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



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

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.