Marcy Mutch - Investor Relations Ed Garding - Chief Executive Officer Kevin Riley - Chief Financial Officer.

Jeff Rulis - D.A. Davidson Brad Milsaps - Sandler O’Neill Jackie Chimera - KBW Matthew Keating - Barclays.

Good morning. And welcome to the First Interstate BancSystem’s First Quarter 2014 Earnings Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded.

I would now like to turn the conference over to Marcy Mutch. Please go ahead, Ma’am..

Thanks Denise. Good morning. Thank you for joining us for our first quarter earnings conference call. As we begin, I’d like to direct all listeners to the cautionary note regarding forward-looking statements and factors that could affect future results in our most recently filed Form 10-K.

Relevant factors that would cause actual results to differ materially from any forward-looking statements are listed in the earnings release and in our SEC filings. The company does not intend to correct or update any of the forward-looking statements made today.

Joining us from management this morning are Ed Garding, our Chief Executive Officer; and Kevin Riley, our Chief Financial Officer, along with other members of our management team. At this time, I will turn the call over to Ed Garding.

Ed?.

Thanks, Marcy. Good morning and thanks again to all of you for joining us on the call. It’s been a productive quarter for us. Yesterday, we reported earnings of $21.4 million or $0.48 per share. This equates to a respectable return on equity of 10.74% and a return on assets of 1.16%.

Along with strong earnings this quarter, we are also excited about the pending merger with Mountain West Bank based in Helena, Montana. I assume you can feel the excitement in my voice. Let’s get back to our earnings.

Once again, earnings were significantly impacted by a negative provision with the improvement we saw in credit quality dictating that we should release some of the money we have previously putted into the allowance for loan losses. I know I have stated publicly that I didn’t anticipate reversals at this level for 2014.

However, as you saw in the release last evening, we had net recoveries of just over $1 million while gross recoveries of $4 million were spread over the quarter, a little over $2 million of the recoveries occurred in late March with one charged-off note refinanced by another bank.

So, this combined with the continued improvement in our level of non-performing loans and general economic conditions, along with the modest amount of loan growth in the first quarter resulted in a $5 million reversal. Mortgage revenue declined $940,000 from last quarter. As anticipated, mortgage activity has returned to a more normal cycle in 2014.

By this, I mean more purchase activity, slower production in the winter months picking up through the middle of the year and then tapering up towards the end of the year. This is exactly what we saw happened this quarter, but had the additional impact of a very cold, very snowy winter that cost us about 10% in our purchase volume.

How cold was it you’re probably thinking because everyone had a cold winter, but I want to challenge you to compare to us.

We had a little over a 100 inches of snow this winter here in Billings with 220 inches in the near-by mountains and the very coldest day I believe was 33-below, which I’ve actually heard of 33-below, having lived here all my life but I don’t think I ever saw it until that particular day.

More specifically, on the home loan front, we identified 30 transactions set to be closed in March that were delayed. Due to weather conditions, most of these were homes under construction, where for obvious reasons they just did not get completed. The home loan production mix for the quarter was 68% purchase and 32% refi.

And we think this emphasis on purchase activity will carry forward throughout the year. We also believe that with spring coming we can catch up with the volume lost from the first quarter. The only caveat to us achieving our mortgage production goals for the year will be the ability of the builders to keep up with the new home demand.

Particularly, in Eastern Montana there is a high demand for housing and the market is churning at a very fast pace. And as we have said before, the Bakken oil field has pulled skilled labors out of this area which could have an impact on the ability to fulfill the demand for housing.

Another interesting fact related to home loans is that 40% of the residential deals across our markets are for cash. In the Flathead market that percentage is as high as 80% to 90%.

So with that and the emphasis on purchased home volume which generally finances for a longer term, we aren’t anticipating much growth in our residential real estate portfolio this year. On to other loan growth, overall, we had $20 million of net growth in loans led by 4.5% or $30 million of growth in the commercial portfolio.

$19 million of this growth was increased line usage, mainly due to business expansion and some seasonal ramp up heading into the spring months. Industries where we are seeing expansion include automobile and recreational vehicle dealers along with the energy related borrowings which is a result of the impact of the Bakken activity.

