First Midwest Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Jan 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2016 Fourth Quarter and Full Year Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open up the conference for questions-and-answers for analysts only after the presentation. It is now my pleasure to turn the floor over to Nick Chulos, Executive Vice President, Corporate Secretary and General Counsel for First Midwest Bancorp. Sir, you may begin.

[Nicholas Chulos:]

Good morning everyone and thank you for joining us today. Following the close of the market yesterday, we released our earnings results for the fourth quarter and full year of 2016. If you have not received a copy of this press release, it is available on our website or you may obtain it by calling us at (630)-875-7463. During the course of the discussion today, our comments may include forward-looking statements. These statements are not historical facts and are based upon our current beliefs. Our comments also are subject to certain assumptions, risks and uncertainties and are not guarantees of future performance or outcomes. The risks, uncertainties and Safe Harbor information contained in our most recent 10-K and other filings with the SEC should be considered for our call today. Here this morning to discuss our fourth quarter and full year results and outlook are Mike Scudder, President and Chief Executive Officer of First Midwest; Mark Sander, our Senior Executive Vice President and Chief Operating Officer; Pat Barrett, our Executive Vice President and Chief Financial Officer; and Paul Clemens, Executive Vice President. With that, I will now turn the floor over Mike Scudder.

[Michael Scudder:]

Thank you, Nick. Good morning, everyone. Thanks for joining us today. It was certainly a very active fourth quarter for our company and marked 2016 as a year that saw significant progress on a number of our strategic priorities, all of which were achieved against a very volatile operating backdrop as we navigated through the course of the year. As we take a look from a higher altitude, our focus is really continued to center on building our talent, diversifying our revenues, and accordingly investing in our infrastructure as we pursue opportunities for growth. That focus is clearly evident in both the quarters and the year's results. As we signaled last quarter, the fourth quarter was significantly impacted by our pending acquisitions Standard Bancshares, which closed a little over a two weeks ago on January 6th, as well as on our ongoing organizational response to the underlying growth that has come through 2016. Because of the distorted impact that had on the quarter versus prior periods, I will cover the highlights and leave more time for some additional detail and color from the team here at large. Before I move on and do that though, however let me go through an add to next introduction and introduce Pat Barrett, who has joined us in early January as our new Chief Financial Officer. Welcome Pat. Given the timing of Pat joining us, Paul Clemens will do the heavy lifting this quarter in terms of commentary, and then all of you can expect Pat to be at the point as we move forward from this point on. Obviously, Paul will be working with Pat to facilitate that transition over the next few months, which is again consistent with what we've talked about over the course of the year. So, let me start with some of the quarterly highlights. We reported earnings for the quarter of $0.25 per share versus $0.21 for 2015's fourth quarter and $0.35 versus the linked quarter. When you exclude some $8.5 million of pre-tax costs largely responsive to what I call acquisitions and organizational growth, our earnings were essentially $0.32, are up about 10% from where they were a year ago and consistent with what was a very strong third quarter. Additionally, the quarter also absorbed the equivalent of the impact of our investment in commercial leadership, as well as the healthcare team that we announced over the course of the quarter. So, if you use those same metrics for the full year, earnings per share were up 8% and our profitability continues to improve. We close the year with our balance sheet very well positioned for the upcoming year. Our loans are up 15% versus 2015, largely on the strength of organic and acquired growth. Linked quarter our annualized growth was 4%, but recognize our third quarter growth was abnormally strong, nearly 10% annualized and that took some volume for the fourth quarter. Like we also, we made some solid progress from a credit perspective there as well. So, overall our core growth rate for the year was right in line with our expectations. Importantly, our core funding is even stronger than when he started 2016, average core deposits for the quarter are 11% higher than the same period a year ago with virtually all of that growth concentrated in lower cost transactional accounts. Our capital mix has improved significantly with our total capital ratio over 100 basis points up from a year ago, and our late third quarter sale leaseback transaction adding further flexibility. As we look through what was a comparatively very noisy quarter, our net interest income and margin were generally in line with our expectations, but distorted relative to the third quarter due to a number of factors that I've asked Paul to elaborate on. These temporarily mask the positive contribution we received from relatively higher loan balances. From our perspective, these metrics will normalize as we kick off 2017, and benefits from the full impact of adding Standard's assets and liabilities to the quarter. Our credit quality remains sound, our non-performing assets remain low, though they are marginally higher versus the linked quarter in a year ago, largely due to remediation timing for a singular credit. Our loan loss provisioning was comparatively lower, as third quarter's provisioning was inflated due to changes in the comparative portfolios and pace of growth between the quarters. Year-over-year our loss reserves as a percentage of loans are essentially unchanged and our net charge-off activity was about 8% lower than what we saw in 2015. Our fee-based revenues were up 14% versus 2015, but relatively stable again linked quarter with particularly strong performance by our leasing and mortgage business lines. Our expenses remain well controlled and were largely in line with our expectations. So, with that from a highlight perspective, let me transition over to Mark for some additional color. Mark.

