Kenzie Lawson - Investor Relations Kevin Riley - Chief Executive Officer Marcy Mutch - Chief Financial Officer Bill Gottwals - Executive Vice President and Chief Banking Officer Stephen Yose - Executive Vice President and Chief Credit Officer.

Jared Shaw - Wells Fargo Securities, LLC Jeff Rulis - D.A. Davidson & Co. Matthew Forgotson - Sandler O'Neill & Partners, L.P. Jacqueline Boland - Keefe, Bruyette & Woods, Inc..

Hello and welcome to the First Interstate Bancsystem First Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I’d now like to turn the conference over to Kenzie Lawson, Investor Relations. Please go ahead ma’am..

Thanks Keith. 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 Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer along with other members of our management team. At this time, I’ll turn the call over to Kevin Riley.

Kevin?.

Thank you, Kenzie. Good morning and thank you again to all of you for joining us on our call today. I am going to provide an overview of the major highlights of the quarter and then Marcy will provide us with more details on the financials. For the first quarter, we reported core earnings per share of $0.52.

While this represents over a 50% increase over last year. Frankly, we are disappointed with our results and our loan growth which was somewhat weaker than we expected. While weather was a factor in the first quarter as always seasonally slow, which may explain, our mortgage infrastructure lending being swapped.

The biggest contributor to the under performance was a change in the operating environment in our market. We have spoken with many of you about how throughout this low interest rate cycle, the banks in our markets have generally competed against each other with the high level of respect for responsible banking and prudent risk management.

And as you know, we are upgrading the market where economic growth is more subdued in a most areas of the country and loan demand is modest even in the best of times.

However, over the past couple of quarter with relatively soft loan demand in our markets, we’ve seen a greater degree of unreasonableness in both pricing and terms, which we haven't experienced in the past.

Banks are booking 15 and 20 years fixed rate deals at very low rates and we are seeing this primarily from the community banks and mainly in the commercial real estate sector. You all could say the worst loans are made during the best of times seems to be playing out in our markets.

And you can't blame the borrowers, interest rate increasing, borrowers are looking to lock in low fixed rate loans with low maturities and [indiscernible] buying institutions that are willing to accommodate them. While we don’t understand the motivation many of these banks are willing to take on high levels of interest rate risk.

Conversely the big banks are not playing in this game. While we offer aggressive pricing, they are not offering the length in terms which we are seeing from the smaller banks in our market. A good portion of the modest loan demand gravitate store banks with irrational lending practices and makes it very challenging to grow loan balance.

As difficult as this report our results this quarter, we simply are not going to take additional interest rate risk or duration risk during this point of the cycle. We are in this for the long haul and we believe prudent banking during this time with go best for the banks and our investors.

So as I mentioned, this dynamic is most pronounced in our commercial real estate market and our CRE loans were down approximately $50 million in the quarter. On a positive side, our commercial loans were up $20 million in the quarter.

This growth was broad-based across our markets and industries and there were no large new loans made, this growth represents true relationship banking with small business across our footprint. We also continue to see growth in our indirect auto lending portfolio which was up $10 million in the quarter.

In January, we made some adjustments in our indirect auto program to implement and enhanced risk-based pricing model. This portfolio representing just over 14% of our total loans, the adjustment we made are reducing new origination volumes, which show returns, while increasing our core profitability on each loan.

When we were able to do is the scale pack on the dealer reserve payments on the longer-term loans, which have an actual duration significantly shorted in the original contractual obligation, which causes the write off of unamortized reserves. The credit quality of this portfolio continues to be very good.

Our 30-day delinquency rate at the end of the first quarter was 1.03% compared to 1.56% for the peers that we track in this business. Our net charge-offs for the first quarter were 28 basis points, compared to 78 basis points for our peers.

The 4% of our loans and portfolio were classified a sub-prime loans, compared to approximately 12% across the industry. As just we made the adjusted to our pricing model, less than 1% of our new originations in 2017 will be considered sub-prime loans. So the level of sub-prime loans in the overall portfolio will likely decline as this trend continues.

Looking at some earlier notable items in the quarter, only the other positive trends we are seeing is an expense management. We continue to do a good job controlling expense, while still investing in people, processes and technology.

