First Midwest Bancorp, Inc. Announces 2018 First Quarter Results

ITASCA, Ill., April 24, 2018 (GLOBE NEWSWIRE) -- First Midwest Bancorp, Inc. (the "Company" or "First Midwest") (NASDAQ NGS:FMBI), the holding company of First Midwest Bank (the "Bank"), today reported results of operations and financial condition for the first quarter of 2018. Net income for the first quarter of 2018 was $33.5 million, or $0.33 per share, compared to $2.3 million, or $0.02 per share, for the fourth quarter of 2017, and $22.9 million, or $0.23 per share, for the first quarter of 2017.

Reported results for the fourth quarter of 2017 were impacted by the revaluation of the Company's deferred tax assets ("DTAs") and various actions taken by the Company in light of federal income tax reform legislation. For the first quarter of 2017, reported results 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.

Earnings per share, adjusted⁽¹⁾ was $0.33 for the first quarter of 2018, compared to $0.34 for both the fourth and the first quarters of 2017.

SELECT FIRST QUARTER HIGHLIGHTS

• Increased earnings per share to $0.33, up from $0.02 and $0.23 for the fourth and first quarters of 2017, respectively.
  • Generated earnings per share, adjusted⁽¹⁾ of $0.33, down 3% from the fourth and first quarters of 2017.
  • Higher provision expense impacted earnings per share by $0.05 compared to the fourth quarter of 2017, reflective of loan growth and remediation costs specific to two isolated credits.
• Grew loans to $11 billion, up 9% annualized from December 31, 2017 and 6% from March 31, 2017.
• Maintained total average deposits at $11 billion, consistent with the fourth quarter of 2017 and up 3% from the first quarter of 2017; core deposit mix of 84%, consistent with both prior periods.
• Generated tax-equivalent net interest margin⁽¹⁾ of 3.80%; reflects declining loan accretion and a 3 basis point reduction due to federal income tax reform; excluding these items, underlying margin expanded 3 basis points compared to the fourth quarter of 2017 and up 16 basis points from the first quarter of 2017.
• Lower noninterest income by 11% compared to the first quarter of 2017; up 6% from the first quarter of 2017, excluding the $4 million reclassification impact of recently adopted accounting guidance⁽²⁾, the impact of the Durbin Amendment effective in the third quarter of 2017, and net securities losses⁽¹⁾.
• Controlled noninterest expenses, reporting an efficiency ratio⁽¹⁾ of 61%, consistent with the fourth and first quarters of 2017.
• Increased dividends per share to $0.11, up 10% and 22% from the fourth and first quarters of 2017, respectively.

"We had a solid start to the year," said Michael L. Scudder, Chairman of the Board, President, and Chief Executive Officer of the Company. "Operating performance for the quarter benefitted from strong earning asset growth and stable core funding and margins, combined with lower corporate income taxes. At the same time, comparatively higher credit provisioning weighed on the quarter’s results, reflective of both the pace of loan growth and isolated credit remediation."

Mr. Scudder concluded, "As we look ahead, progress continues on our "Delivering Excellence" initiative, our Company-wide effort to better align customer needs, technology, and processes with client experiences. These same efforts will also enhance operational efficiency and further improve the scalability of our platform. Continued successful execution combined with the strength of our capital and core funding will leave us well-positioned for further business expansion and improved operating performance." 

OPERATING PERFORMANCE 

Net interest income for the first quarter of 2018 was consistent with the fourth quarter of 2017 and increased 2.9% compared to the first quarter of 2017. Compared to the fourth quarter of 2017, net interest income benefited from the impact of higher interest rates and growth in loans and securities, offset by fewer days in the quarter, lower acquired loan accretion, and higher cost of funds. The rise in net interest income compared to the first quarter of 2017 was driven primarily by higher interest rates and loan growth, partially offset by lower acquired loan accretion and higher cost of funds.

Acquired loan accretion contributed $5.1 million, $6.2 million, and $11.3 million to net interest income for the first quarter of 2018, the fourth quarter of 2017, and the first quarter of 2017, respectively.

Tax-equivalent net interest margin for the current quarter was 3.80%, decreasing 4 basis points from the fourth quarter of 2017 and 9 basis points from the first quarter of 2017. Compared to both prior periods, tax-equivalent net interest margin was negatively impacted by a 3 basis points reduction in the tax-equivalent adjustment as a result of lower federal income tax rates. In addition, compared to the fourth quarter of 2017, the decrease in tax-equivalent net interest margin was impacted by a 4 basis point reduction in acquired loan accretion and higher cost of funds, mostly offset by the benefit of higher interest rates. The decrease in tax-equivalent net interest margin compared to the first quarter of 2017 was due to a 22 basis point decrease in acquired loan accretion partially offset by the positive impact of higher interest rates.

