FIBK US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. All of such forward-looking statements are expressly qualified by reference to the cautionary statements provided under the caption “Cautionary Note Regarding Forward-Looking Statements” included on page 1 in Part I of this report. Furthermore, a number of known and unknown factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. Therefore, you are encouraged to read in its entirety the information provided under the caption “Risk Factors” included under Item 1A in Part I of this report for a discussion of risk factors that may negatively impact our expected results, performance, or achievements discussed below.

Executive Overview

We are a financial and bank holding company headquartered in Billings, Montana. As of December 31, 2020, we had consolidated assets of $17.6 billion, deposits of $14.2 billion, loans held for investment of $9.8 billion, and total stockholders’ equity of $2.0 billion.

We operate 150 banking offices, including detached drive-up facilities, in communities across Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming. Through our bank subsidiary, FIB, we deliver a comprehensive range of banking products and services—including online and mobile banking—to individuals, businesses, municipalities, and others throughout our market areas. Our clients participate in a wide variety of industries, including agriculture, construction, education, energy, governmental services, healthcare, mining, professional services, retail, tourism, and wholesale trade.

Our Business

Our principal business activity is lending to, accepting deposits from, and conducting financial transactions with and for 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 credit 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, bankers 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 clients, generally without utilizing brokered deposits and with minimal reliance on wholesale funding sources. For additional information about our underwriting standards and loan approval process, see “Business—Lending Activities,” included in Part I, Item 1 of this report.

Recent Trends and Developments

Current Expected Credit Losses

On January 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326, Measurement of Credit Losses on Financial Instruments (“ASC 326”), and replaced the historically used incurred loss methodology with an expected loss methodology that is referred to as the Current Expected Credit Loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans held for investment and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (for example, loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that management does not intend to sell or believes that it is more likely than not they will be required to sell.

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The following table summarizes the estimated allowance for credit losses related to financial assets and off-balance sheet credit exposures and the corresponding impacts on the deferred tax liability and retained earnings upon adoption of ASC 326 on January 1, 2020:

Pre-ASC 326 Adoption Post-ASC 326 Adoption Impact of ASC 326 Adoption

Assets:

Allowance for credit losses on HTM securities $ — $ — $ —

Allowance for credit losses on loans held for investment 73.0 103.0 30.0

Liabilities:

Off-balance sheet credit exposures — 2.3 2.3

Equity:

For additional information regarding the CECL adoption, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” and “Notes to Consolidated Financial Statements—Recent Authoritative Accounting Guidance” included in Part IV, Item 15 of this report.

COVID-19

Since its emergence in Wuhan, China in December 2019, COVID-19 has spread throughout the world, significantly impacting the entire world’s economies. In many cases, COVID-19 causes severe illness and in a significant minority of cases can result in death. The global impact of the pandemic has been rapidly evolving and many countries, including the United States, reacted by instituting a wide variety of control measures including states of emergency, mandatory quarantines, required business and school closures, implementing state-wide “shelter in place” orders, and restricting travel. The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, signed into law in March 2020, provided one-time payments to individuals, additional health-care funding, loans, and grants to certain businesses, temporary amendments to the Internal Revenue Code, and strengthened unemployment insurance. In addition, the Federal Reserve cut the federal funds rate, lowered the interest rate on emergency lending at the discount window, and lengthened the term of overnight loans up to 90 days. The CARES Act was later extended by the Coronavirus Response and Relief Supplemental Appropriations Act, 2021, or RELIEF Act, which was signed into law on December 27, 2020. A number of key provisions of the RELIEF Act include additional loans and grants for small businesses, one-time payments to individuals, extensions to the increased unemployment insurance, additional health-care funding, and aid for rental assistance programs, amongst other short-term relief programs. The RELIEF Act also included funding for the vaccine rollout, transportation, education, and agricultural aid.

The CARES Act (extended by the RELIEF Act) created a new guaranteed, unsecured loan program under the Small Business Administration called the Paycheck Protection Program, or the PPP, in which the Company participates. Designed to incentivize certain businesses to keep their workers on the payroll during the pandemic period, PPP loans are fully forgivable so long as the funds are used as prescribed by the program, are for a two-year or five-year term, earn interest at a rate of 1%, require no collateral or personal guarantees, and have deferred loan payments. The Company actively participated in assisting our clients with applications for resources through the program and approved approximately 11,700 applications for approximately $1.2 billion. The program ended on August 8, 2020 under the CARES Act and the RELIEF Act re-opened the program in January 2021 with $284 billion of additional funding available. The Company is actively participating in the extended program and assisting our customers with applications and as of February 19, 2021 has approved more than 3,150 applications, for approximately $296.3 million.

The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide guidance as to conditions that would constitute a short-term modification that would not meet the definition of a troubled debt restructuring. This includes the following: (i) the loan modification is made after March 1, 2020 through December 31, 2021, as extended under the RELIEF Act, (ii) the applicable loan was not more than 30 days past due as of December 31, 2019, and (iii) the modification is due to COVID-19. The Company is applying this guidance to qualifying loan modifications and, as of December 31, 2020, we had approximately 295 loans on deferrals totaling approximately $23.7 million, or 0.24% of loans held for investment. Additionally, as of December 31, 2020, the Company currently has forbearance requests granted on approximately 29 residential mortgage loans totaling $9.0 million.

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On December 11, 2020, the U.S. Food and Drug Administration (the “FDA”) issued the first emergency use authorization for the Pfizer-BioNTech COVID-19 vaccine for the prevention of COVID-19 for individuals 16 years of age and older. On December 18, 2020, the FDA issued a second emergency use authorization for the Moderna COVID-19 vaccine. On February 4, 2021, Johnson & Johnson submitted an application for emergency use authorization for their single-shot vaccine with other companies expected to follow. Distribution of the vaccines has commenced, initially with front-line health-care workers receiving vaccinations to be followed by individuals deemed at high-risk of contracting COVID-19 or for severe illness from COVID-19. During the initial phases of the vaccine distribution, vaccine shortages and delays have been caused by high demand outstripping supply and challenging distribution logistics. With vaccine production ramping up and improvements to distribution logistics, experts estimate that the vaccines will be available to the general public by late spring/early summer of 2021.

On February 3, 2021, the US House of Representatives approved an additional COVID-19 relief package but it has not yet been signed into law.

The COVID-19 pandemic triggered a period of material global economic slowdown and recent trends suggest that, while the ongoing recovery is progressing, with the pace impacted by changing rates of positive diagnoses and additional measures by U.S. and local governments to manage developments. Management continues to actively work to minimize the current and future impact of this unprecedented situation, making adjustments to operations where appropriate or necessary to try and minimize the impact of COVID-19. As of January 31, 2021, a significant number of Company employees continue to work remotely and the Company has not yet established a timetable for the full work force to return to our facilities. This has not, however, caused a significant disruption to the Company operations. The extent to which COVID-19 impacts the Company’s financial results remains fluid and will continue to depend on a number of things, including the extent of the spread of the virus, the rate of infection, possible resurgence of the virus, the emergence of new strains of variants of the virus, the severity of illness and the degree of lethality, the relative effect on various portions of the population, the measures taken to combat the virus and their effectiveness, including the development and availability of vaccines and therapeutics and the prevalence of adoption barriers or resistance to them, the impact of control measures such as states of emergency, mandatory quarantines, and required business and school closures, the effect on international trade of any measures taken to combat the virus, including the reinstitution of travel restrictions, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, and other factors.

Management continues to monitor the impact of COVID-19 on the Company’s financial results. The COVID-19 pandemic has affected modestly our operations and has had varying degrees of disruptions and restrictions to our borrowers and to our borrowers’ supply chains, closures of some facilities, and decreases in demand for certain products and services. The United States has signaled that the scope, duration, and severity of the pandemic is not yet fully known. As a result, there continues to be uncertainty as to the long-term effect on the economy and the Company.

Acquisitions

During the past few years, we have increased our community banking footprint across the Rocky Mountain and Pacific Northwest regions, in large part due to our acquisition activity. We continue to evaluate bank acquisitions and other strategic opportunities on an on-going basis. For additional information regarding our recent acquisitions, see “Risk Factors” included in Part I, Item 1A and “Notes to Consolidated Financial Statements — Acquisitions” included in Part IV, Item 15 of this report.

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.

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Results of Operations

Principal tools we use in managing and evaluating our results of operations include tracking performance as measured by certain metrics including return on average equity, return on average assets, efficiency ratio, non-interest expense as a percent of total average assets, earnings per share, total shareholder return, net interest income, non-interest income, non-interest expense, and net income. Net interest income is affected by a number of factors such as the level of interest rates, changes in interest rates, and changes in the volume and composition of interest earning assets and interest-bearing liabilities. Changes in interest rate spread, which is the difference between interest earned on assets and interest paid on liabilities, has the most significant impact on net interest income. Other factors like volume of loans, investment securities, and other interest earning assets, compared to the volume of interest-bearing deposits and indebtedness, also cause changes in our net interest income between periods. Non-interest bearing sources of funds, such as demand deposits and stockholders’ equity, help support earning assets.

The impact of funding, including non-interest-bearing deposit 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 by assessing 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 in view of prevailing market conditions.

We manage our non-interest expenses in consideration of growth opportunities and our community banking model that emphasizes client service and responsiveness. We evaluate our non-interest expense on factors that include our non-interest expense relative to our average assets, our efficiency ratio, and the trends of the individual categories of non-interest expense.

Finally, we seek to increase our net income and provide favorable shareholder returns over time, and we evaluate our net income relative to the performance of similar bank holding companies on factors that include return on average assets, return on average equity, total shareholder return, and growth in earnings.

Financial Condition

We manage and evaluate our financial condition by focusing on liquidity, the diversification and quality of our loans, the adequacy of our allowance for credit 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 held for investment 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 loans held for investment and OREO, and loan charge-offs as a percentage of average loans. We maintain our allowance for credit losses based on an estimate of expected credit losses in the loans held for investment portfolio over the life of the loan, including the incorporation of a one-year forecast period at each balance sheet date, and we evaluate the level of our allowance for credit 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 client deposits spread among various deposit categories, and we evaluate our deposit and funding mix on factors that include the allocation of our deposits among deposit types, the level of our non-interest-bearing deposits, the ratio of our core deposits (i.e. excluding time deposits above $100,000) to our total deposits, and our reliance on brokered deposits or other wholesale funding sources, such as borrowings from other banks or agencies. We seek to manage the mix, maturities, and re-pricing characteristics of our assets and liabilities to maintain relative stability of our net interest rate margin in a changing interest rate environment, and we evaluate our asset-liability management using models to evaluate the changes to our net interest income under different interest rate scenarios.

