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…

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…

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…

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.