[Mark Sander:]

Thanks Mike. Loan growth in the fourth quarter came in as we expected and following our very robust previous result kept an excellent year of 15% total loan growth as Mike referenced. In Q4, diverse commercial real estate projects and 1-4 family mortgages droved the 4% increase. More specifically, we saw a continuing growth in our undersized construction book, steady gains in office and industrial and further modest market share gains in our mortgage volumes. As we look back on the year in total, even after excluding our National Bank & Trust acquisition, organic growth was over 10%. This reflects the diversified contributions across our team, as we are very pleased to see double-digit organic growth in each major category; C&I, CRE and Consumer. These gains were largely result of the talent investments we made in the last few years as we previously discussed on these calls. While slightly exceeding our expectations, this growth was in line with reasonable performance goals on a per lender basis. We expect to be able to continue to outpace industry loan growth going forward as well, as our pipelines are solid across several platforms. In Q4, we further strengthened our teams by taking advantage of some market disruptions, both with the expansion of the healthcare team in the Midwest that we previously announced, but also by adding handful of commercial bankers in Chicagoland. Given all of this, we anticipate high-single digit loan growth in 2017. Fee income came in as expected at $37 million, flat to linked quarter due to normal seasonal declines in certain consumer line items, but up almost 10% from a year ago. About two-thirds of that Q4 year-over-year increase was from our Q1 acquisition of NB&T, and was seen most notably in wealth management and in deposit service charges where it largely offset declines from overdraft related revenues. Card fees continue to grow by 5% organically from the prior period in Q4, as our gains in active checking household bear fruit. Mortgage banking income was flat from the prior quarter, as the benefits of the higher volumes I referenced and MSR valuation gains offset the absence of back book sales like we had last quarter. And lastly, also as expected, given our outsize loan growth in Q3, swap income this quarter came in at a more normalized level. Going forward, we expect total fee revenues to again grow at low-double digit levels in 2017. This is a result of mid-single digits organic growth across multiple categories, layering in Standard and an extra quarter of NB&T and then offset by about a $6 million total hit, resulting from the Durbin impact on card revenue. Turning to credit for a minute, results were favorable compared to our plans and guidance. Charge-offs in Q4 of $4.5 million resulted in full year level of 24 basis points, slightly better than our guidance. All NPAs rose this quarter from 9.30 larger due to the one credit that we expect to remediate early in 2017, conversely adverse performing credits dropped dramatically. We thus begin the year feeling very good about our credit quality. We feel confident that charge-offs in 2017 will be at a similar basis point range that we experienced in the last two years, recognizing that we are at the lower end of what we considered a normalize level for our business. Paul will now offer some additional color on net interest margin and expenses.

