First Midwest Bancorp, Inc.
Q4 2018 Earnings Call Transcript

Published: 23 Jan 2019

[Operator:]

Good morning ladies and gentlemen, and welcome to the First Midwest Bancorp, 2018 Fourth Quarter and Full-Year Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the fourth quarter and full-year of 2018 and also issued presentation materials that we will refer to during the call today. These provide both historical financial information and the company’s outlook for 2019. During the course of the discussion today, management’s comments and the presentation materials may include forward-looking statements. These statements are based upon the company’s current beliefs, are not historical facts and are not guarantees of future performance or outcomes. Actual results or outcomes may differ. The risks, uncertainties and Safe Harbor information contained in the company’s most recent 10-K and other filings with the SEC, as well as the forward-looking statement, non-GAAP and other legends included in the company’s earnings release and presentation materials should be considered for the call today. Finally, the company will not be updating any forward-looking statements after this call. This call is being recorded and all participants are in a listen-only mode. Following the presentation by Mike Scudder, Chairman and Chief Executive Officer, Mark Sander, President and Chief Operating Officer; and Pat Barrett, Chief Financial Officer, the call will be open for question and answers for analyst only. I will now turn the conference over to Mike Scudder. Please go ahead.

[Mike Scudder:]

Great. Thank you and good morning, everyone. Thanks for joining us today. Great to be with you. As a reminder and a supplement to the introduction here we do have a presentation to follow along with as we move through our remarks as is typically our practice, I’ll cover the highlights and then let Mark and Pat walk you through the components of the quarter and commentary on the full year. 2018 was a very active and successful year for us where we saw number of positives on multiple firms. Core earnings per share was up 41% and 24% versus last year’s fourth quarter and full year respectively. This level of performance produced a core return on tangible common of 16.4% and 15.1% respectively for the same periods. Likewise, if you look at our adjusted return on average assets that improved to 1.3% for the quarter and 1.17% for the year, so overall very strong level of earnings performance. Key performance drivers of note, when you look back over the year and the quarter, we grew loans by 10% to over a 11 billion, while average deposits increased by 7%. Our net interest income grew 9% while our margin for the year remained a robust 3.9% overall. And as is typically the way I like to look at it if you adjust acquisition related accretion, our net interest margin expanded 16 basis points over 2017 largely on the strength of our core deposit foundation. Our operating efficiency has improved significantly with our efficiency ratio at 55% from the fourth quarter and 58% for the full year. And then our adjusted effective tax rate was lowered to 24% versus 34% in 2017, it was obviously a very strong contributor as well. Importantly, we took a number of steps to continue to build for our future executing throughout the year on a number of our strategic priorities that included our continued focus on targeted business acquisitions that met our criteria and what we felt to be strategically accretive and our standards as well as our delivering excellence and technology initiatives. In the fourth quarter, we completed the acquisition and integration of Northern States as well as announced our pending acquisitions of Northern Oak Wealth Management which closed actually last week and Bridgeview Bank which is expected to close sometime in the second quarter. Collectively these will add almost $1.8 billion in assets, $1.6 billion dollars in deposits, $1.1 billion in loans and some $800 million in assets under management. Also, over the course of the year we announced and have been successfully executing upon our delivering excellence initiative. This is an ongoing strategic and emphasis for us as a company. Though the initial stage cost benefits of this were effectively achieved by the end of the year or end of the fourth quarter setting us up well for next year. Finally, our balance sheet remains in good shape and is overall very strong are loan to deposit level stand at 95% about the same level as last year, and certainly will benefit from Bridgeview giving us additional room for overall earning assets growth. Non-performing asset levels continue to be low at 0.7% of loans and other real estate owned. And that's about 19 basis points or 20% lower than the end of last year. Our capital levels continue to be robust. Our Tier 1 common to risk weighted assets grew to 10.2% as our dividend increased by 9%. And as we look ahead stronger earnings and the benefits of adopting the least standard which Pat will talk more about certainly will leave us well positioned. All-in-all, I think from my perspective and certainly as the company as a whole was a very busy and successful end to the year. So let me turn it over to Mark and Pat for some additional color.

