Q4 2020 First Midwest Bancorp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the first Midwest Bancorp, 2024th quarter and full year earnings Conference call.
Following the close of the market yesterday first Midwest released its earnings results for the fourth quarter and full year of 2020 and issued presentation materials that will be referred to during the call today.
During the course of the discussion management's comments and the presentation materials may include forward looking statements and non-GAAP financial information.
The company refers you to the forward looking statement non-GAAP and other legends included in its earnings release and presentation materials, which should be considered for the call today.
This call is being recorded and all participants are in a listen only mode.
Following the presentations by Mike Scudder, Chairman and Chief Executive Officer, Mark Sander, President and Chief operating Officer, and Pat Barrett Executive Vice President and Chief Financial Officer. The call will be open for question and answers for analysts only I will now turn the call over to Mr. Scudder. Please go ahead.
Great. Thank you good morning, everyone. Thanks for joining us today, great to be with you Hope. This finds everyone. In your family is doing well staying healthy and certainly rate ready for a new year.
Let me start I went off for some perspective, as we close the quarter and certainly close on what has been.
For a wild year, just reflecting back on the air itself. It certainly has a best of times worst of times bent to it well.
When we set our plan for 2020, we were coming off a record 2019 moving into what was expected to be a lower but relatively stable rate environment and then like all we had to pivot to address the immediacy of the pandemic the economic shut down.
<unk> shifted fiscal and monetary policy, all of which seemed to last longer than most had anticipated, but certainly as we stand here today is looking to be less damaging than what we all would have been initially feared.
So from my perspective, as I think about it what we accomplished during 2020 as a company and frankly as an industry as a whole to me was truly amazing and a true Testament to the character of our company and our teams are so as we kickoff 'twenty 'twenty one while the downside risk I believe is still there we are.
Certainly feeling more positive so.
Our balance sheet remains very strong that provides us with a lot of management flexibility as conditions unfold in 2021, our tier one capital now is at 11, six that's over 100 basis points higher than when we started 2020.
Our loan loss reserve stands at almost 1.7% that's double what it was when we started the year and that's about 40 to 50 basis points higher than what the day one sees the water bad when we kicked off the year.
The quarter also offered several highlights as we move into 2021.
Certainly the quarter reflected improvement from an EPS standpoint that was came in at 33 cents, that's up gosh, some 57 per cent or almost 60% versus last quarter and that's largely on the strength of greater P. P. P revenue and relatively lower loss provision expense.
The forgiveness process for the 'twenty 'twenty program was faster than expected and accelerated the timing of receipts from what we all know and hope will eventually be a finding finite series of programs.
The second drop program is underway and it's frankly, it's going pretty well. Thanks for our teams efforts and we're really pleased to be able to help our clients and the community.
As we rollout the second peers, a second drop program and that'll help partly offset some of the acceleration from the earlier program into 2020, So I'm, Mark and Pat will get into that a little bit further.
We did take the opportunity in the quarter to move further do adjust our L position given low rates are trading some of the quarter's expense for the benefit of future performance that trade are essentially cost us about 12 cents a determinate the remainder of some hedge contracts and redeploy some of the security cash flows that were coming in.
In the combined benefit to 'twenty 'twenty one.
And beyond frankly will more than offset those costs. So that I would also highlight credit stood out as a positive for the quarter provisioning was about $5 million lower than last quarter.
Probably greater import charge offs were meaningfully lower for the quarter. It came in at 12 basis points. That's away from the acquired loan marks and her M. P. H for stable. So while our bias here is more positive we certainly felt it prudent to hold our reserve levels pretty stable given all the noise. That's that's still out there.
On the business side. We were also pleased on a number of fronts are our branch consolidation and retail initiatives that we announced earlier continue to remain on track and performing well with in line with what we expected.
So sometimes it gets lost amid the noise of the pandemic our acquisition of Park Bank continues to go very well remember they added about 1 billion in assets and a really great team with a strong commercial platform that rounded out our wealth and our business presence in the Milwaukee in southeast, Wisconsin market.
So I know, they're very anxious to continue to look for opportunities to expand in the.
For the Milwaukee market.
We're very pleased to post record quarters, this quarter as well for both mortgage and wealth.
And then last but certainly not least the engagement of our teams is exceedingly strong. Our survey scores are up here and we're very pleased once again to be held out as to one of the best places to work in Chicago and in fact, I think we were listed as the top commercial bank in Chicago.
It's all very very positive for us as we kick off 'twenty 'twenty one let.
