First Midwest Bancorp, Inc.
Q2 2021 Earnings Call Transcript

Published: 20 Jul 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2021 Second Quarter Earnings Conference Call. Following the close of the market yesterday, First Midwest released its earnings results for the second quarter of 2021 and issued presentation materials that will be referred to during the call today. During the course of the discussion, management's comments and the presentation materials may include forward-looking statements and non-GAAP financial information. The company refers you to the forward-looking statement non-GAAP and other legends included in its earnings release and presentation materials, which should be considered for the call today. This call is being recorded and all participants are in a listen-only mode.

[Mike Scudder:]

Great. Thank you. Good morning. Thanks to all of you for joining us today. It's great to be with you. I hope this finds everyone doing well, staying healthy and ready to go. These are exciting times here for us at First Midwest, with our announced combination with Old National, now just a little over a month old. So what's the plan here is to give you a quick update on the integration process. Mark will do that at the end. But obviously, the near-term focus or certainly the focus for this call is on sharing perspectives on this quarter. Overall, we are very pleased with our performance for the quarter. Performance continues to improve, as we see the benefits of a recovering economy. Obviously, comparisons a year or two ago are tough, because of the pandemic. So, my comments are going to largely center on quarterly momentum. Pat and Mark can certainly help walk through the nuances year-over-year as you find that necessary. Most importantly, as I think about the quarter, our operating performance, benefited from strong loan production. We also continue to see strong performance from our fee-based businesses and obviously in the environment that we've been operating in for some time, continued focus on managing our costs. So, I'll quickly walk through the highlights. EPS came in at $0.41. That's up 14% for the first quarter. If you allow for adjustments, EPS was $0.46. That's up 24% from the prior periods and again largely due to comparatively lower loan loss provisions and stronger revenue and lower expenses. Our loan growth was solid, up 7% annualized from year-end and Mark can speak to this in greater depth, pretty much what we expected as pipelines continue to normalize. Net interest income was $144 million. That's up about 2% linked quarter, again, as we saw the benefit from stronger PPP fees and one more day in the quarter. Net margin was 2.96%, but once again it's impacted by elevated liquidity, which obviously weighs on the percentages. Fee-based revenues remain strong. And as I said before, we saw again this quarter, record wealth management revenue, which offset the falloff from last quarter, but we have to remember the falloff from last quarter was from record levels from mortgage revenue, so -- and then obviously, away from the transaction costs, attended to the Old National combination.

[Mark Sander:]

Thanks, Mike, and good morning everyone. Starting on slide 3 of our presentation, loan growth was strong and widely distributed in Q2. Away from PPP, loans were up $250 million or 7% annualized from last quarter, as our mortgage, middle market and specialty teams, all generated results in line with our clients' improved expectations. We also added some nice multifamily clients in Milwaukee and Chicago. We discussed in our last earnings call, our view that the outlook for commercial loan growth was favorable, given our rising pipeline. That came to fruition this quarter, as production was up about 6% from the prior quarter and we saw some net line draws for the first time in over a year. The results we posted in commercial in Q2, we believe are likely to continue for the near term, as pipelines remain steady at pre-pandemic levels. Mortgage had another robust quarter with production in excess of $400 million, which allowed us to add about $100 million net to our balance sheet, while still generating nearly $7 million of fee income through asset sales. Lastly, we did buy some high-quality installment paper really to offset the continuing declines we see in home equity loans from refinance activity. In total, then our outlook for full year loan growth of mid single-digits away from PPP remains unchanged. As to PPP and there's a page in the appendix which summarizes this, we ended the quarter with $700 million in outstanding loans as we further supported our clients with some incremental new loans early in the quarter, but then we saw over $450 million forgiven by June 30. Again, we believe most of our balances here will be forgiven and repaid before year end as Pat will detail in his margin discussion shortly.