For the first quarter of 2018, total average interest-earning assets rose by $210.5 million from the fourth quarter of 2017 and $539.7 million from the first quarter of 2017. The increase compared to both prior periods resulted primarily from loan growth, which was partially offset by a reduction in other interest-earning assets. In addition, security purchases during the first quarter of 2018 contributed to the growth in total average interest-earning assets compared to the fourth quarter of 2017. 

Total average funding sources for the first quarter of 2018 increased by $148.8 million from the fourth quarter of 2017 and $440.7 million from the first quarter of 2017. The increase compared to both prior periods resulted from an increase in FHLB advances and time deposits. 

N/M – Not meaningful. 

Total noninterest income of $35.5 million was up 1.8% from the fourth quarter of 2017 and down 11.1% compared to the first quarter of 2017. In the first quarter of 2018, the Company adopted accounting guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the first quarter of 2018 versus a gross basis within noninterest expense for the prior periods. In addition, Durbin became effective for the Company in the third quarter of 2017. Excluding net securities losses, the accounting reclassification, and Durbin, noninterest income was $39.2 million, down 2.7% from the fourth quarter of 2017 and up 5.8% from the first quarter of 2017.

The decrease in noninterest income compared to the fourth quarter of 2017 was impacted by a normal seasonal decline in service charges on deposit accounts and card-based fees. Capital market products income decreased compared to the fourth quarter of 2017, which fluctuates from quarter to quarter based on the size and frequency of sales to commercial clients.

Net card-based fees were up 8.4% compared to the first quarter of 2017, excluding the accounting reclassification and Durbin, due to higher transaction volumes. Compared to the first quarter of 2017, the increase in wealth management fees was driven primarily by the full quarter impact of customers acquired in the Premier Asset Management LLC ("Premier") transaction and organic growth. The decline in merchant servicing fees from the first quarter of 2017 reflected lower customer volumes, substantially offset by the decline in merchant card expense.

Mortgage banking income for the first quarter of 2018 resulted from sales of $63.8 million of 1-4 family mortgage loans in the secondary market, compared to $66.5 million in the fourth quarter of 2017 and $54.6 million in the first quarter of 2017. In addition, mortgage banking income for the first quarter of 2018 was positively impacted by changes in the fair value of mortgage servicing rights, which fluctuate from quarter to quarter.

Net securities losses of $5.4 million were recognized during the fourth quarter of 2017 in connection with securities portfolio repositioning in light of federal income tax reform.

Total noninterest expense decreased by 6.6% compared to the fourth quarter of  2017 and 18.1% compared to the first quarter of 2017. In the first quarter of 2018, the Company adopted accounting guidance which impacted how cardholder and merchant card expenses are presented within noninterest income on a prospective basis. As a result, these expenses are presented on a net basis against the related noninterest income for the first quarter of 2018 versus a gross basis within noninterest expense for the prior periods. In addition, the fourth quarter of 2017 was impacted by a special bonus and charitable contribution in connection with federal income tax reform and the first quarter of 2017 was impacted by acquisition and integration related expenses that resulted from the acquisition of Standard Bancshares, Inc. ("Standard"). Noninterest expense, adjusted, excluding the accounting reclassification, for the first quarter of 2018 was $99.2 million, consistent with the fourth and first quarters of 2017.

Compared to the fourth quarter of 2017, the decreases in salaries and wages and advertising and promotions expense were driven mainly by a special bonus and charitable contribution made during the fourth quarter of 2017. Net occupancy and equipment expense increased compared to the fourth quarter of 2017 primarily as a result of higher costs related to winter weather conditions. The increase in net OREO expense resulted from net losses on sales of OREO properties compared to net gains on sales in the fourth quarter of 2017, partially offset by a decrease in operating expenses.

The increase in salaries and wages compared to the first quarter of 2017 was driven primarily by merit increases and organizational growth. Compared to the first quarter of 2017, net occupancy and equipment expenses increased as a result of higher costs related to winter weather conditions and the timing of expenses related to the Company's planned corporate headquarters relocation. Professional services expense declined compared to the first quarter of 2017 due to lower loan remediation expenses. Compared to the first quarter of 2017, the rise in advertising and promotions expense resulted from the timing of certain advertising costs. Net OREO expense decreased compared to the first quarter of 2017 as a result of lower levels of operating expenses, losses on sales, and valuation adjustments.