[Mark Sander:]

Thanks Mike, and good morning all. Starting with loans on page 4 of the presentation. In Q4, we posted continuing strong organic C&I growth and solid results from our consumer businesses partially offset by anticipated CRE payoffs. C&I loans were up another $100 million in the quarter and almost 17% for the full year as we delivered strong performance across multiple teams throughout 2018. C&I growth in Q4 was primarily from our sector-based businesses diversified across leasing, healthcare, structured finance and asset based. As we forecasted last call. We did see continued extensive CRE payoffs from property sales and refinancings with non-recourse lenders. As a result, overall, legacy corporate loans were relatively flat in Q4. NorStates added about $250 million of corporate loans which was primarily CRE such that our full year corporate growth of 7.5% was about 60% organic and 40% acquired. Consumer loans were up a robust $120 million in the quarter, half from organic mortgage production and half from transactional activity. We remain relatively underweighted in one to four mortgages and our focus remains on solid internal production. This quarter we simply just put a little greater percentage of that production on the balance sheet. On occasion, we selectively take advantage of our funding and capacity to expand our earning asset base and in Q4 we chose to buy some high-quality mortgages as well. Away from Northern States, we grew total loans a little over 7% in 2018 at the higher end of the range we've been at for the last several years. As we look over the very near term. I would note that typically the start of the year is seasonally slower and we foresee some remaining CRE pay-downs such that our growth rate will likely be lower in Q1. That said we expect to again be able to grow mid-single digits for the full year based on our solid pipelines and on the strength of our teams. I should note here that this loan guidance like all the comments that Pat and I will make today is exclusive of Bridgeview which is expected to close in the second quarter. We have provided the additional impact that we expect Bridgeview to have on our 2019 results separately on each of our presentation slides. Turning to asset quality. The story remains largely uneventful as desired. NPAs fell slightly and charge-offs came in at the lower end of our range. As a result, provision was in line with guidance. Based on these trends and our outlook for continued benign credit environment, we expect charge-offs this year to be in the middle of our normalized range of 25 to 40 basis points, subject, of course, to variability by quarter. Provision in 2019 should cover charge-off levels plus support loan growth. Our deposit mix, as demonstrated on Page 6 of the presentation, remains a competitive advantage of our company, further enhanced by our acquisitions. Demand deposits have held steady in the rising rate environment, given the nature and granularity of our client bases. Total deposits were up about $550 million at year-end versus September 30th, mostly from NorStates. We did, though, see good results in our CD production and some core client acquisition, which together partially offset the normal large seasonal public funds outflow we see in the fourth quarter. Our net cost of deposits was 44 basis points in Q4, which remains low relative to our peers due to our continuing favorable mix. For 2019, we expect deposit growth commensurate with earning asset growth. So Pat will now walk through net interest income and margin.

[Pat Barrett:]

Thanks, Mark, and good morning. Turning to net interest income and margin on slide seven. Net interest income was up $7 million or 5% compared to the prior quarter, meeting our guidance of 3% to 4%, and up $19 million or 16% compared to the same period in 2017. Compared to both prior periods, the fourth quarter benefited from the acquisition of interest earning assets from NorStates, higher yields reflecting higher interest rates and growth in both loans and securities, partially offset by modestly higher funding costs. Acquired loan accretion contributed $5 million to the quarter, consistent with our guidance and up $1 million from the prior quarter, down $1 million from the same period in 2017. Moving to net interest margin. Tax-equivalent NIM for the current quarter of 3.96 was up 4 basis points linked quarter and up 12 basis points from the prior year. Excluding accretion, margin was 3.81 for the quarter, up 2 basis points linked quarter and 17 basis points from the same period a year ago. Compared to both prior periods, the benefit of higher interest rates more than offset the rise in funding costs. Turning to interest earning assets and funding sources. Average interest earning assets were up $525 million linked quarter and $1.5 billion compared to the prior year, reflecting loan and investment security growth, combined with the earning assets from NorStates. Average funding sources increased by $500 million linked quarter and $1.3 billion from a year ago, driven by increases in time deposits, FHLB advances and funding sources from NorStates. Moving to our 2019 outlook. We expect high single to low double-digit net interest income growth. We expect continued, modest net interest margin expansion in the accretion of approximately $20 million. And we currently expect 2 additional Fed rate hikes in 2019, one at mid-year and another at year-end. Absent the mid-year rate increase, margin expansion will remain positive but be lessened. Once again, I want to remind you that projections are subject to volatility due to movements in interest rates, asset loan growth, seasonal deposit flows and the impacts of acquisitions. With that, I give you back to Mark to discuss non-interest income.

