FMBI
#Good morning, everyone, and thank you for joining us today.
Following the close of the market yesterday, we released our earnings results for the first quarter of this year.
If you have not received a copy of this press release, it is available on our website or you may obtain it by calling us at 630-875-7463.
During the course of the discussion today, our comments may include forward-looking statements.
These statements are not historical facts and are based on 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 10K and other filings with the SEC should be considered for our call today.
Lastly, I would like to mention that we will not to be updating any forward-looking statements following this call.
Here this morning to discuss our first-quarter results and outlook are <UNK> <UNK>, President and Chief Executive Officer of First Midwest; <UNK> <UNK>, our Senior Executive Vice President and Chief Operating Officer; and <UNK> <UNK>, our Executive Vice President and Chief Financial Officer.
With that, I will now turn the floor over to <UNK> <UNK>.
Thanks, <UNK>.
Good morning, everyone.
As always thanks for joining us today.
As is typically my practice, it would be my intent to cover the highlights for the quarter and then turn it over to <UNK> and <UNK> who then can offer select additional color on the quarter's activities.
As we look at the quarter, it was really a very solid quarter for us on a number of key fronts with our performance across business lines, either right in line with or frankly exceeding our expectations.
This performance, combined with our mid-March close of our acquisition of National Bank & Trust of Sycamore has us off to really a very strong start for 2016.
Earnings per share for the quarter was $0.23 per share or $0.27 after you allow for the acquisition and integration costs related to our NB&T acquisition.
Again these expenses were largely in line with the expectations that we would have shared with you all last quarter.
Contrasted to this time last year, EPS of $0.27 represents an increase of about 4% year-over-year and as is typically the case, the linked quarter core EPS was down about, a marginal amount largely due to the seasonality of the first quarter that comes with having fewer days in the quarter and generally a softer start that we would typically see in our fee revenues to kick off a year.
As we think about the quarter, there is a number of highlights that as I said will serve us well as we progress through the year that I want to emphasize.
First as I mentioned, we closed on NB&T in mid-March that further strengthened our presence in DeKalb County in the western portion of Metro Chicago.
It added about $600 million in deposits, $400 million in loans to our balance sheet and an additional $700 million in assets under management to our wealth management business.
With a great team in place there in both operating and wealth management system conversions behind us, we are very excited to move forward and grow our business in these markets.
We think we've got some great opportunities there.
Away from NB&T's contribution for the quarter, our legacy lending teams also had a particularly strong quarter largely led by growth in corporate lending.
Our total loans were up 3.7% since year-end.
If you annualize that, that is pushing 16% in annualized growth, so a very, very strong quarter out of those teams.
When combined with balance sheet expansion late in the fourth quarter, our period end or interest-earning assets increased about 10% from the fourth quarter.
Now on an average basis, they were up about 2.5% and our margin improved by 7 basis points to 3.66%.
Because this growth was relatively balanced, weighted frankly more heavily to floating rather than fixed, our overall rate sensitivity really wasn't materially changed and continues to be very solid and in line with where we have been over the last several quarters.
So we think we are pretty well positioned there both from the standpoint of having expanded our balance sheet but also in terms of retaining what we think is a very strong interest rate sensitivity position.
As we have talked about it, we have consistently emphasized our drive to expand and diversify our revenues.
Away from margin, our fee-based revenue growth continues to highlight those efforts.
Our fee sources were up 17% from the first quarter of 2015 with linked quarter comparisons influenced by the typical seasonality that comes with fewer days.
So as you look at that, you will oftentimes see our fees down in different card categories, you will see various deposit service charge categories influenced both by the number of days and typical seasonality here.
So posting that strong linked quarter growth is really an outstanding effort over the course of year-to-year.
So if you compare it to this time last year, our wealth management business weathered an extremely volatile start to the year with revenues almost up 8%, versus a year ago.
We expect the addition of NB&T to add some 15% in additional revenue to this business and further strengthen our position as the third largest among the Illinois based institutions in our markets.
At the same time, investments in our equipment financing and derivative sales platforms continue to drive improved results.
These businesses largely contributed to an additional $2.3 million in our other commission and fee items also versus the year ago.
Moving away from fees and revenue, credit was also in line with both non-performer and charge-off levels improved from last year.
In allowing for today's historically low levels and growth year over year, we were generally in line on a metric basis with last quarter.
As we suggested, last quarter higher comparative provisioning simply reflects the fact that we are growing our loans.
So all positives and all boding well for future revenue streams.
Finally from a ---+ revenue contributions rather than streams.
Finally from an expense standpoint away from acquisition costs, our core operating efficiency remains consistent and reflective of today's operating environment.
Our progress on the property initiatives we announced last quarter are right on track in terms of both the sale of targeted properties as well as our newest ---+ the opening of our newest locations in downtown Naperville and on LaSalle in downtown Chicago.
