Good day, and welcome to the First Interstate BancSystem, Inc. Second Quarter Earnings. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to turn the call 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 most 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 is 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, 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, which 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 would 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. So let's get to our results. We generated $60 million in net income in the second quarter or $0.58 per share. We continue to execute well in the second quarter, and our results were generally in line with our expectations, including a 7 basis point expansion in our net interest margin to 3%. We were pleased to see improvements in criticized and nonperforming asset metrics. Our capital and liquidity position remains strong, and our allowance for credit losses is sufficient for our credit profile. All these factors, along with our anticipation of steady expansion in our net interest margin, reinforces our belief that we are well positioned for the remainder of 2024 and into 2025. Expense control remains a key tenet for us, and our expenses came in better than we expected in the second quarter. This was driven primarily by the ongoing prudent management of our base salaries. Our medical expenses continued to run below expectations and as I said, our persistent focus on controllable expenses. We have managed the expense reductions while, at the same time, continuing to make internal investments into our systems and our people. Last quarter, we said one of our focal points…

Thank you, Kevin. And as I walk through our financials, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2024, and I'll begin with our income statement. Our net interest income was $201.7 million in the second quarter, an increase of $1.6 million. Our yields on interest-earning assets increased 6 basis points quarter-over-quarter driven by an increase in loan yields, an improving mix shift and a reduction in investment securities. Our total cost of funding declined by 1 basis point, fueled by a lower average borrowing mix. The net interest margin inflected as we were anticipating for the second quarter. As Kevin mentioned, our net FTE interest margin is 7 basis points to 3%. Excluding purchase accounting accretion, our net interest margin was 2.92%, an increase of 8 basis points from the prior quarter. We continue to expect increases in our net interest margin of approximately the same magnitude sequentially in the third and fourth quarter, which is incorporated in our guidance. Again, this quarter, we anticipate that loans for the full year will be relatively flat, and we intend to use the runoff from our investment portfolio to reduce borrowings. This suggests that our interest-earning assets will decline slightly through the remainder of the year. When we consider this, alongside the trajectory we foresee in our margin, we believe net interest income will increase 3% to 5% in the second half of the year over the first half of the year. You should note that we have revised our rate forecast to 125 basis point rate cut in the fourth quarter. We view our balance sheet as relatively neutral, moving toward a more liability-sensitive position in 2025 as our term borrowings begin to mature. This gives us strong flexibility in light of…

Thanks, Marcy. Our quarter was characterized by stability, and we are pleased that the results were in line with our expectations. We are positioned to manage rate movements well. We are optimistic about our ability to generate improved returns from this point forward. The combination of our ongoing margin inflection, expense discipline, stability in our core asset quality and the balance of our allowance for credit losses provides us with confidence in our ability to generate improving return metrics over the coming quarters, positioning us well as we move into 2025. I would like to wrap up with the recent news about my intention to retire. I am deeply proud of what we have achieved during my 11 years at this great company, but I’m ready to start a new chapter of my life. The Board has retained a leading global executive recruiting firm to conduct a thorough and comprehensive search for the next CEO, and we will provide updates as appropriate. Under this transition plan, I will continue to serve as President and CEO until a successor is appointed and then be available as an adviser as requested. And now, I would like to open the call up for questions.

Thank you. [Operator Instructions] We'll take our first question from Andrew Terrell with Stephens. Please go ahead.

Hey, good morning.

Good morning, Andrew.

Maybe just to start on the non-interest bearing deposits, I'm just trying to get a sense – I appreciate the commentary that maybe the end of period was inflated a little bit. I'm just trying to get a sense for what you view as maybe like the starting point for the third quarter. Like how much would you characterize as being outsized in the balances we can see in this period?

So overall, for the year, Andrew, we think non-interest bearing deposits on average are going to just run in that 26% range, excluding the lumpiness from that deposit.

Okay. Got it. So just model to kind of at 26%.

Yes.

Okay. And then I wanted to ask on just credit. If I back out that $6.8 million, you call this, the construction charge-off in the quarter, still this gross charge-off's roughly $10 million or so. What made up the rest of the gross charge-offs we saw in the quarter?

It just was really just various – we always have about $3 million in consumer and just…

And then some just some various other ones.

Yes, just various other ones, nothing large.

