Good morning, and welcome to the First Interstate Bank System First Quarter 2018 Earnings Call [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Margie Morse, Investor Relations. Please, go ahead.

Thanks, Robert. Good morning. Thank you for joining us for our first 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 in 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 the reconciliation to their most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. Additionally, a presentation with information about the recently announced definitive agreement, between First Interstate BancSystem and Northwest Bancorporation, is available on the webcast and presentations page of First Interstate's Investor Relations website. Joining us from management this morning are, Kevin Riley, our Chief Executive Officer; and Marcy Mutch, our Chief Financial Officer; along with members of our management team. It's also great to have Russ Lee, President and CFO of INB; and members of his leadership team here with us today. At this time, I'll turn the call over to Kevin Riley. Kevin?

Thanks, Margie. Good morning, and thanks again to all of you for joining us on the call today. I'm going to provide an overview of the major highlights of the quarter and discuss the acquisition, we announced yesterday. And then Marcy will provide a little bit more detail around our financial results. We got off to a good start in 2018. We had positive results across most of our key metrics, and we also saw a significant increase in our levels of profitability. On a reported basis, we had earnings per share $0.65 this quarter, which represents a 27% increase over the first quarter of last year. It's worth noting that our reported earnings this quarter, included merger and severance-related expenses, which had a negative impact of $0.05 per share. So on a normalized basis, our earnings growth and returns were even higher. On the year-over-year basis, we also saw a significant improvement in our performance ratios as our return on assets increased to 1.22% from 1.11%, and our return in equity increased to 10.34% from 9.52%. Clearly, we are seeing the positive impacts of the Bank of the Cascades acquisition, and a lower corporate tax rate flowing through to the bottom line. As we've discussed over the last few quarters, we are committed to generating a higher levels of organic balance sheet growth, where our results of this quarter provide further evidence that we're making some solid progress in this area. Historically, we usually see a decline in loan balance during the first quarter due to softer loan demand and seasonal pay downs of ag lines. That said, during the first quarter of 2018, our total loans increased $32 million, excluding the mortgage loans held for sale, our organic growth in the portfolio was actually $47 million or approximately…

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 fourth quarter of 2017. I'll begin with our income statement and our net interest margin. On a reported basis, our net interest margin increased 4 basis points to 3.75% in the first quarter. The change in our federal tax rate had a negative impact of 1.5 basis points to the margin. Charged-off interest was $700,000 compared to $1.4 million last quarter. Total accretion income, on the acquired portfolios, was $3.1 million this quarter, which was $700,000 less than the fourth quarter. Early payoffs contributed $1.1 million to accretion income this quarter about $900,000 less than last quarter. So while unpredictability of early payoffs will continue to cause volatility in our accretion income, we anticipate that scheduled accretion will contribute an average of $1.6 million per quarter for the rest of 2018. If you exclude the impact of charged-off interest and accretion, our operating net interest margin increased 9 basis points to 3.61%. The 9 basis point expansion in our operating margin is attributable to this stability in our deposit cost, a 2 basis point impact from the favorable shift in our mix of earning assets, and a 7 basis point impact from an improvement in our yield on earning assets. Given the short duration, we've maintained in our investment portfolio, we're benefiting from opportunities to reinvest at the current higher rates. We're also originating loans at a higher rate, which was a weighted average of 5.06% this quarter, up 20 basis points from 4.86% last quarter. While we've recently raised deposit pricing, particularly in our west division, we anticipate that the continued increase in our yield on earning assets will enable us to maintain…

Thanks, Marcy. Good job as always. I'm going to wrap up with a few comments about our outlook. We expect to see a continuation of positive trends that drove our strong performance in the first quarter. We are executing well and the sales force has been reenergized, resulting in greater productivity in our business development efforts. Based on our performance in the first quarter and the pipeline we have going in to the stronger seasons, we have even more confidence that we can improve our annual organic loan growth to the mid to high-single digits. On top of organic growth, we are seeing the acquisition of Inland Northwest will give us another catalyst for generating earnings growth, heading into next year. We feel good about how we are positioned, and we are confident in our ability to create additional value for our shareholders going forward. So with that, we'll open the call up for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Jared Shaw of Wells Fargo.

I guess, maybe if we could start with the -- on the deposit side. Marcy had mentioned that it looked like at the end of the quarter, you may have been raising pricing on some products. Is that more to attract new customers and trying to drive the market pricing, or is that more reactionary and looking for retention? And I guess what categories are you seeing that in and the magnitude there?