So with that as a high-level backdrop, let me turn it over to <UNK> for some additional color on the business.
Thanks, <UNK>, and as <UNK> highlighted, we had a strong quarter in all of our revenue producing areas.
Let me start with loans.
Our annualized organic growth of around 15% was led by commercial banking, most notably our commercial real estate and specialty businesses.
This growth was entirely driven by in market relationships and was in line with our existing portfolio mix.
Commercial real estate had a particularly strong quarter as our slightly higher level of new loan production, which actually followed several strong quarters, was not offset by significant pay offs as occurred throughout most of 2015.
Our growth year was spread across office, retail, industrial and construction segments with that latter category largely centered on multifamily.
This diversity in production is purposeful as we look to maintain our existing credit profile across these various real estate sectors.
Specialty growth was also generated from multiple areas most notably healthcare, structured finance and equipment finance.
Our investments in these segments over the last few years have provided measured growth in line with our expectations and we believe that we are still in the early innings of these efforts.
We also saw a modest increase in our legacy C&I businesses in this very competitive landscape.
We are holding to our risk tolerance and profile so our diverse offerings elsewhere are crucial in allowing us to meet our growth objectives overall.
In retail banking, we also saw measured growth in our home equity and installment loan categories as a result mostly of our increasing online activity, another trend we see continuing in the future.
Given all of this, we remain comfortable with our full-year loan growth guidance of mid to high single digits.
We believe production will remain at favorable levels but we anticipate some volatility in certain segments the remainder of the year based on specific property sales and some refinance activity.
So turning to fee income.
Results in Q1 were consistent with our strong history and guidance.
As <UNK> highlighted, in total our fees grew $5 million from last year's first quarter or 17%, actually a little above our expectations.
We saw continued solid growth in wealth management and card income of 4% to 5% organically year-over-year.
Our mortgage business saw an improved run rate in accordance with our efforts to garner our fair share of in footprint business.
And we had a terrific quarter in swap sales as well as continued gains from the sale of leases which together resulted in a 150% increase in the other fee category.
We remain optimistic about fee income growth opportunities broadly across our businesses for several reasons.
First, we saw a modest level of fees from our NB&T acquisition in Q1 given the timing of that closing but we expect that to be more meaningful going forward.
Our new colleagues have a very strong wealth business and we also anticipate expanding various other services to their solid core, retail and commercial businesses.
Across our legacy teams, we have delivered on growth objectives in wealth management, treasury management and cards for several years yet we think there is room for further expansions to existing and new clients in all three of these areas.
Lastly, our mortgage, swaps and leasing income streams have outsized growth potential albeit not linear quarter to quarter.
As a result of all this, we still feel good about meeting or even exceeding our full-year fee growth guidance.
Turning to credit for a moment, our Q1 results again overall were favorable to plan.
As stated in previous calls, we believe normalized charge-offs for us are in the range of 25 to 40 basis points and we have forecasted results in this range for the last several quarters.
While charge-offs this quarter came in slightly better than guidance at 22 basis points, we continue to believe that full-year levels will be in the lower half of that range.
With NPAs at 90 basis points of loans and adverse performing credits at manageable levels, we feel confident in this forecast.
So now <UNK> will walk us through some further income statement detail.
Okay, thank you, <UNK>, and good morning, everyone.
Let me cover net interest income and expenses that I usually do.
Net interest income was up $3.9 million or 5.1% from the first quarter a year ago and $2.7 million or 3.5% from the linked quarter which is in line with where we ---+ our expectations a quarter ago.
The increases from the first and fourth quarters of last year were due to growth in average earning assets of 7.1% and 2.5% respectively led by an improved mix as evidenced by the average loan growth that <UNK> talked about.
In terms of average loan growth, we were up 9% year-over-year and 4.7% from those same periods.
Plus, we saw the benefit of the Fed's February ---+ I'm sorry December ---+ I wish February ---+ December 2015 rate hike.
These more than offset the $2.6 million comparative drop we saw in accretion from acquired and covered loans from the first quarter of 2015.
The linked quarter margin improvement of 7 basis points was right in line with our expectations and reflected the benefit once again of the Fed's rate hike as well as earning asset growth I just described.
Compared to a year ago, the margin declined 13 basis points, substantially all due to the decline in loan accretion.
Otherwise the margin would've been essentially unchanged from a year ago.
We continue to expect low to mid double-digit year-over-year growth in net interest income.
Obviously this will depend on the pace and timing of future earning asset growth and interest rate movements.
As we look to the second quarter, we expect margin to be similar to the first quarter with the increase in linked quarter net interest income commensurate with the increase in earning assets which will be aided by the full quarter's impact of NB&T as well as the substantial loan growth that <UNK> alluded to and the securities we added in the first quarter.
