First Midwest Bancorp, Inc. Announces 2012 Third Quarter Results and Significant Credit Actions

Dramatic Improvement in Credit Risk Profile, Business Momentum Building

Marketwired

ITASCA, IL--(Marketwire - Oct 30, 2012) - Today First Midwest Bancorp, Inc. (the "Company" or "First Midwest") (NASDAQ: FMBI), the holding company of First Midwest Bank (the "Bank"), reported results of operations and financial condition for third quarter 2012. Net loss for the quarter was $48.5 million, before adjustments for non-vested restricted shares, with net loss applicable to common shares of $47.8 million, or $0.65 per share. Performance for the quarter was impacted by higher provision for loan losses driven by significant initiatives designed to improve the Company's credit risk profile. This compares to net income applicable to common shares of $6.3 million, or $0.09 per share, for second quarter 2012 and $6.3 million, or $0.09 per share, for third quarter 2011.

"During the quarter, First Midwest took aggressive action to pursue loan sale and remediation alternatives for select non-performing and performing potential problem loans," said Michael L. Scudder, President and Chief Executive Officer of First Midwest Bancorp, Inc. "Such actions were undertaken only after careful analysis of the potential costs and benefits, contrasting the impact of continuing the workout process for these assets versus their accelerated resolution. These actions represent an immediate and meaningful step toward the achievement of our stated goals of improving our credit risk profile and producing reliable and attractive returns for our shareholders."

Mr. Scudder continued, "As we look to the future, our business momentum continues to build. Core earnings for the quarter remained solid with strong underlying loan growth and increased fee-based revenues offsetting the impact of the low interest rate environment. Improvement in our credit risk profile adds to this momentum through meaningful reduction in loan workout and related costs. As always, we remain focused on tight and balanced control of our operating overhead. This momentum, when combined with our strong capital foundation, positions us well to grow and continue to take advantage of market opportunities."

SELECT HIGHLIGHTS

Credit Risk Profile

  • Targeted $223 million of select non-performing and performing potential problem loans for accelerated resolution, resulting in charge-offs of $99 million.
    • Transferred $171 million of loans to held-for-sale.
    • Modified internal remediation strategies to accelerate resolution of an additional $52 million of loans.
  • Reduced non-performing loans by 46% to 2.15% of total loans, excluding covered loans, compared to second quarter 2012.
  • Lowered performing special mention and substandard loans by 36% from second quarter 2012.
  • Allowance for credit losses at 2.01% of loans, excluding covered loans, representing 105% of non-accrual loans.

Building Business Momentum

  • Increased total loans approximately 7% annualized from June 30, 2012, excluding covered loans and the impact of loans transferred to held-for-sale.
  • Acquired Waukegan Savings Bank, resulting in the addition of $46 million in loans and $73 million in deposits, and generating a pre-tax gain of $3 million.
  • Compared to second quarter 2012:
    • Sustained solid pre-tax, pre-provision earnings of $31 million.
    • Increased net interest income to $67 million, with solid net interest margin of 3.83% 
    • Improved fee-based revenues by 12% annualized.

Active Capital Management

  • Maintained strong Tier 1 common capital to risk-weighted assets at 8.93% while reducing the proportion of non-performing assets to allowance for credit losses plus tangible equity by 31%.
  • Repurchased $4 million of 6.95% junior subordinated debentures and $12 million of 5.85% subordinated notes on October 1, 2012.

SIGNIFICANT QUARTER EVENTS

Accelerated Credit Remediation Actions

   
Aggregate Credit Actions  
(Dollar amounts in thousands)  
   
    Book Value
Prior to
Transfer or
Action
  Charge-offs   Adjusted
Book Value
  % of
Book Value
 
Loan resolution activities:                        
  Transferred to held-for-sale   $ 171,052   $ 80,260   $ 90,792   53.1 %
  Modified disposition strategies     52,350     18,846     33,504   64.0 %
    Total   $ 223,402   $ 99,106   $ 124,296   55.6 %
                             

During third quarter 2012, the Company elected to adjust its existing remediation strategies for $223.4 million of non-performing and performing potential problem loans to more aggressively pursue their liquidation, resulting in charge-offs of $99.1 million. These actions were undertaken after careful analysis of the potential costs and benefits, including an assessment of the impact of continuing the remediation process for these assets and the estimated timeframe for resolution. Approximately $52.4 million, or 23.4%, of these loans represented either non-performing loans that were resolved through foreclosure and the underlying collateral was transferred to other real estate owned ("OREO") or performing loans, which were transferred to non-accrual status to facilitate future restructuring.

In connection with the preparation of the Company's quarterly financial statements, the remaining $171.1 million, or 76.6%, of these loans was transferred to held-for-sale status in anticipation of disposition through wholesale loan transactions expected to be completed during fourth quarter 2012. Based on the longer term prospects for credit improvement or remediation strategies, management identified certain non-performing and performing potential problem loans for transfer to held-for-sale since they were subject to elevated future performance risk. Approximately 65% of the loans transferred were categorized as commercial real estate with the remainder predominately in the commercial and industrial category. Some two-thirds of the held-for-sale loans represented performing loans classified as either special mention or substandard for regulatory purposes.

