Good day, and welcome to the First Interstate BancSystem Third Quarter 2017 Earnings Call -- Earnings Conference Call and Webcast. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Margie Morse, Investor Relations. Please go ahead.

Thanks, Rocco. Good morning. Thank you for joining us for our third 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?

Thanks, Margie. Good morning, and thanks, again, to all of you for joining us on the call. I'm going to provide an overview of the major highlights for the quarter, and then Marcy will provide more detail on our financials. With the positive impact of having a full quarter of the Bank of the Cascades operation, we delivered a strong quarter that reflected a high -- higher level of earnings power following this transaction. We saw positive trends in revenue, net interest margin, operating efficiencies and credit quality, which resulted in improved profitability. On a reported basis, we had earnings per share of $0.48. Merger-related expenses had about a $0.15 impact on this quarter. So excluding those costs, we would have generated about $0.63 in earnings per share. The Bank of the Cascades system conversion in August was a historic event and a major accomplishment for our company. We consider the conversion a tremendous success for our clients, our employees and our shareholders, and the integration continues to go quite smoothly. We are on track to achieve our projected cost savings for this transaction, and the majority of those savings will be apparent in our fourth quarter results. Especially in light of the time and attention required for the conversion integration, our team in the West division, which now includes Idaho, Oregon and Washington, impresses with their ability to stay focused on customer service and business development. As a result of the team's effort, we experienced minimal deposit attrition and consistent loan production across the West division. Our loan totals in the markets increased with particular strength in commercial real estate and construction lending. The performance this quarter underscores the importance of our entrance and exposure to these higher-growth markets. The growth in our West division helped us offset a…

Thanks, Kevin, and good morning, everyone. Most of our variances relative to the second quarter are a result of the full quarter impact of Bank of the Cascades. So as I walk through our financial results, I'll focus on the areas where there were other factors contributing to the quarter-over-quarter variances. As Kevin indicated earlier in the call, we're pleased with our strong quarter of operating earnings and I'll begin with our income statement and our net interest margin. Our reported margin increased 11 basis points to 3.71%. Excluding the impact of charged-off interest and loan accretion income, our operating net interest margin increased 11 basis points to 3.54%. The expansion in our margin is attributable to more of our floating-rate loans rising above their floors. We're also benefiting from a higher mix of variable-rate loans in the portfolio, which now represents approximately 50% of total loans. And as Kevin mentioned, we're seeing more stability in our deposit costs. Total accretion income on the acquired portfolios was $2.7 million this quarter, an increase of $1 million compared to the prior quarter. Early payoffs contributed $1.7 million to accretion income this quarter, up from $300,000 in the prior quarter. While the unpredictability of early payoffs continue to cause volatility in our accretion income, we anticipate that scheduled accretion income will contribute approximately $1.8 million next quarter, which will taper off to an average of $1.4 million per quarter in 2018. Looking forward, absent any additional Fed rate increases, we would expect to see a relatively stable operating net interest margin. Moving to noninterest income. We generated $38.3 million of revenue in the third quarter. As you may recall, we sold the custodial rights of our health savings accounts held by both First Interstate and Bank of the Cascades, which resulted in…

Thanks, Marcy. Nice job. I'm going to wrap up with a few comments about our outlook. Over the past several years, we have utilized an active M&A program to grow our total assets, to gain scale, to improve efficiencies and to drive earnings growth. The transformational acquisition of the Bank of the Cascades as well as a number of smaller bolt-on acquisitions that has helped us enhance the value of the First Interstate franchise. We will continue to look for acquisitions that have a strong strategic and cultural fit as well as a sound economic and performance rationale. At the same time, we want to improve our ability to generate organic growth and we believe we can do so by leveraging the strength of the combined company. We are pleased with the effective business development approaches in the West division and want to adopt some of the same urgency within our Mountain division. In addition, we believe our ability to offer an expanded product set within both divisions will have a positive impact on organic growth. We are confident many First Interstate core product offerings will do well in the high-growth markets of the West division, including our credit cards, our indirect auto, our small business lending, our residential mortgage and our Wealth Management. In fact, we have already begun to expand our offerings and have strategies and plans in place to invest in tools and resources to increase sales in these areas. In particular, we are excited about the opportunity for growth in commercial credit cards, specifically for treasury clients as a purchasing tool. Further, our new markets are some of the strongest housing markets in the country. And with the acquisition, we gain some very specialized expertise in residential construction lending to consumers. On the flip side, we see an opportunity to expand the Bank of the Cascades' SBA lending platform into our Mountain division. It's a high priority for us to train our employees, market these products across our expanded footprint. And it will take some time to gain traction. But over the next few quarters, we feel confident that our focused efforts have the potential to drive higher levels of organic growth than we have seen historically. Heading into the fourth quarter, we expect to see the continuation of our positive trends in revenue and efficiencies as we realize the synergies from the Bank of the Cascades acquisition. And we're also fully committed to improving our business development capabilities so that we have a stronger foundation for driving sustainable growth in the coming years. So with that, we'll open up the call for questions.

