First Midwest Bancorp, Inc.
Q1 2015 Earnings Call Transcript

Published: 22 Apr 2015

[Operator:]

Welcome to the First Midwest Bancorp 2015 First Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the floor over to Nick Chulos, Executive Vice President, Corporate Secretary and General Counsel of First Midwest Bancorp. Sir, you may begin. Nick Chulos Good morning, everyone. We're pleased to have you join us today. Following the close of the market yesterday, we released our earnings results for the first quarter of 2015. If you have not received a copy of this press release, you may obtain it on our website or 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 on management's 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 when evaluating any forward-looking statements. Here this morning to discuss our first quarter results and outlook are Mike Scudder, President and Chief Executive Officer of First Midwest Bancorp; Mark Sander, our Senior Executive Vice President and Chief Operating Officer and Paul Clemens, our Executive Vice President and Chief Financial Officer. With that, I will now turn the floor over to Mike Scudder.

[Mike Scudder:]

Thank you, Nick. Good morning, everyone. As always, thanks for joining us here today. My intent is to cover the highlights for the quarter and then I'll turn it over to Mark and Paul and offer some -- they can offer some additional color from a line item and a business perspective and then I'll certainly take it back up with some closing remarks. Looking at the quarter as a whole, the quarter was solid. That was in line with our expectations and reflected good progress on a number of our plan initiatives for this year. Earnings for the first quarter came at a $0.26 per share and what is traditionally a softer quarter as we look to start the season. That is 8% higher than a year ago, 37% higher than last quarter though certainly from a core perspective given last quarter's M&A activity and acquisition activity was relatively in line when you contrast core performance for the fourth quarter as a whole. Top line revenues were up 17% from the same quarter a year ago, 5% annualized from the fourth quarter and that's largely reflected of our acquisitions of Great Lakes and the popular community branches that we acquired in December and August of last year respectively. This growth helped improved our efficiency which fell to 64% from 67% a year ago. Operationally, both our operational and sales integrations are now fully complete for Great Lakes, which we recall closed with the first week roughly in December and I'm pleased to say that the client experience both in the case of Great Lakes as well as the acquisition of the popular community bank branches in August of last year were exceptional and our client and colleague retention levels have greatly exceeded our expectations. Late in the quarter we can validate at four of the former Great Lakes locations, two of those were what I would describe as full service locations into our own network broadly. Our fee businesses for the quarter were particularly strong, Mark will touch on this in a little greater depth, but those are up 14% from a year ago. Strong performance was exhibited across our teams, most notably our wealth management team was again a strong contributor for the quarter that was up from last quarter above 4% by itself. As was our newly rebranded First Midwest equipment finance, again the former national machine tool, which contributed to noninterest income about a $150,000 for the quarter as that continues -- that business continues to gain momentum. From a credit perspective the quarter reflected the lumpiness that I would describe that comes with today's low levels, both from a potential problem performing level as well as what's nonaccrual loans, our nonaccrual loans fell to 48 million, that’s down 20% from the fourth quarter that was largely due to a credit we talked about in the third quarter of last year getting resolved. And as a result our credit cost came at a little higher in the quarter, but we expect that to even out over the course of the year. So with that as a quick recap, let me turn it over to Mark and Paul and they could offer some additional color.

[Mark Sander:]

