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First Interstate Bancsystem Inc. (NASDAQ:FIBK)

Acquisition of Mountain West Financial Corp. Conference Transcript

February 11, 2014 12:00 PM ET

Executives

Marcy Mutch - Investor Relations Officer

Kevin Riley - Chief Financial Officer

Bob Cerkovnik - Chief Credit Officer

Analysts

Jeff Rulis - D.A. Davidson

Brett Rabatin - Sterne Agee

Tim Coffey - FIG Partners

Jackie Chimera - KBW

Operator

Good afternoon. And welcome to the First Interstate Bancsystem Acquisition of Mountain West Financial Corporation Conference Call. 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 that this event is being recorded. I would now like to turn the conference over to Marcy Mutch, Investor Relations Officer. Please go ahead.

Marcy Mutch

Thanks, Laura. Good morning. Thank you for joining First Interstate conference call announcing the merger with Mountain West Financial Corp. As we begin, I’d like to direct all listeners to the cautionary note regarding forward-looking statements included on page two of our webcast.

The company does not intend to correct or update any of the forward-looking statements made today and investors are urged to read the proxy statement prospective and other relevant materials related to the merger when they become available because they will contain information about Mountain West, First Interstate and the merger.

Joining us from management this morning is Kevin Riley, our Chief Financial Officer, along with other members of our executive management team.

So, Kevin, I’ll turn this call over to you.

Kevin Riley

Thanks, Marcy, and thanks you all for joining us. I let you know upfront, I am traveling today and Marcy will be operating the slide deck to Montana so let see how that goes. So I might be providing her a little coaching as we work through the slide deck.

I also want to note that Ed Garding is not on the call this morning as he and our Board Chair and Executive Vice Chair along with Rick Hart, the CEO of Mountain West got on the road yesterday in our meeting with the Mountain West team over the next few days.

During our due diligence, we are excited to meet the delegated management team and some of their talent pool of employees that will help complement the existing team here at First Interstate.

At the close of business last night, we are excited to announce our merger with Mountain West Financial Corp., the parent company of Mountain West Bank headquarter in Helena, Montana.

This is the company’s first transaction since 2008 acquisition of First Western in South Dakota. So I would like to spend a little time this morning going through some of the highlights of our deal.

Mountain West has assets of approximately $650 million and operates 12 branches in five primary markets across Montana. This franchise compliments and it expands our presence across the state and in particular the Helena market.

The acquisition is strategic for First Interstate in a couple of ways. Mountain West is one of a few opportunities in the state of Montana of meaningful size that will allow us to expand without running into significant market concentration issues.

Also, it provides the defense’s strategy which precludes other competitors from gaining a foothold in these attractive markets where Mountain West resides. While total consideration will vary based on our stock price at the closing, the deal value the close of business yesterday was at $72.8 million with 47% of the consideration being paid in stock and 53% in cash.

Because of the overlap of our footprint, we anticipate cost saving opportunities that will allow the transaction to be immediately accretive to our earnings per share with minimal book value -- tangible book value dilution that we believe can be recaptured in about three years.

As you can see, let me slide change here but as you can see by the map, our combined companies have a number of overlapping markets. As you can see in the bottom right, obviously, or bottom left, obviously, that we have four branches within a quarter mile and seven within a half mile of our current locations, there will be we believe opportunities to consolidate.

I also like to point out that the market areas in which Mountain West is located represents five of the largest markets in Montana versus they will be the only non-money center bank to have a presence in all five of those markets.

Next slide, this slide, as you can see demonstrates a significant market share position of the combined companies. With this transaction, we will have the number one market share in the State of Montana and we will move from the number six position to the number one position in the Helena market and from number three to number one in the Great Falls market.

We believe our strong position across Montana will help us attract and retain new customers, which is an exciting opportunity when you consider the strength of our economy and the wealth being created as a result of the energy boom. Also, I am sure you are aware, we are near full employment levels here in Montana as Montana employment rate has been around 5% for quite some time.

