Good morning, ladies and gentlemen, and welcome to the First Interstate Bank System Inc. Q2 2023 Earnings Conference Call. At this time all lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Thursday, July 27, 2023. I will now turn the conference over to Andrea Walton. Please go ahead.

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 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 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.

Thanks, Andrea. 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 some additional disclosures that we believe will be helpful. The presentation can be accessed on our Investor Relations website. And if you haven’t 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. We performed well in a difficult environment during the second quarter reflecting the strength of the franchise we’ve built, while we see pressure on deposit costs, balances performed as expected, benefiting from the strength of our markets and the diversity of our client base. We have not had to take any extraordinary measures around liquidity. Credit continues to perform well. Our capital is strong, and importantly we are beginning to see some stabilization in net interest margin, which has remained flat around 3% for May, June and July. Though we expect the environment to remain challenging for the banking industry for the remainder of the year, we are well positioned to play offense. We generated $67 million in net income or $0.65 per share in the second quarter, which includes $0.01 of severance expense primarily related to the strategic repositioning of our home lending business, which we will discuss later in the call. As we indicated on our last earnings call, we did not see any meaningful disruption in customer behavior following the bank failures in March. During the second quarter, it was very much business as usual in what we would characterize as a relatively normalized operating environment. We…

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 2023, and I’ll begin with our income statement. Our net interest income decreased by $20.5 million, which was primarily due to an increase in our interest expense resulting from higher rates on interest-bearing deposits and a shift in our funding mix toward higher cost, short-term borrowings and interest-bearing deposit accounts. Purchase accounting accretion was also $600,000 lower quarter-over-quarter. Our reported net interest margin decreased 24 basis points from the prior quarter to 3.12%. Excluding purchase accounting accretion, our adjusted net interest margin also decreased by 24 basis points to 3.05% from the prior quarter as the 9 basis point increase in the average yield on earning assets was more than offset by the increase in our total cost of funds. Looking to the balance of the year, given the recent trend in our deposit costs, we are now expecting our interest-bearing deposit beta to reach the low- to mid-30% range by the end of the year. This outlook assumes one additional 25 basis point rate hike in the second half of 2023. As Kevin noted, in June and July our net interest margin was around 3%. Under the re-pricing assumptions just noted and assuming deposits remained stable through the end of the year and average earning assets approximate $28 billion, we would now expect this to approximate the net interest margin for the balance of the year. Our total noninterest income increased $27.7 million quarter-over-quarter, primarily due to the $23.4 million loss on investment securities and the $1.9 million net write-down fair value of loans held for sale recorded during the first quarter. Excluding these items, non-interest income increased about 6%…

Thanks Marcy. Now I’ll wrap up with a few comments. Given the relative stability in our outlook from here, the strength of our balance sheet and the strength of our footprint, we continue to believe First Interstate is well positioned to play offense. As such, we are moving forward with several initiatives to further strengthen the franchise and improve our ability to generate long-term profitable growth. One of these initiatives is a shift in our mortgage business away from a mortgage loan originator model. We have implemented a new digital loan origination system enabling us to push the sourcing of loans across our branch network, while the underwriting is and the fulfillment is now fully centralized. Not only will this improve our operational efficiencies for the benefit of our people and our clients but is much more cost-effective delivery mechanism for the company, allowing this product to be more profitable and were scalable in the future. As part of this restructure, we have eliminated most of our MLO positions, which contributed to the severance expense this quarter that Marcy mentioned earlier. Going forward, we will look to leverage our network of more than 300 retail branches to generate referrals for our digital mortgage loan origination platform. And we will incent our retail staff for leads they generate. We have just launched this program, but the initial results are encouraging, and we are excited about the possibilities. In August, we will be introducing our new suite of consumer credit cards, which will offer a more robust set of benefits and a more competitive and user-friendly rewards program. We believe this new suite of cards, along with our marketing initiatives, will help us achieve our goals of growing our customer base and expanding existing customer relationships, particularly in our new markets. We are also strengthening our commitment to being a good corporate steward and reducing our carbon footprint to the investment in two solar projects, one in Iowa and one in Oregon. The electricity generated by these two projects will offset a good portion of the Scope 2 emissions from our operations in these two states. Heading into the second half of the year, we will continue to prioritize prudent risk management and expect to deliver solid financial performance. Expect us to remain thoughtful regarding new loan production which will likely result in a full year loan growth being in the low single-digit range. Finally, we are pleased to announce that the Board has approved a $0.47 dividend for the third quarter. Given the strength of our balance sheet, the prospective earnings power of the company and our high and growing capital ratios, we are well positioned to maintain our dividend at the current level which is an important component of the total return that we delivered to our shareholders. So with that, we’ll open the call for questions.