Acquisition

On August 3, 2012, the Company acquired substantially all the assets of the former Waukegan Savings Bank ("Waukegan Savings") in a Federal Deposit Insurance Corporation ("FDIC")-assisted transaction generating a pre-tax gain of $3.3 million. Loans totaling $46.3 million comprise the majority of the assets acquired and are not subject to a loss sharing agreement with the FDIC. The Company also assumed $41.5 million in transactional deposits and $31.2 million in time deposits.

OPERATING PERFORMANCE

   
Operating Performance Highlights  
(Dollar amounts in thousands)  
   
    Quarters Ended  
    September 30,
2012
    June 30,
2012
    September 30,
2011
 
Net (loss) income   $ (48,527 )   $ 6,365     $ 8,942  
Net (loss) income applicable to common shares   $ (47,812 )   $ 6,289     $ 6,263  
Diluted (loss) earnings per common share   $ (0.65 )   $ 0.09     $ 0.09  
Return on average common equity     (19.36 %)     2.59 %     2.60 %
Return on average assets     (2.35 %)     0.32 %     0.43 %
Net interest margin     3.83 %     3.88 %     3.97 %
Efficiency ratio     69.04 %     60.56 %     60.57 %
Loans, excluding covered loans, at period end   $ 5,218,345     $ 5,298,026     $ 5,104,494  
Provision for loan losses   $ 111,791     $ 22,458     $ 20,425  
Average transactional deposits (1)   $ 5,247,485     $ 5,080,730     $ 4,876,261  
   
(1) Comprised of demand deposits and interest-bearing transactional accounts.
   
   
Pre-Tax, Pre-Provision Operating Earnings (1)  
(Dollar amounts in thousands)  
   
    Quarters Ended  
    September 30,
2012
    June 30,
2012
    September 30,
2011
 
(Loss) income before income tax   $ (85,520 )   $ 7,126     $ 10,525  
Provision for loan losses     111,791       22,458       20,425  
  Pre-tax, pre-provision earnings     26,271       29,584       30,950  
Adjustments to Pre-Tax, Pre-Provision Earnings(1)                        
Net securities (losses) gains     (217 )     151       449  
Gain on FDIC-assisted transaction     3,289       -       -  
Losses on sales and valuation adjustments of other real estate owned ("OREO")     (2,025 )     (2,527 )     (2,611 )
Accelerated accretion of FDIC indemnification asset     (4,000 )     -       -  
Valuation adjustment on assets held-for-sale     (1,255 )     -       (75 )
Severance-related costs     (840 )     -       (78 )
  Total adjustments     (5,048 )     (2,376 )     (2,315 )
  Pre-tax, pre-provision operating earnings (1)   $ 31,319     $ 31,960     $ 33,265  
   
(1) The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. As a supplement to GAAP, the Company provided this non-GAAP performance result, which the Company believes is useful because it assists investors in assessing the Company's operating performance. Although it is intended to enhance investors' understanding of the Company's business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP.

Pre-tax, pre-provision operating earnings of $31.3 million for third quarter 2012 decreased slightly from second quarter 2012 and $1.9 million from third quarter 2011. The reduction from second quarter 2012 was driven by higher noninterest expense, excluding certain non-operating items, due to higher salaries and employee benefits and a seasonal increase in utilities costs, which were partially offset by an increase in fee-based revenues.

The decline in pre-tax, pre-provision operating earnings from third quarter 2011 is attributed primarily to lower net interest income, reflecting the lower yields on earning assets, and lower periodic benefits received from bank owned life insurance contracts.

Further discussion of net interest income and noninterest income and expense is presented in later sections of this release.

 
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
             
      Quarters Ended  
    September 30, 2012   June 30, 2012   September 30, 2011
    Average
Balance
    Interest
Earned/ Paid
  Yield/
Rate
(%)
  Average
Balance
    Interest
Earned/ Paid
  Yield/
Rate
(%)
  Average
Balance
    Interest
Earned/ Paid
  Yield/
Rate
(%)
Assets:                                                      
Federal funds sold and other short-term investments   $ 435,528     $ 265   0.24   $ 432,036     $ 258   0.24   $ 741,782     $ 463   0.25
Trading securities     15,389       25   0.65     16,090       26   0.65     16,248       23   0.57
Investment securities (1)     1,220,654       10,841   3.55     1,238,767       11,172   3.61     1,057,075       11,604   4.39
Federal Home Loan Bank and Federal Reserve Bank stock     47,111       341   2.90     46,750       354   3.03     58,187       331   2.28
Loans, excluding covered loans (1)     5,353,911       64,289   4.78     5,213,944       62,559   4.83     5,136,130       64,509   4.98
Covered interest-earning assets (2)     276,180       3,223   4.64     297,141       4,473   6.05     387,635       6,640   6.80
  Total interest-earning assets (1)     7,348,773       78,984   4.28     7,244,728       78,842   4.37     7,397,057       83,570   4.49
Cash and due from banks     128,714                 122,165                 120,624            
Allowance for loan losses     (118,925 )               (122,723 )               (143,443 )          
Other assets     868,551                 869,572                 855,542            
  Total assets   $ 8,227,113               $ 8,113,742               $ 8,229,780            
Liabilities and Stockholders' Equity:                                                      
Interest-bearing transaction deposits   $ 3,394,675       898   0.11   $ 3,282,876       913   0.11   $ 3,306,590       1,361   0.16
Time deposits     1,498,993       3,228   0.86     1,548,410       3,765   0.98     1,731,413       5,293   1.21
Borrowed funds     189,835       507   1.06     195,934       490   1.01     262,001       706   1.07
Senior and subordinated debt     231,156       3,691   6.35     231,123       3,646   6.34     137,749       2,280   6.57
  Total interest-bearing liabilities     5,314,659       8,324   0.62     5,258,343       8,814   0.67     5,437,753       9,640   0.70
Demand deposits     1,852,810                 1,797,854                 1,569,671            
  Total funding sources     7,167,469                 7,056,197                 7,007,424            
Other liabilities     77,062                 80,491                 73,808            
Stockholders' equity - common     982,582                 977,054                 955,548            
Stockholders' equity - preferred     -                 -                 193,000            
  Total liabilities and stockholders' equity   $ 8,227,113               $ 8,113,742               $ 8,229,780            
Net interest income/margin (1)           $ 70,660   3.83           $ 70,028   3.88           $ 73,930   3.97
                                                       
