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Edited Transcript of FMBI earnings conference call or presentation 24-Jul-19 3:00pm GMT

Q2 2019 First Midwest Bancorp Inc Earnings Call

ITASCA Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of First Midwest Bancorp Inc earnings conference call or presentation Wednesday, July 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark G. Sander

First Midwest Bancorp, Inc. - President, COO & Director

* Michael L. Scudder

First Midwest Bancorp, Inc. - Chairman of the Board & CEO

* Patrick S. Barrett

First Midwest Bancorp, Inc. - Executive VP & CFO

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Conference Call Participants

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* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2019 Second Quarter Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the second quarter of 2019 and also issued presentation materials that will be referred to during the call today. These provide both historical financial information and the company's outlook for 2019.

During the course of the discussion today, management's comments and the presentation materials may include forward-looking statements. These statements are based upon the company's current beliefs and are not historical facts or guarantees of future performance or outcomes. Actual results or outcomes may differ. The risks, uncertainties and safe harbor information contained in the company's most recent 10-K and other filings with the SEC as well as the forward-looking statement, non-GAAP and other legends included in the company's earnings release and presentation materials should be considered for the call today. Finally, the company will not be updating any forward-looking statements after this call. This call is being recorded. (Operator Instructions) 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.

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [2]

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Great. Thank you. Good morning, and thank you, everyone, for joining us today. It's great to be with you.

Well, as I opened up in the release and certainly with my quote, it was an active quarter for us on several business fronts, but most notably for our mid-May closing of the Bridgeview Bank acquisition as well as the completion of the related system conversion. To help you, we've provided a supplemental presentation to follow along with as we move through our remarks. As is typically our practice, I'll cover the highlights, leave it to Mark and Pat to walk you through the components, and certainly, they can add the differentiation of the impact of Bridgeview on our numbers.

Let me start with some of the headlines. We closed the quarter at $17.5 billion in assets. That's up about 10% from last quarter, 18% from a year ago. Bridgeview added about $1.2 billion to this total, and importantly, a talented team to our overall Metro Chicago market presence. Combined with our fourth quarter acquisition of Northern States, this puts us in the top 10 of our overall market share in Chicago.

We are very pleased with our progress and execution overall in the Bridgeview integration. Our projections remain on track. And with the systems conversion behind us and a great team on board, we have some solid momentum going forward.

Away from acquisition costs, our underlying EPS increased to $0.50, up 9% and 25% from the first quarter of 2019 and second quarter of 2018, respectively. At the same time, our return on tangible common equity improved to 16%. That's up 64 basis points and 114 basis points from the first quarter of '19 and the second quarter of 2018, respectively.

From a business perspective, if you look away from Bridgeview for a minute, loans were up -- annualized about 9% for both the linked quarter and from a year ago. We are very pleased with C&I growth while consumer reflected both solid sales activity as well as our desire to add some duration and diversification to the balance sheet given the evolving rate outlook. At the same time, we saw CRE paydowns and production timing weighing on growth here for the quarter.

Prospectively, we continue to build and strengthen our sales teams as we benefit directly and indirectly from overall market disruption. We moved forward with our commercial expansion in Milwaukee adding 2 more lenders in the market, further complementing our RIA acquisition of Northern Oak in the first quarter. We also continue to add lenders locally as we move forward. All of this is in addition to the expansion of our direct mortgage team. Importantly, all of these additions pay future dividends down the road.

Our deposits held up nicely, increasing on average 6% and 14% linked quarter and from a year ago, respectively, while our mix was relatively unchanged. Growth in earning assets and accretions on net interest income grow to $150 million or 8% over the linked quarter while margin improved to 4.06%. As expected, underlying margin was down about 8 basis points, which was, just to recap, a little bit better than what we would have expected given the rate environment and some of the actions that we took to better position the balance sheet.

Operating efficiency was 55% for the quarter and the year-to-date, improved from last quarter and 5 percentage points better than what it was a year ago. Greater revenue has helped us along with higher net interest income as well as our fee-based fees -- or revenues, sorry, bounced back nicely as well.

