Acquisition

On February 10, 2014, the Company entered into an agreement and plan of merger to acquire all of the outstanding stock of Mountain West Financial Corp ("MWFC"), a Montana-based bank holding company that operates one wholly-owned subsidiary bank, Mountain West Bank, NA ("MWB"), with branches located in five of the Company's current market areas in Montana. The acquisition was completed on July 31, 2014, and the Company merged MWB with its existing bank subsidiary, First Interstate Bank ("FIB"), on October 17, 2014. The acquisition allowed the Company to gain market share in several of its current market areas. The Company also expects to benefit from future cost savings related to the merger of MWB with FIB.

Under the terms of the agreement and plan of merger, each outstanding share of Mountain West common stock was canceled and converted into the right to receive 0.2552 shares of the Company's Class A common stock plus $7.125 in cash, or, at the stockholder's election, an amount in all cash or all stock intended to be substantially equal in value to the combination of stock and cash merger consideration described above. Consideration for the acquisition of $74,451 consisted of cash of $38,479 and the issuance of 1,378,230 shares of the Company's Class A common stock valued at $26.10 per share, the closing price of the Company's Class A common stock as quoted on the NASDAQ stock market on the acquisition date. The acquisition was accounted for using the acquisition method with the cash portion of the purchase price funded from cash on hand.

The assets and liabilities of MWFC were recorded in the Company's consolidated financial statements at their estimated fair values as of the acquisition date. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as goodwill. This acquisition was accounted for as a tax-free exchange; therefore, goodwill recorded in conjunction with this acquisition is not deductible for income tax purposes.

The following table summarized the consideration paid, fair values of MWFC assets acquired and liabilities assumed and the resulting goodwill. All amounts reported are provisional pending completion of review of valuations obtained from third parties.



	As Recorded			Fair Value				As Recorded
As of July 31, 2014	by MWFC			Adjustments				by the Company

Assets acquired:
Cash and cash equivalents	$	74,035		$	—			$	74,035
Investment securities	104,945			(34		)	(1)	104,911
Loans	378,558			(18,286		)	(2)	360,272
Allowance for loan losses	(11,598		)	11,598			(3)	—
Premises and equipment	35,283			(5,685		)	(4)	29,598
Company-owned life insurance	13,046			—				13,046
Deferred tax asset, net	6,491			1,461			(5)	7,952
Core deposit intangible	—			11,014			(6)	11,014
Other assets	16,559			(5,300		)	(7)	11,259
Total assets acquired	617,319			(5,232		)		612,087

Liabilities assumed:
Deposits	515,538			(159		)	(8)	515,379
Other liabilities	20,501			2,290			(9)	22,791
Subordinated debentures held by subsidiary trusts	20,439			—			(10)	20,439
Total liabilities assumed	556,478			2,131				558,609

Net assets acquired	$	60,841		$	(7,363	)		53,478

Consideration paid:
Cash								38,479
Class A common stock								35,972
Total consideration								74,451

Goodwill								$	20,973



Explanation of fair value adjustments:
(1)	Write down of the book value of investment securities to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)	Write down of the book value of loans to their estimated fair values. Except for collateral dependent loans acquired with deteriorated credit quality, the fair value of loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of the each loan's underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3)	Adjustment to remove the MWB allowance for loan losses at acquisition date as the credit risk is accounted for in the fair value adjustment for loans receivable described in (2) above.
(4)	Write down of the book value of premises and equipment to their estimated fair values based upon appraisals obtained from an independent third party appraiser.
(5)	Adjustment represents the net deferred tax assets resulting from fair value adjustments related to acquired assets, assumed liabilities, core deposit intangible assets and other purchase accounting adjustments.



(6)	Adjustment represents the value of the core deposit base assumed in the acquisition based upon a valuation obtained from an independent third party valuation expert.
(7)	Adjustment consists of a reduction in the value of equity method investments and accrued interest receivable and the write-off of federal and state income taxes receivable, pre-existing goodwill and computer software costs.
(8)	Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition.
(9)	Adjustment represents decrease in the book value of Federal Home Loan Bank borrowings to their estimated fair market values based upon interest interest rates of similar advances with similar characteristics on the date of acquisition.
(10)	Recorded value of junior subordinated debentures held by subsidiary trusts approximates fair value as of the acquisition date due to the short-term nature of the instruments. The Company intends to redeem these debentures in December 2014.

The core deposit intangible asset of $11,014 is being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years.

The Company recorded third party acquisition-related costs of $1,053 and $1,649 during the three and nine months ended September 30, 2014. These costs are included in non-core expenses in the Company's consolidated statements of income.

The Company acquired certain loans that are subject to Accounting Standards Codification ("ASC") Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality." ASC Topic 310-30 provides recognition, measurement and disclosure guidance for acquired loans that have evidence of deterioration in credit quality since origination for which is it probable, at acquisition, the Company will be unable to collect all contractual amounts owned. For loans that meet the criteria stipulated in ASC Topic 310-30, the excess of all cash flows expected at acquisition over the initial fair value of the loans acquired ("accretable yield") is amortized to interest income over the expected remaining lives of the underlying loans using the effective interest method. The accretable yield will fluctuate due to changes in (i) estimated lives of underling credit-impaired loans, (ii) assumptions regarding future principal and interest amounts collected, and (iii) indices used to fair value variable rate loans. Information regarding acquired credit-impaired loans as of the July 31, 2014 acquisition date is as follows:



Contractually required principal and interest payments	$	112,882
Contractual cash flows not expected to be collected ("non-accretable discount")	74,760
Cash flows expected to be collected	38,122
Interest component of cash flows expected to be collected ("accretable discount")	5,233
Fair value of acquired credit-impaired loans	$	32,889

The accompanying consolidated statements of income for the three and nine months ended September 30, 2014 include the results of operations of the acquired entity from the July 31, 2014 acquisition date. Had the acquisition been completed as of January 1, 2014, the Company's consolidated revenues and net income, on a pro forma basis, would have been $101,369 and $18,730, respectively, for the three months ended September 30, 2014, and $293,258 and $62,913, respectively, for the nine months ended September 30, 2014. Change in control expenses related to employee benefit plans, stock option cancellation fees and legal and professional expenses related to the acquisition activities of the acquired entity aggregating $2,441, net of income taxes, have been excluded from pro forma net income.