FIRST INTERSTATE BANCSYSTEM INC - FORM 10-Q

Attached files

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EX-32 - SECTION 1350 CERTIFICATIONS - FIRST INTERSTATE BANCSYSTEM INC	fibk-20160930xex32.htm
EX-31.2 - CHIEF FINANCIAL OFFICER CERTIFICATION - FIRST INTERSTATE BANCSYSTEM INC	fibk-20160930xex312.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION - FIRST INTERSTATE BANCSYSTEM INC	fibk-20160930xex311.htm

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, 2016


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

For the transition period from to

COMMISSION FILE NUMBER 001-34653

________________________________________________________________________________________________________

First Interstate BancSystem, Inc.

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________________________



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

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

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

______________________________________________________________

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

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

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



Large accelerated filer	¨	Accelerated filer	ý

Non-accelerated filer	¨	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:



	September 30, 2016 – Class A common stock		21,459,481
	September 30, 2016 – Class B common stock		23,420,517

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, 2016 and December 31, 2015	3

	Consolidated Statements of Income - Three and Nine Months Ended September 30, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and 2015	5

	Consolidated Statements of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2016 and 2015	6

	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and 2015	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58

Item 4.	Controls and Procedures	59

Part II.	Other Information

Item 1.	Legal Proceedings	59

Item 1A .	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

Signatures		61

Table of Contents

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

	September 30, 2016		December 31, 2015
Assets
Cash and due from banks	$	148,690	$	132,595
Interest bearing deposits in banks	550,531		647,299
Federal funds sold	2,146		563
Total cash and cash equivalents	701,367		780,457
Investment securities:
Available-for-sale	1,533,221		1,456,840
Held-to-maturity (estimated fair values of $554,048 and $607,550 at September 30, 2016 and December 31, 2015, respectively)	539,052		600,665
Total investment securities	2,072,273		2,057,505
Loans held for investment	5,462,936		5,193,321
Mortgage loans held for sale	67,979		52,875
Total loans	5,530,915		5,246,196
Less allowance for loan losses	81,235		76,817
Net loans	5,449,680		5,169,379
Goodwill	212,820		204,523
Company-owned life insurance	197,070		187,253
Premises and equipment, net of accumulated depreciation	191,064		190,812
Accrued interest receivable	31,002		27,729
Mortgage servicing rights, net of accumulated amortization and impairment reserve	17,322		15,621
Core deposit intangibles, net of accumulated amortization	10,546		10,589
Other real estate owned (“OREO”)	9,447		6,254
Other assets	81,256		78,074
Total assets	$	8,973,847	$	8,728,196
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	1,965,872	$	1,823,716
Interest bearing	5,362,709		5,265,221
Total deposits	7,328,581		7,088,937
Securities sold under repurchase agreements	476,768		510,635
Accounts payable and accrued expenses	55,050		53,042
Accrued interest payable	5,622		4,960
Deferred tax liability	14,888		9,765
Long-term debt	27,949		27,885
Other borrowed funds	8		2
Subordinated debentures held by subsidiary trusts	82,477		82,477
Total liabilities	7,991,343		7,777,703
Stockholders’ equity:
Nonvoting noncumulative preferred stock without par value; authorized 100,000 shares; no shares issued and outstanding as of September 30, 2016 or December 31, 2015	—		—
Common stock	293,960		311,720
Retained earnings	679,722		638,367
Accumulated other comprehensive income, net	8,822		406
Total stockholders’ equity	982,504		950,493
Total liabilities and stockholders’ equity	$	8,973,847	$	8,728,196

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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,
	2016			2015			2016			2015
Interest income:
Interest and fees on loans	$	65,626		$	62,062		$	191,076		$	181,835
Interest and dividends on investment securities:
Taxable	7,878			7,410			23,898			23,381
Exempt from federal taxes	820			962			2,557			3,061
Interest on deposits in banks	607			342			1,734			1,002
Interest on federal funds sold	4			4			9			11
Total interest income	74,935			70,780			219,274			209,290
Interest expense:
Interest on deposits	3,099			3,241			9,435			9,789
Interest on securities sold under repurchase agreements	100			55			282			162
Interest on long-term debt	457			544			1,357			1,596
Interest on subordinated debentures held by subsidiary trusts	698			610			2,036			1,800
Total interest expense	4,354			4,450			13,110			13,347
Net interest income	70,581			66,330			206,164			195,943
Provision for loan losses	2,363			1,098			8,913			3,533
Net interest income after provision for loan losses	68,218			65,232			197,251			192,410
Non-interest income:
Payment services revenues	9,019			8,574			25,658			24,383
Mortgage banking revenues	8,013			7,983			20,347			22,691
Wealth management revenues	4,995			5,233			14,736			15,067
Service charges on deposit accounts	4,692			4,379			13,781			12,376
Other service charges, commissions and fees	2,628			2,521			8,081			7,752
Investment securities gains, net	225			23			312			75
Other income	2,299			2,465			7,049			8,515
Non-recurring litigation recovery	—			—			3,750			—
Total non-interest income	31,871			31,178			93,714			90,859
Non-interest expense:
Salaries and wages	23,618			25,460			71,791			76,902
Employee benefits	8,610			8,008			26,285			23,987
Outsourced technology services	5,211			2,520			14,843			7,576
Occupancy, net	4,413			4,413			13,361			13,434
Furniture and equipment	2,398			3,849			7,114			11,345
OREO expense, net of income	8			(720		)	109			(1,604		)
Professional fees	1,191			1,916			3,635			4,731
FDIC insurance premiums	1,212			1,190			3,668			3,636
Mortgage servicing rights amortization	854			617			2,210			1,863
Mortgage servicing rights impairment recovery	(16		)	(76		)	(21		)	(147		)
Core deposit intangibles amortization	875			842			2,529			2,551
Other expenses	12,542			12,613			36,740			37,994
Loss contingency expenses	—			5,000			—			5,000
Acquisition expenses	1,197			566			1,197			629
Total non-interest expense	62,113			66,198			183,461			187,897
Income before income tax expense	37,976			30,212			107,504			95,372
Income tax expense	12,783			10,050			36,633			32,008
Net income	$	25,193		$	20,162		$	70,871		$	63,364

Basic earnings per common share	$	0.57		$	0.45		$	1.59		$	1.40
Diluted earnings per common share	$	0.56		$	0.44		$	1.58		$	1.39

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	25,193		$	20,162		$	70,871		$	63,364
Other comprehensive income, before tax:
Investment securities available-for sale:
Change in net unrealized gains during period	(3,430		)	10,855			15,241			12,264
Reclassification adjustment for net gains included in income	(225		)	(23		)	(312		)	(75		)
Change in unamortized loss on available-for-sale securities transferred into held-to-maturity	490			448			1,394			1,353
Unrealized loss on derivatives	512			(436		)	(2,490		)	(436		)
Defined benefit post-retirement benefits plans:
Change in net actuarial loss	15			15			43			43
Other comprehensive income (loss), before tax	(2,638		)	10,859			13,876			13,149
Deferred tax benefit (expense) related to other comprehensive income	1,038			(4,273		)	(5,460		)	(5,174		)
Other comprehensive income (loss), net of tax	(1,600		)	6,586			8,416			7,975
Comprehensive income, net of tax	$	23,593		$	26,748		$	79,287		$	71,339

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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, 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

Balance at December 31, 2014	$	323,596		$	587,862		$	(2,534	)	$	908,924
Net income	—			63,364			—			63,364
Other comprehensive income, net of tax expense	—			—			7,975			7,975
Common stock transactions:
789,743 common shares purchased and retired	(20,548		)	—			—			(20,548		)
21,414 common shares issued	—			—			—			—
169,577 non-vested common shares issued	—			—			—			—
3,484 non-vested common shares forfeited	—			—			—			—
158,828 stock options exercised, net of 58,996 shares tendered in payment of option price and income tax withholding amounts	1,909			—			—			1,909
Tax benefit of stock-based compensation	979			—			—			979
Stock-based compensation expense	3,231			—			—			3,231
Common cash dividend declared ($0.60 per share)	—			(27,259		)	—			(27,259		)
Balance at September 30, 2015	$	309,167		$	623,967		$	5,441		$	938,575

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,
	2016			2015
Cash flows from operating activities:
Net income	$	70,871		$	63,364
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	8,913			3,533
Net (gain) loss on disposal of premises and equipment	492			(822		)
Depreciation and amortization	14,482			13,702
Net premium amortization on investment securities	9,423			11,527
Net gain on investment securities transactions	(312		)	(75		)
Realized and unrealized net gains on mortgage banking activities	(15,126		)	(16,397		)
Net gain on sale of OREO	(693		)	(2,862		)
Write-downs of OREO and other assets pending disposal	621			985
Mortgage servicing rights impairment recovery	(21		)	(147		)
Deferred income tax benefit (expense)	(344		)	12,975
Net increase in cash surrender value of company-owned life insurance	(3,431		)	(2,169		)
Stock-based compensation expense	3,350			3,231
Tax benefits from stock-based compensation expense	1,352			979
Excess tax benefits from stock-based compensation expense	(1,126		)	(884		)
Originations of mortgage loans held for sale	(799,445		)	(856,384		)
Proceeds from sales of mortgage loans held for sale	795,527			865,833
Changes in operating assets and liabilities:
Increase in interest receivable	(2,203		)	(3,962		)
Increase in other assets	(2,644		)	(4,766		)
Increase (decrease) in accrued interest payable	646			(639		)
Decrease in accounts payable and accrued expenses	(1,278		)	(17,583		)
Net cash provided by operating activities	79,054			69,439
Cash flows from investing activities:
Purchases of investment securities:
Held-to-maturity	(18,170		)	(28,745		)
Available-for-sale	(626,574		)	(253,049		)
Proceeds from maturities and pay-downs of investment securities:
Held-to-maturity	86,306			80,759
Available-for-sale	652,064			450,462
Purchases of company-owned life insurance	—			(30,000		)
Extensions of credit to customers, net of repayments	(203,216		)	(251,450		)
Recoveries of loans charged-off	6,363			4,439
Proceeds from sale of OREO	3,352			13,586
Acquisition of banks and bank holding companies, net of cash and cash equivalents received	18,554			(1,636		)
Proceeds from sale of loan production office	932			—
Capital expenditures, net of sales	(5,113		)	(2,236		)
Net cash used in investing activities	$	(85,502	)	$	(17,870	)

Table of Contents

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

	Nine Months Ended September 30,
	2016			2015
Cash flows from financing activities:
Net increase (decrease) in deposits	$	30,057		$	(33,983	)
Net decrease in securities sold under repurchase agreements	(51,917		)	(66,717		)
Net increase in other borrowed funds	6			1
Repayments of long-term debt	(49		)	(1,297		)
Advances on long-term debt	113			5,066
Proceeds from issuance of common stock	3,657			1,909
Excess tax benefits from stock-based compensation expense	1,126			884
Purchase and retirement of common stock	(26,119		)	(20,548		)
Dividends paid to common stockholders	(29,516		)	(27,259		)
Net cash used in financing activities	(72,642		)	(141,944		)
Net decrease in cash and cash equivalents	(79,090		)	(90,375		)
Cash and cash equivalents at beginning of period	780,457			798,670
Cash and cash equivalents at end of period	$	701,367		$	708,295

Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	40,416		$	27,335
Cash paid during the period for interest expense	12,448			13,853

Supplemental disclosures of noncash investing and financing activities:
Transfer of loans to loans held for sale	50			10,619
Transfer of loans to other real estate owned	5,335			5,380
Capitalization of internally originated mortgage servicing rights	3,890			2,709
Transfer of bank buildings and land pending disposal to other assets	—			1,805

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, 2016 and December 31, 2015, the results of operations for each of the three and nine month periods ended September 30, 2016 and 2015, and cash flows and changes in stockholders' equity for each of the nine month periods ended September 30, 2016 and 2015, in conformity with U.S. generally accepted accounting principles. The balance sheet information at December 31, 2015 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, 2016 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, 2015. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.


(2)	Acquisitions

Flathead Bank. On April 6, 2016, the Company's bank subsidiary, First Interstate Bank ("FIB"), entered into a stock purchase agreement to acquire all of the outstanding stock of Flathead Bank of Bigfork ("Flathead"), a Montana-based bank wholly owned by Flathead Holding Company. The acquisition was completed as of August 12, 2016 for cash consideration of $34,100. The acquisition allowed the Company to gain market share in several of its current market areas and expand its market presence in Montana. The Company also benefited from cost savings related to the merger of Flathead with FIB. The acquisition was accounted for using the acquisition method with the cash purchase price funded from cash on hand. In conjunction with the acquisition, the Company recognized acquisition costs of $1,197.

The assets and liabilities of Flathead were recorded in the Company's consolidated financial statements at their estimated fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Flathead and the Company.

