First Midwest Bancorp, Inc.
Q2 2015 Earnings Call Transcript

Published: 22 Jul 2015

[Operator:]

Good morning, ladies and gentlemen. And welcome to the First Midwest Bancorp 2015 Second Quarter 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 the conference up for questions-and-answers for analysts only, after the presentation. It is now my pleasure to turn the floor over to Mr. 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 earnings for the second quarter of this fiscal year. If you have not received a copy of this press release, it is available on our Web site or by calling us at area-code 630-875-7463. During the course of our discussion today, our comments may include forward-looking statements. These statements are not historical facts and are based on 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 when evaluating any forward-looking statements. And lastly we will not be updating any forward-looking statements following this call. Here this morning to discuss our second 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. As is our typical custom, what I'll do is cover some of the highlights for the quarter and let Mark and Paul provide some additional color and then certainly take it back up for some closing remarks. On the whole, the quarter was very strong, reflected good production across virtually all of our business lines. And most importantly we saw continued execution on our business priorities. Well that means in terms of both growing our revenues but also diversifying our revenue streams, we had balanced investment and the quality and engagement of our teams colleagues here at First Midwest continue to grow. So, earnings for the quarter came in at $0.29 per share, that's 12% higher than the first quarter, 16% higher than a year ago. If you look at our return on tangible common equity, that's up some 200 basis points from where we were a year ago, so, very positive numbers. A lot of that is driven by our top-line revenue growth which remains strong, that's up 5% from the first quarter, 20% from the same quarter last year. Our expenses were up slightly from last quarter, but that's primarily due to the fact that we made some, what I would call conservative adjustments recurring values for our couple of OREO properties. But on the whole our non-interest expense numbers came in very much in line with where we thought they would be. Year-over-year comparisons continue to be largely reflective of our acquisitions in the second half of 2014, from our acquisitions of both Great Lakes and the popular community branches in December and August of last year as I said respectively. This growth has helped us improve our -- not only our returns on tangible common but also helped us improve our efficiency, which decreased or improved to 62% from 64% last quarter and likewise the year ago. Our net interest income performance was solid. We had acquisition related accretion helped continue self offset the impact of low rates. And in our case we saw what I would call -- describe is abnormally heavier corporate loan pay downs, both in portions of our corporate book as well as in our commercial real-estate. That really masked a very strong production quarter in what I continue to suggest, and I am sure Mark would agree as what best described as a somewhat fluffy in competitive market. Mark can further elaborate on this. But we saw about 75 million in pay downs that really resulted from three or four borrowers having the opportunity to proactively sell their business or in some cases their investor real-estate interest. This activity by itself, kept us from being in line with where we said our loan production or our net loan production would be for the quarter which was above the 7% annualized range. So, at the same time though, our fee businesses remain a significant highlight for the company, up 10% from last quarter, 17% from a year ago, while the second quarter seasonably is stronger quarter, we again posted very notable wealth management growth. And that particular business area was up 6% from last quarter alone. As well as our growth -- continued growth and positive numbers that we've seen both in our merchant, swap and equipment leasing areas. From a credit perspective, we had a solid quarter. Non-performing assets dropped 7% from last quarter, our annualized charge-off numbers declined to about 33 basis points for the quarter itself. And on a number of fronts, very positive overall through the quarter. So with that let me turn it over to Mark and Paul who can offer some additional color.

[Mark Sander:]

