Good morning, and welcome to the First Interstate BancSystem Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please also 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 third quarter earnings conference call. As we begin, it is worth noting 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. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements and factors that could affect future results contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release as well as the risk factors identified in the annual report, and our more recent periodic reports filed with the SEC. Relevant factors that could cause actual results to differ materially from any forward-looking statements are included in the earnings release and in our SEC filings. The company does not undertake to update any forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at fibk.com. Information regarding our use of non-GAAP financial measures may be found in the body of the earnings release, and reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. 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, Lisa. Good morning, and thanks again to all of you for joining us on our call today. I'm going to provide an overview of the major highlights of the quarter and discuss the two acquisitions we recently announced, and then Marcy will provide more details on our financials. We executed well in the third quarter, delivering strong financial results, completing our acquisition of INB and making good progress on integration, which will take place over Veterans Day weekend. I couldn't be more proud of all of our team's accomplishments and believe we are firing on all cylinders, with strong earnings, successful acquisitions and continued efforts to strengthen our company's infrastructure. We generated $41.4 million in net income in the third quarter or $0.71 per share, which included $3.1 million of INB merger-related expenses. Excluding these expenses, we generated earnings per share of $0.75, which compares to the $0.74 last quarter and a year-over-year of operating earnings per share are up 90% from the same period. The positive trends we are seeing in our net interest margin and the improved efficiency we are getting from our larger scale more than offset the $3.2 million decrease in revenue this quarter from the Durbin Amendment. Excluding recovered interest and accretion income, our net interest margin increased another four basis points during the third quarter. And over the past year, we've seen our margin expand 24 basis points. This reflects the consistent benefit we are getting from the repricing of our earning assets and a higher loan-to-deposit ratio, combined with the effective management of our deposit cost. As we've talked about for the last year, we are focused on maintaining and growing our solid base of core deposits and believe this is important to our long-term success. In the third quarter, we had…

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 second quarter of 2018. I'll begin with our income statement. Our net interest income increased 6% from the prior quarter, primarily due to the partial-quarter contribution of INB and a higher net interest margin. Included in net interest income this quarter was charged-off interest at $700,000 compared to $1.9 million last quarter. Total accretion income on the acquired portfolios was $3.6 million this quarter, which was $700,000 more than the second quarter. Included in this accretion -- included in this was accretion related to early payoff of $1.5 million this quarter, which was $400,000 more than last quarter. With the addition of INB, we anticipate that our scheduled accretion will be $2.2 million in the fourth quarter. Looking forward to 2019, we expect scheduled accretion to be approximately $2 million per quarter, excluding the impact from our 2 pending acquisitions. On a reported basis, our net interest margin increased one basis point to 3.88% in the third quarter. Although as Kevin mentioned, excluding the impact of charged-off interest and loan accretion, our operating net interest margin increased four basis points to 3.73%. The expansion in our operating net interest margin was driven by an increase in our yield on earning assets, which more than offset the six basis point increase in our cost of funds. We continue to see an increase in the yield on our investment portfolio, and with the short duration of this portfolio, which is currently at 2.8 years, we are able to reinvest funds today at around 3.25% without significantly extending the duration. We're also seeing a lift from the loan portfolio. Approximately half of our portfolio consists of variable…

Thanks, Marcy. Nice job as always. I'm going to wrap up with a few comments about our outlook. The 2 acquisitions that we just announced are another example of our balanced approach to capital allocation, to organic growth, accretive acquisitions and returning capital to our shareholders through a strong dividend. We believe we have a successful formula for creating value for our shareholders. And we are optimistic that we have ample opportunities to continue executing on all aspects of the formula in the future. Heading into the end of the year, we feel good about how we are positioned. Although, the fourth quarter has typically been a softer period for loan growth for the company, we think our increased exposure to higher-growth markets could result in a different outcome this year. The pipeline in the west division market remains quite strong, and they have historically had good loan production in the fourth quarter. So we are optimistic that we can see better overall fourth quarter growth to finish the year and deliver another strong quarter for our shareholders. When I started off the call, I mentioned how proud I was of the team. And the company has consistently given 2% of its pretax net income back to the communities. On Columbus Day, over half of our employees gave a part of their day-off to volunteer for a not for profit in their community as a way to celebrate the company's 50th-year anniversary. It is incredible to be part of a company whose commitment to the community is more than just words. Looking into 2019, we feel great about the position of our company. We built a strong team of leaders, not just at the executive level, but throughout the company. We are executing on building a better company with acquisitions that complement our franchise. And we'll be wrapping up our current infrastructure initiatives. We should complete streamlining our consumer and commercial loan processes, upgrading our financial systems and lastly, transforming our core to allow better analytics and the ability to plug and play digital applications to better serve our customers. So overlaying this on our strong balance sheet and improved financial performance, we feel good about where we are headed. And so with that, I'll open the call up for questions.