[Pat Barrett:]

Thanks, Mark. Good morning to everyone on the call. Turning to net interest income and margin on slide 7. Net interest income was up 2% compared to the prior quarter and down 1% from the same period in 2020. The increase linked quarter was driven by $2 million in higher PPP loan forgiveness and an additional day in the quarter as Mike mentioned partly offset by lower acquired loan accretion. PPP loans forgiven in the quarter increased from approximately $200 million in the first quarter to approximately $450 million in the second quarter. Compared to the prior year, the decrease in NII was due to lower rates partly offset by interest income and fees on PPP loans, lower cost of funds and loan growth. Acquired loan accretion of approximately $6 million was down $1 million compared to both prior periods. Accretion in the second quarter was higher than anticipated due to favorable resolution of certain acquired loans. Continuing on the same slide with net interest margin. Tax-equivalent NIM for the current quarter of 2.96% was down 7 basis points linked-quarter and down 17 basis points from the same period a year ago. Excluding accretion, adjusted margin was 2.84% for the quarter down 4 basis points linked quarter and 14 basis points from the prior year.

[Mark Sander:]

So on slide 11 we tried to briefly summarize the great opportunity ahead in combining with Old National. As Mike mentioned, and as we discussed, when we announced on June 1st, we're tremendously excited about our anticipated merger. The strategic fit and the financial benefits remain clear. But as importantly I would say, we continue to feel great about the cultural alignment as we work through the process. Recognizing it has only been 1.5 months since announcement, we are extremely pleased with the progress we're making and how the teams are working together. Slide 12 highlights some of these processes.

[Mike Scudder:]

Thanks Mark. And let me just add to a couple of things in Mark's comments, before we open it up for questions. Obviously, we are very excited about what lies ahead for our partnership with Old National, certainly what it means for our clients, our markets, our communities, our colleagues just across the board. And as we have shared and for those of you who had the opportunity to listen to Old National and Jim speak this morning, certainly that was echoed in their comment -- comments. This is really at its core a growth strategy for two strong companies, that share a vision and a culture that we firmly believe leaves us very well positioned for the future. So with that, let's open it up for any questions you might have.

[Operator:]

Thank you. The question-and-answer session will begin at this time. It is from Michael Young of Truist. Please go ahead.

[Michael Young:]

Hey. Thanks for taking the question. Yes. I was just curious maybe sort of qualitatively what we should expect in the interim before the Old National deal closes in terms of any efforts you may undertake in terms of retention or proactive marketing decline. Should we expect any higher expenses related to any of those things and just any other qualitative things you'd like to put out there?

[Mike Scudder:]

This is Mike. I certainly can speak to some of that. I thought certainly you can expect us to continue to make active outreach to clients and the markets and to build on what we've established here across the marketplace and continue to reinforce all the positives that come along the cost -- or excuse me, the transaction as we've described. And strategically, it's a great opportunity. So we spent a lot of time and energy. But that's really largely embedded in our run rate as we go forward. So I wouldn't think that you would see anything different than what Pat had guided to today.

[Mark Sander:]

Yes. I guess can I add, I would just say -- this is Mark. Michael thanks for the question. It starts with its business as usual here. We continue to expect to grow. We continue to call on clients proactively and tell our story. And I think the market reaction has been very favorable. So, it's -- and any expenses that we have were certainly built into retention efforts that were built into our modeling as we outlined the transaction.

[Michael Young:]

Okay, great. And maybe just kind of bigger picture on loan growth, loan demand. I heard a few comments obviously about that in the prepared remarks. But are there areas that you're seeing maybe higher demand or more strength? And then, are there any sort of limitations or anything we should think about in terms of growth going into the back half before the merger closes?

[Mark Sander:]

I think you're seeing a nice recovery -- it's Mark again Michael -- across really all sectors. We've seen the most strength in C&I thus far. The headwinds would be those pesky competitors that are out there. But, we face the competitors and we've competed and went and won before and we continue to do so. So, I don't mean to be so tongue in cheek about it. I think that there's no market headwinds that we see. I think businesses overall are recovering. There's still some pockets in the economy that are a little slower to recover. But, by and large, we see good strength across all of our sectors.

[Michael Young:]

Okay. And maybe last one for me. Just as you look at sort of the fee business lines as you move into closing with Old National, are there certain areas that you're starting to or going to try to expand maybe proactively ahead of the merger close geographically or otherwise, or will it kind of be status quo until the actual day one closing?

