Good day, and welcome to the First Interstate BancSystem’s Fourth Quarter 2018 Earnings 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, this event is being recorded. I would now like to turn the conference over to Lisa Slyter-Bray. Please go ahead.

Thanks, Sean. Good morning. Thank you for joining us for our fourth 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 regarded 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 of the 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 of their mostly 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, and good morning, and thanks again to all of you for joining us on the call today. I’m going to start off today by reviewing our year, and then I will provide an overview of the major highlights of the quarter. And then I’ll turn the call over to Marcy Mutch in order to provide some more detail behind our financial numbers. 2018 was an amazing year for our company. We started the year with realignment of our executive team, allowing us to provide better clarity around roles and responsibilities. With the executive team in place, we formed the next level leadership, our senior leadership team. It is so gratifying to watch these talented individuals develop and collaborate with one another. The gender diversity is about 50-50 male, female, and their age, young, talented bankers, the future of banking. This is the leadership team that is helping us to understand and address the needs of our diverse customer base. In an effort to stay relevant, we continued to build out our technology infrastructure, finishing up projects that were started in 2017 and embarking on new ones. This is all in an effort to make us able to compete in this ever-changing world. This year, we continue to enhance our digital app, which is highly regarded and rated 4.7 at the Apple Store. We’re currently building on online application processes, which will start rolling out in the first quarter. All these improvements will either allow our customers to receive our prices and services in a manner of their choosing and at a time that is convenient for them or they will deliver needed tools for our staff to do a more effective and efficient job. We announced and integrated the acquisition of INB this year and announced the acquisition…

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 third quarter of 2018. And I’ll begin with our income statement. As Kevin stated, our net interest income increased 8% from the prior quarter due to higher levels of earning assets and an expanded net interest margin. Included in net interest income this quarter was charged-off interest of $700,000, which was the same amount as last quarter. Total accretion income on the acquired portfolios was $4.1 million this quarter, which was $500,000 more than the third quarter. Included in this was accretion related to early payoffs of $1.7 million this quarter, which was $200,000 more than last quarter. Prior to the closing of our two pending acquisitions, we expect scheduled accretion to run at approximately $2 million per quarter. On a reported basis, our net interest margin increased 11 basis points to 3.99% in the fourth quarter. Excluding the impact of charged-off interest and loan accretion, our operating net interest margin also increased 11 basis points to 3.84%. The expansion in our operating net interest margin was driven by a 14 basis point increase in our yield on earning assets, excluding charged-off interest and loan accretion, which was offset by a 3 basis point increase in our cost of funds. The increase in our earning assets yields is being driven by increases in both average loan yields and the yields on our investment securities. With the full quarter impact of the rate increase in September, we saw further benefit from the repricing in our loan portfolio, which drove our average loan yields up 14 basis points to 5.02% on an operating basis. The yield on our investment portfolio also increased by 8 basis points…

Thank you, Marcy, and nice job as always. I’m going to wrap up with a few comments about our outlook. We anticipate 2019 to be another year of progress in the evolution of First Interstate from a relatively small community bank to a dynamic regional community bank with a footprint spanning across six states. As always, our focus will be on people, processes and technology. As we increase our presence in fast-growing markets and go against larger banks, it’s critical that we have the technology in place to compete from a customer service standpoint. These improvements will further enhance our community bank model. We are particularly excited about this year’s rollout of enhanced digital capabilities. It will start with the delivery of our online mortgage application process as we head into the height of the production cycle. And additionally in 2019, we’ll introduce online credit card applications. And further down the road, we’ll have online small business loan applications and guided wealth management offerings. We will also be making it easier and more efficient for both our customers and our employees to do business by enabling e-signature and document transmittal through secure e-mail during 2019. Collectively, we believe these new digital capabilities will enhance our business development efforts by making it easier for employees at all levels of the organization to assist customers in starting loan applications and finishing them. We will also improve our overall banking experience by giving customers a wider choice in how they want to engage with First Interstate and do business with us in a way that they want. And other issues that we’re working on is our loan transformation project that will enhance our speed to market for small business loans. When completed, we will have the standardized process in place for closing and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Hi, good morning.

Good morning, Jared.

Thanks for the details on the share count and the expense stuff. I guess, my first question is on the deposits. One, with the outflow this quarter, I guess, how long – you said you’d expect to get those back. Is that something that’s going to take two or three quarters or is that two or three months? I guess, what’s the timing in terms of you think being able to recover some of those DDAs? And then as a correlator to that, we saw really good low deposit beta this quarter. Do you think that that’s going to stay with us with the December rate hike into first quarter?