[Mark Sander:]

The non-interest income rose nearly $1 million in the quarter as we expected. On a year-over-year basis, adjusted non-interest income was relatively flat as strong Treasury Management and solid card-based fee growth offset mortgage and capital markets declines. Wealth management was up 3% on a linked-quarter basis despite market pressures due to solid production earlier in the year, although the year-over-year comparison was flat due to some outside, onetime fees in the prior year. We foresee continuing solid gains in 2019 from Treasury Management, wealth management and our card income businesses, primarily based on cross-sell opportunities. In addition, we believe comparisons will be favorable from mortgage and swaps after a relatively modest 2018 and that NSF fees, which have been declining for several years, will level of following the repositioning of our offering this year. Lastly, our recent wealth management acquisition of Northern Oak in Milwaukee should add about $4 million in revenues this year. Taking all of this into account, we forecast non-interest income to rise about 10%, give or take, in 2019. Now Pat will give some detailed outlook on expenses.

[Pat Barrett:]

Moving to expenses on slide nine. There are several items to note that affect our quarterly expense run rate. First, the current quarter includes $10 million of acquisition and integration expenses associated with the NorStates acquisition and $3 million of Delivering Excellence implementation costs, primarily driven by branch closure and employee severance costs. Additionally, and as we mentioned every quarter in 2018, card and merchant revenues and expenses reached for each quarter were impacted by a $4 million quarterly reclassification of the expenses up to non-interest income. While prior period financial statements were restated, we continue to present this change for you in the earnings release and on slides eight and nine. Keep in mind; this is just a reclass of expenses to revenue, no impact to net income. And thankfully, after this quarter, we won't have to talk about it again. Away from these items and additional operating costs associated with NorStates, total expenses continued to be relatively stable, aided by $3 million of recurring benefits from Delivering Excellence efforts, were in line with our previous guidance, which was $94 million to $96 million per quarter plus $2 million for NorStates. Our efficiency ratio of 55% was down from 56% in the prior quarter and 61% a year ago. Our outlook for 2019 is for low to mid-single-digit growth in non-interest expense for the full year. Annualize our fourth quarter results of $98 million and adjust for an average inflation of 3%, you get to a pretty good proxy as the $8 million of incremental Delivering Excellence benefit we expect in 2019 will be largely consumed with $6 million of higher occupancy due to the accounting change for the sale-leaseback transaction. Last note on taxes before I leave this slide. Our effective tax rate for the quarter was 24%, largely in line with our guidance and down from 34% a year ago, reflective of our lower corporate tax rate. For 2019, our effective tax rate, we continue to expect to be approximately 25%. Moving to capital on slide 10. We continue to maintain capital at strong levels and are pleased with how rapidly we've earned back the capital previously deployed acquisitions. Our total capital and CET1 to risk-weighted asset ratios increased from the prior quarter, reflecting strong earnings, partly offset by the NorStates acquisition and risk-weighted asset growth. Tier 1 capital ratios were also impacted during the quarter by the phase-out of a Tier 1 treatment of our trust preferred securities during the quarter as we crossed over the $15 billion in total asset threshold. Finally, as a reminder, on January 1, 2019, we adopted the new lease accounting rules that resulted in the reclassification of our remaining deferred gain, approximately $50 million after tax, from our past sale-leaseback transaction directly to retained earnings and Tier 1 capital. Now Mark has a few comments on Delivering Excellence on the next slide.