Finally, our capital and earnings remained very strong, providing us with flexibility as we navigate today's environment. We closed the quarter with Tier 1 common at 10.11% to risk-weighted assets. That's essentially stable if you compare us to where we were a year ago, and up 40 basis points -- or excuse me, stable versus year-end, up about 40 basis points from a year ago, and that's after having acquired Bridgeview, repurchased -- repurchasing $20 million in shares under our newly authorized program and increasing our dividend to $0.14, and that's up almost 30% from a year ago.

So all in all, another busy quarter. And I'll turn it over to Mark and Pat for some additional color.

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [3]

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Thanks, Mike, and good morning all. Loans, as shown on Page 3 of the presentation materials, increased nearly $1 billion in the second quarter, right in line with our expectations. Bridgeview, of course, was the largest piece of that at about $700 million, 65% of which was in commercial real estate.

We also acquired over $200 million of 1 to 4 mortgages to extend our overall portfolio duration as we signaled in last quarter's call while protecting and growing earnings. Away from these acquired assets, we saw solid gains in C&I and consumer partially offset by continued pressure from CRE payoff activity. C&I growth was particularly strong and well-diversified across middle market and specialty teams as our previous talent investments continued to incrementally build our business quarter by quarter.

Similarly, our consumer direct and mortgage teams had another solid quarter. Our business banking and real estate teams had softer production this quarter, however, and in conjunction with continued refinance and sale activity, resulted in a drop in net CRE loans away from Bridgeview. We believe the modest Q2 production here was more timing than anything and that we can and will grow CRE in the face of payout pressures in the future. We are thus maintaining our outlook for high single to low double-digit loan growth for the full year. We think our commercial and consumer businesses in total will each post solid incremental organic growth from here based largely on disciplined prospecting efforts but also helped by some of the staff additions Mike referenced in his opening comments.

Turning to asset quality on Page 4. Results in Q2 were also right in line with expectations. Charge-offs of 31 basis points and NPAs of 0.77 of loans were consistent with the prior quarter. Our provision expense covered charge-offs and loan growth as expected, yet our allowance fell slightly on a percentage basis as we reduced specific reserves in conjunction with a couple of losses this quarter. We expect all of these asset quality metrics to stay in the same range for the remainder of the year.

While some of the payoff activity we've seen in recent quarters is an indication that the competitive landscape remains aggressive, we will not chase loan growth by sacrificing credit quality, and we believe our broad diversification and conservative underwriting will serve us well going forward.

Relative to deposits as seen on Page 5. Our average deposits are up $1.5 billion over the last year as we have a very high retention rate on acquired deposits due to our very strong customer satisfaction scores. Bridgeview added consistently to our strong mix in Q2, and our core base remains stable. While we remain competitive across all deposit products, a big strength of our overall franchise is this stable low-cost deposit base. In Q2, our average cost of deposits was 60 basis points, which will again be amongst the best in our peer group.

Pat will now translate all that into margin and net interest income.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [4]

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Thanks, Mark, and good morning, everyone, on the call who are listening in.

Turning to net interest income and margin on Slide 6. Net interest income was up $11 million or 8% from the prior quarter and up $23 million or 18% compared to the same period in 2018. Compared to both prior periods, the acquisition of Bridgeview, securities purchases and loan growth were partly offset by higher funding costs. In addition, the increase compared to the first quarter benefited from an extra day in the quarter while the increase compared to the same period a year ago was impacted by the acquisition of NorStates. Acquired loan accretion contributed $10 million to the quarter, higher than expected due to the favorable resolution of certain loans.

Moving to net interest margin. Tax-equivalent NIM for the current quarter of 4.06% was up 2 basis points linked quarter and 15 basis points from the prior year. Excluding accretion, margin was 3.78% for the quarter, down 8 basis points linked and up 1 basis point to the same period a year ago, very much in line with our expectations. Compared to both prior periods, margin compression reflected the mix of interest-earning assets acquired in the Bridgeview transaction, purchases of securities in 1-4 family mortgages to mitigate the risk of falling rates and higher funding costs consistent with our previous guidance.

