Good morning. Thank you for attending today's First Interstate BancSystem, Inc. Third Quarter Earnings Conference Call. My name is Bethany, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Lisa Slyter-Bray with First Interstate BancSystem. Please go ahead.

Thanks, Bethany. Good morning. Thank you for joining us for our Third 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 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. 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 off 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. During the quarter, we continue to see positive trends in loan growth, margin expansion and asset quality, all of which resulted in a meaningful improvement in our financial performance. We generated net income of $85.7 million or $0.80 per diluted share in the third quarter, which included a $24 million loss on the sale of investment securities as part of some of the repositioning we did in the portfolio, which we will discuss later in the call, another $4 million of acquisition expenses and a litigation related accrual. Excluding these items, the company had a $1.01 in earnings per share and generated a very strong return on total equity of 13.3%. Loan growth was a significant driver of our increased profitability this quarter, with our net contribution from across the footprint resulting in an annualized growth rate of over 10%. The higher levels of growth reflects our ability to capitalize on the healthy demand we are seeing in all of our markets and the funding of prior loan commitments with improved pricing and structure across the portfolio. We are pleased to see net growth coming out of our new markets earlier than we expected, even while working through credit-related…

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 second quarter of 2022, and I'll begin with our income statement. Our net interest income increased by $27.8 million, primarily due to our strong loan growth and net interest margin expansion. Our reported net interest margin increased 46 basis points from the prior quarter to 3.71%. Excluding purchase accounting accretion and PPP-related income, our adjusted net interest margin also increased 46 basis points from the prior quarter to 3.47%. This was driven by a favorable shift in our earning asset mix and increased yields on loans, investments and cash. As we indicated on our last call, we began raising pricing on deposits during the third quarter, which increased our cost of total funds to 28 basis points, but this was more than offset by the 64 basis point increase on average interest-earning assets. With the continued redeployment of our excess liquidity, on an average basis, loans increased to 61.1% of earning assets in the third quarter, up from 57.9% in the prior quarter. We ended the quarter with a loan-to-deposit ratio of 68%, up from 63.9% in the prior quarter. To help fund our strong loan growth in the third quarter, we added $650 million in overnight FHLB borrowings, which we plan to use as a temporary funding source that can quickly be adjusted based on loan production and deposit flows. Looking ahead, we believe we are well positioned to see continued expansion in our net interest margin due to a number of factors. We anticipate a continued shift in the earning asset mix toward loans in the fourth quarter. New loan production is coming on the books at higher rates and is currently…

Thanks, Marcy. I just want to update some of the numbers that Marcy talked to you, a little bit misspoke. On our forecast for the quarter of noninterest expense, it's going to be in the range of $163 million to $165 million. So with that, I'll wrap up with a few other comments. We expect the continuation of positive trends seen in the third quarter. Loan growth should remain solid into year-end, although likely at a seasonally slower pace than we saw this quarter. The tailwinds to our net interest margin remained and credit quality should continue to improve. The strength of our balance sheet and continued expense control leaves us well positioned to continue generating positive operating leverage and strong financial returns for our shareholders while remaining committed to our conservative through the cycle approach to risk management. While we continue to deliver strong financial performance in the near term, we continue to make targeted investments that will further enhance our ability to generate profitable growth over the long term. We recently added a Chief Specialty Banking Officer, who will oversee our indirect lending, payment services and mortgage banking businesses, including the expansion of these businesses into our newer markets where significant opportunities remain. The efforts currently underway in these areas and across the company are building the foundation to help us realize revenue synergies for the Great Western merger in 2023 and beyond. While the current environment creates some near-term economic uncertainty, the strength of our balance sheet, and our strong profitability profile leaves us feeling comfortable with our ability to manage through a potential period of economic stress should it emerge. And with the strong execution we are seeing from our teams across our footprint, we believe we have never been in a better position to build long-term franchise value for our shareholders. Against that backdrop and with confidence in our financial outlook, we are pleased to announce a $0.06 increase in our quarterly dividend payment, bringing our yield to a robust 4.5% on our current stock price. And so with that, I will open the call up for questions.

