First Midwest Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2021 first quarter earnings conference call. Following the close of the market yesterday, First Midwest released its earnings results for the first 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 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, everybody. Thanks again for joining us today. It's great to be with you. I hope this finds everyone on the call and your family's doing well, staying healthy and ready to rock and roll as we go into 2021. So let me start with some perspective on the quarter. We really had a pretty solid start to the year. Overall performance, improvement. We've seen nicely as the economy continues to gain traction here. Operating performance certainly benefited from stronger production this quarter from our fee businesses, which has frankly been ongoing for some time now, and a continued focus on our end of managing our costs. Unfortunately, in the world today, quarterly comparisons to a large degree get distorted, distorted particularly in the first quarter of the year by normal seasonality, but also the impact and the magnitude of just what's going on with the various stimulus programs and how those are impacting liquidity and transactional volume. So I'll leave that to Mark and Pat to help you walk through some of those nuances. Importantly, underneath all of that, our underlying business momentum is strengthening as both production volumes and sales pipelines normalize. And as we see, operating and credit conditions continue to improve. So quickly, here's a walkthrough of the highlights. EPS came in at $0.36. That's up about 9% and 100% from the fourth and first quarters of last year, respectively. If you allow for adjustments, EPS was $0.37. Now about $0.06 of that drop from the fourth quarter was mostly due to the timing of PPP revenue, which was also partly offset by some of the lower provisioning for credit losses. Obviously, if you're kind of comparing year over year, the increase in the improvement this year largely reflects the initial increase in provisioning that we saw responsive to the pandemic. So as I said in my earlier remarks, fee-based revenues were up 5% and 17% from the fourth and first quarters of 2020. And Mark can expand on this. We saw record wealth management and mortgage banking income again this quarter. Non-interest expense adjusted was only up about 2% from last quarter. And when you think about the typical inflation that you see in the first quarter, as well as the fact that it was a heavy snow year here across our markets, we feel pretty good about that. So we continue to closely control our costs and obviously align that with the company's growth. Net interest income was $141 million. Net margin was 3.03%, with the change from the fourth quarter largely exaggerated by lower PPP loan income and the elevated level of liquidity that's out there and the typical normal fewer days commentary that you see this time of year. Total loans were up almost 3% annualized from year end. And Mark can speak to this in greater depth. I think they were up over 3% anyways. It was almost 4%. We'll see pipelines returning to pre-pandemic levels, which is important for us. And he can expand on that. As I said earlier, credit conditions are also improving. And as they do so, our credit and capital reserves remain robust as the economy continues to gain traction here. Our allowance is at 1.73% of total loans. if you exclude PPP as a part of that, which is basically in line down a little bit from where it was the prior quarter, enough from 1.62% a year ago. Our net loan charge-offs, away from loans that we acquired, came in at $8 million, but about $4 million of that, or more than half of it, was related to an election we made just to do a note sale and had incurred some losses and charges as a part of that. So we simply brought forward some activity there. Overall, that remains at very, very low historical levels. Non-performing assets relative to loans stayed within normal ranges, while loans classified, you know, we call those generally substandard or special mention, dropped by almost 10% linked quarter, and our loans past due 30 to 89s declined by 24%, again, on a linked quarter comparison. Tier 1 capital grew to 11.7%. That's about 200 basis points higher than a year ago. And I would also note that, as we announced, we started our repurchase program back up again. And again, Pat can expand on that. But I think we bought about 715,000 shares as a part of that restart last quarter. So with that, let me turn it over to Mark and Pat, and they can expand on some of the details as we walk through the deck.

Thanks, Mike, and good morning all. Starting on slide three of our presentation, loans increased $100 million again this quarter, largely due to strong mortgage production. The momentum we had last year has continued thus far in 2021, with production of $400 million in Q1. In addition to loan growth, this helped drive a strong fee income quarter as well, which we'll cover in more detail here shortly. The mortgage business remains robust, and given the improving outlook for consumer credit more generally, we expect to see similar steady increases in consumer loans the rest of this year. Commercial loan production continued its upward trend this quarter, up 10% from Q4, largely driven by our specialty businesses. Payoff activity remained flat at what I'll call fairly robust levels, though, resulting in a relatively flat quarter for corporate loans. The excess liquidity our clients continue to maintain somewhat masks the overall strengthening economic outlook, which we see in the expectations our clients have for growth in their businesses. Thus, our overall outlook for commercial growth is favorable despite the pressures. As Mike alluded to, we're encouraged that our commercial pipeline continued to grow nicely this quarter, now at pre-pandemic levels for the first time. And as a result, we anticipate net growth in commercial loans on a quarterly basis going forward. Our outlook in total then for loan growth away from PPP is thus unchanged at mid-single digits for the full year. As to PPP loans for a second, we have a full page on this in the appendix. For now, just to summarize briefly, we ended the quarter with about $1.1 billion of outstanding loans comprised of half of our first-round program that are still in the process of forgiveness and about $525 million from the 2021 program. We were certainly pleased to be able to help our clients yet again at a high level this year. We believe most of the balances here will be forgiven and repaid before year end, which Pat will detail in his margin discussion in a minute. Looking deeper at the portfolio, beginning on slide four, our story relative to the higher risk elements remains very similar to last quarter, with flat overall balances and generally improving trends. We continue to have a well-diversified loan book broadly, with very modest exposures to the industries most impacted by the pandemic. At this point, our payment deferrals across all clients are very low, as the programs we ran to help our clients accomplish their objectives and, of course, the economy began to recover. Slide five displays our consumer loan portfolio, a prime book dominated by one to four residentials. We've discussed the highlighted unsecured installment segment several times over the last year. Suffice it to say, we remain very comfortable with our risk exposures in this relatively modest but nicely profitable category. Looking at credit performance then, beginning on slide six, we came in at or slightly better than our expectations as we started the year. Credits began to move their way through the cycle at a greater pace in Q1, and we saw some nice progress, particularly in special mention loans. from both payoffs as well as upgrades. Non-accrual loans, as Mike said, remain in line with historical averages. Special mention and substandard loans in total remain elevated from pre-pandemic levels but came down materially, and our reserves to cover them are also elevated. Charge-offs, as shown in slide seven, were at the low end of our guidance. We expect the credit story to play out over the remainder of the year as we articulated in January, specifically Charge-offs will likely increase from here and may fluctuate from quarter to quarter, but will stay within our 25 to 40 basis point range for the full year. We remain very well-reserved to fully absorb any charge-offs, and thus we would expect to bring the allowance down as the credit migration plays out this year and next. Turning to deposits on slide nine. Funding, of course, remains a core strength of our franchise. With the industry flush with liquidity, our 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 nine basis points, levels last seen following the financial crisis. Importantly, we have plenty of dry powder and funding sources to take advantage of market opportunities. So Pat will pick it up from here.