[Paul Clemens:]

Sure. Thank you, Mark, and good morning, everyone. Let me cover net interest income and margin first. As expected, the temporary overlap of $150 million, September debt raise subsequently used to repay November maturing debt – senior debt weighted on the fourth quarter, coupled with the $2 million decline in accretion primarily related to the NB&T acquisition. Our net interest income decline $3 million from third quarter. We anticipated a decline in accretion, though estimates are difficult given the volatility that can occur particularly in the first year after an acquisition. Net interest margin which declined 16 basis points from the third quarter was distorted relative to recent trend line by the combined effects of the overlapping debt cost and lower accretion and to a lesser extent certain interest accrual adjustments all of which obscured the benefit we received from higher loan balances. Adjusting for the temporary drag of the overlapping debt, our margin would have been back above 3.50%, close to 3.52% or 3.53%. For the full year, net interest income of $315 million was up $38 million or 12% compared to the prior year. This increase was due to a combination of higher loan balances relative to our earning assets total, reflecting both organic growth in the acquisition of NB&T as well as investment issues which deployed excess cash. Net interest margin for the year compressed slightly from 3.68% to 3.60% primarily reflecting the continued shift in loan mix to lower yielding variable rate loans under the continuing low rate environment. As we look to 2017, we expect significant growth in net interest income in 2017 largely attributable to the combination that Mark mentioned of $1.8 billion of loans from the acquisition of Standard combined with continued strong organic loan production of high-single digits Mark just mentioned. We further expect the impacts of acquired loan accretion and higher rates loss be large in 2017 than we saw in 2016. Let me be a little more specific. In total, we would expect net interest income to be up nearly 40% compared to 2016, with roughly 80% due to balance sheet growth and the remaining 20% split relatively evenly between the impact of accretion and higher rates. Know however that accretion is likely to be largest in the beginning of 2017, diminishing steadily throughout the year. By contrast, our assumptions on interest rates, or the effect will be largely in the second half in 2017. Consistent with net interest income, we expect net interest margin in 2017 to be significantly higher than 2016 due to higher balances, higher loan accretion and higher interest rates. We expect margin in the first quarter of 2017 to be approximately 40 to 50 basis points higher than the fourth quarter of 2016, and remain relatively stable throughout the year as the diminishing effect of accretion are offset by the impact of rate hikes and shifts in earnings asset mix, leading to a more consistent core NIM. Let me turn to noninterest expense for a second. Excluding acquisition-related expenses and a lease cancellation fee associated with the announced relocation of our corporate office, fourth quarter expenses were $84 million compared to $82 million for the third quarter. The increase was due primarily to higher salaries, expense related to rise of the Company stock price on a non-qualified deferred comp plan, which the stock price grew from roughly $19 to $25 over the quarter. Additions to commercial sales staff Mark mentioned earlier along with certain staff add and anticipated the Standard transaction which closed the very first week after the year end also contributed, as did certain seasonal increases as the normal uptick in advertising. Overall, or as Mike mentioned, our 2016 expenses came in as expected excluding the integration, they were at $324 million or roughly $81 million on average per quarter. Let me give some guidance as far as our expense for 2017 as well as Mike and Mark both alluded; two, we are anticipating a significant growth in 2017 and expect to support this growth with positive operating leverage that will steadily improve our profitability. From an expense standpoint, this translates into the following 2017 expectations. Approximately a 21% increase in total noninterest expense compared to full year 2016, comprised of $50 million increase in the Standard acquisition by itself. This is in line with our original target of 40% cost saves with around 75% or $20 million realized in 2017. This dollar increase is expected to be generally spread evenly between salary and benefits and all other categories. Excluding Standard, salary and benefits are expected grow at a mid-single digit rates reflecting normal increases from merit and promotions, employee health insurance and other benefit costs, as well as relatively modest staff increases for revenue producers. It also includes higher staffing cost and risk compliance organizational management costs reflecting the upward bias in certain expenses associated with crossing $10 billion in assets. Also excluding Standard, total other noninterest expenses are also expected to growth at a mid-single digit rate, primarily in occupancy [ph], professional services and so forth, as well as higher FDIC premiums reflecting the higher cost with our size. This equates to approximately $98 million per quarter excluding integration. Although, first quarter expenses will be – likely be $1.5 million to $2 million higher since we won't be converting Standard's operating systems or executing certain branch close until late in the quarter, with the subsequently quarter slightly less than that. Finally, we expect the cost saves from Standard to more than cover the 2017 integration cost, though the majority of the costs will be incurred in the first quarter with the cost saves beginning primarily with the second quarter. With that, let me turn over to Mike. Michael Scudder

[Operator:]

[Operator Instructions] The first question comes from Michael Young with SunTrust. Please go ahead.