[Operator Instructions] And today's first question comes from Jeff Rulis of D.A. Davidson.

Hi, everyone. It's actually Drake on for Jeff today. I just had a first question on the expense run rate. I know INB, you mentioned that it won't affect the quarter until late in the fourth quarter. But can you just give a little bit more color on where you see that run rate in 4Q and beyond?

The run rate for INB. So to our historical run rate during this year, we expect INB will add $5 million a quarter -- $5 million to $6 million.

And that's on the $85 million before INB.

Okay. So we have maybe flattish expenses next quarter, is that fair? Or do you say, it's picking up a little bit more?

No, outside of acquisitions --

Outside the acquisition costs that are in there, it'd be flattish.

Except for it will have a full month of INB versus just 1.5 month?

Yes. The next quarter, we'll also -- fourth quarter, let's just be clear, we're going to have a normal run rate of about $90 million. But we're going to have acquisition costs as we start having termination of IT contracts and the severance costs and everything else associated with the final acquisition costs related to that acquisition. So we'll have a core run rate of about $90 million, and then we'll have the additional costs on the final acquisition expenses.

Okay, great. And then just another question on your margin going forward. I know you had a little bit less recoveries in the quarter. Do you see deposit costs continuing to pick up going forward? And where do you see your margin going into 2019?

We see our deposit costs continue to increase, but we believe our margin will also continue to increase. So both positive for the market.

Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Hi, good morning. Maybe just following up on the deposit question. So it was great to see only 6 basis points of costs increase on the deposit side, as you add these new geographies and you think that the customer base is going to be as price-insensitive as you have in your core markets. And then when you were talking about preemptively or you're continuing to raise pricing, is that something you said that, that start this quarter to retain those customers? Or is that something we expect to see in the next coming quarters?

Jared, that's the position we've been taking since the day they started raising fed funds. We've been always proactive to raising our deposit costs to preempt the other banks out there. We remain one of the highest deposit-paying banks currently in our markets. And we're going to continue because of asset sensitivity to increase our deposits in order to hopefully gather deposits from the other institutions that are reluctant to pay because they can't. So we're going to continue increasing our deposit costs, and we're going continue to increase our net interest margin.

Okay. But so the rate of that increase isn't necessarily really going to change? It's just going to be doing more of what you've been doing as we've been moving through it.

Exactly. Yes, we are totally controlling the market, so nobody is forcing. We're not being pressured to increase at a higher rate. Quite frankly, we are -- the market is moving when we move it. So we are not going to be pressured to increase that philosophy.

Okay. And then looking at the loan growth, it was great to see the growth in Ag this quarter. But on the C&I side, why -- is that a little weaker than you had expected? I know you said that there was a large payout in there. And as we look out, as you grow more into Idaho and the faster-growing markets, should the C&I loan group start growing faster than the rest of the portfolio?

Yes, I'm going to have Bill Gottwals answer that question, since he's head of our banking group.

Yes. I think, Jared, we have been obviously increasing our exposure in the C&I space. This quarter in particular though, we did have 1 large credit, as Marcy indicated, that had a significant impact on that. But more specifically, we have several large C&I credits now that we brought on last year that are incredibly seasonal, and we saw pay downs from them. So this quarter really wasn't impact of pay down of 1 credit and then the seasonal pay down, so actually what drove that. We would expect only to see more rapid growth in that C&I space.

Okay. And then finally for me. Kevin, you talked about the systems investments that you've made and the increased capacity there. As you look at the -- all these system investments that you've made, how big of a company, how big of a bank do you have capacity to run now with these improvements?

I think once we finish everything up by the end of '19, I don't know, probably until I retire. So it depends how big we get before I retire. But I have a feeling that these investments will take us well over $20 billion into the future. So I'm not -- we won't have to address it probably within my tenure here.

And our next question today comes from Jackie Bohlen of KBW.

I wanted to start off with a conceptual question. In terms of the net interest margin, just looking into the future. As you continue to develop the western part of the franchise, all else equal and ex the impact of higher margin M&A, will we see that trend up because of the types of loan growth you're able to get and the added loan growth you're able to get?

I wouldn't want to it to continue to trend up because of the additional aspect. I think it could trend up, but I think the nature of our business is -- kind of gives us the ability to have a higher net interest margin of banks out there. So I can see it hanging here to up to maybe at the most 4%. But I think once you start getting over 4%, that's going to be a tough environment to play in.

Okay, that's fair. And then as your initiatives wind down, and it sounds like they'll continue into 2019, but as those are winding down, do you expect to see efficiency improvements outside of just additional revenue generation?

Yes.

Okay. Any general quantification on that?