The following table summarizes the consideration paid, fair values of the Flathead assets acquired and liabilities assumed and the resulting goodwill. All amounts reported are provisional pending completion of management review.



	As Recorded			Fair Value				As Recorded
As of August 12, 2016	by Flathead			Adjustments				by the Company

Assets acquired:
Cash and cash equivalents	$	52,653		$	—			$	52,653
Investment securities	99,801			1,315			(1)	101,116
Loans	87,181			(3,833		)	(2)	83,348
Allowance for loan losses	(1,567		)	1,567			(3)	—
Premises and equipment	4,529			891			(4)	5,420
Core deposit intangible assets	—			2,486			(5)	2,486
Company-owned life insurance	6,386			—				6,386
Other assets	5,200			(2,373		)	(6)	2,827
Total assets acquired	254,183			53				254,236
Liabilities assumed:
Deposits	209,673			(86		)	(7)	209,587
Repurchase agreements	18,050			—				18,050
Other liabilities	838			—				838
Total liabilities assumed	228,561			(86		)		228,475
Net assets acquired	$	25,622		$	139			25,761
Cash consideration paid								34,100
Goodwill								$	8,339

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



Explanation of fair value adjustments:
(1)	Write up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)	Write down of the book value of loans to their estimated fair values. The fair value of loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of 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 Flathead 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 pending buy/sell agreements.
(5)	Adjustment represents the value of the core deposit base assumed in the acquisition based upon an internal valuation using industry averages obtained from an investment banking firm.
(6)	Adjustment consists of the write-off of pre-existing goodwill and prepaid assets.
(7)	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.

The core deposit intangible asset of $2,486 is being amortized using an accelerated method over the estimated useful lives of the related deposits of nine years.

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

Information regarding acquired credit-impaired loans as of the August 12, 2016 acquisition date is as follows:



Contractually required principal and interest payments	$	19,324
Contractual cash flows not expected to be collected ("non-accretable discount")	10,999
Cash flows expected to be collected	8,325
Interest component of cash flows expected to be collected ("accretable discount")	1,113
Fair value of acquired credit-impaired loans	$	7,212

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



Contractually required principal and interest payments	$	100,616
Contractual cash flows not expected to be collected	4,702
Fair value at acquisition	76,136

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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 accompanying consolidated statements of income include the results of operations of the acquired entity from the August 12, 2016 acquisition date. Operations of the acquired entity were immediately integrated with the Company's operations. Post-acquisition revenues and net income of the acquired entity were not captured separately subsequent to the merger. As such, the Company has determined it is not practical to report the post-acquisition date revenues and net income of the acquired entity that were included in the Company's consolidated income statement for the three months and nine months ended September 30, 2016.

The following table presents unaudited pro forma consolidated revenues and net income as if the acquisition had occurred as of January 1, 2015.



	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Interest income	$	75,736	$	72,605	$	223,547	$	207,425
Non-interest income	32,114		31,647		95,011		91,218
Total revenues	$	107,850	$	104,252	$	318,558	$	298,643

Net income	$	26,207	$	20,783	$	72,844	$	64,545

The unaudited pro forma net income presented in the table above for 2016 was adjusted to exclude acquisition-related costs, including change in control expenses related to employee benefit plans and legal and professional expenses of $778, net of tax. Pro forma net income presented in the table above for 2015 was adjusted to include the aforementioned acquisition-related costs. The unaudited pro forma net income presented in the table above for 2016 and 2015 includes adjustments for scheduled amortization of core deposit intangible assets acquired in the acquisition. The unaudited pro forma net income presented in the table above for 2016 and 2015 does not include operating costs savings and other business synergies expected as a result of the acquisition and adjustments for accretion or amortization of fair value adjustments other than core deposit intangible assets.

Absarokee Bancorporation, Inc. On July 24, 2015, the Company acquired all of the outstanding stock of Absarokee Bancorporation, Inc. ("Absarokee"), a Montana-based bank holding company that operated one subsidiary bank, United Bank. The Company merged United Bank with and into FIB immediately subsequent to the acquisition. During March 2016, the Company completed its review of Absarokee's tax items and finalized the fair value of the acquired deferred tax asset. Finalization of provisional estimates resulted in a $42 decrease in goodwill.


(3)	Investment Securities

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



September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury notes	$	3,609	$	30	$	—		$	3,639
Obligations of U.S. government agencies	439,488		1,819		(180		)	441,127
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	1,063,642		20,088		(361		)	1,083,369
Private mortgage-backed securities	124		1		(1		)	124
Other investments	4,920		42		—			4,962
Total	$	1,511,783	$	21,980	$	(542	)	$	1,533,221

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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)



September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	165,891	$	6,048	$	(30	)	$	171,909
Corporate securities	53,146		614		(14		)	53,746
Obligations of U.S. government agencies	19,737		315		—			20,052
U.S agency residential mortgage-backed securities & collateralized mortgage obligations	300,018		14,643		(6,581		)	308,080
Other investments	260		1		—			261
Total	$	539,052	$	21,621	$	(6,625	)	$	554,048



December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury notes	$	3,912	$	3	$	(4	)	$	3,911
Obligations of U.S. government agencies	521,079		712		(1,610		)	520,181
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	921,699		9,448		(2,101		)	929,046
Private mortgage-backed securities	156		1		(1		)	156
Other investments	3,550		5		(9		)	3,546
Total	$	1,450,396	$	10,169	$	(3,725	)	$	1,456,840



December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-Maturity:
State, county and municipal securities	$	173,785	$	5,103	$	(227	)	$	178,661
Corporate securities	50,046		64		(220		)	49,890
Obligations of U.S. government agencies	19,738		—		(102		)	19,636
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	356,742		7,686		(5,420		)	359,008
Other investments	354		1		—			355
Total	$	600,665	$	12,854	$	(5,969	)	$	607,550

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,
	2016			2015		2016			2015
Gross realized gains	$	239		$	23	$	404		$	75
Gross realized losses	(14		)	—		(92		)	—

On October 30, 2015, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations with amortized costs and fair values of $100,343 and $100,140, respectively, into the held-to-maturity category. Unrealized net losses of $203 included in accumulated other comprehensive income at the time of the transfer are being amortized to yield over the remaining expected lives of the transferred securities of 4.0 years.

On June 27, 2014, the Company transferred available-for-sale U.S. agency residential mortgage-backed securities and collateralized mortgage obligations with amortized costs and fair values of $396,640 and $388,808, respectively, into the held-to-maturity category. Unrealized net losses of $7,832 at the time of the transfer are being amortized to yield over the remaining expected lives of the transferred securities of 4.3 years.

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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 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, 2016 and December 31, 2015:



	Less than 12 Months					12 Months or More					Total
September 30, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale:
Obligations of U.S. government agencies	$	—	$	—		$	103,776	$	(180	)	$	103,776	$	(180	)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	83,050		(222		)	17,419		(139		)	100,469		(361		)
Private mortgage-backed securities	—		—			50		(1		)	50		(1		)
Total	$	83,050	$	(222	)	$	121,245	$	(320	)	$	204,295	$	(542	)



	Less than 12 Months					12 Months or More					Total
September 30, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity:
State, county and municipal securities	$	7,746	$	(24	)	$	2,843	$	(6	)	$	10,589	$	(30	)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	8,791		(2,721		)	18,523		(3,860		)	27,314		(6,581		)
Corporate securities	5,056		(14		)	—		—			5,056		(14		)
Total	$	21,593	$	(2,759	)	$	21,366	$	(3,866	)	$	42,959	$	(6,625	)



	Less than 12 Months					12 Months or More					Total
December 31, 2015	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-Sale:
U.S. Treasury notes	$	2,092	$	(4	)	$	—	$	—		$	2,092	$	(4	)
Obligations of U.S. government agencies	209,631		(1,077		)	54,619		(533		)	264,250		(1,610		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	343,875		(1,577		)	28,010		(524		)	371,885		(2,101		)
Private mortgage-backed securities	—		—			61		(1		)	61		(1		)
Other investments	1,225		(9		)	—		—			1,225		(9		)
Total	$	556,823	$	(2,667	)	$	82,690	$	(1,058	)	$	639,513	$	(3,725	)



	Less than 12 Months					12 Months or More					Total
December 31, 2015	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Held-to-Maturity:
State, county and municipal securities	$	10,182	$	(39	)	$	9,476	$	(188	)	$	19,658	$	(227	)
Obligations of U.S. government agencies	19,738		(102		)	—		—			19,738		(102		)
U.S. agency residential mortgage-backed securities & collateralized mortgage obligations	67,295		(4,288		)	69,539		(1,132		)	136,834		(5,420		)
Corporate securities	31,135		(220		)	—		—			31,135		(220		)
Total	$	128,350	$	(4,649	)	$	79,015	$	(1,320	)	$	207,365	$	(5,969	)

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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 investment portfolio is evaluated quarterly for other-than-temporary declines in the market value of each individual investment security. The Company had 126 and 198 individual investment securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, 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, 2016 and 2015.

Maturities of investment securities at September 30, 2016 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, 2016	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	340,072	$	345,636	$	99,864	$	97,362
After one year but within five years	1,030,847		1,045,108		290,601		304,804
After five years but within ten years	108,831		109,852		117,829		121,191
After ten years	32,033		32,625		30,758		30,691
Total	$	1,511,783	$	1,533,221	$	539,052	$	554,048

As of September 30, 2016, the Company had investment securities callable within one year with amortized costs and estimated fair values of $220,907 and $221,189, 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, 2016, the Company had callable structured notes with amortized costs and estimated fair values of $10,095 and $10,100, respectively.


(4)	Loans

The following table presents loans by class as of the dates indicated:



	September 30, 2016		December 31, 2015
Real estate loans:
Commercial	$	1,843,120	$	1,793,258
Construction:
Land acquisition & development	212,680		224,066
Residential	137,014		111,763
Commercial	128,154		94,890
Total construction loans	477,848		430,719
Residential	1,047,150		1,032,851
Agricultural	172,949		156,234
Total real estate loans	3,541,067		3,413,062
Consumer:
Indirect consumer	731,901		622,529
Other consumer	153,624		153,717
Credit card	66,860		68,107
Total consumer loans	952,385		844,353
Commercial	814,392		792,416
Agricultural	152,800		142,151
Other, including overdrafts	2,292		1,339
Loans held for investment	5,462,936		5,193,321
Mortgage loans held for sale	67,979		52,875
Total loans	$	5,530,915	$	5,246,196

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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)

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



							Total Loans
	30 - 59		60 - 89		> 90		30 or More
	Days		Days		Days		Days		Current		Non-accrual		Total
As of September 30, 2016	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	8,023	$	484	$	727	$	9,234	$	1,806,929	$	26,957	$	1,843,120
Construction:
Land acquisition & development	500		424		50		974		206,388		5,318		212,680
Residential	592		—		237		829		135,919		266		137,014
Commercial	3,375		57		—		3,432		123,905		817		128,154
Total construction loans	4,467		481		287		5,235		466,212		6,401		477,848
Residential	4,019		1,870		2,837		8,726		1,035,626		2,798		1,047,150
Agricultural	10		—		830		840		168,773		3,336		172,949
Total real estate loans	16,519		2,835		4,681		24,035		3,477,540		39,492		3,541,067
Consumer:
Indirect consumer	5,707		1,735		622		8,064		723,048		789		731,901
Other consumer	1,029		329		20		1,378		151,886		360		153,624
Credit card	711		261		565		1,537		65,323		—		66,860
Total consumer loans	7,447		2,325		1,207		10,979		940,257		1,149		952,385
Commercial	2,366		640		1,915		4,921		782,378		27,093		814,392
Agricultural	219		88		17		324		148,741		3,735		152,800
Other, including overdrafts	—		—		311		311		1,981		—		2,292
Loans held for investment	26,551		5,888		8,131		40,570		5,350,897		71,469		5,462,936
Mortgage loans originated for sale	—		—		—		—		67,979		—		67,979
Total loans	$	26,551	$	5,888	$	8,131	$	40,570	$	5,418,876	$	71,469	$	5,530,915

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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)



							Total Loans
	30 - 59		60 - 89		> 90		30 or More
	Days		Days		Days		Days		Current		Non-accrual		Total
As of December 31, 2015	Past Due		Past Due		Past Due		Past Due		Loans		Loans		Loans
Real estate
Commercial	$	6,051	$	724	$	418	$	7,193	$	1,762,294	$	23,771	$	1,793,258
Construction:
Land acquisition & development	3,190		163		1,325		4,678		212,757		6,631		224,066
Residential	1,288		—		—		1,288		110,182		293		111,763
Commercial	3,232		—		—		3,232		90,703		955		94,890
Total construction loans	7,710		163		1,325		9,198		413,642		7,879		430,719
Residential	5,991		1,196		2,063		9,250		1,018,359		5,242		1,032,851
Agricultural	176		17		—		193		150,686		5,355		156,234
Total real estate loans	19,928		2,100		3,806		25,834		3,344,981		42,247		3,413,062
Consumer:
Indirect consumer	6,675		1,089		210		7,974		614,029		526		622,529
Other consumer	1,312		331		34		1,677		151,381		659		153,717
Credit card	533		317		477		1,327		66,768		12		68,107
Total consumer loans	8,520		1,737		721		10,978		832,178		1,197		844,353
Commercial	8,493		1,060		699		10,252		759,851		22,313		792,416
Agricultural	879		152		62		1,093		140,430		628		142,151
Other, including overdrafts	—		—		314		314		1,025		—		1,339
Loans held for investment	37,820		5,049		5,602		48,471		5,078,465		66,385		5,193,321
Mortgage loans originated for sale	—		—		—		—		52,875		—		52,875
Total loans	$	37,820	$	5,049	$	5,602	$	48,471	$	5,131,340	$	66,385	$	5,246,196

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 principal balance, accrued interest receivable and accrual status of loans acquired with credit impairment as of September 30, 2016 and 2015:



As of September 30,	2016		2015

Outstanding balance	$	38,505	$	35,265

Carrying value
Loans on accrual status	23,665		22,867
Total carrying value	$	23,665	$	22,867

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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, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015

Beginning balance	$	5,905		$	7,482		$	6,713		$	5,781
Additions	1,114			624			1,114			1,073
Accretion income	(670		)	(845		)	(1,899		)	(2,200		)
Reductions due to exit events	(595		)	(143		)	(900		)	(539		)
Reclassifications from nonaccretable differences	729			347			1,455			3,350
Ending balance	$	6,483		$	7,465		$	6,483		$	7,465

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 $820 and $828 for the three months ended September 30, 2016 and 2015, respectively, and approximately $2,492 and $2,331 for the nine months ended September 30, 2016 and 2015 respectively.