Year-over-year, our non-interest expense excluding acquisition expense was up only 1% despite the significant upgrades we have made to our infrastructure. To equip the company to better compete in the new era of digital banking as well prepare for increased regulatory requirements, associated with crossing $10 billion threshold.

We are focus and achieving operating leverage as we scale the company and we expect the ability to manage expense levels will translate into higher profitability as we see greater revenue growth in the future. So with those comments, I’d like to turn the call over to Marcy, for a little more detail behind the numbers. Go ahead, Marcy..

Thank you, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparison will be with the fourth quarter of 2016. And I’ll begin with our income statement. Net interest income decreased $4.7 million on a linked quarter basis.

As you recall, we had a $1.8 million interest adjustment in the fourth quarter that accounted for 38% as different. Additionally, two less accrual days, lower accretion income at a higher cost of funds account for the remaining balance. Our reported net interest margin decreased 13 basis points in the quarter.

However, excluding the impact of the one-time interest adjustment which had nine basis point impact on our margin last quarter and excluding interest recoveries and accretion income, our core net interest margins decreased three basis points. This three basis point decline is primarily due to a decline in outstanding loan balances.

I don’t want to skip over funding costs, and as we stated many time, we believe our clients have been waiting to see some type of return on the funds they’ve invested to us and we positioned ourselves to be able to meet this expectation ones rates increased. As a result, we returned approximately 27% of the last two rate increases to our clients.

As a leader in the community we serve, we feel like this is our responsibility and as we continue to meet the needs of our clients, our shareholders will be well served. Moving to non-interest income, the $5.7 million decrease from the prior quarter reflects the seasonal weakness we experience in fee income during the first quarter.

Mortgage banking revenues were down $2.4 million from the prior quarter, but relatively flat compared to the first quarter of last year. Mortgage origination for home purchases accounted for 54% of our first quarter loan production, down from 59% in the prior quarter.

Both management revenues were down $711,000 from the prior quarter primarily due to lower growth with revenues that were up $438,000 compared to the first quarter of last year, reflected of the growth we had in assets under management over the last year. Our total non-interest expense decrease by $5.9 million or 8.5% from the prior quarter.

If you exclude acquisition related expense or non-interest expense decrease approximately 7.3%. The decrease was primarily driven by the decline in salaries and benefits expense as lower incentive and profit sharing accruals more than offset a higher employee benefits expense that we occur in the first quarter.

In addition, we occurred $727,000 in separation expense related to the restructuring at departments as a result of the internal assessment we told you we were performing last year. Looking at the balance sheet, total assets were flat quarter-over-quarter and Kevin's already discussed the major trends in our loan portfolio [indiscernible] deposits.

Total deposits declined by approximately $76 million or about 1%. We saw some shift in the mix within our core deposit account during the first quarter along with some runoff in our CD balances.

Now moving to asset quality, our non-performing assets increased by approximately $2 million in the quarter which is in the normal range of quarter-to-quarter variance that we've been seeing. Our total criticize loans increased by approximately $11 million. This increase was driven by the downgrade of two commercial borrowers aggregating $23 million.

The increase was partially offset by a decrease of special mention loans. The new loan grading system we implemented in the first quarter is improving the granularity of risk ratings in the portfolio and is allowing us to understand, which borrowers require a heightened level of attention and monitoring and in earlier stage than we had in the past.

And while overall criticized assets have continued to increase over the last year as we've implemented these new processes, we are not seeing a systemic issue throughout the portfolio. The implementation of these changes and the resulting increase in criticized loans have had minimal impact on our credit cards.

Net charge-offs in the quarter were just $1.7 million or 13 basis points of average loans. Our provision expense of $1.7 million covered these net charge-offs and increased our overall allowance level to 1.41% of total from 1.39% at the end of last quarter. We believe the allowance is more than adequate to cover the risk within the portfolio.

Further, since you always ask about oil and gas, the allowance against that portfolio remain high at 10.3%. And then lastly, as we noted in the earnings release, changes in the accounting rules allowed us to record $1.4 million benefit in income tax expense, which was related to the exercise of stock option.

With that, I will turn the call back over to Kevin.

Kevin?.

