in 2016, due to the impact of BOTC and Flathead acquisitions.

Core deposit intangible amortization expense increased $1.0 million, or 115.4%, to $1.9 million during the three months ended September 30, 2017 as compared to $0.9 million in the same period of 2016 with the increase attributable to the BOTC acquisition. For the nine months ended September 30, 2017 core deposit amortization expense increased $1.0 million 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 the acquisition of BOTC.

Other expenses increased $2.0 million, or 15.8%, to $14.5 million during the three months ended September 30, 2017, as compared to $12.5 million during the same period in 2016, primarily due to normal fluctuations in operating expenses and the acquisition of BOTC. For the nine months ended September 30, 2017, other expenses increased $4.1 million, or 11.3%, to $40.9 million as compared to the same period in 2016 primarily due to the acquisition of BOTC, which were partially offset by efficiencies from the continued scalability initiatives of the Company.

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

Income Tax Expense. Our effective tax rate decreased slightly to 33.5% for the three months ended September 30, 2017 compared to 33.7% for the three months ended September 30, 2016. Similarly, our effective rate decreased to 32.7% for the nine months ended September 30, 2017 as compared to 34.1% in the same period of 2016. Both decreases were a result of the January 1, 2017 adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)." Our income tax expense for the three and nine months ended September 30, 2017 includes a tax benefit of $0.3 million and $2.3 million, respectively, 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 nine months ended September 30, 2017 was 34.8%. The remaining fluctuation was largely a result of a higher ratio of taxable to tax-exempt income and additional state taxes due to higher rates in the expanded footprint as a result of the BOTC acquisition.

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Financial Condition

Total Assets. Total assets increased $3.1 billion, or 34.7% to $12.2 billion as of September 30, 2017, from $9.1 billion as of December 31, 2016, primarily as a result of the acquisition of BOTC. Significant fluctuations in balance sheet accounts are discussed below.

Total Loans. Total loans increased $2.1 billion, or 37.8%, to $7.6 billion as of September 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 $13.4 million 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 held for investment grew organically $25.6 million from December 31, 2016. Significant contributing portfolios are discussed in greater detail below:

Total real estate loans increased $1.6 billion, or 45.7%, to $5.1 billion as of September 30, 2017. Included in this portfolio, commercial real estate loans increased $924.1 million, or 50.4%, to $2.8 billion as of September 30, 2017. Exclusive of the BOTC acquisition, total commercial real estate loans decreased $33.9 million, or 1.9%, from December 31, 2016. Construction loans increased $221.2 million, or 45.9%, to $703.2 million as of September 30, 2017, from $482.0 million as of December 31, 2016. Exclusive of acquired BOTC loans, construction loans decreased $16.1 million, or 3.3%, from December 31, 2016. Residential real estate loans increased $471.6 million, or 45.9%, to $1.5 billion as of September 30, 2017. Exclusive of acquired BOTC loans, residential real estate loans increased $11.5 million, or 1.1%, from December 31, 2016.

Indirect consumer loans increased $36.4 million, or 4.8%, to $788.8 million as of September 30, 2017, from $752.4 million as of December 31, 2016, with all of the increase attributable to organic growth. The BOTC acquisition provides the Company with the opportunity to expand this portfolio to clients in Washington, Oregon and Idaho.

Commercial loans increased $388.3 million, or 48.7%, to $1.2 billion as of September 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 $29.0 million, or 3.6% 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 $12.1 million, or 19.5%, to $49.7 million as of September 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.

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)	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016
Non-performing loans:
Non-accrual loans	$	74,480		$	76,687		$	74,580		$	72,793		$	71,469
Accruing loans past due 90 days or more	5,665			9,362			4,527			3,789			8,131

Total non-performing loans	80,145			86,049			79,107			76,582			79,600
OREO	10,344			11,286			9,428			10,019			9,447

Total non-performing assets	$	90,489		$	97,335		$	88,535		$	86,601		$	89,047

Troubled debt restructurings not included above	$	10,862		$	14,956		$	16,379		$	22,343		$	17,163

Non-performing loans to total loans	1.06		%	1.14		%	1.47		%	1.40		%	1.44		%
Non-performing assets to total loans and OREO	1.20		%	1.29		%	1.64		%	1.58		%	1.61		%
Non-performing assets to total assets	0.74		%	0.80		%	0.98		%	0.96		%	0.99		%