[Michael Young:]

I wanted to start first maybe with the expense guidance you laid out, the 21% increase in 2017, is that off the core expenses from last year, the $324 million?

[Paul Clemens:]

That's correct.

[Michael Young:]

Then, you mentioned sort of a modest amount of hiring this year. Can you maybe just talk about how many people you hired last year and maybe what a modest amount of producer hiring this year would look like?

[Mark Sander:]

I'd say it this way, we probably – we had an outsized amount of it in the fourth quarter. We hired a healthcare team that was four people and we hired five commercial bankers in Chicagoland, that's outsized in Q4 I would say. Over the course of year, we probably hired a dozen in total commercial bankers in Greater Chicagoland. I would say for 2017, not a lot. We've got the team in place. So, we'll always like we'll say opportunistically keep our eyes open for talents particularly where there is market disruption, but we don't have needs that we need to fill in terms of new hires. So, it would be very spotty in 2017, I would suspect.

[Michael Young:]

Great, and then maybe just switching to net interest income and the NIM outlook, I may have missed how many basis points you thought that was going to be higher this year, but also just wanted to get the amount of interest rate hikes you are sort of baking into your guidance there?

[Paul Clemens:]

Sure. This is Paul, let me take them one at a time. The number of interest rate hikes we have built in are 25 basis point in June, again in September and then next December which will have no relative impact. And we gave the – we estimate the impact was beta built in roughly of about every 25 basis point is worth about $2.5 million per quarter. Little higher than that was Standard coming on board and the early raises and beta starts to kick in as we start to impact our non-indexed deposits. So, thus we have in terms of the rate increases. In terms of, the net interest income we had going up roughly 40% in total, about 80% of that is from rates in loan growth and the other 20% is split between the – I am sorry, is loan growth and the other 20% is basically between rates and accretion. So, our accretion will go up roughly, we think accretion was roughly $14 million this quarter of this year, it will be roughly $29 million next year, primarily on the strength of Standard.

[Michael Young:]

Okay. And the total NIM increase, I'm sorry I think I just missed it in your prepared remarks.

[Paul Clemens:]

I don't know that I – I think what you'll see is that our – on a 75 basis points increase roughly saying this December, June and September you'll see roughly a 30 basis points on average NIM next year for the whole year.

[Michael Young:]

Okay, perfect. And I'll step back for now and let someone else go. Thanks.

[Operator:]

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

[Brad Milsaps:]

Good morning, guys. Paul, sorry, I guess I'll stick with the margin. Maybe I'm a bit confused. I think you said 40 to 50 basis points up in 2017, is that from the reporter number for the year or is that more from the number you know less year accretion that you reported in 2016?

[Paul Clemens:]

Let it be clear, for the first quarter alone, it's up 40 to 50 basis points from the reported in the fourth quarter of 2016.

[Brad Milsaps:]

Okay. Got it. So, you would be in that kind of 3.85% to 3.95% range, you believe?

[Paul Clemens:]

That's exactly right for the first quarter.

[Brad Milsaps:]

Okay. And then you would be stable from there based on your two additional or I guess three, the December 1, that you're taking, it doesn't really count, but you would be stable from there as the accretion runs off offset by the rate hikes?

[Paul Clemens:]

That is exactly right.

[Brad Milsaps:]

Okay. Because if I look at Standard, I guess they've been running at closer to a 3.5% margin, so really it's the rate hikes. I guess, I am still – or I guess you just have a lot of accretion built into the first quarter.

