First Interstate BancSystem (FIBK) Q2 2022 Earnings Call Transcript

First Interstate BancSystem (FIBK 1.06%)
Q2 2022 Earnings Call
Jul 27, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the First Interstate BancSystem, Inc. second quarter earnings conference call. My name is Harry, and I'll be coordinating your call today. [Operator instructions] I'd now like to hand you over to our first speaker, Lisa Slyter-Bray to begin.

Lisa, please go ahead.

Lisa Slyter-Bray -- Executive Assistant

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?

Kevin Riley -- President and Chief Executive Officer

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. We are particularly pleased with the higher level of growth we are seeing in the legacy First Interstate footprint, with every market contributing positively, including Wyoming, which, as you know, was a headwind last year.

Overall, the legacy First Interstate branch network had an annualized loan growth rate of 15% in the second quarter with Montana, Idaho, Eastern Washington markets leading the charge. As always, we are maintaining discipline in our pricing. And as a result, our new production reflected the impact of higher interest rates. The average rate on new loan production in the second quarter was 25 basis points higher than it was in the first quarter.

As we discussed last quarter, we intended to deploy more of our excess liquidity into higher-yielding assets -- earning assets, both in loans and the investment portfolio. This allowed us to benefit from higher interest rates, resulting in a 45 basis points increase in our net interest margin. More importantly, our core net interest margin expanded 36 basis points to 3.01%. We saw a significant increase in our yield on earning assets while keeping our core -- our cost of funds flat with the prior quarter.

While deposits declined a little bit more than we originally anticipated in the quarter, we were encouraged by the stickiness of our noninterest-bearing and our interest-bearing demand deposits and the performance of the legacy FIB footprint overall. During the quarter, a large portion of the attrition was discretionary on our part as we chose not to retain expensive non-relationship-acquired balances. Additionally, we are taking a proactive and strategic approach to product and pricing in this environment to drive incremental client growth from here. With our strong financial performance and capital position, we were able to increase our return of capital to our shareholders during the second quarter with the resumption of our share repurchase activity.

During the second quarter, we repurchased 1.7 million shares of our common stock at a weighted average price of $37.38 and paid a dividend yielding 4.6% on an annualized basis. And with that, I will turn the call over to Marcy to provide some additional details on the second quarter results. Go ahead, Marcy.

Marcy Mutch -- Chief Financial Officer

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 as we believe, based on what we're seeing in our local markets, this can provide us a competitive advantage to attract new clients. As a result, you should expect to see a higher cost of deposits into the next quarter.

That said, we still expect to see a relatively low deposit beta over this cycle, and that the increase in our yield on earning assets should exceed any increases to our funding costs in the coming quarters. Our noninterest income increased $1.8 million quarter over quarter to $51 million. We saw continued strong results from our payment services businesses as well as the full quarter impact of adding Great Western's Wealth Management business. Adding Great Western's wealth business allowed us to offset the negative impact to total assets under management from the market pullback.

Excluding the $3.4 million recovery of mortgage servicing rights impairment we had last quarter, our mortgage banking revenues were flat. Going forward, we expect them to remain relatively stable as we head into the back half of the year as the increased production volumes we should see from our new markets will help us offset the lower overall demand resulting from higher mortgage rates. When compared with last quarter's outlook, given the incremental interest rate and market-driven headwinds on mortgage, wealth management, and swap fee income, we have made a slight reduction to the run rate for noninterest income that we expect by the fourth quarter of 2022, adjusting the run rate to be approximately $50 million, down from the prior range of $52 million to $54 million. Moving to total noninterest expense.

Exclusive of acquisition-related expenses, our noninterest expense increased $22.5 million from the prior quarter, which was primarily attributable to the additional one month of Great Western's operations and consistent with what we told you to expect last quarter. With the completion of the core system conversion in late May, we will now start to realize more of the cost savings projected for the transaction. By the fourth quarter of 2022, we still expect our quarterly run rate for total operating expenses to be approximately $160 million. Moving to the balance sheet.

Our loans held for investment increased $262 million, excluding PPP loans from the end of the prior quarter with growth in all of our major portfolios with the exception of ag. As of June 30th, we had approximately $12.1 million in PPP loans remaining on our balance sheet, net of $300,000 of remaining associated deferred loan fees. Our investment portfolio increased by approximately $1.4 billion from the end of the prior quarter as we continue to take advantage of higher rates. We also terminated a $5 million forward starting -- excuse me, $500 million, forward-starting pay fixed swap on June 1st.