(1) Revenue from tax-exempt securities and investments that receive tax credits is presented on a basis comparable to taxable securities and investments. Consequently, interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. This non-GAAP financial measure assists management in assessing the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income.
   
(2) Covered interest-earning assets consist of loans acquired through the Company's Federal Deposit Insurance Corporation ("FDIC")-assisted transactions subject to loss sharing agreements and the related FDIC indemnification asset.

Total average interest-earning assets for third quarter 2012 increased $104.0 million from second quarter 2012 and declined $48.3 million from third quarter 2011. Compared to June 30, 2012, growth in the loan portfolio, primarily from new commercial and industrial ("C&I") loans and the addition of loans acquired from Waukegan Savings, resulted in higher average loans, excluding covered loans, which was partially offset by a decrease in covered interest-earning assets. The variance from third quarter 2011 was driven by decreases in federal funds sold and other short-term investments and covered interest-earning assets, which more than offset higher loan volumes and an increase in investment securities.

Total average funding sources for third quarter 2012 were $111.3 million higher than second quarter 2012 and up $160.0 million from third quarter 2011. A rise in transactional deposits from the acquisition of Waukegan Savings contributed to the increase in average funding sources from second quarter 2012. Compared to third quarter 2011, the higher level of demand deposits reflects the purchase of certain Chicago-market deposits during December 2011, which more than offset the decline in interest-bearing liabilities and resulted in a more favorable funding mix.

The growth in average senior and subordinated debt for third quarter 2012 compared to third quarter 2011 is attributed to the issuance of $115.0 million in senior debt during fourth quarter 2011, which was used to redeem the Series B preferred stock issued to the United States Department of the Treasury in combination with other excess cash. Interest paid on the senior debt reduced net interest margin by ten basis points for both the second and third quarters of 2012.

Tax-equivalent net interest margin for third quarter 2012 decreased 5 basis points compared to second quarter 2012 and 14 basis points compared to third quarter 2011. The decrease compared to both prior periods resulted primarily from the continued decline of market interest rates, which drove reduced yields earned on investment securities and loans, as well as lower interest earned on covered interest-earning assets, and was mitigated by a decline in rates paid on retail time deposits. In addition, the decrease from third quarter 2011 also reflects the cost of additional senior debt.

Interest earned on covered loans is generally recognized through the accretion of the discount taken on expected future cash flows. The declining yield on covered interest-earning assets from second quarter 2012 and third quarter 2011 was driven by revised estimates of future cash flows. In addition, the yield for third quarter 2011 benefited from certain settlements of actual cash realized in excess of estimates.

   
Noninterest Income Analysis  
(Dollar amounts in thousands)  
   
    Quarters Ended     September 30, 2012
Percent Change From
 
    September 30,
2012
    June 30,
2012
    September 30,
2011
    June 30,
2012
    September 30,
2011
 
Service charges on deposit accounts   $ 9,502     $ 8,848     $ 10,215     7.4     (7.0 )
Wealth management fees     5,415       5,394       4,982     0.4     8.7  
Other service charges, commissions, and fees     4,187       4,097       4,289     2.2     (2.4 )
Card-based fees     5,246       5,312       4,931     (1.2 )   6.4  
  Total fee-based revenues     24,350       23,651       24,417     3.0     (0.3 )
Bank-owned life insurance ("BOLI") income     300       404       1,479     (25.7 )   (79.7 )
Other income     727       406       598     79.1     21.6  
  Total operating revenues     25,377       24,461       26,494     3.7     (4.2 )
Net trading gains (losses) (1)     685       (575 )     (2,352 )   N/M     N/M  
Net securities (losses) gains     (217 )     151       449     N/M     N/M  
Gain on FDIC-assisted transaction     3,289       -       -     N/M     N/M  
  Total noninterest income   $ 29,134     $ 24,037     $ 24,591     21.2     18.5  

N/M - Not meaningful.

