First Midwest Bancorp's (FMBI) CEO Michael Scudder on Standard Bancshares Acquisition (Transcript)

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First Midwest Bancorp, Inc. (NASDAQ:FMBI)

Standard Bancshares Acquisition Conference Call

June 29, 2016 09:00 AM ET

Executives

Michael L. Scudder - President and CEO

Paul F. Clemens - EVP and CFO

Analysts

Christopher McGratty - Keefe, Bruyette & Woods

Terry McEvoy - Stephens, Inc.

Russell Gunther - Macquarie Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp Conference Call regarding First Midwest's proposed acquisition of Standard Bancshares, Inc., the holding Company for Standard Bank and Trust Company, headquartered in Hickory Hills, Illinois.

If you haven't already received a copy of First Midwest's press release that was issued yesterday, you may obtain it on First Midwest's website, or by calling 630-875-7463. We direct your attention to the slides for this call. The slides are available in the investor relations section of First Midwest's website and also are attached to the 8-K that First Midwest filed with the SEC this morning, including the forward-looking statement and other legends that are included with the slides.

At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open the conference up for questions-and-answers for analysts only after the presentation. It is now my pleasure to turn the floor over to Mike Scudder, President and Chief Executive Officer of First Midwest Bancorp. Sir, you may begin.

Michael L. Scudder

Thank you. Thank you and good morning everyone. We greatly appreciate you joining our call. Joining me here today are Mark Sander, our Senior Executive Vice President and Chief Operating Officer; and Paul Clemens, our Executive Vice President and Chief Financial Officer. We are very pleased and excited to announce a significant in-market merger with Standard Bank and Trust. As was previously shared from a housekeeping perspective, we've provided in the company, an investor deck that's available on our Investor Relations website that you can refer to throughout my remarks.

Before we get into the details and specifics of the transaction, on behalf of all of us here at First Midwest, I did want to take the opportunity to say welcome to our colleagues from Standard. We greatly look forward to working with you and building on your successes collectively. We are convinced that together all of us have a brighter future.

Let me now give an extension of that and talk a little bit about Standard itself. Standard has operated in our south suburban markets for nearly seven years. So like First Midwest they're very much a long-standing established relationship focused franchise. Much like us they are also very active in their communities. Today, Standard operates 35 full service branches, all of which are in the Chicago MSA. They have approximately $2.5 billion in assets, $2.2 billion in deposits, over 90% of which are considered core deposits, and $1.8 billion in loans and $300 million in assets under care for their wealth management clients.

Standard's Chief Executive Officer, Larry Kelley and their management group have built a very strong team, similarly focused on client service. Importantly, I would highlight that we've asked Larry to stay on with us and he's agreed to stay on as our Market President for our South Metro region as well as our Northwest Indiana region, as well as serving as a Director on the Board of First Midwest Bank. Many of you heard me say previously that as we talk about opportunities that are available to us in the marketplace, M&A in and of itself is not a strategy, it's rather than an accelerator strategy. That is clearly the case here for us. Our combination with Standard is compelling on a number of fronts for both of us, both strategically and financially.

First, this solidifies First Midwest as the leader for business banking in our market. It greatly enhances our Chicago Metro franchise. It leverages our leading market position in the south metro portion of that market, and furthers our targeted expansion in the northwest Indiana.

Second, given the concentration of locations in our markets, our combination enables us to simultaneously enhance what is a nationally recognized service delivery platform to our consumer and business clients through an expanded and more efficient network. Third, our combination further strengthens what is already an exceptionally strong core deposit base. Some 85% of our pro forma $11 billion in deposits will be core transactional accounts. And then finally the proximity of both our sales and support teams to our existing hubs allows us to retain talent and leadership from both of our teams and that helps us as we grow.

Financially the deal value is approximately $365 million and it is anticipated that we will realize over 12% accretion to the company's 2018 fully diluted earnings per share base and consensus estimates. It will be 8.4% accretive in 2017 when you exclude transaction expenses or it's projected to be 4.3% if you include those same projected transaction expenses. We expect that the tangible book value dilution will be recovered in approximately 3.75 years. I'll let Paul provide further clarity on that here in a moment.

We anticipate cost saves of approximately 40%, with 75% of that realized in 2017 and the remainder coming in the following year of 2018. Our strong capital position and the expected earnings accretion from the combination will leave us on very solid capital footing and with further flexibility available to us.

