DBRS Comments on First Midwest Bancorp 2Q13 Results; Ratings Unchanged at BBB (low); Stable

DBRS, Inc. (DBRS) has today commented on the 2Q13 earnings of First Midwest Bancorp, Inc. (First Midwest or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB (low) with a Stable trend. For the quarter, First Midwest reported net income applicable to common shareholders of $16.2 million, up from $14.6 million and $6.4 million from 1Q13 and 2Q12, respectively. Earnings equated to a 0.79% return on average assets and 6.66% return on average common equity.

DBRS sees First Midwest’s 2Q13 earnings as continued evidence of progress building the Company’s core earnings capacity. Specifically, the Company is looking to build core fee revenues and lower expenses to help offset continued net interest margin (NIM) pressure in the current rate environment. Additionally, First Midwest’s long struggle with asset quality continues to stabilize with losses moderating and nonperforming asset (NPA) levels declining.

Total revenues (adjusted to exclude one-time items) increased modestly to $92.4 million from $91.4 million in the linked quarter reflecting an increase in net interest income partially offset by a decline in non-interest income. As a result of seasonally higher public fund balances, the NIM compressed 7 basis points (bps) to 3.70%. Additionally, lower expenses helped drive the improved earnings for the quarter as controlling expenses remains a vital component of the Company’s plan to improve operating results going forward. Although still higher than many peers, the modest revenue growth and lower expenses resulted in First Midwest’s efficiency ratio improving to 64.27%.

Period-end loans, excluding covered loans, increased 2.2% QoQ. Growth in C&I and residential mortgages was partially offset by a decline in home equity and CRE loans. First Midwest continues to derive the large majority of its funding from deposits; a key rating strength for the Company. In 2Q13, deposits increased a strong 10.4% and the Company’s 77% loan to deposits ratio gives it a strong level of funding flexibility.

While vastly improved, NPAs remain elevated relative to historic, pre-crisis levels and have stayed roughly at this manageable level following the Company’s 4Q12 bulk loan sale. NPAs, excluding covered loans, decreased modestly by 1.9% from 1Q13 to $140.8 million and represented 2.64% of loans plus OREO. Meanwhile, net charge-offs (excluding covered loans) increased 7.1% QoQ and 3 bps as a percentage of average loans to 0.57%. Still, NCO levels are much improved from 1.55% a year ago. The provision for loan losses was relatively stable at $5.8 million, which maintained the allowance for credit losses at a sufficient 93% of non-accrual loans, excluding covered loans. Positively, performing potential problem loans (special mention and substandard) declined 5% from 1Q13 and 42% from 2Q12.

Capital remains solid with levels basically in line with the previous quarter. At June 30, 2013, First Midwest reported a tangible common equity ratio of 8.62%, down just 4 bps from the prior quarter, and a Tier 1 common ratio of 9.69%, up 7 bps from the prior quarter. Reflecting its improving prospects and capital position, the Company raised its common stock dividend to $0.04 per share.

Notes:
All figures are in in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]