First Midwest Bancorp, Inc. Announces 2020 Third Quarter Results

CHICAGO, Oct. 20, 2020 (GLOBE NEWSWIRE) — First Midwest Bancorp, Inc. (the “Company” or “First Midwest”), the holding company of First Midwest Bank (the “Bank”), today reported results of operations and financial condition for the third quarter of 2020. Net income applicable to common shares for the third quarter of 2020 was $23.4 million, or $0.21 per share, compared to $17.8 million, or $0.16 per share, for the second quarter of 2020, and $54.1 million, or $0.49 per share, for the third quarter of 2019.
Results for the third quarter of 2020 were impacted by retail and balance sheet optimization strategies as well as securities gains. For the first nine months of 2020, the COVID-19 pandemic (the “pandemic”) and governmental responses to it impacted performance for 2020, resulting in higher provision for loan losses, as well as lower net interest and noninterest income. Reported results for all periods were impacted by acquisition and integration related expenses. For additional detail on these adjustments, see the “Non-GAAP Financial Information” section presented later in this release.SELECT THIRD QUARTER VS. SECOND QUARTER HIGHLIGHTSGenerated EPS of $0.21, compared to $0.16 for the prior quarter, impacted by:$0.12 per share, or $18 million, for retail and balance sheet optimization costs in the third quarter of 2020.$0.07 per share, or $10 million, for the third quarter of 2020 and $0.17 per share, or $25 million, for the prior quarter, for the estimated impact of the pandemic on the allowance for credit losses (“ACL”).$0.01 per share, or $1 million, of other pandemic related expenses compared to $0.02 in the prior quarter.Reported pre-tax, pre-provision earnings, adjusted⁽¹⁾of $71 million, up 13% from the prior quarter due primarily to:Higher fee-based revenues of $38 million, up 25% from the prior quarter, reflective of record mortgage banking income and higher transaction volumes.Controlled noninterest expense, adjusted⁽¹⁾, to $112 million, down 3% from the prior quarter.Produced net interest income of $143 million at a net margin of 2.95%, down 18 basis points from the prior quarter, reflective of lower interest rates and the full quarter impact of Paycheck Protection Program (“PPP”) loans.Credit performance stable with risk rating migration as expected:ACL of 1.68% of total loans, 1.83% excluding PPP loans, consistent with 1.80% as of June 30, 2020.Non-performing assets (“NPAs”) to total loans plus foreclosed assets of 1.11%, consistent with 1.09% at June 30, 2020.Net loan charge-offs (“NCOs”) of 0.26% of average loans excluding purchased credit deteriorated (“PCD”) and PPP loans, consistent with 0.27% for the prior quarter.Adverse rated performing loan migration to $707 million, increasing from $450 million in the prior quarter, concentrated in elevated risk sectors.Total loans of $15 billion, down 2% from the prior quarter reflecting lower customer demand and higher customer liquidity levels.Increased total average deposits to $16 billion, up 3% from the prior quarter reflecting higher customer balances resulting from PPP funds, other government stimuli, and seasonal inflows of municipal deposits.
“Operating performance for the quarter benefited from improved fee-based revenues and tightened cost management,” said Michael L. Scudder, Chairman of the Board and Chief Executive Officer of the Company. “Encouragingly, business activity showed signs of recovery after widespread shutdowns, even as the lag in demand and low interest rates weighed on the quarter’s production. Against a backdrop of uncertainty, we prudently maintained our credit reserves, strengthened capital and took steps to better position our balance sheet for today’s lower rate environment. We also took steps to further optimize our retail distribution to better align with client preferences and needs. Combined, these actions position our Company for both improved performance and future investment.”Mr. Scudder concluded, “As we look ahead, our collective drive remains centered on helping our clients achieve financial success. While times such as these present challenges, they also provide opportunities to leverage our financial strength to serve the needs of our clients, grow and enhance the value of our franchise.”RETAIL OPTIMIZATIONFirst Midwest continues its commitment to best meet the evolving needs and preferences of its clients. During the third quarter of 2020, the Company initiated certain actions that include optimizing its retail branch network and delivery model through the consolidation of 17 branches, or approximately 15% of its branch network, in early 2021. These actions resulted in pre-tax costs of $18 million associated with valuation adjustments related to locations identified for closure, modernization of our ATM network, and advisory fees and are recorded within optimization costs within noninterest expense.BALANCE SHEET OPTIMIZATIONDuring the third quarter of 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.1 billion, as well as reduced a portion of the borrowed funds related to the terminated swaps. At the same time, the Company liquidated $160 million of securities. As a result of these transactions, $14 million of pre-tax securities gains was fully offset by $14 million of pre-tax loss on swap terminations, with both items recorded within noninterest income. These actions are expected to positively impact future net interest income along with reducing high levels of excess liquidity as the remaining borrowed funds hedged by the terminated swaps mature in the fourth quarter of 2020.⁽¹⁾ This metric is a non-GAAP financial measure. For details on the calculation of this metric, see the sections titled “Non-GAAP Financial Information” and “Non-GAAP Reconciliations” presented later in this release.OPERATING PERFORMANCENet Interest Income and Margin Analysis
(Dollar amounts in thousands)
Net interest income for the third quarter of 2020 was down 1.7% from the second quarter of 2020 and 5.3% from the third quarter of 2019. The decrease in net interest income compared to both prior periods resulted primarily from lower interest rates, partially offset by lower costs of funds and an increase in interest income and fees on PPP loans. Compared to the second quarter of 2020, net interest income was also impacted by a decrease in average loans, excluding PPP loans, and securities, partially offset by the number of days in the quarter. Net interest income compared to the third quarter of 2019 was impacted by growth in loans and securities as well as the acquisition of interest-earning assets from the Park transaction in the first quarter of 2020.
