U.S. Markets open in 1 hr 52 mins

Edited Transcript of FMBI earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q3 2019 First Midwest Bancorp Inc Earnings Call

ITASCA Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of First Midwest Bancorp Inc earnings conference call or presentation Wednesday, October 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Christopher Edward McGratty

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

* Daniel Tamayo

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentleman, and welcome to the First Midwest Bancorp 2019 Third Quarter Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the third 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everybody. Thanks for joining us today. It's great to be with you.

Overall, it was record quarter for us against what we described as a tougher rate backdrop. As was shared in the opening introduction for the call, I remind you, we do have a supplemental presentation to follow along with as we move through our remarks.

As our custom, I'll cover the highlights and then leave it to Mark and Pat to walk you through the components. So let me start with the highlights.

As I suggested, we closed the quarter with a -- having generated a record levels of earnings, $54.5 million. Total assets stood at $18 billion. That's up 3% from last quarter and 20% from a year ago.

Adjusted for the impact of acquisitions, delivering excellence, and that's for all periods and delivering excellence implementation costs from prior periods, our EPS was up a robust 4% versus last quarter and 13% from a year ago. As a result, our return on tangible common equity improved to 16.1%, even as our common equity Tier 1 ratio to risk-weighted assets expanded to 25 basis points, again, all versus a year ago.

Operationally, we had a full quarter of Bridgeview with the systems conversions having completed -- been completed, and integration and onboarding activity going well and on track.

Our loans were up 8% annualized from last quarter as we follow through on our guidance that we were looking to add both diversification, duration and yield through our consumer portfolio responsive to the rate backdrop.

C&I growth was also solid, while CRE continues to see heavier paydowns. We continue to hold our own there, and we're maintaining our underwriting discipline. As from my perspective, and Mark and I have talked about this, in this environment, this is where you really have to be careful as the rate environment sometimes will lead others to chase volume.

Deposits also held up very nicely, increasing, on average, 4% and 16% linked quarter and from a year ago, respectively, while our mix was relatively unchanged.

Net interest income remained stable as average earning assets grew 6%, essentially holding our revenues as margins declined to 3.82%, reflective of both the rate environment and change in mix. Also offsetting the impact of lower margins was improved fee-based revenues, which increased 12% from last quarter and 20% from last year. It was nice from our perspective to see the investments that we've made, both in our mortgage platform, as well as our sales of derivative products in prior years, both of which benefited from lower rates, and those were big contributors to drive the increases this quarter.

Operating efficiency continues to remain a focus for us, coming in at 54% for the quarter, improved from last quarter's 55% and 2 percentage points better than where we were a year ago.

And then last, but certainly not least, credit, which allowing for our growth, was generally stable and in line with prior quarters.

So with that, let me turn it over to Mark and Pat for some additional color.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mike, and good morning, all.

Overall, loan growth came in as expected in Q3 at $250 million, as shown on Page 3 of our presentation deck. Our commercial and consumer teams all had solid, the strong production in the quarter, which allowed us to grow in line with expectations, despite continued and, in fact, elevated payoff activity.

We've seen and talked about high payoff levels in CRE from longer-term financings and property sales all year and again this quarter. Fortunate for borrowers, but a headwind for us, these dynamics also developed in our C&I book in Q3. Such that very strong C&I production resulted in modest overall growth of about $50 million given some elevated payoffs for reasons that were favorable to our clients.

Our consumer businesses had a good quarter across the board led by mortgage. The rate environment certainly drove volumes higher across the industry.

Importantly, we also expanded our teams earlier this year, as noted in previous calls. So together, this allowed us to retain mortgages to grow earning assets, while also expanding fee income. Elsewhere, our consumer direct business again grew at a nice pace organically.

Looking forward, we expect more of the same story in Q4. We think commercial will be flat to up modestly this quarter given certain asset sales we foresee and credit market dynamics that may stretch beyond our comfort level. Conversely, our consumer businesses look to again post solid results. In total then, we expect low to mid-single-digit annualized loan growth this quarter.

