FMBI - First Midwest Bancorp Inc. Announces 2019 Fourth Quarter and Record Full Year Results

CHICAGO, Jan. 21, 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 fourth quarter and full year of 2019. Net income for the fourth quarter of 2019 was $52.1 million, or $0.47 per share, compared to $54.5 million, or $0.49 per share, for the third quarter of 2019, and $41.4 million, or $0.39 per share, for the fourth quarter of 2018. For the full year of 2019, the Company reported net income of $199.7 million, or $1.82 per share, compared to $157.9 million, or $1.52 per share, for the year ended December 31, 2018.

Reported results for all periods were impacted by acquisition and integration related expenses and implementation costs related to the Company's Delivering Excellence initiative ("Delivering Excellence"). In addition, results for full year 2018 were impacted by certain income tax benefits resulting from federal income tax reform legislation ("Tax Reform"). For additional detail on these adjustments, see the "Non-GAAP Financial Information" section presented later in this release.

Earnings per share ("EPS"), adjusted⁽¹⁾ was $0.51 for the fourth quarter of 2019, compared to $0.52 for the third quarter of 2019 and $0.48 for the fourth quarter of 2018. EPS, adjusted⁽¹⁾ was $1.98 and $1.67 for the full years ended December 31, 2019 and 2018, respectively.

FOURTH QUARTER AND FULL YEAR HIGHLIGHTS

• Generated EPS of $0.47 for the fourth quarter of 2019 and $1.82 for the full year of 2019, up from $0.39 and $1.52 from the same periods in 2018, respectively.
  • Increased EPS, adjusted⁽¹⁾ by 6% and 19% from the fourth quarter and full year of 2018, respectively.
• Produced returns on average tangible common equity, adjusted⁽¹⁾ of 15.7% for the full year of 2019, up 58 basis points versus a year ago.
• Expanded net interest income to $148 million and $588 million for the fourth quarter and full year of 2019, up 7% and 14% from the same periods in 2018.
  • Reported net interest margin of 3.72% for the fourth quarter of 2019, down 24 basis points from the same period in 2018, reflective of lower rates, and 3.90% for the full year of 2019, consistent with 2018.
• Increased noninterest income to $46 million and $163 million for the fourth quarter and full year of 2019, up 28% and 13% from the same periods in 2018.
• Maintained net loan charge-offs to average loans of 0.33% and 0.31% for the fourth quarter and full year of 2019, reflective of the benign credit environment.
• Improved operating efficiency, lowering the efficiency ratio⁽¹⁾ to 55% for the full year of 2019 from 58% for 2018; realized an efficiency ratio⁽¹⁾ of 56% for the fourth quarter of 2019 compared to 55% for the same period in 2018.
• Grew loans to nearly $13 billion, up 2%, annualized, from September 30, 2019 and 12% from December 31, 2018.
• Increased total average deposits to $13 billion, consistent with the third quarter of 2019 and up 12% from the fourth quarter of 2018.
• Generated 34 basis points of common equity Tier 1 capital from September 30, 2019 and 32 basis points from December 31, 2018, ending the year at 10.52%; replenished to levels last achieved prior to 2019 acquisitions.

"2019 was another strong year for First Midwest," said Michael L. Scudder, Chairman of the Board and Chief Executive Officer of the Company. "Against a difficult rate backdrop, we continued to expand our balance sheet, adding clients across our businesses while building operational efficiency. The success of these efforts helped to offset the revenue pressure resulting from lower interest rates. As a result, operating performance as reflected in adjusted EPS for the quarter and full year improved by a robust 6% and 19%, respectively, as compared to 2018."

Mr. Scudder concluded, "While our momentum in early 2020 will continue to be impacted by the transition to lower rates, we believe the economy remains solid. The strength of our funding and capital foundation provides the flexibility for continued investment in our businesses, communities, and colleagues as we navigate the year. We expect the environment will provide both the opportunity and incentive to invest in and leverage our infrastructure, processes, and capabilities to better serve our clients and manage risk. As always, we will remain focused on those actions that help our clients achieve financial success and inure to the long-term benefit of our shareholders."