[Mark Sander:]

Yes, I would summarize by saying our Delivering Excellence program remains firmly on track. The initiatives that generate the financial benefits forecasted have been implemented such that the $20 million of cost savings, shown on Page 11, is assured. As a result, we have simply built this impact into our guidance and our budgets for the year. Going forward, our focus is squarely on process and client experience improvements, with any further savings likely to be reinvested in technology enhancements. Back to Pat to discuss our pending acquisition of Bridgeview.

[Pat Barrett:]

So turning to slide 12. There's a recap on the details of the acquisition of Bridgeview that we recently announced and which has Mark said is expected to close early in the second quarter of 2019. As a reminder, the transaction is expected to generate around $0.11 of EPS in its first full year 2020, with approximately 3/4 of that recognized in 2019, assuming an early second quarter close. The economics of the transaction remain favorable with a relatively quick tangible book value earn-back of approximately 3 years. And finally, consistent with our usual practice, we've summarized both our outlook for the year and our current quarter's earnings on slides 13 and 14, respectively. Now I'll turn it back over to Mike for final remarks.

[Mike Scudder:]

Thanks. And I'll move through this quickly and just recap as Pat and Mark did a great job of covering as what I suggested here before I introduced them was a very busy and active year for us, and certainly, a busy and active end to the year. As we look forward to the New Year, we're excited. Yes. We're entering the New Year with a strong balance sheet. We've got a strong and engaged team and good underlying business momentum. Bridgeview and Northern States will further set us apart as a market leader here in Chicago, providing our clients with access to one of the area's largest networks. And we're very excited to welcome our newest colleagues to the First Midwest team. We're equally excited about Northern Oak, which will grow our wealth management platform to some $11 billion in assets under management. This will also mark our entry into the Milwaukee marketplace, and we are very pleased about the accompanying opportunity that represents our expansion of product and services. Continuation of our Delivering Excellence initiatives will further enhance an already superior client experience, as Mark suggested, as well as strengthen our operational performance and scalability. So as I said, we're very excited as we enter the New Year, and we're doing so with a significant amount of underlying business momentum. So with that, let's open it up for your questions.

[Operator:]

Thank you, sir. The question and answer session will begin at this time. [Operator Instructions] The first question comes from Michael Young with SunTrust. Please go ahead.

[Michael Young:]

Hey, good morning.

[Pat Barrett:]

Good morning.

[Michael Young:]

Pat just wanted to quickly clarify some of that outlook items as it pertains to Bridgeview. The percentages in dollar amounts that adds this year, is that based on the early 2Q close and so it's the impact for the full year, not an annualized impact?

[Pat Barrett:]

Yes, that's correct. We're kind of hedging a little bit because they haven't finalized -- we haven't finalized purchase accounting. There's some uncertainty around actual closing date with the Federal Register not working at full capacity. And so we're still assuming an early 2Q.

[Michael Young:]

Okay. But it's the impact for full year 2019?

[Pat Barrett:]

Correct.

[Michael Young:]

Okay. And then to that end, just wanted to follow up maybe on the non-interest income guide. It was a little higher than kind of what I was thinking. So just wanted to get a little feel for the puts and takes there. Anything that was maybe a little weaker this year that's going to grow at a faster pace next year outside of, obviously, the wealth management acquisition?

[Pat Barrett:]

Yes, Mike, you think the nail on the head. I think we're going to continue the good pace of growth we've seen in wealth management and Treasury Management, but I think the year-over-year comparisons in areas like swaps and mortgage will be favorable. I wouldn't say they were soft, but they were modest 2018. So I think the -- we have a few categories where I think we can see $1 million to $2 million increase year-over-year.

[Michael Young:]

Okay. And then one last one just on the loan growth outlook, the mid-single digits. Obviously, a little bit slower, similar to kind of what the industry as a whole is seeing. But can you provide any color around how much of that may be purchase volume? Or do you kind of view that as a fallback if organic production is a little weaker in 2019?

[Mike Scudder:]

As we've forecasted that mid-single-digit growth, we've assumed no transactional growth activity. So at times when we looked -- if growth rates are coming a little short, sure, we'll think about it, but we don't think we'll have to in 2019 to hit those targets.