Finally, we seek to maintain adequate capital levels to absorb unforeseen operating losses and to help support the growth of our balance sheet. We evaluate our capital adequacy using the regulatory and financial capital ratios including leverage capital ratio, tier 1 risk-based capital ratio, total risk-based capital ratio, tangible common equity to tangible assets, and tier 1 common capital to total risk-weighted assets.

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Critical Accounting Estimates and Significant Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States and follow general practices within the banking industry. 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 “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” included in Part IV, Item 15 of this report.

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 Credit Losses

The allowance for credit losses is a valuation account that creates an allowance for credit losses expected over the life of loans at each balance sheet date which is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Increases in the allowance are recorded through net income as a provision for credit loss expense. Decreases in the allowance are recorded through net income as a reversal of provision for credit loss expense. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries recorded in the valuation account do not exceed the aggregate of loan amounts previously charged-off and loans expected to be charged-off. The allowance for credit losses represents management’s estimate of expected credit losses in the loans held for investment portfolio over the life of the loan, including the incorporation of a one-year forecast period for economic conditions.

We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a detailed review of each significant loan we have assessed to have weaknesses that does not share common risk characteristics with other loans. Based on this analysis, we record a provision for credit losses in order to maintain the allowance for credit losses at appropriate levels. In determining the allowance for credit losses, management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental and economic conditions, such as changes in unemployment rates, property values, or other relevant factors. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

For loans acquired in a business combination with no significant evidence of credit deterioration since origination, the Company estimates an allowance for credit losses of the loans determined using the same methodology as other loans held for investment.

The allowance for credit losses is maintained at an amount we believe to be sufficient to provide for estimated losses expected over the life of the loans at each balance sheet date resulting from management’s assessment of the quantitative and qualitative factors utilized to determine the allowance for credit 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. Changes in the estimates and assumptions are possible and may have a material impact on our allowance, and as a result, on our consolidated financial statements or results of operations.

As of January 1, 2020, the Company’s accounting policies changed significantly to comply with the adoption of ASC 326. Consistent with the transition guidance within ASC 326, prior years were not restated. Prior to January 1, 2020, general allowances and nonspecific allowances were based on incurred credit losses as described in our 2019 Form 10-K. See “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” for a description of the methodology used to determine the allowance for credit losses and our policy pertaining to acquired loans. See “Notes to Consolidated Financial Statements—Loans” for a discussion on the factors driving changes in the amount of the allowance for credit losses. See also Part I, Item 1A, “Risk Factors—Credit Risks.”

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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 it is likely impairment has occurred. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. 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 quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of net assets is estimated based on analyses of the Company’s market value, discounted cash flows, and peer values. The determination of goodwill impairment is sensitive to market-based economics and other key assumptions used in determining or allocating fair value. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.

Our annual goodwill impairment test is performed each year as of July 1st. The Company performed its 2020 annual goodwill impairment qualitative assessment and determined the Company’s goodwill was not considered impaired. We monitor our performance and evaluate our goodwill for impairment annually or more frequently as needed.

For additional information regarding goodwill, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies,” included in Part IV, Item 15 of this report and “Risk Factors—Operational Risks,” included in Part I, Item 1A of this report.

Fair Values of Loans Acquired in Business Combinations

Loans acquired in business combinations are initially recorded at fair value as adjusted for credit risk and an allowance for credit losses at the date of acquisition. For loans with no significant evidence of credit deterioration since origination, the difference between the fair value and the unpaid principal balance of the loan at the acquisition date is amortized into interest income using the effective interest method over the remaining period to contractual maturity.

Loans acquired with evidence of deterioration in credit quality since origination, or PCD loans, are accounted for in accordance with ASC Topic 326-20 “Financial instruments - 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. An allowance for credit losses is recognized by estimating the expected credit losses of the purchased asset and recording an adjustment to the acquisition date fair value to establish the initial amortized cost basis of the asset. Differences between the established fair value, or amortized cost basis, and the unpaid principal balance of the asset is considered to be a non-credit discount/premium and is accreted/amortized into interest income using the interest method in accordance with ASC 310-10. Subsequent changes to the allowance for credit losses are recorded through provision for credit loss expense using the same methodology as other loans held for investment.

For additional information regarding acquired loans, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies,” “Notes to Consolidated Financial Statements—Acquisitions,” and “Notes to Consolidated Financial Statements—Loans Held for Investment,” included in Part IV, Item 15 of this report.

Results of Operations

The following discussion and analysis is intended to provide detail about the results of operations by comparing the years ended December 31, 2020 to December 31, 2019 and the years ended December 31, 2019 to December 31, 2018.

Performance Ratios

Return on average common stockholders’ equity 8.12 9.53 10.50

(1)Our efficiency ratio definition conforms with the FDIC definition for all periods presented as non-interest expense less amortization of intangible assets divided by net interest income plus non-interest income.

(2)Common stock dividend payout ratio represents dividends per common share divided by basic earnings per common share.

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Net Interest Income

Net interest income, the largest source of our operating income, is derived from interest, dividends, and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. Interest earning assets primarily include loans and investment securities. Interest bearing liabilities include deposits and various forms of indebtedness. Net interest income is affected by the level of interest rates, changes in interest rates, and changes in the composition of interest earning assets and interest-bearing liabilities.

Changes in interest rate spread, which is the difference between interest earned on assets and interest paid on liabilities, has the most significant impact on net interest income. Other factors like volume of loans, investment securities, and other interest earning assets compared to the volume of interest-bearing deposits and indebtedness also cause changes in our net interest income between periods. Non-interest-bearing sources of funds, such as demand deposits and stockholders’ equity, help to support earning assets.

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The following table presents, for the periods indicated, condensed average balance sheet information using daily average balances, 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

Year Ended December 31,

Interest earning assets:

Federal funds sold 0.1 — — 0.8 — — 11.1 — —

Interest-bearing liabilities:

Other borrowed funds — — — — — — 1.7 0.2 11.76

Less FTE adjustments (2) (2.0) (2.0) (2.2)

(1)Average loan balances include mortgage loans held for sale and non-accrual loans. Interest income on loans includes amortization of deferred loan fees net of deferred loan costs of $32.5 million, $3.9 million, and $3.4 million during 2020, 2019, and 2018, respectively.

(2)Interest income and average rates for tax exempt loans and securities are presented on a fully taxable equivalent, or FTE, basis utilizing the 21% federal income tax rate.

(3)Net FTE interest margin during the period equals (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

(4)Calculated by dividing total interest on interest-bearing liabilities by the sum of total interest-bearing liabilities plus non-interest-bearing deposits.

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Net FTE interest income increased $2.0 million to $499.0 million during 2020, as compared to $497.0 million in 2019. The increase is primarily attributable to lower cost of funds on interest-bearing deposit balances, which was partially offset by interest on higher long-term debt balances, as a result of the subordinated debt offering in May 2020, and lower levels of interest earned on earning assets as a result of lower interest rates. Also contributing to net FTE interest income during 2020, as compared to 2019, was interest accretion related to the fair value of acquired loans of $13.1 million during 2020 as compared to $18.4 million in 2019, of which $5.2 million was the result of early loan payoffs during 2020, as compared to $8.0 million in 2019. Net FTE interest income was also impacted by recoveries of previously charged-off interest of $0.4 million in 2020, as compared to $3.1 million in 2019. The Company’s net interest margin ratio decreased 52 basis points to 3.47% during 2020, as compared to 3.99% in 2019. Exclusive of interest accretion related to acquired loans and the impact of recoveries of charged-off interest, our 2020 net interest margin ratio decreased 44 basis points over our similarly calculated net interest margin ratio in 2019.

Net FTE interest income increased $62.3 million to $497.0 million during 2019, as compared to $434.7 million in 2018, primarily due to higher outstanding loan balances as a result of the full year impact of the Inland Northwest Bank (“INB”) acquisition, the Idaho Independent Bank (“IIBK”) and Community 1st Bank (“CMYF”) acquisitions, and organic loan growth, combined with increases in yields earned on interest earning assets, which were partially offset by a higher cost of funds. Also contributing to the increase in net FTE interest income during 2019, as compared to 2018, was interest accretion related to the fair value of acquired loans of $18.4 million during 2019 as compared to $13.7 million in 2018, of which $8.0 million was the result of early loan payoffs during 2019 as compared to $5.9 million in 2018. Net FTE interest income was also positively impacted by recoveries of previously charged-off interest of $3.1 million in 2019, as compared to $4.0 million in 2018. The Company’s net interest margin ratio increased 11 basis points to 3.99% during 2019, as compared to 3.88% in 2018. Exclusive of interest accretion related to acquired loans and the impact of recoveries of charged-off interest, our 2019 net interest margin ratio increased 10 basis points over our similarly calculated net interest margin ratio in 2018.

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 millions) Volume Rate Net Volume Rate Net Volume Rate Net

Interest earning assets:

Interest bearing liabilities:

Other borrowed funds — — — (0.2) — (0.2) (1.4) 0.1 (1.3)

(1)Interest income and average rates for tax exempt loans and securities are presented on a FTE basis.

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Provision for Credit Losses

Effective January 1, 2020, the Company adopted ASC 326, Measurement of Credit Losses on Financial Instruments, which replaced the historically used incurred loss methodology with an expected loss methodology and is referred to as the current expected credit loss (CECL) accounting standard. Upon adoption, the Company recorded an increase in the allowance for credit losses on loans of $30.0 million and an increase in the allowance for credit losses on off-balance sheet credit exposures of $2.3 million that was offset in shareholders’ equity and deferred taxes. Fluctuations in the provision for credit losses reflect management’s estimate of possible credit losses based upon the composition of our loan portfolio, evaluation of the borrowers’ ability to repay, collateral value underlying loans, loan loss trends, and estimated effects of current and forecasted economic conditions on our loans held for investment portfolio. During 2020, we recorded a provision for credit losses of $56.9 million, as compared to $13.9 million in 2019, with the difference largely attributable to the adoption of CECL and which reflects an increase in expected losses over the life of the loans held for investment portfolios associated with significant changes in the Company’s internal economic forecast as a result of COVID-19, including uncertainty regarding the benefits of government stimulus programs. The provision for credit losses is reflective of net charge-offs of $14.2 million, or 0.14% of average loans outstanding, for 2020, compared to $13.9 million, or 0.16% of average loans outstanding in 2019.

For information regarding our non-performing loans, see “Non-Performing Assets” included herein. For information regarding our allowance for credit losses, see “Financial Condition—Allowance for Credit Losses” included herein.