Turning to earning assets and funding sources. Average interest-earning assets were up $900 million linked quarter and $1.8 billion compared to the prior year, reflecting earning assets from the Bridgeview acquisition, loan growth and securities purchases. In addition, assets acquired in the NorStates transaction impacted earning asset growth compared to the prior year. Average funding sources were up over $900 million linked quarter and $1.7 billion from the prior year, reflecting the impact of both acquisitions and organic growth.

Moving to our 2019 NII outlook. If you recall, our guidance 3 months ago assumed no additional rate changes this year. Rather than attempt to predict the timing or likelihood of future interest rate changes, I want to quantify that each 25 basis point downward adjustment by the Fed would likely result in a $2 million to $3 million decline in NII per quarter. On the positive side, we're updating our accretion guidance to be $30 million to $33 million in range for the year, up modestly from our previous outlook. Overall, we do not expect either of these potential rate cuts or the improved accretion to change our full year guidance range of low to mid-double-digit NII growth. If we do get 75 basis points of Fed rate cuts, as many predict, expect to see relatively flat NII compared to the second quarter run rate adjusted for day count. If we do not get those rate cuts, expect $6 million to $9 million of incremental NII growth.

From a NIM and earning asset outlook perspective, as we've said previously, we'll likely institute further actions to protect against future rate cuts as well as any further declines in market rates. These actions would likely continue to drive earning assets, both securities and mortgages, higher as a percentage of total earning assets, and at the same time, should be expected to result in quarterly NIM compression similar to what we saw in second quarter for at least the next 1 or 2 quarters or as long as these actions and rate changes continue.

Once again, I want to remind you that projections are subject to volatility due to movements in interest rates, pace of loan growth and the impact of acquisitions.

Mark, turn it back over to you to discuss noninterest income on Slide 7.

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [5]

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Thanks, Pat. Noninterest income rebounded as expected in Q2, up 10% versus linked quarter and 4.3% higher than a year ago. At the core, these comparisons reflect what we view as our normal organic growth trajectory of low single digits overall plus the benefit of acquisitions. We were pleased with our consistent performance here following Q1 results that were skewed lower by a couple isolated items. Our primary fee income growth streams, wealth management, treasury management and card services all posted solid organic growth results in Q2. Capital markets and mortgage rebounded sharply from Q1, really just to levels we consider normalized, and thus, we look to grow both of these from here. We have updated our noninterest income guidance for the full year, as shown on Page 7, to mid to high single-digit growth as a result of the impact of market conditions on the first part of the year and overdraft fee pressures. More simply stated, we think each of the next 2 quarters, we can generate solid mid-single-digit growth over what we posted in Q2.

Now back over to Pat to talk about expenses.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [6]

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Moving on to expenses on Slide 8. Please note the current quarter includes $10 million of acquisition and integration-related expenses associated with the Bridgeview acquisition, and to a lesser extent, some lingering Delivering Excellence implementation costs, both of which we believe will remain at or better than original expectations for the full year.

Away from these items, total expenses were up 6%, in line with our guidance compared to both the prior quarter and the year. The increase linked quarter reflects additional operating costs associated with Bridgeview, merit increases to salaries, valuation adjustments on certain properties and other expenses related to organizational growth, partly offset by lower occupancy costs. The increase compared to prior year is reflective of increased operating costs associated with the Bridgeview, Northern Oak and Northern States acquisitions, merit increases and higher other expenses, partially offset by the full incremental benefit of Delivering Excellence expense initiatives. Our efficiency ratio of 55% improved from 56% linked quarter and from 60% a year ago.

Our outlook for 2019 legacy expenses is unchanged, which was the fourth quarter of 2018 run rate of $98 million plus 3% inflation, with $4 million in additional expense in second quarter plus $6 million in each of the third and fourth quarters related to Bridgeview. Said another way, our second quarter run rate of $104 million plus an additional $2 million spread across staff costs and occupancy expense to reach Bridgeview's full quarter run rate is a good quarterly estimate for the remainder of the year.