Thank you. [Operator Instructions] Your first question comes from Jared Shaw from Wells Fargo. Please go ahead.

Hey good morning everybody. Can you hear me? Hello, hello, hello.

Can you hear us Jared? Can you hear us, Jared?

I can hear you. Okay. So maybe sticking with the – starting with deposits, do you think we’re – do you think we’re at a floor for dollars of DDA here? Or is there still more pressure on sort of the dollars of DDA.

Non-interest bearing, you’re talking about, Jared?

Yes.

Well, we’ve seen some stabilization in that, but we’re still projecting that there will be some deterioration as we move through the remainder of the year, but we are seeing some stabilization in that.

And so Jared, by the end of the year, we’re thinking noninterest gains should be about 25% of total deposits.

Okay. 25% with the overall balance of deposits still following those trends in June, still seeing an upward bias as we go through the year?

Yes, flat deposits through the balance of the year.

Okay. And then on the loan yields, thanks for the color on loan yields ex construction. What’s the balance of remaining construction loans that could be funded? And should we be – what’s the timing of the funding of those loans?

So there’s still about $1.1 billion to be funded based on around $75 million a month?

Jared its John. So, the yield [indiscernible] commitment is just over 5.3%. So as we roll forward, that yield drag that we were referencing that will lessen as the year goes on. But it’s about $75 million a month, as Marcy mentioned but the funding kind of picks up as the year progresses.

Okay. Okay, that’s good. Thanks. And then when we look at the securities cash flow slide, should we just assume that you to pay down FHLB and as we move forward, should we assume that securities are smaller as a percentage of assets and that wholesale funding goes lower?

[Indiscernible] for loan growth, we’ll be paying down our funding.

Yes. And we expect loan growth pretty modest into the back half of the year.

Okay. And I guess just finally for me. When you look at the rollout of cards that you’re talking about, how is the proposed legislation, the proposed Durbin legislation on interchange does that impact your timing or your enthusiasm for that product?

No.

No.

So if for some reason that went through that wouldn’t change the economics of rolling that out?

Well, the thing is that, first of all, I’ll be honest with you, I am not fully aware of the new amendment law that you are talking about because Durbin usually is on debit cards was on credit cards. But if you are going toward credit card, it is going to hurt the economics of the product.

Okay. Yes, there is a proposed legislation to have the interchange impact credit cards as well. So it feels like it’s a long shot, but it seems like they are trying to sneak it in on must pass legislation. So…

That will have an impact on us and every other bank.

Yes. Okay, all right thanks guys.

Your next question comes from Brody Preston from UBS. Please go ahead.

Hi. My question is on the NII guidance. So I’m looking at that as it kind of implies flattish NII in the back half of the year. I was just curious if there are any factors or any levers you could pull that would cause it to be either above or below that?

The only factor would be is really, as we’ve touched back in the past, it’s really based on our assumption of deposits right now, deposits balances have been stable since the end of April to date. So, if deposits continue to perform the way we think they are going to perform seasonal through the remainder of the year or growth that should be stable.

Got you. And then just on the – on that metro office construction project, I was just hoping for a little more color on that, like what metro was it in? And any details you can give on that one plus. Are there any updates on the two CRE NPLs from last quarter?