Turning to asset quality on Page 4. Results in Q3 were right in line with our guidance. Charge-offs fell modestly to 29 basis points, a level we expect to be near in Q4 as well. Nonperforming assets were slightly elevated, reflecting normal quarter-to-quarter fluctuations, but this was more than offset by a 13% drop in adverse performing loans. Thus, our outlook remains unchanged. Provision going forward should approximate charge-offs, plus enough to cover loan growth, such that we maintain our allowance near current levels.

Deposit growth closely matched loan growth, as shown on Page 5. We remain competitive on rates and markets, thus far, have not reacted meaningfully to interest rate cuts. Fortunately, whatever the rate environment, our strong core deposit base continues to result in a cost advantage versus our peers.

So Pat will now discuss net interest income and margin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mark. Turning to net interest income and margin on Slide 6. Net interest income was up modestly compared to the prior quarter and up $19 million or 14% compared to the same period in 2018. Compared to both prior periods, the acquisition of Bridgeview, which closed mid-second quarter of this year, securities purchases, combined with loan growth, were partly offset by higher funding costs.

In addition, the increase compared to the second quarter benefited from an extra day, while the increase compared to the same period a year ago was impacted by the acquisition of NorStates Bank.

Acquired loan accretion contributed $9 million to the quarter, in line with expectations, and down $1 million from the prior quarter, up $4.7 million compared to the same period a year ago.

Moving to net interest margin. Tax-equivalent NIM for the current quarter of 3.82% was down 24 basis points linked quarter and 10 basis points from the prior year. Excluding accretion, margin was 3.59% for the quarter, down 19 basis points linked and 20 basis points from the same period a year ago.

Margin compression reflected the impact of lower market rates on loan yields compared to the prior quarter and compression related to the mix of interest-earning assets acquired in the Bridgeview transaction compared to a year ago.

In addition, actions we've taken to reduce rate sensitivity and higher cost of funds impacted the current quarter compared to both prior periods. Overall, margin compression was nearly double our expectations as a result of lower-than-expected market rates as well as modestly higher funding costs due to balance sheet mix.

Turning to earning assets and funding sources. Average earning assets were up $850 million linked quarter and $2.3 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 $850 million linked quarter and $2.3 billion from the prior year, reflecting the impact of acquisitions, organic growth and Federal Home Loan Bank advances.

Moving to our fourth quarter 2019 NII outlook. We expect a flat to modest NII decrease from the third quarter, assuming further rate cuts occur. Every 25 basis points downward adjustment by the Fed would likely result in approximately $2 million decline in NII per quarter. Our accretion guidance is unchanged with approximately $7 million expected in the fourth quarter. Overall, this guidance is in line with the full year guidance for 2019 that we've previously provided.

From a NIM outlook perspective, we expect continued compression in the high single-digit range in the fourth quarter, assuming further rate cuts by year-end, but we do expect this compression to slow as interest rates stabilize. 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.

And with that, I'll turn it back over to Mark to talk about noninterest income on Slide 7.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks. As you can see, noninterest income was up dramatically. It exceeded our expectations in Q3, 11% higher versus last quarter and 20% higher than a year ago. Mortgage had a strong quarter, as I previously mentioned, and the outlook remains positive there given interest rate levels.

The uptick in commercial loan production and the desire to take advantage of this rate environment to lock in fixed rates led to a record swaps quarter, nearly double linked quarter. Elsewhere, in core services, we had solid gains as well. As a result, our $43 million of noninterest income was above our guidance. Assuming swap income holds at current levels, we expect to post similar fee results in Q4.

Now back over to Pat to talk about expenses and capital.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Moving to expenses on Slide 8. Please note that the current quarter includes $4 million of acquisition and integration-related expenses associated with the Bridgeview acquisition and, to a lesser extent, the residual 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 in line with the second quarter and up 11% compared to the same quarter a year ago. The increase compared to the prior year was driven by increased operating costs associated with acquisitions, combined with higher staff costs reflecting merit increases.