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

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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)	September 30, 2017		Percent of Total		December 31, 2016		Percent of Total
Real estate:
Commercial	$	30,544	38.1	%	$	26,514	34.6	%
Construction:
Land acquisition and development	4,785		6.0		5,304		6.9
Commercial	3,844		4.8		762		1.0
Residential	675		0.8		456		0.6
Total construction	9,304		11.6		6,522		8.5
Residential	5,898		7.4		7,137		9.3
Agricultural	2,218		2.7		4,327		5.7
Total real estate	47,964		59.8		44,500		58.1
Consumer	2,949		3.7		2,894		3.8
Commercial	27,609		34.4		26,166		34.2
Agricultural	1,623		2.0		3,022		3.9
Other	—		—		—		—
Total non-performing loans	$	80,145	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 $2.5 million would have been accrued for the nine months ended September 30, 2017 and 2016, respectively. Non-accrual loans increased approximately $1.7 million, to $74.5 million as of September 30, 2017, from $72.8 million as of December 31, 2016. Accruing loans past due 90 days or more increased $1.9 million, or 49.5%, from December 31, 2016, primarily due to the loans purchased in the BOTC acquisition. The decline in the non-performing ratios from December 31, 2016 was a result of higher loan balances and total assets from the BOTC acquisition.

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:

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(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 September 30, 2017, management determined that an allowance of $727 thousand related to loans acquired in prior year acquisitions with evidence of credit impairment 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.

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.

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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
	September 30,			June 30,			March 31,			December 31,			September 30,
	2017			2017			2017			2016			2016
Balance at beginning of period	$	75,701		$	76,231		$	76,214		$	81,235		$	80,340
Provision charged to operating expense	3,443			2,355			1,730			1,078			2,363
Charge offs:
Real estate
Commercial	1,070			527			18			2,382			173
Construction	447			(7		)	259			—			72
Residential	178			444			167			—			135
Agricultural	—			21			—			8			—
Consumer	3,115			2,412			2,596			2,846			2,157
Commercial	2,609			1,044			793			3,754			578
Agricultural	41			49			22			(5		)	—
Total charge-offs	7,460			4,490			3,855			8,985			3,115
Recoveries:
Real estate
Commercial	293			290			371			38			83
Construction	177			25			96			313			31
Residential	136			—			53			113			103
Agricultural	7			(6		)	4			4			4
Consumer	962			1,109			1,205			615			742
Commercial	1,313			158			391			1,802			680
Agricultural	—			29			22			1			4
Total recoveries	2,888			1,605			2,142			2,886			1,647
Net charge-offs	4,572			2,885			1,713			6,099			1,468
Balance at end of period	$	74,572		$	75,701		$	76,231		$	76,214		$	81,235

Period end loans	$	7,552,116		$	7,555,973		$	5,399,779		$	5,478,544		$	5,530,915
Average loans	7,579,350			6,128,867			5,420,245			5,493,911			5,469,294
Net loans charged-off to average loans, annualized	0.24		%	0.19		%	0.13		%	0.44		%	0.11		%
Allowance to period end loans	0.99		%	1.00		%	1.41		%	1.39		%	1.47		%

Our allowance for loan losses was $74.6 million, or 0.99% of period end loans, as of September 30, 2017. Declines in the percentage of allowance for loan losses to period end loans in recent quarters 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 $493.2 million, or 23.2%, to $2.6 billion, or 21.4% of total assets, as of September 30, 2017, from $2.1 billion, or 23.4% of total assets, as of December 31, 2016. The increase is attributable to the acquisition of BOTC. As of September 30, 2017, the estimated duration of our investment portfolio was 2.6 years, as compared to 3.0 years as of December 31, 2016.

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 September 30, 2017, we had investment securities with fair values aggregating $189.6 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities of $3.2 million as of September 30, 2017 were attributable to changes in interest rates. No impairment losses were recorded during the three and nine months ended September 30, 2017 or 2016.

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Cash and Cash Equivalents. Cash and cash equivalents increased $100.8 million, or 12.9%, to $882.8 million as of September 30, 2017, from $782.0 million as of December 31, 2016. During the first nine months of 2017, cash and cash equivalents increased as a result of the acquisition of BOTC, which were partially offset by loan growth funded through available funds.

Goodwill and Other Intangible Assets. Goodwill increased $232.2 million, from $212.8 million as of December 31, 2016, to $445.0 million as of September 30, 2017. Core deposit intangibles, net of accumulated amortization, increased $41.3 million from $9.6 million as of December 31, 2016, to $51.0 million as of September 30, 2017. These increases are attributable to provisional goodwill and core deposit intangibles recorded in conjunction with the acquisition of BOTC.

