Acquisitions

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

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

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

The assets and liabilities of Cascade were recorded in the Company's consolidated financial statements on a provisional basis at their estimated fair values as of the acquisition date and will be finalized in the coming months. The excess value of the consideration paid over the fair value of assets acquired and liabilities assumed is recorded as provisional goodwill. The preliminary purchase price allocation resulted in provisional goodwill of $232.2 million, which is not deductible for income tax purposes. Goodwill resulting from the acquisition was allocated to the Company's one operating segment, community banking, and consists largely of the synergies and economies of scale expected from combining the operations of Cascade and the Company.

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



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

Assets acquired:
Cash and cash equivalents	$	246,804		$	—			$	246,804
Investment securities	476,733			4,876			(1)	481,609
Loans held for investment	2,112,077			(31,703		)	(2)	2,080,374
Mortgage loans held for sale	10,253			6			(2)	10,259
Allowance for loan loss	(23,974		)	23,974			(3)	—
Premises and equipment	46,554			178			(4)	46,732
Other real estate owned ("OREO")	1,192			—				1,192
Core deposit intangible	—			47,968			(5)	47,968
Deferred tax assets	47,653			(21,661		)	(6)	25,992
Other assets	98,570			1,136			(7)	99,706
Total assets acquired	3,015,862			24,774				3,040,636

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

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

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

Goodwill								$	232,208



Explanation of fair value adjustments. Note that certain marks have been updated since prior quarter, and certain balances have been reclassified, none of which are material:
(1)	Write up of the book value of investments to their estimated fair values on the date of acquisition based upon quotes obtained from an independent third party pricing service.
(2)	Write down of the book value of loans to their estimated fair values. Shared National Credits (SNC) were recorded at quoted sales prices where available. The fair value of the remaining loans was estimated using cash flow projections based on the remaining maturity and repricing terms, adjusted for estimated future credit losses and prepayments and discounted to present value using a risk-adjusted market rate for similar loans. The fair value of collateral dependent loans acquired with deteriorated credit quality was estimated based on the Company's analysis of the fair value of each loan's underlying collateral, discounted using market-derived rates of return with consideration given to the period of time and costs associated with foreclosure and disposition of the collateral.
(3)	Adjustment to remove the Cascade allowance for loan losses at acquisition date, as the credit risk is accounted for in the fair value adjustment for loans receivable described in (2) above.
(4)	Write up of the book value of premises and equipment to their estimated fair values on the date of acquisition based upon appraisals obtained from an independent third party appraiser or broker's opinion of value.
(5)	Adjustment represents the value of the core deposit base assumed in the acquisition based upon valuation from an independent accounting and advisory firm.
(6)	Adjustment consists of the write-off of pre-existing deferred tax assets as a result of the acquisition.
(7)	Adjustment consists of various other assets recorded as a result of the acquisition, including mortgage servicing rights, SBA servicing rights, and favorable leases offset by reductions to the fair value of other items.
(8)	Decrease in book value of time deposits to their estimated fair values based upon interest rates of similar time deposits with similar terms on the date of acquisition based upon valuation from an independent accounting and advisory firm.
(9)	Increase in fair value due to credit card incentive program, unfavorable leases, write-off of balance sheet reserve, and swap liability offset.

The core deposit intangible asset of $48.0 million is being amortized using an accelerated method over the estimated useful lives of the related deposits of ten years.

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

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



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

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

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



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

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



Contractually required principal and interest payments	$	2,098,452
Contractual cash flows not expected to be collected due to projected prepayment	23,387
Fair value at acquisition	$	2,067,869

The accompanying consolidated statements of income include the results of operations of the acquired entity from the May 30, 2017 acquisition date. For the period from May 30, 2017 to June 30, 2017, Cascade reported revenues of $12.9 million and net income of $3.0 million. The acquired entity continued to operate as Bank of the Cascades until August 11, 2017 at which point the operations were integrated with the Company's operations, and Bank of the Cascades merged with First Interstate Bank. Standalone amounts for the Bank of the Cascades were no longer available after that date.

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



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

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

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

The unaudited supplemental pro forma net income presented in the table above for 2017 was adjusted to exclude acquisition-related costs, including change in control expenses related to employee benefit plans and legal and professional expenses of $19.7 million, net of tax. Pro forma net income presented in the table above for 2016 was adjusted to include the aforementioned acquisition-related costs. The unaudited supplemental pro forma net income presented in the table above for 2017 and 2016 includes adjustments for scheduled amortization of core deposit intangible assets acquired in the acquisition. The unaudited supplemental pro forma net income presented in the table above for 2017 and 2016 does not capture operating costs savings and other business synergies expected as a result of the acquisition.