[Paul Clemens:]

Yes. I mean, it's roughly 35 basis points, roughly it tends to double in the first quarter for Standard.

[Brad Milsaps:]

Okay. Got it. And can you go back, and I am sorry I was writing quickly. You said this quarter, you thought that the more normal margin was kind of in that 3.50% to 3.53% range, is that what you said? I was curious kind of how you get there?

[Paul Clemens:]

Well, we actually were 3.44% and we had roughly 8 basis points associated with the debt with the additional debt overlap.

[Brad Milsaps:]

Yeah.

[Paul Clemens:]

Okay. That gets us about 3.53%. I would say that we had some slightly higher than normal interest reversal, so I've always said along we're somewhere around 3.55% on a normalized basis.

[Brad Milsaps:]

Okay. Got it. And then just back to the expense thing. You said sort of not – excluding Standard you look for mid-single digit growth on standalone First Midwest expenses?

[Paul Clemens:]

Correct.

[Brad Milsaps:]

Okay. All right. Great. Thank you very much.

[Operator:]

The next question comes from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Good morning everybody. Paul, maybe for you just going back to the margin, the $29 million for the year for total accretion, I guess that includes Standard and previous acquisitions. What's the total amount that's going to be added to the accretion from Standard? I believe at the end of the fourth quarter, the total accretable prior to Standard was around $20 million.

[Paul Clemens:]

You mean how much is accretion in total over the life?

[Chris McGratty:]

Yeah, how much did you add…

[Paul Clemens:]

We are going to add about $60 million in accretion, the mark is roughly a $60 million, okay.

[Chris McGratty:]

And that comes in over what three to four year period, is that right?

[Paul Clemens:]

Correct. We're actually just finalizing our mark right now.

[Chris McGratty:]

Yeah, understood. Just to make sure I understood the fee income guidance, the growth rate is off of – is it off the $159 million reported or is it off of – maybe net of modest gains?

[Paul Clemens:]

Is off of the fee income – the fee based revenues line Chris, so the $145 million.

[Chris McGratty:]

Okay. So, it's the growth off the $145 million, okay. And did you quantify the MSR in the quarter to the mark?

[Paul Clemens:]

We do not.

[Chris McGratty:]

Was it meaningful – was there a meaningful contributor?

[Paul Clemens:]

That's not really. I mean it was less than the gain we expect to gain we had in the third quarter. So, it was a modest of boost.

[Chris McGratty:]

Okay, understood. Maybe last question on the tax rate, how should we be thinking about an effective tax rate with 2017?

[Paul Clemens:]

Yeah, that's a good question, Chris. In 2016 it went from 31.5, in 2015 to 33 in third, in 2016 it was really predicated on the increase of taxable pre-tax income to total pre-tax income, it just continues to grow. Our non-taxable income is in the muni book and BOLI and that's not growing. So, I would expect you'll see our effective tax rate for the whole year to grow similar in 2017 what it did in 2016, a couple percentage points with the first quarter where we have pretty heavy integration cost the tax rate should be lower than that.

[Chris McGratty:]

So, around 35% for the year basically?

[Paul Clemens:]

Yeah.

[Chris McGratty:]

Okay. And the total number of one timers and the timing that comes through, do you have an estimate?

[Paul Clemens:]

I am sorry, the integration costs or total what?

[Chris McGratty:]

Just the merger one-time expenses that are going to come through with the integration?

[Paul Clemens:]

We expect there to be somewhere around $17 million, that's in line with the guidance we gave.

[Chris McGratty:]

Okay. Thanks for taking the questions.

[Operator:]

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

[Terry McEvoy:]

Good morning. I will steer clear the NIM questions. I guess bigger picture, what impacted either the rate increase in December have on your borrower behavior? And then also maybe after the elections in November, what were you hearing and seeing as we moved through the fourth quarter and how has that impacted loan pipelines if anything?