Thanks, Mike. And as Mike noted, revenues were up 17% in the first quarter versus a year ago driven by organic loan growth, continuing strength that Mike highlighted in several income constrains and of course the benefit of the acquisitions. Let me start with loans. Year-over-year growth away from covered of over $1 billion was up 18.5% approximately a third organic and two-thirds from our acquisitions. In Q1 alone our growth of 5% annualized from year-end was helped by planned portfolio purchase of home equity loans. Recall we purchased about a $100 million of similar loans in 2014 and as that total dropped over the course of the year to about $70 million, we replenished this asset class in the quarter. These high quality loans have performed better than our expectations and given our very modest level of transactional credit across the bank we felt there is approximately $50 million net increase in the quarter was a good use of our strong liquidity. Away from this purchase, loans were up about 2.5% annualized in the seasonally slow first quarter. Loan growth each of the last three years in Q1 was softer than our annual result and we would expect a similar pickup in Q2 and Q3 of this year as well. We did see continuing strengths in C&I this quarter up over 11% annualized since December in line with our success build in this segment the last couple of years. This growth was largely offset by commercial real estate, which fell almost 60 million dollars in the first quarter as anticipated pay downs and refinances that we foresaw indeed occurred. Fortunately, our current pipeline in this unit is very strong. So we would expect good growth in commercial real estate in Q2. Combined with solid pipelines in our other commercial business units and the favourable organic loan growth coming from our branch online and phone retail channels our full year guidance remains unchanged. We continue to look for full year loan growth of mid topper single digits in 2015. Should I shift into non interest income for a few minutes? Key revenues as Mike highlighted were bright spot in the quarter of 14% from a year ago. You know, in a summary I would say we continued to generate very strong wealth management, treasure management and card income growth. Our NSF revenue continues to slip more modestly than in prior years and we are creating higher and notably we believe sustainably higher in the long term. Income streams from our mortgage expansion and our new leasing capabilities. Mike give a little bit more specifics and a little more granularity on each line someone to go through each line from page 4 of our release and in each case compare Q1 to Q1 of last year which we believe is generally the best comparison. Referring at the top service charges we're up over 15.5% driven largely by acquisitions, which added about 10% to this revenue strength. In addition, our fee growth in treasury management was significantly greater than the decline I mentioned in NSF. So should that drove about a third of this line item increase. Wealth management as Mike highlighted growth of 8.5% continues a long story of consistently positive quarterly results, a testament to the strength of that team, again our wealth management group delivered on the strong value proposition. Clients and prospects seeing our investment management, guardianship and retail brokerage offerings. Card-based fee growth of a million dollars year-over-year in the quarter was 60% organic and 40% from acquisitions, both largely driven by growth in active households. Mortgage, our mortgage business had a solid quarter. Mortgage production was up 40% year-over-year in the quarter in line with the increased expectations we've previously laid out and this should allow us to grow this revenue stream quarterly going forward. Lastly, the year-over-year jump you see in other fees is largely attributable of two items; first capital market sales improved from a year ago and then again as Mike mentioned asset sales from our leasing business that we bought in Q3 of last year and have now we branded as first personalized last equipment leasing. As with all three of our acquisitions our results in leasing thus far exceed our expectations. So last fees we noted that fee income growth for 2015 would, we said, well exceed 2014 levels. I'm getting a little bit more specific. While we may not equal to 14% growth we posted this quarter, we do believe the total fee growth would be at double digit levels for the full year. So now turning to credit, charge-offs of 50 basis points were high as a result of actions on three classified commercial relationships that two of these came a bit earlier in the year than we anticipated demonstrates the lumpiness inherent in this area, but does not change our outlook appreciably. We also liquidated the large commercial relationship we discussed in our Q3 call last year and the $2.5 million charge this quarter on that credit will equal to the reserve we established at that time. These actions decreased non-performing assets for over 11% lower than year end levels. In conjunction with normalized levels of adverse performing credits as well this should generate more normalized charge-off levels going forward. Looking at the rest of the year, our guidance here again is consistent with prior calls. We previously provided a charge-off range estimate of 25 to 40 basis points and we still expect to be in that range for the full year. So with that I’ll turn it over to Paul for margins and expenses.