(1) Net trading gains (losses) result from changes in the fair value of diversified investment securities held in a grantor trust under deferred compensation agreements and are substantially offset by nonqualified plan expense for each period presented.
   

Total fee-based revenues for third quarter 2012 grew 3.0% compared to second quarter 2012 and remained consistent with third quarter 2011. The increase in fee-based revenues from second quarter 2012 was attributed primarily to an increase in service charges on deposit accounts resulting from seasonally higher volumes of non-sufficient funds ("NSF") fees.

The slight variance in fee-based revenues from third quarter 2011 to third quarter 2012 resulted from lower NSF fees, which were offset by increased card-based fees and wealth management fees.

During third quarter 2011, the Company received a $1.2 million benefit settlement, which drove higher BOLI income compared to third quarter 2012.

As described in the "Significant Quarter Events" section, the Company acquired certain loans and deposits of Waukegan Savings during third quarter 2012 and recorded a $3.3 million gain.

   
Noninterest Expense Analysis  
(Dollar amounts in thousands)  
   
    Quarters Ended     September 30, 2012
Percent Change From
 
    September 30,
2012
  June 30,
2012
    September 30,
2011
    June 30,
2012
    September 30,
2011
 
Salaries and wages   $ 26,064   $ 24,446     $ 25,659     6.6     1.6  
Nonqualified plan expense (1)     817     (594 )     (2,702 )   N/M     N/M  
Retirement and other employee benefits     6,230     5,714       6,225     9.0     0.1  
  Total compensation expense     33,111     29,566       29,182     12.0     13.5  
Valuation adjustments of OREO     1,410     1,824       674     (22.7 )   N/M  
Net losses on sales of OREO     615     703       1,937     (12.5 )   (68.2 )
Net OREO operating expense     1,183     1,597       1,563     (25.9 )   (24.3 )
  Total OREO expense     3,208     4,124       4,174     (22.2 )   (23.1 )
Loan remediation costs     3,206     3,594       4,638     (10.8 )   (30.9 )
Other professional services     3,459     3,311       2,933     4.5     17.9  
  Total professional services     6,665     6,905       7,571     (3.5 )   (12.0 )
Net occupancy and equipment expense     8,108     7,513       8,157     7.9     (0.6 )
Technology and related costs     2,906     2,851       2,709     1.9     7.3  
FDIC premiums     1,785     1,659       1,799     7.6     (0.8 )
Advertising and promotions     1,427     1,032       2,502     38.3     (43.0 )
Other expenses     12,913     7,507       8,082     72.0     59.8  
  Total noninterest expense   $ 70,123   $ 61,157     $ 64,176     14.7     9.3  

N/M - Not meaningful

(1) Nonqualified plan expense results from changes in the Company's obligation to participants under deferred compensation agreements.
   

Total noninterest expense for third quarter 2012 increased 14.7% compared to second quarter 2012 and 9.3% compared to third quarter 2011.

Third quarter 2012 salaries and wages increased $1.6 million from second quarter 2012 due to the accrual of certain severance benefits, a decrease in levels of deferred salaries due to comparatively lower loan originations, annual merit increases, and additional retail banking staff related to the Waukegan Savings acquisition. The increase in retirement and other employee benefits from second quarter 2012 reflects the normal adjustment of the annual pension expense estimate.

OREO expenses declined from second quarter 2012 due to lower real estate taxes and maintenance expenses on three large commercial properties sold in second quarter 2012. The decrease in OREO expenses compared to third quarter 2011 resulted primarily from lower losses recognized on sales.

The decline in loan remediation costs in third quarter 2012 compared to both prior periods presented was due primarily to a decline in real estate taxes paid on collateral associated with problem loans. Other professional services increased from September 30, 2011, driven largely by higher personnel recruitment expense, the reclassification of certain director fees from salaries and wages expense during second quarter 2012, and other non-recurring items.

Net occupancy and equipment expense increased from second quarter 2012 as a result of seasonal increases in utilities and maintenance costs.

The increase in other expenses from second quarter 2012 and third quarter 2011 was largely driven by $4.0 million of accelerated accretion of the FDIC indemnification asset. This adjustment reflects management's periodic assessment of the amount and timing of future cash flows from covered loans. In addition, the Company recorded a $1.3 million valuation adjustment on a single property held-for-sale based on a signed sales contract during third quarter 2012.

