Q2 2021 First Midwest Bancorp Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the first Midwest Bancorp 2021 second quarter earnings Conference call. Following the close of the market yesterday first Midwest released at the earnings results for the second quarter of 2021 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 in the all participants are in a listen only mode for.
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 opened for questions and answers for analysts on the I will now turn the call over to Mr. Scudder.
Great. Thank you. Good morning, Thanks to all of you for joining US today, it's great for you with you and find everyone's doing well and healthy and ready to go.
These are exciting times here for us the first and last with our announced combination of old National now just a little over a month old.
So what's the plan here is to give you a quick update on the integration process Mark will do that at the end, but obviously the near term focus or certainly the focus for this call for insurance perspective from this quarter.
The overall, we're very pleased with our performance for the quarter. Our performance continues to improve as we see the benefits of a recovering economy, obviously comparisons of Europe.
For tough because of the pandemic. So my comments youre going to largely centered on a quarterly momentum Pat and Mark can certainly help walk through the nuances of year over year as you find that necessary. Most importantly, as I think about the quarter. Our operating performance benefited from strong loan production. We also continue to see strong performance from our fee based.
And obviously in the environment that we've been operating in for some time continued focus on managing our costs.
So I'll quickly walk through the highlights EPS came in at 41, that's up 14% from the first quarter. If you allow for adjustments EPS from 46, that's up 24%.
From the prior periods and again largely due to comparatively lower loan loss provisions.
<unk> revenue and lower expenses.
Our loan growth was solid up 7% annualized from yearend and Mark can speak to this in greater depth of pretty much what we expected of pipelines contained of normalized.
Net interest income was 144 million thats up about 2% linked quarter again, as we saw the benefit from stronger P. P. P fees and 1 more day in the core net margin was 296%, but once again impacted by elevated liquidity, which obviously weighs on the percentage.
Fee based revenues remained strong and as I said before we saw again this quarter of record wealth management revenue, which offset the fall off from last quarters, but we have to remember the far from first quarter was record levels for mortgage revenue.
And then obviously away from the transaction cost attendant to the old National combination noninterest expense was down about 3% from last quarter, which was inflated by seasonality and obviously from our perspective reflects our efforts to remain tightly controlling our expenses.
Credit and capital reserves are still robust as we see economic recovery continuing our allowance for credit losses stood at 1.56% of total loans and that's after you exclude PPP, which is down from last quarter, but still elevated relative to where we started 2020.
During the quarter, we absorbed previously reserved charge offs for 2 credits, while the improved credit climate and outlooks simply just didn't warrant further provisioning given where we are in the economic recovery.
Overall, our nonperforming and potential problem levels continued to improve as they have as debt or past due 30 to 89. So those trends continue to look positive.
So with that as the recap, let me turn it over to Mark and Pat and they can expand on some of the detail auction of the deck Mark Thanks, Mike and good morning, everyone.
Starting on slide 3 of our presentation loan growth was strong and widely distributed in Q2.
Away from PPP loans were up $250 million of 7% annualized from last quarter as our mortgage middle market and specialty teams all gender generated results in line with our clients improve the expectations. We also added some nice multifamily clients in Milwaukee and Chicago.
We discussed in our last earnings call, our view that the outlook for commercial loan Brooklyn, the favorable given our rising pipeline.
That came to fruition this quarter as production was up about 6% from the prior quarter and we saw some net line draws for the first time in over a year.
The results we posted in the commercial in Q2, we believe are likely to continue for the near term as pipelines remain steady at pre pandemic levels.
Mortgage had another robust quarter with production in excess of $400 million, which allowed us to add about 100 million net to our balance sheet, while still generating nearly $7 million of fee income through asset sales.
Lastly, we did buy some high quality installment paper merely to offset the of continuing declines we see in home equity loans from refinance activity.
In total debt our outlook for full year loan growth of mid single digits away from PPP remains unchanged.
As the PPP and there's a page in the appendix for summarizes this.
We ended the quarter with $700 million in outstanding loans.
As we further supported our clients with some incremental new loans early in the quarter, but then we saw over $450 million forgiven by June 30th.
Again, we believe most of our balances here will be forgiven and repaid before year end as Pat will detail in his margin discussion shortly.
Asset quality beginning on slide for continued to improve as expected like Mike highlighted.
All adverse categories N P. As sub standard special mention and 30 to 80.90 days past due they all declined in Q2.
