Hello and welcome to the First Interstate Bancsystem Fourth Quarter 2016 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.

Thank you. Good morning. Thank you for joining us for our fourth quarter earnings conference call. Before 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?

Thanks, Kenzie. Good morning and thanks again to all of you for joining us on the call today. We delivered another solid quarter to finish up 2016 with positive year-over-year trends in most of our key metrics. We reported earnings per share of $0.55 for the fourth quarter compared to $0.51 for the same period 2015. When you breakout the acquisition expenses and the impact of legal settlements, we generated core earnings per share of $0.57 in the fourth quarter compared to $0.52 a year ago, an increase of 9.6%. For the full year, our GAAP earnings per share were up more than 12% over 2015. Based on this growth and the healthy outlook for the company, we have recently announced a 9% increase to our quarterly cash dividend. This adds to our longstanding track record of consistently increasing our dividend and returning cash to our shareholders. While this is a solid quarter overall, there is a little noise along with reclassification related to mortgage banking, which Marcy will discuss in her comments later. In the fourth quarter, our earnings growth was primarily driven by higher revenue, the most of that coming from higher spread income. Taking a look at expenses, our goal for the year was to maintain a reasonable efficiency ratio even while we deployed resources to improve our processes and technology. We’re pleased that we continue to operate on stable level of efficiency. For the full year, our core efficiency ratio was 61.2%, an improvement of 54 basis points over 2015. One of the drivers of the improved efficiency is our commitment to accurately manage our headcount. We continue evaluating our staff needs and as positions come open to national attrition, we carefully consider whether the replacement is truly necessary. Through these diligent processes, we reduced our…

Thanks, Kevin. Good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the third quarter of 2016. I will begin with our income statement. Net interest income increased $3 million on a linked quarter basis. The increase was primarily due to higher loan yields combined with an increase in the average outstanding loan and investment portfolio balances. To address the noise comment Kevin made earlier, we had an adjustment interest income this quarter of $1.8 million, which was attributable to interest on acquired non-accrual loan. The reason for this adjustment is a little confusing, so please bear with me. We had a pool of acquired non-accrual loans that were handled correctly on our system. Our loan purchase accounting system assumes the core system is accruing interest based on the contractual term on non-accrual loans. And then the purchase accounting system automatically reverses this interest resulting in a zero net impact to income. However in this instance, our core system was not accruing interest on a small pool of non-accrual loans. So the interest has been reversed by the purchasing accounting system that had never been recorded in the first place. It was a small adjustment month to month, but the issue got picked up during analytics in the fourth quarter and resulted $1.8 million adjustments to interest income. This issue has since been corrected. This adjustment was roughly equivalent to the interest recovery we had last quarter, so netting out these two items, it was not a factor in the increase of net interest income quarter-over-quarter, however it does impact the net interest margin and loan yield this quarter. Our reported net interest margin increased 4 basis points in the quarter, excluding accelerated discount accretion, recoveries of charged…

Thanks, Marcy, nice job. I am going to warp up with a few comments about our outlook. From an economic standpoint, we are seeing fairly healthy conditions across our existing footprint. The recent executive order authorizing the construction of the Keystone XL pipeline is expected to have a very positive impact on our markets. The Montana Chamber of Commerce estimates that the construction of the pipeline will generate $767 million of economic activity in Montana alone and support 3700 jobs. Even before the news of the pipeline, we are seeing encouraging employment data in all of our markets. Since our last conference call in October, the unemployment rate has declined in all three states that we operate in with the most significant improvement in Wyoming. From August to November, the unemployment rate in Wyoming dropped from 5.5% to 4.9%. When we don’t expect to see strong loan demand in our Wyoming markets, the strong unemployment or employment trends should have help stabilize our credit trends in 2017. We expect these economic trends will support overall loan growth in 2017, that's consistent where our historical mid-single digits range with most of the growth occurring in our Montana and South Dakota markets. In 2016, we put a lot of emphasis on people, process and technology. We made significant progress, adding some exceptional banking talent, streamlining key processes and enhancing our use of technology in many areas of the Company. During the fourth quarter alone, we rolled out a new digital banking platform and a number of changes to our accounting system with a new general ledger and accounts payable system as well as a new financial reporting system and a new HR, or human resource system. People, process and technology will continue to be our mantra in 2017 where one of the key priorities being an enhancement of our consumer lending processes and a procedure to ensure that we effectively manage the growth of this portfolio as we enter new markets in Oregon, Washington, and Idaho. We're very pleased with the strategic priorities we have executed that have translated into both higher earnings and higher returns. Based on our core earnings, we improved to return average common equity to 9.82% in 2016 up from 9.75% in the prior year. As we continue to execute well and realized synergies we project in our combination with Cascade Bancorp, we remain optimistic that we will continue to generate higher earnings growth, increased returns and strengthen the value we deliver to our shareholders in the years ahead. So with that I would like to open the call up for questions.

