Good day and welcome to the First Interstate Bancsystem, Inc. second quarter 2012 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 would now like to turn the conference over to Ms. Marcy Mutch, Investor Relations Officer. Ms. Mutch, the floor is yours ma’am.

Thanks, Mike. Good morning. Thank you for joining us for our earnings conference call for the second quarter of 2012. Before we begin, I would 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 Forms 10-Q and 10-K. Joining us from management this morning are Ed Garding, our Chief Executive Officer; and Terry Moore, our Chief Financial Officer. Ed will begin by giving you a general overview of the company’s results and review credit quality information. Terry will follow up with specific information behind the quarterly results. Bob Cerkovnik, our Chief Credit Officer will also be available during the question-and-answer time to address specific questions concerning asset quality. At this time, I would like to 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 today. Last night, we were pleased to report earnings for the second quarter of $12.1 million, which equates to earnings per share of $0.28. This represents an increase of 7% from last quarter and an increase of 33% from the same quarter a year ago. Let's start by discussing the loan portfolio, which overall was fairly stable. This is notable to us given the higher level of charge-offs that we had during the quarter. We saw a modest loan growth in a number of the loan types, but that was offset by the expected run-off in the construction portfolio, specifically, land acquisition and development portion of the construction portfolio. Terry told you at the end of last year that our total construction portfolio could shrink to around $300 million. And that’s looking like it will be pretty accurate. 28% of that construction portfolio is still considered criticized and so although we continue to make new construction loans, we will likely see further declines in that category as we clean up the remaining criticized loans. Residential mortgage lending continues to be a source of strength for us with volume being over twice for what it was last year. We’ve indicated in the past that we’re retaining some of our residential mortgages. These are typically the 10 to 15 year mortgages that do meet secondary market standards. Because of soft loan demand in other areas, we anticipate continuing to retain many of these mortgages. As we looked across our footprint for the quarter, we saw modest levels of loan growth in the majority of our markets. However, these were offset by significant declines within the Jackson and Flathead markets, not only from charge offs and…

Thanks, Ed, and thanks for joining us this morning. Our net interest margin which was 3.74% for the second quarter was up two basis points from last quarter. As we stated in the press release, the main factor behind the increase related to the recovery of interest on loans upgraded to accrual status. This factor also contributed to the increase in average yield on loans quarter-over-quarter. Having meaningful recovery of interest is opposed to a net charge-off is another indicator of improving credit quality and we’re at in this credit cycle. The continued shift in the deposit mix that we’ve seen over the last couple of years helped drive the decline in cost of funds to 49 basis points, down three basis points from last quarter. The yield on the investment portfolio remained flat quarter-over-quarter as well. However, we’re still seeing new purchases priced at lower yields than what is maturing or playing down. So it remains a challenge to maintain yield on the portfolio. On an average basis, our interest-bearing deposits which are mainly funds held at the Federal Reserve Bank were higher than in the first quarter but by the end of the quarter, we reduced these funds to $387 million. When we consider where our net interest margin will be going on a go-forward basis, we anticipate the average loan and investment yields will continue to be pressured and with limited room to improve cost of funds, it would be natural to expect a decline of a few basis points in each of the next few quarters. However, there are a couple of positive factors that will help offset some of this margin compression. As we indicated back in April, we redeemed $40 million of TruPS at the end of June. Going forward beginning this third quarter…

Thanks, Terry. As a general comment on our outlook, we continue to be committed to seeking new ways to improve revenue growth and become more efficient on the expense side. That probably sounds like every other bank in the country too. Credit costs should continue to decline going forward, resulting in improved earnings for us. The lack of organic growth opportunities in the marketplace, M&A activity is always a question, we do continue to have conversations and as you expect, we would be interested in opportunities that would add value to our franchise. That being said, we continue, I think the real opportunities for us along M&A lines are probably in 2013. So with that, lets open up for questions.

(Operator Instructions) Our first question comes from Jeff Rulis of D.A. Davidson.

Terry, I had a question about just a follow up on the non-interest expenses; some moving pieces in there and I wanted to kind of make sure I understand what's happening. You know in Q1, you had a $3 million in collection and settlement costs. I am looking at that other non-interest expense line item, around, it was $13 million and change and if you back out the cost of the trust preferred move; that was roughly flat quarter-to-quarter. I was just a little surprised that the number didn’t come down granted it sounds like you had $1.5 million donation, but what made up the other, was it OREO cost that had increased, linked quarter, why that $3 million wasn’t absent, I guess, quarter-to-quarter is really the question?

Yes, a great question, Jeff. Good morning. I think you’ve got most of the large elements there if you looked at the $3 million is no longer there; that was there in the first quarter. But the other expenses you identified were the donation expense of about $1.5 million and roughly $500,000 of the TruPS cost; so there is $2 million and if you’re tallying the difference. There were -- second quarter, we have a little bit higher director fee expense from our Shareholder Meeting and some of the one-time retainer costs that are expense. So that was about $250,000; a little bit higher visa debit card expenses just from what we can best tell, just associated activity levels being a bit higher, so those will be the main elements that nearly offset that $3 million from a quarter-to-quarter basis. Certainly, as we would look on a run rate basis, we would not anticipate it being between $13 million and $14 million, but outside of some unusual surprises like this that it might approach something closer to in the $11 million range.

Okay. And with that backdrop then coupled with your comments on the expecting OREO cost to be higher in the second half; I guess there is some offset to that, but again, that on a net basis expect non-interest expense to be down from this level?