So the metro offers that we talked about today was the one that was in Seattle that we talked about. And we have a qualified new tenant going into that. We took a charge-off wrote down to level and it’s it should – and we had some more equity coming from the investors. So, from this time forward, we’re looking at that we should perform going well going forward, but it did cost us a little bit to get it into that position.

So that was the one that we talked about last quarter. And so it should be resolved, the one in Seattle.

Understood. And then just last one for me. On the expense base, is there any other opportunities to rationalize that outside of the mortgage that you guys announced this quarter?

We continue to look at that as their staff turnover. We continue to look at the fact that are they needed? And part of the goal we had this year for Interstate we’re working on, and we don’t have any kind of estimates on that is that we’re looking at a process to automate some manual processes in the back room, where there’s a number of processes done and then re-entered into the operational groups. So, we’re looking at how to make that, so it goes – flows straight through. So, there are some possibilities to eliminate some staff and operations as we modernize some of the processes.

Great. That’s it from me. Thanks for taking the questions.

Thanks.

Your next question comes from Chris McGratty from KBW.

This is Nick Moutafakis for Chris McGratty. Good morning guys.

Good morning Nick.

Good morning Nick.

Hi. Maybe just on the deposits, just going back to the NIBs, are you seeing primarily outflows from the – from commercial side on the NIB mix? And is there any catch-up in the retail, you think, on a go-forward basis?

Actually, seasonally, we’re seeing commercial growth and the downward a little bit more on the retail side. So seasonally, that’s what we’re expecting, and we are seeing that our commercial balances are growing.

Hi. Maybe just on Okay. And then maybe just on the CDs, what’s the duration on that portfolio now? Is it relatively short?

Well, most of the CDs that were put on is like 12 months or less, so the duration is pretty short.

Okay. Just trying to get a sense if the forward curve plays out and we start to get cuts in 2020 forwards, you kind of comment on how you think the margin reacts to rate cuts on the way down.

Well, right now, we would characterize ourselves as slightly liability sensitive, and that we would benefit on a downward rate cuts.

Okay, thanks guys.

Thank you, Nick.

[Operator Instructions] Your next question comes from Jeff Rulis from D.A. Davison. Please go ahead.

Thanks. Good morning. Question on the criticized loan balance increase, that $20 million. What segments was that in? And was that acquired legacy credits? Just looking for a little color.

It was acquired loan. It was – it’s in Arizona. It’s a commercial…

Criticized loan.

Oh, criticized, I thought I was talking about [indiscernible].

Yes. Yes. And so criticized loans, that was – those were acquired and largely in the senior housing sector. And so again, we expect those to improve over the long term is because we’re – as the states kind of resolve the reimbursement rate issues, we could see some improvement in those credits.

And we’re forecasting – just so you know; we’re forecasting that our criticized loans should go down from here throughout the remainder of the year.

And that, Kevin, is that resolution of some of these credits? Or is that broad-based other improvement that you see.

It’s the resolution of these credits as well as other credits that are in that portfolio.

Okay. I appreciate it. And you mentioned the elevated charge-offs this quarter were related to the office credit. Is that right?

Yes, 85% of the charge pretty which was the office credit in Seattle.

Great, thank you. And then Kevin, and Marcy, you touched on it as well, but Kevin mentioned the margin in June and July was near 3%, I believe and just wanted to clarify, Marcy, you’re kind of in the guide as well. Is that the expectation that you’ve moderated and so for the balance of the full quarter average could be down, but kind of hugging the 3% at this point?

That is correct.

Okay. Great. And last one for me would just be interested in the competitive – on the deposit side, not just your own customers’ sort of asking rate, but just seeing the peer landscape, how aggressive do you see pricing amongst peers in your footprint?

Well, it varies geographically, but I would tell you that everybody is pretty much in the same place and kind of really where the short-term rates are. So it’s – I would say, pretty much everybody has moved to the same position. So it’s pretty competitive.

Yes, it is very competitive and really for credit unions as much as anything that kind of tend to price up some deposits.

Okay, I appreciate it thanks.

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Again, 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 thank you for tuning in today. Goodbye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.