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| FMBI > SEC Filings for FMBI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
The discussion presented below provides an analysis of our results of operations and financial condition for the quarters ended March 31, 2009 and 2008. When we use the terms "First Midwest," the "Company," "we," "us," and "our," we mean First Midwest Bancorp, Inc., a Delaware Corporation, and its consolidated subsidiaries. When we use the term the "Bank," we are referring to our wholly-owned banking subsidiary, First Midwest Bank. Management's discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report, as well as in our 2008 Annual Report on Form 10-K ("2008 10-K"). Results of operations for the quarter ended March 31, 2009 are not necessarily indicative of results to be expected for the year ending December 31, 2009. Unless otherwise stated, all earnings per common share data included in this section and throughout the remainder of this discussion are presented on a diluted basis.
PERFORMANCE OVERVIEW
General Overview
Our banking network provides a full range of business and retail banking and trust and advisory services through 97 banking branches, one operational facility, and one dedicated lending office primarily in suburban metropolitan Chicago. The primary sources of our revenue are net interest income and fees from financial services provided to customers. Business volumes tend to be influenced by overall economic factors including market interest rates, business spending, consumer confidence, and competitive conditions within the marketplace.
First Quarter 2009 vs. 2008
Table 1
Selected Financial Data (1)
(Dollar amounts in thousands, except per share data)
Quarters Ended
March 31,
2009 2008 % Change
Operating Results
Interest income $ 91,480 $ 108,475 (15.7)
Interest expense 27,261 49,975 (45.5)
Net interest income 64,219 58,500 9.8
Fee-based revenues 20,134 23,269 (13.5)
Other noninterest income 415 1,782 (76.7)
Noninterest expense (48,394) (49,343) (1.9)
Pre-tax earnings, excluding provision for loan
losses and market-related
losses (2) 36,374 34,208 6.3
Provision for loan losses (48,410) (9,060) 434.3
Gains on securities sales, net 11,160 7,249 54.0
Securities impairment losses (2,938) (2,281) 28.8
(Loss) income before income tax benefit
(expense) (3,814) 30,116 (112.7)
Income tax benefit (expense) 9,541 (5,078) (287.9)
Net income 5,727 25,038 (77.1)
Preferred dividends (2,563) - -
Net income applicable to non-vested restricted
shares (9) (59) (84.7)
Net income applicable to common shares $ 3,155 $ 24,979 (87.4)
Diluted earnings per common share $ 0.07 $ 0.51 (86.3)
Performance Ratios
Return on average common equity 1.78% 13.72%
Return on average assets 0.15% 1.24%
Net interest margin - tax equivalent 3.67% 3.53%
Efficiency ratio 52.33% 54.02%
March 31, December 31, March 31, 3/31/09 $ Change From
2009 2008 2008 12/31/08 3/31/08
Balance Sheet Highlights
Total assets $ 8,252,576 $ 8,528,341 $ 8,315,368 $ (275,765) $ (62,792)
Total loans 5,387,128 5,360,063 5,045,765 27,065 341,363
Total deposits 5,508,382 5,585,754 5,721,562 (77,372) (213,180)
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(1) All ratios are presented on an annualized basis.
(2) The company's accounting and reporting policies conform to U.S. generally
accepted accounting principles ("GAAP") and general practice within the
banking industry. As a supplement to GAAP, the Company has provided this
non-GAAP performance result. The Company believes that this non-GAAP
financial measure is useful because it allows investors to assess the
Company's operating performance. Although this non-GAAP financial measure is
intended to enhance investors' understanding of the Company's business and
performance, this non-GAAP financial measure should not be considered an
alternative to GAAP.
We recorded a loss before taxes of $3.8 million for first quarter 2009, as compared to income of $30.1 million for first quarter 2008, with the difference largely due to higher provision for loan losses. Provision for loan losses for first quarter 2009 was $48.4 million as contrasted to $9.1 million for first quarter 2008. Excluding the provision for loan losses and net securities gains from each period, income before taxes was $36.4 million for first quarter 2009 and $34.2 million for first quarter 2008.