Just two questions. One, I think the deposit beta is going to be a little higher in the first quarter, so we’ll get that behind us. But we still think our net interest margin will be flat to slightly up even with that. I would say with regards to deposits, shocking to us that they all ran out on the 31st of the month. But normally, seasonally, we have deposits that kind of runoff or deteriorate a little bit in the first quarter as we see in the prior years. But last year, we actually had an increase, which was a surprising first quarter. But then, what we’re going to see is deposits then start flattening out in the second quarter and we normally see our growth cycle in the third and fourth quarter. That’s kind of the cycle we have with regards to deposit balances.

Okay. And that should replicate itself this year with that then?

Yes. I would say that maybe some of the deposit runoff happened one day earlier than normal, but it – I believe that, that probably will be the same cycle that we see.

Okay. And then on the fee income side, on wealth management that has been relatively stable for a while now. Do you think – what are the opportunities to grow that especially in the newer regions? And I guess, how should we be expecting to see that trend over the year?

I’ll have Renee Newman answer that, our Chief Banking Officer.

Hi, Jared. Yes, we are continuing to look for ways for our efficiencies and effectiveness to grow our revenues in the wealth management space. We are looking to expand in the West, so we are – we’ve hired wealth adviser in our Spokane region. We’re looking to do so as well in Idaho, so we’re wanting to strategically place those individuals in our highest opportunity markets.

Okay, great. Thank you.

Our next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Good morning.

Good morning, Jeff.

Kevin, you mentioned you did some pruning in the portfolio this quarter. I guess, could you characterize what you think in 2019, if there’s some more heavy lifting to go? And maybe if you could touch on kind of net growth outlook for 2019 on loans? Thanks.

I’ll start with net growth. We’re looking at net growth to be somewhere around mid-single digits. We’re coming off the high – so we believe that with some of the things that are going out there, that mid-single digit growth is probably what we’re going to be seeing next year. With regards to pruning more asset quality issues, I’m going to have our Chief Credit Officer, Steve Yose, answer that question.

Yes. We’re always looking at opportunities to improve our asset quality. And as you look at what happened this quarter, several of the non-accrual loans, loans that paid off were long-term criticized loans. So we have a focus on our special assets group to consistently look at how – if they are a non-accrual, how we exit those relationships. Do we have a potential to sell those and we will continue to do that in 2019. We don’t know what’s going to happen with the economy, so we hope the criticized loans stay stable. But with the economic winds ahead of us, I can’t say for certain what it’ll look like this year. Other than, we’ll continue our focused effort on improving asset quality.

The good news is that we still have competitors out there willing to take some of these quality assets off our balance sheet, so we hope that continues and they stay healthy during this credit cycle because once they get full of those type of assets, they probably wouldn’t want to take anymore of ours. So…

Fair enough. The reductions in the NPAs, any color on that as far as what those loan types were and may be as a pretty good like down kind of timing wise. If you could just talk about the reductions out of that bucket, that would be great.

Yes. Steve’s going to handle that again.

They were in the hospitality sector. We had some of the hospitality sector as well as some multifamily related to the oil and gas industry. So these were long-term assets that we had been trying to exit, that we exited successfully and with minimal loss.

Great. And one last one, just wanted to confirm the conversion of NBCT. Is that complete? And just an update on are all the cost saves baked in at this point?

Yes. INB is totally completed, converted and all cost saves are now taken – are in place.

Thanks. That’s if for me.

Our next question comes from Gordon McGuire with Stephens Incorporated. Please go ahead.

Good morning.

Good morning, Gordon.

Marcy, I appreciate the color on the expense guidance. I just wanted to confirm that 2.7% (28:41) expense assets you referenced, that was a full year number, correct? And then just appreciating all the noise with the pending acquisitions, the infrastructure, the digital banking investments you’re making, how should we think about that ratio into 2020 as those investments may be slow or you start to reap some efficiencies from that?

So the 2.73% to average assets was a full year projection for our expenses, excluding acquisition costs. And then we would expect that 2.73% to come down as we head into 2020. And again, our long-term goal is to get that down closer to 2.65%. So that’s the direction that we’re headed. We won’t get there overnight, but that’s where our focus is.

Yes. And all this investment in technology and process improvements, that’s always been baked in our numbers. And we’re just hoping that the end is coming in the third quarter, so that we can start not having to have those expenses in our run rate.

Sure. And then, Marcy, on the mortgage guide, the low single-digit growth there, did that include the acquisitions or was that organic for First Interstate?