So let me turn to non-interest expense for just a moment.
First quarter expenses excluding integration costs, totaled $77.6 million and stripping out the unusual costs from the fourth quarter, the increase was approximately 3% from the fourth quarter largely reflecting the impact of annual salary increases, the normal seasonal increase in weather-related occupancy costs and some level of operating costs from the two banking centers acquired from the People's transaction for our full quarter and the operating costs associated with the 10 former NB&T banking centers as well as the commercial wealth management sales staffs we brought on for the month of March.
Our efficiency ratio was steady at 64.8% essentially unchanged from the prior period quarters.
As we look forward, we expect expense of the second quarter to be largely in line with the first quarter plus approximately $3.5 million from the NB&T acquisition, obviously less the $5 million of first-quarter integration expenses and subject to perhaps some seasoning higher marketing spend.
As another comment, we do not expect any further material integration costs related to NB&T.
And with that, let me turn it back over to <UNK>.
Thanks, <UNK>.
Before we open up for questions, just some further remarks.
You know as I look at the first quarter, we are off to a really good start for the year.
Execution across that quarter has really left us confident in our plan and confident in our positioning here as we go forward.
NB&T's integration has gone very well, we will provide further leverage and by extension, it is going to add to our earnings momentum.
Margins are solid, our rate sensitivity is supported by an even stronger core deposit foundation that provides us, in my view, with an operating advantage few can enjoy as we navigate the course of future interest rates.
Our credit positioning remains strong, with expectations that we have shared previously for a relatively benign environment this year but also recognizing the reality that credit essentially is going to normalize.
As such, we have talked about for the last couple of quarters growth in our lending will continue to be prudently accompanied by reserve provisions.
Most importantly, our ability and willingness to invest in our infrastructure and our talent really leaves us well-positioned to operate as a larger company and grow our business and the ability to do that without sacrificing the focus on really what drives the value and that is helping our clients be ---+ achieve financial success.
So I fully expect growth opportunities to be there as <UNK> had shared before, first and foremost driven by our ongoing investment in talent.
And secondly where it makes sense, through line consolidation opportunities that we would expect to see over the forward environment.
And we have a long-standing philosophy and culture of client and community service and really a business ethic that appeals to many of our peers as we operate in that environment.
Combined with the strength of our balance sheet and our funding base, our investments and our infrastructure and as I shared most importantly an aged team of colleagues, those are tremendous advantages as we go forward.
With NB&T really on pace for successful execution, we are really excited about our future, feel we are well positioned to grow and continue to enhance shareholder return.
So with that, that would conclude my remarks.
Now let's open it up for questions.
You know, the way I would look at it, <UNK>, is consistent with <UNK>'s guidance there.
Generally charge offs are going to flow within the range that he outlined, we think we will be on the lower end there.
I think our raw reserve levels plus or minus a few percentage points as those move through that are going to stay roughly in about the same level.
So if you look at that combined with where the loan growth we were guiding toward, you can get a reasonable sense of where provisioning might ultimately run.
I think this quarter was particularly strong in terms of loan growth, which then obviously came with it a greater level of provisioning as that loan volume and growth would decelerate from really very strong levels today.
You would see some lessening of that as opposed to an increase, all things being equal.
Hopefully that helps.
Not really, <UNK>, it's <UNK>.
They've held up pretty well over the last really several quarters.
So our net margin and our new and renewed spreads over I'll say the last four quarters has been pretty stable quarter to quarter.
Yes, I think it would be 81 to 81.5 somewhere in there.
When we say a starting point, so our fee income last year, <UNK>, the total was $127 million.
We gave guidance previously that we would grow high single digits off of that base.
I would say at this point we think we will meet or exceed that high single-digit number.
Is the base, exactly.
I think the response there where probably you will see earning asset growth more closely parallel loan growth.
Keep in mind, and <UNK> certainly could add additional color to this, remember the seasonality that you see typically over the second and third quarter that comes from municipal tax inflows.
So excluding that, you would see earning asset growth largely track off the loan growth as you go through it.
But keep in mind as well, one of the things we were trying to highlight and that I would emphasize, we closed the quarter with earning asset growth up about 10% period end versus period end, 2.5% was the average growth so on average you should see some not quite 10% earning asset growth but some level slightly below that that will drive second-quarter growth.
The tax rate really I don't think it is going to change a whole lot in the second quarter from the first quarter.
Maybe go up slightly.
It was what at 32 and change.
It would probably be still right in that same range.
Sure, sure.
Well fundamentally the efficiency that we have is by definition the calculation of it is simply the ratio of expense to revenue (technical difficulty) From our perspective, last quarter we took on an initiative to grow and kind of optimize our operating base from an occupancy and channel standpoint.
We think there will be more opportunities there to drive further efficiency within that.