[Mark Sander:]

I'll try my best to -- I'll answer this way. It really is business as usual. So we had nice growth plans, particularly around our core businesses of wealth management, treasury management and card, all of which saw a nice solid growth this quarter, and we expect that to continue. We'll continue to selectively look to add talent. So, I don't think you'll see -- it won't change the dynamic dramatically Michael. But we certainly would look to add talent in all these areas. But, we think we're on a nice path to hit the numbers that we forecasted with the staff that we have.

[Michael Young:]

Okay, great. Thanks. That’s all for me.

[Operator:]

The next question is from Nathan Race of Piper Sandler. Please go ahead.

[Nathan Race:]

Yes. Hi, everyone. Good morning.

[Mark Sander:]

Hi, Nathan.

[Nathan Race:]

Going back to the loan growth discussion in terms of the outlook, it looks like one of the drivers in the quarter was the consumer installment growth. And I think in the past you guys have had some purchases within that segment that's augmented growth in that portfolio. So just curious, one, if that was a driver again this quarter? And two, as you guys kind of look at the pipeline kind of where do you expect to see growth in that mid-single-digit range over the balance of 2021?

[Mark Sander:]

Yes. Nate, it's Mark. I'd answer it this way. The growth you saw in installment was as much our effort to forestall the decline we saw in home equity. So some of the other consumer categories declined. And so our growth in installment was really to keep that relatively flat. The net overall growth that we saw was in C&I multifamily and mortgage. That's really where our growth came from this quarter and we expect that to continue. I'd like to see CRE more broadly grow. They've -- CRE has done nice production levels. But we continue to see a fair amount of pay-offs in that area. So it's been relatively flat away from multifamily. But again our growth this quarter was C&I multifamily and mortgage driven not installments in our view.

[Pat Barrett:]

Nate, it's Pat, though -- Just to kind of close the loop on our transactional purchase book. So we do from time to time augment, more from a mix perspective and a yield perspective with purchases primarily residential one to fours. Those run-off at a pace that has continued to be higher than, what I'd call normal because people first were refinancing like crazy and now they're continuing to sell their houses and buy new ones. So still higher activity. So we do periodically top up that portfolio just to maintain kind of the status quo in balances. But we're not anticipating contemplating or guiding to any of our growth for the year coming from purchased loans just to be clear.

[Nathan Race:]

Got it. I appreciate that. And then kind of along those lines just thinking about the overall earning asset base and balance sheet growth over the next couple of quarters up until the deal closes. As the PPP forgiveness process continues to unfold, I'm curious to get your guys' thoughts on kind of how liquidity balances trend with that process ensuing. Should we expect some continued earning asset growth and liquidity inflows, or do you guys maybe anticipate some shrinkage as some of those dynamics play out going forward?

[Pat Barrett:]

Hey it's Pat, again. I'd say yes to both of those things. We keep forecasting, we're going to see a pretty marked run-off in liquidity balances and we've been believing that for almost a year. So at some point, particularly as we start to see things like commercial line utilization, which ticked up for the first time in a number of quarters this quarter we do expect that customers will naturally draw on their balances. That does get offset by just continued consumer stimulus and whatever the off-set is with consumer spending patterns. So we would anticipate probably somewhere between $500 million and $750 million of run-off of cash that's just sitting there which is difficult to deploy for longer-term reasonably yielding earning assets simply because we continue to have the belief that that is going to run-off at some point later this year, or early into the following.

[Nathan Race:]

Understood. And if I could just ask one follow-up along those lines. If that liquidity does sit around what's the appetite to redeploy some of the securities book absent the opportunities that you guys are going to see from a lending perspective over the next couple of quarters?

[Pat Barrett:]

Well we're always looking for opportunities to top up the securities book. So you've seen yields and rates experience pretty significant volatility on a day-to-day week-to-week month-to-month basis throughout this year. And as we see opportunities to jump in and buy heavier and more we absolutely will do that. Those have been kind of few and far between this quarter. We're kind of struggling to get yields on new purchases much higher than 1.70% 1.75% which was roughly the same as Q1. So our securities purchases were net -- net lower than the volumes that we had during last year when we certainly saw higher and more attractive yields. And we'll look for opportunities to do that again for sure. But that's one of the few places we would park excess liquidity would be something that is very high liquidity low premium that we could get in and out of if we do start to see the kinds of cash outflows that we're expecting at some point.