Acquired loan accretion contributed $8.0 million, $7.0 million, and $9.2 million to net interest income for the third quarter of 2020, second quarter of 2020, and third quarter of 2019, respectively.Tax-equivalent net interest margin for the current quarter was 2.95%, decreasing 18 and 87 basis points from the second quarter of 2020 and third quarter of 2019, respectively. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 2.79%, down 19 and 80 basis points from the second quarter of 2020 and third quarter of 2019, respectively. Compared to both prior periods, tax-equivalent net interest margin decreased as a result of lower interest rates on loans and securities, lower yields on PPP loans, as well as a higher balance of other interest-earning assets due to higher demand deposits as a result of PPP loan funds and other government stimuli, partially offset by lower cost of funds. In addition, tax-equivalent net interest margin compared to the second quarter of 2020 was impacted by higher interest rate swap expense on borrowed funds.For the third quarter of 2020, total average interest-earning assets rose by $653.6 million and $3.6 billion from the second quarter of 2020 and third quarter of 2019, respectively. The increase compared to both prior periods resulted primarily from PPP loans and a higher balance of other interest-earning assets. In addition, the increase in average interest-earning assets compared to the third quarter of 2019 was impacted by the assets acquired in the Park Bank transaction, loan growth, and securities purchases.Total average funding sources for the third quarter of 2020 increased by $467.8 million and $3.4 billion from the second quarter of 2020 and third quarter of 2019, respectively. The increase compared to both prior periods was driven primarily by deposit growth due to higher customer balances resulting from PPP funds and other government stimuli. In addition, the increase compared to the second quarter of 2020 was impacted by seasonal inflows of municipal deposits and compared to the third quarter of 2019 was impacted by deposits assumed in the Park Bank transaction and a higher balance of FHLB advances.Noninterest Income Analysis
(Dollar amounts in thousands)N/M – Not meaningful.Total noninterest income of $40.6 million was up 23.0% from the second quarter of 2020 and down 5.5% from the third quarter of 2019. Compared to both prior periods, the increase in wealth management fees was driven primarily by continued sales of fiduciary and investment advisory services to existing customers and a recovering market environment. The increase in service charges on deposit accounts, net card-based fees, and other service charges, commissions, and fees from the second quarter of 2020 was due to higher transaction volumes, whereas the decrease from the third quarter of 2019 resulted from the impact of lower transaction volumes as a result of the pandemic.Record mortgage banking income for the third quarter of 2020 resulted from sales of $251.8 million of 1-4 family mortgage loans in the secondary market, compared to $168.7 million and $141.0 million in the second quarter of 2020 and third quarter of 2019, respectively.Capital market products income decreased compared to the third quarter of 2019 as a result of lower levels of sales to corporate clients in light of market conditions.During the third quarter of 2020, the Company terminated longer term interest rate swaps with a notional amount of $1.1 billion as a result of excess liquidity and in response to current market conditions. At the same time, the Company liquidated $160 million of securities.As a result of these transactions, $14 million of pre-tax securities gains was fully offset by $14 million of pre-tax loss on swap terminations.Noninterest Expense Analysis
(Dollar amounts in thousands)
Total noninterest expense increased 8.9% from the second quarter of 2020 and 20.9% from the third quarter of 2019. Noninterest expense for all periods presented was impacted by acquisition and integration related expenses. The third quarter of 2020 was impacted by optimization costs associated with retail optimization strategies, and the third quarter of 2019 was impacted by costs related to our Delivering Excellence initiative. Excluding these items, noninterest expense for the third quarter of 2020 was $111.8 million, down 2.8% from the second quarter of 2020 and up 6.7% from the third quarter of 2019. Overall, noninterest expense, adjusted, to average assets, excluding PPP loans decreased to 2.19% for the third quarter of 2020, down 6% and 7% from the second quarter of 2020 and third quarter of 2019, respectively.
