Yahoo Finance First Midwest Bancorp Inc (FMBI) Q4 2018 Earnings Conference Call Transcript
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First Midwest Bancorp Inc (NASDAQ: FMBI)
Q4 2018 Earnings Conference Call
Jan. 23, 2019, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen. And welcome to the First Midwest Bancorp 2018 Fourth Quarter and Full Year Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the fourth quarter and full year of 2018, 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, are not historical facts and are not 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 statements, 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 and all participants are in a listen-only mode. Following the presentations by Mike Scudder, Chairman and Chief Executive Officer; Mark Sander, President and Chief Operating Officer; and Pat Barrett, Chief Financial Officer, the call will be open for questions-and-answers from analysts only.
I will now turn the conference over to Mr. Scudder. Please go ahead.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Great. Thank you, and good morning, everyone. Thanks for joining us today. Great to be with you. As a reminder, and a supplement to the introduction here, we do have a presentation to follow along with as we move through our remarks. As is typically our practice, I'll cover the highlights and then let Mark and Pat walk you through the components in the quarter and our commentary on the full-year.
2018 was a very active and successful year for us, where we saw a number of positives on multiple fronts. Core earnings per share was up 41% and 24% versus last year's fourth quarter and full-year respectively. This level of performance produced a core return on tangible common of 16.4% and 15.1%, respectively, for the same period. Likewise, if look at our adjusted return on average assets, that improved to 1.3% for the quarter and 1.17% for the year. So, overall, a very strong level of earnings performance.
Key performance drivers of note, when you look back over the year and the quarter, we grew loans by 10% to over $11 billion, while average deposits increased by 7%. Our net interest income grew 9%, while our margin for the year remained a robust 3.9% overall. And as is typically with the way I like to look at it, if you adjust acquisition-related accretion, our net interest margin expanded 16 basis points over 2017, largely on the strength of our core deposit foundation. Our operating efficiency has improved significantly with our efficiency ratio at 55% for the fourth quarter and 58% for the full year. And then our adjusted effective tax rate was lowered to 24% versus 34% in 2017, it was obviously a very strong contributor as well.
Importantly, we took a number of steps to continue to build for our future, executing throughout the year on a number of our strategic priorities that included our continued focus on targeted business acquisitions that met our criteria, and what we felt to be strategically accretive in our standards, as well as our delivering excellence in technology initiatives. In the fourth quarter, we completed the acquisition and integration of Northern States, as well as announced our pending acquisitions of Northern Oak Wealth Management, which closed actually last week, and Bridgeview Bank, which is expected to close sometime in the second quarter. Collectively, these will add almost $1.8 billion in assets, $1.6 billion in deposit, $1.1 billion in loans and some $800 million in assets under management.
Also over the course of the year, we announced and have been successfully executing upon our Delivering Excellence initiative. This is an ongoing strategic and emphasis for us as a company, though the initial stage cost benefits of this were effectively achieved by the end of the year or end of the fourth quarter, setting us up well for next year.
Finally, our balance sheet remains in good shape, and is overall very strong. Our loan-to-deposit level stand at 95%, about the same level as last year and certainly will benefit from Bridgeview, giving us additional room for overall earning asset growth. Non-performing asset levels continue to be low at 0.7% of loans and other real estate owned and that's about 19 basis points or 20% lower than the end of last year. Our capital levels continue to be robust. Our Tier 1 common to risk-weighted assets grew to 10.2% as our dividend increased by 9%. And as we look ahead, stronger earnings and the benefits of adapting the lease standard, which Pat will talk more about, certainly will lead us well-positioned. All-in-all, I think from my perspective and certainly as the company as a whole, it was a very busy and successful end of the year.
So let me turn it over to Mark and Pat for some additional color.
Mark G. Sander -- President and Chief Operating Officer
Thanks, Mike, and good morning to all. Starting with loans on page four of the presentation. In Q4, we posted continuing strong organic C&I growth and solid results from our consumer businesses, partially offset by anticipated CRE payoffs. C&I loans were up another $100 million in the quarter and almost 17% for the full-year, as we delivered strong performance across multiple teams throughout 2018. C&I growth in Q4 was primarily from our sector based businesses, diversified across leasing, healthcare, structured finance and asset base. As we forecasted last call, we did see continued extensive CRE payoffs from property sales and refinancings with non-recourse lenders. As a result, overall, legacy corporate loans were relatively flat in Q4.