[Operator Instructions] Today's first question comes from Jared Shaw, Wells Fargo Securities.

Maybe starting on the margin, I know you said that barring any move in the Fed, it should be stable here. But if we do see a December rate hike, and we look at the trends in deposit beta, should we expect to see that you try to keep more of that next rate hike for the bank? Or at that point, you feel like you need to go back into the market and be a little more proactive with deposit funding costs?

Right now, we're probably one of the higher deposit ratepayers. So we'll have to really look at what the market does, but at this juncture, we don't see the reason really to pay a lot more on deposits.

Okay, and then Marcy...

In the West footprint, we'll just --

In the West footprint, what we can do, we could keep on watching the competition out there.

Okay. Great. And then Marcy, you'd mentioned that you had more loans moving above floors. What percentage of those floaters are above a floor at this point?

We have less than $40 million that are still -- what do you...

It's actually about $62 million because on the combined footprint, the last quarter was about $40 million in our footprint. Now that we have everything combined on the same system, it's about $62 million that will -- won't reprice in an up 100 basis point shock.

Ended up 100, okay. And then you had mentioned that in the Mountain division, you were exiting some of the lower, I don't know how you want to describe it, maybe weaker credits. Is that a onetime thing that we saw this quarter? Or should we expect to see that, that sort of has a little bit of a tail on it over the next few quarters?

As I put in my comments, we want -- we should be placing that and then some. So we're going to continue to work out some credit issues, but we're not anticipating that it should have a real headwind to us.

Okay. And then just finally from me on the M&A side. I appreciate your comments there. As you -- would you -- how would you describe, I guess, the view of M&A here? Is it more opportunistic in that you'd look at both markets or would the focus of future M&A shift more to the newer markets?

I would say our focus would probably be more toward the newer markets.

And our next question comes from Jeff Rulis of D.A. Davidson.

Question on the -- you'd talked a little bit about the outlook on growth and I just wanted to kind of maybe tighten that up in terms of your Mountain division, the West division, the balance of that, I guess, historically, legacy kind of organic growth was in maybe the 4% to 6% level. I guess, as you look into '18, is that a high single-digit number? If you could put some context on that?

Our goal is somewhere between mid- to high-single digits next year's growth. Let me comment a little bit about the Mountain division or the legacy group. As we continue to upgrade talent, you can see that we've done at the executive level, but we also are trying to upgrade some talent across our footprint, mainly in maybe the lending area. And so with some of that turnover, these people came in, we're just -- we're getting them up to speed and getting the kind of their batting averages up. So right now, we are anticipating that these guys will come online and [ gouge ] sooner than later.

Okay. And on the -- maybe a similar question on the mortgage banking outlook now that you've got the 2 entities together. Maybe for the balance of '18, kind of your expectations on the income from sale of loans within the income statement.

I think we're going to -- the remainder of the year is going to be a little high as rates are up, but I think that we'll have a decent fourth quarter. I think the growth that we're going to see in the Mountain or the West division going forward will continue to increase as we give our new employees tools that we're building out more online application, more online work, with regards to some of the individuals you've heard me mention before. Some of our employees that we got from the West division don't have the experience really to do some of this lending. So we're going to give them more automated tools that we're building out in order for it to make it easier for them to help customers in those efforts. So that will start taking shape as we move into probably 2018.

Okay. So you had a combined little over $8 million in the quarter, maybe some seasonality kind of Q4, but as you roll into '18 kind of grow or maintain that base is the expectation?

Yes. Actually, we hope that the growth pace really picks up, because there's a lot of opportunity in the West that has not historically been tapped into.

One last one on the credit side. Just the net charge-offs. Do you have the detail of type of loan segment that those were coming from? And then maybe a similar question out of the NPA bucket, the decline there. Obviously, some of those were charge-offs, but if you could give us color on what was declining in the quarter of each of those balances, that'd be great.

Okay. We're going to ask Steve Yose, our Chief Credit Officer, to kind of give you some color on that.

On the commercial side, the mix and as mentioned on the call, some of them were principally loans that we already had specific allocations on the allowance. A few of those were energy-related credits as well as those in the hotel sector. So I think, as we discussed, we're trying to continually improve on the asset quality front. We look at those that are -- we already have specific allocations nonaccrual, how we can move those up quicker. And so the sector is principally impacted by the hotel and oil and gas.

And our next question comes from Matthew Clark of Piper Jaffray.

On the core loan yields, they are up nicely linked quarter. I know some of that was floating rate with the benefit of higher short-term rates. But also curious what the weighted average rate was on new production? How that compared to last quarter?

It was 4.99%.

Do you have that comparison for last, in case I don't have it?