Thanks Marcy. Nice job. I am going to ramp up with a few comments about our outlook. The economic trends in our existing footprint are relatively stable, while challenges in the energy in the commodity markets had a negative impact on some areas. Wyoming is beginning to show some signs of stabilization.

The latest grow straight product GSP data, which reflects the third quarter of 2016 activity showed Wyoming with a 0.3% annualize growth rate in GSP. While this number alone is below the national average is important to note that this marks the first time in ten quarters the Wyoming state GSP wasn’t negative.

While we don’t expect to see much growth in our Wyoming market, it appears as though it won’t be much of the headwind as it has been over the last past couple years. Those are seeing some improvement in Wyoming’s labor trends, which is now at 4.7% down from 5.6% at this time last year.

That’s for Montana and South Dakota improving commodity prices have assisted providing some stability to farm incomes. Tourism also remains strong as consumer feel the tailwind of favorable national economic trends, Raising asset prices and they continuation of low fuel prices.

Labor markets in Montana and South Dakota remain tight with unemployment levels of 3.8% and 2.8% respectively. We also very excited about the opportunity of lies ahead in the new markets as result the upper coming merger with the bank of the Cascades.

Economically these three states and which the bank of Cascade operates Idaho or again Washing provide highly complementary profile to our existing footprint. We would exposure to high performing industries and favorable population growth metrics throughout the region.

In addition, key economic metrics, such as, home price indices, in labor markets; future validates the health of these markets particularly in Oregon and Idaho. Turning into the second quarter, we typically see a pick up in loan growth.

Over the past three years, the second quarter has been the strongest quarter with total loans increasing around 3% on a linked quarter basis. As we indicated earlier, commercial loan production was healthy in the first quarter and we continue to have a good pipeline of business development opportunities. Indirect auto continues to perform well.

And we are heading into the seasonally strong periods residential loan production and inventory of available homes in our market is extremely low which should drive and increase the demand of residential construction. Collectively these favorable trends should help us to offset the headwinds we are seeing in the commercial real estate lending area.

At the same time, we are stepping up the activity with our lending teams to make sure that we are getting to look at every possible commercial real estate deal in our markets with a volume of attractive opportunities decreasing, it is critical that our team it is involved in every lending opportunity that meets our criteria.

Since the start of second quarter, we've seen increases in our total loan balances and in every loan category in each of the first three weeks. So we are confident we are on track to produce a good quarter of loan growth.

Finally, we're ahead of schedule in meeting our merger with the Cascade Bancorp and now expect to close the transaction at the close of business on May 30. We are very excited about leveraging the strength that Cascade will bring to our franchise and capitalizing on the higher growth markets in which they operate Washington, Oregon and Idaho.

States all ranked in the top 10 in home price appreciation where Oregon and Washington being first and second which speaks to the underlying strength of these states economies. Cascade markets will also provide important diversification to our franchise.

Oregon and Washington, Idaho are more influenced by manufacturer, information technology, professional services, and real estate sectors then our existing markets as reflected by Cascade’s strong first quarter loan growth.

Getting into these markets will reduce the impact that more cyclical industries like energy and commodities have on our overall performance. We have a number of products that we have a lot of fixed with such as indirect auto lending and our business credit card that are currently offered by Cascade.

And we think we will be able to generate some valuable revenue synergies by rolling out these products in our new markets, also Cascade has a strong SBA platform that will be able to leverage across our existing current footprint.

In terms of additional synergies, we have been impressed by the employees at the Cascade and have seen a number of complimentary aspects between the two companies cultures.

We look forward to relative our new colleagues at our First Interstate family with a revenue, costs and culture synergies that we've projected from this merger combined with the entrance into markets with more robust economies than our current footprint.

We are excited about our opportunity to generate profitable growth to our shareholders of the combined company in the years ahead. So with that, we like to open the call up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jared Shaw of Wells Fargo Securities..

Hi, good morning..

Good morning, Jared..

Can you spend a little time on the margin, I guess the deposit cost increases more than we seen at other banks in light of sort of the moving Fed funds.

As you are looking at deposit pages now, I guess when will you surprise that at how much you had at passthrough the 27% does seem a little high compared to where we see in other banks? And then going forward, do you think that we are starting to migrate now into the higher data environment almost immediately for you if we see more rate hikes?.