Let me turn it over to Mark and Pat They can expand on some of the details and certainly as they walk through the remainder of the deck Mark do you want to take rate.
Thanks, Mike and good morning, everyone.
Starting on slide four of our presentation loans increased to $100 million from the prior quarter due to strong organic mortgage production and a significant remix of our balance sheet into purchased one for mortgages as Mike referenced largely offset by the decline in PPP balances we saw.
Mortgage had another very strong quarter production was near record levels as the strategic repositioning of this team that we undertook a couple of years ago allowed us to take advantage of the favorable market dynamics.
We saw nearly $150 million of net organic growth after selling approximately $275 million of that production at favorable prices, which boosted fee income as Pat will detail shortly.
The short term outlook for mortgage remains strong and while we certainly expect that the market may slow as the year progresses, I would again stress that our enhanced team here at leaves us well positioned to compete in any market environment.
Turning to commercial we're encouraged by the trends here production increased nicely from Q3 up over 50 per cent as we began to see some return to normalcy.
While demand increased it was not enough to offset payoffs, which were up slightly away from normal amortization.
Commercial real estate finance refinance activity in particular ticked up mostly from C. M. B S. Lenders that are willing to go out longer and at higher levels of non recourse than we are.
Line utilization and C&I was flat during the quarter that's.
That's an improvement from the prior two quarters, but still reflective of clients strong liquidity and overall somewhat cautious outlook.
That all said our pipelines are building nicely, they're not back to pre pandemic levels, but we've recovered more than half of the decrease we saw in the spring.
As a result, we are optimistic for a return to core organic commercial loan growth in 2021, starting this quarter given the strong near term pipeline and our specialty and middle market businesses.
Turning to P. P. P. We saw a decrease here of about $400 million in the quarter as forgiveness occurred a little sooner than we expected which of course is great for our clients.
The client experience and I would say ultimate outcome of the forgiveness stage has gone very well in every regard this thus far and.
And we expect nearly all of the remaining balances from the first program to run out over the first six months of this year.
Similarly, the 'twenty 'twenty one program that launched just last week is off to a great start.
We were really well prepared for this round and submitted about 2000 applications on the day the window opened.
We expect to fund about half as much this round as we did in the initial two phases last year. So page 21 gives us a good amount of detail and summarizes all of what I, just said, but at a high level. We've already received confirmation on about $300 million of new loans, thus far.
As to our outlook going forward.
We expect loans to grow mid single digits in 2021 organically and away from P. P. P.
As the P. P. P. We expect those loans to be largely repaid by year end book.
Of course, we will see a net income benefit as we again assist with what we assume will be near 100 per cent forgiveness. In this round also.
Looking deeper at the portfolio beginning on slide five we continue to have a well diversified loan book with very modest exposures to the industry's most impacted by the pandemic.
We highlighted here the segments, we're watching most closely.
I'd be happy to delve into any one of these or any other industry segment for that matter in the Q&A portion of this call for now suffice it to say, we continue to feel a relatively conservative underwriting exposure granularity and portfolio management practices will serve us well as we navigate the still somewhat uncertain landscape.
Okay.
On slide six we provide detailed information by industry on our loan deferrals.
At this point are payment deferrals across the entire book are very modest as the programs. We ran earlier in the year to help clients accomplish their objectives and expired.
Of course, we will continue to engage and work with clients on the ones if they need help but demand to do so has been very limited.
Slide seven displays our consumer loan portfolio, a prime borrower book dominated by one to for residential.
We highlight here are unsecured installment segment, our specialty product also targeted to prime borrowers.
The enhanced yield here more than offset the higher charge off rate, which theoretically should benefit from a higher level of federal stimulus.
Away from any external factors, we deliberately pulled back on this segment at the end of 2019 by tightening underwriting parameters, which when combined with normal amortization has driven this category down over 20% as of yearend.
As Michael alluded to we again feel better this quarter versus last with regard to the credit outlook.
As shown on slide eight our current level of risk is of course reflective of the uncertain environment, but performing well, including the elevated risk segments.
Our clients have adapted well by generating and managing liquidity and controlling expenses.
Certainly.
Stimulus programs are also helping.
As a result, as a result of all that N P as were stable.
We will continue our proactive portfolio reviews and constant client dialogues in order to identify risk across all sectors, but again, we felt better each successive quarter over the course of 2020.
Turning to slide nine.
Josh we're very benign at the lowest level we've seen in years.
Commercial charge offs were minimal in consumer charge offs. This quarter remained lower than in previous years as expected given the underwriting changes I mentioned a minute ago.