NorStates added about $250 million of corporate loans, which was primarily CRE, such that our full-year corporate growth of 7.5% was about 60% organic and 40% acquired. Consumer loans were up a robust $120 million in the quarter, half from organic mortgage production and half from transactional activity. We remain relatively underweighted in 1-4 mortgages and our focus remains on solid internal production. This quarter, we simply just put a little greater percentage of that production on the balance sheet. On occasion, we selectively take advantage of our funding and capacity to expand our earning asset base, and in Q4, we chose to buy some high quality mortgages as well.
Away from Northern States, we grew total loans a little over 7% in 2018, at the higher end of the range we've been at for the last several years. As we look over the very near-term, I would note that typically the start of the year is seasonally slower and we foresee some remaining CRE paydowns, such that our growth rate will likely be lower in Q1. That said, we expect to again be able to grow mid-single digits for the full-year based on our solid pipelines and on the strength of our teams. I should note here that, this loan guidance, like all the comments that Pat and I will make today is exclusive of Bridgeview, which is expected to close in the second quarter. We have provided the additional impact that we expect Bridgeview to have on our 2019 results separately on each of our presentation slides.
Turning to asset quality, the story remains largely uneventful as desired. NPAs fell slightly and charge-offs came in at the lower end of our range. As a result, provision was in line with guidance. Based on these trends and our outlook for continued benign credit environment, we expect charge-offs this year to be in the middle of our normalized range of 25 basis points to 40 basis points, subject, of course, to variability by quarter. Provision in 2019 should cover charge-off levels plus support loan growth.
Our deposit mix, as demonstrated on page six of the presentation, remains a competitive advantage of our company, further enhanced by our acquisitions. Demand deposits have held steady in the rising rate environment, given the nature and granularity of our client bases. Total deposits were up about $550 million at year-end versus September 30th, mostly from NorStates.
We did, though, see a good results in our CD production and some core client acquisition, which together, partially offset the normal large, seasonal public funds outflow we see in the fourth quarter. Our net cost of deposits was 44 basis points in Q4, which remains low relative to our peers due to our continuing favorable mix. For 2019, we expect deposit growth commensurate with earning asset growth.
So, Pat, will now walk through net interest income and margin.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Thanks, Mark, and good morning. Turning to net interest income and margin on slide seven. Net interest income was up $7 million or 5% compared to the prior quarter, beating our guidance of 3% to 4%, and up $19 million or 16% compared to the same period in 2017. Compared to both prior periods, the fourth quarter benefited from the acquisition of interest earning assets from NorStates, higher yields, reflecting higher interest rates and growth in both loans and securities, partially offset by modestly higher funding costs. Acquired loan accretion contributed $5 million to the quarter, consistent with our guidance, and up $1 million from the prior quarter, down $1 million from the same period in 2017.
Moving net interest margin. Tax equivalent NIM for the current quarter of 3.96% was up 4 basis points linked quarter and up 12 basis points from the prior year. Excluding accretion, margin was 3.81% for the quarter, up 2 basis points linked quarter and 17 basis points from the same period a year ago. Compared to both prior periods, the benefit of higher interest rates more than offset the rise in funding costs.
Turning to interest earning assets and funding sources. Average interest earning assets were up $525 million linked quarter and $1.5 billion compared to the prior year, reflecting loan and investment security growth combined with the earning assets from NorStates, average funding sources increased by $500 million linked quarter and $1.3 billion from a year ago, driven by increases in time deposits, FHLB advances and funding sources from NorStates.
Moving to our 2019 outlook, we expect high single to low double-digit net interest income growth. We expect continued modest net interest margin expansion in the accretion of approximately -- and accretion of approximately $20 million, and we currently expect two additional Fed rate hikes in 2019, one at mid-year and another at year-end. Absent the mid-year rate increase, margin expansion will remain positive, but be lessened. Once again, I want to remind you that projections are subject to volatility due to movements in interest rates, pace of loan growth, seasonal deposit flows and the impact of acquisitions.
With that, I'll give it back to Mark to discuss non-interest income.