Thank you. [Operator Instructions] Our first question is from the line of Chris McGratty with KBW. Please go ahead.

Great. Good morning.

Good morning, Chris.

Marcy, maybe first question for you. Your margin -- your core margin you referred to of 3.47% in the quarter, I'm interested in, given the speed of rates, kind of where that margin was in the month of September? And also, if you had kind of spot loan in interest-bearing deposit yields?

So, in the month of September, the operating margin, so excluding accretion and PPP income and recoveries, would be at the mid to high 3.50s for September. And then September average loan yields are around 4.6%, again, operating basis, and then interest-bearing deposit costs at about 40 basis points.

Okay. Great. Thank you for that. And then I guess assuming the forward -- tough , but assuming the forward curve is right, it would feel like there's a decent path to continued expansion into 2023. So I guess maybe a remark on that, if you could, and ultimately, where you think margins could go in this environment.

Yes.

Yes, we're not going to remark on where we think the margin might end up next year, but we agree that assuming the forward curve is right, there's a decent path for expansion. Your math will be as good as ours there, Chris, based on your assumptions.

Got it. Thank you for that. And I guess maybe more of a balance sheet mix question. I mean you do have a large investment portfolio and the color in the deck was helpful about what cash flows per month. I presume you're going to be fairly selective in new purchases and just put money into the loan book.

Yes.

That's correct.

Okay. And then maybe last one, if I could. The jumping off point for expenses into next year, I guess, relative to the guide you gave, and I appreciate the color on the 80% tied to performance. What's left on the cost saves that's not in that number? And then how do we think about just cadence from early '23?

So if you look at the midpoint of that guidance, that’s like $164 million, you can safely back off $2 million to $3 million as part of that 80% that are related to performance objectives. But for the most part its $160 million to $161 million of kind of core run rate expenses going into next year.

Okay. So that would be -- the full cost saves would be in that number?

Yes.

Yes.

Okay. Great. Thank you.

You bet.

Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.

Hi. Good morning.

Good morning, Matt.

Good morning, Matt.

Just rounding out the margin discussion, it looks like you did add about $625 million of borrowings. Were those overnight? If not, what was the term on those and costs? And what's your outlook for borrowings from here?

So they are overnight. And we just -- Matt, those will go up and down based on deposit flows and what rolls off the investment portfolio and goes into loan growth. So again, I don't expect them to go materially different from that quarter-over-quarter.

Okay. And then were they added late in the quarter? I can -- I have to double-check the average balance sheet.

They started in July.

Yes, they started in July.

Okay. Got it. Thank you. And then shifting to the loan growth outlook, it sounds like seasonally slower, but probably stronger than it has historically been in the fourth quarter. Can you speak to the pipeline and what you're seeing and where it's coming from, both from a geographic perspective as well as a competitive perspective?

Well, loan growth is strong, and we anticipate that continued pipeline looks great. With regard to geography, it's -- we're getting growth across the whole footprint, a little stronger in the legacy, but the Great Western footprint is picking up speed. And so, we're seeing good production there. What was the last part of your question?

Just competitively, is it mostly coming from existing customers or larger banks or regional banks?

Well, it's a new existing. Again, it's line usage that's already out there. But I would tell you the competitive environment, as in said in my remarks is that, it's less competitive out there right now. As we saw in the fourth quarter and the third quarter last year, banks were pricing things at ridiculously low levels, and the structures were not that good, and we didn't participate in that type of market. I would say the market today is we're getting the price that we want, and we're getting the structure that we want. And it just seems like there's less competition out there.

Okay. And then just last one for me on M&A. I know you wanted to make sure you prove to the market that GW deal -- GWB deal was a success. And obviously, you can see it in the numbers. What's your latest appetite for M&A given the marks on securities and credit these days?