[Paul Clemens:]

Sure. Thank you, Mark and good morning. Net interest income increased 1.3% or nearly a $1 million from the linked quarter in 21% to over $13 million from the first quarter a year ago. Linked quarter also reflects the fourth quarter benefit of the December 2014 Great Lake’s acquisition as Mike mentioned that closed in conversion the very first week of December and really reflected a $200 million increase in every joining assets because of that full quarter impact. Likewise the increase during the first quarter 2014 is due to 2014 acquisition of both popular and Great Lake’s as well solid [69%] 2014 organic loan growth. On the margin side, margin benefited from accretion related acquired loans, exploring this accretion as well as income from covered loans our first quarter margin would have been 3.56% which is pretty much in line with the fourth quarter and the 11 basis points higher than the year ago. The year-over-year growth basis points that is due to loans away from the acquisitions as well as the approximately $70 million to $75 million of acquired loans more than offset the margin comparison from changing the interest rates the shift from fixed to floating in competition. Compared to the first quarter of 2014, loans income now comprise 79% of earning assets versus 76% a year ago and draw net 11 basis point improvement margin in [respects] to the redeployed of cash we’ve talked about for some time. If we look to 2015 we don’t expect any rise in rates for the next couple of quarters. Last quarter we said we didn’t thought that there would be a rise in midsummer. We positioned ourselves overtime for rising rates with the growing flowing rate long portfolio, investing excess cash short term and maintaining our core deposits. In fact when we issue our 10-Q in two weeks you’ll see that these actions have increased our sensitivity to rising rates significantly even since December. Given our sensitive rising rates, the longer any rate increase differ the longer our net interest income will be constrained no news really there. But therefore in the short term are any increase in income we’re depended upon the level and timing of loan growth. As Mark mentioned, we expect second and third quarter traditionally or higher loan growth quarters for us. We can take some actions to offset some of the net interest income pressure but we don’t anticipate significant changes to our [indiscernible] positioning that would materially affect our interest rate sensitivity. Now also, as we think about margin for the second and third quarters that will remind you that the margin in these quarters is stored by the temporary build up and pay down of tact deposits from our municipal customers which [indiscernible] during assets lowers on margin but is little benefit to our net interest income and also during these quarter we could see some volatile due to the change in accretion related the acquired loans as well as income from covered loans. Let me turn to the expenses now. In expenses for the quarter, we’re pretty much in line with what we guide you last year, little below expense for the quarter was 72.2 million excluding the non qualified differed comp expense which is as always essentially offset by revenue. Once again actually this was less than anticipated we thought the quarter could be more than 73 million due to seasonal weather related cost as well as certain frontloaded and payroll cost in somewhere else small amount of remains for integration. While it was really cold around here we didn’t see the snow that we saw last year, our snow removal cost were less than we expected and also we also solve the timing for some advertising and shift related quarters which – other than those two items our expenses came in pretty much as expected. Compared to the first quarter 2014 our expenses our up 13.7% primarily related to operating additional 21 banking locations and managing roughly 15% asset growth from acquisitions. The increase scores also covers our annual increase in [indiscernible] commissions health and benefit plans, real estate taxes, IT [indiscernible] away from the acquisitions. For the quarter our official ratio improved to 64% as Mike mentioned as compared to 66% for the fourth quarter and down from 67% a year ago. And with that let turn it back over to Mike.

[Mike Scudder:]

Thanks, Paul. Before we open it up for questions just some further remarks. As I led off -- the quarter was solid. It was in line with where we thought it was going to be and as I said I think it reflected very good progress on a number of our plans through the year. From an operating condition perspective things are getting better. We feel pretty good as the environment is still challenging, challenging as you wait for higher rates and certainly as we tried to navigate, and it depends on your view, it's an increasingly competitive environment, or if it's just a competitive environment that is a very intense competitive landscape certainly for credit in today's environment. As Paul mentioned our non-interesting cum sensitivity continues to grow more positive, or positively sensitive to rising rates. And certainly as we look across call data there was metrics that one measures against that places and what we would call the upper quartile among our peers, when you look at earning assets that didn’t re-price, as well as you look at the incremental or wait the liability contributions that come from the quality of our core deposit base. So we continue to believe that's an advantage for us that few others are in a position to enjoy as we move ahead. It's throughout the year and in the next. Certainly recognizing that in that kind of environment, you have to work hard to maintain your balance in your risk disciplines which in turn requires patience. As I would say, internally here, life moves pretty fast when you live it every 90 days. So we try to maintain a longer term balance in terms of our risk platforms here and certainly as we try to navigate a transitional period to rising rates, we have to continue to maintain that as a focus area. Our priorities continue to remain in strengthening our teams, balancing our business investments and risk as we continue to grow and diversify our loans and by extension of our revenue streams. So we continue to feel and believe strongly that we have great opportunities to expand our platforms and our sales platforms, particularly our business banking and treasury management teams as well, leveraging both our investment on our existing teams , opportunities to continue to add talent both on the sales and support side of the business. We feel we are very well positioned to continue to grow and expand our business, leverage what we believe is a very strong culture, a solid infrastructure and certainly a very strong capital foundation and enhance shareholder value. So with that, let's open it up for your questions. Thank you.