Paul, that's probably a good opportunity for you to take a moment and talk about the tangible book value earn back calculation.

Paul F. Clemens

Sure, thanks, Mike and good morning. Let's just go through the methodology. Using consensus Street forecast, the tangible book value dilution at closing will be 5.1% or $0.57. However if you include all the expected transaction expenses, some of which will not be realized until 2017, the total tangible book value dilution would be higher at 5.5% or $0.62. Using the term, what we phrase [ph] is simple method for book value earn back we would expect to earn -- to recover the $0.62 of dilution with the $0.18 of fully phased in EPS accretion about three and half years.

We typically assess the M&A transaction however using the crossover method where we compare the pro forma tangible book value per share with where we would be on a standalone basis in the future without the transaction. Using that methodology we expect to recover all the transaction tangible book value dilution by the third quarter of 2020 or roughly 3.75 years and so the two earn back calculation methodology are pretty consistent and similar.

Mike, do you want to take it back.

Michael L. Scudder

Yeah, no, thanks, Paul. Kind of moving on, from an integration standpoint, as I said we would hope to see the transaction close and operating systems convert in late 2016 or in early 2017. That’s obviously subject to the normal approval requirements and what I call the system related coordination requirements that you see typically at the end of the year. As we consider the integration there were number of elements that we would also highlight that in our view lower the operational risk for this type of transaction.

First, we have a significant amount of experience here as does our counterparts at Standard. Our most recent acquisition of National Bank and Trust closed and their systems converted in March and has gone extremely well. Along with Standard, if you look at our last four whole bank combinations or acquisitions they will have involved institutions having a average market tenure of roughly -- well not roughly, well in excess of 70 years. So that’s an important element that helps here as well.

As I alluded to as well earlier, Larry and his commercial leadership will be staying on with us and in important leadership roles for us with a focus on minimizing any transactional impact, strengthening our team, obviously pursuing our plans for growth and expansion in these markets. And then third, our product sets align very well, which along with a broader product offering that we are able to bring to bear that should enhance our overall combined client service and certainly minimize any client impact. Finally the existing overlap in our branch distribution will allow us to offer a collectively larger network for our clients but also make that network more efficient. So this proximity both on the support and sales sides allow us to both strengthen our teams and lower our operating cost.

So in closing we are certainly thrilled about this combination and what we can collectively achieve. First and foremost as I would repeat we are better positioned to serve our clients and grow our business. Further we have the ability to do so while at the same time greatly improving our operating leverage and lastly the underlying financial foundation for our transaction is to both of our mutual benefit and reflects underlying assumptions that we believe to be conservative and give full cognizance to the risk of a more challenging environment that is out there in near future potentially. As a result we feel we are collectively better positioned to perform.

So obviously the importance of this opportunity will see our focus for the rest of this year certainly in centered on ensuring a smooth transition for our clients and colleagues and continued execution of our strategic priorities. So with that as a summary let me open it up for your questions.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions] And sir your first question will come from Chris McGratty of KBW. Please go ahead.

Christopher McGratty

Good morning, everybody.

Michael L. Scudder

Hi Chris.

Christopher McGratty

Mike a question on the accretion, just want to make sure I am thinking about it right. The 8.5% or 8.4% for 2017, that implies off the consensus numbers about $0.11. And then if you take the $0.18 you talked about in the deck that’s a pretty big delta. Can you kind of walk us through what the jump besides the incremental stub of the cost saves, are there revenue enhancements in this?

Michael L. Scudder

No, as we’ve reflected from a forecast standpoint, the revenue enhancements are really largely not considered as a part of this. We think there will be opportunities for those enhancements but within the numbers that we share, we really haven’t projected those. What we’ve anticipated as we go through, that impart influences that Chris is certainly as we go through a transition period, expectations for growth are certainly slower as we start and then those build as they move on but we’ve anticipated those to be fairly conservative as well. And then the rest of this is the underlying transaction that comes from achievement of the cost saves.

Christopher McGratty

Okay and I think if I look at Standard's loan growth was about 5% last year. What is that acceleration that you are anticipating once the integration's done?

Michael L. Scudder

Well, I think what we would anticipate, given what I would call a more conservative view is we would anticipate fairly modest growth during the early period, during the first transition period which would be for the most part 2017 and then we would look for growth that at above the pace that the market's expected to grow.