This resulted in a $23.3 million gain that will be accreted into income through May 2026. At the end of the quarter, the duration of the investment portfolio was 3.9 years -- or 3.8 years when you include the impact of our remaining $200 million interest rate hedge. On the liability side. Our total deposits decreased $1.2 billion, which primarily came from outflows in our savings and jumbo CD balances.

A meaningful portion of the decline was attributable to the intentional runoff of higher cost, non-relationship deposits carried over from Great Western. Within our legacy footprint, we saw a decline of 1.7%, but remain in line with our year-to-date expectations given the unseasonal growth we saw in that deposit base in the first quarter. Given our strong liquidity position headed into this quarter, we funded the runoff out of our cash balances. In aggregate, our balances of noninterest-bearing and interest-bearing demand deposits were just about flat during the quarter, which reflects the stability that we typically see in our core deposit base.

Moving to asset quality. We saw positive trends across the portfolio with declines in nonperforming assets and criticized and classified loans. The decline in criticized loans was largely driven by our continued progress in working through the problem loans added in the Great Western acquisition. The strong performance of our loan portfolio is also reflected in the very low level of net charge-offs, which were just $300,000 or one basis point of average loans in the quarter.

Given the positive trends and the low level of loss in the portfolio, we recorded a negative provision of $1.7 million for the quarter, a bias toward a more negative economic outlook was offset by the positive trends in our portfolio. Relative to last quarter, the allowance declined $26.8 million. As part of our reevaluation of the acquired loan portfolio, there was a release of $24.8 million of specific reserves on certain PCD loans, which was booked as an adjustment to the acquired balance sheet, and resulted in a net reduction to goodwill. This brought our allowance as a percentage of loans held for investment to 1.28%, while our coverage of nonperforming loans remain relatively unchanged at 201%.

As further noted on Slide 4 of the investor presentation, in addition to the PCD loans I just mentioned, we also adjusted the initial credit marks on our acquired held-for-sale portfolio. On a combined basis, the after-tax impact of these adjustments resulted in a decrease to goodwill of $37.8 million, and had a corresponding increase to regulatory and tangible capital. And with that, I'll turn the call back over to Kevin.

Kevin Riley -- President and Chief Executive Officer

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 system conversion now behind us, we will see some of the more synergies that we projected from the Great Western merger. The combination of continued loan growth, margin expansion, the realization of more cost savings from the merger should lead to continued improvement in our levels of profitability. And finally, even after this quarter's repurchase activity, we continue to run capital levels in excess of our internal targets.

While our markets continue to perform well, we are mindful of the broader macroeconomic concerns and the potential recessionary environment. Given the strength of our franchise, we believe we are well-positioned to perform well in whatever type of economic environment materializes in the future. I want to end my prepared remarks to reiterate how proud we are of the entire team for what has been a very successful conversion at the end of May. We have noted the similarities of our two organizations from the onset.

And now that we are a one organization, we are experiencing the synergies of our cultures coming together as one. The result of our recent published Gallup Poll survey are a positive sign we are heading in the right direction. Lastly, as part of the $21 million donation to our foundation related to this acquisition, we have agreed to donate $1 million across our footprint through our Believe in Local Grant Campaign. This has encouraged our colleagues from across the footprint in support of local, employee-sponsored not-for-profits in all 14 states.

I could not be happier with the support for this effort. We are truly moving together as one cohesive company. So with that, we'll open the call up for comments.

Questions & Answers:

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hey. Good morning. Thank you.

Kevin Riley -- President and Chief Executive Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

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?

Marcy Mutch -- Chief Financial Officer

So Jared, the provision reversal of $1.7 million was really reflective of the credit quality of the entire portfolio. That was slightly 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 eight 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.

Kevin Riley -- President and Chief Executive Officer

Yeah. I think I'll just add a little bit, Jared, to that. 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 -- 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 dramatic -- drastically changes.

Marcy Mutch -- Chief Financial Officer

Yep.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. 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?

Kevin Riley -- President and Chief Executive Officer

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.

Marcy Mutch -- Chief Financial Officer

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.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. 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?

Kevin Riley -- President and Chief Executive Officer

Yeah. I think that these -- as -- 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 -- 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.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. 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?

Kevin Riley -- President and Chief Executive Officer

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.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thanks.