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jacqui Boland with KBW.

Hi, guys. Good morning.

Hi, Jacqui.

Hi. Just looking on some of the compensation, and Marcy thank you for all that guidance, that was very helpful. As I stripping out the M&A cost that were in 4Q and I know that sometimes it can be a seasonally higher quarter. How does that reconcile to the $64.5 million guidance?

All right, could you elaborate on that question, Jacqui?

All right, so, I am just looking at the non-interest expense line item. And it was above the forward guidance. If I wrote it down correctly, you had said about $64.5 million straight quarter.

That’s correct, sure.

So just trying to reconcile the current quarter to back down to that number and where the variances might be.

So, I really think that the incentive cost is going to be a huge driver in that. So that was an extra $2.2 million this quarter. We had a little bit higher seasonal – a little bit higher technology costs, some higher donation and advertising. So when I got to the $64.5 million that's a run rate average through the year. We do have some noise in there from quarter-to-quarter. Always I think that fourth quarter is a little bit higher than the rest of the year. So, it will probably be a little lower in the first three quarters, a little higher in the fourth quarter again this year.

Okay. That makes sense. So, a lot of incentive comp going away and then just some kind of [indiscernible] in noise and investments and things like that shouldn't repeat?

Right.

Yes, it also – for the whole year, we – this year as we changed over a lot of staff, we actually incurred about $3 million of severance cost in our non-interest expense, so there is some real savings as we move forward in that because we don’t anticipate having the amount of turnover going forward.

Okay and that’s $3 million in severance cost that hasn’t been separately called out in any M&A lines or anything like that right?

That’s correct. This is dealing with our current management

Okay. That’s very helpful. Thank you. And then just one last one, as I look at your mortgage banking outlook I know with the change there was some line item changes obviously in the quarter between fees and expenses, and you had mentioned that you think that originations could be similar in 2017 versus 2016. How does that play in and just with the rate outlook and with your expectations for purchase versus refi volume going forward?

To be honest with you Jacqui we see a pretty robust, we’re kind of surprised at the purchase volume is as low as it was in the fourth-quarter because we see a lot of activity in construction and new home purchases through our footprint. So we just believe that it’s going to continue. As you know in the winter months it’s cold out here a little bit so we have less actual purchase, but we believe that that will increase as we move into warmer months. But it’s pretty robust. Our people are actually out there building homes are very pretty bullish on the economic developments in our markets.

Okay. And pipelines are starting to pick up again after the holidays?

A little bit. Mainly on the – may be on the commercial side I would say the home loan side where you’re going to start picking up as we get there at the end of the first quarter.

Okay, thanks, Kevin. I’ll step back now.

Okay.

Thank you. And the next question comes from Jared Shaw with Wells Fargo.

Hi good morning. This is actually Timur Braziler filling in for Jared. I guess my first question is on the overall reserve level again appreciate the color on the specific reserves included in this quarter’s charge off. But just looking at the overall reserve around 140 of loans is still relatively high, compared to the broader group. What’s the outlook there, what’s the ability to bring that lower kind of given your current non-accrual bucket?

Timur, this is Kevin. The thing is that we continue to work out some of our credits that we have. So we have three buckets that we utilize when we come up with our allowance. The first one is specific reserves. The second is based on migration analysis of historical things. Then we have some subjective factors. Currently, we believe that we’re adequately reserved and until things really improve with regards to some of those buckets, and we continue to have positive run rates, we believe that will be here for a while. But it could as asset quality continues to improve start coming down.

Okay. Thanks for that. And then I guess switching over to linked quarter loan growth in the commercial bucket in particular since a little bit of disappointment, I guess with the overall level of growth this quarter. I’m just looking to get a sense for utilization rates. What you are hearing from your customers and I guess as we head into 2017, what your outlook is for that line item?