Christopher McGratty

Okay and just one more in the model. That Durbin, that you put in the slides of $0.05 to $0.07, that’s consistent with what you guys have previously communicated to the market. Can you give us a sense, does that include the impact from the revenue fall off from Standard?

Michael L. Scudder

Yes.

Christopher McGratty

Okay, and then maybe a last one if I could, are there -- what are your rate expectations through 2018, and in your guidance for this year you talked about a band of NII growth, depending on what the fed does, but what are the specific assumptions on Fed front?

Michael L. Scudder

As we’ve considered this particular opportunity we’ve modeled it across multiple scenarios. So we’ve considered it across scenarios, and it’s difficult to predict at this point given the general uncertainty that’s out there in the markets. But we’ve essentially modeled in under scenarios that would see no interest rate growth over the forward period and we would certainly have modeled it under scenarios where we’ve seen even greater stress than that. And we believe we’ve got a financial foundation for this that certainly operates very well in either scenario and really holds with a lot of the metrics that we’ve already disclosed.

Christopher McGratty

Okay, that makes sense. I'm just trying to -- what, in the $0.18, what is the -- I guess what your terminal Fed funds in this base case that you published?

Michael L. Scudder

It’s 150, at the end of 2018.

Christopher McGratty

150 by the end of 2018 okay, thanks Mike.

Michael L. Scudder

Okay.

Operator

And our next question will come from Terry McEvoy of Stephens. Please go ahead.

Terry McEvoy

Hi, thanks, good morning.

Michael L. Scudder

Good morning, Terry.

Terry McEvoy

Hi, a quick question for you, Mike, and I heard you loud and clear on M&A, M&A being the accelerator strategy, I think you called it. But I guess my question for you is, is $13 billion enough, on a pro forma basis that seems to be where your assets are going to fall out and when I say enough, meaning to kind of cross over the $10 billion threshold and then absorb the Durbin revenue loss as well as the incremental expenses?

Michael L. Scudder

Well, we would certainly say that the opportunity to add the level of accretion that we’re talking about here, plus recall the transactions that we completed, most recently with NBC and the other opportunities with people that we closed and an additional $0.04 to our run rate would be more than sufficient to offset what would be per se just the $0.05 to $0.07 risk off of the Durbin impact. So the short answer to that is, yes. We think that’s a meaningful step forward to be able to do that.

Terry McEvoy

Great, and then just to get me be more comfortable on potential revenue synergies. I mean you had success growing treasury management trust, card, merchant, as you look at the new customer base that’s coming over to you, give a sense of what percentage of those customers use any type of those products and what the upside would be should they get to your current levels?

Michael L. Scudder

We do, we certainly see opportunities there in terms of their penetration rates versus ours and I would say the best opportunities are probably in wealth management and leasing and in treasury management. So we think there are opportunities there. But again as Mike alluded to we haven’t modeled that into the projections that we have, but we certainly think there’s opportunities there.

Terry McEvoy

And then just a last question, Larry Kelley, that you said he’ll be joining the Board and running the market for you. Could you just give us a quick download on his background and what he brings to the table as kind of a banker and a Board member?

Michael L. Scudder

Sure, well Larry, as I suggested, will stay on and run both our South Metro portion of our market as well as that which would include our Northwest Indiana presence. Larry has been with Standard 35 years, operating his entire career into that market and is very well known, certainly to us and within the markets and very well respected.

We worked very closely with Larry, certainly over the last several months in putting this together and he’s done a tremendous job of shepherding that and building a team there that we fully expect to retain and continue to grow into the market. So that’s the real value and he adds that same level of expertise and experience to our bank board, which we think is of tremendous value as well.

Terry McEvoy

Appreciate that. Thanks.

Michael L. Scudder

All right, thanks, Terry.

Operator

[Operator Instructions] Sir, your next question will come from Russell Gunther of Macquarie. Please go ahead.

Russell Gunther

Hi, good morning guys.

Michael L. Scudder

Good morning, Ralph.

Russell Gunther

Just a question on the loan growth. I appreciate the color as it relates to Standard's contribution. But if you can, maybe just flesh out with the opportunity would be, be it from an asset class perspective, maybe larger the loan size, sort of how you expect that to contribute to the pro forma company, and then just as a follow on piece, I do expect kind of putting these two together that you would improve sort of the legacy growth rate at FMBI.