Mark G. Sander -- President and Chief Operating Officer
The non-interest income rose nearly $1 million in the quarter as we expected. On a year-over-year basis, adjusted non-interest income was relatively flat, as strong treasure management and solid card-based fee growth offset mortgage and capital markets declines. Wealth Management was up 3% on a linked quarter basis, despite market pressures due to solid production earlier in the year. Although, the year-over-year comparison was flat due to some outsized one-time fees in the prior year. We foresee continuing solid gains in 2019 from Treasury Management, Wealth Management and our card income businesses, primarily based on cross-sell opportunities.
In addition, we believe comparisons will be favorable for mortgage and swaps after a relatively modest 2018, and that NSF fees, which have been declining for several years will level off following the repositioning of our offerings this year. Lastly, our recent Wealth Management acquisition of Northern Oak in Milwaukee should add about $4 million in revenues this year. Taking all of this into account, we forecast non-interest income to rise about 10% give or take in 2019.
Now, Pat, will give some detail on outlook and expenses.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Moving to expenses on slide nine, there are several items to note that affect our quarterly expense run rate. First, the current quarter includes $10 million of acquisition and integration expenses associated with the NorStates acquisition, and $3 million of delivering excellence implementation costs, primarily driven by branch closure and employee severance costs.
Additionally, and as we mentioned every quarter in 2018, card and merchant revenues and expenses for each quarter were impacted by a $4 million quarterly reclassification of the expenses up to non-interest income. While prior period financial statements weren't restated, we continue to present this change for you in the earnings release and on slides eight and nine. Keep in mind this is just a reclass of expenses to revenue, no impact to net income, and thankfully, after this quarter, we won't have to talk about it again.
Away from these items and the additional operating costs associated with NorStates, total expenses continued to be relatively stable, aided by $3 million of recurring benefits from Delivering Excellence efforts and were in line with our previous guidance, which was $94 million to $96 million per quarter plus $2 million for NorStates. Our efficiency ratio of 55% was down from 56% in the prior quarter and 61% a year ago.
Our outlook for 2019 is for low-to-mid single-digit growth in non-interest expense for the full-year. To annualize our fourth quarter results of $98 million and adjust for an average inflation of 3%, you get to a pretty good proxy, as the $8 million of incremental Delivering Excellence benefit we expect in 2019 will be largely consume with $6 million of higher occupancy due to the accounting change for the sale-leaseback transaction.
Last note on taxes, before I leave this slide. Our effective tax rate for the quarter was 24%, largely in line with our guidance and down from 34% a year ago, reflective of our lower corporate tax rate. For 2019, our effective tax rate we continue to expect to be approximately 25%.
Moving to capital on slide 10. We continue to maintain capital at strong levels and are pleased with how rapidly we've earned back the capital it's what previously deployed on acquisitions. Our total capital and CET1 to risk-weighted asset ratios increased from the prior quarter, reflecting strong earnings, partly offset by the NorStates acquisition and risk-weighted asset growth. Tier 1 capital ratios were also impacted during the quarter by the phase-out of a Tier 1 treatment of our trust preferred securities during the quarter, as we crossed over the $15 billion in total asset threshold.
Finally, as a reminder, on January 1, 2019, we adopted the new lease accounting rules that result in the reclassification of our remaining deferred gain, approximately $50 million after tax from our past sale-leaseback transaction directly to retained earnings and Tier 1 capital.
Now, Mark, has a few comments on Delivering Excellence on the next slide.
Mark G. Sander -- President and Chief Operating Officer
Yeah. I would summarize by saying our Delivering Excellence program remains firmly on track. The initiatives that generate the financial benefits forecasted have been implemented such that the $20 million of cost savings, shown on page 11 is assured. As a result, we have simply built this impact into our guidance and our budgets for the year. Going forward, our focus is squarely on process and client experience improvements, with any further savings likely to be reinvested in technology enhancements.
Back to Pat to discuss our pending acquisition of Bridgeview.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
So turning to slide 12. There's a recap on the details of the acquisition of Bridgeview that we recently announced, and which, as Mark said, is expected to close early in the second quarter of 2019. As a reminder, the transaction is expected to generate around $0.11 of EPS in its first full year 2020 with approximately three quarters of that recognized in 2019, assuming an early second quarter close. The economics of the transaction remain favorable with a relatively quick tangible book value earn-back of approximately three years. And finally, consistent with our usual practice, we've summarized both our outlook for the year and our current quarter's earnings on slides 13 and 14, respectively.