PENDING ACQUISITION

Park Bank

On August 27, 2019, the Company entered into a merger agreement to acquire Bankmanagers Corp. ("Bankmanagers"), the holding company for Park Bank, based in Milwaukee, Wisconsin. As of September 30, 2019, Bankmanagers had approximately $1.0 billion of assets, $875 million of deposits, and $700 million of loans. The merger agreement provides for a fixed exchange ratio of 29.9675 shares of Company common stock, plus $623.02 in cash, for each share of Bankmanagers common stock, subject to certain adjustments. As of the date of announcement, the overall transaction was valued at approximately $195 million. The transaction is subject to customary regulatory approvals and the completion of various closing conditions.

⁽¹⁾ These metrics are non-GAAP financial measures. For details on the calculation of these metrics, see the sections titled "Non-GAAP Financial Information" and "Non-GAAP Reconciliations" presented later in this release.

OPERATING PERFORMANCE

Net Interest Income and Margin Analysis
(Dollar amounts in thousands)

⁽¹⁾ Interest income and yields on tax-exempt securities and loans are presented on a tax-equivalent basis, assuming a federal income tax of 21%. The corresponding income tax impact related to tax-exempt items is recorded in income tax expense. These adjustments have no impact on net income. See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.

Net interest income for the fourth quarter of 2019 decreased by 1.6% from the third quarter of 2019 and increased by 7.0% from the fourth quarter of 2018. The decrease in net interest income compared to the third quarter of 2019 resulted primarily from lower interest rates, partially offset by lower cost of funds and higher acquired loan accretion. Compared to the fourth quarter of 2018, the increase in net interest income was driven primarily by the acquisition of interest-earning assets from the Bridgeview Bancorp, Inc. ("Bridgeview") transaction that closed in May 2019, growth in loans and securities, and higher acquired loan accretion, partially offset by higher cost of funds.

Acquired loan accretion contributed $9.7 million, $9.2 million, and $5.4 million to net interest income for the fourth quarter of 2019, the third quarter of 2019, and the fourth quarter of 2018, respectively.

Tax-equivalent net interest margin for the current quarter was 3.72%, decreasing by 10 basis points from the third quarter of 2019 and 24 basis points from the fourth quarter of 2018. Excluding the impact of acquired loan accretion, tax-equivalent net interest margin was 3.48%, down 11 basis points from the third quarter of 2019 and 33 basis points from the fourth quarter of 2018. Compared to the third quarter of 2019, tax-equivalent net interest margin decreased as a result of lower interest rates, partially offset by lower cost of funds. The decline in tax-equivalent net interest margin compared to the fourth quarter of 2018 was due primarily to lower interest rates, actions taken to reduce rate sensitivity, and higher cost of funds.

For the fourth quarter of 2019, total average interest-earning assets rose by $168.4 million from the third quarter of 2019 and $2.0 billion from the fourth quarter of 2018. The increase compared to the third quarter of 2019 resulted primarily from loan growth, while the increase compared to the fourth quarter of 2018 was driven primarily by interest-earning assets acquired in the Bridgeview transaction, loan growth, and securities purchases.

Total average funding sources for the fourth quarter of 2019 increased by $154.5 million from the third quarter of 2019 and $2.0 billion from the fourth quarter of 2018. The increase compared to the third quarter of 2019 resulted primarily from higher levels of borrowed funds. Compared to the fourth quarter of 2018, the increase was driven mainly by funding sources acquired in the Bridgeview transaction, higher levels of borrowed funds, and organic deposit growth.

Noninterest Income Analysis
(Dollar amounts in thousands)

N/M – Not meaningful.

Total noninterest income of $46.5 million was up by 8.3% and 27.5% from the third quarter of 2019 and the fourth quarter of 2018, respectively. The increase in wealth management fees compared to the third quarter of 2019 resulted from continued sales of fiduciary and investment advisory services to new and existing customers and a strong market environment. Compared to the fourth quarter of 2018, growth in wealth management fees was driven primarily by customers acquired in the Northern Oak Wealth Management, Inc. ("Northern Oak") transaction completed in January 2019.

Capital market products income increased in the fourth quarter of 2019 as a result of higher sales to corporate clients reflecting the lower long-term rate environment. Mortgage banking income for the fourth quarter of 2019 resulted from sales of $173.0 million of 1-4 family mortgage loans in the secondary market, compared to $141.0 million in the third quarter of 2019 and $51.4 million in the fourth quarter of 2018. In addition, mortgage banking income for the fourth quarter of 2019 increased compared to both prior periods due to positive changes in the fair value of mortgage servicing rights, which fluctuate from quarter to quarter. Other income was higher compared to both prior periods due primarily to benefit settlements on bank-owned life insurance.