Last note on taxes before I leave this slide. Our effective tax rate for the quarter was approximately 25%, in line with our guidance, and it remains our expectation for the full year.

Moving to capital on Slide 9. As Mike highlighted, we continue to maintain capital at strong levels and are pleased with our track record of rapidly earning back the capital we've deployed on acquisitions.

Excess earnings combined with the benefits of the change in accounting for our sale-leaseback transaction during the first half of the year essentially funded our acquisitions of Northern Oak and Bridgeview, plus the repurchase of approximately 1 million shares and the 17% dividend increase during the first half of 2019. Note that on an annualized basis, as Mike said, dividends are up approximately 30% compared to a year ago.

We expect continued capital accretion from excess earnings, providing further capital deployment flexibility to fund growth or continued share repurchases. And finally, consistent with our usual practice we've summarized both our outlook and current quarter's earnings on Slides 10 and 11, respectively.

I'll turn it back over to Mike for final remarks.

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [7]

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Thanks, Pat. So just to recap, we continue to like where we're positioned even as we navigate what I call the realities of an evolving rate outlook.

Since 2015, we've grown core EPS by 14% compounded and are well on that pace for 2019. Our focus remains on building talent, expanding our business and leveraging our teams and technology to drive a better and more efficient client experience. We have a strong balance sheet, engaged team, solid underlying momentum. We've got the flexibility to manage our capital to both invest in our business as well as pursue opportunities to expand both in existing and adjacent markets. Always, we do so with an eye on maximizing long-term shareholder return.

So with that, let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brad Milsaps of Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Mark, in the release and in your prepared remarks, you touched on the purchase of some consumer and 1-4 family residential loans during the quarter. I was curious if you could give us the amount and what your appetite would be for future purchases maybe in lieu of continued CRE paydowns or other softness in the book.

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [3]

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Sure. The amount in Q2 was a little bit over $200 million, to answer that question. Our appetite going forward, it's partially about earning assets, Brad, but it's partially about the duration of our book and what we want to do to position our balance sheet for the rate environment that we see. So as we, both opportunistically but also strategically, kind of look at where we want that balance of fixed versus floating to be against the backdrop of earning assets, we might do some additional purchases. We've stayed on the higher credit quality side of 1-4 mortgages, and so there's a certain element of just a good attractive risk return to what we purchase as well.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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That's helpful. And then just to follow up on the whole extension of duration discussion, maybe switch to Pat. Just curious, your appetite for additional securities purchases, it looks like you may have bought, ex Bridgeview, a few hundred million during the quarter. Also, the borrowings were up quite a bit. I don't think Bridgeview had a lot of borrowings. Can you talk about what you're doing there in terms of additional securities purchases kind of funded with borrowings?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [5]

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Sure. The borrowings are a little bit independent of that because we've already locked in and committed to forward fundings in previous years. And as those come in, there's probably about $400 million of maturing FHLBs that those are replacing, so there's a little bit of a timing lag on the FHLB side. But as we're able to find forward funding at attractive rates in this down curve environment, we're certainly looking for opportunities to lock in more future funding at pretty attractive long-term rates.

On the security side, we put on, between this quarter and the first quarter, probably $600 million of net securities, and we're able to get reasonably attractive rates. If you just kind of watch the intraday pricing, on average, we've been putting those on at about 3%, and these do start to extend out the duration modestly, not hugely, we're not taking super long-term bets on it. But net-net, we are really able to improve our asset sensitivity that way.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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And then just to follow up on that and I'll hop back in the queue, but it seems your $2 million to $3 million of NII pressure for each 25 basis point rate cut, that's been pretty consistent. I think that's what you said last quarter as well. In spite of these moves you've made, I guess it hasn't changed the impact on NII in spite of some of the duration you've added to the balance sheet.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [7]

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Yes. Well, the big question is how fast can we lower our deposit and funding cost. And without having had our deposit costs rise further and faster than they have during the cycle, we have very little on an index side that will automatically go down, maybe 0.5 billion in public funds and that's it. So the remainder is things that we have to go after customers and try to reduce rates as rates do fall. And I will say that we've also been still actively promoting money market specials and have been pretty successful in those throughout the course of the second quarter because we think, long term, these are the things that we're going to need to have to remain competitive, but we will remain competitive on deposit rates regardless.