We're also seeing limited activity in the healthcare industry. We were encouraged that both the commercial and construction real estate portfolios had small increases despite the weather. The decrease in Ag real estate was due to an expected $13 million payoff as a result of the sale of assets by one of our customers.

The decrease in our other Ag loans is seasonal and will pick up as farmers and ranchers start utilizing their operating lines this spring. Going forward, there is some increase in loan demand and we feel optimistic that we will still see overall loan growth in the mid single-digits for the year. Let’s move to credit quality.

Non-performing loans decreased $7 million or just over 7%. This decrease was mainly the result of $4 million in pay-downs and $3 million transferred to other real estate. Although, we did see $2 million of sales of other real estate this quarter despite the cold weather, this $3 million addition exceeded the outflows for a $1 million net increase.

We indicated that to be a high performing bank, we think non-performing assets should be at 1% of total assets. And we thought that might be achievable for us by the end of the year.

It will take a lot of effort to reach this goal, but if we continue to decrease non-performing loans at the rate we did this quarter and can dispose off a large portion of our other real estate over the next six months, we could still come close to that.

With that, I'll turn it over to Kevin for a little more detail behind the numbers and then I'll wrap up with a couple comments about the pending merger. Go ahead, Kevin..

Thanks Ed and good morning everyone. I'd like to start off by reviewing the average balance sheet trends. Total earning assets were down slightly from last quarter, but the good news is that our loans outstanding were up approximately $20 million. However, our short term investments were down offsetting this increase.

Our investment portfolio declined $25 million this quarter, but remained stable at 28% of total assets. We continue to focus on keeping our duration short, which declined to 3.4 years this quarter from 3.7 years at December 31. We recognize that we have a lot of cash on hand right now and understand the need to make more than 25 basis points.

So depending how quickly we could deploy some of this in loan demand, we may need to invest some of these funds to get higher returns. We continue to be sensitive to the idea that rates could raise and we want to be ready if and when this may occur.

Other assets increased approximately $60 million due to purchases of bank-owned life insurance at the end of 2013 and at the beginning of 2014. On the liability side, our deposit grew this quarter and we continue to see a shift at time deposits into savings and demand.

We think our customers are doing the same thing we are which is sitting on the side line in short term investments while waiting for the opportunity to earn a better rate on their money. When rates start to move, we know we will need to pay a little more but for now, this shift has allowed our cost of funds to remain stable at 28 basis points.

Our capital levels remain strong with our tangible capital ratio at 8.58%, total risk-based capital at almost 17%. We are excited about the opportunity to deploy a portion of our excess capital within the in-market acquisition of Mountain West Bank.

And as mentioned in our earnings release, we did have the opportunity this quarter to repurchase about a 100,000 shares of our stock under our stock repurchase plan.

So right now, between our healthy dividend and the stock repurchase plan and the acquisition, we believe we are utilizing all of our tools and our tool box to maximize returns for our shareholders, and we will continue to look for other opportunities to do so in the future. Let’s move to the income statement.

Net interest income was down compared to the fourth quarter, primarily due to two less accrual days and a decline in our average loan yield. The margin, however, remains stable for the third quarter in a row at 3.52%.

While we don’t think the net interest margin is going to fall materially, we do think it could decline a couple of basis points over the next few quarters. We do feel positive however about the potential for loan growth and we believe this could more than offset any loss in earnings due to margin erosion.

For the quarter, we had a negative provision of $5 million which was a result of debt recoveries of approximately $1 million, a decline in [doubtful] loans which released about $1.5 million in specific reserves, a shift in criticized assets helped further release some of our general reserves and an improvement in economic indicators that led to improved qualitative measure of factors.

As Ed has mentioned, the negative provision for loan losses of $5 million had a positive impact on net income for the quarter. This $5 million allowance release net of $1 million in net recoveries for the quarter added about $0.05 to our earnings per share.

Going forward, the level of provision will be largely dependent upon loan growth and the improvement in credit quality. If credit quality continues to improve and loan growth is not at a double digit pace, it is possible that we will continue to see some further release of our reserves.

Non-interest income was down for the first quarter and there was a number of reasons for this. Ed has already spoken about income from real estate loan originations and the impact of weather.

So while these revenues are still lower than we would like, we do think the business is out there and we believe will be back on track to meet our expectations for 2014 which is a decrease of 20% to 30% from 2013 levels. Fees and service charge income was also down due to expected seasonal declines and two less days in the quarter.