Yes. I got used to that question, Jared, good question. With regards to passing back, I think Marcy explained it. We believe that we can hold our margin – net interest margin and I know the cost of funds went up and I know it might be litter higher than what other banks are doing.

We believe we have social responsibilities since we are a largest bank in this markets to get back what we can afford to our customers. I think other banks are not be realistic with regards to deposits and I think we’ve seen it written in number of places that bate us, because we haven't seen a rising rate environment like 10 years.

So the thing is that the average data on a rising rate environment is about 50 basis points and people believe that this is going to be different this time and it could run as high 70%.

So while our belief is we're continue to baking that into our results as we move forward, and if we have to put some stress of other institutions because it can afford it then so be it. We believe that we can afford to keep our margin. The only drop in our margin really is because our loan volumes drop.

That did drop our net interest margin on a core base would stay flat. But we believe that we're going to have to pay that price due to the fact that online providers are offering 125 to 130 regards to deposits and in today's environment deposits can move by a click of the finger..

So when you look at the specifically like the decline in non-interest bearing demand.

Did you see that just get reallocated within the bank or is that actually leasing some outflows?.

Usually in the first quarter we see outflows and it always happens in the first quarter, if you look at our trend, it’s nothing that’s unusual that we normally see is the outflows in the first quarter. And then once tax season is over, we start seeing the deposits increase throughout the year that’s consistent.

So we haven’t seen any thing that’s been unusual this quarter..

Okay.

And then on the indirect auto yields, are those moving pretty much in lock step with rate hikes, so as we see a 25 basis point move, are you able to pass that through on the new production pretty quickly?.

Yes..

So in terms of like your buy rate it goes up basically 25 basis points when the fed funds through?.

It actually as I mentioned earlier, our buy rate is actually better, because we are putting a little pressure on how much we are paying for dealer reserves now..

Okay.

And then finally as you look at the $10 billion threshold in the closing of the Cascade, can you remind us of what you look at is the sort of timeline of layering in the expenses, the increased expenses or the change in revenue from approximately $10 billion threshold and what we should be looking for in the next few quarters after closing?.

Sure, and as we said in past, we’ve been preparing for the $10 billion. So we don’t anticipate any real additional cost, we have been layering, compliance, people and we've been layering the systems and the stuff already.

So, we're not anticipating our cost that really increase at all that sort of have been pretty much baked in, but we are going to loss about $11.5 million as we mentioned before and that actually comes out in mid-2018..

Great, thank you..

So the compliance costs are baked into the 64.5 run rate that we provided for expenses..

Okay. And that includes like anticipated costs from DFAST filing and things too, I mean that's all through the personnel line..

Yes..

Okay..

We’ve been putting the systems in the last couple of years [indiscernible] all been baked in..

Okay, thanks..

Thank you. And the next question comes from Jeff Rulis of D.A. Davidson..

Thanks, good morning..

Good morning, Jeff..

Hey, Jeff..

The loan growth, I guess Kevin you had expected mid single-digit growth for 2017, does the start of the year and some increased CRE competition, does that dampened that year outlook?.

Not that much because normally like we said, we’ve always have direct mid single-digits, and our second quarter usually is a robust quarter. So I’d say [indiscernible] and I have to guess a lot..

Gotcha. If you pulling back a little bit on CRE, is there other areas of the loan book that you put a little more attention to or can drive growth not straining, but just deploying more resources elsewhere.

Is there anything that looks more attractive in your view?.

I mean Bill you want to answer that question?.

Certainly. This is Bill Gottwals. We are really pulling back on the commercial real estate side, but we've just seen increased competition there which is what we saw in the results for the first quarter.

If there is an area that we're probably putting additional resources to and focus it’s really around the small business area, it's something we've done well in the past, but there's certainly a different level of pricing compensation there. So I think that's an area we are putting more attention on the vast..

Great. And then maybe on the mortgage revenue outlook in terms of origination sale of loans that line item.

Any outlook there I think normal seasonal patterns Q2 that figure was up 50% sequentially last year, any thoughts on the outlook for that line item?.

Yes. We think it's going to kind of pattern the same patterns last year. We're anticipating that our mortgage revenue would be flat to last year..