It's both. I think in the Western division, we're increasing to be more competitive. In the Mountain division, we're increasing just stay at the top of the market and force the price up. But I would say that the beta that we have is about 16% that we have raised in. So we're not given all the benefit of the rising rates back to our customers, but we believe we want to stay competitive with our customers.

So with the rate increase -- with the higher pricing, you're moving up to a 16% beta?

No, the last pricing increase was about a 16% beta on the last Fed move.

And then looking at the ag portfolio with the acquired portfolio as well as yours, whether you see the impact with the tariff discussions going on, it seems like it tends to be more focused on ag. Is there a big export market that your customers are dealing with?

Well, right now the tariffs are mainly hitting the soybean crops, and mostly the AG that we're picking up in the new markets is around wheat. So we don't see the tariffs really impacting that right now. And our portfolio is about 50% cattle and wheat. So we don't have much soybean at all in our portfolio. We don't know exactly what's going to happen with cattle, but right now it looks good.

And then can you just give us an update after this deal what your thoughts are on future M&A? This is a little bit of a smaller deal, should we look for you to roll up banks this size? Or was this a more opportunistic deal for you and your thoughts generally around M&A?

Well, one thing there's a lot of banks for sale there right now. But we're looking at probably right a billion dollars, it'd probably be on the bottom side of what we're looking at. But I think it's really important -- we're really looking at things that will enhance our franchise value. It's -- so we're being pretty picky about who we actually are actually talking to and courting too and trying to grow the franchise. So it's just not about buying banks, it's about buying the right banks and make the franchise more valuable.

And do you have to wait for this deal to close and integrate before you could look at another deal or could you potentially have a deal overlapping?

Well, we're not going to pass up a good deal. So if we have to overlap, we'll overlap. But hopefully, it will come in more of an easier process for the team, but we're not going to pass up something that would make a big difference for our franchise.

The next question comes from Mr. Jeff Rulis of D.A. Davidson.

A couple of follow-ups on the -- on the [INBDO]. Just the first being -- how does the team from INB weave into the kind of leadership group of the west division?

Well, they have a very strong team in place. So most of the people who are actually customer facing and dealing with those markets, will stay in place, that's currently there. So there's not going to be much change with regards to leadership. I think it's just really combining the back offices. It's kind of nice because all new markets, so it doesn't really affect the team that much.

I guess, is it more referring to the executive team at INB, how do they mesh with -- are they going to be sort of a Regional President? Or how does that kind of get disseminated amongst the leadership of that team?

Our structure is that we have regional presidents and market presidents. So these people will take on presidential roles in those markets. Not all of the executives, unfortunately, will come aboard but most of them we're going to try, it's always about good people. In the Bank of the Cascades, we've got a lot of great people out of it. So it's really somebody's functions as backroom, nobody really wants to talk about it that much, but HR, IT or finance, if they're good people, we'll try to -- we'll probably try to bring them on board, like we did with the Bank of the Cascades, but with regards to the leadership of the sales team in those markets, we'll make a market presence. And we were hopeful that they all stay with us and help us drive the business in those markets.

And I didn't see a pro forma AG exposure, the portfolio -- what is that makeup on a pro forma basis?

I'll have our Chief Credit Officer talk about that.

So total outstanding of their AG portfolio is $117 million, total commitments are about $143 million in total commitments. Their portfolio has 19% AG, ours has 3.8% AG. So it really just lifts ours up to 5%, so it's not a significant impact. And it's also probably the most productive agricultural area in the country, if you look at both the Columbia basin as well as the Palouse for wheat. So it's a great area to be involved in AG.

And maybe one last one. Just the tax rate. I don't know if that was -- I don't know if it was indicated a little higher earlier, but is the 21.9% a good figure or does that pop back up a little bit in the quarters to come?

So it will pop back up a little bit. There was a little bit of an impact from exercise of stock options that typically happens in the first quarter. So we expect it to be around 22.5%.

For the balance of the year?

For the balance of the year.

The next question comes from Matthew Clark of Piper Jaffray.

Just first question on expenses. I think Marcy, you spoke to keeping the lid on noninterest expense growth going forward. How would you think about that run rate. I think last quarter, you talked about $80 million to $81 million obviously, coming a little higher than that here at $82 million and change. But just want to get your thoughts on that run rate for the balance of the year?

Matt, we were disappointed too. Yes, so I do think it's going to be more towards the higher end of the $80 million to $81 million, but I think we'll end up at $81 million a quarter. But we are really focused with our leadership team on managing expenses and so. That's -- we're doing everything we can to kind of keep it in that $81 million range.