[Operator:]

[Operator Instructions]. Our first question comes from Emlen Harmon from Jefferies. Please go ahead with your question.

[Emlen Harmon:]

Just a quick question on charge-off, any commonalities to the credit zero down in terms of either in this three geographies, underwriters, just kind of give us a sense of the landscape that's there?

[Mike Scudder:]

Really no commonality I guess, Emlen, I suppose if we put – so let me just give you a little behind that if you will. The three separate and distinct circumstances but not turned up today. The large commercial relationship that we remediated -- identified in Q3 closed out in Q1 and as I said we had set up a special reserve at that -- a specific reserve at that time. We came in at that same level, so we liquidated that company. That was in landscape materials business. The second one was a portfolio of commercial real estate that we have worked through over the last couple of years and this was the closed out resolution of that one as well. So this has been a two year kind of process that's closed out in the first quarter, again the portfolio of commercial real estate properties. And the third one was a service company that was high on a radar screen but wasn’t an NPA. It's been frankly number one on my and [indiscernible] list of things to look for in ’15. It came a little sooner in ’15 but we certainly anticipated that this was the most troubled one that we had. I guess I would say, in our list of things that we were watching out for. So, not a surprise but again that related in any way to the other two, I guess.

[Emlen Harmon:]

Got you and I thought this is a service company to -- I heard so I think all service, but what industry is that?

[Mark Sander:]

Data and healthcare related.

[Emlen Harmon:]

And then just remind us what you expect the reserve to do over that kind of 25 to 40 basis points of charge-offs.

[Paul Clemens:]

Sure, this is Paul. We've guide that charge-offs last year that came down from -- I'm sorry, the reserve came down from 154 down to around -- went down to 124 and that was down. And so we expect this year to be somewhere in the 114-115-112 range depending on what our credit does if this holds. So it would be down about half or less than what it was the previous year, which continues to trend which came down last year less than be before that.

[Operator:]

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

[Brad Milsaps:]

Paul, just a follow up on the margin. I think you said the discount accretion income was fairly consistent with previous quarters. How much do you guys have left in -- do you have a sense of how that flow through as you look out over the next few quarters.

[Paul Clemens:]

That's a really good question. And we have about -- we have about $23 million in accretion, I guess how Mark related to the acquired loans. You'll see it in our 10-Q___ in another week or two. And it's really a little early for us to know how these loans are going to behave. The accretion is dependent on renewals, pay downs and maturities, right? We peg the accretion as we look forward based on contractual amounts with some sense on what's going to happen with repayments and its -- we're just really a quarter away from Great Lakes and a little bit more there for Popular. So we expect the 23 basis points of accretion including the covered__recovered to be less in the second quarter and just it continued to decline over the next two years, three years. That’s about as much as I can give you at this early stage.

[Brad Milsaps:]

Okay. no, that’s -- that’s helpful. And you guys had a really nice expense quarter particularly given. The seasonally tougher first quarter of the year were some of the cost aides from Great Lakes, sort of offset was some of those normal seasonal type payroll tax numbers etcetera and just trying to get a better sense of how sustainable the first quarter is, kind of relative to the guidance you gave last quarter.