Okay. And then, I mean, last quarter, we talked about like comfortability with the C&I loan. Obviously, you got the third-party valuation that maybe prompted the specific reserve this quarter. I guess from your lens, has the credit deteriorated at all since we discussed last quarter? And then as a follow-up to that, if you're – looking at the charge-off guidance, if you're excluding it from the charge-off guidance, should we assume that means you think there's at least a chance of the kind of lumpier charge-offs here later this year?

What you said, we agree with.

Yes. I think that there's a pretty good chance that we'll end up charging off a healthy portion of that loan that we're fully reserved for.

Okay. I understand. Can you speak to anything that specific has changed the view of this credit?

Well, we just keep on getting more information. As we ultimately said from the beginning, Andrew, is that we were hoping that they would ride the ship and sell the company, and that's what we're kind of still looking at same progression of selling the company. I think what we're seeing is maybe the valuation could be a little different than we anticipated from the get-go. So that's why we're looking at probably a little bit larger maybe loss. But the same direction is happening. It's just that we're looking at trying to be more realistic. As we've proven in the past, we take our lumps early, we take them quick and we try to get things behind us. We don't try to kick the can down the road. So we're taking a really worst-case scenario here, and we hope it can be better, but we're making sure that we're well positioned to take care of this credit.

Understood. Okay, even with kind of a charge-off potentially later this year, you do feel like you're well reserved – with the reserve for it this quarter?

Yes, correct.

Okay. I appreciate it. And Kevin, congrats on the retirement. I hope you have a lot of fishing trips planned.

I got to do better than the last time I was out with you.

Thank you.

We'll go next with Matthew Clark with Piper Sandler.

Hey, good morning, everyone.

Good morning, Matt.

On that larger C&I non-performer, can you just quantify how much in reserves you have set out against it?

We're not going to disclose that, Matt.

I'm just trying to forecast the charge-off that we might see, which is going to come out of reserves.

Yes. The thing is it's not going to – it should not affect earnings. So I think that when you're trying to look at earnings, you can just say that's not – it shouldn't have an impact on the earnings stream.

Understood. Just trying to forecast it. Okay. And then on the core NIM, I think the guide was that the reported NIM expansion continues at a similar pace, accretion step down in the second half. But can you just speak to the core NIM and maybe the June average core NIM?

So on the core NIM, we expect the same trajectory that we would continue to see expansion there. The June NIM was 2.95%. The core NIM was 2.95%.

Okay. And the deposit cost increase was similar, at least interest-bearing to last quarter. Do you have the spot rate on interest-bearing deposits?

At the end of the quarter, for June, it was 1.97.

Okay. Okay. And then on M&A, I assume it's fair to assume that there's no interest in M&A at this stage given your transition, Kevin?

At this point, yes, I would say that. But I would say that we're still in contact. Hopefully, we'll get a CEO that it picks up the time and move this company forward just as it has been moving forward. So I don't want to think that we're going to change our trajectory much. But at this point, I would say that if I was a selling company, I don't know if I want to sell into a departing CEO. So things are pretty much a little bit on hold at this time.

But the Board made it very clear that they expect that to still be part of our strategy going forward that we would be an acquisitive company.

Okay, that's helpful. Thank you.

We'll hear next from Jared Shaw with Barclays.

Hi, good morning.

Good morning.

Kevin, congratulations on the next step as well. Looking forward to seeing what that looks like. Maybe just a couple of follow-ups here. When you look at the deposit side, what are you expecting for CD retention and sort of what's the repricing trend there? And I know you said you're not expecting to see significantly lower deposit costs as rates move lower. Does that mean that maybe with the DDA normalization, we should expect to see time deposits return to growth?

No. I don't think you're going to see return – pretty much flat, Jared, from this point forward.

Yes. And I think we'll see CD balances pretty stable.

Yes.

Okay. But what should we expect, I guess, for deposit beta on the way down? Maybe if we look at that first 25 basis point move and then after that, what – how aggressive do you expect to be on being able to reprice some of that?

Well, first of all, Jared, about 18% of the deposits are indexed to short-term rates. So they will immediately move when rates come down a quarter. I would say there’s probably going to be a little bit of a lag with regards to CD repricing down even though about 90% of our CDs reprice in a 12-month period because they’re shorter term. I would just say that that’s going to be a little bit more of a lag of repricing down, but the money markets will move immediately. Again, in the way up, we didn’t really change a lot of our rack [ph] rates. A lot of our customers moved over to the index money market, which by contract it goes down when rates go down.