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. The following table presents the composition of our non-interest income as of the dates indicated:

Non-interest Income Year Ended December 31, % Change

Other service charges, commissions, and fees* 12.1 7.0 5.8 72.9 20.7

Non-interest income increased $14.1 million, or 9.9%, to $156.7 million in 2020, as compared to $142.6 million in 2019, and increased $3.8 million, or 2.7%, to $142.6 million in 2019 as compared to $138.8 million in 2018. Significant components of these fluctuations are discussed below.

Mortgage banking revenues include origination and processing fees on residential real estate loans held for sale and gains on residential real estate loans sold to third parties. Fluctuations in market interest rates have a significant impact on mortgage banking revenues. Higher interest rates can reduce the demand for home loans and loans to refinance existing mortgages. Conversely, lower interest rates generally stimulate refinancing and home loan origination. Mortgage banking revenues increased $14.1 million, or 42.5%, to $47.3 million in 2020, as compared to $33.2 million in 2019. The increase was primarily driven by increased mortgage loan production due to higher levels of refinance activity as a result of the favorable interest rate environment. The increase was partially offset by mortgage servicing impairments related to projected increases in mortgage prepayment rates due to the favorable interest rate environment of $9.9 million in 2020 and $0.4 million in 2019. Loans originated for home purchases accounted for approximately 42.7% of 2020 loan production, as compared to approximately 68.2% in 2019.

Mortgage banking revenues increased $3.5 million, or 11.8%, to $33.2 million in 2019, as compared to $29.7 million in 2018. The increase is primarily attributable to increased demand in the refinance market as a result of lower interest rates. Loans originated for home purchases accounted for approximately 68.2% of 2019 loan production, as compared to approximately 79.3% in 2018.

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Service charge fees are primarily driven by service and overdraft charges on deposit accounts. These service charges decreased $3.5 million, or 16.6%, to $17.6 million in 2020, as compared to $21.1 million in 2019 and decreased $0.7 million, or 3.2%, in 2019, as compared to $21.8 million in 2018. The decrease in 2020 is primarily due to changes in client behavior in addition to the Company waiving continuous overdraft fees and regular overdraft fees for clients receiving U.S. government stimulus checks during the second quarter of 2020.

Other service charges, commissions, and fees primarily include fees earned on certain derivative interest rate contracts, insurance commissions, and safe deposit boxes. Other service charges, commissions, and fees increased $5.1 million, or 72.9%, to $12.1 million in 2020, as compared $7.0 million in 2019 and increased $1.2 million, or 20.7%, in 2019, as compared to $5.8 million in 2018. These increases were primarily due to additional fees earned on derivative interest rate swap contracts offered to clients.

Non-interest Expense

The following table presents the composition of our non-interest expense as of the dates indicated:

Non-interest Expense Year Ended December 31, % Change

OREO expense, net of income (0.5) (2.2) 0.3 (77.3) NM

Non-interest expense decreased $1.1 million, or 0.3%, to $387.5 million in 2020, as compared to $388.6 million in 2019, and increased $32.2 million, or 9.0%, to $388.6 million in 2019, as compared to $356.4 million in 2018. Significant components of these increases are discussed in more detail below.

Salaries and wages expense increased $18.4 million, or 11.8%, to $173.7 million in 2020, as compared to $155.3 million in 2019. The increase was primarily due to normal merit wage increases, higher mortgage loan originator commissions, higher levels of incentive accruals, and increased personnel costs associated with the full-year impact of the IIBK and CMYF acquisitions in April 2019.

Salaries and wages expense increased $8.9 million, or 6.1%, to $155.3 million in 2019, as compared to $146.4 million in 2018. The increase was primarily due to normal merit increases and increased personnel costs associated with the IIBK and CMYF acquisitions in April 2019 and the full-year impact of the INB acquisition in August 2018.

Employee benefits expense decreased $2.1 million, or 4.1%, to $49.4 million in 2020, as compared to $51.5 million in 2019. The decrease in employee benefits expense was primarily due to decreased health care costs, partially offset by the full-year impact of the IIBK and CMYF acquisitions in April 2019.

Employee benefits expense increased $3.6 million, or 7.5%, to $51.5 million in 2019, as compared to $47.9 million in 2018. The increase in employee benefits expense in 2019, as compared to 2018, was primarily due to additional benefit costs resulting from the IIBK and CMYF acquisitions in April 2019 and the full-year impact of the INB acquisition in August 2018.

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Outsourced technology services expense increased $0.5 million, or 1.5%, to $32.8 million in 2020, as compared to $32.3 million in 2019, and increased $3.6 million, or 12.5%, in 2019, as compared to $28.7 million in 2018. The 2019 increase was primarily due to expenses resulting from the IIBK and CMYF acquisitions in April 2019 and the full-year impact of the INB acquisition in August 2018.

Occupancy, net expense increased $0.2 million, or 0.7%, to $28.5 million in 2020, as compared to $28.3 million in 2019 and increased $2.9 million, or 11.4%, in 2019, as compared to $25.4 million in 2018. The 2019 increase was primarily due to expenses resulting from the IIBK and CMYF acquisitions in April 2019.

Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed, as a result of acquisitions, and are amortized based on the estimated useful lives of the related deposits. Core deposit intangibles amortization expense decreased $0.3 million, or 2.7%, to $10.9 million in 2020, as compared to $11.2 million in 2019, and increased $3.3 million or 41.8%, to $11.2 million in 2019, as compared to $7.9 million in 2018, due to additional amortization of core deposit intangibles recorded in conjunction with recent acquisitions. We acquired core deposit intangibles of $16.6 million in conjunction with our acquisitions of IIBK and CMYF in April 2019 and $15.7 million in conjunction with our acquisition of INB in August 2018. For additional information regarding acquired core deposit intangibles, see “Notes to Consolidated Financial Statements—Acquisitions,” included in Part IV, Item 15 of this report.

Other expenses primarily include advertising and public relations costs; office supply, postage, freight, telephone, and travel expenses; donations expense; debit and credit card expenses; board of director fees; legal expenses; and, other losses. Other expenses decreased $3.2 million, or 5.0%, to $60.4 million in 2020, as compared to $63.6 million in 2019. The decrease in other expenses were primarily the result of lower travel expenses as a result of COVID-19 travel restrictions.

Other expenses increased $5.0 million, or 8.5%, to $63.6 million in 2019, as compared to $58.6 million in 2018. The increase in other expenses were due to the additional operating expenses resulting from the IIBK and CMYF acquisitions in April 2019 and the INB acquisition in August 2018.

We recorded no acquisition related expenses during 2020, compared to $20.3 million and $12.4 million during 2019 and 2018, respectively. Acquisition related expenses primarily include legal and professional fees; technology, conversion, and contract termination costs; employee retention payments; and travel expenses. For additional information regarding our acquisitions, see “Recent Trends and Developments” included herein and “Notes to Consolidated Financial Statements—Acquisitions,” included in Part IV, Item 15 of this report.

Income Tax Expense

Our effective federal tax rate was 17.5% for the year ended December 31, 2020, 18.8% for the year ended December 31, 2019, and 17.1% for the year ended December 31, 2018. Fluctuations in effective federal income tax rates are primarily due to the timing of federal tax credits resulting from our participation in the New Markets Tax Credits Program, a program through the U.S. Department of Treasury aimed at attracting private capital into low-income communities. For additional information about our participation in the New Markets Tax Credits Program, see “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies,” included in Part IV, Item 15 of this report.

State income tax applies primarily to pretax earnings generated within Idaho, Montana, Oregon, and South Dakota. Our effective state tax rate was 5.4% for the year ended December 31, 2020, 4.2% for the year ended December 31, 2019, and 5.2% for the year ended December 31, 2018.

Net Income

Net income decreased $19.8 million, or 10.9%, to $161.2 million, or $2.53 per diluted share, in 2020, compared to $181.0 million, or $2.83 per diluted share, in 2019 and increased $20.8 million, or 13.0%, to $181.0 million, or $2.83 per diluted share, in 2019, as compared to $160.2 million, or $2.75 per diluted share, in 2018. There were no acquisition related expenses in 2020. The after-tax impact of acquisition related expenses on earnings per share was $0.24 and $0.17 in 2019 and 2018, respectively.

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Summary of Quarterly Results

The following tables present the Company’s summarized quarterly financial information for the fiscal years ended December 31, 2020 and 2019.

Quarterly Results (Unaudited)(Dollars in millions except per share data)

FirstQuarter SecondQuarter ThirdQuarter FourthQuarter

Special dividends per common share 0.60 — — —

Provision for loan losses 3.7 3.8 2.6 3.8

Financial Condition

Total assets increased $3,004.5 million, or 20.5%, to $17,648.7 million as of December 31, 2020, from $14,644.2 million as of December 31, 2019, primarily as a result of higher deposits and the impact of PPP loans, which resulted in an increase in cash and cash equivalents of $1,200.0 million, an increase to our investment securities portfolio of $1,008.0 million, and an increase in loans held for investment of $876.8 million.

Total assets increased $1,344.0 million, or 10.1%, to $14,644.2 million as of December 31, 2019, from $13,300.2 million as of December 31, 2018, with $862.3 million of the increase attributable to the IIBK and CMYF acquisitions. The remaining increase was primarily due to the deployment of funds generated through organic deposit growth into interest earning assets.

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Loans Held for Sale

Loans held for sale consist of residential mortgage loans pending sale to investors in the secondary market. Loans held for sale decreased $26.9 million, or 26.7%, to $74.0 million as of December 31, 2020, compared to $100.9 million as of December 31, 2019. The decrease was primarily due to the decision to hold additional mortgage loans originated as loans held for investment on our balance sheet.

Loans held for sale increased $67.6 million, or 203.0%, to $100.9 million as of December 31, 2019, compared to $33.3 million as of December 31, 2018. The increase was primarily due to an increase in originations of mortgage loans held for sale as a result of higher levels of refinance activity driven by lower interest rates.

Loans Held for Investment, Net of Deferred Fees and Costs

The following table presents the composition of our loan portfolio as of the dates indicated:

Loans Outstanding

(Dollars in millions)

As of December 31,

Real estate:

Deferred loan and fees and costs (21.0) (5.5) (4.4) (2.5) (2.8)

Loans held for investment, net of deferred fees and costs, increased $876.8 million, or 9.8%, to $9,807.5 million as of December 31, 2020, from $8,930.7 million as of December 31, 2019. Approximately $739.8 million of the increase was attributable to PPP loans. Significant contributing portfolios are discussed in greater detail below.