Next slide, all right. This slide provides you with an overview of Mountain West. The company had a few dark days. During the last recession, management has done a superior job in working through those issues. In the late 2012 the OCC terminated the seasons descend order and then in early 2013 the fed terminated its written agreement. You can see once the dark days were cleared, they gained the ability to reinstate their dividend to their shareholders.

Profitability metrics have improved over the last year or so as a result of cleaning up their credit problems. These credit issues caused Mountain West to report a high efficiency ratio. But as you can see from the slide, asset quality has improved dramatically over the last couple of years, with net recoveries on loans being realized in the last nine months.

Once we merge, we'll be able to move the dial leaseback on some of these expenses, but I'll say more about that in just a minute. If you see the loan and deposit composition it's very similar to ours with most of the loan volume being in commercial real estate. Next slide.

So to summarize the terms of the deal, each Mountain West shareholder will be issued 0.2552 shares of First Interstate's stock and $7.125 in cash. All outstanding, unexercised Mountain West options will be cashed out at an equivalent price to the merger consideration at close.

Based on our closing price of $24.77 at the end of the business day yesterday, total value of this deal was $72.8 million which is approximately 124% of Mountain West's tangible book value per share and 20 times the last 12 months in earnings per share. Post merger, current First Interstate's stockholders or shareowners will own approximately 97% of the combined company and Mountain West shareowners will own approximately about 3%. We anticipate we'll be able to close this deal by midyear and then it will be subject to the customary regulatory approvals and Mountain West's shareholder approval.

As we discussed earlier, there will be significant opportunities for cost savings due to the overlapping for our two companies. In our modeling we estimated a conservative 35% cost savings with these savings there will be some loss of personnel as a result of the transaction and to that end, we have implemented a hiring freeze within the First Interstate markets, where there will be overlap, our current goal is to place as many employees as possible in positions within our company. However, to the extent individuals do not become a part of the combined company going forward, we will provide them with a generous severance package along with outplacement severances to assist them in finding future employment.

Transactional cost of - are of usual nature and they will approximate $7.2 million. Our anticipated purchase accounting adjustments include about a $17 million credit and interest marked on loans and a $10 million to $11 million write-down on premises. Mountain West has approximately $20 million in trust-preferred securities that we intend to pay off, which will be at a quarter-end as soon as, possibly after the close. As far as impact to our shareholders, we've already touched on most of these metrics, but we do anticipate the deal to be immediately accretive to our shareholders, with a 6% to 7% earnings per share accretion, in the first full year, there will be modest as I mentioned before -- tangible book value dilution which we believe can be earned back at around three years.

Next page. So before I open up for questions, I'd like to once again state how excited we are to have Mountain West join our First Interstate team, both companies will be working hard over the next few months to complete this merger, with a common goal to have a smooth a transition as possible.

That was a short presentation but at this time I'd like to open up for questions.

Question-and-Answer Session

Operator

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

Jeff Rulis - D.A. Davidson

Thanks. Good morning.

Ed Garding

Good morning, Jeff.

Jeff Rulis - D.A. Davidson

Kevin, maybe a tough question, maybe a question for Mountain West, but I was just trying to figure out the rationale for the timing on their sale, I mean was it just a process of getting through as you mentioned the dark times and back paying a dividend, any comment on timing on their end of things?

Kevin Riley

Again, it's probably a better question Jeff, for Mountain West, but I believe that the (inaudible) through the dark days and I think that there's some -- before they are getting close to retirement age, I think they decided that this was the time so. I don't really know the answer to that question.

Jeff Rulis - D.A. Davidson

How about the products suite, moving beyond the cost savings but more on the, you know, I guess some of the products that you think you can unveil on Mountain West platform and perhaps vice versa, if there's anything that they've got that you think you can roll on to FIBK's, from a product standpoint?

Ed Garding

Well, we believe because we're maybe a little larger institution that will be able to expand their product set, little broader within the markets and their customers. They have a very interesting product that they deal with some of the older customers that they've done very good job and taking care of them, so we're going to be looking at that hard to see -- how we move forward with that product.

