Marcy Mutch - Investor Relations Officer Ed Garding - President, Chief Executive Officer and Director Kevin Riley - Chief Financial Officer and Executive Vice President Bob Cerkovnik - Chief Credit Officer.

Jared Shaw - Wells Fargo Matthew Clark - Piper Jaffray Matthew Ferguson - Sandler O’Neill.

Good morning and welcome to the First Interstate Bancsystem’s Second Quarter 2015 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Marcy Mutch, Investor Relations Officer. Please go ahead, Ma’am..

Thanks, Dan. Good morning. Thank you for joining us for our second 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 the 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. Yesterday, we were pleased to report second quarter earnings of $22 million or $0.49 per share, a 6% increase over the last quarter. We had a great second quarter with strong growth in both loans and total revenue. Let’s start with loan growth.

Total organic loan growth was $177 million for the quarter. This equates to a 3.6% increase quarter-over-quarter, and a 5.3% increase year-over-year. Growth in the loan portfolio extended over every major loan category with the exception of construction real estate.

The largest increase in total dollars was in the commercial portfolio, which grew $65 million or 8.6% over the last quarter. This is encouraging and supports the economic stability we are seeing in most of the small communities across our footprint. Ag loans grew $25 million or 21.3% for the quarter.

As we mentioned on the last call, this portfolio fluctuates seasonally and generally increases significantly in the second quarter as our farmers and ranchers draw down on their operating lines. Commercial real estate grew $33 million or 2% quarter-over-quarter with a good share of this growth occurring in Livingston and Billings Montana markets.

The indirect portfolio remains a steady source of loan growth. Indirect loans grew 4.1% for the quarter and currently comprised $589 million of the consumer portfolio. Just to remind you, our indirect portfolio is comprised predominantly of auto and RV loans.

The majority of our lending is done within our markets, but we do have a few dealers in the neighbouring states of Idaho, Nebraska, and North Dakota. On a combined basis, the activity in those three states makes up approximately 5% of our total indirect volume.

The lower tier of this portfolio, which are those consumers with the FICO score under 660 makes up approximately 11% of the total portfolio. Moving to credit quality, our non-performing assets are back down to 1.01% this quarter.

We are making significant progress in disposing of our other real estate and have already disposed of an additional significant piece of other real estate in the third quarter. In case you are wondering what a significant piece of other real estate is, I’ll give you a hint that we no longer own any golf courses, especially in Missoula.

Now for the revenue side, total revenues were up $5 million or 5.4% over last quarter and $10.8 million or 12.5% over the second quarter of last year. I’m not going to go into this in much detail because Kevin will do that, but there are two highlights I’d like to mention; mortgage revenue and fee income.

Mortgage revenue was the largest contributor to our increase in total revenue and was up $3 million or 49% quarter-over-quarter. 65% of the mortgage activity was purchases and 35% was refinancing. Because of our strong economies, we continue to have a strong pipeline headed into the third quarter.

Debit and credit card fee income was up $914,000 from last quarter or a 14% increase. This increase was driven by transaction volume, which is a result of a continual shift in customer behaviour as consumers appear to prefer electronic payments over writing checks along with our initiative to increase our business credit card usage.

Economics across our footprint continue to be strong. As of the end of May, unemployment was 3.8% in South Dakota, 3.9% in Montana, and 4.1% in Wyoming. We’ve now had several months to observe the impact of lower oil prices on our markets, and it’s clear that it has not had much impact on employment across our footprint.

Crude prices were up for the quarter, but have since been flat or down. Economic concerns coming out of Europe, the uncertainty in China and further pressure felt as a result of the strong dollar leads to volatility in oil prices.

Our oil and gas exposure at the end of June was $72 million in direct loans and an additional $42 million committed for total exposure of $114 million. Last quarter, we said we expected the tourism season to go well, and I’m pleased to let you know that it’s living upto our expectations.

You might remember that I warned you that lodging was already full in Yellowstone Park, and if you did want to visit Yellowstone, you are welcome to stay at my cabin which is on the highway to Yellowstone.

I would report that the cabin has been full of analysts since the first part of June, and they make wonderful house guests with the exception that no matter what you give them, they want more.