[Michael Young:]

Okay, perfect. I’ll step back for now.

[Mike Scudder:]

Thanks, Michael.

[Operator:]

The next question comes from Chris McGratty with KBW.

[Chris McGratty:]

Hey, good morning. Thanks for the question. Pat, I want to start on the expenses. Just wanted to make sure I got the expenses right. So $98 million annualized and then 3% inflation gets you about 4.04. And then the 16 from Bridgeview, I assume that's 3/4 but net of whatever savings you would get this year. So in other words, the 4.20 is kind of the expense number fully loaded for 2019 is what you're saying.

[Pat Barrett:]

Yes, I think that's right.

[Chris McGratty:]

Okay. And so the question is, it's a little bit higher. It's a couple million higher than our prior kind of commentary. And you spoke about 3% inflation last quarter. So did anything change in terms of the outlook on expenses relative to what you were speaking on last quarter? Is it, perhaps, timing on the Delivering Excellence? Because I thought I had a pretty good handle on it last quarter. It looks it's a few million dollars higher.

[Mike Scudder:]

Well, Northern Oak brings a little bit into play, not a huge amount. But when we're talking about a difference of $2 million or $3 million on the year that can be part of it. And we are continuing to invest. So we're not cutting expenses in areas where we're building out platform, whether it be technology and platform, operational processing. So we're pleased with the operating efficiency that we've gotten to as we exit the year and think we'll be able to hold and modestly improve on that throughout the year.

[Mark Sander:]

Yes. I've got one -- just keep in mind as well, there are some of the revenue line items have corresponding increase from commission-based activity. So to the extent you start thinking about Mark's non-interest income discussions and outlook that we talked about as a company that adds some variability on what Mike said from an expense standpoint. Our aggregate base, as you suggested, is in excess of $400 million. So a couple of million here or there just as a percentage of what we're doing is reasonable in terms of a level of operating uncertainty.

[Chris McGratty:]

That's great. That's great color. If I could sneak one in on Northern Oak. $800 million, if I'm kind of doing back of the envelope math, 50 basis points would imply around $1 million of quarterly revenues. Is that kind of ballpark of what you're thinking?

[Mike Scudder:]

That's very close to the ballpark, yes. It's a very good ballpark, Chris.

[Chris McGratty:]

Okay. All right. Thanks a lot.

[Operator:]

The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.

[Brad Milsaps:]

Hey, good morning, guys.

[Mike Scudder:]

Good morning.

[Mark Sander:]

Good morning.

[Brad Milsaps:]

Mark just wanted to follow up again on the fees. I know we're probably talking about a few million dollars you're either way. But capital markets, mortgage, kind of a lot of those line items are based on things you can control being rates. Are there changes that you've made in these groups that you feel better about production in 2019? Just kind of curious, it sounds like you're pretty confident that you're going to achieve the goal. Just I'm guessing, you're looking at the pipeline saying, "Hey, we've got some things teed up." But just any additional color there would be appreciated.

[Mark Sander:]

Yes, it's well said, Brad, because you're right, it's not all in our control. On the other hand, yes, we have made for a different story for those couple of those areas, I would say. For mortgage, we've made some investments and some commission folks that we think will improve our production this year. I would also note that we had some unfavorable MSR valuations in 2018 that we're assuming are not going to happen in 2019. So the combination of those 2, I don't think it takes a great leap for us to improve our mortgage fees a little bit in 2019. Swaps, throughout the year CRE production was down a little bit. And so I think that's just a more normal -- yes, I think we'll see a little bit more production there in 2019 that we're forecasting. But again, we're not talking about major huge amounts, $1 million to $2 million of additional fees, I think; year-over-year would be the comparison there. The real drivers behind non-interest income are we think we'll also grow mid-single digits. We think Treasury Management will grow mid to high single digits. And we think card -- a really nice -- we've been growing our card income in retail at a nice mid-single-digit rate for a number of years. We think we're underpenetrated in commercial card. And so we've got an initiative there that's new for 2019 and we think will add some revenues as well.

