Hello, and welcome to the First Interstate BancSystem, Incorporated Second Quarter Earnings Conference Call. My name is Harry, and I'll be coordinating your call today. I'd now like to hand you over to our first speaker, Lisa Slyter-Bray to begin. Lisa, please go ahead.

Thanks, Harry. Good morning. Thank you for joining us for our second 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. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements 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 the non-GAAP financial measures may be found in the body of the earnings release. And a 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. Again, this quarter, along with our earnings release, we have published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you have not downloaded a copy yet, I encourage you to do so. I'm going to start today by providing an overview of the major highlights of the quarter. And then I'll turn the call over to Marcy to provide more details on our financials. I'm very pleased with our performance this quarter. We had good contribution from the entire team across our footprint, resulting in accelerated loan growth, significant expansion in our net interest margin, and further improvement in asset quality, in addition to successfully executing on the Great Western Core System conversion. All of this resulted in a substantial increase in our profitability as we generated $0.92 in earnings per share, excluding acquisition related expenses and some other items. We are starting to see the benefits of our increased scale following the merger, particularly given our strong revenue growth, as our adjusted efficiency ratio improved to 50.8% from 62.2% from the prior quarter. Underlying our strong performance, our healthy economic conditions throughout our markets, which contributed to 6.4% annualized loan growth, excluding PPP loans. In the second quarter, our loan production was 30% higher than the prior period, with growth accelerating as the quarter progressed, ending with 10% annualized growth in the month of June. Our well balanced production resulted in increases in most of the major portfolios. Headed into the third quarter, we are capitalizing on this momentum, and we have a strong pipeline going into the second half of the year.…

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 first quarter of 2022. Of course, a significant portion of the variance will be the full quarter impact from the Great Western merger. So as I move through my review, I will just focus on any other notable items, and I'll start with the income statement. Our net interest income increased by $59.9 million, as we saw improved yields along with an increase in average earning assets. Our reported net interest margin increased 45 basis points from the prior quarter to 3.25%. Excluding purchase accounting accretion and PPP related income, our adjusted net interest margin increased 36 basis points to 3.01% from the prior quarter driven by a favorable shift in our mix and increased yields on our earning assets, while our cost of funds was unchanged at 10 basis points. With the continued redeployment of our excess liquidity on an average basis, loans increased to 58.1% of earning assets in the second quarter, up from 55.6% in the prior quarter. Looking ahead, we believe we're well positioned to see a continued expansion in our net interest margin due to a number of factors. We anticipate a continuation of the positive earning asset mix changes into the third quarter. Investment security purchases continue to be accretive to current book yield. New loan production is coming on the books at higher rates and is currently at or above roll-off yields. And variable and adjustable rate loans and securities will continue to benefit from the recent Fed rate increases. All of this will more than offset some anticipated increases to funding costs. We're beginning to raise our deposit pricing as we head into the third quarter…

Thanks. Thanks, Marcy. I'll wrap up with a few comments on our outlook. Our markets remain resilient, and we have not yet seen higher rates or inflationary pressures having a material impact on economic activity, loan demand or asset quality. Loan production remained strong and we see many catalysts for continuing our positive trend in loan growth. As I mentioned earlier, our legacy First Interstate markets are performing very well, and we are seeing better than expected trends already from the acquired footprint. And we continue to work with our colleagues who joined us from Great Western to accelerate business development efforts in our new markets. This includes Omaha and Lincoln area where we have put new leadership in place in Colorado and Arizona, where we believe we can more effectively capitalize on the strong economic activity in these markets. Additionally, as rates move higher, it is likely that we will see a decline in payoffs, which are less than one of the headwinds to loan growth. Given these catalysts and the trends we are seeing, we are optimistic that we can achieve the mid-single digit annualized loan growth over the second half of the year, which is an improvement from our outlook a quarter ago. While our growth outlook has improved, it should be noted that through our proactive management practices, we continue to resolve acquired credit challenges well inside of our initial loss assumptions. We told you on the onset of the acquisition, that the credit marks were capital that belong to the shareholders. We take that responsibility seriously, and we are very proud that we've been able to recoup some of those marks for the benefit of all constituents. As Marcy mentioned, we expect to continue seeing expansion in our net interest margin. And with the core…

Thank you, Kevin. And our first question is from the line of Jared Shaw of Wells Fargo. Jared, your line is now open if you'd like to proceed.