Now, I'll turn it back over to Mike for final remarks.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Thanks. And I'll move through this quickly and just recap as Pat and Mark did a great job of covering as what I suggested here before I introduced them, was a very busy and active year for us, and certainly, a busy and active end of the year. As we look forward to the New Year, we're excited, yeah. We're entering the New Year with a strong balance sheet, we've got a strong and engaged team, and good underlying business momentum. Bridgeview and Northern States will further set us apart as a market leader here in Chicago, providing our clients with access to one of the area's largest networks. And we're very excited to welcome our newest colleagues to the First Midwest team.
We're equally excited about Northern Oak, which will grow our Wealth Management platform to some $11 billion in asset under management. This will also mark our entry into the Milwaukee marketplace, and we are very pleased about the accompanying opportunities that represents for expansion of products and services. Continuation of our Delivering Excellence initiative will further enhance an already superior client experience, as Mark suggested, as well as strengthen our operational performance and scalability. So as I said, we're very excited as we look to enter the New Year and we just think we're doing so with a significant amount of underlying business momentum.
So, with that, let's open it up for your questions.
Questions and Answers:
Operator
Thank you, sir. The question-and-answer session will begin at this time. (Operator Instructions) The first question comes from Michael Young with SunTrust. Please go ahead.
Michael Young -- SunTrust -- Analyst
Hey. Good morning.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Good morning.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Good morning.
Michael Young -- SunTrust -- Analyst
Pat, just wanted to quickly clarify some of that outlook items as it pertains to Bridgeview. The percentages in dollar amounts that adds this year, is that based on the early 2Q close and so is the impact for the full-year, not an annualized impact?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Yeah. That's correct. We're kind of hedging a little bit because they haven't finalized -- we haven't finalized purchase accounting. There's some uncertainty around actual closing date with the Federal Register, not working at full capacity. And so we're still assuming an early 2Q.
Michael Young -- SunTrust -- Analyst
Okay. But it's the impact for full-year 2019?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Correct.
Michael Young -- SunTrust -- Analyst
Okay. And then, to that end, just wanted to follow-up maybe on the non-interest income guide, it was a little higher than kind of what I was thinking. So I just wanted to get a little feel for the puts and takes there. Anything that was maybe a little weaker this year that's going to grow at a faster pace next year outside of, obviously, the Wealth Management acquisition?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Yeah. Mike, you hit the nail on the head. I think we're going to continue the good pace of growth we've seen in Wealth Management and Treasury Management, but I think the year-over-year comparison in areas like swaps and mortgage will be favorable. I wouldn't say they were soft, but they were modest 2018. So I think, I'll just say, the year-over-year -- we have a few categories where I think we can see $1 million to $2 million increase year-over-year.
Michael Young -- SunTrust -- Analyst
Okay. And then, one last one just on the loan growth outlook, the mid-single digits. Obviously, a little bit slower similar to kind of what the industry as a whole is seeing. But can you provide any color around how much of that may be purchase volume or do you kind of view that as a fallback if organic production is a little weaker in 2019?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
As we've forecasted that mid single-digit growth, we've assumed no transactional growth activity. So at times, when we looked -- it's only if growth rates are coming a little short, sure, we'll think about it, but we don't think we'll have to in 2019 to hit those targets.
Michael Young -- SunTrust -- Analyst
Okay. Perfect. I'll step back for now.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Thanks, Michael.
Operator
The next question comes from Chris McGratty with KBW. Please go ahead.
Chris McGratty -- KBW -- Analyst
Hey. Good morning. Thanks for the question. Pat, I want to start on the expenses. Just want to make sure I got the expenses right. You said, the $98 million annualized and then 3% inflation gets you about $404 million and then is the $16 million from Bridgeview, I assume that's three quarters but net of the -- net of whatever savings you would get this year. So in other ways, the $420 million is kind of the expense number fully loaded for 2019 is what you're saying?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Yeah. I think that's right.
Chris McGratty -- KBW -- Analyst
Okay. And so...
