Good day. And welcome to the First Interstate BancSystem First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. I would now like to turn the conference over to Lisa Slyter-Bray. Please go ahead, ma’am.

Thanks, Rocco. Good morning. Thank you for joining us for our first quarter earnings conference call. As we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements.

Thanks, Lisa. Good morning and thanks again to all of you for joining us on the call today. Again this quarter along with our earnings release we have published an updated investor presentation that has some additional disclosures that we believe will be helpful. The presentation can be accessed on our investor website and if you haven’t downloaded a copy yet, I would encourage you to do so. I’m going to start off today by providing an overview or the major highlights of the quarter and then I’ll turn the call over to Marcy to provide more detail on our financials. The first quarter came in largely consistent with our expectations. We continue to see healthy economic activity throughout our markets, which resulted in strong deposit inflows, a positive impact on our fee generating businesses and further reduction in all of our problem loan categories. We executed well on our near-term strategy to support our net interest income by utilizing some of our excess liquidity to retain more of our residential mortgage production and increased purchases of securities in our investment portfolio. The additional revenue generated through this strategy combined with the stable expense level helped us to deliver another strong quarter of earnings for our shareholders. With a quarter we generated a net income of $51.4 million or $0.83 per share.

Thanks, Kevin, and good morning, everyone. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2020 and I’ll begin with our income statement.

Thanks, Marcy. Nice job. I’m going to wrap-up with a few comments about the remainder of 2021 and how it’s shaping up. Our near-term focus will be continuing to support our net interest income by retaining mortgages and increasing our security portfolio. But we are becoming increasingly confident that we will see stronger loan growth for the remainder of the year, which will give us more opportunity to increase net interest income and further improve profitability. Credit line utilization is at historic low levels. We will see construction lines fund throughout the rest of the year, and we expect both consumer and commercial lines of credit to return to a more normalized level, which will reduce the -- that reduce the excess lines about 9%. If this materialized, this result about $200 million in increased outstanding balances. Our loan pipeline is steady and signs are pointing to higher demand in the coming months. We are seeing good opportunities across a variety of asset classes both in the West and Mount division. We believe commercial construction will be an area of strength. We’re also seeing opportunities in residential construction as homebuilders look to satisfy the strong demand for housing resulting from the population growth in our markets. This also extends the multifamily lending, which is benefiting from the same in migration trends. The outlook for commercial real estate lending looks positive. We don’t have much exposure to office -- the office market that has some people concerned about the long-term impact of work-from-home. And we’re seeing good opportunities across other property types that continue to perform well. We fully expect a very strong tourism season this year given the pent up demand. It’s very difficult to book a room and many tourist destinations in our markets right now. This is --…

Thank you, sir. Today’s first question comes from Jared Shaw at Wells Fargo Securities. Please go ahead.

Hey. Good morning, everybody.

Good morning, Jared.

Good morning, Jared.

Yeah. Kevin, maybe just starting with the some of those tech investments and especially the small business lending portal is how will that be -- how do you see that helping to drive additional business into -- will that enable you I guess to take some of the leads from the PPP maybe from other banks customers and you expect to have that help develop them into a full service customers at a faster pace than before?

Yeah. There’s two things that we see benefit, Jared. One that people can go online and apply for a loan themselves and be immediately approved and funded, because it has automatic scoring process. So it’s a fast efficient way for them to do it themselves. Or we’re also training our FSRs, which are not commercial lenders, FSRs, Financial Service Reps to be able to walk customers through this digital application within some of the locations that might not have commercial lenders to quickly get loans approved and funded.

Okay. Great. And then on the mortgage side, are you retaining everything that you’re producing at this point or are you trying to keep shorter. You don’t looking at 15-year, are you holding on to 30-year as well? And I guess how will that impact mortgage banking revenue going forward in terms of volume retained versus sold?

Marcy is going to answer that question.

Yeah. So, Jared, in the first quarter we retained about 58% of our production in the portfolio and some of that did include 30 -- the 30-year mortgage product. Going forward we will begin to phase out of that headed into the end of the second quarter. So, again, we had a certain amount that we were going to retain around $400 million throughout this whole process since we started retaining mortgages in the fourth quarter and we’re about at that threshold. So we’ll begin to sell mortgages, sell more of our production as we head into the end of the second quarter.