All three of the national parks, Yellowstone, Glacier, and Mount Rushmore are seeing double digit growth in the year-to-date, in the year-to-date what, in the year-to-date recreational visits with Glacier leading the pack at over 25% increase year-over-year. Gasoline prices remained significantly lower than they were a year ago.

This has helped encouraged travel. We continue to be optimistic about agriculture this year. Cattle prices remained stable and closed to all-time highs. We’ve had some drought in parts of our footprint, but certainly not to the extent that we’ve seen occurring west of us in Washington and California.

And generally, our drought conditions are not located in our Ag areas. Because of the unusual weather patterns, however, the grain harvest started earlier this year and will be finished in the next couple of weeks. The yields and price are both good but below last year’s levels.

With those comments, I’d like to turn this over to Kevin Riley for a little more detail behind the numbers. Go ahead, Kevin..

Thanks, Ed and good morning everyone. We had a successful second quarter with GAAP earnings of $0.49 per share or a 6% increase over last quarter. From a pre-tax, pre-provision perspective, we were up 7.9% over the first quarter and 15.5% over the second quarter a year ago.

Earnings did have some unusual onetime items this quarter, both on a positive and negative side, and I’m lay them out as we go through the income statement. But to start off, let’s go over the balance sheet. As Ed mentioned, we had organic loan growth of about $177 million or approximately 4% this quarter.

We are well on our way achieving the mid single digit growth we expected for this year. Since Ed has already reviewed the changes in our portfolio in quite bit of detail, I will not cover them any further. Our invested portfolio declined this quarter by approximately $200 million or about 9%.

The decline in deposits and increase in loans allowed our investment portfolio to dip to 25.5% of total assets. Our strategy is unchanged and we continue to keep our duration short. With long term interest rates rising as a result of the rumblings the potential rate increased by the Fed the duration of the portfolio remains short to around 3 years.

Again, we are well positioned should rates rise in the next few months. Total deposits declined 2.4% this quarter, similar to last quarter, the decline was dispersed across all deposits sites. The mix of deposits quarter-over quarter was stable and as a result our cost of funds remained at a low 24 basis points.

Currently, we don’t see this deposit decrease as a trend but more as a seasonable adjustment. Now let’s move to the income statement. Our net interest income increased $1 million on a length quarterly basis as a result of the increase in loans and the extra accrual date.

For the quarter, our net interest margin increased four basis points to 3.47% from 3.43% last quarter. Loan growth helped mitigate margin erosion resulting from a decline in loan yields but adjusting for accretion related to earlier pay-offs and charged-off interest recoveries in each quarter, the core margin actually increased about 2 basis points.

Our provision expense for the quarter was $1.3 million. The increased provision was a result of loan growth and a slight increase in criticized loans. Our net charge-offs for the quarter were only $124,000 and as Ed has mentioned our non-performing assets declined from 1.11% to 1.01% of total assets.

Our non-interest income was the bright spot this quarter and represented about 33% of our total revenue. A lot of you have heard me talk about our business card, credit card initiative and our focus of moving business customers and paying their bills with our credit card.

As a result, approximately one third of this quarter’s increase and our credit card fees is attributed to business credit card activity. Payment card fees were up $914,000 or 14% over the last quarter. As Ed said, we are seeing a steady increase in the use of payment cards as a preferred method of payment.

Our income from the originations of sale mortgage loans was $8.8 million, up 49% over the prior quarter and 38% over the same quarter last year. Purchase activity accounted for 65% of the products in this quarter up from 57% purchase activity last quarter.

Included in our mortgage revenue was a gain of sale of $410,000 related to the sale of $10 million of some of our residential portfolio loans. While slightly down quarter-over-quarter, our wealth management continues to be a strong source of revenue. Assets under management are stable at $4.6 billion.

Our other income while down suddenly from last quarter did include $863,000 gain from the sale of a parking lot that had been previously been a drive-up facility. Let’s move to non-interest expense.

Our non-interest expense was $62 million this quarter or approximately $2 million over our expected run rate, most of which is due to the increase in other expenses which I’ll cover in just a minute.

Total salaries were up due to increase in commissions resulting from the increase in mortgage revenue, our employee expense increased about 4% this quarter due to our self insured health insurance expense increase over last quarter as a result of some large medical expense claims. Our other expenses increased $2 million or 14%.