So Matt, I should be comfortable that market thinks that this was a good acquisition, that's been well integrated.

I don't know you told me.

As we said, we continue to need to invest in some areas of the company that we're focused on, like I talked about on some of our different specialty lines. We're focused on making those better so we can get the synergies out of the Great Western footprint. We're continuing to invest in technology to modernize. We're going to invest in some new products and services. So we're going to continue to build the infrastructure for a larger institution. When an acquisition comes about we want to have -- we want to be prepared. I don't know when that's going to happen, but we'd be open probably, like I said a while ago, in 2023 we're hoping that we're in a position to look at something.

Got it. Thank you.

Thank you. Our next question comes from the line of Jared Shaw with Wells Fargo. Please go ahead.

Hi, everybody. Good morning.

Good morning, Jared.

Good morning, Jared.

I guess -- shifting over to the allowance ratio, allowance for loans came down this quarter, and I think you mentioned the specific reserve with the GWB charge-off. Where -- as that portfolio seasons, but then also with the broader economic deterioration, where should we be thinking about the allowance level sort of settling out here as a ratio?

I think, Jared, right around this level is what you should be considering.

Okay. So if we see any loan growth, we'll see that sort of backfill to keep this right around the 121% level?

That's correct.

Yes.

Okay. Sorry. And then any -- can you -- what's the expectation for accretion income in the fourth quarter?

Jared, that's in the deck, four to five --

Page 12.

Page 12 of the deck. You can kind of look at what we've done so far and then kind of back into that number.

Okay. And then just as --

Five to six. Jared, it will five to six of scheduled accretion.

Got it. Okay. And then as we look at deposits, with the outflows on muni and sort of some of the rightsizing this quarter, should we -- can we expect deposit growth, I guess, from here? And how should we be thinking about that mix of DDA and interest-bearing as we go forward?

So mix should stay pretty much the same. It's almost back kind of to where it was in 2019, maybe a little bit more flowing into CDs because we have a CD special out there. But I wouldn't expect deposit growth into the fourth quarter. Hopefully, they'll just stabilize. Usually, we see runoff. So we could see a little bit of runoff, just seasonal normal runoff. But I wouldn't expect growth into the fourth quarter. And then going back to next year, hopefully, we'll return to kind of normalized trends.

Okay. Great. Thanks very much. That’s all I had.

Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff.

A question on the -- on -- I guess, you've sort of addressed the M&A side, but thinking about capital, you finished up the buyback authorization, and we did see the dividend pickup. Any thoughts on additional capital deployment of kind of a priority if we kind of going forward from here?

Jeff, we always look at capital, and we had -- as we always had talked about where there's different levers to pull. One, we'd love to use our capital mostly in organic growth first. And then we look at opportunity investments and stuff. But the thing is with regards to share repurchase and dividends, on an ongoing basis we always looked at it and kind of see where we're at. And look at the forward strength of the institution to decide what action that we want to take. So it's an ongoing type, but I'd love to have all our capital that we're generating. We're going to generate a lot. So go into organic loan growth, but I don't think our remaining loan will take all that capital. So we're going to have to have some decision point down the road.

Okay. And if I read you right then, the completion of that buyback doesn't necessarily mean that, that tools on the sideline you may look at reauthorization, just staying flexible. Is that fair?

Yes, that's a fair summary.

Okay. Got you. Jumping over to the expenses. I appreciate the kind of settling endpoint at $160 million to $161 million to kind of enter into '23. But I didn't get a clear view of how much cost saves from Great Western, if that's completely complete? And I guess related to that then, just thinking about '23 growth rate for expenses, do you think you're tracking industry trends? Or do you have a little bit of tailwind on Great Western that maybe growth in '23 could be more modest?