But even this was impacted by weather. As you know debit and credit card revenues along with service charge revenue are highly dependent on volumes of transactions. When people aren’t leaving their homes to go to the grocery store or much less travel, it has an impact on those revenues.

Non-interest expense decreased this quarter and were in line with our expectations. Salaries declined due to smaller quarter-over-quarter incentive compensation accruals while employee benefits were slightly up for the first quarter due to payroll taxes which will decline as annual compensation taxes limits are met.

Our other real-estate expense resulted in a slight gain due to a sale of property and we anticipate this expense will bounce around a little from quarter-to-quarter as we dispose-off our other real-estate.

While there is really not much more to mention to call out on our non-interest expense except that we think this level of non-interest expense could be a little life for a run rate going forward. At this time I’d like to say, I am optimistic about the future.

We have strong capital, improving asset quality, a strategic plan that drives us to our customer interment environment while striving to achieve efficiencies in our operation. Most importantly, we have the employees that will make this all occur. So with that, I’d like to turn the call back over to Ed..

Thanks Kevin. Just a few comments about the economy across our footprint. In terms of economic drivers, we believe we’ll see a positive impact from all three legs of our economy, energy, agriculture and tourism. Oil prices remain stable. Powder River coal prices are up and business in our areas continues to be positively impacted by the Bakken.

With cattle inventories across our country at the lowest level they have been since to 1950s, Ag customer should have another good year and cattle prices are predicted to be high once again. Our winter sports area, specifically ski resorts and snow mobiling areas had record years.

And as we know, the summer will bring tourists into the national parks in our footprint. Construction activity is up, the housing market is healthy, indirect lending is also up. Our loan pipeline is stronger than we’ve seen over the last three to four years.

So headed into our busy season, we feel like the economy has a little more momentum than we’ve had for the last few years. Hopefully, this will translate into loan growth. Lastly I want to wrap-up by providing an update on the Mountain West transaction.

Not only do we anticipate the transaction will be immediately accretive to earnings based on the cost savings we’ve modeled, we believe it will allow us better opportunities for organic growth in Western Montana.

Mountain West has a talented group of employees and we anticipate a smooth transition as the cultures of the two organizations are very similar. We are excited about the opportunity this presents for our company and there aren’t, pardon me, as there aren’t many opportunities for end market acquisition of this size.

We anticipate getting regulatory and Mountain West shareholder approval in the next few weeks with the close dates around the middle of the year. With that, I will open it up to questions..

We will now begin the question-and-answer session. (Operator Instructions). We have a question from Jeff Rulis from D.A. Davidson. Please go ahead sir..

Thanks, good morning..

Good morning Jeff..

Question on the mortgage division or the gain on sale, I guess to the degree that that was impacted by weather, down 18% production wise, any sort of comment on the actual impact, not necessarily a number thing, and just any outlook on that line item, I guess going forward..

The 18% drop is from fourth quarter last year to first quarter this year. The drop year-over-year is actually much more than that and you’ve probably seen some of the industry numbers were not unlike the rest of the country..

Alright, I guess I was referencing the sequential from Q4 and just referencing really that weather comment, what impact do you think that had, to what degree was that decline?.

We think that was a huge part of that 18% drop. It really was so cold and so much snow that the building of houses was delayed dramatically plus you are just not going to see people out shopping even for existing homes when you get kind of weather conditions. So we think it did have an impact.

We are hearing stories about a lot of activity ramping up now that spring is here..

Okay.

And then just a question on the reserve levels, are you getting any comments or pressure on that from accountants or auditors on your reserve levels or this is still just your internal methodology? How are those discussions going?.

I don’t think we are getting any push back, if that’s what you mean. We try to be consistent. And we think that that’s what the accounting industry wants is consistency in the way you measure the allowance that you ought to have.

And because of that we are continuing to put money back into earnings out of the allowance versus building a war chest in the allowance..

Got it, and then one quick last one on, any merger cost in the quarter on the expense side?.

I am going to have Kevin answer that for us..

No, not this time. We do expect some to start being there in the second quarter..

Okay, thank you..

Thanks, Jeff..

Our next question is from Brad Milsaps from Sandler O’Neill. Please go ahead, sir..

Hey, good morning..

Hello, Brad..