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Okay.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
(inaudible)
Chris McGratty -- KBW -- Analyst
Yeah. So the question is, it's a little bit higher, it's a couple million higher than our prior kind of commentary. And you spoke about 3% inflation last quarter. So, did anything change in terms of the outlook on expenses relative to what you were speaking on last quarter, is it perhaps timing on the Delivering Excellence, because I thought I had a pretty good handle on last quarter, it seems like it's now a few million dollars higher?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Well, Northern Oak brings a little bit into play, not a huge amount. But when we're talking about a difference of $2 million or $3 million on the year, that can be part of it. We -- and we are continuing to invest. So we're not cutting expenses in areas where we're building out platform, whether it be technology and platform, operational processing. So, we're pleased with the operating efficiency that we've gotten to as we exit the year and think we'll be able to hold and modestly improve on that throughout the year.
Chris McGratty -- KBW -- Analyst
Okay. That's good.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Yes. I've got one, Chris, I'm sorry. Just keep in mind as well, there are some of the revenue line items have corresponding increase from commission-based activity. So to the extent you start thinking about Mark's non-interest income discussions and outlook that we talked about as a company that adds some variability on what you might see from an expense standpoint. Our aggregate base as you suggested, is in excess of $400 million. So a couple of million here or there just as a percentage of what we're doing is reasonable in terms of a level of operating uncertainty.
Chris McGratty -- KBW -- Analyst
That's great. That's great color. If I could just sneak one in on Northern Oak. $800 million, if I'm kind of doing back of the envelope math, 50 basis points would imply around $1 million of quarterly revenues. Is that kind of ballpark of what you're thinking?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
That's very close to the ballpark, yes. I would say, it's a good -- very good ballpark, Chris.
Chris McGratty -- KBW -- Analyst
Okay. All right. Thanks a lot.
Operator
The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Brad Milsaps -- Sandler O'Neill -- Analyst
Hey. Good morning, guys.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Hey. Good morning.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Good morning.
Brad Milsaps -- Sandler O'Neill -- Analyst
Mark, just wanted to follow up again on the fees. I know we're probably talking about a few million dollars here either way. But capital markets, mortgage, kind of a lot of those line items are based on things you can't control being rates. Are there changes that you've made in these groups that you feel better about production in 2019, just kind of curious, it sounds like you're pretty confident that you're going to achieve the goal. Just -- I'm guessing, you're looking at the pipeline saying, hey, we've got some things teed up. But just any additional color there would be appreciated?
Mark G. Sander -- President and Chief Operating Officer
Yeah. That's well said, Brad, because you're right, it's not all in our control. On the other hand, yes, we have made for -- a different story for those couple areas, I would say. For mortgage, we've made some investments in some commissioned folks that we think will improve our production this year. I would also note that we had some unfavorable MSR valuations in 2018 that we're assuming are not going to happen in 2019. So the combination of those two, I don't think it takes a great leap for us to improve our mortgage fees a little bit in 2019.
Swaps, toward the end of year, CRE production was down a little bit. And so, I think that's just a more normal -- yeah, I think we'll see a little bit more production there in 2019 that we're forecasting. But again, we're not talking about major huge amounts, $1 million to $2 million of additional fees, I think, year-over-year would be the comparison there.
Again, like I say, the real drivers, though, behind non-interest income are, we think wealth will grow mid-single digits, we think Treasury Management will grow mid-to-high single digits and we think card -- we've got a really nice -- we've been growing our card income in retail at a nice mid single-digit rate for a number of years. We think we're underpenetrated in commercial cards. And so we've got an initiative there that's new for 2019 and we think will add some revenues as well.
Brad Milsaps -- Sandler O'Neill -- Analyst
That's helpful.
Mark G. Sander -- President and Chief Operating Officer
I guess, I would add to that, Brad. Just keep in mind, while it's hard to demonstrate realization, we do have Delivering Excellence revenue targets that are largely driven off of cross-sell, both in retail, product penetration, and as Mark mentioned, Treasury Management. And so we're expecting those will help lift what we've been able to do historically modestly.
Brad Milsaps -- Sandler O'Neill -- Analyst
Got it. And just on the charge-off guidance. Mid-30s doesn't seem unreasonable, but at the same time, your NPLs are at one of the lowest levels they've been in a while. I'm just kind of curious, do you think there's some upside to that number based on upside in a good way based on what you're looking at today?