The Company considers impaired loans to include all originated and acquired loans, except consumer loans, that are risk rated as doubtful, or have been placed on non-accrual status or renegotiated in troubled debt restructurings. The following tables present information on the Company’s recorded investment in impaired loans as of dates indicated:



As of September 30, 2016	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	58,137	$	16,518	$	29,451	$	45,969	$	5,868
Construction:
Land acquisition & development	12,922		4,774		1,785		6,559		828
Residential	977		266		—		266		—
Commercial	1,154		232		703		935		737
Total construction loans	15,053		5,272		2,488		7,760		1,565
Residential	5,229		2,774		1,043		3,817		142
Agricultural	3,988		3,646		26		3,672		1
Total real estate loans	82,407		28,210		33,008		61,218		7,576
Commercial	39,349		15,296		18,893		34,189		10,912
Agricultural	3,925		3,294		441		3,735		77
Total	$	125,681	$	46,800	$	52,342	$	99,142	$	18,565

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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, 2015	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate:
Commercial	$	58,179	$	27,882	$	17,614	$	45,496	$	3,401
Construction:
Land acquisition & development	15,503		7,245		778		8,023		282
Residential	992		293		—		293		—
Commercial	1,264		340		739		1,079		739
Total construction loans	17,759		7,878		1,517		9,395		1,021
Residential	7,073		3,547		2,317		5,864		367
Agricultural	6,434		5,563		198		5,761		5
Total real estate loans	89,445		44,870		21,646		66,516		4,794
Commercial	29,593		10,744		13,727		24,471		6,487
Agricultural	1,349		622		356		978		294
Total	$	120,387	$	56,236	$	35,729	$	91,965	$	11,575

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



	Three Months Ended September 30,
	2016				2015
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	33,408	$	100	$	36,075	$	226
Construction:
Land acquisition & development	6,797		13		9,325		29
Residential	274		—		330		—
Commercial	1,055		1		2,339		4
Total construction loans	8,126		14		11,994		33
Residential	3,282		4		2,607		4
Agricultural	4,786		2		8,578		27
Total real estate loans	49,602		120		59,254		290
Commercial	30,123		72		22,483		2
Agricultural	2,249		—		937		13
Total	$	81,974	$	192	$	82,674	$	305

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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)



	Nine Months Ended September 30,
	2016				2015
	Average Recorded Investment		Income Recognized		Average Recorded Investment		Income Recognized


Real estate:
Commercial	$	35,572	$	241	$	38,639	$	587
Construction:
Land acquisition & development	6,992		32		9,591		51
Residential	279		—		300		—
Commercial	1,007		3		1,902		6
Total construction loans	8,278		35		11,793		57
Residential	4,219		7		2,720		6
Agricultural	4,607		3		8,661		62
Total real estate loans	52,676		286		61,813		712
Commercial	27,781		128		18,175		122
Agricultural	2,341		—		848		26
Total	$	82,798	$	414	$	80,836	$	860

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 $993 and $998 for the three months ended September 30, 2016 and 2015, respectively, and approximately $2,994 and $2,932 for the nine months ended September 30, 2016 and 2015, respectively.

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

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

The Company had loans renegotiated in troubled debt restructurings of $44,704 as of September 30, 2016, of which $27,541 were included in non-accrual loans and $17,163 were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $40,330 as of December 31, 2015, of which $24,911 were included in non-accrual loans and $15,419 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, 2016:



	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Three Months Ended September 30, 2016	Number of Notes	Interest only period		Extension of terms or maturity		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	4	$	—	$	841	$	—	$	983	$	1,824
Residential real estate	1	—		64		—		—		64
Agriculture	1	—		121		—		—		121
Total loans restructured during period	6	$	—	$	1,026	$	—	$	983	$	2,009




	Number of Notes	Type of Concession								Principal Balance at Restructure Date
Nine Months Ended September 30, 2016	Number of Notes	Interest only period		Extension of terms or maturity		Interest rate adjustment		Other (1)		Principal Balance at Restructure Date
Commercial real estate	11	$	689	$	1,166	$	—	$	1,233	$	3,088
Residential real estate	1	—		64		—		—		64
Commercial	10	4,240		947		46		2,805		8,038
Agriculture	1	—		121		—		—		121
Total loans restructured during period	23	$	4,929	$	2,298	$	46	$	4,038	$	11,311
(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 and nine months ended September 30, 2016 or 2015.

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, 2016. 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, 2016			Nine Months Ended September 30, 2016
	Number of Notes	Balance		Number of Notes	Balance
Commercial real estate	—	$	—	1	$	194
Total	—	$	—	1	$	194

At September 30, 2016, there were no material commitments to lend additional funds to borrowers whose existing loans have been renegotiated or are classified as non-accrual.

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

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

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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, 2016	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	76,913	$	88,580	$	17,991	$	183,484
Construction:
Land acquisition & development	11,597		7,377		1,383		20,357
Residential	1,615		1,482		664		3,761
Commercial	1,616		5,891		720		8,227
Total construction loans	14,828		14,750		2,767		32,345
Residential	5,461		13,195		214		18,870
Agricultural	6,511		16,605		—		23,116
Total real estate loans	103,713		133,130		20,972		257,815
Consumer:
Indirect consumer	847		1,572		121		2,540
Other consumer	665		1,130		217		2,012
Total consumer loans	1,512		2,702		338		4,552
Commercial	42,080		31,931		19,758		93,769
Agricultural	5,563		7,792		472		13,827
Total	$	152,868	$	175,555	$	41,540	$	369,963

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As of December 31, 2015	Other Assets Especially Mentioned		Substandard		Doubtful		Total Criticized Loans
Real estate:
Commercial	$	61,787	$	84,556	$	10,609	$	156,952
Construction:
Land acquisition & development	16,593		12,482		591		29,666
Residential	1,640		1,886		—		3,526
Commercial	166		323		756		1,245
Total construction loans	18,399		14,691		1,347		34,437
Residential	4,453		9,661		2,540		16,654
Agricultural	6,114		16,529		—		22,643
Total real estate loans	90,753		125,437		14,496		230,686
Consumer:
Indirect consumer	644		1,131		154		1,929
Other consumer	651		1,130		198		1,979
Total consumer loans	1,295		2,261		352		3,908
Commercial	32,975		27,982		15,085		76,042
Agricultural	2,247		7,105		417		9,769
Total	$	127,270	$	162,785	$	30,350	$	320,405

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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(5)	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, 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

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 September 30, 2016	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	7,576		$	—		$	10,912		$	77		$	—	$	18,565
Loans collectively evaluated for impairment	24,195			7,295			29,449			1,731			—		62,670
Allowance for loan losses	$	31,771		$	7,295		$	40,361		$	1,808		$	—	$	81,235

Total loans:
Individually evaluated for impairment	$	61,218		$	—		$	34,189		$	3,735		$	—	$	99,142
Collectively evaluated for impairment	3,479,849			952,385			780,203			149,065			2,292		5,363,794
Total loans	$	3,541,067		$	952,385		$	814,392		$	152,800		$	2,292	$	5,462,936



Three Months Ended September 30, 2015	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	53,935		$	5,828		$	15,797		$	992		$	—	$	76,552
Provision charged to operating expense	(1,149		)	430			2,004			(187		)	—		1,098
Less loans charged-off	(2,219		)	(1,537		)	(791		)	—			—		(4,547		)
Add back recoveries of loans previously charged-off	389			653			111			—			—		1,153
Ending balance	$	50,956		$	5,374		$	17,121		$	805		$	—	$	74,256

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



Nine Months Ended September 30, 2015	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Beginning balance	$	53,884		$	5,035		$	14,307		$	974		$	—	$	74,200
Provision charged to operating expense	(1,718		)	2,201			3,220			(170		)	—		3,533
Less loans charged-off	(3,014		)	(3,675		)	(1,227		)	—			—		(7,916		)
Add back recoveries of loans previously charged-off	1,804			1,813			821			1			—		4,439
Ending balance	$	50,956		$	5,374		$	17,121		$	805		$	—	$	74,256

As of December 31, 2015	Real Estate			Consumer			Commercial			Agriculture			Other		Total
Allowance for loan losses:
Loans individually evaluated for impairment	$	4,794		$	—		$	6,487		$	294		$	—	$	11,575
Loans collectively evaluated for impairment	47,502			5,144			12,288			308			—		65,242
Allowance for loan losses	$	52,296		$	5,144		$	18,775		$	602		$	—	$	76,817

Total loans:
Individually evaluated for impairment	$	66,516		$	—		$	24,471		$	978		$	—	$	91,965
Collectively evaluated for impairment	3,346,546			844,353			767,945			141,173			1,339		5,101,356
Total loans	$	3,413,062		$	844,353		$	792,416		$	142,151		$	1,339	$	5,193,321

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, 2016 and December 31, 2015, the Company's allowance for loan losses included $433 and $382, respectively, related to loans acquired credit impaired.

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(6)	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,
	2016			2015			2016			2015
Beginning balance	$	7,908		$	11,773		$	6,254		$	13,554
OREO acquired through acquisition	1,120			—			1,120			—
Additions	1,316			984			5,335			5,380
Valuation adjustments	—			(73		)	(603		)	(179		)
Dispositions	(897		)	(4,653		)	(2,659		)	(10,724		)
Ending balance	$	9,447		$	8,031		$	9,447		$	8,031

Foreclosed residential real estate properties of $2,730 and $1,686 were included in other real estate owned as of September 30, 2016 and December 31, 2015, respectively. The Company did not have any consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2016 or December 31, 2015.


(7)	Derivatives and Hedging Activities

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

On September 22, 2015, the Company entered into an interest rate swap contract with a notional amount of $100,000 that was designated as a cash flow hedge. Under the terms of the interest rate swap contract, the Company pays a fixed interest rate of 1.94% and the counterparty pays to the Company a variable interest rate equal to the three-month LIBOR. No cash is exchanged until the effective date, which begins on September 15, 2017 and ends on September 15, 2020. The Company designated the interest payments related to Federal Home Loan Bank borrowings as the cash flow hedge. The hedge was fully effective during the current period. As such, no amount of ineffectiveness was included in the Company's income statement for the three or nine months ended September 30, 2016. The Company expects the hedge to remain highly effective during the remaining term of the interest rate swap.

Non-Hedging Interest Rate Swap Contracts. The Company 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.

Interest Rate Lock Commitments and Forward Loan Sales Contracts. 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

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in market interest rate, the fair value measurement of the derivative also contemplates the expected cash flows to be received from the counterparty from the future sale of the loan.