For a discussion of the Company's loan portfolio and credit quality, see the section titled "Loan Portfolio and Credit Quality" elsewhere in this report. For a discussion of net securities gains and impairment losses, see the section titled "Investment Portfolio Management."
Our first quarter operating results reflect both the impact of current economic conditions on our credit costs as well as the implementation of planned initiatives designed to respond to those conditions. Operating performance for the quarter, excluding credit costs, was up from a year ago as we profited from stronger net interest margins, the stability of our core funding base, targeted loan growth, and lower operating expenses. During the quarter, we made the difficult decision to reduce our dividend and took advantage of improvement in the debt security markets to reduce the size of our securities portfolio. In combination, these actions helped further our objectives of enhancing our tangible capital position and improving our overall liquidity.
Net interest margin for first quarter 2009 of 3.67% declined 4 basis points from fourth quarter 2008 but was up 14 basis points from first quarter 2008. While partly due to improved loan pricing, it also reflects our stable, solid customer deposit base. As of March 31, 2009, our loan-to-deposit ratio is 97.8%, with nearly two-thirds of our customer deposits consisting of demand, NOW, money market, and savings core transactional accounts.
Our total noninterest income decreased $1.2 million, or 4.2%, for first quarter 2009 compared to first quarter 2008. Fee-based revenues decreased 13.5% for first quarter 2009 from first quarter 2008. This decrease largely stems from the impact of lower transaction volumes caused by reduced consumer spending on overdraft fees as well as card-based fees. Further, trust and investment advisory fees declined 15.7% as compared to first quarter 2008, resulting from the adverse impact of lower asset values on revenues.
For first quarter 2009, noninterest expense declined by 1.9% compared to first quarter 2008, largely due to a $2.9 million decline in salaries and benefits expense resulting from a 3.6% reduction in FTEs. This reduction substantially offset a $2.1 million increase in FDIC insurance premiums and a $1.4 million increase in legal and operating costs associated with credit remediation and other real estate owned. Operating efficiency for the first quarter 2009 improved to 52.33% for first quarter 2009, compared to 54.02% for first quarter 2008.
Outstanding loans totaled $5.4 billion as of March 31, 2009, an annualized increase of 2.0% from December 31, 2008. The increase since December 2008 was led by growth in commercial and industrial loans and commercial real estate, specifically office, retail, and industrial, and multi-family lending. These increases were partially offset by a decline in residential land and development loans.
Non-performing loans as of March 31, 2009 were $258.5 million compared to $172.1 million at December 31, 2008, with residential land and development loans comprising half of the March 31, 2009 total. Non-accrual loans at March 31, 2009 totaled $183.5 million compared to $127.8 million at December 31, 2008, while loans 90 days or more past due and still accruing totaled $73.9 million, up from $37.0 million at December 31, 2008.
We increased our reserve for loan losses to $116.0 million as of March 31, 2009, up $22.1 million from December 31, 2008. The reserve for loan losses to loans was 2.15% as of March 31, 2009, up from 1.75% as of December 31, 2008. Total loans charged-off, net of recoveries, in first quarter 2009 were 1.98% of average loans.
Total average deposits for first quarter 2009 decreased 3.7% from first quarter 2008 and 2.3% from fourth quarter 2008 due primarily to a decline in time deposits. The Company's average core transactional deposits declined 0.4% from fourth quarter 2008. Traditionally, we would have expected to see a greater decline in average core transactional deposits in the first quarter due to normal seasonal declines in public funds balances.
EARNINGS PERFORMANCE
Net Interest Income
Net interest income equals the difference between interest income plus fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in the "Notes to Consolidated Financial Statements" contained in our 2008 10-K.
Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. For purposes of this discussion, both net interest income and net interest margin have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The effect of such adjustment is presented in the following table.