Operating costs associated with the Park Bank transaction completed in the first quarter of 2020 contributed to the increase in noninterest expense compared to the third quarter of 2019. These costs primarily occurred in salaries and employee benefits, net occupancy and equipment expense, professional services, technology and related costs, and other expenses.Compared to the second quarter of 2020, salaries and employee benefits increased primarily due to lower levels of deferred loan salaries. The increase from the third quarter of 2019 was also impacted by merit increases and higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market, partially offset by lower incentive compensation expenses. Occupancy and equipment costs for the second quarter of 2020 were elevated by expenses resulting from the pandemic. Technology and related costs compared to the third quarter of 2019 was impacted by investments in technology, including the origination of PPP loans. Professional services expenses were lower compared to both prior periods due to elevated prior period expenses associated with process enhancements and organizational growth. Other expenses for the second quarter of 2020 was impacted by a valuation adjustment on a foreclosed asset.Optimization costs of $18.4 million for the third quarter of 2020 primarily include valuation adjustments related to locations identified for closure, modernization of our ATM network, and advisory fees.Acquisition and integration related expenses for the third quarter of 2020 and second quarter of 2020 resulted primarily from the acquisition of Park Bank. In addition, acquisition and integration related expenses for the second quarter of 2020 and third quarter of 2019 resulted from the acquisition of Bridgeview Bank.LOAN PORTFOLIO AND ASSET QUALITYLoan Portfolio Composition
(Dollar amounts in thousands)N/M – Not meaningful.Total loans includes loans originated under the PPP loan program in the second and third quarters of 2020, which totaled $1.2 billion as of September 30, 2020. Excluding these loans, total loans decreased 2.2% from June 30, 2020. Excluding PPP loans and the loans acquired in the Park Bank acquisition in the first quarter of 2020, total loans decreased 0.8% from September 30, 2019. Compared to both prior periods, corporate loans, excluding PPP loans were impacted by lower production and line usage and higher paydowns due to current economic conditions as a result of the ongoing pandemic.Growth in consumer loans compared to both prior periods resulted primarily from strong production and purchases of 1-4 family mortgages, which more than offset higher prepayments. In addition, compared to the third quarter of 2019, purchases of home equity loans contributed to the increase.Allowance for Credit Losses
(Dollar amounts in thousands)
The Company adopted CECL on January 1, 2020, which impacted both the level of ACL as well as other asset quality metrics due to the change in accounting for acquired PCD loans. In addition, the Company participated in the PPP program, which resulted in $1.2 billion of loans originated in the second and third quarters of 2020 that are expected to be forgiven by the Small Business Administration (“SBA”). As a result, certain metrics are presented excluding PCD and PPP loans to provide comparability to prior periods.
The ACL was $246.9 million or 1.68% of total loans as of September 30, 2020, consistent with June 30, 2020 and increasing $136.6 million compared to September 30, 2019. Excluding the impact of PPP loans, ACL to total loans was 1.83% as of September 30, 2020, consistent with 1.80% and up from 0.86% as of June 30, 2020 and September 30, 2019, respectively. Compared to September 30, 2019, the increase in ACL is a result of the adoption of the CECL accounting standard, the Park Bank acquisition, as well as additional ACL established as a result of the pandemic.Asset Quality
(Dollar amounts in thousands)
NPAs represented 1.11% of total loans and foreclosed assets at September 30, 2020 compared to 1.09% and 0.85% at June 30, 2020 and September 30, 2019, respectively. Excluding the impact of PCD and PPP loans, NPAs to total loans plus foreclosed assets was 0.93% at September 30, 2020, compared to 0.87% at June 30, 2020 and 0.85% at September 30, 2019, reflective of normal fluctuations that occur on a quarterly basis.
Adverse rated performing loans increased to $707 million for the third quarter of 2020 from $450 million and $357 million at June 30, 2020 and September 30, 2019, respectively. This increase is as a result of the pandemic’s impact on certain borrowers primarily focused in elevated risk sectors that the Company has determined require additional monitoring. These loans exhibit potential or well-defined weaknesses but continue to accrue interest because they are well secured, and collection of principal and interest is expected.Charge-Off Data
(Dollar amounts in thousands)
NCOs to average loans, annualized was 0.42%, compared to 0.36% for the second quarter of 2020 and 0.29% for the third quarter of 2019. Excluding charge-offs on PCD and the impact of PPP loans on this metric, NCOs to average loans was 0.26% for the third quarter of 2020, down from 0.27% for the second quarter of 2020 and 0.29% for the third quarter of 2019.