Okay. Okay. And then on that large deposit that you mentioned, is the expectation that, that was – is sort of a temporary move in and that, that could move out or just that we shouldn’t expect that level of growth again going forward?

It was a temporary. It moved in, and it moved out. It’s a – deposit [ph] that comes and goes, and it was just a little bit larger at quarter end than normal. So it comes in and goes out periodically. And we don’t control the timing of it, but it’s bumpy, and the bump was at quarter end.

Okay. Okay. And Marcy, you mentioned about you’re not expecting to see a growth in the undrawn commitments on, I’m sorry, a growth in the – yes, the undrawn balances on construction, but pricing is going higher. Where is pricing now on new construction lines?

Yes. So on construction, on average, our loan is around 7.5%. Construction is a little bit higher than that.

Okay. Okay. Thanks. And then just finally for me, I guess, what’s the securities cash flow on a month that we should be thinking could be going towards paying down the wholesale?

Jared, that’s in the investor deck by – in detail. So I can’t remember which page...

Slide 12. Okay. All right. I see that. Yes, yes. Okay.

Yes.

Great. Thanks a lot.

You bet.

We’ll turn now to Chris McGratty with KBW.

Oh, great. Good morning.

Good morning, Chris.

Good morning, Chris.

Hey Kevin. Marcy, a question for you on expenses. If I take the new guide, it roughly maps about 160 a quarter. If we go into next year, is there any reason why this isn’t the right run rate to jump off and maybe put a low single-digit inflation rate on that, anything we would point us either way?

Yes. So I think I would go up a little bit from 160 a quarter. I think it’ll be a little slightly higher than that. But yes, then that should be a pretty good jump-off rate.

Okay. Thank you.

You bet.

And we’ll go next to Timur Braziler with Wells Fargo.

Hi, good morning.

Good morning, Timur.

Just circling up again on that larger C&I credit as it moves to resolution, I’m just wondering if it is charged off, reserves come down. Is the anticipation that those reserves are kind of backfilled? Or is it okay to see that allowance ratio maybe trend a little bit lower as that loan is resolved?

The balance ratio will come in a little bit lower. As you look at our actual asset quality outside is large. It’s improving every quarter. Credit is down for the third straight quarter. So our asset quality continues to improve, and the allowance is reflecting that as well as the specific reserve on this larger credit.

Okay. And then the linked-quarter reduction in the unfunded reserves, maybe just talk to what the driver there was?

I mean, just normal funding of the – oh, on the unfunded reserves, I'm sorry, [indiscernible]. Okay. Yes, it was just that we review an annual review of our methodology. And again, reserve – unfunded reserves came down. A review of our methodology, it just kind of drove that change.

But the unlike balances are down.

And then – okay. And then just maybe lastly for me, just looking at balance sheet size. I mean, there’s pretty good opportunity on the bond repricing or at least bond maturities. I know you had mentioned that’s going to go towards paying down wholesale funding. I guess, as you’re looking at overall demand on the asset side, when do you think the balance sheet is going to stabilize here and start showing some inflection higher?

Well, I think it could change – it would actually show a difference in mix. I think it’s a balance sheet – I think that it what we’re hoping it for is the investment portfolio will continue to shrink, and the loan portfolio would start to expand. So that would help earnings also. But I think the thing is then in deposit growth, hopefully, deposits stabilize and start growing a little bit so we can pay down things. So I would say hopefully, in 2025, there’s – interest rates come down, the economy picks up a little bit, it becomes a little bit more robust. And that starts shifting in the first part of 2025, not the second part of 2025.

Yes, kind of as we talk to our bankers, one of the things they feel like people are on the sidelines as far as the election, kind of see the outcome of the election, waiting for the economy to be – that trajectory to be a little bit more clear. And so I think as kind of all of that settles out, we’ll begin to see some loan growth.

Great. Thanks.

There are no additional questions at this time. I’d like to hand the floor back over to Kevin Riley for any additional or closing comments.

Well, I’d like to thank everybody for their questions. And as always, we are welcome for calls from our investments and analysts. So please reach out to us if you have any follow-up questions, and I want to thank everybody for tuning in today. Good-bye.

Once again, ladies and gentlemen, that will conclude today’s call. Thank you for your participation. You may disconnect at this time.