There were a few unusual items that led to this increase. We incurred a contract termination fee of $876,000 related to change in payment service providers when we upgrade to a better system. We had losses on property sales of $300,000 and lastly we had a spike in fraud losses of about $520,000 over last quarter.

So circling back to my comments at the beginning there was a little noise in the quarter and we had some unusual items both positive and negative. So let me summarize. On the revenue side we had a gain on the sale residential mortgages of $410,000 and a gain on a piece of bank property of $863,000.

This was offset on an expense side by one-time termination fee of $876,000, losses on the disposal of assets of $300,000 and $520,000 spike in fraud losses. Net, net they pretty much offset each other. I’ll wrap up my comments by talking about our capital. Our capital ratios are strong and provide us with room for growth.

We had no share repurchases as the financial metric we use to determine if there is a good use of capital did not allow us to do so this quarter. So, still we paid a healthy dividend of $0.20 per share which resulted in about 2.9% annualized yield.

Through the first half of the year we have paid out 42% of our earnings in the form of dividends which we believe is a strong return of capital to our shareholders, while still allowing us to have sufficient capital support our organic growth and our M&A activity.

The United Bank acquisition is going smoothly and we will merge and convert them onto our system at the end of business this Friday. Acquisition costs have been kept under control and we expect employee integration will grow well. Again, this is an all cash transaction which should be immediately accretive to earnings.

With that, I’ll turn the call back over to Ed..

Thanks, Kevin. We want to wrap up by providing a brief update related to our ongoing litigation. We are entering the mediation phase of the appeal process. Mediation will occur during the third quarter so we’ll see how that process goes, if the mediation is unsuccessful the case would go on to the Montana Supreme Court.

We also want to let you know that our acquisition of Absarokee Bancorporation Corporation, parent company of United Bank is on schedule to close this Friday. This $74 million bank will be a nice extension of our Billings footprint.

As a matter of fact, many of our current customers live in community service by United Bank and this will allow us to offer them more convenient customer service. United Bank has a tremendous staff and a loyal customer base. We are excited to welcome them into the First Interstate family. So with that, we’ll open it up to questions..

Thanks you. [Operator Instructions] And our first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead..

Hi, good morning..

Good morning, Jared..

Maybe if we start with -- looking at commercial loan growth, it was strong in the second quarter, what does that growth do to the pipeline? I guess how do you look at the pipeline now versus this time last quarter and should those trends continue into third quarter?.

I’m going to ask our Chief Credit Officer, Bob Cerkovnik to address that..

I wouldn’t see -- we will continue to grow our commercial loans. We are really excited about the growth that we’ve had this past quarter, and that trend we hope to continue throughout the rest of the year, but as we’ve shown in the past, this third and fourth quarter have been fairly flat..

Okay. Thanks. And when you look at share repurchases and general capital allocation, you’d said that you weren’t buying any shares this quarter.

Is that decision based solely on share price or is it are there other elements that go into whether or not you’d be actually buying back stock?.

Hi, Jared, this is Kevin. We look at it as you know because we buy back stock at certain prices, it’s a dilution to tangible equity. And we look at we want to get at least under five-year payback as we buy those shares back. So with the stock price elevated, we didn’t believe that it was under that five-year threshold..

Okay.

And then finally, looking at the fraud losses that you spoke about increasing, is that just general fraud losses increasing or is that tied to sort of prior tail – is that a tail to some of the prior stuff that you talked about in the past?.

It’s not a tail of the prior stuff, and it’s almost all debit card and credit card transactions where smaller merchants have been compromised or they’ve been hacked and then the customer’s accounts were compromised..

Okay. Okay, great. Thank you very much..

You’re welcome..

And our next question comes from Matthew Clark of Piper Jaffray. Please go ahead..

Hey, good morning guys..

Good morning, Matthew..

Maybe just first on the margin core up a couple of basis points, loan yield still under some pressure though, can you just talk through the potential for additional mix change here like you had this quarter, and the ability to hold that margin at where it is or maybe we see a basis point or two decline in the core overtime here?.

I’ll start and then I think I’ll hand off to Kevin. But obviously the loans that we’re putting on the books today are lower rate than the loans that they are replacing.