Noninterest Expense Analysis
(Dollar amounts in thousands)

⁽¹⁾ See the "Non-GAAP Financial Information" section presented later in this release for a discussion of this non-GAAP financial measure.

Total noninterest expense for the fourth quarter of 2019 increased by 7.7% and 5.3% compared to the third quarter of 2019 and the fourth quarter of 2018, respectively. Noninterest expense for all periods presented was impacted by acquisition and integration related expenses and costs related to the implementation of the Delivering Excellence initiative. Excluding these items, noninterest expense for the fourth quarter of 2019 was up by 6.2% and 13.4% from the third quarter of 2019 and fourth quarter of 2018, respectively, which resulted in an efficiency ratio of 56% for the fourth quarter of 2019, up from 54% and 55% compared to the same prior periods.

Operating costs associated with the Bridgeview and Northern Oak transactions completed during the first half of 2019 contributed to the increase in noninterest expense compared to the fourth quarter of 2018. These costs primarily occurred within salaries and employee benefits, net occupancy and equipment expense, professional services, advertising and promotions, and other expenses.

The increase in salaries and employee benefits compared to both prior periods was due to higher commissions resulting from sales of 1-4 family mortgage loans in the secondary market and the timing of certain compensation accruals. In addition, compared to the fourth quarter of 2018, salaries and employee benefits were impacted by merit increases. Professional services increased compared to both prior periods as a result of technology and process enhancements due to organizational growth. The increase in net OREO expenses compared to both prior periods was due mainly to sales of properties at a loss, partially offset by positive valuation adjustments.

Compared to the fourth quarter of 2018, net occupancy and equipment expense increased due to a deferred gain no longer being included as a quarterly reduction to expense upon adoption of lease accounting guidance at the beginning of 2019.

Other expenses for the third quarter of 2019 were impacted by a reduction in Federal Deposit Insurance Corporation premiums due to small bank assessments credits received.

Acquisition and integration related expenses for the fourth and third quarters of 2019 resulted from the acquisition of Bridgeview and the pending acquisition of Park Bank. Acquisition and integration related expenses for the fourth quarter of 2018 resulted from the acquisition of Northern States Financial Corporation.

Delivering Excellence implementation costs for all periods presented resulted from certain actions initiated by the Company in connection with its Delivering Excellence initiative and include property valuation adjustments on locations identified for closure, employee severance, and general restructuring and advisory services.

LOAN PORTFOLIO AND ASSET QUALITY

Loan Portfolio Composition
(Dollar amounts in thousands)

Total loans of $12.8 billion grew by 2.1%, annualized, from September 30, 2019 and 12.2% from December 31, 2018. Excluding loans acquired in the Bridgeview transaction as of December 31, 2019, total loans grew by 7.1% from December 31, 2018. Commercial and industrial loans decreased compared to September 30, 2019 as a result of higher than expected paydowns due to favorable customer business conditions, partially offset by growth in certain sector-based lending businesses. Compared to both prior periods, total corporate loans benefited from growth in multi-family loans. Strong production within commercial real estate loans was offset by the impact of certain customers selling their commercial business or investment real estate properties, as well as refinancing with institutions offering loan terms outside of our credit parameters compared to both prior periods. In addition, compared to December 31, 2018 total corporate loans benefited from growth in commercial and industrial loans, primarily within our sector-based lending and middle market business units.

Growth in consumer loans compared to both prior periods resulted primarily from purchases of 1-4 family mortgages and home equity loans, as well as organic growth.

Asset Quality
(Dollar amounts in thousands)

⁽¹⁾ Purchased credit impaired loans with an accretable yield are considered current and are not included in past due loan totals.
⁽²⁾ Foreclosed assets consist of OREO and other foreclosed assets acquired in partial or total satisfaction of default loans. Other foreclosed assets are included in other assets in the Consolidated Statement of Financial Condition.
⁽³⁾ 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 on acquired loans is established as necessary to reflect credit deterioration.

Total non-performing assets represented 0.85% of total loans and foreclosed assets at December 31, 2019 compared to 0.85% and 0.70% at September 30, 2019 and December 31, 2018, respectively, reflective of normal fluctuations. These fluctuations occurred within non-accrual loans and foreclosed assets, and are isolated to certain credits for which the Company has remediation plans in place.