Mark G. Sander -- President and Chief Operating Officer
Well, yes, that's always one of the hardest ones to forecast, of course, and we're giving you our best guidance as we see it right now. So I would say, that -- I can't really do much better than that, Brad. Again, we think 25 to 40 is normalized, and we think the middle of that range is kind of where it will be.
Brad Milsaps -- Sandler O'Neill -- Analyst
Okay. And then just one final follow-up, maybe for Pat. I know part of the Bridgeview deal was they're going to divest of their mortgage subsidiary. Has that been completed? I know that was like something you were hoping to accomplish before closing.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
It has. And it'll be -- it's either completely done or it will be in the next week or two.
Brad Milsaps -- Sandler O'Neill -- Analyst
Okay. Great. Thank you.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Thanks, Brad.
Operator
The next question comes from Terry McAvoy with Stephens. Please go ahead.
Terry McEvoy -- Stephens -- Analyst
Good morning.
Mark G. Sander -- President and Chief Operating Officer
Hi, Terry.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Good morning.
Terry McEvoy -- Stephens -- Analyst
Hi. Mark, first off, congratulations on last week's news, we just wanted to get that in.
Mark G. Sander -- President and Chief Operating Officer
Thank you very much.
Terry McEvoy -- Stephens -- Analyst
You're welcome. And a question for Pat. The net interest income, the margin outlook for 2019, you mentioned has two rate hikes. Just out of curiosity, hypothetically speaking, if we do not get any rate hikes, does that bring the NII down to kind of the low end of that range that was -- that we see here on slide 13?
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Yeah. Roughly a 25 basis point rate hike gets us about, depending on what -- if you hold funding costs constant, it gets us about $2 million a quarter now. So, you could consider that at risk for the third and fourth quarter, if we don't get the June rate hike. The second one, we're anticipating right at the end of the year. So it has essentially a zero impact one way or the other.
Terry McEvoy -- Stephens -- Analyst
Okay.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
And then on the NIM itself, I think we expect margin expansion even without a rate hike. So, we expect something modest expansion each quarter of the year, plus if we get a rate hike the following quarter, you typically get 3 or 4 bps as well.
Terry McEvoy -- Stephens -- Analyst
Understood. And I know, like charge-offs, the pay out -- paydowns or payoffs are also difficult to predict, but what are your general assumptions on commercial business sales, CRE sales, which were cited in the press release last night and your thoughts on paydowns in 2019 versus 2018?
Mark G. Sander -- President and Chief Operating Officer
You hit it on the head, Terry. The ability to forecast those far into the future is difficult, but in the near-term we can -- we have a pretty good line of sight to those. And I would say, I think we'll see a continued -- a similar level in Q1 as we saw in Q4, which may kind of damper our loan growth in Q1 a little bit. It will still grow, but perhaps less than the full mid single-digit in Q1. Beyond that, it's hard to see, but we're getting to the point where how much more can happen? This has been three quarters already. I guess, it can continue. But that is a tougher one to predict, but we don't see much more beyond Q1 at this point.
Terry McEvoy -- Stephens -- Analyst
Thanks. And then just one last balance sheet question, if I could. Your non-interest-bearing deposits actually up 2% year-over-year, and I'm guessing that's because of Northern States. Just any commentary on core non-interest-bearing deposit trends last year and how do you incorporate maybe ongoing outflows into your margin outlook for 2019?
Mark G. Sander -- President and Chief Operating Officer
Well, both Pat and I probably will take this one. Our deposit retention, we expected it to be good. It's been, frankly, a little more favorable than we had anticipated in 2018. So that's where the trend has been. We were promotional with some CDs over the course of the year, and that generated right along -- right where we expected it to. But fundamentally, the core transactional deposits have held up really nicely through this rising rate environment. Pat, would you offer anything else there?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Yeah. I think, I'd keep it at that. I would highlight, we did have some increases in corporate or business DDAs as we finished the year off. But for the most part, we were relatively stable throughout the entire year which was better than we expected. We did expect more runoff and we're able to create more funding without sucking it away from our existing funding base.
Terry McEvoy -- Stephens -- Analyst
All right. Thanks everyone.
Mark G. Sander -- President and Chief Operating Officer
Thank you.
Operator
(Operator Instructions) The next question comes from Nathan Race with Piper Jaffray. Please go ahead.
Nathan Race -- Piper Jaffray -- Analyst
Hey, guys. Good morning.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Good morning, Nathan.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Good morning.