[Mike Scudder:]

I guess, I'll add to that, Brad. Just keep in mind, while it's hard to demonstrate realization, we do have Delivering Excellence revenue targets that are largely driven off of cross-sell, both in retail, product penetration and, as Mark mentioned, Treasury Management. And so we're expecting those will help lift what we've been able to do historically modestly.

[Brad Milsaps:]

Got it. And just on the charge-off guidance. Mid-30s doesn't seem unreasonable, but at the same time, your NPLs are one of the lowest levels they've been in a while. Just kind of curious, do you think there's some upside to that number based on upside in a good way based on what you're looking at today?

[Mark Sander:]

Well, that's always one of the hardest ones to forecast, of course, and we're giving our best guidance as we see it right now. So I would say, I can't really do much better than that, Brad. Again, we think 25 to 40 is normalized, and we think the middle of that range is kind of where will be.

[Brad Milsaps:]

Okay. And then just one final follow-up maybe for Pat. I know part of the Bridgeview deal was they're going to divest of their mortgage subsidiary. Has that been completed? Yes, I know that was like you were hoping to accomplish before closing.

[Pat Barrett:]

It has. And it'll be -- it's either completely done or it will be in the next week or 2.

[Brad Milsaps:]

Okay, great. Thank you.

[Pat Barrett:]

Thanks Brad.

[Operator:]

The next question comes from Terry McAvoy with Stephens. Please go ahead.

[Terry McAvoy:]

Good morning.

[Mark Sander:]

Hi, Terry.

[Terry McAvoy:]

Hi. Mark, first off, congratulations on last week's news. Just wanted to get that in.

[Mark Sander:]

Thank you very much.

[Terry McAvoy:]

You’re welcome. And a question for Pat. The net interest income, the margin outlook for 2019 you mentioned has two rate hikes. Just out of curiosity, hypothetically speaking, if we do not get any rate hikes, does that bring that NII down to kind of the low end of that range that we see here on slide 13?

[Pat Barrett:]

Yes, roughly a 25 basis point rate hike gets us about -- depending on what -- if you hold funding costs constant, it gets us about $2 million a quarter now. So you could consider that at risk for the third and fourth quarter if we don't get the June rate hike. The second one, we're anticipating right at the end of the year. So it has essentially a zero impact one way or the other. And then on the NIM itself, I think we expect margin expansion even without a rate hike. So we expect something modest expansion each quarter of the year, plus if we did a rate hike the following quarter, you typically get 3 or 4 bps as well.

[Terry McAvoy:]

Understand. And I know, like charge-offs, the pay-downs or payoffs are also difficult to predict. But what are your general assumptions on commercial business sales; CRE sales, which we're cited in the press release last night; and your thoughts on pay-downs in 2019 versus 2018?

[Mark Sander:]

You hit that on the nail on the head, Terry. The ability to forecast that both far in the future and scope, but in the near term, we have a pretty good line of sight to those. And I would say I think we'll see a continued -- a similar level in Q1 as we saw in Q4, which may kind of damper our loan growth in Q1 a little bit. It will still grow but perhaps less than the full mid-single-digit in Q1. Beyond that, it's hard to say, but we're going to get to a point where how much more can happen? This has been 3 quarters already. I guess it can continue. But that is a tougher one to predict, but we don't see much more beyond Q1 at this point.

[Terry McAvoy:]

Thanks. So just one last balance sheet question, if I could. Your non-interest-bearing deposits actually up 2% year-on-year, and I'm guessing that's because of Northern States. Just any commentary on core non-interest-bearing deposit trends last year? And how do you incorporate maybe ongoing outflows into your margin outlook for 2019?

[Mark Sander:]

Well, I probably will take this one. Our deposit retention, we expect this to be good. It's been, frankly, a little more favorable than we had anticipated in 2018. So that's where the trend has been. We worked promotional with some CDs over the course of the year, and that generated right along -- right where we expected it to. But fundamentally, the core transactional deposits have held up really nicely through this rising rate environment. Pat, would you have anything else there?