But that said, if we can continue with loan growth, we change the mix and obviously the margin will improve in regards to what we’re forecasting, I’m going to let Kevin answer that as much as he can..

Hi, Matt. Part of the decline was that the loans that we put on last quarter had about an average yield of about 4.81%. The good news we saw this quarter is that some of the loans that we put on actually at the end of the quarter had an average yield of 4.92%.

So, we believe maybe that that could stabilize as we move forward, so that it’s actually higher than our current portfolio mix, so we’re hoping that maybe it will stabilize at about this level..

Okay..

Okay, great.

And then within expenses and the growth in the mortgage platform, can you give us a sense for how much of your -- how much of the mortgage expense base is variable, and if you could give us the dollar amount too that might be helpful in trying to balance seasonality?.

I’m not sure I’m understanding the question here, you’re saying how much of the mortgage expense is variable as volume raises and falls, is that the question?.

That’s it, yeah..

Okay. And I can tell you that our originators are on a compensation plan that that is a combination of salary and volume performance for the volume that they do, and I can’t put a percent to that. I just couldn’t tell you that it’s going to be X percent of the total originator expense.

I’d just say it’s not huge, because again the only ones that are on that type of a compensation plan are the originators, and we have about 120 originators..

Great. Okay. And then just last one on the bump-up in criticized loans, can you just give us some additional color there whether or not that tied to energy and related to the Bakken and updated commentary on the Bakken, so it might be helpful? Thanks..

Yes. I’ll start and then I’ll have Bob finish. And we have seen some of the customers that drill for oil or that rely on oil as their income suffer, but not many. We have a couple in that industry that are problem loans that would have been problems regardless of the price. And we have a couple of others that the price is their major problem.

That said, with the whole portfolio being a little over 1% of our total portfolio, it’s not going to have a huge impact, but I want to have Bob -- give Bob a chance to answer that too..

Yes. Matthew. You look at our criticized to answer your first on the criticized. These numbers and percentages are well within what we consider to be an acceptable range for us. You’re always going to see a little bit moment up and down depending on what’s going on with some larger credit. So, again, they are within acceptable ranges for us.

If you – the Bakken, we’re not seeing a huge deterioration from as a result of the Bakken slowing down overall.

Did I answer all your questions here, Matthew?.

Yes. Thanks guys..

I’ll add to that, because in past years we’ve spent a lot of time saying that all of that activity in the Bakken was having a significant positive impact on the economy of Eastern Montana and especially billings and that was because of we were supplying the picks and shovels so to speak to do all of the work that was being done over there.

And so then you got a wonder that that activity is literally been cut in half.

What’s happening, and as I mentioned on the unemployment numbers we’re just not seeing it and what we are seeing is that our builders both the commercial builders and home builders are back to work so to speak and hiring skilled labor, because a year ago the biggest compliant you heard around billings in eastern Montana is we cannot find skilled labor.

And I mentioned one time that there were houses being built that might shift for six weeks, because they couldn’t find roofing crew or siding crew to come in and finish them. And that’s over that the skilled labor is back and perhaps their wage scale isn’t as high as it was over in the oil field. But we just haven’t seen an economic impact yet..

And our next question comes from Matthew Ferguson of Sandler O’Neill. Please go ahead..

Hi. Good morning all..

Good morning..

So, in your press release you mentioned, you alluded to almost like a structural shift in loan demand in your market areas.

Is that attributable to that influx of skilled labor coming back in the Bakken into your footprint, is that kind of – is that consistent?.

No. I think its more about the economy coming back and we’ve mentioned before that our economy – we were a year or year and a half late getting into the recession and we were year or year and a half late getting out of it.

And I think we’re just seeing an off a lot of building, home building, commercial building you know whether its retail and/or hospitality or the two main things we’re seeing in commercial. I think it’s more related to that than to demographic shift from the oil field..

Okay.

And can you just speak broadly about the M&A environment kind of what you’re seeing and chatter and your appetite for doing a transaction?.

Sure. And I’ll hand that off to Kevin Riley..

Hi, Matt. I would say the M&A environment here is pretty active. It’s little different than I’m use to. Normally, you go out and kind of quote [ph] potential targets. A lot of people are contacting us.