And then the other avenue that is continued expansion on the revenue side away from higher interest rates, the investments that we have made and what <UNK> has referred to in the fee-based businesses really start to kick and contribute as we move through that and we think there is some real opportunity there.
So our efficiency as it stands at 64, 65 as it is today, we think we can continue to drive down here over the course of the year and certainly out into the future.
And all I would add was, as we have talked about in the past, Brad, the investments we have made in talent while we will continue to selectively and opportunistically look, we have made a lot of investments over the last few years.
So the leveraging of that talent and getting more out of it, if you will, I think is still ---+ has room to run here.
If I could real quickly, the question on the tax.
I think it was 32 and change in the first quarter.
I think it will be roughly around 33 for the second quarter, just to correct that.
No, I think for the most part they are in our run rate and in the guidance as we have out there.
We have made investments in prior years as <UNK> alluded to in terms of talent and infrastructure here.
We have made system investments that are already reflected in our run rate.
So I don't anticipate significant alteration from our guidance here as we go forward.
So our track record on customer retention and loans and deposits is very good and we have exceeded our plans there in our past acquisitions and we certainly expect to do that in NB&T as well.
I think part of it is it is just a good comfortable fit with NB&T.
So as we have talked to the colleagues and then obviously been talking to clients actively prior and after close, just I think folks, for lack of a better term, feel good about the opportunities with First Midwest.
We are looking to grow their business as an efficiency play.
And so I think we are expecting very high customer retention rates and early indications, early, would say that we are well on track.
Thank you for that.
We feel good about a number of areas, wealth management, treasury management.
We see measured growth in card and merchants so we see some good opportunities there as well.
But I would say the largest would be in treasury management, wealth management and then leasing.
Leasing and sales of equipment finance paper we still have ---+ we have a good plan there in terms of what we think we can grow that business as we did last year.
Mortgages will be a sequential kind of an incremental build where we should have a bigger mortgage business than we have right now, frankly.
So I don't think it will be overly robust but I think you will see favorable comparisons quarter to quarter there as well.
So the service charge income incorporates the two largest drivers there, our NSF and treasury management are the two largest categories within that.
We have been facing declines in our NSF income streams over the course of the last several years of 3%, 4% annually.
We have grown our fees nicely in the face of that challenge because treasury management has more than offset that.
Treasury management largely to commercial clients and to our smaller business banking clients as well.
So in total that is a line item given the NSF.
While I will say that that shrinkage is lessening, it still is not a growing area NSF.
And yet as I say, treasury management should be more than able to offset that.
Well, we have talked fairly consistently and certainly NB&T and the acquisition there puts some short-term decline in the capital metrics that we have.
But we, as we have guided to before we are in a higher earnings level and contribution that comes from NB&T actually sees that recover very quickly.
So that is not so much of a concern as just a reality that contribution will happen very quickly on that end.
As we look to go forward, we continue to run our capital plan as we have over the last several years.
Our focus is continue to generate strong overall earnings, which is continuing to generate higher levels of capital.
We've been focused on deployment of that capital through both our dividend, which has expanded here over the last several years.
And then likewise through the focus of deploying that for organic growth and then to the extent that it makes sense, through what I would call prudent strategic pursuit of opportunities from an M&A standpoint.
So (multiple speakers)
I was going to say ---+ I'm sorry, <UNK>, I was going to say we continue to talk about that regularly.
We discuss our capital plans and what our view is going forward every quarter and have active discussions with our shareholders about that as well.
Yes I would say, so again not to pick on words, but as you think about rebounding, we actually year over year in the first quarter were up about 50% in our mortgage business in terms of our closed loans.
So again first quarter is a little bit softer in that business as well.
You know, January and February are not really great months in Chicago-land to be out looking for a house.
And so we expect to have nice growth year-over-year in the quarterly year-over-year comparisons all the way through out to 2016.
So when I talk about just to be clear, $127 million is straight off of our 10-K fee based revenues not including other income categories that are in total non-interest income.
So our fee-based revenues in 2015 were $127 million.
When I give guidance I try to incorporate - so when I gave that mid-single digits, that growth guidance incorporated NB&T within it.
Again I think we will meet or exceed that high single digits.
But that high single digits was probably about half from acquisitions and half organic.
Does that make sense.
Yes, as expected we are and a good question.
We are starting to see a little bit of stress.
We are seeing a little bit of elevated risk.
We are comfortable with those exposures and are actively monitoring it.
Frankly, proactively we have been talking to our clients as you would expect.
The farm industry had several great years leading into this down part of the cycle.
So they are having a couple tough years right now with where commodity prices are and so we have seen some elevated risk.
But we feel really good about that book still.
Great, thank you.
As always, thank you for joining us today.
We thank you for your interest and First Midwest Bancorp and have a great day, everybody.