LOAN PORTFOLIO AND ASSET QUALITY

   
Loan Portfolio Composition  
(Dollar amounts in thousands)  
   
    As Of   September 30, 2012
Percent Change From
 
    September 30,
2012
  June 30,
2012
  September 30,
2011
  June 30,
2012
    September 30,
2011
 
Corporate:                              
  Commercial and industrial   $ 1,610,169   $ 1,597,427   $ 1,476,034   0.8     9.1  
  Agricultural     259,787     272,742     250,436   (4.7 )   3.7  
  Commercial real estate:                              
    Office     484,215     495,901     440,641   (2.4 )   9.9  
    Retail     356,093     375,078     330,160   (5.1 )   7.9  
    Industrial     490,023     520,150     492,514   (5.8 )   (0.5 )
    Multi-family     309,509     308,250     317,313   0.4     (2.5 )
    Residential construction     61,920     88,908     116,283   (30.4 )   (46.8 )
    Commercial construction     136,509     147,626     145,889   (7.5 )   (6.4 )
    Other commercial real estate     780,712     817,071     877,241   (4.4 )   (11.0 )
      Total commercial real estate     2,618,981     2,752,984     2,720,041   (4.9 )   (3.7 )
        Total corporate loans     4,488,937     4,623,153     4,446,511   (2.9 )   1.0  
Consumer:                              
  Home equity loans     397,506     398,428     424,986   (0.2 )   (6.5 )
  1-4 family mortgages     292,908     237,341     189,587   23.4     54.5  
  Installment loans     38,994     39,104     43,410   (0.3 )   (10.2 )
      Total consumer loans     729,408     674,873     657,983   8.1     10.9  
    Total loans, excluding covered loans     5,218,345     5,298,026     5,104,494   (1.5 )   2.2  
Covered loans     216,610     230,047     289,747   (5.8 )   (25.2 )
    Total loans   $ 5,434,955   $ 5,528,073   $ 5,394,241   (1.7 )   0.8  
                                   

Total loans, excluding covered loans, of $5.2 billion declined by $79.7 million from June 30, 2012 as a result of the transfer of $171.1 million in carrying value of certain loans to held-for-sale, which resulted in charge-offs of $80.3 million. Excluding covered loans and loans transferred to held-for-sale, total loans increased by $91.4 million, or 6.9% annualized, from June 30, 2012 and $284.9 million, or 5.6%, from September 30, 2011. The quarter-over-quarter and year-over-year growth in the 1-4 family mortgages portfolio was predominately due to the loans acquired in the Waukegan Savings transaction.

 
Asset Quality Indicators by Category
(Dollar amounts in thousands)
 
    Performing Loans        
    Pass     Special
Mention
    Substandard     Total     Non-accrual
Loans
    Total
Loans
 
September 30, 2012                                                
  Commercial and industrial   $ 1,534,695     $ 39,966     $ 4,406     $ 1,579,067     $ 31,102     $ 1,610,169  
  Agricultural     256,772       1,811       -       258,583       1,204       259,787  
  Commercial real estate:                                                
    Office, retail, and industrial     1,232,427       58,325       16,955       1,307,707       22,624       1,330,331  
    Multi-family     305,827       1,654       -       307,481       2,028       309,509  
    Residential construction     34,954       13,867       8,349       57,170       4,750       61,920  
    Commercial construction     106,726       14,318       11,042       132,086       4,423       136,509  
    Other commercial real estate     714,296       14,725       30,407       759,428       21,284       780,712  
      Total commercial real estate     2,394,230       102,889       66,753       2,563,872       55,109       2,618,981  
        Total corporate loans     4,185,697       144,666       71,159       4,401,522       87,415       4,488,937  
  Consumer loans     717,244       -       -       717,244       12,164       729,408  
    Total loans   $ 4,902,941     $ 144,666     $ 71,159     $ 5,118,766     $ 99,579     $ 5,218,345  
Changes from:                                                
  June 30, 2012     2.9 %     (30.8 %)     (43.4 %)     0.4 %     (49.8 %)     (1.5 %)
  September 30, 2011     10.5 %     (58.0 %)     (52.7 %)     3.8 %     (41.8 %)     2.2 %
                                                   

Special mention and substandard loans decreased $119.1 million, or 35.6%, from June 30, 2012 and $279.0 million, or 56.4%, from September 30, 2011 from the transfer of $98.1 million to held-for-sale during third quarter 2012, as well as ongoing remediation activities. Based on the longer term prospects for credit improvement or remediation strategies, management identified certain non-performing and performing potential problem loans for transfer to held-for-sale since they were subject to elevated future performance risk.

As of September 30, 2012, special mention and substandard loans totaled $215.8 million, with approximately 55% representing 11 commercial borrowers and the remainder comprising 139 smaller balance relationships. For loans classified as non-accrual, nearly 40% represent five commercial relationships. Management continues to actively work with these individual borrowers to promote improvement in the underlying credit relationship or timely liquidation.

   
Asset Quality, Excluding Covered Loans and Covered OREO (1)  
(Dollar amounts in thousands)  
   
    As Of     September 30, 2012
Percent Change From
 
    September 30,
2012
    June 30,
2012
    September 30,
2011
    June 30,
2012
    September 30,
2011
 