INCOME TAXES

The Company's effective tax rate for the first quarter of 2018 was 22.6%, compared to 94.7% for the fourth quarter of 2017 and 32.0% for the first quarter of 2017. The decrease in the effective tax rate from both prior periods was driven primarily by the reduction in the federal income tax rate from 35% to 21% which became effective in the first quarter of 2018 as a result of federal income tax reform. In addition, the first quarter of 2018 was impacted by a $1.0 million income tax benefit related to employee share-based payments and the fourth quarter of 2017 was impacted by the downward revaluation of DTAs due to federal income tax reform.

LOAN PORTFOLIO AND ASSET QUALITY 

Total loans of $10.7 billion increased by 9.3%, annualized from December 31, 2017 and 6.2% from March 31, 2017. Compared to both prior periods, growth in commercial and industrial loans, primarily within our sector-based lending businesses, multi-family, and construction loans drove the rise in total corporate loans. 

Growth in consumer loans compared to both prior periods benefited from the impact of purchases of shorter-duration home equity loans and organic production. Compared to March 31, 2017, growth in consumer loans also benefited from certain purchases of 1-4 family mortgages and installment loans.

Total non-performing assets represented 0.92% of total loans and OREO at March 31, 2018, up from 0.89% and 0.87% at December 31, 2017 and March 31, 2017, respectively, reflective of normal fluctuations that can occur on a quarterly basis.

The allowance for credit losses to total loans was 0.90% at March 31, 2018, compared to 0.93% at December 31, 2017 and consistent with March 31, 2017.

Net loan charge-offs to average loans, annualized were 0.62%, up from 0.27% and 0.12% for the fourth and first quarters of 2017, respectively. The increase in net loan charge-offs compared to both prior periods resulted largely from expected losses on two corporate relationships based upon circumstances unique to these borrowers. Included within net charge-offs for the first quarter of 2017 were $3.4 million in recoveries which related to three corporate relationships that were charged-off in prior periods.

DEPOSIT PORTFOLIO

Average core deposits of $9.3 billion for the first quarter of 2018 decreased by 2.8% from the fourth quarter of 2017 and increased 1.0% compared to the first quarter of 2017. The decrease in average core deposits compared to the fourth quarter of 2017 resulted primarily from the normal seasonal decline in commercial and municipal deposits. Compared to the first quarter of 2017, the rise in average core deposits was driven by organic growth. The increase in average time deposits compared to both prior periods was primarily driven by the continued success of promotions started in 2017.

CAPITAL MANAGEMENT

Overall, the Company's regulatory capital ratios decreased compared to December 31, 2017, due primarily to the impact of loan growth on risk-weighted assets and the nearly 10 basis point impact of the phase-in of certain provisions related to regulatory capital ratio calculations, substantially offset by an increase in retained earnings. Compared to March 31, 2017, the Company's regulatory capital ratios benefited from the full-year impact of retained earnings and certain actions taken by management in the fourth quarter of 2017 to sell all of its $46 million in trust-preferred collateralized debt obligations, partially offset by loan growth and the phase-in of certain provisions.

The Board of Directors approved a quarterly cash dividend of $0.11 per common share during the first quarter of 2018, which is a 10% increase from the fourth quarter of 2017 and will represent the 141^st consecutive cash dividend paid by the Company since its inception in 1983.

Conference Call

A conference call to discuss the Company's results, outlook, and related matters will be held on Wednesday, April 25, 2018 at 11:00 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, 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 ID 10118829 beginning one hour after completion of the live call until 9:00 A.M. (ET) on May 9, 2018. 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 Website

This 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 www.firstmidwest.com/investorrelations.

Forward-Looking Statements

This press release 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 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. Forward-looking statements are not guarantees of future performance, and First Midwest cautions you not to place undue reliance on these statements. Forward-looking statements are made only as of the date of this press release, and First Midwest undertakes no obligation to update any forward-looking statements contained in this press release to reflect new information or events or conditions after the date hereof.

Forward-looking statements may be deemed to include, among other things, statements relating to our future financial performance, including the related outlook for 2018, the performance of our 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 our business, regulatory developments, the impact of federal income tax reform legislation, acquisition transactions, including estimated synergies, cost savings and financial benefits of consummated transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and assumptions. For a discussion of these risks, uncertainties and assumptions, you should refer to the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2017, as well as our subsequent filings made with the Securities and Exchange Commission. However, these risks and uncertainties are not exhaustive. Other sections of such reports describe additional factors that could adversely impact our business and financial performance.