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Operator [8]

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Our next question will be from Michael Young of SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [9]

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I wanted to start on just kind of the balance sheet mix on the asset side. You kind of mentioned, obviously, that you guys are trying to extend duration. But can you just remind us of kind of where your fixed, floating and variable rate book stand now, and then what your sort of desired, I guess, outcome would be down the road in terms of those books?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [10]

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Sure. I'll take that, Michael. It's Pat. We typically, just based on our natural origination, would migrate to around a 60-40 floating-fixed split. We employ balance sheet strategies to bring that swaps, to bring that back to a 50-50 mix, which is our general target. Bridgeview was ever so slightly more fixed than floating so it didn't really move the needle on that. And so we -- rather than taking big interest rate bets, our goal is to really just stay fairly evenly balanced with the understanding that our floating rate book is going to reprice a lot of it, probably over half of it on a 30-day LIBOR, whereas the fixed book with its remaining life is going to reprice on average every 3 years, 1/3 a year.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [11]

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Okay. So are you saying you're pretty close to the fixed-floating mix that you want to be at currently?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [12]

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We are. I think we -- you shouldn't be surprised to see us continue to add a little more duration through a combination of incremental securities and/or 1-4 family purchases in the remainder of the year, again, in recognition of the fact that we don't expect rates to rise going forward. Whether they fall and how long they stay depressed, you tell us. But we still think for our size and profile, trying to stay balanced -- generally balanced over time is the right posture.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [13]

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And then maybe just one more on capital returns, the total capital ratio's gotten a little bit thinner. Would there be an interest in issuing some sort of sub debt or preferred to continue to be able to buy back stock? Or do you feel like you'll get to the level you need to be to continue the share repurchases going forward?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [14]

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Yes. Well, we throw off about $25 million or 15 basis points of Tier 1 capital every quarter in excess earnings, so we're fighting a rising tide with capital. I mean it's a good problem to have. We generally like our capital levels where they are and tend to fund acquisitions as they occur. So I think the main focus on raising incremental capital would be to take advantage of current market conditions for liquidity more than capital, and we continue -- we always evaluate that based on what our long-term needs we think are versus the opportunities in the market.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [15]

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Okay. Maybe just quickly on M&A, are you seeing many of those opportunities? Or conversations kind of just generally cooled?

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [16]

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The M&A environment is, stated fact, that the dialogue and the strategic dialogue that people have relative to what they perceive they are going to do with their particular franchises stay -- tends to stay pretty constant. So I haven't seen any of those things in terms of cooling. Now whether that means that will translate to activity, I guess, remains to be seen, but I haven't seen any shift. I mean, the activities that propel an increase in that generally fall either towards succession issues or just peoples' perception of where the operating environment is going to go. So I don't think that necessarily shrinks that.

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Operator [17]

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Our next question is from Chris McGratty of KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [18]

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Pat, I want to come back to the margin for a sec, just to make sure I understand it. So on a core basis excluding accretion, it was 3.78% this quarter. I think last quarter, you said Bridgeview was kind of mid to high single digits, and it was in for 2/3. So call it a couple of basis points that need to come off next quarter. And then obviously, the rate environment, so you're kind of basically saying somewhere between 5 to 8 a quarter based on each 25. If we get a couple -- I just want to make sure if we get a couple cuts, you're suggesting that the NIM, on an adjusted basis, should be in that kind of 3.60% range the next few quarters. Is that right? Okay.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [19]

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I think that's fair. You can think of each rate cut as being -- or maybe 3 to 5 basis points of impact. And then the balance of the compression would be through anticipated further duration adding through the securities book.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Okay. That's helpful. The securities book is about 18% of earning assets. Is there a targeted level? I think you said you added 600 in the quarter. Given your liquidity, is that a number -- a kind of proportion that will continue to grow or kind of stay relatively in that 18% range?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [21]

