DBRS Comments on First Midwest Bancorp 3Q13 Results; Ratings Unchanged at BBB (low); Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $28.9 million, up substantially from earnings of $16.0 million and a loss of $47.8 million for 2Q13 and 3Q12, respectively. Earnings for this quarter equated to a 1.38% return on average assets and 11.66% return on average common equity.

First Midwest’s 3Q13 earnings benefited from one-time items, improving asset quality , as well as organic growth, evidencing continued progress in building the Company’s core earnings capacity. The major one-time items this quarter collectively added $11.4 million to the quarter’s earnings. These items included a $34.2 million gain from the sale of a $4.0 million equity investment in Textura Corporation, a $7.8 million gain following a termination of a forward borrowing commitment with the Federal Home Loan Bank of Chicago partially offset by a $13.3 million charge for modifying a bank-owned life insurance (BOLI) investment. In addition to the benefits from the non-core items, First Midwest’s DBRS-calculated adjusted income (excluding non-core items) before provision and taxes (IBPT) increased 6% QoQ driven by revenue growth. 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 3.6% to $95.4 million QoQ reflecting an increase in both noninterest and net interest income. Largely as a result of a decline in yield on new and renewing loans, the net interest margin (NIM) compressed 7 bps to 3.63%. However, loan growth offset the decline in the NIM and net interest income increased modestly QoQ. Meanwhile, higher deposit service charges and an increase in mortgage banking income drove the increase in fee revenue. Excluding one-time items, expenses were up incrementally QoQ and controlling expenses remains a vital component of the Company’s plan to improve operating results going forward. First Midwest’s reported 3Q13 efficiency ratio improved 157 bps QoQ to 62.7%.

Period-end loans, excluding covered loans, increased 3.1% QoQ driven primarily by growth in C&I, agricultural, and CRE loans. First Midwest continues to derive the large majority of its funding from deposits; a key rating strength for the Company. In 3Q13, deposits increased 2% and the Company’s 78% loan to deposits ratio gives it a strong level of funding flexibility.

NPAs are showing significant improvement although remaining above pre-crisis levels. NPAs, excluding covered loans, decreased by 5.0% from the end of 2Q13 to $133.8 million and represented 2.44% of loans plus OREO. Meanwhile, net charge-offs (excluding covered loans) decreased 12.2% QoQ and 10 bps as a percentage of average loans to 0.47%. Reflecting the improving asset quality, the QoQ provision for loan losses was down 18% to $4.8 million, which maintained the allowance for credit losses at a sufficient 118% of non-accrual loans, excluding covered loans. Positively, performing potential problem loans (special mention and substandard) declined 3.3% from 2Q13 and 13.3% from 3Q12.

Capital remains solid. Specifically, as of September 30, 2013, First Midwest reported a tangible common equity ratio of 8.61%, roughly in-line with the prior quarter, and a Tier 1 common ratio of 10.23%, up 54 bps from the prior quarter. The increase in Tier I capital reflected an increase in allowable deferred tax assets as well as earnings retention partially offset by loan growth and an increased common stock dividend.

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

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