We forecast total charge offs to remain relatively modest for the short forward period, but ultimately increase further out yet still remain manageable in the 25 to 40 basis points range for the full year 2021.
We are very well reserved for losses with an allowance to loans, excluding PPP of nearly 1.8 per cent.
While we feel better about the outlook as I stated our elevated reserves continue to reflect the uncertainty relative to the virus vaccinations and re openings and the fact that the economy has been propped up by the massive federal stimulus.
Deposits remain a core strength of our franchise as seen on slide 10.
With the industry flush with liquidity or historical comparative strength in funding cost is a little more muted now, but still there are cost of deposits came down another six basis points in the quarter to 11 basis points levels last seen following the financial crisis.
Accordingly, we have plenty of dry powder and funding sources to take advantage of market opportunities.
Pat will pick it up from here.
Thanks, Mark and good morning to everybody turning to net interest income and margin on slide 11.
Net interest income increased 4% compared to the prior quarter and was consistent with the same period in 2019.
Compared to both prior periods NII reflected the positive impact from the more than $400 million of P. P. P loan forgiveness during the fourth quarter as well as lower funding costs offset by the negative impact of lower rates compared to the prior year growth in both loans and securities as well as the Park Bank acquisition helped partially offset the impact from lower.
Our rates.
Acquired loan accretion contributed nearly $8 million for the quarter consistent with the prior quarter and down $2 million compared to the same period a year ago.
<unk> was higher than scheduled due to favorable resolution of certain acquired loans.
Continuing on the same slide with net interest margin tax equivalent NIM for the current quarter of $3. One four per cent was up by 19 basis points linked quarter, primarily as a result from the P. P P loan forgiveness.
And down 58 basis points from the same period a year ago.
Excluding accretion margin was $2 98 per cent for the quarter up 19 basis points linked and down 50 basis points from the prior year.
Compared to a year ago margin compression was primarily driven by the impact of lower interest rates on loans and securities yields as well as the impact of higher customer liquidity balances.
Our outlook for 'twenty 'twenty, one NII is relative stability.
With core NIM, excluding the impact of accretion approximating three per cent throughout the year.
The accretion is expected to be approximately $16 million for the full year down.
Down 15 million or 40% from 2020 Actuals force.
More specifically speaking to the impact of PPP loans.
The remaining effect of the 'twenty 'twenty P. P. P program. So last year's program is expected to be around $15 million compared to the $28 million in 2020.
And concentrated in the first half of this year.
The impact of the 'twenty 'twenty, one PPP program, which is really just getting stood up at this point is likely to be around half a day the prior year's program.
And the impact is estimated at this point to be in the $10 million to $15 million pre tax range of NII.
But the magnitude and timing will be much more actionable by the end of the first quarter of this year.
Turning to noninterest income on slide 12.
We continued to see solid recovery in growth overall in our fee income streams.
In total were up 10% linked quarter mortgage income of $9 2 million was a record of 38 per cent from the third quarter driven by the factors Mark already referenced.
As Mike mentioned, we also posted a record quarter in wealth management.
While the robust market helps a continuation of great sales production and client retention growth. These strong results.
James didn't Miss a beat in 2020.
Additionally, our Treasury management group posted solid sales gains up 5% year over year away.
Away from the Park acquisition.
As we've said previously we see continued growth opportunities in the Treasury management business unit is weighted deliberate over the first past few years.
Card income was relatively flat linked quarter and versus the prior year demonstrate.
Demonstrating a near returned to normalcy.
We forecast a modest upside here is spending normalizes.
Various product strength substantially offset the pressure we saw in service charges, specifically in NSF fees from both long term trends and of course, the short term boost in customer liquidity.
As well as capital markets, which has been softer reflecting lower commercial real estate loan production.
We expect both areas to continue improving in 2021 as the economy recovers more fully.
In total we expect high single digit fee growth in 2021. After all the puts and takes of a gradual return to normalcy across several categories and the underlying solid continuing opportunities we see in wealth management Treasury management and card.
I'd also highlight that during the quarter in light of current market conditions, we continued executing on our balance sheet optimization strategy to deploy excess liquidity.
This involve terminating our remaining $510 million in longer term interest rate swaps, resulting in reductions in future borrowings that were hedged to turn to the terminated swaps.
Actual results resulted in $18 million of pretax termination.
Costs during the fourth quarter.
The offset is future NII will benefit by approximately $8 million annually.
This optimization provides further flexibility to take advantage of lower costs on future borrowings.