Okay. For the full-year..

Yes. I think we disclosed during the past..

Got it. Okay, thanks..

That just closer to stay standalone not with the acquisition..

Sure.

And in terms of the – one last one just the goodwill and other intangibles went up a bit, do you have the breakout of the two buckets in the most recent quarter?.

It will be in our 10-Q, we bought our name. So that was the increase and that will disclose, but we're not supposed to disclose actually what we pay for name underneath the agreement, but that was the increase in our intangibles..

Okay.

And then the - I think the goodwill on Cascade and other intangible CDI are those [2.75%] and $40 million respectively in the ballpark of those two?.

I don't have that..

We will have to get back to the next question..

Okay. Thank you..

Thank you. And the next question comes from Matthew Forgotson with Sandler O’Neill. .

Hi. Good morning, everybody..

Good morning, Matt..

Just wondering in terms of the margin outlook from here, I guess just on a core basis, as you said you are down about three basis points sequentially to 3.44%.

What’s your expectation for the trajectory from here? Do you think if loan growth accelerates, could you see some margin expansion or are you kind of running to hold it in line? What's your view here?.

We're anticipating margin expansion as loan growth of that. What we lost in that, really we believe we're going to make up in the second quarter..

Okay. Thank you. And on the expense side, I know you set for standalone First Interstate, you are targeting $64.5 million average run rate for the year.

In light of the first quarters performance and updated expectations, can you give us a sense of – is that guidance still intact or is there some downside maybe to that?.

I think there could be some downside in that. I think it could be more or like $63.5..

Okay.

And I guess just lastly, can give us a little bit of color on the decline in special mention this quarter, tough to discern in the release if there was any migration from special mention to substandard that resulted in that decline in special mention or are you just seeing an overall decline in new “problem loans”?.

Clearly, I’ll answer you from my perspective Steve Yose, our Chief Credit Officer, what I would say there was a lot of movement in the first quarter with regards to classifications and part of it was because as Marcy mentioned, we instituted a new grading system in the first quarter, but look at our loans in a more granular sense and actually get heightened awareness of that loans that maybe deteriorating.

So in my remarks that we have people who are doing some irrational banking, some of the loans that were criticized and actually some non-accruals loans were actually passed off to some of our competitors nicely, but with the new grading system we had some other loans that we put into that probably so we could have better attention, but I would say the portfolio today as good shape or better than it was last quarter just to effect that we have more visibility on the loans that were looking at and we are able to move out some loans that were not going to get any better any time soon..

Okay..

Stephen, you want to add anything that..

Yes, I would agree with Kevin.

We are looking very closely the timeliness of risk ratings and our new rating system also has some more granularity that helps us look at say a watch category more, so we looking very closely, the special mentioned category and so we did have some upgrades and risk ratings for those to a pass risk rating from special mentioned.

And we are also focusing in a very disciplined approach with our special assets group in our substandard category to look more closely like we were able to exit; we said a $4.8 million non-accrual.

We are hopeful that we can continue to have increased disciplined to exit those non-accrual so improve them in a way to improve [non-accrual] also improved asset quality..

I appreciate of the color. Thank you very much..

Thank you. [Operator Instructions] And the next question comes from Jackie Boland with KBW..

Hi, good morning, everyone..

Good morning, Jackie..

Do you have an updated timeline on integration? This is given the earlier close date for Cascade in terms of conversion and everything?.

Conversion or deep in at the same weekend of August 11, we grew that the close date for that. We plan the conversion for a period time that happens on our August..

Okay and very assume that just given how quick been on other integration that probably by the end of third quarter you should have everything nice and cleaned up?.

That’s correct, Jackie, everything should be clean and all wrapped around it by the end of the third quarter..

Great.

And then in terms of the tax rate both western without Cascade, do you expect there to be any meaningful change there?.

No, there shouldn’t be a meaningful change it should quite about what our tax rate is..

Okay and bounce back up from 1Q level?.

That’s correct..

Okay, everything [indiscernible], so thanks guys..

Thank you, Jackie..

Thank you, Jackie. End of Q&A.

Thank you. And there are no more questions at the present time. I would like to turn the call to management for any closing comments..

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

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