Other Assets. Other assets increased $68.2 million, or 83.4%, to $149.9 million as of September 30, 2017, from $81.7 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 $5.3 million as of September 30, 2017, from a net deferred tax liability of $6.8 million as of December 31, 2016, primarily as a result of increases in net deferred tax assets resulting from the acquisition of BOTC, partially offset by 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 $2.6 billion, or 34.7%, to $9.9 billion as of September 30, 2017, from $7.4 billion as of December 31, 2016, as a result of deposits acquired in the acquisition of BOTC. The following table summarizes our deposits as of the dates indicated:



Deposits
(Dollars in thousands)	September 30, 2017		Percent of Total		December 31, 2016		Percent of Total
Non-interest bearing demand	$	2,965,332	29.9	%	$	1,906,257	25.8	%
Interest bearing:
Demand	2,693,266		27.1		2,276,494		30.9
Savings	3,092,697		31.1		2,141,761		29.0
Time, $100 and over	452,853		4.6		461,368		6.3
Time, other (1)	729,320		7.3		590,230		8.0
Total interest bearing	6,968,136		70.1		5,469,853		74.2
Total deposits	$	9,933,468	100.0	%	$	7,376,110	100.0	%


(1)	Included in Time, other are Certificate of Deposit Account Registry Service, or CDAR, deposits of $89.0 million as of September 30, 2017 and $25.7 million as of December 31, 2016.

Other Borrowings and Long-term Debt. Other borrowings increased to $30.0 million as of September 30, 2017, as compared to $6 thousand as of December 31, 2016. Long-term debt decreased to $8.0 million as of September 30, 2017, as compared to $28.0 million as of December 31, 2016. The fluctuation in both balances relates to the reclassification of $20.0 million of subordinated debt, as the maturity of the debt is now under one year.

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 $436.8 million, or 44.5%, to $1.4 billion as of September 30, 2017, from $982.6 million as of December 31, 2016, due to the retention of earnings, increases in unrealized holding gains on available-for-sale investment securities, net of taxes, proceeds from stock option exercises, and the issuance of additional shares of Class A common stock with an aggregate value of $386.0 million as partial consideration for the acquisition of BOTC.

On October 16, 2017, the Company's board of directors declared a quarterly dividend of $0.24 per common share, payable on November 13, 2017, to owners of record as of October 31, 2017. The dividend equates to a 2.63% annual yield based on the $36.23 average closing price of the Company's common stock during the third quarter of 2017.

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deductions and adjustments to regulatory capital began phasing in starting January 1, 2015 and will be fully implemented on January 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 September 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.



	Actual				Regulatory minimum to be "well capitalized" (1)
	Amount		Ratio		Amount		Ratio
September 30, 2017
Total risk-based capital:
Consolidated	$	1,100,588	12.76	%	$	862,253	10.00	%
FIB	1,097,287		12.78		858,350		10.00
Tier 1 risk-based capital:
Consolidated	1,026,016		11.90		689,802		8.00
FIB	1,022,715		11.91		686,680		8.00
Common equity tier 1 risk-based capital:
Consolidated	949,821		11.02		560,464		6.50
FIB	1,022,715		11.91		557,928		6.50
Leverage capital ratio:
Consolidated	1,026,016		8.71		589,026		5.00
FIB	1,022,715		8.72		586,384		5.00



	Actual				Regulatory minimum to be "well capitalized" (1)
	Amount		Ratio		Amount		Ratio
December 31, 2016
Total risk-based capital:
Consolidated	$	974,488	15.13	%	$	643,876	10.00	%
FIB	841,967		13.13		641,320		10.00
Tier 1 risk-based capital:
Consolidated	894,273		13.89		$	515,101	8.00
FIB	765,753		11.94		513,056		8.00
Common equity tier 1 risk-based capital:
Consolidated	814,273		12.65		$	418,519	6.50
FIB	765,753		11.94		416,858		6.50
Leverage capital ratio:
Consolidated	894,273		10.11		$	442,297	5.00
FIB	765,753		8.69		440,353		5.00

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

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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 Bank and, therefore, we provide for our own liquidity. Our main sources of funding include management fees and dividends declared and paid by our subsidiary and access to capital markets. There are statutory, regulatory and debt covenant limitations that affect the ability of our Bank to pay dividends to us. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.

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 September 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 September 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 September 30, 2017 were effective in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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

Limitations on Controls and Procedures

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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

There have been no material changes in risk factors described in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.


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 September 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 September 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
July 2017	—	$	—	—	24,123
August 2017	—	—		—	24,123
September 2017	1,273	36.81		—	24,123
Total	1,273	$	36.81	—	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

None.

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Item 6. Exhibits



Exhibit Number		Description

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.

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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:	November 8, 2017	By:	/S/ KEVIN P. RILEY
			Kevin P. Riley
			President and Chief Executive Officer

Date:	November 8, 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

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.

First Interstate BancSystem - 10-Q quarterly report FY2017 Q3

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