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We generally have a range that's 15 to 20 in that, and then we monitor and plan accordingly. Could it go a little lower, could it go a little higher in certain conditions? Sure. But it's important for us to keep for -- certainly, for liquidity purposes. And just a follow-up to what you said earlier, as we do add duration, it'll add earning assets, so it does contribute to NII growth. So there's a purpose other than just interest rate risk management to -- it will just be at a lower margin than if we were adding commercial loans or consumer loans.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Got it. Great. And maybe one more on the accretable. With CECL coming -- I mean this quarter, you earned a little bit more on accretion given the kind of the early stage of the deal closing. How do we think about level of what's remaining going into next year? I know the guide for this year is kind of $30 million to $33 million, which assumes -- which basically says it's going to down to like 8 a quarter. How do we think about that going into next year?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [23]

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It'll fall off about 1/3, something in the low 20s for the full year, and that's all other things being equal, which they never are. So this quarter's outperformance was really resolution of the loan that we acquired 2 or 3 years ago.

Did that answer your question on CECL? Did you have a question on CECL?

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [24]

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Yes, yes, I think you answered it. I think there was previously a concern in the market for banks that have been acquisitive, that there was going to be a fall-off in accretion income. But I think the work we've done and some of the conversations we've had, it would suggest that it's not as precipitous of a decline that I think some had feared maybe 6 to 12 months ago.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [25]

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Right. And it just moves geographically out of NII and then to a credit to your provision, yes, so it will change ratios.

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Operator [26]

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Our next question comes from Kevin Reevey of D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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So I was just curious, first of all, the new loans you're booking, are you adding floors to those loan agreements? And then kind of looking at your overall loan book, what percent of your loan book has floors as a way to protect you from falling rates?

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [28]

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I like the notion, Kevin, but unfortunately, the market won't let us in the commercial space right now add floors, so the answer is no. We're monitoring it, but we're just not seeing that competitively in the marketplace. In our consumer book, we do have floors in our HELOCs. They're almost standard across our entire portfolio, so that's not new. That's always been there, but that's a relatively modest part of our entire loan book.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

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And then as you -- I know earlier in the quarter, you announced a branching initiative. You're opening a branch up in the Quad Cities area, and then you've been growing in Milwaukee. Can you kind of talk about future branching strategies on a de novo basis in light of your efficiency initiatives that you've undertaken?

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [30]

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Yes. I think we will be very select in terms of de novo openings. I will say that the opening in the Quad Cities, we're closing -- that's a relocation to a better location, a better facility and brand-new. So there's -- we have the deposits already in that marketplace that will shift to make that branch earning from day 1.

In Milwaukee, we have not announced any branches, but we certainly will look to grow our business in that marketplace. We like it. We have a nice wealth business now, and we've added commercial. And over time, we like to do more in Southeast Wisconsin, but we have no plans at this point to open a branch.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

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And then lastly, year-to-date, your stock has underperformed KRX, but it looks like you guys are doing all the right things in terms of your efficiency initiative. You're buying back stock, you're increasing the dividend, and then you're putting up great numbers. Why do you think your stock has underperformed?

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [32]

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That's an interesting question. I think a sharp analyst would write a report that would correct that, Kevin, and who will do that.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [33]

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Touché. Appreciate the commentary.

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [34]

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I think somebody's got a great opportunity, and they can take advantage of it. That's the way I look at it. But we're -- our job is -- we're running the company for the long term. We're doing the right things, and it's all about execution.

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Operator [35]

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Our next question comes from Terry McEvoy of Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [36]

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Pat, earlier, you mentioned that deposit rates will be important for the NIM assuming the Fed does cut rates. So I guess my question for you is what is -- what are your assumptions in that $2 million to $3 million drop in NII? And then just maybe as a follow-up, have you seen an opportunity at all, either in the second quarter or early in the third quarter to begin cutting rates?

