Q4 2019 Earnings Call

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Good morning, ladies and gentlemen and welcome to the First Midwest Bank Corp, 2019 fourth-quarter and full-year earnings conference call following the closing the market yesterday. The company released its earnings results for the fourth quarter and full-year of 2019 and also issued presentation materials that will be referred to during the call to get these provide both historical financial information and the company's outlook for 2020.

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 and are not historical facts or 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 corrected 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 presentations by Mike's gutter chairman and chief executive officer marks and our president and Chief Operating Officer and Pat Barrett is vice president and Chief Financial Officer wage.

the call will be open for questions and

Answers for analysts only I will now turn the call over to mister Scudder, please. Go ahead.

Great. Good morning. Thank you everyone for joining us today. It's great to be with you. I want to remind all of you that we've given the in provided a supplemental presentation to follow along with as we move through Thursday. So it's as as is our custom. I'll cover the highlights and then leave it to Mark and Pat and they can walk you through the details looking back on the year we closed what was truly a meaningful year for 1st of June 2019 sauce grow to a record $18 billion in assets as well as our EPS do a record dollar ninety-eight per share. Both of those represented growth levels adds a greater than 15% year-over-year. The year also saw is closed on our acquisition of Bridgeview as well as expand into Milwaukee through our acquisition of Northern Oaks very early in nineteen as well as admissions to our commercial lending teams there. This was further augmented by our announced impending acquisition apartment. So we're excited about all of those moves as a result of those activities are

the profitability is improved with our

Turn on tangible common Equity increasing to 15.7% That's up. Almost sixty basis points from last year.

Our recovery of capital also accelerated largely in the strength of that earnings as our tangible book value per share has increased by almost 15% over 2018 as well all due to the fact stronger earnings accelerate Capital recovery and certainly the capital that we spend on our acquisition activity for the quarter adjusted EPS was $0.51 for the fourth quarter that's Upstream sensor about 6% over fourth quarter of 18 down about a penny or 2% from the third quarter as our as as we expected. Our performance continues to reflect the impact on revenues from the course reversal the lower rates from what we would have started the year at

Highlights for the quarter's performance would include our loans were up 12% year-over-year. That's about 7% It exclude the benefits of Bridgeview linked order loans increased 2% annualized though that largely on the strength of our Consumer Portfolio as we added diversification duration and yield response to the rate environment their net interest income was down about one and half percent length quarterback margin declined by about ten basis points all as expected with our loans repricing and are mixed shifting at a pace different in contrast to the repricing of deposit down at the same time fee based revenues increased 8% from last quarter and 28% from last year, which largely helped offset the impact of lower rates. It was once again nice to see the Investments that we've made in our wealth and mortgage platforms along with the record quarter for our our sale of derivative products driving increase.

Credit costs were down.

Lately is our greater mix and the quality of the consumer lending origination that we put on the books warranted lower provisioning. Well charge-offs as a percentage of the portfolio. We're up slightly link quarter-page the whole charge also in line with trends that we've seen for the full year as well as down from what we would have seen from last year as a percentage of the portfolio operating efficiency has been and continues to be a focus area for us. It came in at 56% for the quarter. That's up from last quarter's 54, but while while the full quarter was a full year excuse was up.

Welcome. Please hold an operator will be with you shortly.

Would you like to join?

And your name, sir?

Thanks that will follow up offline as needed. I'm sure there'll be some follow-up calls.

Ladies and gentlemen, as a reminder, please, press star one. If you have a question, the next question is from Chris with KBW, please go ahead. Hi, this is Jeff for Chris. Thank you for taking my question. I wanted to maybe stay on on Nim. I think you mentioned in your prepared remarks that same spot rates. I'm kind of wondering how how to think about your the trajectory of your deposit cost from here and and kind of if we were to get another cut off you would still have room to kind of offset or or how we should be thinking about overall All Nippon pressure of that were to happen. Sure come down question Kelly. So let me do take off best shot at it. So um, so I'll answer the the sensitivity question first. I think a 25 basis-point change, assuming that Libor and and Thursday.

Moves kind of in lockstep over time would be about 1 and 1/2 million dollars.

Whether it's up or down at this point, so with deposit repricing kind of lagging loan repricing over the last two quarters. That's stayed. We see that stabilizing in life and seeing a pretty stable Nim. So the continued impact of compression on loan yields should be reflected in lower funding costs. So we think that we're going to walk after maybe two or three basis point drop in q1. We think we're going to see him pretty much returned to the levels. We printed this quarter. So in the high 340s, and we would expect that to persist throughout the year.

Got it. Thank you and just a point of clarification on the accretion. You said 16 million in total and then Park is an additional 1 million or is that included in the next? Yep? Okay additional one. We we had to pick and choose how we gave our guidance extra included in the park and we should have done probably to make it clear 16 without Seventeen with right. Thank you so much choice.