Our efficiency ratio of 54% improved from 55% linked quarter and 56% a year ago.

Our outlook for 2019 legacy expenses remains unchanged, as we continue to expect expenses to average around $106 million per quarter for the second half of the year. Said another way, expect the fourth quarter to be up modestly from the third quarter.

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 remains our expectation for the fourth quarter.

Moving to capital on Slide 9. We continue to maintain capital at strong levels and are pleased with our track record of rapidly earning back the capital we've deployed. Capital accretion from excess earnings continues to provide us with flexibility to fund both growth and continued share repurchases, although note that we are currently constrained on repurchase activity until we close the Park acquisition.

During the quarter, we repurchased 645,000 shares and paid the dividend to shareholders that represents nearly a 30% increase from the same period a year ago. We expect continued capital accretion from excess earnings, providing further flexibility to fund growth or continued share repurchases once we close Park. And for that, we have remaining Board-approved repurchase capacity of approximately $145 million.

Looking ahead, on Slide 10, we've summarized our current estimated range of impact of both capital and the allowance for credit losses for the adoption of CECL standard on January 1, 2020. Overall, and as we expected, the estimated impact to our Tier 1 capital is relatively limited at approximately 25 to 40 basis points or approximately $35 million to $55 million, which can be earned back with our typical quarterly earnings accretion rate in 1 to 2 quarters. Excluding the impact of acquired loans, we expect the allowance will increase by 20% to 40% or approximately $20 million to $45 million. Building allowance for acquired loans will add an additional 45% to the allowance or approximately $50 million. But the majority of this represents the mark on purchased credit impaired loans, which will transition to the title purchase credit deteriorated, or PCD, loans as an allowance with no capital impact. As a reminder, these are estimates, and the extent of the increase will depend on the composition of the loan portfolio as well as economic conditions and forecasts as of the adoption date.

And finally, note that for your convenience, we've summarized our outlook, the announced details of the Park acquisition as well as our current quarter's earnings on Slides 11 through 13, respectively.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Pat. So just to recap, obviously, it's a tough rate backdrop, but that's really true for the short term. As we look to the longer term, we really like our positioning. We continue to execute on our priorities. And as we say in this type of environment, that also creates opportunities that we believe will accrue to our long-term benefit. Included among those is our teams continue to work hard and have built a tremendous core deposit foundation, which can be undervalued amidst today's short-term noise. Our credit capabilities are broader and more diverse. Our acquisition of Park Bank will add an additional $1 billion in assets, a talented team and broader access to what we believe is a very attractive Milwaukee marketplace. As we await an expected first quarter close, the team is locked and loaded. And we look forward to competing in the marketplace. We're very thrilled with our progress to date there.

Our earnings remain very strong, as we continue to organically build capital. This gives us tremendous flexibility to leverage the environment, grow capital as well as optimize our mix.

Operationally, we remain very much focused on our efforts to leverage technology and process improvements, all with an eye toward driving a better and more efficient client experience. Today's environment makes that even more important.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Michael Young with SunTrust.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

--------------------------------------------------------------------------------

Wanted to start just with the mortgage loan purchases in the quarter. Can you just tell us how much of that was purchase volume? And then maybe give us an update on kind of where we stand in that process of reducing asset liability sensitivity and where that kind of stands today from an NII at risk perspective.

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Michael, it's Pat. I'll take that. I would say that the majority of the mortgage purchases during the quarter were under the banner of extending our duration, but we have pretty tight guidelines on both credit quality and yield. So we continue to make sure that we're getting paid for the incremental risk over what we would get if we just bought mortgage-backed securities, for example, which we're pretty comfortable with. Away from the purchase mortgages, we still had pretty solid origination activity of -- I don't know, it was probably 25% of our increase was origination and 75% of our increase was repurchases. Right, Mark?