We're still in the midst of -- I think the biggest savings probably would be in our loan processes improvements that we're doing. And we're still in the process of coming to what that might be. It's bigger than bread box, but I'm not saying. I'm not sure exactly how big it is.

Okay, fair enough. And then just one last one. With the addition of the two pending acquisitions and then the 1 recently closed, does that impact your forward tax guidance at all? I know in the past, we've talked about -- oh no, I can't find my notes. But in the past, we've talked about a similar tax rate. Will it start to trend up at all?

It shouldn't.

Today's next question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Hi, everyone. So just some clarification around the noninterest income here. My sense is that as you alluded to that gain on sales is probably going to dip here from seasonality. What other seasonal trends should we expect to see here going into the fourth quarter?

Well, first of all, I think card income actually is going to go up on seasonal bases. Net interest income should go up. I think mortgages should be flat to down slightly. But the rest of the stuff, I think that mortgage is probably the only seasonal thing. Hopefully, this year's loan growth and total loan growth is going to be better than we've seen in the past, up slightly. So I don't think there's anything more seasonal. Probably the only thing would be really that we have some card revenue going up and mortgages softening a little bit. The rest should --.

Yes. Wealth management service charges, other fees should stay pretty constant.

And our next question today comes from Matthew Clark of Piper Jaffray. Please go ahead.

Hi, good morning. Just on the noninterest expense run rate, $90 million core excluding merger charges. I think you've got about just under $8 million of cost saves coming from this latest acquisition that closed. I mean, should we think about that kind of getting back down to $88 million and growing from there? Or is there some additional efficiencies you think you can achieve to reduce that further, excluding the pending acquisitions?

In the future as we get some of these initiatives behind us that there would be some additional cost saves, as we've been talking about. But the thing is as we get cost saves, and then the cost of doing business goes up a little bit. So I'd say all in all, I don't see expenses growing that much during the year, as we have cost saves bring it in. So I would say that $90 million, right around there is probably a good run rate quarter-by-quarter next year.

Okay. And how much of the cost saves have you gotten out of this latest deal, INB deal.

Out of INB, very little. Most is coming in the -- after conversion.

Okay, great. And then just on the special mention bucket, it looked like a little uptick. Just wondered if that was acquisition-related or whether or not there was something else going on there.

That was acquisition-related.

And our next question comes from Bryce Rowe of Baird. Please go ahead.

Hi, good morning. I wanted to ask about the balance sheet mix. Saw that cash and liquidity on the balance sheet ticked up here in the third quarter, and you guys called out the current reinvestment rate around 325 basis points for the bond portfolios. So curious if you guys are thinking about maybe adding to the bond portfolio, if you can put some of that cash to work. Or is there another way to think about the excess cash on the balance sheet? Thanks.

Yes, it means, if that sticks and we don't get the loan production, we will put that to work. We do like to have, as you've seen in the past, a good amount of cash, but we are exceeding our normal cash level. So if -- we probably will have deposits continue to pick up, put more and more of that cash to work in the investment portfolio.

Excellent, that's -- it's good color, Kevin. And I wanted to ask a question about deposits. I think one of the comments you guys made at the Investor Day was consistent with what you said this morning that you want to maintain a dominant market share position in those markets where you have dominant market share. You also talked about a possible strategy to go into some markets where you maybe don't have as much of a dominant market share. I'm curious if you've kind of thought more about how you might approach those markets to take market share in some of those less dominant markets. Thanks.

We still are -- that's still in progress, and we're still looking at that. But we have not gone out with a huge marketing campaign, as we're actually waiting for our deposit pricing to get up to a certain level and believe that there's an inflection point before we attack the market. And then at that point, we think that we could make a bigger impact with our marketing dollars. You know the interesting thing; I just want to kind of go off the script here a little bit, are we having a pretty strong deposit base here. In the sense where you see some of these bigger banks are losing large deposits. And interesting thing is our customers are small businesses, small middle market customers, and they don't have cash managers on staff to manage excess cash balances. So a lot of these larger banks because of the interest rates and the other alternatives out there, a lot of their larger and larger customers are moving cash into these other alternatives to seek higher yields. Ours mom and pop customers, they rely on us to give them a decent yield, as they can't pay for high-cost cash managers because they don't have that much deposit. So if we can continue giving them a reasonable rate, they're going to continue depositing all their excess cash with us and not look for alternatives. And that's kind of what we're doing. And so we don't believe that we're going to have large runoff of deposits because we don't have large customers with large amounts they're going to move somewhere else. So we believe if we continue with the formula that we have, that we will maintain a strong deposit base going forward.

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

Thank you for your questions. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-up questions. Thanks for tuning in today. Have a great day.

Goodbye, everybody.

Thanks everyone. 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.