Loans held for investment, net of deferred fees and costs, increased $460.3 million, or 5.4%, to $8,930.7 million as of December 31, 2019, as compared to $8,470.4 million as of December 31, 2018. Approximately $416.6 million of this increase was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, loans held for investment grew organically $43.6 million, or 0.5%, with the growth occurring in commercial real estate, construction, agricultural real estate, agricultural, and loans held for sale. These increases were partially offset by declines in residential real estate, consumer, and commercial loans.

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Real Estate Loans. We provide interim construction and permanent financing for both single-family and multi-unit properties, medium-term loans for commercial, agricultural and industrial property and/or buildings and equity lines of credit secured by real estate.

Commercial real estate loans. 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. Approximately 45.5% and 44.7% of our commercial real estate loans were owner occupied as of December 31, 2020 and 2019, respectively. Commercial real estate loans increased $255.4 million, or 7.3%, to $3,743.2 million as of December 31, 2020, from $3,487.8 million as of December 31, 2019. Growth primarily occurred in Idaho, Oregon, and Washington.

Commercial real estate loans increased $240.3 million, or 7.4%, to $3,487.8 million as of December 31, 2019, from $3,247.5 million as of December 31, 2018. Exclusive of $151.5 million of IIBK and CMYF acquired loans, commercial real estate loans increased organically $88.8 million, or 2.7%. Organic growth primarily occurred in Idaho and Oregon.

Construction loans. 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. As of December 31, 2020, our construction loan portfolio was divided among the following categories: approximately $250.9 million, or 24.1%, residential construction; approximately $523.5 million, or 50.4%, commercial construction; and approximately $265.0 million, or 25.5%, land acquisition and development. This compares to approximately $244.1 million, or 25.0%, residential construction; approximately $431.5 million, or 44.1%, commercial construction; and approximately $302.1 million, or 31.0%, land acquisition and development as of December 31, 2019.

Construction loans increased $61.7 million, or 6.3%, to $1,039.4 million as of December 31, 2020, from $977.7 million as of December 31, 2019. Construction loans increased due to increases in commercial and residential construction loans, which were partially offset by a decrease in land acquisition and development loans. Construction loans increased $139.0 million, or 16.6%, to $977.7 million as of December 31, 2019, from $838.7 million as of December 31, 2018. Exclusive of $100.5 million of IIBK and CMYF acquired loans, construction loans increased organically $38.5 million, or 4.6%, due to increases in commercial construction loans, which were partially offset by decreases in land acquisition and development and residential construction loans.

Residential real estate loans. Retained residential real estate loans are typically secured by first liens on the financed property and generally mature in less than 15 years. Included in residential real estate loans were home equity loans and lines of credit of $384.0 million and $423.5 million as of December 31, 2020 and December 31, 2019, respectively. Residential real estate loans increased $150.2 million, or 12.1%, to $1,396.3 million as of December 31, 2020, from $1,246.1 million as of December 31, 2019 as a result of our decision to hold a portion of our mortgage loans originated on our balance sheet.

Residential real estate loans decreased $38.2 million, or 3.0%, to $1,246.1 million as of December 31, 2019, from $1,284.3 million as of December 31, 2018. Exclusive of $76.0 million of IIBK and CMYF acquired loans, residential real estate loans decreased $114.2 million, or 8.9%.

During 2020 and 2019, we sold most of our residential real estate loan production to secondary investors.

Consumer Loans. 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. Credit cards are offered to clients in our market areas. Lines of credit are generally floating rate loans that are unsecured or secured by personal property. Approximately 78.5% and 75.1% of our consumer loans as of December 31, 2020 and 2019, respectively, were indirect consumer loans.

Consumer loans decreased $19.3 million, or 1.8%, to $1,025.9 million as of December 31, 2020, from $1,045.2 million as of December 31, 2019. Within the consumer loan portfolio direct consumer loans decreased $28.4 million, or 15.9%, and credit card loans decreased $11.4 million, or 14.0%, partially offset by an increase in indirect consumer loans of $20.5 million, or 2.6%. Consumer loans decreased $25.0 million, or 2.3%, to $1,045.2 million as of December 31, 2019, from $1,070.2 million as of December 31, 2018. Exclusive of $14.6 million of IIBK and CMYF acquired loans, consumer loans decreased organically $39.6 million, or 3.7%, across all consumer loan categories.

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Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The 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 and outstanding balances tend to be cyclical in nature. The loans are generally made with business operations as the primary source of repayment and are typically collateralized by inventory, accounts receivable, equipment, and/or personal guarantees.

Commercial loans increased $480.2 million, or 28.7%, to $2,153.9 million as of December 31, 2020, from $1,673.7 million as of December 31, 2019. Exclusive of $739.8 million of PPP loans, commercial loans decreased $259.5 million, primarily due to paydowns within the portfolio. Commercial loans increased $113.4 million, or 7.3%, to $1,673.7 million as of December 31, 2019, from $1,560.3 million as of December 31, 2018. Exclusive of $61.4 million of IIBK and CMYF acquired loans, commercial loans increased $52.0 million.

Agricultural Loans. Our agricultural loans generally consist of short- and medium-term loans and lines of credit that are primarily used for crops, livestock, equipment, and general operations. Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid from the operations of the farm or ranch. Agricultural loans generally have maturities of five years or less, with operating lines for one production season. Agricultural loans decreased $31.5 million, or 11.3%, to $247.6 million as of December 31, 2020, from $279.1 million as of December 31, 2019. The decrease occurred primarily in Montana. Agricultural loans increased $24.3 million, or 9.5%, to $279.1 million as of December 31, 2019, from $254.8 million as of December 31, 2018. Exclusive of $12.6 million of IIBK and CMYF acquired loans, agricultural loans increased organically $11.7 million, or 4.6%. The increase is primarily attributable to Oregon.

The following table presents the maturity distribution of our loan portfolio and the sensitivity of the loans to changes in interest rates as of December 31, 2020:

Maturities and Interest Rate Sensitivities(Dollars in millions)

Non-accrual loans — — — 39.5 39.5

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Non-Performing Assets

Non-performing assets include non-accrual loans, loans contractually past due by 90 days or more and still accruing interest, and OREO. The following table sets forth information regarding non-performing assets as of the dates indicated:

Non-Performing Assets and Troubled Debt Restructurings

(Dollars in millions)

Non-performing loans:

(1)Accruing loans modified in troubled debt restructurings are not considered non-performing loans. While still considered impaired under applicable accounting guidance, these loans are performing as agreed under their modified terms and management expects performance to continue.

(2)Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to loans held for investment and OREO would be 0.55%, 0.70%, 0.92%, 1.26% and 2.01% as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively.

(3)Including accruing troubled debt restructurings described in footnote 1, the ratio of non-performing assets to total assets would be 0.30%, 0.43%, 0.59%, 0.78% and 1.20% as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively.

(4)Including accruing troubled debt restructurings described in footnote 1, the ratio of allowance for credit losses to non-performing loans would be 281.84%, 134.91%, 114.55%, 84.72% and 77.04% as of December 31, 2020, 2019, 2018, 2017, and 2016, respectively.

Non-performing loans. Non-performing loans include non-accrual loans and loans contractually past due 90 days or more and still accruing interest.

Total non-performing loans decreased $0.6 million, or 1.2%, to $48.0 million as of December 31, 2020, from $48.6 million as of December 31, 2019. Non-accrual loans, the largest component of non-performing loans, decreased $3.4 million, or 7.9%, to $39.5 million as of December 31, 2020, from $42.9 million as of December 31, 2019.

Total non-performing loans decreased $9.5 million, or 16.4%, to $48.6 million as of December 31, 2019, from $58.1 million as of December 31, 2018. Non-accrual loans, the largest component of non-performing loans, decreased $11.4 million, or 21.0%, to $42.9 million as of December 31, 2019, from $54.3 million as of December 31, 2018. This decrease was primarily due to the movement of non-performing loans out of the portfolio through pay-downs, charge-offs, and the resolution of workout strategies in the commercial loan portfolio.

Non-accrual loans. We generally place loans on non-accrual status when they become 90 days past due unless they are well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. Non-accrual loans decreased approximately $3.4 million, to $39.5 million, as of December 31, 2020, from $42.9 million as of December 31, 2019, primarily as a result of the execution and resolution of workout strategies of non-performing loans. Accruing loans past due 90 days or more increased $2.8 million, or 49.1%, primarily due to an increase in commercial real estate and agricultural loan portfolios. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and when, in the opinion of management, the loans are estimated to be fully collectible as to both principal and interest.

For additional information regarding non-performing loans, see “Notes to Consolidated Financial Statements—Loans Held For Investment” included in financial statements included Part IV, Item 15 of this report.

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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 credit 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 decreased $6.0 million, or 70.6%, to $2.5 million as of December 31, 2020, from $8.5 million as of December 31, 2019. During 2020, we recorded additions to OREO of $3.3 million, wrote down the fair value of OREO properties by $0.1 million, and sold OREO with a book value of $9.2 million. As of December 31, 2020, 69.1% of our OREO balance was related to commercial properties and 30.9% to land properties.

OREO decreased $5.9 million, or 41.0%, to $8.5 million as of December 31, 2019, from $14.4 million as of December 31, 2018. During 2019, we recorded additions to OREO of $14.1 million, acquired $2.4 million in conjunction with the IIBK acquisition, wrote down the fair value of OREO properties by $0.9 million, and sold OREO with a book value of $21.8 million. As of December 31, 2019, 25.5% of our OREO balance was related to land and land development properties, 46.8% to commercial properties, 27.0% to residential real estate properties, and 0.7% to construction properties.

The following table sets forth the allocation of our non-performing loans among our different types of loans as of the dates indicated.

Non-Performing Loans by Loan Type(Dollars in millions) As of December 31,

Real estate:

Construction:

Other — — — — — — — — — —

Collateral-dependent loans. Collateral-dependent loans rely solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. The loan may become collateral-dependent where the borrower is experiencing financial difficulty and as sources of repayment become inadequate over time and that repayment is expected to be provided substantially through the operation or sale of the collateral.

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Troubled Debt Restructurings. 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, 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 we, for economic or legal reasons, grant a concession to the borrower that we would not otherwise consider. Those modifications deemed to be troubled debt restructurings are monitored centrally to ensure proper classification as a troubled debt restructuring and if or when the loan may be placed on accrual status.

As of December 31, 2020, we had loans renegotiated in troubled debt restructurings of $14.5 million, of which $11.3 million were reported as non-accrual loans in the non-performing asset and troubled debt restructurings and non-performing loan tables above. The remaining $3.2 million were on accrual status and are reported as troubled debt restructurings in the non-performing asset and troubled debt restructurings table above.