Moving to expenses on slide 13.
Note that the current quarter includes $2 million of anticipated acquisition and integration related expenses, largely driven by costs associated with the park bank acquisition as well as a million dollars in optimization costs associated and associated with executing on the retail optimization strategy that we announced in the third quarter.
Away from these items total expenses were up 3%, both linked quarter and versus the same period a year ago.
Per the both prior periods higher commissions, primarily on mortgages.
Were partly offset by higher deferred loan origination costs, and lower advertising and Oreo workout expenses.
In addition, higher compensation accruals and equity compensation valuations.
And true ups at year end contributed to the increase linked quarter.
They prepared for the same quarter, a year ago, our larger operating base due to the arc acquisition combined with elevated pandemic related expenses and higher technology costs contributed to the increase.
We continue to be focused on our expense run rate, while our efficiency ratio has ticked up due to revenue declines during the year overall annualized expenses as a percentage of average assets.
Excluding PPP loans was approximately two three per cent down 7% from a year ago.
Our outlook for 'twenty and 'twenty, one is for a very modest uptick in expenses for the full year compared to 2020.
Primarily driven by an additional $6 million in mortgage loans servicing costs associated with our larger mortgage portfolio.
As the timing you should expect an uptick in the first half of the year, reflecting the elevated servicing expenses.
And then a gradual overall declines in expenses in the second half of 'twenty, one, reflecting the benefits of ongoing process efficiency efforts.
Yeah.
Last note on taxes before I leave this slide.
Our effective tax rate for the quarter was around 12% half of the 24 per cent for both prior periods reflected the approximately $4 million in nonrecurring benefits, resulting from deferred tax asset adjustments and other prior year tax return finalization.
We expect our effective tax rate going forward to revert to a more normal 25 per cent for 'twenty 'twenty one.
We've included a summary on slide 14 that reflects the optimization strategies, both retail and balance sheet.
Including the remix of current unexpected securities cash flows into around $600 million of net growth in high quality wonder for family mortgages, the upfront pre tax cost of $18 million due to the balance sheet optimization.
And the ongoing 8 million pretax benefit to NII annually, starting in the first quarter of 2021.
In addition, as we continue to execute on our retail optimization strategy, we recognize one and a half million during the fourth quarter associated with severance and other costs associated.
With closing 17 branch locations previously announced.
We continue to expect the full run rate impact of this optimization to be around $8 million pretax expense.
Expense reduction in 2021.
As we've said previously we continue to see a steady shift to a more digital transaction volumes, comprising both online and mobile banking. This.
This is not a new trend for us clearly has accelerated during the pandemic you should expect to see us continue to make technology investments to further enhance our digital platform capabilities.
I should note that all of our outlook and guidance contemplates all of these changes as a result of these optimization strategies and investment and anticipated investments.
Moving to capital on Slide 15.
Capital levels continue to be strong with earnings in the volume and mix of risk weighted assets contributing to fourth quarter growth.
These levels support our quarterly dividend of <unk> 14 per share consistent with the prior quarter and a year ago.
Consistent with our usual practice, which summarizes our outlook for 'twenty and 'twenty one on slide 16.
I have to emphasize that our commentary and outlook for the quarter and for the year.
Is it dependent on the persistence and impact of the pandemic customer behaviors and the impact of significant federal stimulus activities.
We've also included for your convenience for summary of our financial results for the quarter on slide 17.
Now I'll turn it back over to Mike for final remarks.
Thanks Pat.
So before we open it up just a couple of things to reemphasize, a clearly as we stand here today I think most of US it would not be a stretch to say theres downside risks still out there.
At the same time like many of US are we're hopeful and feel better about recovery in 2021 I've been doing this for this year will be 35 years at first Midwest and I've noticed over that period of time as many of you had the world rarely operates in a linear fashion.
As we think about 'twenty 'twenty, one I really think about it in the context of building momentum over the course of the year and we would expect the second half of the year to see the greater benefit on production from the vaccination efforts in fiscal and monetary stimulus and the effectiveness of the same so as we worked through all of this is just again to reemphasize.
So I start with our balance sheet is really strong liquidity as their credit stable and our reserves are robust all of which is going to create opportunity as conditions stabilize and outlooks improve.
Volumes are recovering our core deposit base remains an undervalued strength that will differentiate us rates ultimately move higher at some point.
In the interim the efforts that we undertook this quarter also will help navigate that.
Our teams are working hard as Mark suggested pipelines are building and again, we have the flexibility that our capital offer stuff there.