Hey, good morning. Thank you.

Good morning, Jared.

Hey, everybody. Maybe just starting on the credit side and the provision, how much of the provision reverse or I guess was most of that provision reversal Great Western, and just the better performance there? And how should we be thinking about the allowance ratio here at, call it, 129 ex-PPP and then migrating toward that day one level with the combined bank?

So Jared, the provision reversal of $1.7 million was really reflective of the credit quality of the entire portfolio. That was slightly you know, offset by kind of a negative bias. So higher qualitative factor for macroeconomic factors. In terms of going back to day one, again, we were around 120 as of CECL day one, we're at 128 now and as we continue to see credit improvement, which we expect to do, it will be slightly offset by probably a more negative bias toward a negative economic outlook. So it's hard to say, it's only 8 basis points, how quickly we'll go back to the day one. I would expect it to stay kind of stable from here. It was not any big shift one way or another, unless we see something turning in the economic conditions more negatively than we are today.

Yeah. I think I'll just add a little bit, Jared, to that, right. I think the thing is that we believe asset quality will continue to improve right now in the short run, even though the macroeconomic factors might get a little bit worse, they might be - we're looking at, they could offset each other, improvement in asset quality macroeconomics, so they all offset. So we think our allowance should be pretty much stable from this point until something drastically changes.

Yeah.

Okay. And then in terms of like the remaining loans that you're trying to resolve from Great Western, any change in sort of the pace of that, either the appetite for sales or helping to work that out? Or how should we be thinking about that continued resolution?

I think the thing is - I think as you look at, Jared, is that we're working through it. The pace of getting rid of it is going just the way we expected. It's going very well, and it's not going to be any kind of wholesale selling of the loans, so.

Yeah. We'll work through the criticized book just in the north course of business and the held for sale will most likely come off by the end of the year.

Okay. Thanks. And then on the funding side, you've been able to keep data extremely low, which is great. As we go forward here, how should we be thinking about what you'll do to defend deposits at this level in terms of beta? And how does the deposit mix look with the potential for DDA growth or stability from here?

Yeah. I think that these – you know, last rate cycle, we were pretty aggressive with our deposit pricing because we could afford it because we're very asset sensitive. And so we're not going to see the beta that we saw last time, which – look, it was about 27%. We are going to increase some of our pricing in the deposit area to give our employees a product to be able to defend our position within the market. And also, I think it's - we have the ability to take market share due to the fact that some other banks are unwilling or unable to increase deposit costs. So we're going to do some deposit price raising in specific areas to defend and possibly grow market share. But it will not be at the beta that we saw in the past rate hikes. And it's not going to eat into our earnings projections of the future either.

Okay, great. And then just finally for me, any update on -are you still seeing similar trends in terms of migration into the markets from some of the coastal areas? Or has that started to slow down at all?

No. It's continuing, and it's pretty robust. So it's like we said, in my remarks, economic activity is strong, pretty much throughout our footprint, and we have not seen that kind of come down much yet.

Great. Thanks.

And our next question is from the line of Jeff Rulis of D.A. Davidson. Jeff, your line is now open, if you'd like to continue with your question.

Thanks. Good morning.

Good morning, Jeff.

This is actually Andrew Gorzka on for Jeff Rulis. I just had a question on specifically relating to deal conversion, and the closing of the deal. Now that we're through both of those, just wondering how net personnel flow has gone? Are you guys seeing departures or new additions?

Can you clarify that question again?

Now that we're through the closing and conversion of GWB. Just wondering about just personnel employee flow, are you guys seeing additions to your team or departures?

Well, the thing is - you're talking about unexpected departures and employees of Great Western. Is that what you're talking about in that area?

Right.