Non-accrual loans   $ 99,579     $ 198,508     $ 171,189     (49.8 )   (41.8 )
90 days or more past due loans     12,582       8,192       6,008     53.6     109.4  
  Total non-performing loans     112,161       206,700       177,197     (45.7 )   (36.7 )
Troubled debt restructurings (still accruing interest) ("TDRs")     6,391       7,811       7,033     (18.2 )   (9.1 )
OREO     36,487       28,309       23,863     28.9     52.9  
  Total non-performing assets   $ 155,039     $ 242,820     $ 208,093     (36.2 )   (25.5 )
30-89 days past due loans   $ 20,088     $ 23,597     $ 34,061     (14.9 )   (41.0 )
Allowance for credit losses (2)   $ 104,995     $ 118,682     $ 131,291     (11.5 )   (20.0 )
Non-accrual loans to total loans     1.91 %     3.75 %     3.35 %            
Non-performing loans to total loans     2.15 %     3.90 %     3.47 %            
Non-performing assets to loans plus OREO     2.95 %     4.56 %     4.06 %            
Allowance for credit losses to loans (2)     2.01 %     2.24 %     2.57 %            
Allowance for credit losses to non-accrual loans     105 %     60 %     77 %            
                                     
(1) Covered loans and covered OREO were acquired through transactions with the FDIC and are subject to loss sharing agreements with the FDIC whereby the Company is indemnified against the majority of any losses incurred on these assets.
(2) The allowance for credit losses includes an $8.4 million allowance for covered loan losses, excluding covered open-end consumer loans. The remainder of this table excludes covered loan and covered OREO balances as noted above; therefore, covered loans totaling $216.6 million as of September 30, 2012 are not included in the allowance for credit losses to loans calculation.
   

Non-performing assets, excluding covered loans and covered OREO, were $155.0 million at September 30, 2012, a significant reduction of $87.8 million from June 30, 2012 and $53.1 million from September 30, 2011.

Compared to both prior periods presented, the improvement in non-performing loans resulted from the reclassification of $63.5 million in carrying value of certain non-accrual loans to held-for-sale and ongoing remediation activities.

The increase in OREO during third quarter 2012 compared to both prior periods presented mainly resulted from the transfer of one large commercial land credit and OREO acquired in the Waukegan Savings transaction.

The Company increased the provision for loan losses from second quarter 2012 by $89.3 million due primarily to charge-offs resulting from the transfer of select loans to held-for-sale and the targeted modification of disposition strategies.

 
Charge-Off Data
(Dollar amounts in thousands)
 
    Quarters Ended
    September 30,
2012
    % of
Total
  June 30,
2012
    % of
Total
  September 30,
2011
    % of
Total
Net loan charge-offs (1):                                    
  Commercial and industrial   $ 39,253     31.4   $ 5,870     29.2   $ 10,165     36.4
  Agricultural     4,531     3.6     18     0.1     177     0.6
  Office, retail, and industrial     32,322     25.8     2,263     11.2     2,543     9.1
  Multi-family     2,755     2.2     313     1.6     2,170     7.8
  Residential construction     9,242     7.4     3,598     17.9     2,250     8.1
  Commercial construction     11,037     8.8     2,616     13.0     4,115     14.7
  Other commercial real estate     23,026     18.4     2,934     14.6     4,421     15.8
  Consumer     2,920     2.4     2,494     12.4     2,100     7.5
    Total net loan charge-offs, excluding covered loans     125,086     100.0     20,106     100.0     27,941     100.0
    Net covered loan charge-offs (1)     442           2,434           1,024      
      Total net loan charge-offs   $ 125,528         $ 22,540         $ 28,965      
Net loan charge-offs to average loans, excluding covered loans, annualized:                                    
  Quarter-to-date     9.29 %         1.55 %         2.16 %    
  Year-to-date     4.26 %         1.61 %         1.73 %    
(1)   Amounts represent charge-offs, net of recoveries.

Net loan charge-offs, excluding covered loan charge-offs, increased $105.0 million from June 30, 2012 as a result of accelerated credit remediation actions taken by management for select credits during third quarter 2012. Management identified $223.4 million of loans to more aggressively pursue disposition, resulting in charge-offs of $99.1 million. The majority relates to the transfer of $171.1 million in carrying value of performing and nonperforming loans transferred to held-for-sale with related charge-offs of $80.3 million. In addition to these actions, the Company recorded net charge-offs of $26.4 million, nearly 70% of which reflects the estimated losses attributed to a single commercial borrower currently in the process of bankruptcy.

CAPITAL MANAGEMENT

 
Capital Ratios
(Dollar amounts in thousands)
 
    September 30, 2012     December 31, 2011     Regulatory Minimum For "Well-Capitalized"     Excess Over Required Minimums at September 30, 2012
Regulatory capital ratios:                      
  Total capital to risk-weighted assets   11.65 %   13.68 %   10.00 %   16 %   $106,209
  Tier 1 capital to risk-weighted assets   9.92 %   11.61 %   6.00 %   65 %   $252,597
  Tier 1 leverage to average assets   8.13 %   9.28 %   5.00 %   63 %   $246,123
Tier 1 common capital to risk-weighted assets (1)   8.93 %   10.26 %   N/A (2)     N/A (2)     N/A (2)
Tangible common equity ratios (3):                            
  Tangible common equity to tangible assets   8.26 %   8.83 %   N/A (2)     N/A (2)     N/A (2)
  Tangible common equity, excluding other comprehensive loss, to tangible assets   8.38 %   9.00 %   N/A (2)     N/A (2)     N/A (2)
  Tangible common equity to risk- weighted assets   10.12 %   10.88 %   N/A (2)     N/A (2)     N/A (2)
Non-performing assets to tangible common equity and allowance for credit losses   20.50 %   31.01 %   N/A (2)     N/A (2)     N/A (2)
   
(1) Excludes the impact of trust-preferred securities.
(2) Ratio is not subject to formal Federal Reserve regulatory guidance.
(3) Tangible common equity ("TCE") represents common stockholders' equity (i.e., total stockholders' equity less preferred stock) less goodwill and identifiable intangible assets, net of related deferred tax liabilities. Return on TCE measures the Company's earnings as a percentage of TCE. In management's view, Tier 1 common and TCE measures are meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with competitors.  
   