The Company sells residential mortgage loans on either a best efforts or mandatory delivery basis. The Company mitigates the effect of the interest rate risk inherent in providing interest rate lock commitments by entering into forward loan sales contracts. During the interest rate lock commitment period, these forward loan sales contracts are marked to market through earnings and are not designated as accounting hedges. Exclusive of the fair value component associated with the projected cash flows from the loan delivery to the investor, the changes in fair value related to movements in market rates of the interest rate lock commitments and the forward loan sales contracts generally move in opposite directions, and the net impact of changes in these valuations on net income during the loan commitment period is generally inconsequential. When the loan is funded to the borrower, the interest rate lock commitment derivative expires and the Company records a loan held for sale. The forward loan sales contract acts as a hedge against the variability in cash to be received from the loan 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, 2016				December 31, 2015
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Derivative Assets (included in other assets on balance sheet):
Derivatives designated as hedges:
Interest rate swap contracts	$	—	$	—	$	100,000	$	165

Non-hedging interest rate derivatives:
Interest rate swap contracts	20,757		1,577		9,369		788
Interest rate lock commitments	92,847		2,590		—		—
Total derivative assets	$	113,604	$	4,167	$	109,369	$	953

Derivative Liabilities (included in accounts payable and accrued expenses on balance sheet):
Derivatives designated as hedges:
Interest rate swap contracts	$	100,000	$	2,325	$	—	$	—

Non-hedging interest rate derivatives:
Interest rate swap contracts	20,757		1,701		9,369		829
Forward loan sales contracts	156,264		620		—		—
Total derivative liabilities	$	277,021	$	4,646	$	9,369	$	829

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Derivatives designated as hedges:
Amount of gain (loss) recognized in other comprehensive income (effective portion)	$	512		$	(436	)	$	(2,490	)	$	(436	)
Non-hedging interest rate derivatives:
Amount of loss recognized in other non-interest income	(3		)	(31		)	(82		)	(48		)
Amount of net fee income recognized in other non-interest income	—			—			245			—
Amount of net gains recognized in mortgage banking revenues	752			—			1,970			—


(8)	Capital Stock

The Company had 21,459,481 shares of Class A common stock and 23,420,517 shares of Class B common stock outstanding as of September 30, 2016. The Company had 21,698,594 shares of Class A common stock and 23,729,631 shares of Class B common stock outstanding as of December 31, 2015.

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. During the nine months ended September 30, 2015, the Company repurchased and retired 765,875 shares of its Class A common stock in open market transactions at an aggregate purchase price of $19,921. 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, 2016 and 2015 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.


(9)	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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The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2016 and 2015:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Net income	$	25,193	$	20,162	$	70,871	$	63,364
Weighted average common shares outstanding for basic earnings per share computation	44,415,213		45,150,104		44,505,544		45,223,988
Dilutive effects of stock-based compensation	390,708		428,874		379,368		481,636
Weighted average common shares outstanding for diluted earnings per common share computation	44,805,921		45,578,978		44,884,912		45,705,624

Basic earnings per common share	$	0.57	$	0.45	$	1.59	$	1.40
Diluted earnings per common share	$	0.56	$	0.44	$	1.58	$	1.39

Anti-dilutive unvested time restricted stock	135		5,884		95,886		5,884

The Company had 218,556 and 165,489 shares of unvested restricted stock as of September 30, 2016 and 2015, respectively, that were not included in the computation of diluted earnings per common share because performance conditions for vesting had not been met.


(10)	Regulatory Capital

On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accord, ("Basel III"). Basel III includes a more stringent definition of capital and introduces a new common equity tier 1, or CET1, capital requirement, sets forth a comprehensive methodology for calculating risk-weighted assets, introduces a conservation buffer and sets out minimum capital ratios and overall capital adequacy standards. Under Basel III, certain deductions and adjustments to regulatory capital began to phase in starting January 1, 2015 and will be fully implemented on January 1, 2018. The capital conservation buffer required under Basel III began to phase in starting January 1, 2016 and will be fully implemented on January 1, 2019.

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As of September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015 are presented in the following tables:



	Actual				Adequately Capitalized Basel III Phase-In Schedule				Adequately Capitalized Basel III Fully Phased-In				Well Capitalized (1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2016
Total risk-based capital:
Consolidated	$	962,182	14.9	%	$	558,157	8.6	%	$	679,495	10.5	%	$	647,138	10.0	%
FIB	898,288		13.9		556,154		8.6		677,057		10.5		644,816		10.0
Tier 1 risk-based capital:
Consolidated	877,285		13.6		428,729		6.6		550,068		8.5		517,711		8.0
FIB	817,678		12.7		427,191		6.6		548,094		8.5		515,853		8.0
Common equity tier 1 risk-based capital:
Consolidated	797,285		12.3		331,658		5.1		452,997		7.0		420,640		6.5
FIB	817,678		12.7		330,468		5.1		451,371		7.0		419,131		6.5
Leverage capital ratio:
Consolidated	877,285		10.2		343,228		4.0		343,228		4.0		429,035		5.0
FIB	817,678		9.5		342,629		4.0		342,629		4.0		428,286		5.0



	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, 2015
Total risk-based capital:
Consolidated	$	946,156	15.4	%	$	492,692	8.0	%	$	646,658	10.5	%	$	615,865	10.0	%
FIB	882,504		14.4		490,866		8.0		644,262		10.5		613,582		10.0
Tier 1 risk-based capital:
Consolidated	861,339		14.0		369,519		6.0		523,485		8.5		$	492,692	8.0
FIB	805,805		13.1		368,149		6.0		521,545		8.5		490,866		8.0
Common equity tier 1 risk-based capital:
Consolidated	781,339		12.7		277,139		4.5		431,105		7.0		$	400,312	6.5
FIB	805,805		13.1		276,112		4.5		429,508		7.0		398,829		6.5
Leverage capital ratio:
Consolidated	861,339		10.1		340,480		4.0		340,480		4.0		$	425,600	5.0
FIB	805,805		9.5		339,316		4.0		339,316		4.0		424,145		5.0

(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.

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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)


(11)	Commitments and Contingencies

In the normal course of business, the Company is involved in various other claims and litigation. In the opinion of management, following consultation with legal counsel, the ultimate liability or disposition thereof of all other claims and litigation is not expected to have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

As of September 30, 2016, the Company had a commitment under a forward starting interest rate swap contract with a notional amount of $100,000. For additional information about the forward starting interest rate swap contract, see Note 7 — Derivatives and Hedging Activity.

As of September 30, 2016, the Company had commitments under construction contracts of $527.

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 $2,912 of sold residential mortgage loans with recourse provisions still in effect as of September 30, 2016.


(12)	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, 2016, commitments to extend credit to existing and new borrowers approximated $1,604,619, which included $545,399 on unused credit card lines and $419,638 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, 2016, the Company had outstanding standby letters of credit of $54,424. The estimated fair value of the obligation undertaken by the Company in issuing the standby letters of credit is included in other liabilities in the Company’s consolidated balance sheet.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


(13)	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,	2016			2015			2016			2015			2016			2015
Investment securities available-for sale:
Change in net unrealized gains during period	$	(3,430	)	$	10,855		$	(1,359	)	$	4,272		$	(2,071	)	$	6,583
Reclassification adjustment for net gains included in net income	(225		)	(23		)	(89		)	(10		)	(136		)	(13		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	490			448			209			177			281			271
Unrealized loss on derivatives	512			(436		)	195			(172		)	317			(264		)
Defined benefits post-retirement benefit plan:
Change in net actuarial loss	15			15			6			6			9			9
Total other comprehensive income (loss)	$	(2,638	)	$	10,859		$	(1,038	)	$	4,273		$	(1,600	)	$	6,586



	Pre-tax						Tax Expense (Benefit)						Net of Tax
Nine Months Ended September 30,	2016			2015			2016			2015			2016			2015
Investment securities available-for sale:
Change in net unrealized gains during period	$	15,241		$	12,264		$	5,963		$	4,827		$	9,278		$	7,437
Reclassification adjustment for net gains included in net income	(312		)	(75		)	(123		)	(30		)	(189		)	(45		)
Change in unamortized loss on available- for-sale securities transferred into held-to- maturity	1,394			1,353			549			532			845			821
Unrealized loss on derivatives	(2,490		)	(436		)	(946		)	(172		)	(1,544		)	(264		)
Defined benefits post-retirement benefit plan:
Change in net actuarial loss	43			43			17			17			26			26
Total other comprehensive income	$	13,876		$	13,149		$	5,460		$	5,174		$	8,416		$	7,975

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



	September 30, 2016			December 31, 2015
Net unrealized gain on investment securities available-for-sale	$	10,618		$	684
Net unrealized gain (loss) on derivatives	(1,444		)	100
Net actuarial loss on defined benefit post-retirement benefit plans	(352		)	(378		)
Net accumulated other comprehensive income	$	8,822		$	406

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


(14)	Fair Value Measurements

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

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

•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 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 or nine months ended September 30, 2016 and 2015.

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.

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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)

Deferred Compensation Plan Assets and Liabilities. The fair values of deferred compensation plan assets are based primarily on the use of independent, market-based data to reflect a value that would be reasonably expected in an orderly transaction between market participants at the measurement date. These investments are in the same funds and purchased in the same amounts as the participants’ selected investments, which represent the underlying liabilities to plan participants. Deferred compensation plan liabilities are recorded at amounts due to participants, based on the fair value of participants’ selected investments.

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, 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	$	3,639	$	—	$	3,639	$	—
Obligations of U.S. government agencies	441,127			—	441,127			—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	1,083,369			—	1,083,369			—
Private mortgage-backed securities	124			—	124			—
Other investments	4,962			—	4,962			—
Loans held for sale	67,979			—	67,979			—
Derivative assets:
Interest rate swap contracts	1,577			—	1,577			—
Interest rate lock commitments	2,590			—	2,590			—
Derivative liabilities:
Interest rate swap contracts	4,026			—	4,026			—
Forward loan sale contracts	620			—	620			—
Deferred compensation plan assets	10,534			—	10,534			—
Deferred compensation plan liabilities	10,534			—	10,534			—



			Fair Value Measurements at Reporting Date Using
As of December 31, 2015	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	$	3,911	$	—	$	3,911	$	—
Obligations of U.S. government agencies	520,181			—	520,181			—
U.S. agencies mortgage-backed securities & collateralized mortgage obligations	929,046			—	929,046			—
Private mortgage-backed securities	156			—	156			—
Other investments	3,546			—	3,546			—
Derivative assets:
Interest rate swap contracts	953			—	953			—
Derivative liabilities
Interest rate swap contracts	829			—	829			—
Deferred compensation plan assets	10,149			—	10,149			—
Deferred compensation plan liabilities	10,149			—	10,149			—

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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)

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, 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	$	39,746	$	—	$	—	$	39,746
Other real estate owned	2,808			—		—	2,808
Long-lived assets to be disposed of by sale	1,506			—		—	1,506

				Fair Value Measurements at Reporting Date Using
As of December 31, 2015	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	20,875	$	—	$	—	$	20,875
Other real estate owned	1,789			—		—	1,789
Long-lived assets to be disposed of by sale	1,506			—		—	1,506

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, 2016, certain impaired loans with a carrying value of $68,733 were reduced by specific valuation allowance allocations of $18,565 and partial loan charge-offs of $10,422 resulting in a reported fair value of $39,746. As of December 31, 2015, certain impaired loans with a carrying value of $42,679 were reduced by specific valuation allowance allocations of $11,575 and partial loan charge-offs of $10,229 resulting in a reported fair value of $20,875.

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 $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. Write downs of $179 during the nine months ended September 30, 2015 included $106 directly related to receipt of updated appraisals and $73 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, 2016 and December 31, 2015, 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 $857 resulting in an aggregate fair value of $1,506.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair values:



	Fair Value As of
	September 30, 2016		December 31, 2015		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans	$	39,746	$	20,875	Appraisal	Appraisal adjustment	0%	-	53%	(38%)
Other real estate owned	2,808		1,789		Appraisal	Appraisal adjustment	2%	-	96%	(19%)
Long-lived assets to be disposed of by sale	1,506		1,506		Appraisal	Appraisal adjustment	0%	-	9%	(6%)

The Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. The methodologies for estimating the fair value of financial instruments that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other financial instruments are discussed below. For financial instruments bearing a variable interest rate where no credit risk exists, it is presumed that recorded book values are reasonable estimates of fair value.

Financial Assets. Carrying values of cash, cash equivalents and accrued interest receivable approximate fair values due to the liquid and/or short-term nature of these instruments. Fair values for investment securities held-to-maturity are obtained from an independent pricing service, which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the investment’s terms and conditions, among other things. Fair values of fixed rate loans and variable rate loans that reprice on an infrequent basis are estimated by discounting future cash flows using current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. Carrying values of variable rate loans that reprice frequently, and with no change in credit risk, approximate the fair values of these instruments.

Financial Liabilities. The fair values of demand deposits, savings accounts, securities sold under repurchase agreements and accrued interest payable are the amounts payable on demand at the reporting date. The fair values of fixed-maturity certificates of deposit are estimated using external market rates currently offered for deposits with similar remaining maturities. The fair values of derivative liabilities are obtained from an independent pricing service, which considers observable data that may include the three-month LIBOR forward curve, the federal funds effective swap rate and cash flows, among other things. The carrying values of the interest bearing demand notes to the United States Treasury are deemed an approximation of fair values due to the frequent repayment and repricing at market rates. The fixed and floating rate subordinated debentures, floating rate subordinated term loan, notes payable to the FHLB, fixed rate subordinated term debt, and capital lease obligation are estimated by discounting future cash flows using current rates for advances with similar characteristics.

Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit, based on fees currently charged to enter into similar agreements, is not significant.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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



					Fair Value Measurements at Reporting Date Using
As of September 30, 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	$	701,367	$	701,367	$	701,367	$	—	$	—
Investment securities available-for-sale	1,533,221		1,533,221		—		1,533,221		—
Investment securities held-to-maturity	539,052		554,048		—		554,048		—
Accrued interest receivable	31,002		31,002		—		31,002		—
Mortgage servicing rights, net	17,322		25,845		—		25,845		—
Loans held for sale	67,979		67,979		—		67,979		—
Net loans held for investment	5,462,936		5,321,409		—		5,281,663		39,746
Derivative assets	4,167		4,167		—		4,167		—
Deferred compensation plan assets	10,534		10,534		—		10,534		—
Total financial assets	$	8,367,580	$	8,249,572	$	701,367	$	7,508,459	$	39,746

Financial liabilities:
Total deposits, excluding time deposits	$	6,235,993	$	6,235,993	$	6,235,993	$	—	$	—
Time deposits	1,092,588		1,090,434		—		1,090,434		—
Securities sold under repurchase agreements	476,768		476,768		—		476,768		—
Other borrowed funds	8		8		—		8		—
Accrued interest payable	5,622		5,622		—		5,622		—
Long-term debt	27,949		27,801		—		27,801		—
Subordinated debentures held by subsidiary trusts	82,477		72,803		—		72,803		—
Derivative liabilities	4,646		4,646		—		4,646		—
Deferred compensation plan liabilities	10,534		10,534		—		10,534		—
Total financial liabilities	$	7,936,585	$	7,924,609	$	6,235,993	$	1,688,616	$	—

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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, 2015	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	$	780,457	$	780,457	$	780,457	$	—	$	—
Investment securities available-for-sale	1,456,840		1,456,840		—		1,456,840		—
Investment securities held-to-maturity	600,665		607,550		—		607,550		—
Accrued interest receivable	27,729		27,729		—		27,729		—
Mortgage servicing rights, net	15,621		31,011		—		31,011		—
Net loans	5,169,379		5,128,705		—		5,107,830		20,875
Derivative assets	953		953		—		953		—
Deferred compensation plan assets	10,149		10,149		—		10,149		—
Total financial assets	$	8,061,793	$	8,043,394	$	780,457	$	7,242,062	$	20,875

Financial liabilities:
Total deposits, excluding time deposits	$	5,957,345	$	5,975,345	$	5,975,345	$	—	$	—
Time deposits	1,131,592		1,137,289		—		1,137,289		—
Securities sold under repurchase agreements	510,635		510,635		—		510,635		—
Other borrowed funds	2		2		—		2		—
Accrued interest payable	4,960		4,960		—		4,960		—
Long-term debt	27,885		27,622		—		27,622		—
Subordinated debentures held by subsidiary trusts	82,477		74,969		—		74,969		—
Derivative liabilities	829		829		—		829		—
Deferred compensation plan liabilities	10,149		10,149		—		10,149		—
Total financial liabilities	$	7,725,874	$	7,741,800	$	5,975,345	$	1,766,455	$	—


(15)	Recent Authoritative Accounting Guidance

ASU 2014-09 "Revenue from Contracts with Customers." The amendments in Accounting Standards Update ("ASU") 2014-09 introduce a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. 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 2014-09 for all entities by one year until January 1, 2018. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements, results of operations or liquidity.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

ASU 2014-12 "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period." ASU 2014-12 amends Accounting Standards Codification ("ASC") Topic 718, Compensation-Stock Compensation, to clarify that a performance target that affects the vesting of a share-based payment award and that could be achieved after the requisite service period should be treated as a performance condition that affects the vesting of the award. ASU 2014-12 further clarifies that the requisite service period ends when the employees can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The Company adopted the amendments in ASU 2014-12 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2014-16 "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity." The amendments in ASU 2014-16 clarify that an entity should consider all relevant terms and features-including the embedded derivative feature being evaluated for bifurcation-in evaluating the nature of the host contract within a hybrid financial instrument. The amendments further clarify that no single term or feature would necessarily determine the economic characteristics and risk of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risk of the entire hybrid financial instrument. The Company adopted the amendments in ASU 2014-16 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2015-02 "Amendments to the Consolidation Analysis." The amendments in ASU 2015-02 (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and (iv) provide scope exceptions from consolidation guidance for reporting entities with interest in legal entities that are required to comply or operate in accordance with requirements of the Investment Company Act of 1940 for registered market funds. The Company adopted the amendments in ASU 2015-02 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2015-03 "Simplifying the Presentation of Debt Issuance Costs." The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, rather than as a deferred charge. The guidance in ASU 2015-03 did not address presentation or subsequent measurement of debt issues costs related to line-of-credit arrangements. ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," addresses this gap. ASU 2015-15 adds that the Securities and Exchange Commission (the "SEC") staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the amendments in ASU 2015-03 and ASU 2015-15 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2015-05 "Intangibles-Goodwill and Other Internal-Use Software." The amendments in ASU 2015-05 provide guidance about whether a cloud computing arrangement includes a software license. Under the guidance in ASU 2015-05, if a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted the amendments in ASU 2015-05 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2015-10 "Technical Corrections and Improvements." The amendments in ASU 2015-10 represent changes to clarify the codification, correct unintended application of guidance, or make minor improvements to the codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company adopted the amendments in ASU 2015-10 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

ASU 2015-16 "Business Combinations-Simplifying the Accounting for Measurement-Period Adjustments." The amendments in ASU 2015-16 eliminate the requirement to retrospectively account for adjustments made to provisional amounts recognized as part of a business combination. Under the amendments in ASU 2015-16, an acquirer must recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in ASU 2015-16 require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Company adopted the amendments in ASU 2015-16 effective January 1, 2016. The adoption did not have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2016-01 "Financial Instruments-Overall: 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)." On February 25, 2016, the Financial Accounting Standards Board issued new lease accounting guidance in ASU No. 2016-02. 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 dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in ASU 2016-05 will be effective for the Company on January 1, 2017, and are not expected to have a significant impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU 2016-07 "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." The amendments in ASU 2016-07 eliminate the requirement that when an investment qualified for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investments, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods hat 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 will be effective for the Company on January 1, 2017, and are not expected to have a significant impact on on the Company’s consolidated financial statements, results of operations or liquidity.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

ASU 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal versus 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. The Company is continuing to evaluate the new guidance to determine the impact it will have on its 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 should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be 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 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 will be effective for the Company on January 1, 2017, and are not expected to have a significant impact on impact on the Company’s consolidated financial statements, results of operations or liquidity.

ASU No. 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 is continuing to evaluate the new guidance to determine the impact it will have on its consolidated financial statements, results of operations and liquidity.

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.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

ASU 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. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. 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 impact on the Company’s consolidated financial statements, results of operations or liquidity.


(16)	Subsequent Events

Subsequent events have been evaluated for potential recognition and disclosure through the date financial statements were filed with the SEC. On October 21, 2016, the Company declared a quarterly dividend to common shareholders of $0.22 per share, to be paid on November 14, 2016 to shareholders of record as of October 31, 2016.

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, 2015, including the audited financial statements contained therein, filed with the Securities and Exchange Commission, or SEC.

When we refer to “we,” “our,” and “us” in this report, we mean First Interstate BancSystem, Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, First Interstate BancSystem, Inc.

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: declining business and economic conditions, credit losses, adverse economic conditions affecting Montana, Wyoming and South Dakota, declining oil and gas prices, lending risk, adequacy of the allowance for loan losses, impairment of goodwill, failure to integrate or profitably operate acquired organizations, additional regulatory requirements if our assets exceed $10 billion, access to low-cost funding sources, changes in interest rates, dependence on the Company’s management team, ability to attract and retain qualified employees, governmental regulation and changes in regulatory, tax and accounting rules and interpretations, failure of technology, cyber-security, unfavorable resolution of litigation, inability to meet liquidity requirements, environmental remediation and other costs, ineffective internal operational controls, competition, reliance on external vendors, implementation of new lines of business or new product or service offerings, soundness of other financial institutions, failure to effectively implement technology-driven products and services, inability of our bank subsidiary to pay dividends, risks associated with introducing new lines of business, products or services, litigation pertaining to fiduciary responsibilities, change in dividend policy, uninsured nature of any investment in Class A common stock, volatility of Class A common stock, decline in market price of Class A common stock, voting control of Class B stockholders, anti-takeover provisions, dilution as a result of future equity issuances, controlled company status, and subordination of common stock to Company debt.

A more detailed discussion of each of the foregoing risks is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed March 1, 2016. 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

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, 2016, we had consolidated assets of $8,974 million, deposits of $7,329 million, loans of $5,531 million and total stockholders’ equity of $983 million. We currently operate 80 banking offices, including detached drive-up facilities, in 46 communities located in Montana, Wyoming and South Dakota. Through our bank subsidiary, First Interstate Bank, or 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.

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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 April 6, 2016, our bank subsidiary, First Interstate Bank, entered into a stock purchase agreement to acquire all of the outstanding stock of Flathead Bank of Bigfork, or Flathead Bank, a wholly-owned subsidiary of Flathead Holding Company of Bigfork, with branches located in western and northwestern Montana. The acquisition was completed on August 12, 2016 for cash consideration of $34 million. As of the date of the acquisition, Flathead Bank had total assets of $254 million, loans of $83 million and deposits of $210 million. For additional information regarding the acquisition, see “Note 2 – Acquisitions” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

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, or Basel III. Under Basel II, certain 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 phases in beginning January 1, 2016 and will be fully implemented on January 1, 2019. As of September 30, 2016 and December 31, 2015, we had capital levels that, in all cases, exceeded the well-capitalized guidelines. For additional information regarding our capital levels, see "Capital Resources and Liquidity Management" included herein and “Note 10 – Regulatory Capital” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

Effective January 1, 2016, we elected to account for our loans held for sale using the fair value option. Under the fair value option, unrealized gains and losses on loans held for sale are included in mortgage banking revenues in our consolidated statements of income. Changes in the fair value of mortgage loans decreased mortgage banking revenues by $752 thousand during the three months ended September 30, 2016, and increased mortgage banking revenues by $1.9 million during the nine months ended September 30, 2016.

Also effective January 1, 2016, we began reducing mortgage banking revenues by the direct standard costs of originating residential mortgage loans held for sale, resulting in a decrease in mortgage banking revenues and a corresponding decrease in salaries and wages expense during the three and nine months ended September 30, 2016, as compared to the same periods in 2015. During the three and nine months ended September 30, 2016, direct standard costs of originating mortgage loans held for sale were $3.3 million and $8.1 million, respectively.

In prior periods, we recorded net gains or losses attributable to deferred compensation plan assets as other income, and the corresponding compensation expense or benefit related to these net gains or losses as employee benefits expense in our consolidated statements of income. However, because we pass all gains or losses on deferred compensation plan assets through to plan participants, these income and expense amounts offset and do not impact our consolidated net income. To eliminate fluctuations in other income and employee benefits expense caused by changes in the market values of deferred compensation plan assets, during second quarter 2016 we began recording these gains or losses in other income net of the directly offsetting employee compensation expense or benefit. All prior periods presented in this report have been revised to reflect this change.

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Primary Factors Used in Evaluating Our Business

As a banking institution, we manage and evaluate various aspects of both our financial condition and our results of operations. We monitor our financial condition and performance 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.

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, and 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 taking into consideration seasonality and 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.

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 other real estate owned, or 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 (total deposits 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.

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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 ratio and tier 1 common capital to total risk-weighted assets ratio.

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, 2015.

Our critical accounting estimates are summarized below. Management considers an accounting estimate to be critical if: (1) the accounting estimate requires management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and (2) changes in the estimate that are reasonably likely to occur from period to period, or the use of different estimates that management could have reasonably used in the current period, would have a material impact on our consolidated financial statements, results of operations or liquidity.

Allowance for Loan Losses

The provision for loan losses creates an allowance for loan losses known and inherent in the loan portfolio at each balance sheet date. The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio.

We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant loan with identified weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the allowance for loan losses at appropriate levels. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of subjective measurements, including management’s assessment of the internal risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Subjective measurements may be periodically re-evaluated and 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, 2015 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, 2015 describes our accounting policy with regard to goodwill.

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Our annual goodwill impairment test is performed each year as of July 1^st. Upon completion of the most recent evaluation, it was determined that 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, 2015 describes our accounting policy with regard to acquired loans.

Results of Operations

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

Net Interest Income. The most significant impact on our net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the interest rate spread, produces changes in the net interest income between periods.