But no, quite frankly, we - I mean, it's typical in a bank, you're going to lose a banker here and there. We're not seeing anything outside of normal swapping of some people back and forth from other banks. So no, we do not see any major departure of employees that we really wanted to stay on.

Okay. Thank you. And second question, just wondering, gain on sale expectation for 2023, for mortgage/

You know, I think that's a little bit too early for us to comment on that at this point. I think we've talked about before, we have a digital product that we intend to roll out across the Great Western footprint. So we're hoping to see some increased volume from that product. But at this point, I'm not going to speak to 2023 expectations.

Okay. Thank you. Next question is hard. Loan growth in June was at 10%, and now with guiding to mid-single digits. Was the growth in June due to demand getting pulled forward in anticipation of higher rates in the future?

No. I think it just was the growth in - when we say mid-single digits, I think we're going to have a good third quarter. And I think the fourth quarter will be normally seasonally like we've seen in the past where growth will be a little harder in the fourth quarter due to the fact that lines you know, or pay you off and stuff like that. So you have that headwind. So that's why we're saying mid-single digits. You know, we're hoping that one quarter will be better than the other, but that's why we're targeting mid-single digits.

Yes. That's into the second half of the year, so just to be clear.

Got it. Thank you. And last question from me. Just wondering about buyback appetite going forward with the TCE ratio at 6.6%, and the CET1 ratio down linked quarter?

Well, I think the thing is we have - we still believe we have excess capital to do share repurchases. And the Board authorized $5 million, and we bought back $1.7 million, and we will continue to look at our position with regards to buyback as we move forward.

Okay. Thank you. Congrats on the quarter.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Andrew Terrell of Stephens. Andrew, your line will be open now, if you would like to proceed with your question. Andrew Terrell of Stephens, your line is open now.

Can you hear me?

Now we can hear you. Go ahead.

Hi, Andrew.

Hi, Kevin. Hey, Marcy. Sorry about that. I wanted to start on the expense side, maybe for Marcy, reiterated the $160 million run rate by 4Q. I was curious when you announced the deal, you expected, I think, $56 million annually in cost saves. How much of that has been realized to date? And do you think there's any opportunity still to do better than the $160 million 4Q run rate? Or does kind of some of the inflation, maybe continued investments, limit that ability?

I…

Yeah. So we're right in line with where we expected to be. Andrew, we're not anticipating any other changes based on inflation or other investments that we've seen that are going to take us above that $160 million in the fourth quarter.

Yes. I think the thing is - Andrew, I'll put it another way. I think we're seeing a little bit better in some of the expenses than we anticipated, but we have inflationary expenses that are creeping in. Soaring wages are putting pressure on that in some of the other areas. So I think where we're seeing increased costs because of inflation is being offset because we're doing better than we anticipated.

Yeah, understood. Okay. And do you have, how much of the just total announced cost saves you've realized like a percentage to date?

They're all - my finance people are kind of sitting here, shaking their head. They are - let's get back to you on that.

Yeah, we can get back to you…

Yeah and then - no problem. Thank you.

But the most of it, Andrew, will be in the second half of the year. So again conversion may play in, so, okay…

Yes. Got it. Okay. Wanted to move over to the deposits. It looks like the runoff mostly this quarter was from kind of the higher cost or higher beta acquired balances. Do you anticipate any more of those to kind of move out of the bank in the back half of the year? Or do some of the actions you're taking on pricing kind of prevent that? And then just overall thoughts on what you expect for net deposit growth in the second half.

Yeah. That's a great question. I would say that we don't anticipate any of those large amounts to go out that we saw in the second quarter. I think our pricing will stem the tide of other maybe outflows. But what we're looking at around with deposits is pretty much being flat from here to the remainder of the year.

Got it, okay. And last question just on - just the efficiency ratio. The revenue trends sound really solid. You've got continued cost savings coming through, the benefit from Fed interest rates in 3Q, 4Q. Do you think you can work the efficiency ratio, it improved a lot this quarter, but do you think you can get it down to like a low 50% -type number in the back half?

We're hoping. We're hoping.

Yes. We'll go lower than we were this quarter, yes, we should continue to come down.