As of December 31, 2019, we had loans renegotiated in troubled debt restructurings of $24.9 million, of which $19.4 million were reported as non-accrual loans in the non-performing asset and troubled debt restructurings and non-performing loan tables above. The remaining $5.5 million were on accrual status and are reported as troubled debt restructurings in the non-performing asset and troubled debt restructurings table above.

For additional information regarding loans modified in troubled debt restructurings, see “Notes to Consolidated Financial Statements—Loans Held For Investment” included in financial statements included Part IV, Item 15 of this report.

Allowance for Credit Losses

The Company performs a quarterly assessment of the adequacy of its allowance for credit losses in accordance with GAAP and as modified by the adoption of CECL. The allowance for credit losses for 2020 comparative periods utilized the incurred loss methodology under historical GAAP as described in our 2019 Form 10-K. The methodology used to assess the adequacy is consistently applied to the Company’s loans held for investment portfolio. The allowance for credit losses is established through a provision for credit losses based on our evaluation of quantitative and qualitative risk factors in our loan portfolio at each balance sheet date. In determining the allowance for credit losses, we estimate losses on specific loans, or groups of loans, where the expected loss can be identified and reasonably determined. The balance of the allowance for credit losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature or tenure of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current environmental and economic factors, and the estimated impact of current and forecasted economic conditions on certain historical loan loss rates. See the discussion under “Critical Accounting Estimates and Significant Accounting Policies — Allowance for Credit Losses” above.

The allowance for credit 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 credit losses consists of three elements:

(1)Specific valuation allowances associated with collateral-dependent 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 loans.

(2)Historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends. The Company applies probability of default and loss given default methodologies for all portfolio segments. The Company uses a transition matrix for probability of default components of the methodology and a historical average for the loss given default components of the methodology. The probability of default and loss given default is applied to the current principal balance as of the reporting date. The transition matrix determines the probability of default by tracking the historical movement of loans between loan risk tiers over a defined period of time. Loan transitions are measured by either internal ratings or delinquency status. Those loans tracked by ratings are generally commercial purpose including agricultural, commercial, and commercial real estate. Those loans tracked by delinquency are generally consumer in nature, with the exception of multi-family and credit cards. The loss given default used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experiences from 2008 to the current period, based on a migration analysis of our historical loss experience, designed to account for credit deterioration. The model compares the most recent period losses to prior period defaults to calculate the loss given default, which is averaged over the historical observations.

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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 or forecasts, and other qualitative risk factors, both internal and external to us, including the incorporation of a one-year forecast period for economic conditions.

Based on the assessment of the adequacy of the allowance for credit losses, the Company records provisions for credit losses to maintain the allowance for credit losses at appropriate levels.

Loans acquired in business combinations are initially recorded at fair value as adjusted for credit risk and an allowance for credit losses at the date of acquisition. For loans with no significant evidence of credit deterioration since origination, the difference between the fair value and the unpaid principal balance of the loan at the acquisition date is amortized into interest income using the effective interest method over the remaining period to contractual maturity. An allowance for credit loss is recorded for the life of loan expected credit losses on loans acquired without evidence of credit deterioration. Subsequent changes to the allowance for credit losses are recorded through provision expense using the same methodology as other loans held for investment.

For loans acquired in business combinations with evidence of deterioration in credit quality since origination, the Company determines the fair value of the loans by 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. An allowance for credit losses is recognized by estimating the expected credit losses of the purchased asset and recording an adjustment to the acquisition date fair value to establish the initial amortized cost basis of the asset. Differences between the established amortized cost basis, and the unpaid principal balance of the asset, is considered to be a non-credit discount/premium and is accreted/amortized into interest income using the level yield interest method. Subsequent changes to the allowance for credit losses are recorded through provision expense using the same methodology as other loans held for investment.

Loans, or portions thereof, are charged-off against the allowance for credit losses when management believes 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 a collateral-dependent loan is adequately collateralized, a specific valuation allowance is not recorded. As such, significant changes in collateral-dependent and non-performing loans do not necessarily correspond proportionally with changes in the specific valuation component of the allowance for credit losses. Additionally, the Company expects the timing of charge-offs will vary between quarters and will not necessarily correspond proportionally to changes in the allowance for credit losses or changes in non-performing or collateral dependent loans due to timing differences among the initial identification of a collateral-dependent loan, recording of a specific valuation allowance for collateral-dependent loans, and any resulting charge-off of uncollectible principal.

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The following table sets forth information regarding our allowance for credit losses as of the dates and for the periods indicated.

Allowance for Credit Losses

(Dollars in millions)

Allowance for credit losses on loans: (1)

Initial impact of adopting ASC 326 30.0 — — — —

Charge-offs:

Real estate

Recoveries:

Real estate

Agricultural — — — — 0.6

Agricultural — — 0.2 — —

Allowance for off-balance sheet credit losses:

Beginning balance $ — $ — $ — $ — $ —

Initial impact of adopting ASC 326 2.3 — — — —

Provision for off-balance sheet credit losses 1.4 — — — —

Ending balance $ 3.7 $ — $ — $ — $ —

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Our allowance for credit losses on loans was $144.3 million, or 1.47% of loans held for investment, including PPP loans, as of December 31, 2020, as compared to $73.0 million, or 0.82% of loans held for investment, as of December 31, 2019. The increase in the percentage from December 31, 2019 is primarily a result of adoption of the CECL standard and changes in the Company’s internal economic forecast in response to COVID-19 and uncertainty regarding the benefits of government stimulus enacted in response to COVID-19. The allowance for credit losses represents management’s estimate of expected credit losses in the loan portfolio expected over the life of the loan, including the incorporation of a one-year forecast period for economic conditions.

While the allowance for credit losses on loans of 1.47% include the PPP loan balances, the allowance for credit losses does not include a reserve on the 100% Small Business Administration guaranteed PPP loans. The allowance for credit losses on loans as a percentage of period-end loans held for investment would have been 12 basis points higher had the PPP loan balances been excluded at December 31, 2020.

Although we have established our allowance for credit losses in accordance with GAAP in the United States and we believe that the allowance for credit 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.

The allowance for credit losses is allocated to loan categories based on the relative risk characteristics, asset classifications, and expected losses of the loan portfolio. The following table provides a summary of the allocation of the allowance for credit losses for specific loan categories as of the dates indicated. The allocations presented should not be interpreted as an indication that charges to the allowance for credit losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amount available for future losses that may occur within these categories.

Allocation of the Allowance for Credit Losses

(Dollars in millions)

Other loans — — — — — — — — — —

Unallocated — N/A — N/A — N/A — N/A — N/A

The allowance for credit losses allocated to real estate loans increased 178.5%, to $80.5 million, as of December 31, 2020, from $28.9 million as of December 31, 2019, primarily due to the adoption of CECL and the expected losses over the life of the loans in the real estate portfolio. The allowance for credit losses allocated to real estate loans decreased 6.8% to $28.9 million as of December 31, 2019, from $31.0 million as of December 31, 2018, primarily due to lower loss rates offset by higher levels of specific reserves in the real estate portfolio.

The allowance for credit losses allocated to consumer loans increased 141.4%, to $23.9 million, as of December 31, 2020, from $9.9 million as of December 31, 2019, primarily due to the adoption of CECL and the expected losses over the life of the loans in the consumer portfolio. The allowance for credit losses allocated to consumer loans increased 13.8% to $9.9 million as of December 31, 2019, from $8.7 million as of December 31, 2018, primarily due to higher loss rates within consumer portfolio.

The allowance for loan losses allocated to commercial loans increased 20.3% to $39.2 million as of December 31, 2020, from $32.6 million as of December 31, 2019, primarily due to higher loss rates offset by lower levels of specific reserves within the commercial portfolio. The allowance for loan losses allocated to commercial loans increased 4.2% to $32.6 million as of December 31, 2019, from $31.3 million as of December 31, 2018, primarily due to higher loss rates offset by lower levels of specific reserves within the commercial portfolio.

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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. Our portfolio principally comprises U.S. government agency residential mortgage-backed securities and collateralized mortgage obligations, U.S. government agency securities, and tax-exempt securities. Federal funds sold and interest-bearing deposits in bank are additional investments that are classified as cash equivalents rather than as investment securities. Investment securities classified as available-for-sale are recorded at fair value, while investment securities classified as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the deferred tax effect, on available-for-sale securities are reported as increases or decreases in accumulated other comprehensive income or loss, a component of stockholders’ equity.

Investment securities increased $1,008.0 million, or 33.0%, to $4,060.3 million as of December 31, 2020, from $3,052.3 million as of December 31, 2019. The increase is primarily due to the investment of funds generated through deposit growth. Investment securities increased $374.8 million, or 14.0%, to $3,052.3 million as of December 31, 2019, from $2,677.5 million as of December 31, 2018. Approximately $78.7 million of this increase was attributable to the acquisitions of IIBK and CMYF in April 2019 with the remaining increase due to the investment of funds generated through deposit growth.

As of December 31, 2020, the estimated duration of our investment portfolio was 3.3 years, as compared to 2.4 years as of December 31, 2019. The weighted average yield on investment securities decreased 37 basis points to 2.02% in 2020, from 2.39% in 2019, and increased 18 basis points to 2.39% in 2019, from 2.21% in 2018.

As of December 31, 2020, investment securities with amortized costs and fair values of $2,323.0 million and $2,383.6 million, respectively, were pledged to secure public deposits and securities sold under repurchase agreements, as compared to $2,132.0 million and $2,144.9 million, respectively, as of December 31, 2019. For additional information concerning securities sold under repurchase agreements, see “—Securities Sold Under Repurchase Agreements” included herein.

Mortgage-backed securities and, to a limited extent other securities, have uncertain cash flow characteristics that present additional interest rate risk in the form of prepayment or extension risk primarily caused by changes in market interest rates. This additional risk is generally rewarded in the form of higher yields. Maturities of mortgage-backed securities presented below have been adjusted to reflect shorter maturities based upon estimated prepayments of principal. As of December 31, 2020, the carrying value of our investments in non-agency mortgage-backed securities totaled $10.9 million. All other mortgage-backed securities included in the table below were issued by U.S. government agencies and corporations. As of December 31, 2020, there were no significant concentrations of investments (greater than 10% of stockholders’ equity) in any individual security issuer, except for U.S. government or agency-backed securities.

Approximately 82.8% and 80.1% of our tax-exempt securities were general obligation securities as of December 31, 2020 and 2019, respectively, of which 67.4% and 61.0%, respectively, were issued by political subdivisions or agencies within the states of Idaho, Montana, Oregon, South Dakota, Washington, and Wyoming.