DEPOSIT PORTFOLIODeposit Composition
(Dollar amounts in thousands)Total average deposits were $15.8 billion for the third quarter of 2020, up 3.2% from the second quarter of 2020 and 17.5% from the third quarter of 2019. Compared to both prior periods, the rise in total average deposits was impacted by higher customer balances resulting from PPP funds and other government stimuli. In addition, the increase in total average deposits compared to the second quarter of 2020 was impacted by seasonal inflows of municipal deposits and compared to the third quarter of 2019 was impacted by the deposits assumed in the Park Bank transaction in March 2020.CAPITAL MANAGEMENTCapital Ratios
Total and Tier 1 capital to risk-weighted assets ratios increased compared to all prior periods primarily as a result of retained earnings and the mix of risk-weighted assets. Compared to September 30, 2019 total and Tier 1 capital ratios also benefited from the issuance of preferred stock. In addition, compared to September 30, 2019, all capital ratios were impacted by the approximately 50 basis point decrease due to the Park Bank acquisition, 15 basis point decrease due to stock repurchases, and the impact of loan growth and securities purchases on risk-weighted and average assets. The Company elected the five year CECL transition relief for regulatory capital, which retained approximately 30 basis points of CET1 and tier 1 capital at September 30, 2020.
The Board of Directors approved a quarterly cash dividend of $0.14 per common share during the third quarter of 2020, which is consistent with the second quarter of 2020 and the third quarter of 2019. This dividend represents the 151^st consecutive cash dividend paid by the Company since its inception in 1983.Conference CallA conference call to discuss the Company’s results, outlook, and related matters will be held on Wednesday, October 21, 2020 at 11 A.M. (ET). Members of the public who would like to listen to the conference call should dial (877) 507-0639 (U.S. domestic) or (412) 317-6003 (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, investor.firstmidwest.com. 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. 10148585 beginning one hour after completion of the live call until 9:00 A.M. (ET) on January 20, 2021. 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.Press Release, Presentation Materials, and Additional Information Available on WebsiteThis press release, the presentation materials to be discussed during the conference call, and the accompanying unaudited Selected Financial Information are available through the Investor Relations section of First Midwest’s website at investor.firstmidwest.com.Forward-Looking StatementsThis press release, as well as any oral statements made by or on behalf of First Midwest, may contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of words such as “may,” “might,” “will,” “would,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “outlook,” “predict,” “project,” “probable,” “potential,” “possible,” “target,” “continue,” “look forward,” or “assume” and words of similar import. Forward-looking statements are not historical facts or guarantees of future performance but instead express only management’s beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management’s control. It is possible that actual results and events may differ, possibly materially, from the anticipated results or events indicated in these forward-looking statements. First Midwest cautions you not to place undue reliance on these statements. Forward-looking statements speak only as of the date made, and First Midwest undertakes no obligation to update any forward-looking statements.Forward-looking statements may be deemed to include, among other things, statements relating to First Midwest’s future financial performance, including the related outlook for 2020, the performance of First Midwest’s loan or securities portfolio, the expected amount of future credit reserves or charge-offs, corporate strategies or objectives, including the impact of certain actions and initiatives, anticipated trends in First Midwest’s business, regulatory developments, acquisition transactions, estimated synergies, cost savings and financial benefits of announced and completed transactions, growth strategies, including possible future acquisitions, and the continued or potential effects of the pandemic on our business, financial condition, liquidity, loans, asset quality and results of operations. These statements are subject to certain risks, uncertainties and assumptions, including the duration, extent and severity of the pandemic, including the continued effects on our business, operations and employees, as well as on our customers and service providers, and on economies and markets more generally and other risks, uncertainties and assumptions that are discussed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in First Midwest’s Annual Report on Form 10-K for the year ended December 31, 2019, and in First Midwest’s subsequent filings made with the Securities and Exchange Commission (“SEC”). These risks and uncertainties are not exhaustive, and other sections of these reports describe additional factors that could adversely impact First Midwest’s business and financial performance.Non-GAAP Financial InformationThe Company’s accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company’s operating performance. These non-GAAP financial measures include EPS, adjusted, the efficiency ratio, return on average assets, adjusted, tax-equivalent net interest income (including its individual components), tax-equivalent net interest margin, tax-equivalent net interest margin, adjusted, noninterest expense, adjusted, tangible common equity to tangible assets, tangible common equity, excluding AOCI, to tangible assets, tangible common equity to risk-weighted assets, return on average common equity, adjusted, return on average tangible