Operator

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.

Unknown speaker

Thanks. Good morning.

Kevin Riley -- President and Chief Executive Officer

Good morning, Jeff.

Unknown speaker

This is actually Andrew [Inaudible] 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?

Kevin Riley -- President and Chief Executive Officer

Can you clarify that question again?

Unknown speaker

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?

Kevin Riley -- President and Chief Executive Officer

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?

Unknown speaker

Right.

Kevin Riley -- President and Chief Executive Officer

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.

Unknown speaker

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

Marcy Mutch -- Chief Financial Officer

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.

Unknown speaker

OK. Thank you. Next question. 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?

Kevin Riley -- President and Chief Executive Officer

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 [Inaudible] and stuff like that. So you have that headwind.

So that's why we're saying mid-single digits. We're hoping that one quarter will be better than the other, but that's why we're targeting mid-single digits.

Marcy Mutch -- Chief Financial Officer

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

Unknown speaker

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.

Kevin Riley -- President and Chief Executive Officer

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.

Unknown speaker

OK. Thank you. Congrats on the quarter.

Kevin Riley -- President and Chief Executive Officer

Thank you.

Marcy Mutch -- Chief Financial Officer

Thank you.

Operator

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.

Andrew Terrell -- Stephens, Inc. -- Analyst

Can you hear me?

Kevin Riley -- President and Chief Executive Officer

Now we can hear you. Go ahead.

Marcy Mutch -- Chief Financial Officer

Hi, Andrew.

Andrew Terrell -- Stephens, Inc. -- Analyst

Hey, 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?

Kevin Riley -- President and Chief Executive Officer

I --

Marcy Mutch -- Chief Financial Officer

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.

Kevin Riley -- President and Chief Executive Officer

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.

Andrew Terrell -- Stephens, Inc. -- Analyst

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

Kevin Riley -- President and Chief Executive Officer

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

Andrew Terrell -- Stephens, Inc. -- Analyst

Yeah. No problem. Thank you.

Marcy Mutch -- Chief Financial Officer

But the most of it, Andrew, will be in the second half of the year. So again --

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. Yes. Got it. OK.

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.

Kevin Riley -- President and Chief Executive Officer

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.

Andrew Terrell -- Stephens, Inc. -- Analyst

Got it. OK. 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?

Kevin Riley -- President and Chief Executive Officer

We're hoping. Yes. We're hoping.

Marcy Mutch -- Chief Financial Officer

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

Andrew Terrell -- Stephens, Inc. -- Analyst

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

Kevin Riley -- President and Chief Executive Officer

Alright. Thank you.

Marcy Mutch -- Chief Financial Officer

Thank you, Andrew.

Operator

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

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning.

Kevin Riley -- President and Chief Executive Officer

Morning, Matt.

Matthew Clark -- Piper Sandler -- Analyst

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.

Marcy Mutch -- Chief Financial Officer

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.

Kevin Riley -- President and Chief Executive Officer

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

Matthew Clark -- Piper Sandler -- Analyst

No. I hear you. 36 might be a stretch, basis points Yes. 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?

Marcy Mutch -- Chief Financial Officer

So that's -- go ahead.

Kevin Riley -- President and Chief Executive Officer

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.

Matthew Clark -- Piper Sandler -- Analyst

OK. Thank you.

Operator

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

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

Great. Thanks. Kevin or Marcy, the -- 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.

Kevin Riley -- President and Chief Executive Officer

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 [Inaudible]?

Marcy Mutch -- Chief Financial Officer

Just on an average basis, the loans will come up quarter over quarter.

Kevin Riley -- President and Chief Executive Officer

Yes.

Marcy Mutch -- Chief Financial Officer

And we expect to continue to see loan growth that we can fund with some of that security portfolio runoff.

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

Got it. OK. 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?

Kevin Riley -- President and Chief Executive Officer

Yeah. That -- and Chris, that leads into why we did -- we got rid of the $500 million swap, the [Inaudible] 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.

Operator

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.

Kevin Riley -- President and Chief Executive Officer

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. Goodbye.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Lisa Slyter-Bray -- Executive Assistant

Kevin Riley -- President and Chief Executive Officer

Marcy Mutch -- Chief Financial Officer

Jared Shaw -- Wells Fargo Securities -- Analyst

Unknown speaker

Andrew Terrell -- Stephens, Inc. -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

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