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [4]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Going forward, we feel -- well, we hit our objective that we set out about 3 quarters ago from an extending duration perspective. But frankly, with the market behaving the way it is and with the continued origination of predominantly floating rate loans that we still see, I think that, that might be something that we could continue into next year modestly. But I think that we've got the lion's share of what we were looking to do this year -- done this year.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [6]

--------------------------------------------------------------------------------

Okay. And so future, kind of purchases will be more of a pacing with what's going on in the commercial portfolio. Is that kind of the right way to think about it? I don't know if that's stronger growth and we'll see less purchases next year.

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [7]

--------------------------------------------------------------------------------

I think that's exactly the way to think about it, Michael. It's Mark, yes.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [8]

--------------------------------------------------------------------------------

And Mark, just on kind of the activity you're seeing. I think you called out specifically C&I, seeing higher payoffs and paydowns. Do you expect that to persist into the fourth quarter? Do you get the sense that a lot of clients are looking to liquidate or sell businesses ahead of a presidential cycle or capturing this favorable tax environment, et cetera?

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [9]

--------------------------------------------------------------------------------

We do see a little bit more in the fourth quarter, and I'll say it this way. This has been a trend in CRE for a number of quarters, as you know, across the industry and certainly for us. And we've got some visibility to that, and I think that will continue in Q4.

C&I, this is the first time we've seen a dramatic increase in payoffs in C&I in some time. And it was largely at company sales, but there's also a credit component of that, that just either stuff we didn't want to do or stuff that we had that we didn't want to continue doing, I guess, I would say. And so I see a little bit of -- we've got short-term visibility to a few more of those in Q4. I'm not ready to call that a trend, but there is a couple -- a little bit more of that pressure in Q4. So therefore, as I said, I think commercial in total will be flat to up very modestly in Q4.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [10]

--------------------------------------------------------------------------------

Okay. And one last one, if I could just sneak it in. Just on hiring, I mean, given some of those dynamics that you're seeing, does that make you kind of more aggressive to hire to try to get more production or kind of given where we are in the cycle? Or are you kind of easing off into saying the market is moving away from us, maybe we just -- we wait for a little bit and buy back more stock?

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [11]

--------------------------------------------------------------------------------

I'll say it this way, Michael. Our production is not the issue. We had a really nice production quarter. And so -- and I think we'll have a nice production quarter in Q4. So I don't feel a need to go hire at all. On the other hand, as we've always said, opportunistically, and just as part of a normal course, we have to stay in touch with high-quality bankers in our markets. And if some of them want to join us, and some did in Q3, we're happy to make room, even if we don't have a spot. Good bankers pay for themselves quickly.

--------------------------------------------------------------------------------

Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [12]

--------------------------------------------------------------------------------

And Michael, this is Mike. If you picked it up in my comments, this is also an environment where you want to maintain your underwriting discipline because you can see some in the market start to chase that growth to the detriment of long-term performance in our judgment. So...

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Chris McGratty with KBW.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [14]

--------------------------------------------------------------------------------

Pat, maybe we can start with the margin or the NII guide. The down high single-digit basis points, but slight -- flat to down modestly NII would imply a continuation of kind of the securities purchases in the quarter. Could you provide an update on where you are in terms of adding securities and borrowings at this point and maybe what you're buying at these levels?

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [15]

--------------------------------------------------------------------------------

Well, at current -- fourth quarter, we're not really in the market too much. I think the bulk of what we did, we finished up midway in this -- in the third quarter, call it, late July. And other than just reinvesting cash flows, we're not really aggressively looking to buy. So our NIM guidance for the fourth quarter presumes what we've assumed for the last -- actually, since the downward expectation for interest rates is that we're assuming an October rate cut 25 basis points and in December, which will have a modest impact. If we get both of those, then our revenues will come down maybe $2.5 million. And the bulk of that, call it, $2 million would be the October rate cut. So we're not anticipating that adding duration asset sensitivity will have anywhere near the impact that it did this quarter, which was probably half of our compression was due to that.

--------------------------------------------------------------------------------

Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [16]

--------------------------------------------------------------------------------

Okay. So the bond portfolio will kind of stay at current levels is kind of what I'm hearing, maybe a little bit of growth.