Michael L. Scudder

We have a great deal of respect for the team at Standard. We've competed against them for a number of years. So we feel like we know them quite well and with our capital and liquidity there certainly are opportunities for higher hold limits for instance. They have also done some nice niche businesses, for instance they have a nice medical dental practice, that's very appealing to us that we think. They have done a very nice job growing. But can be expanded more broadly across our footprint. So we think there is some nice synergies, and again the elaborating on Mike's comments, Larry has built a strong commercial leadership team. So we are very excited to have them be leaders in our company. So our growth rate…

[Technical Difficulty]

Russell Gunther

Hello?

Operator

Ladies and gentlemen please standby. We've lost communication with the speaker line. One moment please. Ladies and gentlemen we have obtained the speaker location again. Please go ahead, sir.

Michael L. Scudder

To pick it up where it was, perhaps that's a signal that I was going on too long. But fundamentally we think we like the teams and we think the synergies between them will only help to improve our growth rate I guess I would say. Is that [indiscernible]?

Russell Gunther

It is, yes, I appreciate that. And then maybe if you could just expand a little bit on what the drivers of the cost saves will be?

Michael L. Scudder

Well, obviously the drivers of cost saves predominantly will be reflective of taking the two operations and looking at what the overlap is within the network, and making that more efficient. We've got, as we look at the two low platforms we have about 12 of the 35 locations that are at the Standard within two miles of our existing locations, and if you expand that to three there is 21. But that cost saves, if you will or that efficiency that will be driven won't necessarily come directly out of the operating platform of Standard. In some portions that will come out of the operating platform of First Midwest, simply because of the locations that they have, in some cases are preferred [indiscernible].

We'll certainly we have to figure out the magnitude of what that is, but those are generally drivers along that -- then the typical savings that come from combination of backroom operations and those types of things.

Russell Gunther

Okay, great and then just last one for me. I appreciate the color you gave in terms of your Fed fund expectations in that $0.18 accretion number. What if anything are you guys considering for a contribution from purchase accounting accretion in that number?

Paul F. Clemens

As far as the credit marks there is no accretion assumed. We presume that's going to be consumed if you will in credit marks. The interest rate mark that will be accreted over the three years, that's about $0.04 a year.

Russell Gunther

Okay and that's in that $0.18?

Paul F. Clemens

It is.

Russell Gunther

Okay. Thanks very much. I appreciate the time.

Michael L. Scudder

Great. Thank you.

Operator

And our next question will be a follow up from Chris McGratty of KBW. Please go ahead.

Christopher McGratty

Yeah, thanks for taking the follow-up. Mike in your prepared remarks you talked about your comfort with the capital position and then flexibility going forward. Can you remind us, I guess, number one where the pro forma tangible common equity will fall out and number two what your comfort level is taking it further lower or rebuilding it?

Michael L. Scudder

Sure. Standard's capital ratios for us are about 150. Standard's capital ratios generally were about 150 to 200 basis points higher than First Midwest at the end of the first quarter. So if you take that fact and combine it with the fact that it's all capital or all stock consideration, it certainly minimizes the transaction's impact on our overall capital. When you think about the purchase accounting marks they are higher risk weighted asset profile relative to us. Our pro forma capital levels will fall about 25 to 75 basis points depending on the metric at close. And then obviously the transaction's earning accretion will allow us to quickly recover that. And then it will move back through fairly quickly.

Christopher McGratty

Okay. Sure and just so I'm clear, your tangible was about 8 in the quarter. That's suggesting that it's going to be the high 7s and then rebuild, is that alright?

Michael L. Scudder

Paul, go ahead.

Paul F. Clemens

No, I think it will be closer to 8%, right around 8%.

Christopher McGratty

And then maybe I missed it. Do you have the number of shares that you're going to be issuing?

Paul F. Clemens

Yeah, it's going to be about 22 million shares will be delivered to Standard.

Christopher McGratty

Okay, thanks a lot, guys.

Michael L. Scudder

All right, thank you.

Operator

[Operator Instructions] And if there are no further questions, I will now turn the call back over to Mr. Scudder for his closing comments.

Michael L. Scudder

Thank you. At just in closing, I would say, reiterate what I started, we're extremely excited about this opportunity and what we can collectively achieve with our combination with Standard. We greatly look forward to executing on that here in the near future. Thank you and I would add my thanks to all of you for joining us. Thank you as always for your interest in our company. And we would wish you all to have a great day.

Operator

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