Nathan Race -- Piper Jaffray -- Analyst
Pat, just one housekeeping question on Bridgeview. I know you guys are still working through the various items to get that deal closed. But do you guys have a timing in mind for the conversion of their system, just trying to get a sense of when those 40% cost saves should ladder over?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Yeah. It will be -- this is Mike. I can help you in here. That will likely be in the second quarter is what we're anticipating. It's really a function of timing of the approval process and just the flow-through itself.
Nathan Race -- Piper Jaffray -- Analyst
Okay. Got it. And then just kind of thinking about the balance sheet dynamics post the close of Bridgeview. Could you guys kind of help us think about the size of the securities portfolio and if we should kind of factor in any type of run-off or attrition with Bridgeview post close?
Mark G. Sander -- President and Chief Operating Officer
On the securities book specifically?
Nathan Race -- Piper Jaffray -- Analyst
Both on the securities book and then just also on loans and deposits.
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
I would say, we generally initially try very hard to hold balances, loans and deposits, understanding that there is just a natural bias in the short-term toward some attrition. On the investment portfolio, that would likely remain similar in size, but over time recycle a little bit as to character -- just to conform with the duration and asset types that we prefer.
Nathan Race -- Piper Jaffray -- Analyst
Okay. All my other questions have been answered. Thank you.
Operator
The next question is a follow-up from Michael Young with SunTrust. Please go ahead.
Michael Young -- SunTrust -- Analyst
Hey. Thanks for the follow-up. Just wanted to touch base particularly on some of the C&I sector lending areas, if there are any areas that you felt like were going to have particularly stronger 2019. And any update on kind of just the healthcare lending specialty, that's been an area where we've seen some higher charge-offs, so just kind of curious your outlook on that area?
Mark G. Sander -- President and Chief Operating Officer
Yeah. I would say not stronger, Michael, because we had a really strong 2018. So, I would say, we would see a continuation of what we saw in 2018, I think, in most of our sectors. The healthcare that we do has been -- is mostly senior living. We do a bit of physician practices as well. I feel really good about the credit quality of that portfolio. I'll just state that and so it's a -- we've been looking particularly given some of the noise we've heard externally from others. We're not just waiting for them to happen. We go looking and I feel really good about the credit quality of those portfolios.
So I think you'll continue to see nice growth there. I actually think, I'm hopeful that asset base will particularly grow a little bit more in 2019 than it did in 2018. We had a nice Q4, and I think they have a nice momentum going into 2019. But the rest, I think, is more continuation of what we did in 2018.
Michael Young -- SunTrust -- Analyst
Okay. And one last one just on kind of staffing and the competitive environment, there was some disruption obviously announced about eight months ago. Any update to kind of thoughts this year or any hire -- hiring plans as we move throughout kind of typical hiring season post-bonuses here in the first quarter?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Yeah. I would say, we're always in the market for high-quality talent and that good commercial bankers and good Wealth Management revenue producers pay for themselves very quickly. So we'll continue to be active looking for those where there's disruption, which is even more general in the marketplace.
Michael Young -- SunTrust -- Analyst
Okay. Thanks.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Thank you.
Operator
(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 -- Chairman of the Board and Chief Executive Officer
Thank you, and let me close it here briefly. Just as a reminder and for those on the call. Our focus as a company has been and continues to remain on our promise to help our clients achieve financial success, giving them and providing them with the superior client experience they've come to expect. That's really what sets us apart and that's what differentiates us as we operate in the marketplace.
With that, I therefore want to take the opportunity to thank all of our colleagues for their many contributions to and investment in our performance. They are the face of our company and they deliver on that promise every day and we certainly would thank them for their contribution. I would also want to take the opportunity to thank all of you for listening, for your interest in and investment in First Midwest. So as we close, on behalf of all of us here, have a happy and healthy New Year. Thank you.
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.
Duration: ?? minutes
Call participants:
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Mark G. Sander -- President and Chief Operating Officer
Patrick S. Barrett -- Executive Vice President and Chief Financial Officer
Michael Young -- SunTrust -- Analyst
Chris McGratty -- KBW -- Analyst
Brad Milsaps -- Sandler O'Neill -- Analyst
Terry McEvoy -- Stephens -- Analyst
Nathan Race -- Piper Jaffray -- Analyst
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