The Company's capital ratios decreased from December 31, 2011 as a result of the net loss of $48.5 million for third quarter 2012, driven by the Company's election to pursue accelerated credit remediation actions.

The Company's regulatory ratios as of September 30, 2012 exceeded all regulatory mandated ratios for characterization as "well-capitalized."

The Board of Directors reviews the Company's capital plan each quarter, giving consideration to the current and expected operating environment as well as an evaluation of various capital alternatives.

SUBSEQUENT EVENTS

On October 26, 2012, the Company entered into an agreement to sell $64.0 million of loans held-for-sale, which represents 71% of the total loans held-for-sale at September 30, 2012. Management expects to close the sale in fourth quarter 2012 with proceeds approximating carrying value.

On October 1, 2012, the Company repurchased and retired $4.3 million of 6.95% junior subordinated debentures at a premium of 3.0% and $12.0 million of 5.85% subordinated notes at a premium of 5.0%. These transactions resulted in the recognition of a pre-tax loss of $814,000, which was recorded in fourth quarter 2012.

About the Company

First Midwest is the premier relationship-based banking franchise in the dynamic Chicagoland banking market. As one of the Chicago metropolitan area's largest independent bank holding companies, First Midwest provides the full range of business and retail banking and wealth management services through approximately 100 offices located in communities in metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. First Midwest was recognized by the Chicago Tribune for the second straight year as one of the top 20 best places to work in Chicago among large employers. Additionally, Forbes has recognized First Midwest as one of America's Most Trustworthy Companies for 2012.

Safe Harbor Statement

This press release contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only the Company's beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company's control. It is possible that actual results and the Company's financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the Company's future results, see "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and other reports filed with the Securities and Exchange Commission. Forward-looking statements represent management's best judgment as of the date hereof based on currently available information. Except as required by law, the Company undertakes no duty to update the contents of this press release after the date hereof.

Conference Call

A conference call to discuss the Company's results, outlook, and related matters will be held on Wednesday, October 31, 2012 at 10:00 AM (ET). Members of the public who would like to listen to the conference call should dial (877) 317-6789 (U.S. domestic) or (412) 317-6789 (international) and ask for the First Midwest Bancorp, Inc. Earnings Conference Call. The number should be dialed 10 to 15 minutes prior to the start of the conference call. There is no charge to access the call. The conference call will also be accessible as an audio webcast through the Investor Relations section of the Company's website, www.firstmidwest.com/investorrelations. For those unable to listen to the live broadcast, a replay will be available on the Company's website or by dialing (877) 344-7529 (U.S. domestic) or (412) 317-0088 (international) conference I.D. 10019351 beginning one hour after completion of the live call until 9:00 A.M. (ET) on November 7, 2012. Please direct any questions regarding obtaining access to the conference call to First Midwest Bancorp, Inc. Investor Relations, via e-mail, at investor.relations@firstmidwest.com.

Accompanying Financial Statements and Tables

Accompanying this press release is the following unaudited financial information:

  • Condensed Consolidated Statements of Financial Condition
  • Condensed Consolidated Statements of Income

Press Release and Additional Information Available on Website

This press release, the accompanying financial statements and tables, and certain additional unaudited Selected Financial Information are available through the "Investor Relations" section of First Midwest's website at www.firstmidwest.com/investorrelations.

   
   
Condensed Consolidated Statements of Financial Condition  
Unaudited  
(Amounts in thousands)  
   
    September 30,
2012
    June 30,
2012
    December 31,
2011
    September 30,
2011
 