Okay, Tim, I’m going to turn it over to Bill Gottwals, our Chief Banking Officer to answer that question.

You bet. Well as we saw in the fourth quarter, there was some migration into this current quarter in part around construction. If you look in the markets that where you have the most concentration for that we really had more of a harsh winter, so we saw a real slowdown in construction that we would expect to pick back up. And looking at the details behind our pipeline, I would say it’s up fairly significantly over last quarter and over what we would normally expect for the current quarter. The good news is that it’s spreads fairly evenly across all geographies including Wyoming, that being primarily the Jackson Market. Then more broadly we are seeing it spread across industries and product type pretty uniformly and not being driven by any particular single, large transaction. So that’s kind of a broad scope of what our pipeline looks like. But we are seeing good projected growth for Q1.

Okay. Thanks for that. And then the last one from me, kind of a bigger picture question for you Kevin. Just looking at some of the deals that have been announced and then subsequently canceled in recent weeks and months, just looking at the progress that you guys are making with Cascade and the conversations that you guys have had with regulators to date, and I know it’s not that long into the process. But anything in there that’s troubling. I guess any kind of insight you can provide to the conversations you’re having with regulators and if you are still projecting a third quarter close for that deal.

We are still projecting a third quarter close. I would tell you the relationship we have with our regulators is really good and we have a continuing ongoing dialogue, the regulators were just in the past month speaking to our Board and everything. So everything seems positive. We continue to try to modernize and to short things with regards to as we get bigger. And as I mentioned in my remarks, we’re really focused on not that we have any problem, but focused on our consumer loan process and consumer loan oversight going into 2017 more to really enhance our processes and procedures around that to ensure that we don’t run a follow with the CFPB once they start regulating us and stuff like that. So we are looking at things and trying to modernize and to really shore up anything that could be of concern with the regulators. So they are very positive about that. They love what we’re doing and trying to relate strengthen this institution. So we have, like I said, a good relationship with our regulators.

Okay. And are there any systems that you’re building out in conjunction with this deal progressing to the close. And I guess lastly is the expectation for Cascade to switch over to all First Interstate systems or are there going to be some kind of backwards migration going on?

There’s no actual real system that we really have to move forward to do this transaction. But I will tell you when I look at the transaction with Cascade, we are kind of excited because I think to other we’re stronger than we’re a part. We’re actually looking at the backroom operations of Cascade to really to be developed into our disaster recovery site. We have some developers there and some call centers there because we are in a different time zone. So we are really looking at to enhance our capabilities with them due to the fact that now we can actually hire people to live in van [ph] versus buildings and really support a better operational technology shop. And so we believe that that’s just going to strengthen us going forward. And what was the second part of your question?

If there’s any kind of reverse migration on to their systems or are they going to be all coming on to First Interstate Systems?

At this juncture, I think you pretty much relative to come onto our systems. But I will tell you another thing that we like with regards to Cascade is that they have a very strong SBA lending program and a system. And as you know it’s a specialized type of lending process. So they have a very strong process there. They are the number one SBA lender in Bend, they are the number four SBA lender in Boise and the Prime Financial that they purchased up in Seattle, again specialized SBA lender. So we’re not as strong as they are so that platform will probably be something that we adopt through our current footprint.

Great, thanks Kevin.

Thank you. And the next question comes from Matt Yamamoto with D.A. Davidson.

Good morning. I just had a couple of questions. In regards to eventually passing the $10 billion threshold what do think that added cost will be relating to the Durbin amendment?

As we disclosed in the acquisition – and I didn’t catch your name, what’s your name again?

Matt Yamamoto.

Matt okay. We have disclosed it. We’re calculating that to be $11.5 million, $8 million of that would represent the current activity at First Interstate and $3.5 million would be the current activity at Cascade Bancorp.

And that’s a pretax.

That’s a pretax number.

Number.

Awesome, and could you – I’m sorry if I missed it but could you provide more color on the three – sorry the three borrowers that caused NCOs to increase for the quarter?

That chart – well the two big ones, one was one that we talked about on our conference in 2015, it was kind of a restaurant company, franchises and everything that was a surprise to us. Last third quarter and that’s why we provisioned about over $3 million in fourth quarter last year. The second one was a flooring company that supports construction and that one came to light in the second quarter of 2016, which we put away money regarding that. So those are really the two [indiscernible], they represented about $4.8 million of our losses this quarter. So those really were the two that were the problem assets.