As of December 31, 2020, we had available-for-sale investment securities with fair values aggregating $16.6 million that had been in a continuous loss position more than 12 months. Gross unrealized losses on these securities totaled $0.2 million as of December 31, 2020, and were attributable to changes in interest rates. As the Company does not have the intent to sell any of the available-for-sale securities and it is more likely than not that the Company will not have to sell any securities before a recovery in cost, no impairment or credit losses were recorded during 2020, 2019, or 2018.

The following table sets forth the carrying value as of December 31, 2020 and 2019, and the percentage of total investment securities and weighted average yields on investment securities as of December 31, 2020. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%.

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U.S. Treasuries

Maturing within one year $ 9.0 $ — — % — %

Mark-to-market adjustments on securities available-for-sale — — — NA

Total 9.0 — — —

U.S. government agency securities

Mortgage-backed securities

Mark-to-market adjustments on securities available-for-sale 13.2 66.8 1.65 NA

Marketable CDs

Maturing within one year 2.9 0.2 — 2.50

Maturing in one to five years 0.3 — — —

Mark-to-market adjustments on securities available-for-sale — — — NA

Tax exempt securities

Mark-to-market adjustments on securities available-for-sale 0.8 3.8 0.09 NA

Corporate securities

Mark-to-market adjustments on securities available-for-sale 1.2 6.4 0.16 NA

Other securities

Maturing in one to five years 0.1 0.1 — 7.72

Mark-to-market adjustments on securities available-for-sale — — — NA

Maturities of the 2020 securities noted above reflect $282.4 million of investment securities at their final maturities, which have call provisions within the next year. Based on current market interest rates, management expects approximately $81.5 million of these securities will be called in 2021.

For additional information concerning investment securities, see “Notes to Consolidated Financial Statements — Investment Securities” included in Part IV, Item 15.

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Goodwill and Intangibles

Goodwill was $621.6 million as of December 31, 2020 and 2019. Goodwill increased $74.9 million, or 13.7%, to $621.6 million as of December 31, 2019, from $546.7 million as of December 31, 2018, attributable to goodwill recorded in conjunction with the acquisitions of IIBK and CMYF and finalization of provisional amounts related to INB.

Core deposit intangibles represent the intangible value of depositor relationships resulting from deposit liabilities assumed and are amortized based on the estimated useful lives of the related deposits. Core deposit intangibles, net of accumulated amortization, decreased $10.9 million, or 17.6%, to $51.2 million as of December 31, 2020, from $62.1 million as of December 31, 2019, due to scheduled amortization expense. Core deposit intangibles, net of accumulated amortization increased $5.2 million, or 9.1%, to $62.1 million as of December 31, 2019, from $56.9 million as of December 31, 2018, attributable to the core deposit intangibles recorded in conjunction with the acquisitions of IIBK and CMYF. We acquired core deposit intangibles of $16.6 million in conjunction with our acquisitions of IIBK and CMYF in April 2019 and $15.7 million in conjunction with our acquisition of INB in August 2018.

Deposits

We emphasize developing relationships with our clients in order to increase our core deposit base, which is our primary funding source. Our deposits consist of non-interest bearing and interest-bearing demand, savings, individual retirement, and time deposit accounts.

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

Deposits

(Dollars in millions)

Interest bearing:

Total deposits increased $2,553.5 million, or 21.9%, to $14,217.0 million as of December 31, 2020, from $11,663.5 million as of December 31, 2019, primarily related to an increase of $1,207.0 million in non-interest-bearing business deposits and an increase in interest bearing demand and savings deposits. These increases were partially offset by decreases in interest bearing time deposits. During 2020, the mix of deposits shifted slightly from higher-costing time deposits to lower-costing savings and demand deposits. Deposit mix fluctuations and deposit growth were driven by lower interest rates paid on deposits as a result of a drop in the federal funds rate and a change in client behavior related to the COVID-19 and economic stimulus provided by the U.S. government. Total deposits increased $982.8 million, or 9.2%, to $11,663.5 million as of December 31, 2019, from $10,680.7 million as of December 31, 2018, with approximately $706.7 million of the increase attributable to the IIBK and CMYF acquisitions in April 2019.

Non-interest-bearing demand deposits. Non-interest-bearing demand deposits increased $1,207.0 million, or 35.2%, to $4,633.5 million as of December 31, 2020, from $3,426.5 million as of December 31, 2019. The increase in 2020 was largely driven by changes in client behavior related to COVID-19 and the economic stimulus provided by the U.S. government. Non-interest-bearing demand deposits increased $268.2 million, or 8.5%, to $3,426.5 million as of December 31, 2019, from $3,158.3 million as of December 31, 2018. Approximately $244.9 million of the increase in 2019 was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, non-interest-bearing demand deposits decreased organically $23.3 million, or 0.7%.

Interest bearing demand deposits. Interest bearing demand deposits increased $923.5 million, or 28.9%, to $4,118.9 million as of December 31, 2020, from $3,195.4 million as of December 31, 2019. The increase in 2020 was largely driven by changes in client behavior related to COVID-19 and the economic stimulus provided by the U.S. government. Interest-bearing demand deposits increased $237.9 million, or 8.0%, to $3,195.4 million as of December 31, 2019, from $2,957.5 million as of December 31, 2018. Approximately $171.8 million of the increase in 2019 was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, interest bearing demand deposits decreased organically $66.1 million, or 2.2%.

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Savings deposits. Savings deposits increased $814.3 million, or 22.7%, to $4,405.9 million as of December 31, 2020, from $3,591.6 million as of December 31, 2019. The increase in 2020 was largely driven by changes in client behavior related to COVID-19 and the economic stimulus provided by the U.S. government. Savings deposits increased $343.7 million, or 10.6%, to $3,591.6 million as of December 31, 2019, from $3,247.9 million as of December 31, 2018. Approximately $254.7 million of the increase in 2019 was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, savings deposits decreased $89.0 million, or 2.7%.

Time deposits of $100,000 or more. Time deposits of $100,000 or more decreased $231.8 million, or 35.6%, to $419.3 million as of December 31, 2020, from $651.1 million as of December 31, 2019. The decrease in 2020 was largely driven by changes in client behavior related to COVID-19 and the economic stimulus provided by the U.S. government. Time deposits of $100,000 or more increased $103.5 million, or 18.9%, to $651.1 million as of December 31, 2019, from $547.6 million as of December 31, 2018. Approximately $26.4 million of the increase in 2019 was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, time deposits of $100,000 or more increased organically $77.1 million, or 14.1%.

Other time deposits. Other time deposits decreased $159.5 million, or 20.0%, to $639.4 million as of December 31, 2020, from $798.9 million as of December 31, 2019. The decrease in 2020 was largely driven by changes in client behavior related to COVID-19 and the economic stimulus provided by the U.S. government. Other time deposits increased $29.5 million, or 3.8%, to $798.9 million as of December 31, 2019, from $769.4 million as of December 31, 2018. Approximately $8.9 million of this increase was attributable to the acquisitions of IIBK and CMYF in April 2019. Exclusive of the IIBK and CMYF acquisitions, other time deposits decreased $20.6 million, or 2.7%.

As of December 31, 2020 and 2019, we had Certificate of Deposit Account Registry Service, or CDARS, deposits of $97.3 million and $117.7 million, respectively. As of December 31, 2020, we had no brokered deposits and as of December 31, 2019 we had brokered deposits of $2.9 million, which were acquired through acquisitions.

For additional information concerning client deposits, including the use of repurchase agreements, see “Business—Community Banking—Deposit Products,” included in Part I, Item 1 and “Notes to Consolidated Financial Statements—Deposits,” included in Part IV, Item 15 of this report.

Securities Sold Under Repurchase Agreements

Under repurchase agreements with commercial and municipal depositors, client deposit balances are invested in short-term U.S. government agency securities overnight and are then repurchased the following day. All outstanding repurchase agreements are due in one day and balances fluctuate in the normal course of business. Repurchase agreement balances increased $393.8 million, or 56.5%, to $1,091.4 million as of December 31, 2020, from $697.6 million as of December 31, 2019, and decreased $14.8 million, or 2.1%, as of December 31, 2019 from $712.4 million as of December 31, 2018.

The following table sets forth certain information regarding securities sold under repurchase agreements as of the dates indicated:

Securities Sold Under Repurchase Agreements

(Dollars in millions)

Securities sold under repurchase agreements:

Average interest rate:

Long-term Debt

Long-term debt increased $98.5 million, or 708.6%, to $112.4 million as of December 31, 2020, from $13.9 million as of December 31, 2019. In May 2020, the Company issued $100.0 million of subordinated notes due May 15, 2030. The subordinated notes were issued with a fixed-to-floating rate of 5.25% and an effective rate of 5.33%, due to issuance costs.

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Long-term debt decreased $1.9 million, or 12.0%, to $13.9 million as of December 31, 2019, from $15.8 million as of December 31, 2018, primarily due to the redemption of one note payable maturing September 2032. For additional information regarding the long-term debt, see “Notes to Consolidated Financial Statements—Long-Term Debt and Other Borrowed Funds,” included in Part IV, Item 15 of this report.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses increased $14.8 million, or 11.4%, to $144.4 million as of December 31, 2020, from $129.6 million as of December 31, 2019, attributable to an increase in forward contracts, higher incentive compensation accruals, and other fluctuations in the normal course of business. Accounts payable and accrued expenses increased $35.5 million, or 37.7%, to $129.6 million as of December 31, 2019, from $94.1 million as of December 31, 2018, primarily attributable to the Company recognizing $39.6 million in liabilities related to leases, as a result of the adoption of ASU 2016-02, on January 1, 2019, in addition to fluctuations in the normal course of business.

Deferred Tax Liability/Asset

The net deferred tax liability increased $0.5 million, or 1.9%, to $27.2 million as of December 31, 2020, from $26.7 million as of December 31, 2019. The net deferred tax liability increased $18.1 million, or 210.5%, to $26.7 million as of December 31, 2019, from $8.6 million as of December 31, 2018, primarily due to decreases in deferred tax assets as a result of the utilization of NOL carryforwards, reduction of deferred compensation liabilities, and an increase in unrealized gains in our investment portfolio; the decreases were offset by increases in deferred tax liabilities related to amortization of intangible assets and an increase in mortgage servicing rights retained.

Contractual Obligations

Contractual obligations as of December 31, 2020 are summarized in the following table.

Contractual Obligations(Dollars in millions) Payments Due

Deposits without a stated maturity $ 13,158.3 $ — $ — $ — $ 13,158.3

Securities sold under repurchase agreements 1,091.4 — — — 1,091.4

Purchase obligations (2) 4.6 — — — 4.6

Subordinated debentures held by subsidiary trusts (3) — — — 87.0 87.0

(1)Long-term debt obligations consists of fixed rate note payables with various interest rates from 1.00% to 6.24% and maturities from July 29, 2022 through December 31, 2041 and 5.25% fixed-to-floating rate subordinated notes due May 15, 2030. For additional information concerning long-term debt, see “Notes to Consolidated Financial Statements—Long Term Debt and Other Borrowed Funds” included in Part IV, Item 15.