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [17]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Maybe what...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Depending on what tomorrow brings. So I mean, it's a volatile environment. So...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, totally get it. Maybe a little bit on credit. The 2 commercial credits you called out in the press release, could you provide a little detail? Were these loans previously nonaccrual? Did they pop up kind of unexpectedly and maybe what industry they might be in?

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [21]

--------------------------------------------------------------------------------

Yes, they were criticized and classified, but not nonaccruals. They moved to nonaccrual this quarter. They were both in the $8 million to $10 million range. One was in the services business and one was in manufacturing, so no real trend there. And they've been on the radar screen as, again, they were criticized and classified, so they've been on the radar screen for some time. That said, had a nice decrease in our criticized and classified overall. So we don't see any change in the credit outlook as a result of this.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Great. And then maybe a housekeeping one, Pat. The -- a lot of banks have had that FDIC insurance benefit in the quarter. Could you specify what that might have been?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. We got, like a lot of people did, it was a little over $1 million, which drove -- for the most part, drove our beat on expenses versus our guidance, so that we weren't sure about the timing that we would get that. But we did get that during the quarter. You also telegraphed a couple of quick questions on other income, I think, on BOLI, and that's -- BOLI is about 3/4 of our other income, nonfee-based revenue, and that was pretty stable linked quarter. So there wasn't a big hit on that.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

The next question is from Terry McEvoy with Stephens.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [25]

--------------------------------------------------------------------------------

Thanks for all the disclosure on CECL and the day 1 impact. I guess I'm thinking about 2020. And if I build the reserve, say, $80 million, I come up with a reserve-to-loan ratio of 1.20% to 1.25%. And I understand your economic assumptions will change, the portfolio will change. But all things being equal, within 2020, is that the ratio I should hold to on a quarterly basis as we think about charge-offs, loan growth and, ultimately, the provision?

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [26]

--------------------------------------------------------------------------------

I'd say 1.30% would be a good handle.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [27]

--------------------------------------------------------------------------------

Okay. On the deposits -- the deposit side, your margin outlook for the fourth quarter, does that assume continued increase in your deposit costs? Or do you see some sort of plateau or potentially a decline in the fourth quarter?

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

I'll say that we're certainly hopeful that it won't go up. We -- I could see it coming down modestly. A lot will depend on what the market competitive dynamics do. I mean we're still running money market promotion and a 7-month CD promotion just so that we are competitive with what the market is offering. And to the extent we have those there, then that could keep us from dropping cost debt as much as we would prefer to. We obviously don't have a lot of room on the retail side to drop just because we have such a large noninterest-bearing or low interest-bearing retail deposit base. So the bigger opportunity would be in the municipal borrowings and, to a certain extent, in the corporate money markets. But we'd love to bring them down. But I think if you look at our quarterly interest expense, we're now down to about $27 million, under $30 million a quarter. So -- and that's all in with borrowings and deposits. So there's only so much room that we have to bring interest expense down at all. So this is the curse of having such a great core deposit base is when interest rates go down, we don't have as much room to drop the cost.

--------------------------------------------------------------------------------

Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [29]

--------------------------------------------------------------------------------

Let me add that, that, again, philosophically, we're not operating quarter to quarter. We're competitive in the marketplace, and we will be. We continue to -- we don't set the market rate for deposits. We continue to take advantage of those and continue to look to grow the franchise.

--------------------------------------------------------------------------------

Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [30]

--------------------------------------------------------------------------------

Maybe a quick one for Mark. Not sure if you have it, but the size of your shared national credit portfolio, do you have that handy as well as your leverage loan portfolio? And I'm not quite sure how you describe leverage lending, but if you have that handy, it would be great.