We believe this favorable risk rating migration will continue over the back half of this year.
Charge offs as shown on slide 5 did increase as expected solely due to the 2 large credits that we had previously fully reserved for.
While these isolated issues came a little earlier than we thought they were in our 2021 forecast and thus our outlook for the full year has really not changed.
If anything it's improved slightly as elsewhere across both commercial and consumer charge offs were benign.
Given our continuing improved outlook are $220 million allowance leaves us very well reserved for the lower charge offs, we foresee the rest of the year.
Turning to the 2 deposits on slide 6.
Funding remains a core strength of our franchise with the industry flush with liquidity or historical comparative cost advantage is more muted now, but it's still there.
Our cost of deposits came down a little further in the quarter to 8 basis points.
All of those last seen following the financial crisis importantly, we have plenty of dry powder and funding sources to take advantage of market opportunities.
Pat will now pick it up from here on net interest income.
Good morning, everyone on the call turning to net interest income and margin on slide 7 net interest income was up 2% compared to the prior quarter down 1% from the same period in 2020.
The increase linked quarter was driven by $2 million in higher PPP loan forgiveness, an additional day in the quarter as Mike mentioned, partly offset by lower acquired loan accretion.
The P P loans forgiven in the quarter increased from approximately 200 million in the first quarter to approximately $450 million second quarter.
And of the prior year decrease in NII was due to lower rates, partly offset by interest income and fees on the PPP loans lower cost of funds and loan growth.
For our loan accretion of approximately $6 million was down $1 million compared to both prior periods accretion.
Accretion in the second quarter was higher than anticipated 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 2.96% was down 7 basis points linked quarter and down 17 basis points from the same period a year ago.
Excluding accretion adjusted margin was 2.84% for the quarter down 4 basis points linked quarter, and 14 basis points from the prior year.
Note that adjusted net interest margin, excluding the impact of PDT continued to increase modestly trend that we've been experiencing since late 2020.
Linked quarter net interest margin compression was due to higher customer liquidity and the normal seasonal increase of municipal deposits that occurs in the second and third quarters, partly offset by higher accelerated income on the forgiveness of PPP loans.
Compared to a year ago net interest margin compression was primarily driven by the impact of lower interest rates on loan and securities yields as well as the impact of higher customer liquidity, partly offset by lower cost of funds and Pvp income.
Our outlook for 2021 net interest income is unchanged and is expected to remain relatively stable, while net interest margin, excluding accretion and Pvp is expected to grow modestly the remainder of the year from the second quarter of 2021 levels.
Krishna is expected to be approximately $22 million for the full year with $9 million expected over the remaining 2 quarters of 2021.
Aggregate PPP net interest income is expected to approximate $35 million for the full year with $14 million coming in the remainder of the year roughly evenly by quarter, though the exact timing and the amounts of completely dependent on the SBA process for forgiveness.
Turning to noninterest income on slide 8 we continue to see solid recovery most fee based revenue streams, returning to pre pandemic levels, except for capital markets income.
Noninterest income was up 1% linked quarter to 40% versus a year ago.
Mortgage income of $7 million was down $3 million from our record first quarter 2021 levels, but was up $3 million of 94% from a year ago.
Posted another record quarter in wealth management of 3% linked quarter, 22% from a year ago, reflecting robust market as well as strong sales production and client retention.
Service charges on deposits were up 8% linked quarter and 18% from a year ago, while card income was up 5% linked quarter and 50% from a year ago.
Both areas, reflecting of much more normalized transaction volume environment.
Capital markets income was relatively flat linked quarter and up $1 million from a year ago pipeline is continuing to strengthen during the second quarter.
Our guidance for high single digit to low double digit growth of noninterest income for the full year remains unchanged with quarterly total noninterest income expected to be stable to Q2 levels over the second half of the year. Despite the expected continued normalization of mortgage income from it.
<unk> levels at the beginning of the year.
Moving on to expenses on slide 9.
The current quarter includes $8 million of acquisition integration costs associated with the pending old national merger away.
Away from these items total expenses were down 3% linked quarter down 1% from the same period a year ago.
Q1 expenses were impacted by the seasonal impact of payroll tax timing and weather related costs, which were both the absence of the second quarter. In addition, lower equity compensation valuations and the ongoing benefits of expense optimization strategies contributed to the linked quarter decrease per.
