First Midwest Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the First Midwest Bankwork 2020 Third Quarter Earnings Conference call. Following the close of the market yesterday, First Midwest released its earnings results for the third quarter 2020 and issued presentation materials that will be referred to during the call today. During the course of the discussion today, management's comments and the presentation materials may include forward-looking statements and non-GAAP financial information. The company refers you 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 questions and answers for analysts only. I will now turn the call over to Mr. Scudder.

Great. Thank you. Good morning, everyone. Thanks to you all for joining us today. It's great to be with you, and I hope this finds everyone and your families doing well and staying healthy. A lot going on this quarter. As we move through the pandemic, Dialogue today, obviously we have the materials that are available to follow along with. I'll start off with some of the highlights and as is typically our custom, I'll turn it over to Mark and Pat to follow along with some further details. So obviously performance for the quarter once again reflects the enormity of the times and the inherent uncertainty of the environment. Encouragingly this quarter, business activity showed signs of recovery. and that's obviously following the widespread shutdowns that we'd seen earlier. Practically, the resulting lag in the recovery of demand from those shutdowns and continued low interest rates weighed on the quarter's production. Net income for the third quarter was $23.4 million, or $0.21 per share. That's up from $0.16 a share in the second quarter and obviously down significantly from where we were a year ago. Operating performance, or what we refer to as pre-tax, pre-provision, away from branch optimization activities, improved 13% to $71 million as we benefited from stronger fee-based revenues and lower expenses. All of this, as we would expect to see as the economy recovers, we should see continued improvement there. Again, Mark and Pat will expand, but recognizing the environment We did take a number of actions this quarter that we believe will hold us in good stead as we move forward. We did announce consolidation of 17 locations, as well as certain optimization efforts relative to our retail distribution and ATM networks that will cost about 12 cents a share, but that will be recovered in roughly two years or a little under that. We did reposition a portion of our balance sheet. unwinding swap and funding commitments, and then liquidating about $160 million in securities, all at effectively no cost, but importantly to the benefit of our future net interest income. And that, again, without the loss of funding flexibility that still remains available to us. We held our loss reserves at about $250 million, or 1.8% if you exclude the PPP from the numbers. Overall, credit performance was solid, notable for stable non-performing assets, and our legacy charge-offs, again, were stable, and delinquencies were lower. We did have about $7 million in charges related to closing out one of our acquired loans, or largely due to one of our acquired loans, which aligned with our original marks. So that's simply an accounting nuance relative to CECL. The most important element of that is For how we marked it, it was how we were able to liquidate it. We have spent a significant amount of time working through our portfolio, working with our clients through the deferral process. And appropriately, the rating migration of performing loans to both special mention and substandard categories increased. And that was largely weighted to our elevated risk categories that we've been talking about for some time. and was aligned with what we felt were very encouraging reduction in the second round of deferrals. Recognizing, as I said earlier, the economic uncertainty, we simply maintained our reserves at $250 million. Near term, we're very comfortable with our reserves, the diversity of our book, and where we're at. But ultimately, as we've said for a number of quarters now, the depth and duration of the pandemic, how stimulus plays out will either drive better or more challenged outcomes as we go forward. With that as an overview, let me turn it over to Mark and Pat, and they can offer some additional color and walk you through the remainder of the deck. Mark, why don't you pick it up?

Thanks, Mike, and good morning, everyone. Starting on slide three of our presentation, loans fell $300 million as another strong quarter in mortgage was not enough to offset lagging commercial demand. Corporate borrowers, I would say, remain somewhat cautious and very liquid. So not surprisingly, we again saw line utilization fall significantly this quarter. While we remain active seeking new business, we have been a bit cautious as well, focusing our efforts on taking care of existing clients and maintaining credit discipline. We have recently gotten back to playing offense more, and we're beginning to see a slight pickup in activity, and thus we're optimistic for more stable commercial results going forward. Mortgage had another strong quarter driven by the favorable rate environment and the high performance of our team. We elected to sell a greater percentage of our production in Q3 given favorable prices and thus held total consumer loan balances flat in the quarter. We expect another good quarter in Q4 in mortgage to close out what will be a record year for us in this business. Our loan book is well diversified on slide four with very modest exposures to the highest risk areas resulting from the pandemic. The fact is restaurants, hotels, and recreation are high risk areas in any environment in our view, and thus have always been discouraged industries for us, meaning they just have a very high bar for approval. Of course, the virus has impacted the entire economy, and we highlighted here other areas that we view as of particular concern. I would note that we've talked about retail CRE and leveraged finance as being higher risk areas for the last several years and have managed our individual and total portfolio exposures accordingly. It's important to note that we have seen very little evidence of deterioration in these two areas these past six months, but given the inherent current risk levels, we are closely monitoring them. The outlook for office CRE is murkier in the current environment. How it plays out remains to be seen. but we feel our total exposure in this area, too, is at a very manageable level and well diversified. On slide five, we provide detailed information by industry on our loan deferral programs. As we guided two last calls, deferrals decreased significantly in the second round. We were pretty accommodative in the first round if a client requested a deferral, but subsequently worked with each of them on alternative solutions going forward. The fact is requests were down sharply in Q3, as borrowers accessed other sources of liquidity, and also as operating cash flow improved somewhat as the economy opened to varying degrees. While the three high-risk sectors remain the largest users of loan deferrals, utilization by these clients was also greatly reduced by 50 percent. The outlook has improved overall, seen most notably, I would say, in franchises. While they're not unaffected, they are performing better than they were after the freeze-up in the early spring. So to summarize, round two deferrals were 3% of our total loan book or 20% of the first round level at the low end of our guidance. Slide six displays our consumer loan book, which is dominated by one to four residential. Deferral requests here also dropped significantly and our highest risk sector, unsecured installment, represents less than 2% of total loans and is largely higher end FICO borrowers. Looking a little deeper at credit starting on slide seven, our metrics were stable other than the risk rating migration we expected. Non-performing assets were unchanged and 30-day past due loans actually improved. We did see a large increase in special mention and substandard loans as we projected due to the pandemic. Over half of the total increase in the quarter in these two adverse categories was from the elevator risk segments we highlighted earlier. Turning to slide eight, charge-offs away from PCD loans were flat at 26 basis points. Total charge-offs were inflated in the quarter, as Mike mentioned, by the change in accounting relative to assets we acquired at a discount, as we resolved a couple large acquired credits at losses that closely matched our original mark. We cut our provision in half relative to Q2, but maintained our total allowance levels by adding to our pandemic reserve given the continued uncertain environment, albeit at a much reduced level from the previous two quarters. Trying to give future guidance on credit is difficult given these unprecedented times. While we expect further deterioration, our outlook has actually improved from 90 days ago. We think criticized loans will increase, but at a much reduced pace given our proactive looks across the portfolio thus far. Charge-offs look well contained in Q4 as well, absent a material shift in the environment or one-offs that might come as we resolve PCD credits. But again, we expect any PCD losses to be very close to our original estimates. The credit story will be more evident in 2021 and we'll have a better read next quarter, influenced, of course, by anticipated further stimulus and the outlook for containment of the virus. Now I'll turn it over to you, Pat.