[Paul Clemens:]

Yes, I think that you'll see -- we guided to roughly $72 million in that range on average for the year per quarter and we thought first quarter would be higher, right? What we did see is -- what generally happens is even though the seasonal costs are higher in the first quarter in some payroll aide, what happens in subsequent quarters is that production goes up, we see higher commissions and incentives based on that production as well as the media spends and so forth. So that’s why traditionally what happens is the subsequent quarters cover what the -- cover the seasonal higher costs the first quarter. That makes sense?

[Brad Milsaps:]

Yes, that does. So 1Q more or less represents a pretty good run rate.

[Paul Clemens:]

Yes.

[Operator:]

[Operator Instructions] and our next question comes from Michael Perito from KBW. Please go ahead with your question.

[Michael Perito:]

Paul on the margin, I'm sorry I just want to make sure I heard right. Did you say accretion execution for the quarter was 365?

[Paul Clemens:]

356.

[Michael Perito:]

56. Okay, thank you. And so I guess that the expectation you mentioned the accretion should be less than 2Q at least. That’s how you're seeing it right now. On the core margin are you guys expecting to see some additional compression there as well?

[Paul Clemens:]

Well the margin will come down because a little bit -- very little bit because of that. Because we'll see some loan growth and more deployment from excess cash and loans. So that should offset some of that. The margin get distorted because we have literally $500 million to $600 million over the next three months of realty tax deposits that come in as a 25 base but we don’t lend out, so. The margin on a -- it's all you got [indiscernible] that comment.

[Michael Perito:]

And then Mike, may be on just M&A any updates on what you guys are seeing or how you guys are -- what you're looking for and may be any thoughts on what you are looking for and maybe any thoughts on – obviously the approaching of 10 billion related to growth guidance, just curious of how you guys are thinking about that.

[Paul Clemens:]

Yes. That really changed our view on that or on our positions we talked about in the quarters, we’re certainly – I’ve used the phrase before Michael that we’re not intimidated by the 10 billion at the same time I’m respectful of what the impact is. So, we tend to be – we continue to be conscious for that. We have a lot of liquidity that allows us some flexibility in terms of how we manage that particularly in the course of this year. As far as the M&A environment broadly it continues to be what I would describe an active dialogue environment and I guess it remains to be seen how much dialogue translates into formal action. But it continues to be a certainly an active from a dialogue perspective. But we continue to look for the opportunities in regards – as I said in my opening remarks, we feel we have a great culture we certainly got the infrastructure to be able to grow and expand and we have the capital foundation to do that. So, as those opportunities arise that meet our criteria and are discipline around that, we’ll continue to look to pursue those.

[Michael Perito:]

Okay. And then just a quick one on the two prior deals, you guys have recognized all the cost saves from Great Lakes and Popular are those in your run rate at this point?

[Paul Clemens:]

Yes

[Operator:]

[Operator Instructions]. Our next question comes from Bryce Rowe from Robert W. Baird. Please go ahead with your question.

[Bryce Rowe:]

Thanks. Michael just asked my question about the $10 billion, Mark. But appreciate you for taking the call. Thanks.

[Operator:]

[Operator Instructions]. And we do have an additional question from Daniel Cardenas from Raymond James.

[Daniel Cardenas:]

Just a quick question, your thoughts what impact of any would what the adoption of higher HECRE amounts have on your regulatory capital ratio.

[Paul Clemens:]

You’re talking about the transition of [indiscernible]?

[Daniel Cardenas:]

Correct.

[Paul Clemens:]

Yes. It would much have you see, it really didn’t have much impact on us its essentially increased risk rating on commitments under one year and increased risk rating on high volatile mortgage we don’t a lot of those and then few other minor things have to do with taxes. So impact was relativity modest for us. But we are having [indiscernible] transition.

[Operator:]

[Operator Instructions]. And gentlemen at this time it’s showing no additional question. I’d like to turn the conference call back over for any closing remarks.

[Paul Clemens:]

Thank you. I just want to close with just saying thank you for joining us today. Thank you for your interest in First Midwest Bancorp we greatly appreciate it and we would wish everyone a great day.

[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.