Partly offset by higher pension plan payouts and higher advertising costs.
Compared to a year ago, lower pandemic related expenses and the ongoing benefits of optimization strategies more than offset higher compensation accruals pension plan payouts for merit increases.
We continue to be focused on our expense run rate lowering our efficiency ratio to 59% in the second quarter compared to 62% in the first quarter, 64% the same period a year ago.
Away from the ongoing acquisition and integration costs of our outlook noninterest expenses is relative stability compared to Q2 run rate.
Last note on taxes for laser sight for effective tax rate for the quarter was approximately 26% down from 28% for the prior quarter, which was impacted by approximately $1 million of equity compensation vesting expense.
Compared to the same period, a year ago, the effective tax rate increased from 24% to 26% due to a lower concentration of tax exempt income.
Our guidance for an effective tax rate of 26 per cent for 2020.1 remains unchanged.
Moving to capital on Slide 10.
Capital levels continue to be strong with retained earnings and the volume and mix of risk weighted assets contributing to growth in the second quarter.
These level of support our quarterly dividend of <unk> 14 per share consistent with prior quarter and prior year and provides strong capabilities to support the borrowing needs of our customers.
Now I'll turn it back over to Mark.
So on slide 11, we tried to briefly summarize the great opportunity ahead, and combining with old national.
Mentioned and as we discussed when we announced on June 1st.
Tremendously excited about our anticipated merger the strategic fit and the financial benefits remain clear, but as importantly, I would say we continue to feel great about the cultural alignment as we worked through the process.
Recognizing it is only about a month of the half since the announcement we are extremely pleased with the progress we are making and how the teams are working together.
Slide 12 highlights some of these processes.
We have made all of the appropriate filings and we have an experienced team leading our efforts encompassing over 350 of our colleagues I would simply emphasize that while much work remains we are on track on all fronts and still hoping to close prior year at.
And the back to you Mike. Thanks, Lauren Yeah, Let me just ask a of couple of things of marks kind of set it before we open it up for questions way absolutely. We are very excited about what lies ahead for our partnership with old National certainly what it means for our clients. Our markets are you needs of our colleagues of <unk>.
Across the board and as we have share and for those of you had the opportunity of listen to all of National and Jim speak. This morning, certainly that was echoed in their common comments. This is really at its core of growth strategy for 2 strong companies and share of vision and a culture that we firmly believe leaves us very well positioned for the future. So.
With that let's open it up for any questions you might have.
Thank you the question and answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing the Keith if you have a question. Please press Star then 1 on your Touchtone zone. If you wish to withdraw from the queue. Please press Star then to your questions will be taken in the order rate.
Please standby for your first question Sir.
It is from Michael Yang of True Inc. Please go ahead.
Hey, Thanks for taking the question yes. It was just curious maybe sort of qualitatively you know what we should expect in the interim before the old national deal closes in terms of you know.
Any any efforts you may undertake in terms of retention or proactive marketing clients should we expect the higher expenses related to any of those things and.
Any other qualitative things you'd like the crowd there.
Well this is Mike I, certainly can speak to some of that.
Certainly you can expect us to continue to make active outreach to clients in the markets and to build on what we've established here across across the marketplace and continue to reinforce all the positives that come along the cost or excuse me. The transaction is as we've that we've described strategically it's a great opportunity. So we spent a lot.
Lot of time and energy, but that's really largely embedded in our run rate as we go for it. So I wouldn't think that you would see anything different than what panic guided to today.
Yes, I guess can I add I would just say as Marc Michael Thanks for the question.
First with its business as usual here, we are we continue to expect to grow.
We continue to call on clients proactively and tell our story and I think the market for our reaction has been very favorable so.
And any expenses that we have we're starting the built into the retention of the efforts that were built into our modeling as we as we outline the transaction.
Okay, Great and maybe just kind of bigger picture on loan growth loan demand I heard a few comments obviously about that.
The prepared remarks, but are there areas that you're seeing maybe higher demand or more strength.
And then are there any sort of limitations or any things, we should think about in terms of growth going into the back half before the merger.
Hoses.
I think you've seen a nice recovery, it's mark again Michael.
Across really all sectors.
We've seen the most strength in C&I, thus far.
The headwinds would be.
Of those pesky competitors that are out there, but we face the competitors and we have of.