Non-GAAP Financial Information

The 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 earnings per share ("EPS"), adjusted, the efficiency ratio, total 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 income, excluding net securities losses, the accounting reclassification, and Durbin, noninterest expense, adjusted, excluding the accounting reclassification, effective income tax rate, excluding revaluations of DTAs, tangible common equity to tangible assets, tangible common equity, excluding AOCI, to tangible assets, tangible common equity to risk-weighted assets, return on average tangible common equity, and return on average tangible common equity, adjusted.

The Company presents EPS, the efficiency ratio, return on average assets, and return on average tangible common equity, all adjusted for certain significant transactions. These transaction include the revaluation of DTAs (fourth and third quarters of 2017), certain actions resulting in securities losses and gains (fourth and third quarters of 2017), a special bonus to colleagues (fourth quarter of 2017), a charitable contribution to the First Midwest Charitable Foundation (fourth quarter of 2017), and acquisition and integration related expenses associated with completed and pending acquisitions (first, second, and third quarters of 2017). Management believes excluding these transactions from EPS, the efficiency ratio, return on average assets, and return on average tangible common equity is useful in assessing the Company's underlying operational performance since these transactions do not pertain to its core business operations and their exclusion facilitates better comparability between periods. Management believes that excluding acquisition and integration related expenses from these metrics is 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 enhances comparability for peer comparison purposes.

The Company presents noninterest income, excluding net securities losses, the accounting reclassification, and Durbin and noninterest expense, adjusted, excluding the accounting reclassification. Management believes that excluding these items from noninterest income and noninterest expense is useful in assessing the Company’s underlying operational performance as these items either do not pertain to its core business operations or their exclusion facilitates 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 subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate applicable at that time, or 35%. 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 enhances comparability for peer comparison purposes. In addition, management believes that presenting tax-equivalent net interest margin, adjusted, enhances 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 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.

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. 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 the Company

First Midwest is a relationship-focused financial institution and one of the largest independent publicly-traded bank holding companies based on assets headquartered in the Midwest, with over $14 billion in assets and approximately $11 billion in trust assets under management. First Midwest's principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, retail, wealth management, trust and private banking products and services through over 130 locations in metropolitan Chicago, northwest Indiana, central and western Illinois, and eastern Iowa. First Midwest's common stock is traded on the NASDAQ Stock Market under the symbol FMBI. First Midwest's website is www.firstmidwest.com.

Contact Information

Accompanying Unaudited Selected Financial Information

Footnote to Consolidated Statements of Financial Condition

Footnotes to Condensed Consolidated Statements of Income

Footnotes to Selected Financial Information

1. See the "Non-GAAP Reconciliations" section for the detailed calculation.
2. Annualized based on the actual number of days for each period presented.
3. Presented on a tax-equivalent basis, assuming the applicable federal income tax rate for each period presented. As a result, interest income and yields on tax-exempt securities and loans subsequent to December 31, 2017 are presented using the current federal income tax rate of 21% and prior periods are computed using the federal income tax rate applicable at that time, or 35%.
4. Cost of funds expresses total interest expense as a percentage of average total funding sources.
5. This measure excludes the impact of revaluation of DTAs related to federal tax reform and changes in Illinois income tax rates for the fourth and third quarter of 2017.
6. This ratio includes acquired loans that are recorded at fair value through an acquisition adjustment, which incorporates credit risk, as of the acquisition date with no allowance for credit losses being established at that time. As the acquisition adjustment is accreted into income over future periods, an allowance for credit losses is established on acquired loans as necessary to reflect credit deterioration.
7. Adjustments to net income for the fourth and third quarters of 2017 include revaluation of DTAs related to federal income tax reform and changes in Illinois income tax rates, a special colleague bonus, a charitable contribution, and certain actions related to the securities portfolio. In addition, net income for certain periods was adjusted for acquisition and integration related expenses associated with completed and pending acquisitions. For additional discussion of adjustments, see the "Non-GAAP Financial Information" section.
8. Presented as calculated prior to March 31, 2018, which included a tax-equivalent adjustment for BOLI. Management believes that removing this adjustment from the current calculation of this metric enhances comparability for peer comparison purposes.

Footnotes to Non-GAAP Reconciliations