First Midwest Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the First Midwest Bank Corp 2021 Second Quarter Earnings Conference Call. Following the close of the market yesterday, First Midwest released its 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, 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. Thanks to all of you for joining us today. It's great to be with you and hope this finds everyone doing well, staying healthy and ready to go. These are exciting times here for us at First Midwest with our announced combination with Old National, now just a little over a month old. So what 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, is on sharing perspectives on this quarter. Overall, we are very pleased with our performance for the quarter. Performance continues to improve as we see the benefits of a recovering economy. Obviously, comparisons a year ago are tough because of the pandemic, so my comments are going to largely center on quarterly momentum. Pat and Mark can certainly help walk through the nuances 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 businesses 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 cents. That's up 14% for the first quarter. If you allow for adjustments, EPS was $0.46. That's up 24% from the prior period. And again, largely due to comparatively lower loan loss provisions and stronger revenue and lower expenses. Our loan growth was solid, up 7% annualized from year end. And Mark can speak to this in greater depth. Pretty much what we expected as pipelines continue to normalize. Net interest income was $144 million. That's up about 2% linked quarterly. Again, as we saw the benefit from stronger PPP fees and one more day in the quarter. Net margin was 2.96%, but once again is impacted by elevated liquidity, which obviously weighs on the percentages. Fee-based revenues remain strong. And as I said before, we saw again this quarter record wealth management revenue, which offset the fallout from last quarter. But we have to remember the fallout from last quarter was from record levels for mortgage revenue. And then obviously away from the transaction costs. attended to the old national combination. Non-interest expense was down about 3% from last quarter, which was inflated by seasonality and obviously from our perspective reflects our effort 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 two credits, while the improved credit climate and outlook simply just didn't warrant further provisioning given where we are in the economic recovery. Overall, our non-performing and potential problem levels continue to improve as did our past dues 30 to 89, so those trends continue to look positive. So with that as a recap, let me turn it over to Mark and Pat, and they can expand on some of the details and walk through the deck. Mark? Thanks, Mike, and good morning, everyone.

Starting on slide three of our presentation, loan growth was strong and widely distributed in Q2. Away from PPP, loans were up $250 million, or 7% annualized from last quarter, as our mortgage, middle market, and specialty teams all generated results in line with our clients' improved 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 growth was favorable given our rising pipelines. 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 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, really to offset the continuing declines we see in home equity loans from refinance activity. In total, then, our outlook for full-year loan growth of mid-single digits away from PPP remains unchanged. As to PPP, and there's a page in the appendix which 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 four. continued to improve as expected, like Mike highlighted. All adverse categories, NPAs, substandard, 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 five, did increase as expected solely due to two 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, our $220 million allowance leaves us very well reserved for the lower charge-offs we foresee the rest of the year. Turning to deposits on slide six, Funding 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 eight 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 now pick it up from here on net interest income.