Great and then net charged-off this quarter, a lot lighter than expected. Was there anything lumpy there in terms of recoveries or just a lower level of loss in the quarter?

I'll have Steve Yose, Chief Credit Officer to take that.

Yes, we did have two nice recoveries on the commercial portfolio. One in Wyoming, for $1.1 million and one in Montana for $1.5 million. So we did have two recoveries that helped us on our net charge-offs this quarter.

And then on the AG portfolio that you're acquiring. Can you speak to how much of that portfolio is wheat and whether or not they've been facing any issues as it relates to the oversupply of wheat to any credit issues?

I'll take that one, this is Russ. We have a very stable customer base in the Palouse, where our major wheat is. So this is really our third going into the fourth down crop year, and our classifieds are even. We really have not seen any change in that. Early forecasts are probably for a slightly better price this year than maybe we've seen in the last couple of years. So I don't see any trends to go negative this year. And the previous question about tariffs, you got to remember that all just proposed at this point, on a lot of those crops, so I think there's a lot of to be determined on that.

[Operator Instructions] The next question comes from Jackie Bohlen of KBW.

Thinking about the conversion of the transaction and just the timing for pulling out cost savings. Understanding that you've given a late 3Q, early 4Q close guidance. Assuming that, that does come to pass, what timing would you expect for those items?

We expect that most all the cost be out by the beginning of 2019.

Meaning starting January 1 clean, or having some clean up into January?

We're hoping to start January 1, clean.

Okay. And then just as you think about any future expansion plans that you have given the recent acquisition and then any plans you have now that your -- obviously, it's not making you as large as Cascade made you, but still making you bigger. How are you thinking about your geographic plans in the future and might that possibly include additional states, like California, for instance?

I'm pretty adamant that, we have no plans right now to go to California. So California probably is not in the cards anytime soon. I think what we're really focused on is our six state footprint to continue to fill in that and kind of really have a dominant presence in that footprint. Not to say that we might drift south at some point in time, but I don't think that we're really focused on that right now. We're really focused on the Northwest.

So filling in existing markets?

That's correct.

Okay. And then just lastly, maybe, Kevin, if you can you speak broadly, in your prepared remarks mentioned, the rebound you're seeing in Wyoming, just what impact that's having on operations?

Well the impact on operations well, it's helping us grow in that market. I would tell you that the oil price has increased nicely. So some of the people are going back to work. [indiscernible] is going -- they're going back to work. So really the economies are doing a lot better in Wyoming. One of -- we have some oil guys on our board. They were saying that the future is bright for Wyoming due to the factor that there's about a 1000 permits that have been filed for additional wells in that state. Wells cost about $100 million apiece. So you're talking about an investment of about $10 billion that's going to happen in the near term in Wyoming. So people are getting pretty bullish on what's going to happen in Wyoming and the economy. So we believe we'll continue to move forward. We're not going to say it's going to go anywhere near double-digit growth aspect, but I think we are feeling better that there's some economic growth in the future in Wyoming.

And what kind of lending do you see yourself participating in there?

One, we don't do a lot of oil and gas. So we don't do large oil and gas loans. But I think the thing is it's just taking care of the growth in the market due to the fact that, there's housing and that needs to be done. There's a lot of commercial activity that happened in those markets. So we have to help them fund that, I think there's some expansion that is occurring. So really it's broad-based to just how the economy grows.

The next question comes from Tim Coffey of FIG Partners. Please go ahead.

Just sticking on the some of the deal terms. Have you identified a potential conversion date?

Yes, we said a conversion date would probably be in the fourth quarter or first thing in the first quarter.

And the Class A shares, post-deal, what would that be as a percentage of total shares outstanding, both the A and the B?

The B shares lose about 2%....

They're down 36%.

So they're going to be down around 36% the B shares, so the inverse to that is 64%. So that's what the A shares would probably represent.

And understanding that there was a dividend increase this quarter and looks like you'll have a pretty good earnings pickup this year relative to last year, and you might have another one -- good earnings pickup in '19. Do you have any thoughts right now on where the dividend can go post deal?

We look at our capital plan once a year, and again, we have a dividend payout ratio of about 35% to 45%. And we'll look at how we think 2019 is going to play out based on that, we've determined what the dividend levels would be.

And this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Riley for any closing remarks.

As always, we welcome calls from our investors and analysts. And please reach out to us if you have any follow-up questions. Thank you for tuning in today, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.