First Midwest Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2020 Fourth 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 questions 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. I hope this finds everyone and your families doing well, staying healthy, and certainly ready for a new year. Let me start. I want to offer some perspective as we close the quarter and certainly close on what has been, gosh, a wild year. You know, just reflecting back on the year itself, it certainly has a best of times, worst of times bent to it. 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 shutdown, a massive shift in fiscal and monetary policy, all of which seemed to last longer than most had anticipated. But certainly, as we stand here today, it's looking to be less damaging than what we all would have 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 of to the character of our company and our teams. So as we kick off 2021, while the downside risk, I believe, is still there, we are certainly feeling more positive. Our balance sheet remains very strong. That provides us with a lot of management flexibility as conditions unfold in 2021. Our Tier 1 capital now is at 11.6. 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 day one CECL would have been 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 came in at 33 cents. That's up, gosh, some 57% or almost 60% versus last quarter. and that's largely on the strength of greater PPP revenue and relatively lower loss provision expense. The forgiveness process for the 2020 program was faster than expected and accelerated the timing of receipts from what we all know and hope will eventually be a finite series of programs. The second draw program is underway, and frankly, it's going pretty well. Thanks to our team's efforts, we're really pleased to be able to help our clients in the community. as we roll out the second draw program. And that'll help partly offset some of the acceleration from the earlier program into 2020. So Mark and Pat will get into that a little bit further. We did take the opportunity in the quarter to move further to adjust our AL position given low rates, trading some of the quarter's expense for the benefit of future performance. That trade essentially cost us about 12 cents to terminate the remainder of some hedge contracts and redeploy some of the security cash flows that were coming in. The combined benefit to 2021 and beyond, frankly, will more than offset those costs. So I would also highlight credits stood out as a positive for the quarter. Provisioning was about $5 million lower than last quarter. Of probably greater import, charge-offs were meaningfully lower for the quarter. They came in at 12 basis points, and that's away from the acquired loan marks. And our MPAs were 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 still out there. On the business side, we were also pleased on a number of fronts. Our branch consolidation and retail initiatives that we announced earlier continue to remain on track and performing well 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 a billion to an asset and a really great team with a strong commercial platform that rounded our wealth and our business presence in the Milwaukee and southeast Wisconsin market. So I know they're very anxious to continue to look for opportunities to expand in 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. So all very positive for us as we kick off 2021. 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, you want to take it?

Thanks, Mike, and good morning, everyone. Starting on slide four of our presentation, loans increased $100 million from the prior quarter due to strong organic mortgage production and a significant remix of our balance sheet into purchased one-to-four 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 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 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%, 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 amortizations. Commercial real estate finance refinance activity in particular ticked up, mostly from CMBS lenders that are willing to go out longer and at higher levels of non-recourse than we are. Line utilization in CNI was flat during the quarter. 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 in our specialty and middle market businesses. Turning to PPP, 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 thus far. 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 2021 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 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 PPP. As to PPP, we expect those loans to be largely repaid by year end. Of course, we will see a net income benefit as we again assist with what we assume will be near 100% 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 industries most impacted by the pandemic. We highlighted here the segments we are 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 our relatively conservative underwriting, exposure granularity, and portfolio management practices will serve us well as we navigate the still somewhat uncertain landscape. On slide six, we provide detailed information by industry on our loan deferrals. At this point, our payment deferrals across the entire book are very modest, as the programs we ran earlier in the year to help clients accomplished 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 four residential. We highlight here our unsecured installment segment, a specialty product also targeted to prime borrowers. The enhanced yield here more than offsets the higher charge-off rate, which theoretically should benefit from the 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 year-end. As Mike alluded to, we again feel better this quarter versus last with regard to the credit outlook. As shown in 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 the stimulus programs are also helping. As a result of all that, NPAs 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, charge-offs were very benign, at the lowest level we have seen in years. Commercial charge-offs were minimal, and 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%. While we feel better about the outlook, as I stated, Our elevated reserves continue to reflect the uncertainty relative to the virus, vaccinations, and reopenings, 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, our historical comparative strength in funding costs is a little more muted now, but still there. Our cost of deposits came down another six basis points in the quarter to 11 basis points, levels last seen following the financial crisis. Importantly, we have plenty of dry powder in funding sources to take advantage of market opportunities. So, Pat, we'll pick it up from here. Pat?