[Michael Scudder:]

I don't think it's impacted our loan pipelines itself. Terry, I would say that certainly optimism I guess is up a little bit. Anytime you have – what's perceive to be pro-business rhetoric and the prospect of lower taxes gets business owners a little more optimistic of course. But I don't think anyone has changed their plans and doesn't has any impact on our loan demand as we see everything. People are taking a little bit more of a wait and see attitude. But against the backdrop of people, we're generally fairly optimistic going in. This is giving that a little bit more boost I would say.

[Terry McEvoy:]

And then Mark, the construction book up another $50 million if I remember. Is any of that residential development or is that predominantly on the commercial side?

[Mark Sander:]

It is all on the commercial side. I don't believe there is any residential development in there. If there is, it's nominal.

[Terry McEvoy:]

And then just a last question on Standard, if I go back to my notes, you felt the deal would be accretive in 2018 by about 13% in terms of earnings per share. Can you just remind me, am I correct on the 13%? And what was the rate outlook under that scenario last June when you made that statement?

[Paul Clemens:]

I think it was 12.8% or something, it's 13%, you are exactly correct. As far as the rate increases, I think it was at that time to be honest with you, was a couple rate increases in 2017, but that's what we have built in.

[Michael Scudder:]

Terry, from my perspective of the any difference in the rate forecast over the different periods of time would have been on both sides of the equator there. So the actual percentage impact probably would have been about in the same way.

[Terry McEvoy:]

Yeah. Great. Thanks Mike and thanks Paul.

[Operator:]

The next question comes from Kevin Reevey with D.A. Davidson. Please go ahead.

[Kevin Reevey:]

Good morning, everyone. A quick question on – I just noticed your wealth management fees in the quarter were down just a little bit. Was that just seasonality related or was there something else going on there?

[Mark Sander:]

A little bit of seasonality, a little bit of as the retail brokerage business specifically transitions to more of the away from the transactional and more towards the fiduciary rules that are phasing in in the second quarter of this year. There is a little bit of softness in the retail brokerage as we made that transition. We are long way down the road of that transition I would say, but that was really what caused the flatness if you will, because our trust revenues were up nicely in the quarter.

[Kevin Reevey:]

Okay. And then, I know it's a little early, but I know you are into a couple weeks with the standard deal. Are you seeing any type of customer attrition as a result?

[Mark Sander:]

We're not. As you noted, we are early in it of course, but I would say that we're just optimistic. There is always some time for transition, and so the growth rate that we've anticipated from Standard is perhaps lower than our legacy, just reflective of that transition happens, but we're still expecting growth there, where I would say, we had a lot of dialogues lean up to the merger date, and so, I'd like to characterize it, I would say that team is leaning in and looking out and we're just optimistic about the leaders and the colleagues that we've hired there.

[Kevin Reevey:]

Great, and then the last question on the – your non-accurals, one if I know was one customer relation. Can you kind of give us some color as far as the industry and kind of the region?

[Mark Sander:]

It was in Greater Chicagoland in the manufacturing, but again was one credit that I expect will be completely remediated in the first half of this year. You know we took a little charge on it in the fourth quarter, which is in our numbers. And again, overall credit quality, we're pleased with our charge-offs, very good levels and the adverse performing piece, when you see that come out was significant improved. So, in total we felt good about credit quality.

[Kevin Reevey:]

Excellent. Thank you for taking my call. Thank you.

[Operator:]

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

[Nathan Race:]

Just a question on the reserve, first just kind of curious on expectations where you think that will settle as we get out and towards the end of 2017, obviously you are going to have to provision as you accrete some of the discount type of standards, so just any thoughts on the reserve as we go through 2017?

[Michael Scudder:]

We've just generally looked at it and obviously there is a number of factors that are forward occurring that drive ultimately where year-end levels are going to be. But fundamentally given where we start today, we don't see much incremental difference in the reserves. We're pretty low on the cycle in terms of the credit and we'll just continue to monitor it. But if you look at where our reserve levels are today, I don't see those being incrementally that much different than where they are next year, all things being equal.