--------------------------------------------------------------------------------

Mark G. Sander, First Midwest Bancorp, Inc. - President, COO & Director [31]

--------------------------------------------------------------------------------

Yes. Our SNC portfolio is really very modest, Terry, so it's really a relatively small number. Our leverage portfolio is -- leverage loan structure tranche, as we call it, is in the range of about $400 million.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from Nathan Race with Piper Jaffray.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [33]

--------------------------------------------------------------------------------

First on the buyback from here. I think, Pat, you mentioned that probably you'd be constrained in the fourth quarter as the Park deal nears closing. So just curious on maybe the appetite for buybacks into 2020, assuming maybe the stock remains near the current levels. And it seems like the CECL impact is going to be fairly digestible, so just curious to kind of get your thoughts on the buyback heading into 2020.

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [34]

--------------------------------------------------------------------------------

Yes. So we like our capital levels where they are. So we're not in a big hurry to lower them. But absent other -- either higher organic growth or other acquisition or capital deployment alternatives, we're creating 70% of our earnings every quarter. And so the philosophy behind the buyback, if you will, was to be able to eat up that excess earnings accretion over time as we earned it. We like the stock at today's price as a buyer. We would like it probably a good bit higher, quite frankly, to Mike's prepared remarks on the value of our stock. So we think that will continue to be a good buy for the foreseeable future, and you should expect us to be more programmatic with that as we earn and accrete excess capital.

--------------------------------------------------------------------------------

Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [35]

--------------------------------------------------------------------------------

Again, we -- let me be helpful there as well. We manage our capital consistent with what our long-term goals and priorities are. So as we look to determine how we're going to manage that, we look at what provides we think the strongest return to our shareholders, and that's where we'll ultimately drive it. So how we ultimately deploy it will really be dependent on the environment and what the choices are as we go through and do that, consistent with the capital plans that we've talked about with our board and then consistent with the feedback that we get from our investors. We're talking consistently with them as well.

--------------------------------------------------------------------------------

Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [36]

--------------------------------------------------------------------------------

Understood. That's helpful color. And I guess, within that context, Mike, curious to get an update just in terms of what you're seeing in terms of the flow of M&A opportunities at this point. I can't imagine the size of the Park deal will put you guys on the sideline near term. So just curious if you're seeing increased activity flow across your desk or if it's kind of a steady state versus what we've seen recently.

--------------------------------------------------------------------------------

Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [37]

--------------------------------------------------------------------------------

I always say the environment generally reflects -- the M&A environment just reflects the environment around us. So right now, there's just a lot of noise and a lot of volatility around the market. So I would assume that would slow things down to a degree. But there's always some steady stream of dialogue that's out there at any one point in time. I would say our focus, as we think about it, certainly here in the short run is we want to make sure that we put our best foot forward as we go through and integrate Park, and that's really where our point of emphasis is. To the extent opportunities become available, we're always ready to consider those and be proactive there.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Daniel Tamayo with Raymond James.

--------------------------------------------------------------------------------

Daniel Tamayo, Raymond James & Associates, Inc., Research Division - Senior Research Associate [39]

--------------------------------------------------------------------------------

This is just a little bit of a cleanup question here. You mentioned the employee expense had some commissions related to the higher loan sales. Do you have that number in terms of the change between the second quarter and the third quarter?

--------------------------------------------------------------------------------

Patrick S. Barrett, First Midwest Bancorp, Inc. - Executive VP & CFO [40]

--------------------------------------------------------------------------------

Don't have that tip of fingers, but we can follow up with you on that.

--------------------------------------------------------------------------------

Daniel Tamayo, Raymond James & Associates, Inc., Research Division - Senior Research Associate [41]

--------------------------------------------------------------------------------

Okay. Sounds good. And then the decline in professional services fees, I think, was impacted by timing differences. The second quarter number, the $10.5 million, is that a better jumping-off point then going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. I think that timing would be sort of delayed and deferred, so that could tick up modestly.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Michael L. Scudder, First Midwest Bancorp, Inc. - Chairman of the Board & CEO [44]

--------------------------------------------------------------------------------

Great. Thank you. So in closing, I just want to take the opportunity, as we always do, to thank all of our colleagues, many of whom listen to this call, for their many contributions and investment on our performance. It's their engagement that drives our success. I also want to take the opportunity to thank all of you for listening and for your interest in and investment in First Midwest. Have a great day, everybody.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

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