Ed, you sound a little more optimistic about the economy as well as the loan pipeline, I know one of the kind of big hurdles or stumbling blocks you talked about is not liking maybe a lot of the terms or structures kind of -- or pricing for that fact that’s out there.

Any improvement there or is it really more, the economy is getting better, so that’s why you feel a little bit better about loan growth versus other things you are seeing in the market in terms of term, structure pricing that may have prevented you from being more aggressive before?.

It’s more about feeling better about the economy. We are seeing a lot of positive signs, most which are relating to home building again and even some subdivision development, some related to commercial projects like retail and even some wholesale. And there is still a tremendous need for all of us bankers to find loans.

And so the competitive pressure hasn’t changed in regards to -- there is always going to be someone out there with a lower rate or better loan terms. But I think that as the economy continues to ramp up, there will be more to go around.

And we have a pretty good list of loyal relationship customers that are going to start expanding their businesses and we are going to help them..

Got it. Okay thank you very much..

You are welcome, Brad..

Our next question is from Jackie Chimera from KBW. Please go ahead, ma’am..

Hi, good morning everyone..

Hi, Jackie..

Just given your prepared remarks, is it possible that we could see the deal close at the end of 2Q now instead of 3Q?.

Kevin go ahead..

No Jackie. Right now, it looks like it’s going to be in early July probably..

Okay. And then you mentioned that you felt that some of the expenses could move up in future quarters.

Were there any particular line items that you thought were late in the first quarter?.

I think ORE was a little bit late due to fact that we had gains and so that could come back up a little bit, I think that salary expense might come back up a little bit just because of seasonality and going back into maybe a little higher accrual and incentive. So those might come back.

So, I think the guidance that we gave kind of at the end of last year of total non-interest expense around $50 million to $55 million and to $55.5 million is still kind of range we believe that we’ll be operating in..

Okay.

So, was salary expenses late given the weather as well?.

Yes. And I think that just later accrual for incentive so a little bit later than normal..

Okay.

And then lastly, the share repurchases, I personally was just a little bit surprised to see some of that ahead of the deal, is that something that as you continue to manage capital levels you might continue up until the deal closes and then possibly accelerate after that point?.

Yes. We’re going to pick our times again. We want to make sure we purchase stock at a good price so that we don’t do tangible book and our stock price did give us an opportunity at one point to buy some shares back at a price level that we like.

So, we’re going to pick and choose but as you know the deal gives you a lot of blackout period because of certain things and we’re going to have probably some more of those in the second quarter.

So, we’ll pick and choose when we believe is the right time to utilize that but -- so that could be some in the second quarter and could be some in the third just based upon where we see the opportunities to deploy that capital..

Okay.

And then potentially picking up momentum in 4Q and into 2015 after the future deal announcement?.

We could..

Okay. Great, thank you..

Thanks Jackie..

(Operator Instructions). Our next question is from Matthew Keating from Barclays. Please go ahead sir..

Yes. Thank you, good morning..

Good morning Matt..

I guess my first question would be following the Mountain West announcement, have you seen any pick up in coming call volumes from banks either within your footprint or near your footprint in terms of those banks that might be interested in partnering with you longer term as well? Thanks..

I’m trying to think of the conversations that I’ve had Matt and I honestly think that I would have had them with or without that announcement. We have talked to some banks and continually do and often times it’s not the right fit or the right price tag, but I can’t say that I’ve had any calls due to that Mountain West announcement..

Okay. That’s helpful. And then I appreciate the commentary on the weather. I’m suddenly feeling a lot better about the weather, the winter we just got through in the northeast given the 100 inch of snow, you guys have endured.

I guess, you know a few other banks that I do follow though have talked about higher snow removal cost, is that something you guys just don’t bother within your footprint as the snow will be there for the winter? So, was there any impact on expenses on that front?.

Most of our customers own snow mobiles and we have snow mobile lanes in the drive-in. And I’m just kidding Matt. But no, we pay people to plough the parking lots and the driving lanes and so on, but it’s a budgeted item that happens year-in and year-out and it wouldn't anything that we would call an extraordinary expense or even a material expense..

Got you. All right. Well, thanks again..

Yes, thank you Matt..

Showing no further questions at this time, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks..

I don’t have any closing remarks other than thank you and good bye..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..