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The following tables present, for the periods indicated, condensed average balance sheet information, together with interest income and yields earned on average interest earning assets and interest expense and rates paid on average interest bearing liabilities.



Average Balance Sheets, Yields and Rates
(Dollars in thousands)	Three Months Ended September 30,
	2016							2015
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	5,469,294	$	66,291		4.82	%	$	5,141,484	$	62,577		4.83	%
Investment securities (2)	2,038,498		9,191			1.79		2,097,835		8,927			1.69
Interest bearing deposits in banks	458,415		607			0.53		471,682		342			0.29
Federal funds sold	2,183		4			0.73		2,876		4			0.55
Total interest earnings assets	7,968,390		76,093			3.80		7,713,877		71,850			3.70
Non-earning assets	777,083							781,559
Total assets	$	8,745,473						$	8,495,436
Interest bearing liabilities:
Demand deposits	$	2,141,892	$	514		0.10	%	$	2,086,112	$	528		0.10	%
Savings deposits	2,055,083		647			0.13		1,924,612		645			0.13
Time deposits	1,088,261		1,938			0.71		1,150,223		2,068			0.71
Repurchase agreements	466,079		100			0.09		433,007		55			0.05
Other borrowed funds	8		—			—		6		—			—
Long-term debt	27,917		457			6.51		43,200		544			5.00
Subordinated debentures held by subsidiary trusts	82,477		698			3.37		82,477		610			2.93
Total interest bearing liabilities	5,861,717		4,354			0.30		5,719,637		4,450			0.31
Non-interest bearing deposits	1,843,800							1,787,419
Other non-interest bearing liabilities	66,822							58,623
Stockholders’ equity	973,134							929,757
Total liabilities and stockholders’ equity	$	8,745,473						$	8,495,436
Net FTE interest income			71,739							67,400
Less FTE adjustments (2)			(1,158		)					(1,070		)
Net interest income from consolidated statements of income			$	70,581						$	66,330
Interest rate spread						3.50	%						3.39	%
Net FTE interest margin (3)						3.58	%						3.47	%
Cost of funds, including non-interest bearing demand deposits (4)						0.22	%						0.24	%


(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,
	2016							2015
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
Interest earning assets:
Loans (1) (2)	$	5,339,479	$	192,910		4.83	%	$	5,010,251	$	183,305		4.89	%
Investment securities (2)	2,080,454		27,950			1.79		2,236,581		28,209			1.69
Interest bearing deposits in banks	441,748		1,734			0.52		462,262		1,002			0.29
Federal funds sold	1,789		9			0.67		2,412		11			0.61
Total interest earnings assets	7,863,470		222,603			3.78		7,711,506		212,527			3.68
Non-earning assets	762,979							759,169
Total assets	$	8,626,449						$	8,470,675
Interest bearing liabilities:
Demand deposits	$	2,140,981	$	1,587		0.10	%	$	2,087,241	$	1,558		0.10	%
Savings deposits	2,008,032		1,949			0.13		1,894,132		1,897			0.13
Time deposits	1,101,205		5,899			0.72		1,181,931		6,334			0.72
Repurchase agreements	471,165		282			0.08		453,610		162			0.05
Other borrowed funds	8		—			—		5		—			—
Long-term debt	28,313		1,357			6.40		41,469		1,596			5.15
Subordinated debentures held by subsidiary trusts	82,477		2,036			3.30		82,477		1,800			2.92
Total interest bearing liabilities	5,832,181		13,110			0.30		5,740,865		13,347			0.31
Non-interest bearing deposits	1,779,344							1,750,152
Other non-interest bearing liabilities	60,301							60,149
Stockholders’ equity	954,623							919,509
Total liabilities and stockholders’ equity	$	8,626,449						$	8,470,675
Net FTE interest income			209,493							199,180
Less FTE adjustments (2)			(3,329		)					(3,237		)
Net interest income from consolidated statements of income			$	206,164						$	195,943
Interest rate spread						3.48	%						3.37	%
Net FTE interest margin (3)						3.56	%						3.45	%
Cost of funds, including non-interest bearing demand deposits (4)						0.23	%						0.24	%


(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.

Our net interest income on a fully taxable equivalent, or FTE, basis increased $4.3 million, or 6.4%, to $71.7 million during the three months ended September 30, 2016, as compared to $67.4 million for the same period in 2015, and $10.3 million, or 5.2%, to $209.5 million during the nine months ended September 30, 2016, as compared to $199.2 million for the same period in 2015. These increases were primarily attributable to organic loan growth combined with a shift in the mix of interest earning assets from lower yielding investment securities into higher yielding loans. Also contributing to the third quarter 2016 increase in net FTE interest income, as compared to third quarter 2015, were increases in net recoveries of previously charged-off interest. Charged-off interest recoveries were $1.8 million and $2.2 million during the three and nine months ended September 30, 2016, as compared to $679 thousand and $2.0 million during the same respective periods in 2015.

Our net FTE interest income was positively impacted by interest accretion related to the fair valuation of acquired loans. Interest accretion related to the fair valuation of acquired loans was $1.4 million and $4.7 million during the three and nine months ended September 30, 2016, respectively. This compares to $1.4 million and $4.1 million during the same respective periods in 2015.

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Our net interest margin ratio increased 11 basis points to 3.58% for the three months ended September 30, 2016, as compared to 3.47% for the same period in 2015, and 11 basis points to 3.56% for the nine months ended September 30, 2016, as compared to 3.45% during the same period in 2015. Increases in net FTE interest margin ratio during the three and nine months ended September 30, 2016, as compared to the same periods in 2015, were primarily due to increases in average outstanding loans, higher yields earned on interest-bearing deposits in banks and investment securities and a slight reduction in funding costs. Exclusive of interest accretion related to the fair valuation of acquired loans and recoveries of previously charged-off interest, our net interest margin ratio was 3.42% during the three months ended September 30, 2016, as compared to 3.36% for the same period in 2015, and 3.44% during the nine months ended September 30, 2016, as compared to 3.35% during the same period in 2015.

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, 2016 compared with Three Months Ended September 30, 2015									Nine Months Ended September 30, 2016 compared with Nine Months Ended September 30, 2015
	Volume			Rate			Net			Volume			Rate			Net
Interest earning assets:
Loans (1)	$	3,990		$	(276	)	$	3,714		$	12,045		$	(2,440	)	$	9,605
Investment securities (1)	(252		)	516			264			(1,969		)	1,710			(259		)
Interest bearing deposits in banks	(10		)	275			265			(44		)	776			732
Federal funds sold	(1		)	1			—			(3		)	1			(2		)
Total change	3,727			516			4,243			10,029			47			10,076
Interest bearing liabilities:
Demand deposits	14			(28		)	(14		)	40			(11		)	29
Savings deposits	44			(42		)	2			114			(62		)	52
Time deposits	(111		)	(19		)	(130		)	(433		)	(2		)	(435		)
Repurchase agreements	4			41			45			6			114			120
Other borrowed funds	—			—			—			—			—			—
Long-term debt	(192		)	105			(87		)	(506		)	267			(239		)
Subordinated debentures held by subsidiary trusts	—			88			88			—			236			236
Total change	(241		)	145			(96		)	(779		)	542			(237		)
Increase in FTE net interest income	$	3,968		$	371		$	4,339		$	10,808		$	(495	)	$	10,313

(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 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. During the three months ended September 30, 2016, we recorded a provision for loan losses of $2.4 million, as compared to $1.1 million during the same period in 2015. For the nine months ended September 30, 2016, we recorded a provision for loan losses of $8.9 million, as compared to $3.5 million during the same period in 2015. Quarter-to-date and year-to-date increases in provision for loan losses are reflective of loan growth, increases in general and specific reserves related to energy sector loans and higher levels of criticized and non-performing loans.

During second quarter 2016, we adjusted certain qualitative factors used in determining the appropriate level of the allowance for loan losses to better reflect our loss experience subsequent to the financial crisis. The adjustment resulted in increases in specific reserves on commercial real estate loans, which were partially offset by reductions in general reserves allocated to commercial real estate and construction loans. For information regarding our non-performing loans, see “Non-Performing Assets” included herein. For information regarding our allowance for losses and the second quarter 2016 adjustment of certain qualitative factors, see "Financial Condition - Allowance for Loan Losses" included herein.

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Non-interest Income. Our principal sources of non-interest income primarily include fee-based revenues such as payment services, mortgage banking and wealth management revenues, service charges on deposit accounts and other service charges, commissions and fees. Non-interest income increased $693 thousand, or 2.2%, to $31.9 million for the three months ended September 30, 2016, as compared to $31.2 million for the same period in 2015, and $2.9 million, or 3.1%, to $93.7 million for the nine months ended September 30, 2016, as compared to $90.9 million during the same period in 2015. Year-over-year increases in other income were primarily due to the second quarter 2016 non-recurring recovery of $3.8 million of prior year litigation settlement expense. Other significant components of the quarter-over quarter and year-over year increases are discussed below.

Payment services revenues consist of interchange fees paid by merchants for processing electronic payment transactions and ATM service fees. Payment services revenues increased $445 thousand, or 5.2%, to $9.0 million during the three months ended September 30, 2016, as compared to $8.6 million for the same period in 2015, and $1.3 million, or 5.2%, to $25.7 million during the nine months ended September 30, 2016, as compared to $24.4 million during the same period in 2015, due to additional interchange income resulting from higher credit card transaction volumes.

Service charges on deposit accounts increased $313 thousand, or 7.1%, to $4.7 million during the three months ended September 30, 2016, as compared to $4.4 million during the same period in 2015, and $1.4 million, or 11.4%, to $13.8 million for the nine months ended September 30, 2016, as compared to $12.4 million during the same period in 2015. The increases were primarily due to increases in overdraft charges on consumer accounts. Management attributes this increase to a focused effort on educating depositors on the benefits of overdraft protection for one-time debit and ATM card transactions. As of September 30, 2016, approximately 8% of our depositors have opted for overdraft protection.

Mortgage banking revenue increased $30 thousand, or less than 1.0%, to $8.0 million during the three months ended September 30, 2016, as compared to $8.0 million during the same period in 2015, and decreased $2.3 million, or 10.3%, to $20.3 million during the nine months ended September 30, 2016, as compared to $22.7 million during the same period in 2015.

Effective January 1, 2016, we began offsetting the direct standard costs of originating residential mortgage loans held for sale against the related mortgage banking revenues. This offset decreased mortgage banking revenues by $3.3 million and $8.1 million in during the three and nine month periods ended September 30, 2016, respectively. Also effective January 1, 2016, we elected to carry our loans held for sale at fair value. Changes in the fair value of mortgage loans decreased mortgage banking revenues by $752 thousand during the three months ended September 30, 2016, and increased mortgage banking revenues by $1.9 million during the nine months ended September 30, 2016.

Exclusive of the impacts of the direct standard costs offset and changes in fair values of mortgage loans held for sale described above, mortgage banking revenues increased $2.6 million, or 32.2% to $10.6 million during the three months ended September 30, 2016, as compared to $8.0 million during the same period in 2015, and $7.7 million, or 33.8%, to $30.4 million during the nine months ended September 30, 2016, as compared to $22.7 million during the same period in 2015. Despite general declines in mortgage rates, our margin on loan sales increased by approximately 40 basis points beginning in the second quarter of 2016, which contributed to our quarter-over-quarter and year-over-year growth in revenue. Partially offsetting year-over-year increases in mortgage banking revenues was a $410 thousand gain on the sale of $10.6 million of seasoned portfolio loans that was recorded during second quarter 2015. During the first nine months of 2016, loans originated for home purchases accounted for approximately 61% of our production, as compared to approximately 66% during the same period in 2015.

Other income includes company-owned life insurance revenues, check printing income, agency stock dividends and gains on sales of miscellaneous assets. Other income decreased $166 thousand, or 6.7%, to $2.3 million during the three months ended September 30, 2016, as compared to $2.5 million during the same period in 2015, and $1.5 million, or 17.2%, to $7.0 million for the nine months ended September 30, 2016, as compared to $8.5 million during the same period in 2015. During second quarter 2015 we recorded an $863 thousand gain on the sale of land and a $1.0 million expense reversal related to the settlement of claims assumed in a prior period acquisition.

Non-interest Expense. Non-interest expense decreased $4.1 million, or 6.2%, to $62.1 million for the three months ended September 30, 2016, as compared to $66.2 million for the same period in 2015, and $4.4 million, or 2.4%, to $183.5 million during the nine months ended September 30, 2016, as compared to $187.9 million in the same period in 2015, primarily due to reductions in loss contingency expenses. During third quarter 2015, we recorded loss contingency expenses of $5.0 million related to a lender liability lawsuit. Other significant components of the quarter-over-quarter and year-over-year decreases are discussed below.