Thanks Mike. Starting with loans, our 3% annualized growth was driven by solid production which was in line with our expectations, but as Mike mentioned offset by several unanticipated pay downs. Most notably, in various commercial real-estate sectors but also in the middle market space, we saw pay downs from sales of properties of companies in light of -- let's say our improving economic conditions and valuations. Commercial real-estate loans actually fell slightly in the quarter. A result frankly, we did not expect given the good production levels here and certainly one we do not see repeating going forward given our views on both pipelines and future anticipated pay-offs. Our net loan growth in all of other sectors was strong, as expected and as guided during our previous calls. Commercial and industrial loans grew 8%, agricultural 9% and consumer 7% on an annualized basis in Q2. All three of these areas met our expectations of high single-digit growth. The C&I results I'd say were particularly noteworthy, given the consistency of growth this quarter in the face of those unanticipated pay downs. We posted solid organic growth in C&I across multiple segments and multiple teams, just as we have done for the last several years. Our pipelines remain solid and we think new loan production will continue to meet our goals for the remainder of the year, as it did in Q2. With more normalized levels of pay-offs, we expect stronger growth in the second half of the year in the range we previously provided of mid to high single-digits. Shifting to deposits, deposits remain the strength of our franchise and core deposits again represented by 85% of our total. While seasonally we saw some out-size growth this quarter. The $1.1 billion increase from last year is mostly due to acquisitions. We believe our high retention on these deposits in line with our internal projections is largely due to our customer service culture. Turning to fee income as Mike alluded to our second quarter was very strong literally across the board. We guided to double-digit growth this year on our last two calls. And in fact the 10% growth from last quarter slightly exceeded our expectations. As always we believe year-over-year comparisons are most representative here and this quarter we again demonstrated the strong progress we continue to drive and making non-interest income a bigger part of our revenue mix. Our 17% growth in Q2 versus last year came approximately 40% from acquisitions and thus notably about 60% from our legacy business units. We had a particularly strong quarter versus last year in several key areas. Business service charges were up 20% about half of that was growth in pricing and product sales from our legacy businesses consistent with higher expectations we previously set and noted around fresher management and then about half from acquisitions. Wealth management continues to set new revenue records quarterly, was up 13% on the strength of our diversified revenue generation and high retention across the franchise as our assets under management continue to grow organically. Card-based fees were up 16% driven largely by growth in households, most of that was from acquisitions but note we also continue to see higher card usage across our franchise. Mortgage banking income was up 50%, this is really due to the efforts we've previously discussed around building out this business across our footprint which started to deliver expected results this quarter. And lastly, other income was up 78% as a result of a very good quarter and swap sales and also a third of this increase was due to sales of lease paper generated by our acquisition in September. So all-in-all a great quarter on many fronts in fees and really nice momentum going forward. For the full year, our guidance here remains for double-digit growth, I would say at about the same levels as we saw on first half. So now touching on credit for a minute, our results in Q2 were right in line with expectations and in line with our long-term outlook. Charge-offs of 33 basis points were in the middle of our 25 to 40 basis point range. As we talked previously the first half brought some forward so we expect better charge off results in the second six months. Our guidance for the full year remains at the middle of that range of 25 to 40 basis points unchanged from our last call. Our steady continued declines in both non-performing assets and adverse performing credits lend credence to this guidance. So Paul will pick it up from here to walk through some other income statement items.

[Paul Clemens:]

Thank you, Mark, and good morning to everyone. Net interest income, NII increased 2.8% or 2.1 million from the linked quarter and 19% to almost 13 million from a year ago. The linked quarter increase reflects the benefit of 75 million increase in average loans quarter-over-quarter and to a lesser extent an increase in purchase loan accretion and full quarter impact of some hedging strategies. The increase in second quarter 2014 obviously is impacted by our 2014 acquisitions which took place in August and December as well as settled year-over-year organic loan growth that occurred all during the year. Margin for the second quarter was 3.76% as compared to 3.79% for the first quarter and 3.65 from second quarter 2014. The linked quarter decline is due almost entirely to the seasonal increase in our municipal customers' deposits, our real-estate tax payments that we invest short-term. Margin for the quarter benefited somewhat from accelerated accretion related to acquire loans represent early pay-offs our recoveries and excess the purchase accounting mark. Excluding this accelerated accretion, our second quarter margin would have been approximately 3.69%. The year-over-year growth in loans away from acquisitions as well as the approximate 775 million of acquired loans offset the margin compression from change in interest rates the shift from fixed to floating and competition. As we looked to 2015 we position ourselves for rising rats with a growing floating rate loan portfolio, investing excess cash short-term and maintain our core deposits. You will see in our 10-Q which we'll issue shortly that we continue to become more positively influenced by rising rates, of our nearly 7 billion in loans approximately half actually more than half our floating rates paid to the LIBOR prime that we reset almost immediately bought any change. As oppose to core deposits which are non-indexed and therefore will rise more gradually. Obviously given our sensitivity to rising rates the longer any rate increase is deferred to longer, our net interest income will be constrained therefore on the short-term any increase in income will be depended upon the level and timing of loan growth and the level of accretion on acquired loan which can vary from quarter to another. We don’t anticipate making any significant changes to our balance sheet that would materially impact our interest rate sensitivity. Let me turn to expenses briefly. For the quarter as Mike said our efficiency ratio improved 62% as compared to 64 for the first quarter of 2015 in the same quarter of 2014. Expenses for the quarter were 73.5 compared to 72.7 for the first quarter with the increase due to the timing of certain accruals as well as OREO losses reflecting losses on sales as well as adjusted securing value of a couple of OREO properties. Just a point of reference, we actually had OREO net gains in the first quarter so this was rather unusual. The year-over-year increase in our expenses is substantially due to operating additional 17 banking locations and managing roughly 15% asset growth from acquisitions. We expect non-interest expense for the remainder of 2015 to be coupled in first half subject to the level of commissions and other expenses that vary based upon production. And with that, let me turn it back over to Mike.