[Nathan Race:]

Okay, understood. I appreciate the color. Thanks guys, nice quarter

[Pat Barrett:]

Thanks.

[Mark Sander:]

Thanks.

[Operator:]

The next question is from Chris McGratty of KBW. Please go ahead.

[Chris O'Connell:]

Hi, good morning, gentlemen. This is Chris O'Connell filling in for McGratty. I just wanted to kind of follow up on the same trend there or line of questioning with regards to liquidity management. I appreciate the guidance that you guys have given around the unchanged on the stable NII with the NIM growing. But just curious so far into 3Q 2021 have you've seen any of those deposit movements from customers or any of kind of the strong inflows that you've seen over the past year start to moderate or come down yet, or do you think that's still a little bit more of a late half 2021 guide?

[Pat Barrett:]

Yes. I think the pace of inflows from consumer and commercial balances slowed a bit. Those balances were relatively stable linked-quarter, which isn't always typical. We would typically see balances declining early in the year as people paid-off things that they accumulated late the previous year. Municipal inflows remain very consistent. And so we're in the middle of kind of the normal seasonal inflow for municipal deposits. But I'll say that the growth has moderated a little bit absent the late Q1 stimulus outflow, the stimulus checks that went out as part of the most recent CARES package. And we can see that every time there's a stimulus package, we can see multiple hundreds of millions hit it -- almost immediately. So it just seems to be persisting as far as balanced growth. Mark is there anything you'd add on that?

[Mark Sander:]

I think you summarized that well, Pat.

[Chris O'Connell:]

Got it. Understood. And as far as the deployment into securities and I hear you on the rates for it -- it hasn't been a great environment recently to go all in. Is there a certain point where -- or is there a certain yield threshold where you guys are going to be more aggressive or take opportunities that you'd, kind of, be allowed to disclose?

[Pat Barrett:]

Well, I mean, we've got cash that needs to be deployed that's always coming through just from the normal cash flows out of our book. That's $150 million a quarter roughly. And so we're generally going to work pretty hard to make sure we're investing that. Away from that we look for opportunities to see where yields tick up to potentially pre-invest future cash flows or to grow the book modestly. We just haven't seen as many of those opportunities this past quarter where rates were generally falling our yields. So we'll continue to watch for those. Volatility seems to be the rule of the day given the low rate environment. So there we'll expect and take advantage of opportunistic investing.

[Chris O'Connell:]

Got it. Thanks. And then one last one if I could. The loan growth and guidance stable seems to be on track. And is there anything on the commercial side, I guess, where you see opportunities to kind of beat guidance there in the mid single-digit? Is there any particular industry or area where if line utilization could come back a little bit stronger than expected or somewhere along those lines?

[Mark Sander:]

I would say nothing in particular. But I'd answer it this way maybe better, which is we expect modest to medium growth in all of our business lines. And so those growth rates might be different in some of our core business banking and CRE markets so might get a little lower there, but -- and a little higher in some of our specialty units where we've had some outsized growth these last few years. But again, we expect every one of our business units to have some growth all netting to a mid-single digit.

[Chris O'Connell:]

Understood. Thanks.

[Pat Barrett:]

Thank you.

[Operator:]

There are no further questions. I would now like to turn the call back over to Mr. Scudder for closing comments.

[Mike Scudder:]

Great. Thank you. Thank you all. Before closing once again I think it's always nice to take the opportunity to thank all of our colleagues both here and frankly with our newest partners at Old National who all have the opportunity to listen to our collective calls for their enthusiasm and hard work. It is really an exciting time for us. And I want to thank all of them for their continued commitment to living our values which is what makes our two companies so special. I'm very proud to be surrounded by so many good people who strive to do the right thing, every day for our clients, our communities and for each other. So thank you all for your attention and interest in our story and our ongoing belief that we're a great investment. So, have a great day, everybody.

[Operator:]

Ladies and gentlemen, this concludes the conference for today. Thank you all for participating. And have a nice day. All parties may now disconnect.