[Nathan Race:]

Then Mike, just in terms of opportunities for additional acquisitions in 2017, just curious how conversations have trended since the election kind of – if you are ready to do another acquisition as we sit here today?

[Michael Scudder:]

Sure. As I said in may prepared remarks, we spent a lot of time in building infrastructure and talent and getting organized to do that. Our primary focus is making sure that what we've accomplished and our combination with Standard goes well and we continue to execute on that. But I always say there is really no barriers to further pursuit of opportunities other than common sense, and making sure that that's aligned with what we're trying to accomplish strategically. As far as the environment for those types of activities, I haven't seen a significant uptick or downtick in terms of just general conversations and discussions that are out there broadly, but I don't anticipate what I would call any meaningful change in that outlook over the next couple of quarters and people will continue to evaluate the environment, and obviously it's not lost on sellers that are out there relative to the improvement in the overall operating environment, expected improvement in that and certainly the lift in stock prices that have been seen, certainly provide avenue for currency to be used there more effectively. We'll say there's really nothing other than making sure what we've been doing consistent with our strategy of M&A opportunities for us are not a strategy. They are accelerator of a strategy. So, we continue to execute on our strategy for those opportunities that are aligned with what we're trying to do, and we'll certainly pursue those.

[Nathan Race:]

Thanks for taking the questions.

[Operator:]

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

[Michael Young:]

Hey just had one quick follow-up on the NIIs sort of harp on that but, any changes in strategy maybe within the securities book or even loan pricing is kind of driving I guess the potential upside there. I know obviously past, you know it might bring some new ideas to the table, just wanted to check on that?

[Mark Sander:]

Relative to loan pricing, I would say no change in strategy. Our margins have held up pretty well and have been pretty stable over the course of the year.

[Paul Clemens:]

There is going to be no real appreciable change in our investment book. Honestly, it will – it rolled this past year as we deployed some cash, but it's going to be held fairly constant.

[Michael Young:]

So, no material liquidity to pull them in the first quarter, or extension of duration that you expect?

[Paul Clemens:]

No.

[Michael Young:]

Okay. Thanks.

[Operator:]

The next question is a follow-up from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Thanks for taking the follow-up. The guidance on the margins, I'm interested in how are you modeling betas, maybe over the next couple of rate hikes, can you disclose or offer an opinion on the assumed betas as we kind of get into a rising rate environment?

[Michael Scudder:]

We haven't Chris disclosed specific betas across the modeling that we do. Obviously we try to adapt those. Ultimately, what's going to happen is going to be reflective of what market conditions do, but as we've modeled, and as we looked across others that are out there, you generally see people modeling in that 40% kind of beta range and that's, you could presume we're in that general ball park.

[Chris McGratty:]

And you haven't seen Mike any of the larger banks you market move pricing or have you see any movement yet?

[Michael Scudder:]

We have not seen it as of yet.

[Chris McGratty:]

Just the final one, just so I'm clear. The net interest income guide, is that off of FTE, or that is reported?

[Paul Clemens:]

I'm sorry what was the question?

[Chris McGratty:]

The net interest income growth, the guidance you provide, is that off of the $350 million or kind of the $358 million FTE for the year?

[Paul Clemens:]

Off the $350 million, of the reported.

[Chris McGratty:]

Alright. 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.

[Michael Scudder:]

Thank you very much. Before I close, I want to take the opportunities. I know we have a number of our newest colleagues from Standard Bank & Trust maybe listening to the call. I take the opportunity to welcome them to the First Midwest family. We also want to thank all of our colleagues across the Company, both newly joining us and those who have been with use for a long period of time for their contributions to a very successful 2016. I would also be remised if I did not take the opportunity to thank Paul as he moves towards retirement here, for his many contributions to First Midwest over what's been a stellar career here. So, with that, what I would do is, as I always do on these calls, thank you for your interest in and attention to our story. We greatly appreciate your interest and hopefully share in our belief that First Midwest is a great investment opportunity. 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. You may now disconnect.