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Salaries and wages expense decreased $1.8 million, or 7.2%, to $23.6 million during the three months ended September 30, 2016, as compared to $25.5 million during the same period in 2015, and $5.1 million, or 6.6%, to $71.8 million during the nine months ended September 30, 2016, as compared to $76.9 million during the same period in 2015, primarily due to the offset of direct standard loan costs, principally salaries, wages and commissions, on mortgage loans held for sale against the related mortgage banking revenues. This offset decreased salaries and wages expense by $3.3 million and $8.1 million during the three and nine month periods ended September 30, 2016, respectively.

Exclusive of the impacts of the direct standard costs offset described above, salaries and wages expense increased $1.4 million, or 5.7% to $26.9 million during the three months ended September 30, 2016, as compared to $25.5 million during the same period in 2015, and $3.0 million, or 3.9%, to $79.9 million during the nine months ended September 30, 2016, as compared to $76.9 million during the same period in 2015. Quarter-over-quarter increases were primarily due to increases in incentive compensation accruals reflective of the Company's performance against predetermined goals. Year-over-year increases were primarily due to one-time separation and special bonus expenses recorded during the first quarter of 2016.

Employee benefits expense increased $602 thousand, or 7.5%, to $8.6 million during the three months ended September 30, 2016, as compared to $8.0 million during the same period in 2015, and $2.3 million, or 9.6%, to $26.3 million during the nine months ended September 30, 2016, as compared to $24.0 million during the same period in 2015, primarily due to increases in payroll tax and group health insurance expenses.

Furniture and equipment expense decreased $1.5 million or 37.7%, to $2.4 million for the three months ended September 30, 2016, as compared to $3.8 million during the same period in 2015, and $4.2 million, or 37.3%, to $7.1 million during the nine months ended September 30, 2016, as compared to $11.3 million during the same period in 2015. Effective January 1, 2016, we began capturing certain software costs separately from equipment costs, resulting in decreases in furniture and equipment expense and corresponding increases in outsourced technology expenses of approximately $1.4 million and $3.8 million during the three and nine months ended September 30, 2016, respectively, as compared to the same respective periods in 2015.

Outsourced technology services expense increased $2.7 million or 106.8%, to $5.2 million for the three months ended September 30, 2016, as compared to $2.5 million during the same period in 2015, and $7.3 million, or 95.9%, to $14.8 million during the nine months ended September 30, 2016, as compared to $7.6 million during the same period in 2015. Approximately $1.4 million of the third quarter 2016 increase and $3.8 million of the year-to-date increase was the result of the classification of certain software costs as outsourced technology services expenses in the current year versus classification as furniture and equipment expense in the prior year. The remaining quarter-over-quarter and year-over-year increases in outsourced technology services are primarily due to the enhancement of our technology systems and processes to improve scalability and support our future growth.

Net OREO expense increased $728 thousand, or 101.1%, to $8 thousand during the three months ended September 30, 2016, as compared to net OREO income of $720 thousand during the same period in 2015, and $1.7 million, or 106.8%, to $109 thousand during the nine months ended September 30, 2016, as compared to net OREO income of $1.6 million during the same period in 2015. Increases in OREO expense were primarily due to lower net gains recognized on the sale of OREO properties. During the three and nine months ended September 30, 2016, we recorded net gains on the sale of OREO properties of $57 thousand and $693 thousand, respectively, as compared to net gains on the sale of OREO properties of $1.1 million and $2.9 million recorded during the same respective periods in 2015.

Professional fees decreased $725 thousand, or 37.8%, to $1.2 million during the three months ended September 30, 2016, as compared to $1.9 million during the same period in 2015, and $1.1 million, or 23.2%, to $3.6 million during the nine months ended September 30, 2016, as compared to $4.7 million during the same period in 2015. During the three and nine months ended September 30, 2015, we recorded higher professional fees in association with the identification and execution of revenue enhancement strategies and changing trust data platforms.

Other expense decreased $71 thousand, or less than 1.0%, to $12.5 million during the three months ended September 30, 2016, as compared to $12.6 million during the same period in 2015. During third quarter 2016, we recorded donation expense of $310 thousand related to the charitable contribution of land and a building and incurred other losses of $384 thousand primarily related to the write-off of an equity method investment. These increases were offset by decreases in debit card and travel expenses, and lower fraud losses.

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Other expense decreased $1.3 million, or 3.3%, to $36.7 million during the nine months ended September 30, 2016, as compared to $38.0 million for the same period in 2015, primarily due to decreases in advertising expense and lower customer fraud losses. During the nine months ended September 30, 2016, we recorded customer fraud losses of $784 thousand, compared to $1.5 million during the same period in 2015. In addition, during second quarter 2015, we recorded a one-time contract termination fee of $876 thousand related to a change in payment service provider.

Acquisition expenses of $1.2 million recorded during the three and nine months ended September 30, 2016, included legal and professional fees related to the Flathead Bank acquisition in August 2016. Non-core acquisition expenses of $566 thousand and $629 thousand recorded during the three and nine months ended September 30, 2015, respectively, included legal and professional fees related to the acquisition of Absarokee Bancorporation, Inc. in July 2015. For additional information regarding acquisitions, see "Recent Developments" included herein and “Note 2 – Acquisitions” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

Income Tax Expense. Our effective federal income tax rate was 30.1% for the nine months ended September 30, 2016 and 29.4% for the nine months ended September 30, 2015. State income tax applies primarily to pretax earnings generated within Montana and South Dakota. Our effective state tax rate was 4.0% for the nine months ended September 30, 2016 and 4.2% for the nine months ended September 30, 2015. Fluctuations in our effective income tax rates were primarily due to the timing of tax credits.

Financial Condition

Total assets increased $246 million, or 2.8%, to $9.0 billion as of September 30, 2016, from $8.7 billion as of December 31, 2015. Approximately $228 million of the increase was attributable to the Flathead Bank acquisition. The remaining increase was primarily due to the deployment of funds generated primarily through organic deposit growth into interest earning assets. Significant fluctuations in balance sheet accounts are discussed below.

Loans. Total loans increased $285 million, or 5.4%, to $5,531 million as of September 30, 2016, as compared to $5,246 million December 31, 2015. Approximately $83 million of this increase was attributable to the acquisition of Flathead Bank in August 2016. Exclusive of the Flathead Bank acquisition, total loans grew organically $202 million, or 3.8%, with the most notable growth occurring in commercial, commercial real estate, commercial and residential construction, and indirect consumer loans.

Commercial loans are typically made to small and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansions. Commercial loans generally include lines of credit, business credit cards and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. Commercial loans increased $22 million, or 2.8%, to $814 million as of September 30, 2016, from $792 million as of December 31, 2015, with approximately $9 million of the increase attributable to the Flathead Bank acquisition. Exclusive of acquired loans, commercial loans grew organically $13 million, or 1.6%.

Commercial real estate loans include loans for property and improvements used commercially by the borrower or for lease to others for the production of goods or services. Over 50% of our commercial real estate loans were owner occupied as of September 30, 2016 and December 31, 2015. Commercial real estate loans increased $50 million, or 2.8%, to $1,843 million as of September 30, 2016, from $1,793 million as of December 31, 2015, with approximately $27 million of the increase attributable to the Flathead Bank acquisition. Exclusive of acquired loans, commercial real estate loans grew organically $23 million, or 1.3%. Management attributes this organic growth in commercial and commercial real estate loans to continued business expansion in within our market areas, particularly in the Billings, Rapid City, Gallatin Valley and Sheridan markets.

Construction loans are primarily to commercial builders for residential lot development and the construction of single-family residences and commercial real estate properties. Construction loans are generally underwritten pursuant to pre-approved permanent financing. Construction loans increased $47 million, or 10.9%, to $478 million as of September 30, 2016, from $431 million as of December 31, 2015, with approximately $13 million of the increase attributable to the Flathead Bank acquisition. Exclusive of acquired loans, construction loans grew organically $34 million, or 8.0%, due to organic growth in commercial and residential construction loans. Management attributes this organic growth to continuing increased housing demand and business expansion within our existing markets.

Our consumer loans include direct personal loans; credit card loans and lines of credit; and, indirect loans created when we purchase consumer loan contracts advanced for the purchase of automobiles, boats and other consumer goods from the consumer product dealer network within the market areas we serve. Personal loans and indirect dealer loans are generally secured by automobiles, recreational vehicles, boats and other types of personal property and are made on an installment basis. Consumer

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loans increased $108 million, or 12.8%, to $952 million as of September 30, 2016, from $844 million as of December 31, 2015, due to organic growth in indirect consumer loans. Indirect consumer loans grew organically $109 million, or 17.6%, to $732 million as of September 30, 2016, from $623 million as of December 31, 2015, due to the continued expansion of our indirect lending program within our existing markets and increases in the average loan amounts advanced.

Non-performing Assets. Non-performing assets include non-accrual loans, loans contractually past due 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, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
Non-performing loans:
Non-accrual loans	$	71,469		$	74,311		$	63,837		$	66,385		$	66,359
Accruing loans past due 90 days or more	8,131			4,454			4,362			5,602			3,357

Total non-performing loans	79,600			78,765			68,199			71,987			69,716
OREO	9,447			7,908			9,257			6,254			8,031

Total non-performing assets	$	89,047		$	86,673		$	77,456		$	78,241		$	77,747

Troubled debt restructurings not included above	$	17,163		$	16,408		$	12,070		$	15,419		$	16,702

Non-performing loans to total loans	1.44		%	1.46		%	1.30		%	1.37		%	1.35		%
Non-performing assets to total loans and OREO	1.61		%	1.60		%	1.47		%	1.49		%	1.50		%
Non-performing assets to total assets	0.99		%	1.01		%	0.89		%	0.90		%	0.90		%

Non-performing loans. Non-performing loans include non-accrual loans and loans contractually past due 90 days or more. We monitor and evaluate collateral values on non-performing loans quarterly. Appraisals are required on all non-performing loans every 18-24 months, or sooner as conditions necessitate. We update valuations on collateral underlying oil and gas credits based on recent market-based oil price forecasts provided by an independent third party. We also monitor real estate values by market for our larger market areas. Based on trends in real estate values, adjustments may be made to the appraised value based on time elapsed between the appraisal date and the impairment analysis or a new appraisal may be ordered. Appraised values in our smaller market areas may be adjusted based on trends identified through discussions with local realtors and appraisers. Appraisals are also adjusted for selling costs. The collateral valuation is then compared to the loan balance and any resulting shortfall is recorded in the allowance for loan losses as a specific valuation allowance. Provisions for loan losses are impacted by changes in the specific valuation allowances and historical or general valuation elements of the allowance for loan losses.

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



Non-Performing Loans by Loan Type
(Dollars in thousands)	September 30, 2016		Percent of Total		December 31, 2015		Percent of Total
Real estate:
Commercial	$	27,684	34.8	%	$	24,189	33.6	%
Construction:			.
Land acquisition and development	5,368		6.8	%	7,956		11.1	%
Commercial	503		0.6	%	955		1.3	%
Residential	817		1.0	%	293		0.4	%
Total construction	6,688		8.4	%	9,204		12.8	%
Residential	5,635		7.1	%	7,305		10.1	%
Agricultural	4,166		5.2	%	5,355		7.4	%
Total real estate	44,173		55.5	%	46,053		63.9	%
Consumer	2,356		3.0	%	1,918		2.7	%
Commercial	29,008		36.4	%	23,012		32.0	%
Agricultural	3,752		4.7	%	690		1.0	%
Other	311		0.4	%	314		0.4	%
Total non-performing loans	$	79,600	100.0	%	$	71,987	100.0	%

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Non-accrual loans. We generally place loans, excluding acquired credit impaired loans, on non-accrual when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. If all loans on non-accrual had been current in accordance with their original terms, gross income of approximately $2.5 million and $2.3 million would have been accrued for the nine months ended September 30, 2016 and 2015, respectively. Non-accrual loans, the largest component of non-performing assets, increased $5 million to $71 million as of September 30, 2016, from $66 million as of December 31, 2015, primarily due to the loans of four commercial real estate borrowers in the hospitality sector that were placed on non-accrual status during second quarter 2016 and the loans of one agricultural real estate borrower placed on non-accrual status during third quarter 2016. These increases were partially offset by the pay-off of the loans of one agricultural real estate borrower and one commercial real estate borrower aggregating $7 million.

Accruing loans past due 90 days or more. Accruing loans past due 90 days or more increased $3 million, or 45.1%, to $8 million as of September 30, 2016, from $5 million as of December 31, 2015, primarily due to the loans of one borrower in the energy sector.