Okay. And then just finally coming on credit, I guess, are two things. One, should we expect that the negative provision this quarter sort of got you to where the current economic environment is reflective of and any reduction of the ACL will be more a function of loan growth at this point or could there be another negative provision? And then just sort of tying into slide 21 in your slide deck, there is a construction loan that you highlight as management attention. It doesn’t look like there was a reserve against that. Can you just give a little color on that?

So I’m going to let Michael Lugli ask -- answer that last question. But I’m hoping that we grow into the reserve balance where it is right now with loan growth. And I’m not anticipating any substantial change in our economic outlook until we -- unless we are to continue to see things markedly improve from here. And then does that answer that question, Jared?

Yeah. Thanks.

Okay. And then Michael?

Michael.

Michael.

Hi, Jared. It’s Mike Lugli. What you’re referring to is the -- I believe its commercial institutional building construction and the…

Yeah.

…management attention piece. That’s primarily driven by a couple of hospitality loans that we are doing. And it’s really not -- has nothing to do with the actual project but a weakness of the guarantor from other assets that they own, which is draining their liquidity. So, given the uncertainty, that’s why that was moved over to management attention. Does that make sense to you or answer your question.

Yeah. Okay. And the reserve or specific reserve associated with that because of that risk creating or not necessarily?

Management attention is about as late as we get and criticized. So, no, there is not. We feel a very good about the project. It is really just looking and we’re looking at that hospitality book and office book closely. It’s just looking at that guarantor that out of caution, abundance of caution we move that to special mentioned.

Great. Thank you.

And our next question today comes from Levi Posen with D.A. Davidson. Please go ahead.

Kevin, Marcy good morning. This is Levi on for Jeff Rulis.

Good morning, Levi.

Good morning, Levi.

If I can just start with a housekeeping question on the tax rate, is it fair to assume that the seasonality we’ve seen in the past couple of years repeats this year and we land towards the 23% for the full year?

Yeah. I think we’ll be between 22.5% and 23%. We always have some benefit that we see in the first quarter from the tax benefit associated with option exercises and so that’s what happens in the first quarter to drive that rate down a little bit.

Got it. Okay. Thank you. And then I apologize if I missed it, missed it earlier, but was there an expense run rate going forward?

1% increase year-over-year.

Great. Thank you. And then last one for me on the capital side of things, you guys have been active with buybacks and the dividends. What are your thoughts on M&A coming up here?

Well, we’re always -- as you know in the past we’re always talking to people about doing a possible acquisition. Those conversations continue to be have -- had, but we were being pretty picky like we have in the past. I mean there’s a lot more coming to market right now. We’re being called on, but we’re not jumping to somebody, because we have certain acquisitions that we believe will enhance the franchise value and we believe just being patient is the position we’re going to take it this -- at this juncture.

Understood. Okay. Thank you. I’ll step back now.

And our next question today comes from Matthew Clark with Piper Sandler. Please go ahead.

Hi. Good morning.

Good morning, Matt.

Good morning, Matt.

Marcy, do you have the weighted average rate on new loans this quarter for PPP?

It was 4 -- yeah, 425.

Okay. Okay. And I guess what I’m getting at is kind of the incremental core margin based on new business, new securities at 119, new loans at 4.25. Maybe some additional security from here might be a little bit lower in that 119. Assuming kind of a similar mix of assets, I mean, do you feel like we’re kind of near the bottom here on the core NIM…

So…

…beside, but…

I know it is difficult to say, so just based on where we ended the quarter and then with the expectation that we’re going into our stronger season where we could see some additional modest deposit growth. I think that we could possibly see a little bit more pressure on our core NIM, just resulting from that mix shift. So, again, if we see folks spending money and deposits don’t grow and we see higher loan growth that, that could change that. But I -- just on a core basis, I think, we could see a little bit more pressure. Not substantial but a little bit.

Okay. Okay. And then can you quantify the gain in other income, I’m assuming it’s about $2 million, but just want to double check, the other fee income?

Say that again, Matt, I’m sorry.

Just looking to quantify the gain in other non-interest income…

Oh! So…

This quarter, I think, it was around...