I would emphasize what Pat said efficiency and optimization activities are clearly a focus as one operates in a extended low rate period.
And while it's important and those are there and the focus of that is on those it is also equally important that they remain aligned with our broader priorities around building a superior client experience.
Which is ultimately what we're trying to accomplish our digital and online skill sets and the investments we've made and are making or will also mature and all of those will help us with our efforts to become more efficient in our processes and deliver around that experience.
So as we navigate the near term our franchise priorities remain pretty much the same drive our returns sustainably higher.
That requires a focus on building and retaining a talented team of colleagues building revenue growth and breadth and continuing to focus on driving a superior and efficient experience and as I said, we will continue to take advantage of those opportunities that present themselves that align with those goals.
So we talk about this all the time with our teams times such as these present challenges, but they also present tremendous opportunities opportunities to leverage the engagement of our people our financial strength and continuing to build on our strong relationships with our clients better serve their needs and ultimately the long term goal of enhancing the value of our franchise.
So with that let's let's turn to it and open it up for questions as is our practice it just to help us from talking over each other out all line I'll take the question and then just direct debt among the three of us as to where the where the answer will come from.
Okay.
Thank you Sir for question and answer session will begin at this time, if you were using a speakerphone. Please pick up your handset before pressing any numbers. If you have a question. Please press star one on your telephone if you wish to withdraw your question. Please press star to your questions will be taken in the order of <unk>.
<unk>. Please standby for your first question Sir.
The first question is from Chris Mcgratty with K B W. Please go ahead.
Hey, good morning.
Hi, Chris.
The the mid single digit loan growth I'm interested in kind of the source you talked about building pipelines, but also you bought the mortgages in the quarter I'm interested.
How you see the allocation of that for 'twenty, one and you know do you expect to be buying more mortgages like some of your peers have been doing given the better alternative do you know what N B S.
Mark.
Sure So Chris good morning.
We expect net net growth to come organically from both commercial and consumer. So we would expect both of those businesses again organically away from purchases to grow mid single digits and at this point, we're not per se planning on transactional purchases.
So much of that of course depends on what happens with our liquidity.
And if it stays higher than we expect like a dessert all through 2020, we may but that's not contemplated in the mid single digit guidance we gave.
Okay.
Okay, and then just a point of clarification on on slide 16, the the relatively stable NII is that maybe Pat is that a reported number including the accretion in the P. P. P or is that stripping out that like your NIM guidance.
That would be our core NIM, so stripping out the impact I will say.
I will say that we wouldn't be surprised to see a plus minus 10 basis points of volatility on a quarterly basis, depending on how liquidity flows, particularly with the new PPP program and the timing of the forgiveness of the remaining already booked P. P. P.
Which we're finding is a pretty challenging to predict on a quarterly basis, but over.
Over the course of the year away from accretion.
We would expect to hit or modestly exceed a three handle each quarter.
Okay.
That's great on the NII net interest income is that the stable comment is that reported or is that a core.
It actually turns out to be both if you look at it purely on a core basis.
We will see flat to modest like very modest increases each quarter and of course, that's dependent on the timing of loan growth.
So away from the day impacts are.
Accretion from PPP.
Okay got it and then just a couple of housekeeping. The the tax guide that you gave that's that's a GAAP that's not a tax equivalent rate.
Yeah.
Well that would be our our stated reported effective tax rate.
Okay.
So for the.
They fully tax equivalent differential is pretty modest we don't have a lot of tax-exempt screams.
Okay.
And any one timers left from from the chart from the plans you guys have been doing with the balance sheet.
In the first quarter.
I would say.
De Minimis.
I think if if there is any it's likely to be kind of in the million dollar range.
Got it okay. Thanks a lot.
The next question is from Daniel Tamayo with Raymond James. Please go ahead.
Okay.
Good morning, guys how are you.
Good morning day Danny.
<unk>.
Yeah, maybe.
Maybe first on the AR on the balance sheet optimization, and how that impacts your asset sensitivity and how does that compare now you know if we do were to see a an increase in the short rates to what it was prior to the to the optimization efforts.
Go ahead bad it.
It's Danny it's a modest improvement so it would take us from them.
Earnings at risk of say, 6% to five per cent.
Not significant and puts us from a an interest rate shock perspective, it doesn't modest it modestly changes that but not meaningfully.
Okay got it.
And then maybe on a you know now that the environment is improving and you do have the excess capital here, if you're having to the extent I should say, you're having conversations with potential targets.