OREO. OREO consists of real property acquired through foreclosure on the collateral underlying defaulted loans. We initially record OREO at fair value less estimated selling costs. Any excess of loan carrying value over the fair value of the real estate acquired is recorded as a charge against the allowance for loan losses. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings in the period in which they are identified. The fair values of OREO properties are estimated using appraisals and management estimates of current market conditions. OREO properties are appraised every 18-24 months unless deterioration in local market conditions indicates the need to obtain new appraisals sooner. OREO properties are evaluated by management quarterly to determine if additional write-downs are appropriate or necessary based on current market conditions. Quarterly evaluations include a review of the most recent appraisal of the property and reviews of recent appraisals and comparable sales data for similar properties in the same or adjacent market areas. Commercial and agricultural OREO properties are listed with unrelated third party professional real estate agents or brokers local to the areas where the marketed properties are located. Residential properties are typically listed with local realtors, after any redemption period has expired. We rely on these local real estate agents and/or brokers to list the properties on the local multiple listing system, to provide marketing materials and advertisements for the properties and to conduct open houses.

OREO increased $3 million, or 51.1%, to $9 million as of September 30, 2016, from $6 million as of December 31, 2015, with approximately $1 million of the increase attributable to the Flathead Bank acquisition. As of September 30, 2016, the composition of OREO properties was 29% residential real estate, 32% land and land development and 39% commercial.

Allowance for Loan Losses. The Company performs a quarterly assessment of the adequacy of its allowance for loan losses in accordance with generally accepted accounting principles. The methodology used to assess the adequacy is consistently applied to the Company's loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of known and inherent risk in our loan portfolio at each balance sheet date. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. See the discussion under “Critical Accounting Estimates and Significant Accounting Policies — Allowance for Loan Losses."

The allowance for loan losses is increased by provisions charged against earnings and net recoveries of charged-off loans and is reduced by negative provisions credited to earnings and net loan charge-offs. The allowance for loan losses consists of three elements:

(1)

Specific valuation allowances associated with impaired loans. Specific valuation allowances are determined based on assessment of the fair value of the collateral underlying the loans as determined through independent appraisals, the present value of future cash flows, observable market prices and any relevant qualitative or environmental factors impacting the loan. No specific valuation allowances are recorded for impaired loans that are adequately secured.

(2)

Historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends. Historical valuation allowances are determined by applying percentage loss factors to the credit exposures from outstanding loans. For commercial, agricultural and real estate loans, loss factors are applied based on the internal risk classifications of these loans. For consumer loans, loss factors are applied on a portfolio basis. For commercial, agriculture and real estate loans, loss factor percentages are based on a migration analysis of our historical loss experience, designed to account for credit deterioration. For consumer loans, loss factor percentages are based on a one-year loss history.

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(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.

The Company's allowance for loan losses increased to $81 million, or 1.47% of period end loans, as of September 30, 2016, as compared to $77 million, or 1.46% of period end loans, as of December 31, 2015. During second quarter 2016, management performed an in-depth review of the qualitative factors used in determining the appropriate level of the allowance for loan losses utilizing our loss experience subsequent to the financial crisis. This review resulted in the adjustment of certain qualitative factors. The adjustment of qualitative factors combined with the management's assessment of losses on specific loans with identified weaknesses did not result in a material impact to the overall level of our allowance for loan losses.

During third quarter 2015, we added a general economic qualitative loss factor to our allowance for loan loss calculation to estimate the potential impact of economic stresses on loans in our markets which are heavily impacted by energy prices. As of September 30, 2016, our direct exposure to the energy sector was approximately $61 million in outstanding loans, including approximately $45 million related to drilling and extraction activity and approximately $16 million advanced to service companies. We also had commitments to lend an additional $24 million to energy borrowers. Reserves allocated to energy loans as a percentage of total energy loans totaled 12.4% as of September 30, 2016, compared to 7.8% as of December 31, 2015. The increase in reserves allocated to energy loans was primarily due to specific valuation allowances related to the loans of two energy borrowers, an increase in criticized and classified energy sector loans and an increase in the general economic loss factor applied to all loans in markets heavily impacted by energy prices.

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, 2016, management determined that an allowance for loan losses related to acquired loans of $433 thousand was required under generally accepted accounting principles.

Loans, or portions thereof, are charged-off against the allowance for loan losses when management believes that the collectability of the principal is unlikely, or, with respect to consumer installment loans, according to an established delinquency schedule. Generally, loans are charged-off when (1) there has been no material principal reduction within the previous 90 days and there is no pending sale of collateral or other assets, (2) there is no significant or pending event which will result in principal reduction within the upcoming 90 days, (3) it is clear that we will not be able to collect all or a portion of the loan, (4) payments on the loan are sporadic, will result in an excessive amortization or are not consistent with the collateral held or (5) foreclosure or repossession actions are pending. Loan charge-offs do not directly correspond with the receipt of independent appraisals or the use of observable market data if the collateral value is determined to be sufficient to repay the principal balance of the loan.

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,
	2016			2016			2016			2015			2015
Balance at beginning of period	$	80,340		$	79,924		$	76,817		$	74,256		$	76,552
Provision charged to operating expense	2,363			2,550			4,000			3,289			1,098
Charge offs:
Real estate
Commercial	173			257			694			50			120
Construction	72			26			625			305			2,028
Residential	135			240			601			91			71
Agricultural	—			—			2			614			—
Consumer	2,157			1,712			1,892			2,008			1,537
Commercial	578			1,018			488			432			791
Agricultural	—			188			—			221			—
Total charge-offs	3,115			3,441			4,302			3,721			4,547
Recoveries:
Real estate
Commercial	83			45			309			639			387
Construction	31			51			1,441			538			—
Residential	103			93			51			153			—
Agricultural	4			21			558			—			—
Consumer	742			649			775			736			653
Commercial	680			448			275			927			113
Agricultural	4			—			—			—			—
Total recoveries	1,647			1,307			3,409			2,993			1,153
Net charge-offs	1,468			2,134			893			728			3,394
Balance at end of period	$	81,235		$	80,340		$	79,924		$	76,817		$	74,256

Period end loans	$	5,530,915		$	5,413,242		$	5,244,458		$	5,246,196		$	5,244,458
Average loans	5,469,294			5,324,812			5,222,905			5,194,970			5,222,905
Net loans charged-off to average loans, annualized	0.11		%	0.16		%	0.07		%	0.06		%	0.26		%
Allowance to period end loans	1.47		%	1.48		%	1.52		%	1.46		%	1.43		%

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 $15 million, or less than 1.0%, to $2,072 million, or 23.1% of total assets, as of September 30, 2016, from $2,058 million, or 23.6% of total assets, as of December 31, 2015. In conjunction with the Flathead Bank acquisition, we acquired investment securities with fair values aggregating $101 million. Approximately $29 million of these securities were immediately sold. As of September 30, 2016, the estimated duration of our investment portfolio was 2.4 years, as compared to 2.8 years as of December 31, 2015.

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, 2016, we had investment securities with fair values aggregating $143 million that had been in a continuous loss position more than twelve months. Gross unrealized losses on these securities of $4.2 million as of September 30, 2016 were attributable to changes in interest rates. No impairment losses were recorded during the three or nine months ended September 30, 2016 and 2015.

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Cash and Cash Equivalents. Cash and cash equivalents decreased $79 million, or 10.1%, to $701 million as of September 30, 2016, from $780 million as of December 31, 2015. Exclusive of net cash and cash equivalents acquired as part of the Flathead Bank acquisition, cash and cash equivalents decreased $98 million, or 12.5%, from December 31, 2015 to September 30, 2016. During the first nine months of 2016, organic loan growth and stock repurchases were primarily funded through available funds resulting in decreases in cash and cash equivalents. Remaining decreases in cash and cash equivalents occurred during the normal course of business and are not reflective of changes in business plan or strategy.

Company-Owned Life Insurance. Company-owned life insurance increased $10 million, or 5.2%, to $197 million as of September 30, 2015, from $187 million as of December 31, 2015, with $6 million of the increase attributable to the Flathead Bank acquisition. The remaining increase was due to increases in the cash surrender values of existing company-owned life insurance policies.

Deposits. Our deposits consist of non-interest bearing and interest bearing demand, savings, individual retirement and time deposit accounts. Total deposits increased $240 million, or 3.4%, to $7,329 million as of September 30, 2016, from $7,089 million as of December 31, 2015, with approximately $210 million of the increase attributable to the Flathead Bank acquisition. Exclusive of the Flathead Bank acquisition, total deposits increased $30 million, or less than 1.0%, due to organic growth. During the nine months ended September 30, 2016, we continued to experience a shift in the mix of deposits away from higher costing time deposits to lower costing demand deposits.

The following table summarizes our deposits as of the dates indicated.



Deposits
(Dollars in thousands)	September 30, 2016		Percent of Total		December 31, 2015		Percent of Total
Non-interest bearing demand	$	1,965,872	26.8	%	$	1,823,716	25.7	%
Interest bearing:
Demand	2,174,443		29.7		2,178,373		30.7
Savings	2,095,678		28.6		1,955,256		27.6
Time, $100 and over	485,253		6.6		487,372		6.9
Time, other (1)	607,335		8.3		644,220		9.1
Total interest bearing	5,362,709		73.2		5,265,221		74.3
Total deposits	$	7,328,581	100.0	%	$	7,088,937	100.0	%


(1)	Included in Time, other are Certificate of Deposit Account Registry Service, or CDAR, deposits of $28 million as of September 30, 2016 and $38 million as of December 31, 2015.

Securities Sold Under Repurchase Agreements. In addition to deposits, repurchase agreements with commercial depositors, including municipalities, provide an additional source of funds. Under repurchase agreements, deposit balances are invested in short-term U.S. government agency securities overnight and are then repurchased the following day. Repurchase agreement balances decreased $34 million, or 6.6%, to $477 million as of September 30, 2016, from $511 million as of December 31, 2015. Fluctuations in repurchase agreement balances correspond with fluctuations in the liquidity of our customers.

Deferred Tax Liability. Our net deferred tax liability increased $5 million, or 52.5%, to $15 million as of September 30, 2016, from $10 million as of December 31, 2015, primarily due to increases in deferred tax liabilities related to unrealized gains on available-for sale investment securities.

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 $32 million, or 3.4%, to $983 million as of September 30, 2016, from $950 million as of December 31, 2015, primarily due to the retention of earnings and increases in unrealized holding gains, net of taxes, on available-for-sale investment securities. During the nine months ended September 30, 2016, we repurchased and retired 975,877 shares of our Class A common stock in open market transactions at an aggregate purchase price of $26 million. The repurchases were made pursuant to a stock repurchase program approved by our Board of Directors. For additional information regarding the repurchase, see “Note 8 – Capital Stock” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

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On October 21, 2016, we declared a quarterly dividend to common stockholders of $0.22 per share payable on November 14, 2016 to to shareholders of record as of October 31, 2016. This dividend equates to a 3.0% annual yield based on the $29.83 average closing price of the Company's common stock during third quarter 2016.

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, or Basel III. Under Basel II, certain 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 phases in beginning January 1, 2016 and will be fully implemented on January 1, 2019. As of September 30, 2016 and December 31, 2015, we had capital levels that, in all cases, exceeded the well-capitalized guidelines. For additional information regarding our capital levels, see "Note 10 – Regulatory Capital” in the accompanying “Notes to Unaudited Consolidated Financial Statements” included in this report.

Liquidity. Liquidity measures our ability to meet current and future cash flow needs on a timely basis and at a reasonable cost. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest bearing deposits in banks, federal funds sold, available-for-sale investment securities and maturing or prepaying balances in our held-to-maturity investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market funds through non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the issuance of preferred or common securities.

Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the unaudited “Consolidated Statements of Cash Flows,” included in Part I, Item 1.

As a holding company, we are a corporation separate and apart from the Bank and, therefore, we provide for our own liquidity. Our main sources of funding include management fees and dividends declared and paid by the Bank and access to capital markets. There are statutory, regulatory and debt covenant limitations that affect the ability of our subsidiary 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 15 – 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, 2016, 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, 2015.

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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, 2016, 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, 2016, 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, 2016, that have materially affected, or are reasonably likely to materially affect, such control.

Limitations on Controls and Procedures

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, any system of disclosure controls and procedures or internal control over financial reporting may not be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

PART II.

OTHER INFORMATION


Item 1.	Legal Proceedings

There have been no material changes in legal proceedings as described in our Annual Report on Form 10-K for the year ended December 31, 2015.


Item 1A.	Risk Factors

There have been no material changes in risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2015.


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, 2016.

(b) Not applicable.

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(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, 2016.



				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	Per Share		or Programs	Plans or Programs
July 2016	1,333	$	28.93	—	24,123
August 2016	—	—		—	24,123
September 2016	1,202	31.99		—	24,123
Total	2,535	$	30.38	—	24,123


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

Not applicable or required.

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*		Section 1350 Certifications.

101		Interactive data file


*	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 7, 2016	By:	/S/ KEVIN P. RILEY
			Kevin P. Riley
			President and Chief Executive Officer

Date:	November 7, 2016		/S/ MARCY D. MUTCH
			Marcy D. Mutch
			Executive Vice President and Chief Financial Officer

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