Yeah. And so that the -- only non -- I guess, non-core gain that I’d seen there. We had about a $750 million -- I mean $750,000 gain on the deposit premium when we sold that Lynnwood branch. Other than that it’s just the normal ins and outs of what we usually see in that line item.

Okay. And then just on the service charges and the fee waivers, I guess, I would have thought we’ve kind of come to the end of that at this point, but any change in strategy their rationale on waiving fees?

So, again, when we had stimulus payments come into those accounts we waived fees again this quarter, but that we’re no longer doing that. So going into the second quarter we should see that return to more normalized levels.

Okay. And then just lastly on the Round 2 of PPP, are using a five-year amortization…

Yeah.

…life or something shorter, okay.

Yeah. We’re using five.

Okay. Thanks.

Yeah.

Our next question today comes from Jackie Bohlen with KBW. Please go ahead.

Hi. Good morning. Hi. Just a couple….

Hi. Good morning, Jackie.

Good morning, I wanted to pick up a little bit on Matthew’s question just in terms of service charges. I’m thinking about seasonality, knowing that you had a strong tourism season last year, this year equally strong if not more so I would guess. So just -- it’s hard to tell the trends because of the pandemic and how that influenced activity. So I’m wondering what your expectations are for the pick up that we might see this summer if it’s a more normalized trajectory than what we saw last year, understanding that fee waivers are stopping and there’s a couple of things at play in there?

So I think it’s really hard to say, Jackie, I agree with you, because clients have more cash in their accounts as well. And so NSF charges are down. We -- I wouldn’t expect the trend to be too much different than what we saw last year at this point. Time will tell if things, spending becomes more robust, but I would expect it to be close to what we saw last year.

Okay. Okay. And then just in terms of the strength of your customers and how that’s driving some deposit volume. To the extent that net migration continues, I would expect economic activity to be robust. Is there anything that would stop that flow and I know that this quarter had stimulus and everything involved too, but just thinking about it outside of that?

No. I don’t think there’s anything that would stop that. I mean we’re not trying to actively exit deposits from the bank.

No. And Jackie, we’re -- we usually decline in deposits in the first part of the year and our growth of deposits starts in, like, the mid-second quarter and a remainder year. So we believe with the increase in economic activity, deposit should grow. The question is how fast do they grow and do they grow at the pace they have been growing. But there is all anticipation that deposits will continue to grow. We just don’t know how fast, because we’re entering to the normalized season where deposits grow.

And then we don’t know how fast spending will pick up as well. So it’s just kind of a new…

Okay.

…environment.

Yeah. No. I get it and I myself am just trying to wrap my arms around it. So your thoughts on that are helpful. So thank you. Everything else I had was already covered.

Thanks, Jackie.

Thanks, Jackie.

And our next question comes from Tim Coffey with Janney. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Tim.

Good morning. Hey. Kevin I kind of follow up on your comments about the loan growth, I mean you’re kind of -- you’re more bullish expectations going forward as for the outlook. What do you think that translates into, say, loan growth for the rest of this year?

Well, we’re hoping that -- well, we believe definitely we will meet the mid single-digit level, depends it that we’re now kind of moving toward maybe upper single digits in our expectations of growth for this year.

Okay. Okay. And then just on the MSR recovery in the quarter, can you provide any color with that. Is that just kind of -- are you -- your expectations of a one-time thing, is it built up from previous impairments?

Well, I think, the thing is, is that we had previous impairments of last year due to the speed of prepayments and we had a write-down our MSR and we did give highlights that this year that we’d probably see a recovery of that, so that just part of writing it up and writing it down. So the thing is that, we don’t see any more really large recoveries of impairments for the remainder of the year. But it’s just an accounting thing you have to go through where you write them down, you write them back up. So it’s just puts noise in our numbers, which we don’t like.

Yeah. So but on our prepared comments, we didn’t factor any additional recovery into the run rate of non-interest income going forward.

Yeah. Great. I just want to clear that up. Thanks a lot. Those are my questions.

Yeah.

No problem, Tim.

And ladies and gentlemen, that concludes our question-and-answer session. I’d like to turn the conference back over to management team for any final remarks.

Well, I want to thank everybody for your questions. As always, we welcome calls from our investment and analysts. Please reach out to us, if you have any follow-up questions. Again, thank you for tuning in today and good-bye.

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.