Okay. I appreciate you taking my questions. I'll step back.

All right. Thank you.

Thank you, Andrew.

Thank you. And our next question is from the line of Matthew Clark of Piper Sandler. Matthew, your line is now open.

Hey, good morning.

Hi, Matt.

Morning, Matt.

Yeah. That was a good question there by Andrew, and one of mine that I was going to ask. It does seem like if there's still a fair amount of cost saves left to be realized by the end of the year, your run rate should come down even if you assume some annual growth in comp, but we can follow up on that. Shifting to the core NIM, the core margin. Do you happen to know that the average core margin was in the month of June? Just trying to get a sense for whether or not we might see core NIM expansion that might be larger than what we saw here in 2Q?

So, Matt, we don't normally give out that information. And so I think I'm just going to leave it at that. Again, we continue to have 26% of our loans that are going to reprice immediately part of our investment portfolio even if we do a little bit of - have a little bit higher cost of funds, we should see core net interest margin expansion next quarter.

We're not just going to try to tell you what the number might be, but it will expand.

No. I hear you. 36 might be a stretch, basis points Yeah, now the - and then did you happen to - I guess I'm trying to hone in on kind of the deposit cost increases that we might see. I know you mentioned that the beta is going to be lower this cycle, no reason for it not to, given your loan to deposit ratio. But any comments on kind of the spot rate on deposits coming out of the quarter or kind of rates on promotion on some promotional offerings you might be using right now?

So that's - go ahead…

Well, first of all, I feel those who haven't heard the promotional rates that were going to be offered, so it will be a little bit premature to start talking about it on our earnings call. But the rates are going to come up. I mean we're not - we're trying to look at the market. We're trying to be protecting it. You have credit unions out there. You have other online banks that are out there offering and our customers, we're making a lot of money, want a return on their money. So we're just going to be kind of very strategic, surgical, and trying to price the deposits in areas where we believe that we have to give our customers that return. But again, it's - we're going to be very cautious. We're not going to try to go to hog wild with regard to pricing. But I think if we have to - our customers want increases, and I think we have to proactively move in that direction.

Okay. Thank you.

Thank you. And our next question is from the line of Chris McGratty of KBW. Chris, your line is now open. Please proceed.

Great. Thanks. Kevin or Marcy, I'm interested in the remixing comment on the balance sheet in your prepared remarks. You took cash down quite a bit in the quarter. So I guess two part question. What's the - what do you think is the reasonable amount of cash that you need to run? And then also, maybe monthly or quarterly cash flows off the bond book. And presumably, if you're guiding to flat deposits, there'll be some remix going forward? Thanks.

Yes. So the cash flow coming off of the investment portfolio is about $300 million a quarter. With regard to holding cash balances, we're going to try to hold cash balances of, I would say, below $500 million. And in regards to deposits, flat. What was your part of the question Chris?

Just on an average basis, the loans will come up…

Yeah…

Quarter-over-quarter. We expect to continue to see loan growth that we can fund with some of that security portfolio runoff.

Got it. Okay, great. And we've seen some of your peers, given what the futures market is pricing for cuts reduce - take steps to reduce some of the asset sensitivity or lock it in. I'm interested in any thoughts there about just strategies or swaps you might be doing to kind of lock-in if we do get a cut in the next 18 months?

Yeah. That - and Chris, that leads into why we did - we got rid of the $500 million swap, the flow, some of the sub So that's why we got rid of that to start changing the balance sheet a little bit to protect from a down rate environment. So that was one that actually took and we're looking at other actions. We do have another $200 million swap out there. So we are looking at taking - but we don't want to do it all in one interest rate cycle, just like we didn't want to invest the whole investment portfolio in one interest rate cycle. We're trying to be cautious of how we do that. But I hear what you're saying, and we are looking at that.

Okay, great. Thank you.

Thank you. We have no further questions being registered at this time. So it's my pleasure to hand back 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. And thanks for tuning in to the call today. Good-bye.

Thank you to everyone who has joined the call today, this concludes. And you may now disconnect your line.