Assets                                
Cash and due from banks   $ 124,447     $ 110,924     $ 123,354     $ 116,003  
Interest-bearing deposits in other banks     393,927       367,238       518,176       946,330  
Trading securities, at fair value     15,512       15,314       14,469       13,308  
Securities available-for-sale, at fair value     1,191,582       1,174,931       1,013,006       970,430  
Securities held-to-maturity, at amortized cost     41,944       60,933       60,458       74,375  
Federal Home Loan Bank and Federal Reserve Bank stock, at cost     47,232       46,750       58,187       58,187  
Loans held-for-sale     90,011       -       4,200       4,620  
Loans, excluding covered loans     5,218,345       5,298,026       5,088,113       5,104,494  
Covered loans     216,610       230,047       260,502       289,747  
Allowance for loan and covered loan losses     (102,445 )     (116,182 )     (119,462 )     (128,791 )
    Net loans     5,332,510       5,411,891       5,229,153       5,265,450  
OREO, excluding covered OREO     36,487       28,309       33,975       23,863  
Covered OREO     8,729       9,136       23,455       21,594  
FDIC indemnification asset     47,191       58,302       65,609       63,508  
Premises, furniture, and equipment     132,005       133,638       134,977       132,425  
Investment in bank-owned life insurance     206,043       206,572       206,235       205,886  
Goodwill and other intangible assets     281,914       281,981       283,650       283,163  
Accrued interest receivable and other assets     217,642       193,436       204,690       201,032  
    Total assets   $ 8,167,176     $ 8,099,355     $ 7,973,594     $ 8,380,174  
Liabilities and Stockholders' Equity                                
Deposits                                
  Transactional deposits   $ 5,253,658     $ 5,121,261     $ 4,820,058     $ 4,899,216  
  Time deposits     1,495,397       1,506,482       1,659,117       1,727,392  
    Total deposits     6,749,055       6,627,743       6,479,175       6,626,608  
Borrowed funds     183,691       189,524       205,371       386,429  
Senior and subordinated debt     231,171       231,138       252,153       137,751  
Accrued interest payable and other liabilities     69,824       72,398       74,308       77,476  
    Total liabilities     7,233,741       7,120,803       7,011,007       7,228,264  
Preferred stock     -       -       -       191,393  
Common stock     858       858       858       858  
Additional paid-in capital     417,245       414,665       428,001       425,647  
Retained earnings     773,976       823,250       810,487       807,334  
Accumulated other comprehensive loss, net of tax     (9,248 )     (11,867 )     (13,276 )     (11,413 )
Treasury stock, at cost     (249,396 )     (248,354 )     (263,483 )     (261,909 )
    Total stockholders' equity     933,435       978,552       962,587       1,151,910  
    Total liabilities and stockholders' equity   $ 8,167,176     $ 8,099,355     $ 7,973,594     $ 8,380,174  
   
   
Condensed Consolidated Statements of Income  
Unaudited  
(Amounts in thousands, except per share data)  
   
    Quarters Ended  
    September 30,
2012
    June 30,
2012
    September 30,
2011
 
Interest Income                        
  Loans   $ 63,672     $ 61,993     $ 64,085  
  Investment securities     8,058       8,414       8,633  
  Covered loans     3,223       4,473       6,640  
  Federal funds sold and other short-term investments     631       638       817  
    Total interest income     75,584       75,518       80,175  
Interest Expense                        
  Deposits     4,126       4,678       6,654  
  Borrowed funds     507       490       706  
  Senior and subordinated debt     3,691       3,646       2,280  
    Total interest expense     8,324       8,814       9,640  
    Net interest income     67,260       66,704       70,535  
  Provision for loan and covered loan losses     111,791       22,458       20,425  
    Net interest income after provision for loan losses     (44,531 )     44,246       50,110  
Noninterest Income                        
  Service charges on deposit accounts     9,502       8,848       10,215  
  Wealth management fees     5,415       5,394       4,982  
  Other service charges, commissions, and fees     4,187       4,097       4,289  
  Card-based fees     5,246       5,312       4,931  
    Total fee-based revenues     24,350       23,651       24,417  
  Net securities (losses) gains     (217 )     151       449  
  Gain on FDIC-assisted acquisition     3,289       -       -  
  Net trading gains (losses)     685       (575 )     (2,352 )
  Other     1,027       810       2,077  
    Total noninterest income     29,134       24,037       24,591  
Noninterest Expense                        
  Salaries and employee benefits     33,111       29,566       29,182  
  Net OREO expense     3,208       4,124       4,174  
  Net occupancy and equipment expense     8,108       7,513       8,157  
  Professional services     6,665       6,905       7,571  
  Technology and related costs     2,906       2,851       2,709  
  FDIC premiums     1,785       1,659       1,799  
  Other     14,340       8,539       10,584  
    Total noninterest expense     70,123       61,157       64,176  
  (Loss) income before income tax expense     (85,520 )     7,126       10,525  
  Income tax (benefit) expense     (36,993 )     761       1,583  
    Net (loss) income     (48,527 )     6,365       8,942  
  Preferred dividends     -       -       (2,586 )
  Net (loss) income applicable to non-vested restricted shares     715       (76 )     (93 )
    Net (loss) income applicable to common shares   $ (47,812 )   $ 6,289     $ 6,263  
      Diluted earnings per common share   $ (0.65 )   $ 0.09     $ 0.09  
      Dividends declared per common share   $ 0.01     $ 0.01     $ 0.01  
Weighted average diluted common shares outstanding     73,742       73,659       73,361  
Contact:
CONTACT:
Paul F. Clemens
(Investors)
EVP and Chief Financial Officer
(630) 875-7347
paul.clemens@firstmidwest.com

James M. Roolf
(Media)
SVP and Corporate Relations Officer
(630) 875-7533
jim.roolf@firstmidwest.com

First Midwest Bancorp, Inc.
One Pierce Place, Suite 1500
Itasca, Illinois 60143-9768
(630) 875-7450
www.firstmidwest.com
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