No, I would say that the cost saves at Great Western are done. The way we do acquisitions, we pretty much get rid of those right away, we don't have a linger on, that doesn't get any better over time. So, all the cost saves that we saw with the acquisition of Great Western are behind us. Now looking forward, the outlook of inflation and where we have to go with wages and stuff is something that we're concerned about. So I would say we'll probably track to industry norms with regard to that. Hopefully, we get inflation under control, and we can keep our expenses from growing too much.

Okay. And one last one on -- just curious as to the two credits that were charged off, it was basically, I think you said the majority of the net charge-offs, do you have the dollar amount on each? And then kind of a follow-on to that is, is there anything else in the portfolio that kind of chunkier credits that you're still looking at addressing? I think, Kevin, you said the other office real estate loan in the metro area is in good shape. But anything else to kind of clean up, if you will, that's on the chunkier side? Thanks.

At this point, we're not seeing any more chunky stuff that would come in. There's nothing on the radar at all. So that's kind of behind us. But with regards to the other side, Marcy is you going the question.

Yes. So again, that's on page 10 of the deck, it lines it out, Jeff, that it's $5.7 million for the PCD loan and $6.6 million for the metro office property.

Got it. Thanks. I missed that. That’s all I had. Thank you.

Thanks, Jeff.

Awesome. Thanks.

Thank you. Our next question comes from the line of Andrew Terrell with Stephens. Please go ahead.

Hi. Good morning, Kevin. Good morning, Marcy.

Good morning, Andrew.

Good morning, Andrew.

Hi. Most of mine have been asked and addressed already. But maybe if I could just square out the deposits. I guess, you've done a good job in running off some kind of higher beta deposits over the past couple of quarters. Is there any more of that to go? Or do you feel like you're in a good spot as we move forward?

Yes. We feel like we're in a good spot. And again, most of these deposit runoffs didn't come out as a legacy, First Interstate portfolio came out of Great Western. And I think that they had some I guess, larger chunkier deposits relationships than we realized. So we look at right now, most of that's behind us. So if something goes out, it's going to be hopefully at a smaller chunk, but we think most of that's behind us.

Okay. And then on the securities portfolio, I appreciate all the color there, any kind of further repositioning efforts that are possible? And then, Marcy, a lot of movement in the bond book this quarter. Can you just help us out with what the yield on the securities portfolio was either spot or in the month of September?

So the yield coming off is about 2.2% going on. It's right around three -- yes. Let me grab that. I know it's in the deck. I just can't remember the number off the top of my head.

I think it was at 3.9%, the spot rate.

Yes, 3.9%. Yes, 3.9%. What was the rest of the question, Andrew?

He's talking about repositioning the investment portfolio. We continue to look at is there opportunities to do. But right now, it's -- we're just looking at what's going to happen with the Fed and everything else before we do any major repositioning.

But you should expect maybe some small incremental balance sheet adjustments there.

So Andrew, its John. The average yield on the portfolio on an FTE basis in the month of September was in the mid 260.

Perfect. Very helpful. Okay. Thanks for taking the questions.

Thanks, Andrew.

Thank you. Our next question is a follow-up from the line of Chris McGratty with KBW. Please go ahead.

Thanks for follow-up. You see a lot of banks take steps this quarter to take down rate sensitivity. I appreciate what you did. Is there any bigger steps with new swaps or floors or some derivative to lock in some margin?

Yes. We're looking at that as balance sheet managers. As I said prior, Chris, is that we're in the process of trying to kind of redo our balance sheet a little bit from being as asset-sensitive as we're in taking some of that sensitivity out of the balance sheet so that rates do fall and we don't lose all the upside that we've already picked up here. So we are repositioning the balance sheet to be less asset sensitive.

Okay. Thanks.

There are no additional s waiting at this time. I would like to pass the conference back to Kevin Riley for any closing remarks.

Again, thank you for all your questions. As always, we welcome calls from our investors and analysts. Please reach out to us if you have any follow-ups questions. Again, thanks for tuning in today. Goodbye.

That concludes the First Interstate BancSystem, Inc. Third Quarter Earnings Conference Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.