common equity, return on average tangible common equity, adjusted, non-accrual loans, excluding PCD loans, 30-89 days past due loans, excluding PCD loans, non-accrual loans to total loans, excluding PPP loans, non-accrual loans to total loans, excluding PCD and PPP loans, NPLs to total loans, excluding PPP loans, NPLs to total loans, excluding PCD and PPP loans, NPAs to total loans plus foreclosed assets, excluding PPP loans, NPAs to total loans plus foreclosed assets, excluding PCD and PPP loans, NCOs, excluding PCD loans, NCOs to average loans, excluding PPP loans, NCOs to average loans, excluding PCD and PPP loans, and pre-tax, pre-provision earnings, adjusted.The Company presents EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity, all adjusted for certain significant transactions. These transactions include optimization costs (third quarter of 2020), swap termination costs (third quarter of 2020) acquisition and integration related expenses associated with completed and pending acquisitions (all periods), net securities gains (losses) (third and first quarters of 2020), and Delivering Excellence implementation costs (all periods in 2019). Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, return on average common equity, and return on average tangible common equity may be useful in assessing the Company’s underlying operational performance since these transactions do not pertain to its core business operations and their exclusion may facilitate better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics may be useful to the Company, as well as analysts and investors, since these expenses can vary significantly based on the size, type, and structure of each acquisition. Additionally, management believes excluding these transactions from these metrics may enhance comparability for peer comparison purposes.Income tax expense, provision for loan losses, and the certain significant transactions listed above are excluded from the calculation of pre-tax, pre-provision earnings, adjusted due to the fluctuation in income before income tax and the level of provision for loan losses required based on the estimated impact of the pandemic on the ACL. Management believes pre-tax, pre-provision earnings, adjusted may be useful in assessing the Company’s underlying operational performance and their exclusion may facilitate better comparability between periods and for peer comparison purposes.The Company presents noninterest expense, adjusted, which excludes optimization costs, acquisition and integration related expenses, and Delivering Excellence implementation costs. Management believes that excluding these items from noninterest expense may be useful in assessing the Company’s underlying operational performance as these items either do not pertain to its core business operations or their exclusion may facilitate better comparability between periods and for peer comparison purposes.The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. In addition, management believes that presenting tax-equivalent net interest margin, adjusted, may enhance comparability for peer comparison purposes and is useful to the Company, as well as analysts and investors, since acquired loan accretion income may fluctuate based on the size of each acquisition, as well as from period to period.In management’s view, tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company’s use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution’s capital strength since they eliminate intangible assets from stockholders’ equity and retain the effect of accumulated other comprehensive loss in stockholders’ equity.The Company presents non-accrual loans, 30-89 days past due loans, non-accrual loans to total loans, NPLs to total loans, NPAs to total loans plus foreclosed assets, NCOs, and NCOs to average loans, all excluding PCD and/or PPP loans. Management believes excluding PCD and PPP loans is useful as it facilitates better comparability between periods. Prior to the adoption of CECL on January 1, 2020, PCI loans with an accretable yield were considered current and were not included in past due and non-accrual loan totals and the portion of PCI loans deemed to be uncollectible was recorded as a reduction of the credit-related acquisition adjustment, which was netted within loans. Subsequent to adoption, PCD loans, including those previously classified as PCI, are included in past due and non-accrual loan totals and an ACL on PCD loans is established as of the acquisition date and the PCD loans are no longer recorded net of a credit-related acquisition adjustment. PCD loans deemed to be uncollectible are recorded as a charge-off through the ACL. The Company began originating PPP loans during the second quarter of 2020 and the loans are expected to be forgiven by the SBA if the applicable criteria are met. Additionally, management believes excluding PCD and PPP loans from these metrics may enhance comparability for peer comparison purposes.Although intended to enhance investors’ understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations in the “Non-GAAP Reconciliations” section for details on the calculation of these measures to the extent presented herein.About First MidwestFirst Midwest (NASDAQ: FMBI) is a relationship-focused financial institution and one of the largest independent publicly traded bank holding companies based on assets headquartered in Chicago and the Midwest, with approximately $21 billion of assets and an additional $13 billion of assets under management. First Midwest Bank and First Midwest’s other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust and private banking products and services. First Midwest operates branches and other locations throughout metropolitan Chicago, southeast Wisconsin, northwest Indiana, eastern Iowa and other markets in the Midwest. Visit First Midwest at www.firstmidwest.com.CONTACTS:Accompanying Unaudited Selected Financial Information