Competed in the wet and 1 before and we continue to do so so I don't I don't mean to be sort of tongue in cheek about it I think that theres no market headwinds that we see.
I think the businesses overall are recovering theres still some pockets in the economy that are little slower to recover but by and large we see good strength across the across all of our sectors.
Yes.
Okay.
Okay, and maybe last 1 for me just as you look at sort of the fee business lines. You know as you move in the closing with the old national or are there certain areas that you're starting to or going to try to expand maybe proactively ahead of the merger close of geographically or other.
The wise or will it kind of the status quo until the actual day 1 closing.
I'll try my best to I'll answer it this way it really is business as usual. So we had nice growth plans of particularly around our core businesses of wealth management Treasury management and card all of which saw nice solid growth this quarter and we expect debt to continue.
We will continue to selectively look to add talent. So I don't I don't think you'll change that you'll see it won't change the dynamic dramatically Michael but we certainly would look to add talent in all of these areas, but we think Brian nice path to hit the numbers that we forecasted with the staff that we have.
Okay, great. Thanks, that's all for me.
Okay.
Ladies and gentlemen, as a reminder, please press star 1 if you have a question. The next question is from Nathan race of Piper Sandler. Please go ahead.
Yeah, Hi, everyone. Good morning.
And then just going back to the loan growth discussion.
In terms of the outlook it looks like 1 of the drivers in the quarter was the consumer installment growth and I think in the past you guys. The patent purchases within that segment that augmented the growth in that portfolio. So just curious if that was the driver again this quarter and 2 as you guys kind of look at the pipeline kind of where do you expect to see growth of net.
Mid single digit range over the balance of the 'twenty 'twenty 1.
Yeah, Nate it's Mark I would answer it this way the growth you saw in installment was as much of our effort to forestall the decline we saw in home equity. So some of the other consumer categories declined and so our growth of installment was really to keep that relatively flat the net overall growth debt.
We saw was in C&I.
Multifamily and mortgage that's really where our growth came from this quarter and we expect that to continue I would like to see CRE more broadly grow.
The nice CRE is the nice production levels, but we continue to see a fair amount of payoffs in that area. So it's been relatively flat away from multifamily, but again our growth this quarter was.
C&I multifamily mortgage driven net installment and.
In our view.
Please go ahead on the data.
<unk>, it's Pat.
2 of kind of close the loop on our transactional purchased book So we do from time to time augment.
The more for amount of mix perspective in the yield perspective.
With purchases primarily of residential 1 to force those run off at a pace that has continued to be higher than what I call normal because people first for refinancing my crazy. It now they're continuing to sell their houses and buy new ones. So still higher activity. So we do periodically top of.
Of that portfolio just to maintain kind of the status quo imbalances, but we're not anticipating contemplating or guiding to any of our growth for the year coming from purchase loans.
To be clear.
Got it.
And then.
Kind of along these lines of thinking about the overall, earning asset base.
Of balance sheet growth over the next couple of quarters up until the deal closes.
As the PPP forgiveness process continues to unfold I'm curious to get your guys thoughts on kind of how liquidity balances trend with the process and suing them should we expect some continued earning asset growth and liquidity inflows or do you guys. Maybe anticipate some shrinkage at some of those dynamics play out going forward.
Hey, it's Pat again, I'd say, yes, the bus of those things, we keep forecasting we're gonna see of pretty market runoff and liquidity balances and we've been believing that for almost a year.
So at some point.
Particularly as we start to see things like commercial line utilization, which ticked up for the first time in a number of quarters. This quarter, we do expect that customers will naturally draw on their balances.
It does get offset by continued consumer stimulus and whatever the Australia is where the consumer spending patterns. So we.
We would anticipate probably somewhere between 500 and $750 million of runoff of of.
The cash that you're sitting there, which is difficult to deploy for longer term reasonably yielding earning assets simply because we continue to have the belief that that is going to run off at some point later this year for early into the following.
Understood and if I could just 1 follow up along those lines if that liquidity the sit around what's the appetite to redeploy some of that in the securities book absent the opportunities that you guys are going to see from the.
Lending perspective over the next couple of quarters.
Well, we're always looking for opportunities to top up the securities book, So you've seen yields and rates experienced pretty pretty significant volatility on a day to day week to week month to month basis throughout this year and as we see opportunities to.
The jump in and buy heavier and more we absolutely will do that.
Those have been kind of few and far between.