Probably a little bit, Jeff. I was talking particularly about other expense line item and so other real estate expenses are not included there. But I do think that it’s reasonable to expect that there will be some higher level of OREO expense from what we have recorded in the first two quarters. And I think all-in last year we are may be in the $8 million range for total other real estate expenses, and I think a reasonable estimate is that’s where we will end up and I think we are at $3 million or $3.5 million year-to-date so far. So we are expecting those maybe increase slightly in other real estate probably as you are surmising that would offset in large part some of these other savings that will have another expense.

Got you, I did mean to talk about the two line items probably there. Just a follow up on the trust preferreds; I guess the remaining balance you talked about some, that the rate is adjusting, but any idea on additional redemptions that you would consider with the remaining balance?

They are certainly up for consideration; at this point there are no specific plans to have further redemptions of the TruPS and I would find it probably unlikely that it will occur in the short next couple of quarters. So it might be up in the future a little longer when we evaluate that obviously we know they are going away overtime in the counter risk based capital, but they still -- the offset is that they are still up fairly low cost of funding, if we want to retain it and think that there is a good leverage proposition there; so at this point no specific plans to redeem.

And one last one if I could on the tax rate; you’ve kind been running a little bit higher north of 33% last three quarters or so; is that now the new run rate; is it I think last year you were closer to sort of 32 and change but I just wanted to get some clarification?

You know I think it is and it’s largely driven because of our increased profitability and the other primary item would be municipal securities haven’t kept pace, or that tax exempt income hasn’t kept pace with our increase in overall pretax profitability side; I would think that the 33% is a better run rate than 32%.

(Operator Instructions) Our next question comes from Fred Cannon of KBW

Just a question, it sounds you know that was very interesting in terms of seeing a bit of a rebound in the housing market out there, and I was wondering if we might be seeing a bottom in your construction portfolio in terms of the continued run off that we’ve seen there, for we maybe near a bottom given and perhaps some opportunities to either stabilize or grow the portfolio?

Fred, I'm going to ask Bob Cerkovnik our Chief Credit Officer, address that one.

Yes, that's a very good question. We are seeing some stabilization across the market and our construction portfolio. We do think we are on the downward cycle of that portfolio as far as problems go.

And then I was wondering if there was any more color on the building that you did the donation and the gain on, in particular did you maintain any kind of loan on that property or is there no lending relationship still there?

Yes, Fred, this was bank building that we had vacated and had built a new building and so it had been empty for a couple of years and so it wasn’t through a customer relationship or another real estate so it was a bit unique and it was a very large building and still a usable building and this looked like a great opportunity in disposition for that property. I would make a comment that we don't have any other buildings that are like this that are being held for sale in any kind of a portfolio so this was kind of a one-time item.

And then just one final question on your loan yield. They seem to be quite stable this quarter, I was wondering if there's any color on that, I mean we would, I think we have to expect them to tail off in the future given where the yield curve currently is and loan pricing, so any kind of color on that, any kind of discussion about loan pricing would be helpful.

Absolutely, Fred, this is Terry again. I will take you back to the recovered interest from loans put back on accrual and there were several hundred thousand dollars in the quarter and when you annualize that impact on the loan yield. The loan yield is without that would it went down several basis points maybe around four or five basis points instead of reflecting a slight increase. And so we would expect without, that we may have some quarters of having charged-off interests recovered or charged-off, but when we net that impact out we would have otherwise and would expect in the future that our loan yield will go down and certainly we are still seeing compressed yields from kind of the new generation, new loans being generated, there are still a lot of competitive pressure in that repricing front and I think it’s reasonable to expect a few basis points decline in that loan yield on a run rate basis for the next several quarters.

And just as a follow-up on that, are you seeing a lot of push out in terms of the duration on some of the loan request out in for a multi year kind of lending?

I would say yes, I am not sure a lot is the right terminology but certainly there is a lot more interest in that and so there has been some extension in fixed rate, but nothing that would change the substantial make up of our portfolio so certainly a lot more interest. For the most part, when you offer three or five or seven year rate that's fixed and you just price it right, the customer will tend to opt for a shorter term fixed rate as opposed to pay the higher rate for the long-term fixed rate.

The next question we have comes from Tim Coffey of FIG.

Terry, you gave some good color about kind of your forward outlook on the gain on the sales from the mortgage origination business and I am wondering do you anticipate seeing a ramp up in gain on sale or originations or you see kind of more of a level you now have at these elevated levels?

Well, good morning, Tim. I would see that it will probably level off here this third quarter and not ramp up, but if we ramp back and look at the purchased activity and we were to segregate the activity as purchased versus refi, we are certainly committed to this line of business; this product that is offered to our customers and we would like to have higher penetration and market share in the markets we’re serving in capturing that business. So overall on the macro side, we would see it having peaking here this year and perhaps in this quarter and next and beginning to tail off as refi business; we're expecting that maybe rates are approaching their low, we were expecting that a year ago as well. But so, to the extent that rates are near their low that we’re about there and that that revenue would decline some in years to come on a total basis, but increase on a purchase basis.

Do you feel you’ve added really traded markets for the mortgage origination business that you want to or how do you see potential more expansion?

For the most part, we’ve tried to stick to the states that we operate in, Tim, and so we're not looking to make this a national growth engine, with a separate product that’s largely occurring in the markets that we have our banking footprint in and we just try to do a much better job of penetrating that and having the right people and adequate number of people to capture the opportunity that’s fair.

Okay, so you have the adequate number of people for your footprint?

Well, in the refi business in the last six months I suspect that a team of folks would suggest that they could have used some more help. But we do think that we are adequately staffed on a go forward basis certainly for that purchase growth.

Hey, Ms. Mutch and gentlemen, it appears that we have no further questions at this time. Do you want to make any final comments?

No, we don’t have any final comments.

Okay, well thank you, sir. The conference call has now concluded. We thank you all for attending today’s presentation. At this time you may disconnect your lines. Thank you and take care.