How those may be changing over the last few months and kind of what what expectations are out there by by others.
Well I can take that one.
You know fundamentally any conversation.
True.
Just in this current environment been anytime for US always starts with how does it align strategically with what we're trying to do and how the things match up culturally.
In terms of bad as spreads on those fronts again. These are broader perspectives there they're always wide for some reason people who are looking to sell always think their value is higher than people looking to buy and that's just the natural the natural state of affairs. So.
But other than that I think most people are just trying to get their feet under them relative to the environment and look out forward as to how that's going to play out.
Okay. That's that's helpful and can you just remind us.
Of your area, you know geographically and end sides, how youre thinking about priorities there.
Well again as we've focused on our platform and our business, we look up and say you know we're operating in the Metropolitan Chicago marketplace with one of our really strong operating presence and a very diverse and broad market. So we the anchoring of that here is a real value to the franchise.
And then from there we just look at a a Jason urban Midwestern markets as the opportunities that are continuing to expand much like what we did and in Milwaukee.
And is there a particular size that has that shifted at all.
Recently or how are you thinking about price.
Obviously, we're a larger company. So you have to think about how does that change relative to the size of the opportunity. So it really does start as I said smaller and I mean on the small scale probably are more difficult for us to integrate culturally at the same time it really does start with the.
The platform and how it aligns with what we're trying to do again, it's easier to do it in the context of looking at partnering.
When you look up and you've got a billion to a financial institution that brings a really strong commercial platform.
To a market that we think is important to be able to grow and build.
And what we do from a relationship based lending standpoint so.
Understood I appreciate all the color.
Right.
The next question is from Terry Mcevoy with Stephens. Please go ahead.
Good morning to everyone.
Hi, Terry.
Just a question on the expense outlook when I read the presentation. It seemed like maybe there was a downward bias to expenses you talked about identifying further process efficiency benefits, but then listening to pad it sounded like.
You know technology and investing in technology would also be.
Something that you'd focus on this year. So I guess my question is if there's a dollar of cost saves that <unk> identified does that is that really offset by just call. It technology spending or do you think there are opportunities to maybe improve the expense outlook over the course of this year.
Well I had bad thing would be to run with yeah.
Tier it's a great question I think that this because we're continuing to invest in platform which includes people.
But it's also from a product platform perspective pretty significantly this year.
I think that our kind of rate reasonably flat guidance is likely to be the 'twenty and 'twenty one outlook I think the better opportunity is once we start completing.
The investment is.
How does that drive further transaction volume to digital away from physical which obviously has the potential expense impact.
And how do <unk>.
Customer self service trends impact that so we're hopeful that with the investments we're making this year, we're setting ourselves up for further efficiency improvements and operating leverage improvements away from growth.
As we go into 2022.
Roundabout way to sort of answer your question, Joe If I didn't ask it again.
That's great. Thanks, Pat.
And then as a follow up.
On slide five as I think about 'twenty 'twenty one those other areas of focus kind of retail CRE office CRE may kind of grow in importance among kind of the investment community.
And maybe some of those elevated risk may fall off so I don't know Mark could you maybe comment on retail and office, whether those trends have improved in and where do you think maybe there's some kind of additional risk over the course of 2021 that will keep it on this slide thanks.
Yeah, I would say it this way Terry I think the.
What we've seen over these last quarters has been stability in terms of occupancy.
Occupancy and rent collections, but you know in our view the jury's still out here a little bit and so as we've talked about over last few years, we've been cautious on retail CRE for quite some time.
We view leverage financing is an important business, but a higher risk business inherently.
So I think those two will stay on here for.
For some time, because as I say I think there's still the story remains to be seen.
And that's probably most notable in office CRE, where that's about as murky as anything again rent collections have been very strong and we feel good about our original underwriting such that the loan to values are strong, but what does that look like over the success of a few years there's.
There's a mixed views there and so as I say I think youll see these those three stay there for some time.
Great. Thanks, everyone.
Yeah.
Ladies and gentlemen, as a reminder, please press star one if you have a question.
The next question is from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, guys good morning.
And then maybe just continuing the credit discussion just curious to kind of get some thoughts on just the charge off guidance, perhaps or particularly you know with the increase expected in the back half of 2021 here.
More so a function of just the stimulus kind of abating as we get further out this year or is it somewhat of a bump from just the increase in criticized loans that we saw during the last couple of quarters that may drive some of that you guys put through.
Go ahead Mark.
Yeah, I think you answered your own question well are they.
Because I think that is it really its not like we see.