Awesome. Thank you. I’ll step back.

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

Hi good morning.

Good morning Matt.

Just on your provision expectations. I guess $1.1 million this quarter. If you reconcile add back in the recovery, gives us like $2.6 million or so of stabilized provision. Is that a reasonable expectation as we move into and across 2017?

You know Matt we’re looking at some where between 20 and 25 basis points of total loan for next year. That would be our estimate.

Yes, but 20 to 25 basis points of outstanding loans on average is what we’re looking at as to be the provision expense next year.

Okay, great. And in terms of loan growth I guess heading into the first quarter of the year I know historically just holding balances flat has been a victory but it sounds like there was some originations that were pushed off into the first quarter of the year. Are you expecting flat to modest growth or should we be tempering our enthusiasm a bit?

No I think flat to modest growth is, I mean it’s not going to be like what we normally do in the second quarter. Our second quarter as you know historically is somewhere around 3.2% and 3.6% growth that we’ve seen over the last three years. But we’ve had some modest growth in first quarter.

Okay great. And then lastly, just in terms of M&A can you give us a sense of your capacity to do another small bank deal or may be another larger deal? I know you got a – obviously you got a big one in the works. But what are you seeing and hearing on M&A?

As you know you guys I prospect a lot as I talk to my lenders. I talk to a lot of people because you can’t be part of the party if you are not invited. So I think that thing is, I think, we’re laser-focused on making sure that the Cascade acquisition comes in quick and effectively and is integrated in a very fast, timely basis. My belief is that there’s a lot of M&A activity out there. So we don’t want to be delaying too long. Like the last acquisitions we did we normally would close, and convert and actually get all synergies within a week or two of the actual closing date. We anticipate to really get Cascade done in a very timely basis. We’re spending a lot of time with their personnel now. I don’t know what’s going to be the next acquisition, but what we want to do is make sure that there’s a meaningful acquisition that could be an enhancement to our franchise and to our shareholders that we can take advantage of that. And I would anticipate more acquisition activity out there. So it’s our job as management to prepare the Company as quickly as possible.

Thanks very much.

Thank you. [Operator Instructions] And the next question comes from Tim Coffey with FIG Partners.

Good morning Kevin.

Good morning Tim.

As I look at the Ag book it seems like it might not be as much of a headwind to loan growth in 1Q as it was in 2016. Am I seeing that right?

I think you might be right. I think we have little more paydowns again in the fourth-quarter earlier than expected, so it might not be as much as headwind going into the first-quarter.

And then with the kind of construction activity you seem to like your footprint could it lead to a noticeable uptick in residential mortgages or commercial mortgages for you?

I didn’t get that question.

The construction activity in your footprint, could that lead to a noticeable increase in mortgages whether residential or construction for First Interstate?

Correct.

Okay. And when do you think that might start to appear in marketplace?

Billy why don’t you take that one.

Certainly, in some of our higher growth markets, not to blame much on weather, but somewhat anecdotally look at a bulls mid-market inventory is unusually low for the growth and is truly driven by their ability to start building right now. South Dakota, is in the same boat. So you are right there, once we can get back into the ground and start putting in foundations, I think you’ll see a bump up in construction and then a tie back into the permanent side.

Okay, great. Thank you. And then Kevin kind of follow-up on the SPA comment, you are right Cascade does have a great SPA operation and First Interstate doesn’t really. How quickly are you going to move on bringing that system across the First Interstate operations?

Tim I enjoyed your frankness. The think is we’re going to – that’s going to be part of the integration plan. We will look at that and see how quickly we can do that I think it’s really good because there’s a couple things we want to transfer – transform into their markets and I think there’s some in ours. So it’s all going to be part of the acquisition integration plan, because we also want to get somewhat management over there, we want to get our card business over there more and I think we can do a little may be better job in mortgage lending. Like I said I think that two companies coming together really make both companies far stronger than they were apart.

Okay, great. Thank you Kevin those were my questions.

Thanks Tim.

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

Thank you. As always we welcome calls from our investors and analysts. Again if you have any questions please reach out to us and we will follow-up with you. Thanks again for tuning in today and good bye.

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