(2)Purchase obligations relate to obligations under construction contracts to build or renovate banking offices.

(3)The subordinated debentures are unsecured, with various interest rates and maturities from June 30, 2035 through April 1, 2038. Interest distributions are payable quarterly; however, we may defer interest payments at any time for a period not exceeding 20 consecutive quarters. For additional information concerning the subordinated debentures, see “Notes to Consolidated Financial Statements—Subordinated Debentures Held by Subsidiary Trusts” included in Part IV, Item 15.

We also have obligations under a post-retirement healthcare benefit plan. These obligations represent actuarial determined future benefit payments to eligible plan participants. See “Notes to Consolidated Financial Statements — Employee Benefit Plans” included in Part IV, Item 15.

Off-Balance Sheet Arrangements

We have entered into various arrangements not reflected on the consolidated balance sheet that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or liquidity. These include guarantees, commitments to extend credit, and standby letters of credit.

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We guarantee the distributions and payments for redemption or liquidation of capital trust preferred securities issued by our wholly-owned subsidiary business trusts to the extent of funds held by the trusts. Although the guarantees are not separately recorded, the obligations underlying the guarantees are fully reflected on our consolidated balance sheets as subordinated debentures held by subsidiary trusts. The subordinated debentures currently qualify as tier 1 capital under the Federal Reserve capital adequacy guidelines. For additional information regarding the subordinated debentures, see “Notes to Consolidated Financial Statements—Subordinated Debentures Held by Subsidiary Trusts” included in Part IV, Item 15.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit and standby letters of credit. For additional information regarding our off-balance sheet arrangements, see “Notes to Consolidated Financial Statements—Financial Instruments with Off-Balance Sheet Risk” included in Part IV, Item 15.

Capital Resources and Liquidity Management

Capital Resources

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 decreased $54.1 million, or 2.7%, to $1,959.8 million as of December 31, 2020 from $2,013.9 million as of December 31, 2019, due to stock repurchases related to the Company’s stock repurchase program, stock repurchases of vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by participants, regular and special cash dividends paid to common shareholders during 2020 of $128.6 million, and the cumulative effect of adopting ASC 326, a new accounting principle. This decrease was offset by retention of earnings, other comprehensive income, and proceeds from stock option exercises.

Stockholders’ equity increased $320.0 million, or 18.9%, to $2,013.9 million as of December 31, 2019 from $1,693.9 million as of December 31, 2018, due primarily to the retention of earnings, other comprehensive income, proceeds from stock option exercises, and issuance of additional Class A common stock as consideration for the acquisitions of IIBK and CMYF. This increase was offset by stock repurchases of vested restricted shares tendered in lieu of cash for payment of income tax withholding amounts by participants and aggregate cash dividends of $79.2 million to common shareholders during 2019.

On January 28, 2021, we declared a quarterly dividend to common stockholders of $0.41 per share, which was paid on February 19, 2021 to shareholders of record as of February 9, 2021. The dividend equates to a 4.3% annual yield based on the $37.95 average closing pricing of the Company’s common stock as reported on NASDAQ during the fourth quarter of 2020.

On February 19, 2020, we paid a special dividend to common stockholders of $0.60 per share on March 12, 2020 to shareholders of record as of March 2, 2020.

During 2020, the Company issued 19,491 shares of its Class A common stock to directors for their annual service on the Company’s board of directors. The aggregate value of the shares issued to directors of $0.6 million is included in stock-based compensation expense in the accompanying consolidated statements of changes in stockholders’ equity.

On June 11, 2019, the Company’s board of directors adopted a stock repurchase program permitting the Company to repurchase up to 2.5 million of its outstanding shares of Class A common stock. On March 23, 2020, the Company’s board of directors suspended stock repurchases in response to the COVID-19 pandemic. Effective August 24, 2020, the Company’s board of directors lifted the temporary suspension of the Company’s stock repurchase program. On September 12, 2020, the Company’s board of directors increased the number of shares of Class A common stock authorized to be repurchased by the Company under the stock repurchase program by an additional 3.0 million shares bringing the total number of shares authorized under the program to 5.5 million shares. During 2020, the Company repurchased and retired 3.5 million shares of Class A common stock under the stock repurchase program.

For additional information regarding the repurchases, see “Notes to Consolidated Financial Statements—Capital Stock and Dividend Restrictions” included in Part IV, Item 15 of this report.

On April 8, 2019, the Company issued 3,871,422 and 463,134 shares of its Class A common stock with an aggregate value of $157.3 million and $18.8 million as consideration for the acquisitions of IIBK and CMYF, respectively.

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As a bank holding company, the Company must comply with the capital requirements established by the Federal Reserve, and our subsidiary Bank must comply with the capital requirements established by the FDIC. The current risk-based guidelines applicable to us and our Bank are based on the Basel III framework, as implemented by the federal bank regulators. As of December 31, 2020 and 2019, the Company had capital levels that, in all cases, exceeded the guidelines to be deemed “well-capitalized.”

For additional information regarding our capital levels, see “Notes to Consolidated Financial Statements—Regulatory Capital,” included in Part IV, Item 15 of 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 clients, 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 client deposits. For additional information regarding our operating, investing and financing cash flows, see “Consolidated Financial Statements—Consolidated Statements of Cash Flows,” included in Part IV.

As a holding company, we are a corporation separate and apart from our subsidiary Bank and, therefore, we provide for our own liquidity. Our primary 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 Bank to pay dividends to us. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations. For additional information regarding dividend restrictions, see “Financial Condition—Capital Resources and Liquidity Management” above, “Business—Government Regulation and Supervision—Dividends and Restrictions on Transfers of Funds” included in Part I, Item 1 of this report, and “Risk Factors—Liquidity Risks and Regulatory and Compliance Risks” included in Part I, Item 1A of this report.

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is interest rate risk. Our business and the composition of our balance sheet consists of investments in interest earning assets (principally loans and investment securities) which are primarily funded by interest bearing liabilities (deposits and indebtedness). Such financial instruments have varying levels of sensitivity to changes in market interest rates. Interest rate risk results when, due to different maturity dates and repricing intervals, interest rate indices for interest earning assets fluctuate adversely relative to interest bearing liabilities, thereby creating a risk of decreased net earnings and cash flow.

Although we characterize some of our interest-sensitive assets as securities available-for-sale, such securities are not purchased with the intent to sell in the near term. Rather, such securities may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk. See “Notes to Consolidated Financial Statements—Summary of Significant Accounting Policies” included in Part IV, Item 15 of this report.

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Asset Liability Management

The goal of asset liability management is the prudent control of market risk, liquidity, and capital. Asset liability management is governed by policies, goals, and objectives adopted and reviewed by the Bank’s board of directors. Development of asset liability management strategies is the responsibility of the Asset Liability Committee, or ALCO, which is composed of members of senior management.

Interest Rate Risk

Interest rate risk is the risk of loss of future earnings or long-term value due to changes in interest rates. Our primary source of earnings is net interest income, which is affected by changes in interest rates, the relationship between rates on interest-bearing assets and liabilities, the impact of interest rate fluctuations on asset prepayments, and the mix of interest-bearing assets and liabilities.

The ability to optimize net interest income is largely dependent upon the achievement of an interest rate spread that can be managed during periods of fluctuating interest rates. Interest sensitivity is a measure of the extent to which net interest income will be affected by market interest rates over a period of time. Interest rate sensitivity is related to the difference between amounts of interest earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference is known as interest rate sensitivity gap.

The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio for different intervals as of December 31, 2020. The information presented in the table is based on our mix of interest earning assets and interest-bearing liabilities and historical experience regarding their interest rate sensitivity.

Interest earning assets:

Federal funds sold 0.1 — — — 0.1

Interest bearing liabilities:

Securities sold under repurchase agreements 1,091.4 — — — 1,091.4

Subordinated debentures held by subsidiary trusts 87.0 — — — 87.0

(1)Does not include non-accrual loans of $39.5 million. Variable rate loans are included in the three months or less category in the above table although certain of these loans have reached interest rate floors and may not immediately reprice.

(2)Adjusted to reflect: (a) expected shorter maturities based upon our historical experience of early prepayments of principal, and (b) the redemption of callable securities on their next call date.

(3)Interest bearing demand and savings deposits, while technically subject to immediate withdrawal, actually display sensitivity characteristics that generally fall within one to five years. Their allocation is presented based on those sensitivity characteristics. If these deposits were included in the three month or less category, the above table would reflect a negative three month gap of $4.7 million, a negative cumulative one year gap of $2.4 million, and a positive cumulative one to five year gap of $3.6 million.

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Net Interest Income Sensitivity

We believe net interest income sensitivity provides the best perspective of how day-to-day decisions affect our interest rate risk profile. We monitor net interest income sensitivity by utilizing an income simulation model to subject 12 and 24 month net interest income to various rate movements. Simulations modeled quarterly include scenarios where market rates change instantaneously up or down in a parallel manner and scenarios where market rates gradually increase 200 basis points. Estimates produced by our income simulation model are based on numerous assumptions including, but not limited to: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) repricing characteristics for market rate sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in our assets, such as caps and floors, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results, but rather to provide insight into our current interest rate exposure and execute appropriate asset/liability management strategies accordingly.

We target a mix of interest earning assets and interest bearing liabilities such that no more than 4.0% of the net interest income will be at risk over a one-year period, should interest rates immediately shift up or down 100 basis points, or gradually shift up 200 basis points over a 12 month period. As of December 31, 2020, our income simulation model predicted net interest income would increase 7.00% on an immediate 100 basis point shock, assuming a static balance sheet. Assuming a 0.5% gradual increase in interest rates during each of the next four consecutive quarters, net interest income would increase $27.6 million or 6.32%. Conversely, if interest rates declined 100 basis points, the model indicates that net interest income would decline 7.04% under a static balance sheet scenario.

We did not simulate the gradual 200 basis points decrease in interest rates due to the low rate environment as of December 31, 2020. Additionally, rates are modeled not to fall below 0% with a decrease in interest rates. Although we did not simulate a ramp decrease in interest rates due to the low rate environment as of December 31, 2020, a further decline in interest rates would result in compression of our net interest income.

Each scenario predicts that our interest bearing assets reprice faster than our interest bearing liabilities. We are not currently engaged in significant derivative or balance sheet hedging activities to manage our interest rate risk. The preceding interest rate sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results.