Jeff Rulis - D.A. Davidson

Now, these are more specifically are you talking about wealth management, talking about on the mortgage side anything that you can say more specific?

Ed Garding

It was more of a club-account, more of -- dealing with deposits, we believe that we can expand the wealth management within their markets at this time, but more this product is in the actual deposit relationships.

Jeff Rulis - D.A. Davidson

Got you. And then maybe one last one on what the key executives do you expect to stay on from Mountain West?

Ed Garding

Well, the executives there have done a great job and we have -- they've been very enjoyable to work through in this process and really, we're trying to figure out how to make the smoothest transition. So for the time being I think they'll be around for a while, but right now, they have to decide what they want to do within -- within the process so time will tell, how long those executives stay around.

Jeff Rulis - D.A. Davidson

Okay, I'll step back then.

Operator

Our first question will come from Brett Rabatin of Sterne Agee.

Brett Rabatin - Sterne Agee

Hi, good morning.

Ed Garding

Good morning, Brett.

Brett Rabatin - Sterne Agee

I joined a few minutes late, so you may have covered this somewhat, but just to -- I want to go over the accretion that you guys were expecting went for 100% phase in the cost saves. Can you talk about the timing of the cost saves and how long you think that’s going to take and just around but maybe some color around data processing conversions and sort of your thoughts on how you are going proceed with pulling out the expenses?

Kevin Riley

We believe that the cost saves will be fully implemented within the first six months. So hopefully by 2015 that will be all behind us. We believe that we will convert the systems early and we do that, that most of the consolidation will happen at the same time.

Brett Rabatin - Sterne Agee

Okay. And then any thoughts on the branch network, you obviously have some overlap and a couple key markets. Do you half the branches or how many of the branches do you think you will end up with?

Kevin Riley

Well as you see by the slide early on, there is a few slides that may -- a few branches that are pretty close in proximity. I mean there is some branches you can actually throw stone to. So we will be consolidating those. Somewhere you can probably picture about half with the reaosonable guesstimate.

Brett Rabatin - Sterne Agee

Okay, and then post to closing this deal, I mean, I guess you guys have not done a deal in a while. Will you still be in the market looking for other opportunities, or is this kind of the deal that you have been looking for, and is kind of placates your M&A appetite for a while?

Kevin Riley

The thing is that everybody asks that question. You always got to be out there looking because the purchaser doesn’t really set the time when acquisitions occur, usually the seller. So we'll be keeping our eyes open for opportunities that really are good for the -- first there is a franchise. What we want to make sure is that, that we do a deal, its good for our shareholders and the future value of the company and not just to do deals for the sake of doing deals.

This deal came to us and it was -- it made sense because it was in market so we pursued it. There could be other deals out there that we will not pursue yet they do not make sense for the value of the company. But we will assess each deal as they come to us.

Brett Rabatin - Sterne Agee

Okay. Thanks. I appreciate the color.

Kevin Riley

Thanks Brett.

Operator

The next we have question from [Bob Dennis].

Unidentified Analyst

Yes. Good morning. I understand that Mountain West declared a $0.33 dividend on December 30, 2013 less than a couple months ago. Is that correct and will that dividends be paid?

Kevin Riley

Yes that is correct and that dividend will be paid.

Unidentified Analyst

Okay. And without trying to make a tax advisor from you, generally speaking when stock is received in a merger transaction, is there a tax event at a time that stock is received or is it tax event occurred only after the stock is sold in this case, First Interstate stock?

Kevin Riley

We put this transaction as a tax-free re-org. So the stock that will be received will be tax free until such time that stock is sold.

Unidentified Analyst

Okay. Thank you.

Operator

And your next question is from Tim Coffey of FIG Partners.

Kevin Riley

Hey, Tim.

Tim Coffey - FIG Partners

Good morning Kevin. I have a question about the OREO. Mountain West does not have a whole lot, but I am wondering are you planning on taking any additional marks on that or do you like where it is valued right now?