Again lot of the banks that here are privately owned and I think as some of the management is aging they’re looking for their liquidity events so they can retire.

So, as I mentioned probably in the past there’s a bunch of smaller acquisitions like the Absarokee transaction we did and there’s a lot of ones that are little larger that are possibilities and you know there’s a lot of talk and I think its probably going to be robust over the next few years..

Thanks. All right.

And then lastly as it relates to the $10 billion threshold, I known yet the task force working away, any incrementally learning this quarter and can you remind us kind of what you’re currently thinking for the call it that day one hit once you cross over revenue at risk, et cetera?.

I’ll start and then I’ll let Kevin finish. And I would start by saying that we’ve already purchase the software or the stress testing piece. And that’s obviously one of the major pieces of going over that threshold. We do know approximately the dollar amount for the Durbin amendment piece on what that would cost us.

And then finally I’d say that Tom it’s hard to tell when day one is because I believe that most of that goes into effect after you had something like three quarters or two quarters or three quarters, three consecutive quarters of being over the $10 billion marks. So it will be – it sounds like its more of a gradual change than a follow off a cliff.

But Kevin, do you want to that..

Yes. Durbin amendment cost us about $8 million pretax in fee revenue and the way we see it right now is that if we go over $10 billion and $16 billion, it will probably end up reporting in 2018 and once you start doing a reporting that’s when you actually have the impact of revenue. So it’s a quite a way out.

But we first got to get over there and we’re doing all the planning necessary to do that. But its quite a couple years out right now..

Thank you..

And our next question comes from Jeff Rulis of DA Davidson. Please go ahead..

This is actually Matt in for Jeff..

Hi, Matt..

I know you guys have already talked quite a bit about the loan growth, but was there any thing unusual in this quarter? Were there any bigger deals or introduction that maybe shifted from Q1 or the third quarter that affected this quarter so much stronger than we’ve previously seen?.

Bob..

No, Matt. I wouldn’t directly attribute to one or two large deals..

You know Matt, if you look back at our second quarter last year we did have loan growth of about 3.2% in the second quarter of 2014, so 3.6% growth this quarter is not really unusual as compared to kind of seasonal trend that was kind of started set last year..

Sure..

Matt, I would add that sometimes we will see a bank our size attribute loan growth to a $75 million deal that they closed and you just want to see us doing that because we don’t do $75 million deals.

We held very close to a $10 million house limit for many years, recently raised that to $15 million and today, and we do a lot of exceptions for what we think are very good customers, but today we have about 30 customers that are in excess of that $10 million and the very largest one is little over $30 million.

So, we just wouldn’t make one loan or two loans that would swing the growth..

Sure. Okay. All my other questions are been answered. Thank you..

All right..

[Operator Instructions] Our next question comes from Tim Coffey of FIG Partners. Please go ahead..

Tim, you’re not coming through.

Are you on mute?.

Hi. Good morning, guys. This is actually [Indiscernible] in for Tim Coffey..

Good morning..

I just got a couple of questions. One would be a loan growth.

I saw there were some $107 million change, what percentage of that is actually from new clients and what the derived from existing clients?.

I’ll hand that off to Bob..

It is a combination, a little bit of combination of both. And most of our existing customers have seen good economic times and are expanding..

Okay. Great.

And I saw that you guys took picks [ph] for eliminating your payment service provider are you guys expecting any cost savings out of that?.

Yes. And Kevin, go ahead..

Yes. We expect the actual cost of each transaction is actually a payment service provider will go down and we were incented also to move over to this other payment service provider that will be amortized over the life of the contract, so it will take our cost down..

Okay. And then just one last question on NPA, so you guys brought it down to $85 million.

Now, as far as the market is concerned and the location – the areas you operate, do you see momentum towards the NPAs are likely to get this below $75 million or you guys treating it as a case by case basis at this point?.

Bob?.

We’re treating as case-by-case basis. We, as I said before we have to be under 1% to be high performing bank and that’s what our long term goal is..

Okay, great. Thanks. That’s all from me..

This concludes our question and answer session. I would like to turn the conference back over to Ed. Garding for any closing remarks..

As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning in and good bye..

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