I think it was just a couple of basis points down from last quarter.

Okay. And then, on the loan pipeline, I know you reiterated your expectation for mid- to high single-digit growth for next year. But going into the fourth quarter here, I know it tends to be a little bit seasonally slower, but I would think it would be better than what we just saw, maybe with less run-off. Just curious how the pipeline looks this quarter versus last and whether or not we should see an uptick here in growth?

The pipeline, I would say, looks about the same as last quarter. So absent some runoff, it should bode well for us.

[Operator Instructions] Today's next question comes from Matthew Forgotson of Sandler O'Neill.

Marcy, you mentioned that 50% of the portfolio is now variable rate. Can you give us a feel for what those loans are benchmarked to? And a sense of how much are free to move with the next move in rates, please?

Well, I think she mentioned that there's only about $60 million on floor. So everything else is free to move. And it's just probably a combination, Matt, of both. Some are tied to LIBOR, which are bigger credits and the smaller credits, which are small business being more of a prime-based thing, but both move with the movement of rates.

Right. Okay. And the NIM guide for the core margin is to hold the current range. But I guess, if we get a 25 basis point increase in Fed funds, is it fair to say that this quarter's bump in the core margin, I guess, of 11 basis points sequentially is a fair reflection of how we should expect margin to react, if that comes to fruition?

Yes. Absent of -- I mean, as -- if you heard me say in the past, at some point in time, there's going to be an inflection point in regard to some of these deposits and the competitors are going to start paying up. So absent that, I would agree with that statement.

Okay. And then, how should we be thinking about loan loss provisioning here going forward?

I would say that probably similar to what we saw this quarter.

Okay. Great. And then, just lastly and then I'll hop out. Kevin, just fleshing out your M&A comments a little bit more, can you give us a feel for kind of the level of activity in the market and your enthusiasm for maybe getting something else done in the not too distant future?

Well, there's a lot of activity out in the market. We see a number of deals. And I think we're being picky to what deal that we're going to enter into. And partly is because we're really trying to build our infrastructure. And I get on my soapbox a little bit on this aspect. And part of it is that as we grow the company through acquisitions, we also want to have the company stay relevant in the financial industry. And when I talk about relevance, I talk about making sure that we have a digital platform that compete with the likes of Rocket Mortgage and LendingTree and stuff like that. So we are continually building out our technology in order to serve the customers that now want a different experience than coming into the branches. So we're kind of balancing out our infrastructure build in staying relevant versus just doing a bunch of small little acquisitions and taking our eye off the ball for the future. So we're kind of balancing that. So we are trying to make sure if we go into an acquisition, which there's a number out there, that is the right acquisition for the company and not just to grow and take our eye off the ball and staying relevant. And I always make the analogy between Wal-Mart and Kmart. They both sell the same products. Wal-Mart's still relevant and Kmart is probably going out of business. So the thing is we, as a finance institution, want to grow and stay profitable, but we also want to stay relevant for the future.

And our next question comes from Jackie Bohlen of KBW.

Do you have any onetime merger costs left?

It will be pretty minimal. I'm sure there'll be a few stragglers but there's nothing significant, Jackie.

Okay. And then, the severance that was in the quarter, was that driven by the talent upgrades that you referenced?

Yes.

And do you anticipate any more of that activity in the future?

Not at the same level.

Okay. And then just lastly, obviously, you brought on somebody new in Wealth Management and it's an area of focus. How do you see that line item playing out over the next several quarters?

I think that line item is going to play out nicely as the new individuals -- again, as we've done trying to build the infrastructure's company, part of the things we've done is restructured the various groups to be more aligned to a bigger organization. So I think Renee's impact will have a positive reflection of that. And again, one of the things I go back to digital is to build out our [ Robot Wealth Management ] platform in order to track some of the smaller customers. So we're going to look at some reorganization and shifting things around as focusing -- as we focus on taking care of our customers.

So I guess, is it fair to say that there would be a ramp-up period and then you could see some increasing growth that gains traction as we go forward?

Yes, I would say that, that probably will start occurring again in probably the first quarter of '18.

Okay. And when you look at the 2 divisions that you have, the Mountain and the West, does one have more opportunity than the other? Or are there opportunities fairly equal?

Well, the West, we don't do much wealth management business at all. We only acquired with the West division about $50 million of assets under management. So the sky is the limit for the West and I think we can continue to grow and rationalize our product offering in the Mountain division. But I think the best growth opportunities would probably be in our new markets, starting with Boise and Bend, which we have a strong presence, which I think we can -- and we already have hired some wealth management advisers in those markets to try to start expanding our presence in those markets.

Okay. So the majority of the growth would come from the new added markets, rather than a retooling of what you have with the legacy footprint?

That's correct.

Correct.

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

Again, I want to thank everybody for joining us on the call today. And 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, again, for tuning in today. Good bye.

And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.