That includes the acquisitions.

And then the last thing just on the invested liquidity. It looks like the interest-bearing deposits are now kind of yields or now kind of in parity with the investment portfolio. How are you thinking about liquidity deployment here and has that changed any in recent months?

Can you ask that question one more time because I didn’t follow it neither did Marcy.

Sorry. I’m just looking at the investment portfolio and the yields there versus the interest-bearing deposits in your liquidity. It looks like those yields are at parity now. Maybe the interest-bearing deposits are a little ahead of the investment portfolio. And I’m just wondering if there’s any thoughts or changes to your investment strategy going forward?

So that investment portfolio runs off about $120 million to $130 million a quarter, and we’re continuing to invest in that portfolio. We would expect the yield in our investment securities portfolio on average to come up quicker. And then we are looking at the possibility of moving more of our cash into the investment portfolio.

Great. Thank you guys.

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Hi, good morning.

Good morning, Matt.

Can you give us the weighted average rate on new production this quarter?

Yes. It was 5.71%.

Okay. And then the $96 million operating expense run rate in the fourth quarter of this year. I assume that includes the Idaho acquisition. And if so, could you give us the contribution from those two deals in that run rate?

Yes. It does include the Idaho – the two new pending acquisitions. The run rate during – yes, it’s between $4 million to $5 million a quarter.

After cost saves.

After cost saves.

After cost saves are taken out.

Yeah.

Okay, great. And then the – in terms of the deliberate you’ve done with Cascade, do you have that number for full year 2018? I think it was $71 million year-to-date after the third quarter. Just curious where that stood at the end of the year? And whether or not you would say similar headwinds with the two Idaho acquisitions or not?

For the full year, it was just a little over $101 million. And for 2019, we expect that to slow down a bit because we’re not anticipating today any payoff of this next portfolio, although that could happen. But we’re looking at around $40 million of runoff from that portfolio this year.

Okay. And then with the two pending acquisitions, do you see a need to have to do that as well?

No.

Okay. Okay, and then last one, Just any update on the M&A outlook in terms of things that you might want to consider, size, geography, chatter?

I would tell you that there’s a lot of banks, one that would be taken out and paid for, but we’re being very strategic in what we do in moving this company forward as we have in the past. We’ll continue being disciplined exactly who we partner with going forward to enhance our franchise. And I would say that again, we’ll probably be looking to the Northwest and building that growth profile as we go forward, but we need to say no a lot, I’ll tell you that.

You probably hear as much chatter as we do.

Okay. Fair enough, thanks.

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

Hi, good morning.

Good morning, Jackie.

Marcy, question on the $13.9 billion you provided for the average assets for 2019, if I understood that correctly. Are you anticipating a slower level of balance sheet growth versus overall loan and deposit growth in 2019?

Organically?

Yes.

It’ll be...

It’ll be about the same because we didn’t have really robust – we’re thinking about perhaps the same growth for next year.

Okay. And that $13.9 billion number, that is, in average, anticipated for the full year, right?

It is with the IIBK and Community 1st acquisitions coming in early in the second quarter.

Okay. Thank you. Sorry, go ahead.

CFO No. Go ahead.

And then with the share count you provided, and thank you for that, just a point of clarity. Was that basic or diluted?

That was basic.

And do you anticipate any major changes to the diluted factor?

No.

Okay, thank you. And then actually everything else I have already been asked. Thank you.

Thanks, Jackie.

[Operator Instructions] Our next question comes from Andrew Liesch with Sandler O’Neill. Please go ahead.

Good morning, everyone.

Good morning, Andrew.

Yes. Just one follow-up question around your margin guidance. Now recognizing that deposit betas are going to be a little bit higher this quarter, but you also – I mean, the loan yields are moving up nicely as well. Why not more optimism around the margin? Why – what is going to cause it to stay near the flatter end of your guidance?

We just don’t know what – how – we’re increasing our deposit costs up. Again, we’re not getting too much pressure on that, but we just – we always are cautioned in the area around how fast other banks might start raising their deposits, but we feel we’re in a good position. We don’t get a lot of competition after our rate increases and stuff. And I’d say that margin would be slightly up if we have to combat unreasonable – I wouldn’t say unreasonable pricing, just higher prices that would have – we probably want to meet those.

Okay. Thanks.

At this time, there are no further questions in the question queue. This will conclude our question-and-answer session. I would now like to turn the conference back over to Kevin Riley for any closing remarks.

Thank you for your questions. And 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, and goodbye.

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