This quarter.
We were kind of struggling to get yields on new purchases much higher than 170, 175, which was roughly the same as Q1. So our securities purchases were net net lower than the volumes that we had during last year. When we certainly saw hired more attractive yield.
And we'll look for opportunities to do that again for sure.
So thats 1 of the few places we would part excess liquidity would be something that is.
Very high liquidity low premium that we could get in and out of if we do start to see the kind of cash outflows. The we're expecting at some point.
Okay understood I appreciate all the color thanks, guys nice quarter.
Thanks.
Sure.
The next question is from Chris Mcgratty of <unk>. Please go ahead.
Hi, Good morning, gentlemen, this is Chris O'connell filling in for Greg.
I just wanted to.
Kind of follow up on the same from there.
Our line of questioning what for.
With regards the liquidity management.
I appreciate the guidance that you guys of given around the unchanged on the stable NII.
And then with the NIM growing.
But just curious if you know so far into for.
For Q2 'twenty 1.
You've seen any of those deposit movements from the customers.
Or any of kind of the you know the strong inflows that you've seen over the past year I start to moderate or come down yet or do you think that's still a little bit.
You know more of a late for.
2021 of that.
Yeah.
The the pace of inflows from consumer and commercial balances.
Slowed a bit those those balances were relatively stable linked quarter, which isn't always typical.
We would typically see balances declining early in the year as people paid off.
Things that they accumulated at the <unk>.
Dias year.
Initial inflows remained very consistent and so we're in the middle of kind of.
The the normal seasonable seasonal inflow for municipal deposits, but I'll say that the growth has moderated a little bit.
Absent the late Q1 stimulus.
Outflow the stimulus checks went out as part of the most recent cares package and we can see that every time there. There's the stimulus package, we can see multiple hundreds of millions.
Most immediately so it seems to be persisting as far as balance growth.
Mark is there anything you'd add on the that I think you summarized the welfare.
Got it understood and as far as the deployment into.
Securities.
And I hear you on the on rates for it hasn't been of great environment recently.
To go all in the certain point, where.
Or is there sort of yield threshold, where you guys are going to be more aggressive or take opportunities.
That you'd kind of be allowed to disclose.
Well I mean, we've got cash that needs to be deployed that's debt that's always coming through just from the normal cash flows out of our book, that's 150 million of <unk>.
Order of <unk>.
Absolutely.
And so we're generally going to work.
The pretty hard to make sure we're investing.
The investing that.
Away from that we look for opportunities to see where yields tick up.
2 potentially pre invest future cash flows or to grow the book modestly.
We just haven't seen as many of those opportunities this past quarter, where the rates were generally following our yields so.
So we'll continue to watch for the us volatility seems to be the rule of the day, even in the low rate environment. So there will we will expect and take advantage of.
Of opportunistic.
Moving.
Got it.
And then 1 last 1 if I could.
You know the loan growth.
Guidance stable seems to be on track.
And is there anything on the commercial side I guess.
Or you see opportunities to kind of the guidance there in the mid single digit.
In a particular industry or area, where no 1 each line utilization could come back a little bit stronger than expected.
First of all of those launch.
I would say nothing of particular, but I'd answer it this way, maybe better which is where we expect modest to medium growth in all of our business lines and so those growth rates might be different than some of our.
Core business banking in CRE markets.
Might be a little lower there, but and a little higher than some of our specialty units, where we've had some outsize growth. The last few years, but again, we expect every 1 of our business units to have some growth all of that into a mid single digit.
Understood. Thanks.
Yes.
Joe.
Again, if you have a question. Please press Star then 1.
Yes.
Yeah.
There are no further questions I would now like to turn the call back over to Mr. Scudder for closing comments.
Great. Thank you.
Thank you all before closing I once again I think it's always nice to take the opportunity to thank all of our colleagues both here and frankly with our newest partners at old National.
You all have the opportunity to listen to our collective calls for their enthusiasm of hard work.
Really an exciting time for us and I want to thank all of them for their continued commitment to living our values, which is what makes our 2 company. So special.
Proud to be surrounded by so many good people, who strive to do the right things every day for our clients our communities and for each other so thank you all for your attention and interest in our story and our ongoing belief that were great investments.
Have a great day everybody.
Ladies and gentlemen, this concludes the conference for today. Thank you all for participating and have a nice day all parties may now disconnect.