As a reminder, please. Press star one if you have a question.

ladies

If there are no further questions, I will now turn the call back over to mr. Scooter for any closing comments. Pardon me mister Scott. We did have a late question come in if you wanted to take it off. This will be from Cooper brown with Stevens, please go ahead. Hey, good morning guys. This is Cooper Brown on for Terry over had a quick question on the expense guide. I guess what are your assumptions specifically on the capital markets and Mortgage Banking Revenue within that 440 guide before Park.

So maybe I'll take a shot at that. So I guess the the bigger question is the assumptions on the revenue first, maybe Mark we're unclear as to whether we're going to see sustained record levels of capital markets income first of all, but that doesn't really drive a huge amount of our hiding expenses Mortgage Banking does because for every dollar of Revenue, we pay the $0.85 on that dollar gets paid out in commissions. So it really does Drive higher extent space. We're expecting mortgage to continue as long as this low-rate environment does a timer account relatively consistent levels with how we performed in the last couple of quarters. So those revenues will attract at at steady levels, but we'll pay it back out in faith in commissions Capital markets. It's hard to predict much more than 30 to 60 days in the future on that. So we're actually anticipating maybe a more of a normalisation. Yep.

that which could be

Get back down to kind of more of a 2 and 1/2 to 3 million dollar a quarter range, but that shouldn't really influence expenses.

Okay, great. That's all I had. Thank you. The next question is a follow-up from Kelly model with KBW, please go ahead. Hi. I just wanted to ask one last question about the buyback. You mentioned that you were out of the market cuz the park just wondering was diesel coming up and and you know, you're healthy on Capital but kind of thinking Thursday. Would you be interested in stepping in and and continued purchase your stock when you're not blocked out from doing so and how we should kind of think about that going forward we would just kind of birth minder. We put the program in place to geared towards being able to consume our excess earnings over over time rather than one time thing, So the the impact of part I'm sorry diesel is probably going to be roughly equal to a quarter's worth of burning maybe a little bit more than Thursday.

so you'll probably see our Capital level revert back to where they

Work three level at the end of q1 then away from that part, maybe another 15 days point. We still feel even with those two deployment may very well capitalized continue to use BuyBacks way to absorb excess earnings to maintain Capital levels add or maybe a little bit slower than today's level.

Great, and can you just remind us what what kind of your do you have a ratio that your Governor that we should be keeping in mind as far as capital. Yeah, I bought it we like yeah our Tier 1 cet1 blanket to be in the nine to ten range very cool with that the volatility that in short-term do we met her with either Acquisitions or other things kind of moved to stuff and down. So we're a little over the level that we think is necessary or prudent given the Outlook that we have for the environment, which is really the 9th at this point. Yeah, Kelly. I just keep we have the flexibility with that level of earnings generation to be flexible in terms of what's the best way to manage the capital in the environment that you're in.

Great. Thank you.

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

Hey, thanks for the follow up. We're looking a little late today. So I figured I could sneak one more in Pat just on the the balance sheet over all included in that and I I guide or there any assumptions relative to remix either, you know with more Securities purchases or you know, a continuation of kind of a consumer indirect purchases in 2020.

Yeah, I think the well the purchases have been more residential 124 clear not not on indirect or anything like that. So yeah, I think that we would expect a balance sheet mix to stay relatively steady with where it is. We feel good about that. We can have a little more security is a little less than they were really thinking about one for mortgages though as alternatives for excess liquidity and capital to buying mortgage-backed security. So I asked whether we were buying an agent paper in cmbs or similar versus the whole loan. We we balance the the yield dusted for credit and make sure that we're better for the mortgage would do for the security with the with similar directions but higher credit profile so we may continue to do that a little opportunistically kind of

depends on

Jana Krause that we see, but it's really more of a yield decision at this point.

Okay, and can you help us scream? You know what the provision ad is day one on a new mortgage loan that you put on the book.

Yeah, we've we've kind of guided towards a rule of thumb of 1% in the past. It has historically been lower for mortgages tire and I just because of really long positive operating environment. We're operating in right now. But but on average comes back around to 1% under Cecil is probably going to increase on average about twenty-five to thirty percent call Leto 125-130 on average and the mix will shift a little bit. So it would be putting a little bit we putting more on for Residential Mortgages and we have off work late and probably roughly the same on Commercial as our first book tends to be quite short term anyway.

Okay. Thanks. Pat, very helpful.

As a reminder ladies and gentlemen. If you have a question, please press * then 1

showing no further questions. I will answer the call back over to mr. Scooter for his closing comments. All right, great. Thanks before closing. I I think it's always