Obviously, if we saw charge offs.
Clarity, we would take them now.
The as.
As we look out the next quarter or two and they seem pretty.
Muted, but we still just think there's enough uncertainty out there to make us believe that again when you with the amount of.
Criticized and classified that we have you have to believe that there's some level that may manifest itself over time. So that's really all it reflects is our best guess.
Net migration.
Okay.
Understood and then just kind of changing gears, a little bit interest, bringing about the <unk>.
Our growth guidance for this year.
For two five per cent and loans I'm curious if that's just a function of continuing to take market share it around Chicago with some of the M&A.
Transactions that we've seen recently or are you guys finished units first.
Shifting client demand.
Or just some kind of.
Moderation in.
Payoffs.
Pay offs at this point.
But a little bit sorry, a little bit of all of the above are Nathan I would say it this way it starts with having the right team that you feel can compete and win which I strongly feel that we do so I think it's a little bit of Oh, I think we can pick up market share I think we expect to pick up market share.
All of our core businesses Theres, a certain amount of just returned to normalcy of course built in there.
We've added a few people over the last few years, but not not a lot because again as I say, we have the team I think that can can go compete and win.
Okay got it if I could just ask one more on capital and share buybacks.
Obviously the capital ratios.
For use across the board I believe from the fourth quarter here. So I guess, just any thoughts or appetite for them.
Sorry back early this year I.
I know M&A is an ongoing consideration as well, but just any thoughts on buyback, particularly just given where the stock strictly for the.
Go ahead Pat.
Yeah, well look our capital priority you know remained pretty steady, which is you know first and foremost to you know to fund growth.
The outlook for that is as we've laid out probably kind of normal or returning to a more normal organic growth rate sustaining a dividend level, which we feel good about where we are and expect to be from a payout ratio in the near term.
To have dry powder for M&A, which Mike has already talked about and then kind of the last utilization would be.
Capital optimization through buybacks or other means.
I think where we are right now from them from a criticized and classified loans perspective.
Even though our credit is at near record positive levels for the fourth quarter, there's still does.
Expectation that we will see a tick up in credit we feel very good about the reserve levels, we have but.
Until we actually do start to see those wash through and get a higher level of confidence around that day.
It feels a little bit premature for us to be.
Talking about planning for or guiding to share repurchases, but you you should expect that this is gonna be of a recurring.
Our quarterly discussion that we'll have so I'd say more to come as we gain more certainty around both growth.
And ultimate credit outcomes.
Yeah, I would add to that and emphasize what Pat said there at the tail end. This is a ongoing and will be an ongoing and active dialogue that we have.
With the border and frankly with investors as well.
Okay great.
I appreciate you guys, taking the questions. Thank you.
Oh, great. Thanks, Thanks, Thanks for that.
Question is from Michael Young with Truest Securities. Please go ahead.
Hey, Thanks for taking the question I wanted to ask a follow up on the capital return.
Common Terry just mentioned so stocks at one one times tangible I understand you know criticized.
Criticized classifieds are a little elevated but I would assume the priority would be share buyback over M&A despite increases in M&A activity.
These valuation levels is that fair Yeah, Let me, let me kind of stated differently and the answer to that is it.
The goal is always the same what is the best return to our shareholders for the deployment of capital choice that we have available for us.
So yeah, you're right if in a world where opportunities come from an acquisition standpoint, those have to be weighed against the risk and the relative returns that those most project. So that's kind of the screen. We look through it every time, so in a world where you're operating with with the valuation.
Where they are today you have to think about that relative to how you deploy it.
And I guess, Mike maybe as a follow up just on kind of geographic interest and strategy around M&A. You know once we get once you get back to you know a valuation level, where you can be more active there.
Is there still kind of the focus on just bolt on cost out acquisitions or do you feel like this is kind of early cycle and you need to expand geographically from here.
Well, we really havent changed strategically in terms of where our thoughts go relative to who we are and what we do at where where commercial a relationship based franchise, we think that operates well.
In not just the markets in terms of which where we operate here in Chicago, but for those.
Urban markets.
A reasonable size and Midwestern adjacencies those those makes sense for us to be able to continue to build on that so our strategy there really hasn't changed other than our size is larger so the impact in the relative opportunities that are available to us.
Certainly can be.
It'd have to be larger to be more impactful, but the strategic goal of what we're trying to do really hasnt changed.
And then last one for me just on the you know kind of organic growth and hiring opportunities you know theres been a lot of M&A in your market. So I would assume there's potentially some opportunity sets out there should we think of it as kind of an up hearing of talent with a focus on cost.