Recent Accounting Pronouncements

The expected impact of accounting standards recently issued but not yet adopted are discussed in “Notes to Consolidated Financial Statements—Authoritative Accounting Guidance” included in Part IV, Item 15 of this report.

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements of First Interstate BancSystem, Inc. and subsidiaries are contained in Part IV, Item 15 of this report and are incorporated herein by reference.

Report of RSM US LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets — December 31, 2020 and 2019

Consolidated Statements of Income — Years Ended December 31, 2020, 2019, and 2018

Consolidated Statements of Comprehensive Income — Years Ended December 31, 2020, 2019, and 2018

Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2020, 2019, and 2018

Consolidated Statements of Cash Flows — Years Ended December 31, 2020, 2019, and 2018

Notes to Consolidated Financial Statements

Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for selected quarterly financial data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no disagreements with accountants on accounting and financial disclosure.

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Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As of December 31, 2020, our management evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, 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 December 31, 2020, were effective in ensuring that information required to be disclosed by us in reports that we file or submit 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.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements in accordance with U.S. generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of our system of internal control over financial reporting as of December 31, 2020 based on the guidelines established in the Internal Control--Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of December 31, 2020, our system of internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

RSM US LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of our internal control over financial reporting as of December 31, 2020. The report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2020, is included below.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of First Interstate BancSystem, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited First Interstate BancSystem, Inc. and its subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2020 and 2019, the consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements and our report dated February 26, 2021 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Des Moines, Iowa

February 26, 2021

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Item 9B. Other Information

There were no items required to be disclosed in a report on Form 8-K during the fourth quarter of 2020 that were not reported.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

Information concerning directors, executive officers, and corporate governance is set forth under the heading, “Directors and Executive Officers” and “Corporate Governance” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is incorporated herein by reference.

Information concerning our compliance with section 16(a) of the Securities Exchange Act of 1934 is set forth under the heading “Delinquent Section 16(a) Reports” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is herein incorporated herein by reference.

Item 11. Executive Compensation

Information concerning executive compensation is set forth under the headings “Compensation Discussion and Analysis” and “Compensation of Executive Officers and Directors” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is herein incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management as well as related stockholder matters is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is herein incorporated herein by reference.

The following table provides information, as of December 31, 2020, regarding our equity compensation plans.

Number of Securities to be Weighted Average Number of Securities

Issued Upon Exercise of Exercise Price of Remaining Available

Outstanding Options, Outstanding Options, For Future Issuance Under

Equity compensation plans

Equity compensation plans not

approved by shareholders NA NA NA

Item 13. Certain Relationships and Related Transactions and Director Independence

Information concerning relationships and related party transactions of certain of our executive officers, directors, and greater than 5% shareholders as well as the independence of our directors is set forth under the headings “Directors and Executive Officers” and “Certain Relationships and Related Transactions” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is herein incorporated herein by reference. In addition, see “Notes to Consolidated Financial Statements—Related Party Transactions” included in Part IV, Item 15.

Item 14. Principal Accountant Fees and Services

Information concerning principal accountant fees and services is set forth under the heading “Principal Accounting Fees and Services” in our Proxy Statement relating to our 2021 annual meeting of shareholders and is herein incorporated by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)1. Our audited consolidated financial statements follow.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of First Interstate BancSystem, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 27 to the financial statements, the Company has changed its method of accounting for the allowance for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326).

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses - Loans Held for Investment

The Company’s loans held for investment portfolio totaled $9,807.5 million as of December 31, 2020 and the associated allowance for credit losses on loans held for investment was $144.3 million. As described in Notes 1 and 6 to the financial statements, the allowance for credit losses on loans held for investment is a valuation account that is deducted from the Company’s amortized cost basis of loans held for investment to present the net amount of loans held for investment expected to be collected. The Company’s allowance for credit losses on loans held for investment consists of three elements: (1) specific valuation allowances associated with collateral‐dependent loans; (2) historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends; and (3) adjustments to historical loss information for differences in current loan‐specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in or forecasted changes in environmental and economic conditions, such as changes in unemployment rates, property values, or other relevant factors.

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We identified the adjustments to historical loss information component of the allowance for credit losses on loans held for investment, both as it relates to current conditions and forecasted scenarios, as a critical audit matter, because auditing this component of the allowance for credit losses on loans held for investment required significant auditor judgement related to estimates determined by management which are highly subjective and are highly sensitive to change in significant assumptions.

Our audit procedures related to the Company’s adjustments to historical loss information component of the allowance for credit losses on loans held for investment included the following, among others:

•We obtained an understanding of the relevant controls related to the allowance for credit losses on loans held for investment and tested such controls for design and operating effectiveness, including controls relating to management’s review and approval of the allowance for credit losses on loans held for investment calculation, management’s assessment and review of the adjustments to historical loss information component of the allowance for credit losses on loans held for investment for current conditions and forecasted scenarios and management’s validation of underlying source data.

•We tested management’s calculation of adjustments to historical loss information within the allowance for credit losses on loans held for investment calculation by agreeing calculation inputs to the Company’s internal and external source data, including for current and forecasted conditions, verifying the mathematical accuracy of the calculation of adjustments to historical loss information, and evaluating whether adjustments to historical loss information within the allowance for credit losses on loans held for investment, or lack thereof, were consistent with Company provided internal data and external independent data, including data related to current and forecasted periods.

•We assessed the reasonableness of management’s calculated changes in adjustments to historical loss information within the allowance for credit losses on loans held for investment calculation by evaluating the magnitude and directional consistency of changes, or lack thereof, in the level of adjustments to historical loss information between periods and evaluating whether management’s conclusions were consistent with Company provided internal data and external independent data, including data related to current and forecasted periods.

•We agreed management’s calculated adjustments to historical loss information to the allowance for credit losses on loans held for investment calculation.

/s/ RSM US LLP

We have served as the Company’s auditor since 2004.

Des Moines, Iowa

February 26, 2021

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

Assets

Interest bearing deposits in banks 2,015.3 835.2

Federal funds sold 0.1 0.1

Investment securities:

Mortgage loans held for sale, at fair value 74.0 100.9

Loans held for investment, net of deferred fees and costs 9,807.5 8,930.7

Allowance for credit losses 144.3 73.0

Premises and equipment, net of accumulated depreciation 312.3 306.0

Core deposit intangibles, net of accumulated amortization 51.2 62.1

Accrued interest receivable 51.1 46.7

Other real estate owned (“OREO”) 2.5 8.5

Liabilities and Stockholders’ Equity

Deposits:

Securities sold under repurchase agreements 1,091.4 697.6

Accounts payable and accrued expenses 144.4 129.6

Accrued interest payable 5.8 12.1

Deferred tax liability, net 27.2 26.7

Allowance for credit losses on off-balance sheet credit exposures 3.7 —

Subordinated debentures held by subsidiary trusts 87.0 86.9

Stockholders’ equity:

Accumulated other comprehensive income, net 56.6 11.0

Total liabilities and stockholders’ equity $ 17,648.7 $ 14,644.2

See accompanying notes to consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

Interest income:

Interest and dividends on investment securities:

Exempt from federal taxes 2.7 2.0 2.4

Interest on deposits in banks 4.1 18.8 11.3

Interest expense:

Interest on securities sold under repurchase agreements 0.9 3.9 2.7

Interest on other borrowed funds — — 0.2

Interest on long-term debt 4.6 1.3 1.3

Interest on subordinated debentures held by subsidiary trusts 3.0 4.5 4.1

Provision for credit losses 56.9 13.9 8.6

Net interest income after provision for credit losses 440.1 481.1 423.9

Non-interest income:

Service charges on deposit accounts 17.6 21.1 21.8

Other service charges, commissions, and fees 12.1 7.0 5.8

Investment securities gains (losses), net 0.3 0.1 (0.1)

Non-interest expense:

OREO expense, net of income (0.5) (2.2) 0.3

FDIC insurance premiums 5.9 3.5 5.6

Core deposit intangibles amortization 10.9 11.2 7.9

Acquisition related expenses — 20.3 12.4

Basic earnings per common share $ 2.53 $ 2.84 $ 2.77

Diluted earnings per common share 2.53 2.83 2.75

See accompanying notes to consolidated financial statements.

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FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

Other comprehensive income (loss) before tax:

Investment securities available-for-sale:

Change in net unrealized gains (losses) during the period 61.8 54.9 (13.9)

Change in net unrealized loss on derivatives 0.2 — —

Defined benefit post-retirement benefit plans:

Change in net actuarial loss (0.5) (0.8) (0.6)

Other comprehensive income (loss), before tax 61.2 48.0 (12.8)

Other comprehensive income (loss), net of tax 45.6 35.6 (9.5)

See accompanying notes to consolidated financial statements.

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Other comprehensive loss, net of tax expense — — (9.5) (9.5)

Common stock transactions:

24,271 common shares purchased and retired (1.0) — — (1.0)

214,892 non-vested common shares issued — — — —

43,079 non-vested common shares forfeited or canceled — — — —

Stock-based compensation expense 5.6 — — 5.6

Common cash dividends declared ($1.12 per share) — (64.1) — (64.1)

Other comprehensive income, net of tax expense — — 35.6 35.6

Common stock transactions:

43,560 common shares purchased and retired (2.5) — — (2.5)

212,587 non-vested common shares issued — — — —

46,198 non-vested common shares forfeited or canceled — — — —

Stock-based compensation expense 8.0 — — 8.0

Common cash dividends declared ($1.24 per share) — (79.2) — (79.2)

Cumulative change related to the adoption of ASU 2016-13 — (24.1) — (24.1)

Other comprehensive income, net of tax expense — — 45.6 45.6

Common stock transactions:

19,491 common shares issued — — — —

332,085 non-vested common shares issued — — — —

34,912 non-vested common shares forfeited or canceled — — — —

Stock-based compensation expense 7.5 — — 7.5

Common cash dividends declared ($2.00 per share) — (128.6) — (128.6)

See accompanying notes to consolidated financial statements.

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Cash flows from operating activities:

Provision for credit losses* 56.9 13.9 8.6

Net loss (gain) on disposal of property and equipment 0.3 (1.5) (1.2)

Net premium amortization on investment securities 15.9 8.9 10.0

Net (gain) loss on investment securities transactions (0.3) (0.1) 0.1

Net gain on sale of investments in unrelated entities (1.0) — —

Net gain on sale of OREO (0.9) (3.6) (0.8)

Write-downs of OREO and other assets pending disposal 0.1 0.9 0.1

Mortgage servicing rights impairment 9.9 0.4 —