The allowance for credit losses to total loans was 0.85% at December 31, 2019, consistent with September 30, 2019 and down from 0.90% at December 31, 2018. The decrease compared to December 31, 2018 was driven primarily by loans acquired in the Bridgeview transaction, for which no allowance for credit losses was established at the time of acquisition in accordance with accounting guidance applicable to business combinations.

Charge-Off Data
(Dollar amounts in thousands)

⁽¹⁾ Amounts represent charge-offs, net of recoveries.
⁽²⁾ Annualized based on the actual number of days for each period presented.

Net loan charge-offs to average loans, annualized, were 0.33% for the fourth quarter of 2019, compared to 0.29% for the third quarter of 2019 and 0.26% for the fourth quarter of 2018. For the year ended December 31, 2019, net loan charge-offs to average loans was 0.31%, down from 0.38% for the same period in 2018.

DEPOSIT PORTFOLIO

Deposit Composition
(Dollar amounts in thousands)

Total average deposits were $13.4 billion for the fourth quarter of 2019, consistent with the third quarter of 2019 and up 11.7% from the fourth quarter of 2018. The increase in total average deposits compared to the fourth quarter of 2018 was driven primarily by deposits assumed in the Bridgeview transaction during the second quarter of 2019, various time deposit marketing initiatives, and organic growth.

CAPITAL MANAGEMENT

Capital Ratios

⁽¹⁾  These ratios are not subject to formal Federal Reserve regulatory guidance.
⁽²⁾  Tangible common equity represents common stockholders' equity less goodwill and identifiable intangible assets. For details of the calculation of these ratios, see the sections titled, "Non-GAAP Financial Information" and "Non-GAAP Reconciliations" presented later in this release.

Capital ratios generally increased compared to December 31, 2018, as strong earnings and deferred gains recognized due to the adoption of lease accounting guidance at the beginning of 2019 more than offset capital deployed for the Bridgeview and Northern Oak acquisitions, the impact of loan growth and securities purchases on risk-weighted assets, and stock repurchases.

During the first quarter of 2019, the Company announced a new stock repurchase program that authorizes the Company to repurchase up to $180 million of its common stock. Stock repurchases under this program may be made from time to time on the open market or in privately negotiated transactions, at the discretion of the Company. The Company did not repurchase any shares of its common stock during the fourth quarter of 2019 and repurchased 1.7 million shares of its common stock at a total cost of $33.9 million for the full year of 2019. As of December 31, 2019, the Company had remaining authorization to purchase $146.1 million of its common stock.

The Board of Directors approved a quarterly cash dividend of $0.14 per common share during the fourth quarter of 2019, which is a 17% increase from the fourth quarter of 2018. This dividend represents the 148^th 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, January 22, 2020 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 I.D. 10138434 beginning one hour after completion of the live call until 8:00 A.M. (ET) on February 5, 2020. 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, 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, First Midwest's Delivering Excellence initiative, including costs and benefits associated therewith and the timing thereof, anticipated trends in First Midwest's business, regulatory developments, the impact of federal income tax reform legislation, acquisition transactions, including First Midwest's proposed acquisition of Bankmanagers, estimated synergies, cost savings and financial benefits of announced and completed transactions, and growth strategies, including possible future acquisitions. These statements are subject to certain risks, uncertainties and assumptions, including those 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, 2018, 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 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 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, effective income tax rate, 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, and return on average tangible common equity, 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 acquisition and integration related expenses associated with completed and pending acquisitions (all periods), Delivering Excellence implementation costs (all periods), and certain income tax benefits aligned with Tax Reform (full year 2018). In addition, the calculation of the efficiency ratio is adjusted for net OREO expense. 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.

The Company presents noninterest expense, adjusted, which excludes acquisition and integration related expenses and Delivering Excellence implementation costs. In addition, the Company presents the effective income tax rate, adjusted, which excludes certain income tax benefits aligned with Tax Reform. Management believes that excluding these items from noninterest expense and the effective income tax rate 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.

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 the Company

First 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 $18 billion of assets and $12 billion of assets under management. First Midwest's principal subsidiary, First Midwest Bank, and other affiliates provide a full range of commercial, treasury management, equipment leasing, consumer, wealth management, trust and private banking products and services through locations in metropolitan Chicago, southeast Wisconsin, northwest Indiana, central and western Illinois, and eastern Iowa. Visit First Midwest at www.firstmidwest.com.

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Accompanying Unaudited Selected Financial Information