[Pat Barrett:]

Yes. I think I'd keep it at that we did highlight we had some increases in corporate or business DDAs as we finished the year off. But for the most part, we were relatively stable throughout the entire year, which was better than we expected. We did expect more runoff, and we're able to create more funding without sucking it away from our existing funding base.

[Terry McAvoy:]

All right. Thanks everyone.

[Mark Sander:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Nathan Race with Piper Jaffray. Please go ahead.

[Nathan Race:]

Hey, guys. Good morning.

[Mike Scudder:]

Good morning.

[Nathan Race:]

Just one housekeeping question on Bridgeview. I know you guys are still working through the various items to get that deal closed. But do you guys have a timing in mind for the conversion of their systems? Just trying to get a sense of when those cost saves should later over.

[Mike Scudder:]

Nate, this is Mike. I can help you in here. It will likely be in the second quarter is what we're anticipating. It's really a function of timing of the approval process and just the flow-through itself.

[Nathan Race:]

Okay, got it. And then just kind of thinking about the balance sheet dynamics post the close of Bridgeview. Could you guys kind of help with the size of securities portfolio and if we should kind of factor in any type of run-off or attrition with Bridgeview post close.

[Mike Scudder:]

On the securities book specifically?

[Nathan Race:]

Both on the securities book and then just also on loans and deposits

[Mike Scudder:]

I would say we generally initially tried very hard to hold balances, lump-sum deposits, understanding there's just the natural bias in the short term towards attrition. On the investment portfolio, that would likely remain similar in size but over time recycle a little bit as to character just to conform with the duration and asset types that we prefer.

[Nathan Race:]

Okay. All my other questions have been answered. Thank you.

[Operator:]

The next question is a follow-up from Michael Young with SunTrust.

[Michael Young:]

Hey, thanks for the follow-up. Just wanted to touch base particularly on some of the C&I sector lending areas, if there are any areas you felt like were going to have particularly stronger 2019s. And any update on kind of just the health care lending specialty? That's been an area where we've seen some higher charge-offs so. Just curious on your outlook on that area.

[Mark Sander:]

Yes, I would say not stronger, Michael, because we had a really strong 2018. So I would say we would see a continuation of what we saw in 2018, I think, in most of our sectors. The health care that we do has been -- is mostly senior living. We do a bit of physician practices as well. I feel really good about the credit quality of the portfolio. I'll just state that. And so we've been looking to get some of the noise we heard externally from others. We're not just waiting for them to happen. We go looking, and I feel really good about the credit quality of those portfolios. So I think you'll continue to see nice growth there. I actually think -- I'm hopeful that asset base will particularly grow a little bit more in 2019 than it did in 2018. We had a nice Q4, and I think they have nice momentum going into 2019. But the rest, I think, is more continuation of what we did in 2018.

[Michael Young:]

Okay. And one last one on kind of staffing and the competitive environment. There was some disruption, obviously, announced about 8 months ago. Any update kind of thoughts this year? Any hiring plans as we move throughout typical hiring season post bonuses here in the first quarter?

[Mike Scudder:]

Yes, I would say we're always in the market for high-quality talent and that good commercial bankers and good wealth management revenue producers pay for themselves very quickly. So we'll continue to be active looking for those where there's disruption, which is even more general in the marketplace.

[Michael Young:]

Okay. Thanks.

[Mike Scudder:]

Thank you.

[Operator:]

[Operator Instructions] If there are no further questions, I will now turn the call back over to Mr. Scudder for closing comments.

[Mike Scudder:]

Thank you, and let me close it here briefly. Just as a reminder, and for those on the call, our focus as a company has been and continues to remain on our promise to help our clients achieve financial success, giving them and providing them with the superior client experience they've come to expect. That's really what sets us apart, and that's what differentiates us as we operate in the marketplace. With that, I therefore want to take the opportunity to thank all of our colleagues for their many contributions to and investment in our performance. They are the face of our company, and they deliver on our promise every day and we certainly do thank them for that contribution. I would also want to take the opportunity to thank all of you for listening, for your interest in and investment in First Midwest. So as we close, on behalf of all of us here, have a happy and healthy new year. Thank you.

[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.