[Mike Scudder:]

Thanks Paul. Before we open it up for questions just to a couple of further remarks. As we look ahead to the second half of the year our perspectives and priorities really have not changed. We continue to execute as we have suggested throughout the year and planned to continue to do so. Operating conditions on the whole continue to get better. Some of the activities that we see in terms of business activity I think is a positive in the long run, but as we wait for conditions to continue to improve or we wait for higher rates, we continue to navigate -- I think what can be best described as an intense competitive landscape for credit, as we reduce our net interest income sensitivity as Paul suggested continues to grow more positive. And again what appears to be a looming rise in interest rate, as we said last quarter we believe this is an advantage for us as we move ahead and certainly an advantage we hope to enjoy certainly to a greater extent than what we do most others can do. We continue to maintain balance in our risk disciples which I think is critical at this juncture, that requires short-term patients and also requires by definition the converse which as we'll focus on the long-term best interest of our shareholders. So as we look to the second half of the year, we continue to believe we have great opportunities to expand our businesses, our sales production, the opportunity to leverage our investment in both our existing teams and added talent both on the sales and support side of our company. We continue to feel strongly that we are well positioned to continue to grow, expand our business, leverage a culture and a work environment that we will hold out second to none, our infrastructure and capital all with an aim toward enhancing long-term shareholder value. So with that, let me open it up for questions.

[Operator:]

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions]. And the first question comes from Emlen Harmon of Jefferies. Please state your question.

[Travis Potts:]

This is Travis Potts for Emlen. Just starting on the municipal deposit build, so it looks like that probably accounted for most of that 300 million quarter-over-quarter on ended period basis, where should we be thinking that sort of comes back to should we see that tripped down closer to last quarter's level?

[Paul Clemens:]

Yes, it actually will, we'll see about -- you were right the increase was primarily due to 300 million for municipals.

[Travis Potts:]

And then, are you guys still comfortable kind of staying below the $10 billion asset mark through the rest of this year?

[Mike Scudder:]

This is Mike, Travis. Yes, we are. I think as you look ahead and as we kind of navigate the rest of the year, the inflow that we saw this quarter is not atypical that happens and you'll see it for this quarter, you'll see it for the third quarter and then it will flow out, move the spec down into a normal range. So no, I don’t anticipate us crossing the 10 billion this year.

[Operator:]

[Operator Instructions]. Our next question comes from Daniel Cardenas of Raymond James. Please state your question.

[Daniel Cardenas:]

Just kind of your thoughts on the M&A environment right now, what you're seeing in terms of market chatter and your willingness to enter into a transaction at the correct time?

[Mike Scudder:]

Sure, Dan. Our position and what we've seen in terms of [cost] over chatter, I would call it dialogue, dialogue certainly over the last couple of years has been elevated as those of us who operate in this business for a long time dialogue doesn’t always translate into action, but certainly dialogue remains elevated certainly from what I would have seen over the last couple of years particularly and what I would call maybe the smaller end of the space. Having said that, our interest in our plans relative to that really haven't changed, we continue to view that as an opportunity for us to the extent that we see opportunities and potential kind of partnerships there that add strategically to the value of our company and are financially accretive additionally, we'll continue to follow that discipline and pursue those.

[Daniel Cardenas:]

Is the goal to remain in the Chicago line area would it be willing to expand a little bit outside of the footprint?

[Mike Scudder:]

I think we would be able to look to expand, our anchor is certainly within the metropolitan Chicago area but we have the opportunity and we have a very solid presence in certainly out in a quiet cities, Central Illinois that's really where we anchor a lot of our agricultural presence, so I think the opportunity to grow there is certainly of interest us as well as the opportunity to move into some of the adjacent markets here to metropolitan Chicago.

[Operator:]

[Operator Instructions]. Well as there are no further questions at this time, I will now turn the call back over to Mr. Scudder for any closing remarks. Sir?

[Mike Scudder:]

Well, thank you. As always, we greatly appreciate your participation on our call today. We thank you for joining us. Thank you for your interest in First Midwest Bancorp. And I would wish everyone a great day.

[Operator:]

And we thank you Sir, and to the rest of the management team for your time also today. Ladies and gentlemen, this concludes the conference for today. Again we thank you all for participating and have a great day. At this time you may disconnect your lines. Thank you.