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [37]

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Well, I think if we got 3 rate cuts throughout the year, then we would be able at a minimum to keep our funding costs flat overall. The growth in our CD book over the last 1 to 2 years, to a certain extent, means that you're locked into those rates rolling off. We've already reduced rates and no longer have any promotional rates on 2 year or 1 year. I think the only one we have is the 7-month, and we've already reduced the rate on that by 25 basis points from when we launched it a quarter earlier. So on that pricing, we've been able to do that.

I mentioned briefly earlier about $0.5 billion of our public book, public funds book is index-linked, so that will naturally move with whatever the rates are. But we're actually trying to grow organic deposit production and money market as a product where we haven't really completed on money market products or had to for the last decade, and we think long term, that's more important than a short-term, save a few very small basis points on our overall funding costs. So as Mike said, we're really looking to stay very competitive and running for the long term. And while we will be aggressive to take every opportunity we can find to lower our deposit costs, we're not going to do it at the risk of not being at or better than market average rates.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [38]

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And then just a follow-up for Mike. In the release, you mentioned navigate an evolving landscape. As I look at just the headlines in the last kind of 90 days, you recently acquired a national lending team on the ESOP side, and then you also obviously integrated Bridgeview during the quarter. So were your comments there more reflective on a national basis where we should expect to see the company continue to grow on a national basis? Or was it evolving landscape within Chicago given M&A and the opportunities in market to take advantage of?

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [39]

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It was candidly more on a national landscape. Frankly, when I was crafting that, or at least when I was thinking, a lot of the evolving landscape was going to what the rate environment will look like and what was the outlook for that. But it's -- certainly, you're seeing shift locally in the market, and I think we are well-positioned to take advantage of those opportunities as we go through and see that.

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Operator [40]

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Our next question comes from Nathan Race of Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [41]

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Question on capital. Just curious if you guys have any updated thoughts on maybe what the targeted TC range or kind what governors you guys are seeing around capital levels at this point. And along those lines, if we can expect this magnitude of buybacks to persist at least in the back half of this year just given where the stock is today.

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Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [42]

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Yes, I'll try to answer that without answering that exactly. But as we've said before, the level that we have right now, we're very comfortable with. These carry us well through our periodic stress testing exercises for the portfolio that we have and leave us comfortably positioned to continue to grow as we've been growing, both organically and through M&A. So we're not looking to really reduce our overall capital levels at this point. And with the stock buyback in place, that gives us a tool when we don't have opportunities to deploy our excess earnings, which again is around $20 million to $25 million per quarter, that gives us a lever to pull if we don't have other growth -- higher-priority growth opportunities to fund with.

And we also have, in the near-term horizon, we still have to be able to accommodate the impact of CECL, which will be a onetime hit to capital. We don't think it's going to be material, but it probably will consume 1 quarter or 2 quarters worth of excess earnings. So we'll make decisions on that as we go through the second half of the year and get into next year.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [43]

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Understood. Okay, that's helpful. And then if I could just ask one kind of housekeeping question. Card-based fees, they typically -- we tend to see some strength in the back half of the year within that line in particular. Have you guys seen anything within that business to suggest that, that may not occur to the same magnitude that we've seen in the years past?

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Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [44]

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No. I would say there's nothing that would deviate from kind of the plan we've been at. It's all about household growth and -- net household growth, active checking, and I think we're on a nice trajectory there.

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Operator [45]

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(Operator Instructions) If there are no further questions, I will now turn the call back over to Mr. Scudder for closing comments.

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Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [46]

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Great. Thank you. Before I close it out here, I want to take the opportunity to thank all of our colleagues for their many contributions to and investment in our performance. They really make it happen as we go through and perform as a company.

I also want to particularly welcome our newest colleagues from Bridgeview who I know a number will be listening to the call, and certainly thank them as well as others on our team who've worked so hard to make our systems conversion a success and seamless, most importantly to our clients. So I appreciate all the hard work that goes into that.

With that, I also want to thank all of you listening, for your interest in and investment in First Midwest. Have a great day, everybody.

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Operator [47]

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Ladies and gentlemen, this concludes the conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.