You know rationalization from here or do you Wanna be net adders of loan producers at this point.
Cool.
Let me take that Mike.
Mark.
I would say Michael net.
Loan producers good relationship managers I want to be clear, it's not just loans that split relationship. Good relationship managers always pay for themselves very quickly and so we will always be in the market for strong producers.
And so.
In good times and bad times, that's our philosophy I don't think that we need to add a lot of people to hit the growth targets that we have but we will.
We will expect to add a few people, but its more topping up of the talent as opposed to changing out anything that we have.
Okay. Thanks.
The next question is a follow up from Daniel Tamayo with Raymond James. Please go ahead.
Hey, Thanks, just quickly here I just want to make sure I understand that the net interest income guidance does that include your expectation for the $10 million to $15 million from the second round.
Kind of a 'twenty 'twenty one P. P P program.
Go ahead Pat.
Mr. Barrett did you mute your line on your end you're still open on ours.
Book apologies.
Danny It does but whether you include P. B P and the offset that offsets the decline in accretion.
Or not you still end up with essentially the same guide.
Does that makes rate.
No I understand I, just wanted to make sure that debt our debt I understood that correctly in terms of the reported side.
Wait just just our core NII away from the impact of accretion or P. P. P. At all I would expect steady EBIT quite modest improvement quarterly.
Just reflecting ongoing growth.
So sort of like 1% ish for the year, so not significant.
If you include P. B P and accretion that the the kind of improved or increased P. P. P that we would expect will offset the decline in accretion that we had scheduled versus actual in 2020.
For the.
The delta between those two tends to be a wash year on year.
Okay Alright.
Alright, that's helpful.
And then and then within the mortgage banking I'm, a big Spike in the fourth quarter, you talked about that was a really on the margin side.
Is that what's driving the decline I'm, assuming that the debt mortgage banking is kind of as it worked through the numbers you are going to fall off from from that elevated number in the fourth quarter going forward.
Is that really a margin issue or how are you thinking about the origination side in 'twenty 'twenty, one kind of similar to the industry forecast of 20% to 30% down.
Yeah.
Yes is the short answer Danny.
We're expecting it to come down a little bit.
Now that said the first quarter was not that robust.
Presumably a favorable comparison in Q1 versus Q1 of 'twenty, but overall, we're expecting a bit of a decline this year.
Okay, and it was bad but it was a big spike in the margin in the fourth quarter that really drove that increase.
Yeah, the sales price of the sale prices and mortgage were nice we're really strong in the fourth quarter and so we just took advantage of the.
The trade between putting on our balance sheet or the sale. We just thought the sale price was attractive enough to take advantage of them.
Understood. Okay. Thanks, all for me that's all for me. Thanks.
Ladies and gentlemen, once again, if you have a question. Please press Star then one our next question is from Chris Mcgratty of follow from him from K B W. Please go ahead.
Yeah. Thanks.
And I missed it but did you provide.
Provide any color about the the increase in special mentioned, which went up about what 60 million Bucks where portfolio maybe.
Go ahead Mark.
We did not that almost entirely came from fitness and recreation.
In the quarter Chris.
Okay.
And would those be.
You know those are those loans coming off a deferral or is it just are you seeing notable changes just given the pace of improvement in Covid reopening what's the what's the story there mark.
The latter Chris it's really just the pace of improvement and the clarity with which how long it might go on.
It caused us to downgrade a few credits there.
Okay. Thanks.
Yeah.
Hey.
Chris while you're on this is Pat I just wanted to correct myself you were asking about kind of one time ongoing optimization costs in Q1.
And I've said a million I should've said around $2 million, but that should wrap it up.
Got it thanks.
If there are no further questions I will now turn the call back over to Mr. Scudder for any closing remarks.
Great. Thanks, So before we close just once again want to take the opportunity.
And recognize and thank all of our colleagues I know they listen to these calls and I want to thank them.
On behalf of all of Us for their response, particularly during these times. It's their continued commitment to who we are and what we're all about and the values. We represent as a company that I believe makes first Midwest special So we're very proud to be surrounded by so many good people who tried to do the right thing every day for our clients our communities and for each.
Other so.
With that I'd like to thank all of you for your interest in and attention to our story and as.
As we share our ongoing belief that first Midwest is a great investment opportunity I encourage you to take advantage of it so have a great day.
Ladies and gentlemen, this concludes the conference for today. Thank you all for participating and have a nice day all parties may now disconnect.
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