Kevin Riley

They have done a good job of valuing the ORE down on their books as you are right they don’t have much. And we didn’t really have to market much when we looked at it. They have done a good job. We believe on all of their challenged assets. So as you can see they had a recovery over a last nine months net charge off. So we believe that they have done a pretty good job in valuing all of their challenged assets.

Tim Coffey - FIG Partners

And then you talked about the Mountain West marketing comes to ply best in the state of Montana. I wonder, how many lenders are you picking up in those markets?

Kevin Riley

I missed your question, Tim. Can you ask again?

Tim Coffey - FIG Partners

Sure. I'm wondering how many lenders you are picking up from this transaction?

Kevin Riley

Hey, Bob, do you want to answer that question.

Bob Cerkovnik

Hi, Tim. Right now, that has not been decided how many we are going to pick up. It's going to be on a case-by-case basis of each branch as we look at each market. So to give you a finite number I just can't do that at this point in the process.

Tim Coffey - FIG Partners

Yeah. That’s no problem, Bob. Thanks. Those are all my questions.

Bob Cerkovnik

Thanks, Tim.

Kevin Riley

Thanks, Tim.

Operator

And our next question is from Jackie Chimera of KBW.

Kevin Riley

Good morning, Jackie.

Jackie Chimera - KBW

Hi, good morning everyone. I have been traveling, so I apologize for any background noise you might get. I wanted to touch on the dividends again. I know that you’ve finished the one that’s payable on April 1st, but just given the company’s not on a traditional schedule, do you anticipate any additional dividends prior to deal close?

Kevin Riley

At this time no, Jackie.

Jackie Chimera - KBW

Okay. And do you have any revenue synergies into your accretion expectations?

Kevin Riley

No, we did not put any revenue enhancements even though we anticipate that there should be some as we expand the product set.

Jackie Chimera - KBW

So is it primarily just from product set expansion or will it enable your lenders and move into kind of different areas within what they are already doing? I guess just a little bit more color on what kind of revenue do you think you could have?

Kevin Riley

We didn’t put any real revenue enhancements in it. Quite frankly, we were more -- we were very conservative in our modeling to take in account that there could be some market disruption and some competitors trying to nip at our heal. So we were conservative in the way we model it, so that we didn’t get, again we'd like to take the position that we've under promise and over provide.

Jackie Chimera - KBW

Okay. Fair enough. And then just lastly, the non-accruals that they have on the books, are most of those fairly heavily marked already?

Kevin Riley

Yes, they are.

Jackie Chimera - KBW

All right.

Kevin Riley

Bob, you want to comment on that.

Bob Cerkovnik

No, that’s an accurate statement.

Jackie Chimera - KBW

Okay. Pretty much everything else I had was already asked. So, I'll get back. Thank you.

Kevin Riley

Thanks, Jackie.

Operator

(Operator Instructions) And our next question will come from Jeff -- I'm sorry Sanjay Talwani of Montana TV Network. My apologies, Jeff Rulis of D.A. Davidson.

Jeff Rulis - D.A. Davidson

Hi, Kevin. Just a quick follow-up on, with the combined goodwill CDI figure, do you have that available?

Kevin Riley

The CDI, we've marked that for seven and a half.

Jeff Rulis - D.A. Davidson

Okay. So, seven and a half so.

Kevin Riley

And the goodwill is going to be just -- it’s going to be based upon again closing price of stock when it’s all said and done.

Jeff Rulis - D.A. Davidson

But as of now, that’s of anywhere from about $18 million to $20 million figure combined?

Kevin Riley

That’s correct. I will look at my notes. Hold on. Hey, Marcy, do you have that?

Marcy Mutch

Yeah, that’s sounds about right that sounds good.

Jeff Rulis - D.A. Davidson

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Kevin Riley

Just want to thank you all for participating in our conference call, and we look forward to catching up with each of you over the next few months. And with that, I’d like to conclude the call.

Operator

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

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