Table 2
Effect of Tax-Equivalent Adjustment
(Dollar amounts in thousands)
Quarters Ended March 31,
2009 2008 % Change
Net interest income (GAAP) $ 64,219 $ 58,500 9.8
Tax-equivalent adjustment 5,428 5,554 (2.3)
Tax-equivalent net interest income $ 69,647 $ 64,054 8.7
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Table 3 summarizes changes in our average interest-earning assets and interest-bearing liabilities as well as interest income and interest expense related to each category of assets and funding sources and the average interest rates earned and paid on each. The table also shows the trend in net interest margin on a quarterly basis for 2009 and 2008, including the tax-equivalent yields on interest-earning assets and rates paid on interest-bearing liabilities. Table 3 also details increases in income and expense for each of the major categories of interest-earning assets and analyzes the extent to which such variances are attributable to volume and rate changes. Interest income and yields are presented on a tax-equivalent basis assuming a federal income tax rate of 35%, which includes the tax-equivalent adjustment as presented in Table 2 above.
Net interest margin for first quarter 2009 of 3.67% declined 4 basis points from fourth quarter 2008 but was up 14 basis points from first quarter 2008. While partly due to improved loan pricing, it also reflects our stable, solid customer deposit base. As of March 31, 2009, our loan-to-deposit ratio is 97.8%, with nearly two-thirds of our customer deposits consisting of demand, NOW, money market, and savings core transactional accounts.
First quarter 2009 net interest margin reflects our strong core deposit base and our ability to effectively manage our cost of funds. With approximately one-half of our loan portfolio tied to floating indices, the 275 basis point decline in the Federal Reserve's federal funds during the period March through December 2008 resulted in a decline of 158 basis points in average loan yields from first quarter 2008. This negative impact was offset by a shift to less expensive wholesale borrowing from money market and time deposits, a widening of loan spreads, and expanded spreads on our investment portfolio as the interest rate yield curve steepened.
As shown in Table 3, first quarter 2009 tax-equivalent interest income declined $17.1 million compared to first quarter 2008. The increase in interest-earning assets increased interest income by $7.6 million, while a decline in the average rate earned on interest-earning assets reduced interest income by $24.7 million. First quarter 2009 interest expense declined $22.7 million compared to first quarter 2008. The increase in interest-bearing liabilities increased interest expense by $3.9 million, but the shift to less expensive wholesale borrowing, coupled with an overall decrease in the average rate paid on interest-bearing liabilities reduced interest expense by $26.6 million.
We continue to use multiple interest rate scenarios to rigorously assess the direction and magnitude of changes in interest rates and their impact on net interest income. A description and analysis of our market risk and interest rate sensitivity profile and management policies is included in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-Q.
Table 3
Net Interest Income and Margin Analysis
(Dollar amounts in thousands)
Quarters Ended March 31,
Attribution of Change
2009 2008 in Net Interest Income (1)
Yield/ Yield/
Average Rate Average Rate Yield/
Balance Interest (%) Balance Interest (%) Volume Rate Total
Assets:
Federal funds sold and
other
short-term investments $ 4,487 $ 3 0.27 $ 2,072 $ 21 4.08 $ (108) $ 90 $ (18)
Trading account
securities 12,434 40 1.29 18,604 62 1.33 (20) (2) (22)
Securities
available-for-sale (2) 2,109,477 29,376 5.57 2,089,135 30,359 5.81 300 (1,283) (983)
Securities
held-to-maturity 82,969 1,413 6.81 95,747 1,601 6.69 (219) 31 (188)
Federal Home Loan Bank
and
Federal Reserve Bank
stock 54,768 308 2.25 54,767 338 2.47 - (30) (30)
Loans (2):
Commercial and
industrial 1,488,508 17,114 4.66 1,356,868 22,249 6.59 2,469 (7,604) (5,135)
Agricultural 139,947 1,293 3.75 180,088 2,544 5.68 (490) (761) (1,251)
Commercial real
estate 3,010,167 37,928 5.11 2,698,459 44,111 6.57 6,280 (12,463) (6,183)
Consumer 547,876 6,555 4.85 556,252 9,189 6.64 (136) (2,498) (2,634)
Real estate - 1-4
family 192,407 2,878 6.07 227,100 3,555 6.30 (524) (153) (677)
Total loans 5,378,905 65,768 4.96 5,018,767 81,648 6.54 7,599 (23,479) (15,880)
Total
interest-earning
assets (2) 7,643,040 96,908 5.12 7,279,092 114,029 6.29 7,552 (24,673) (17,121)
Cash and due from banks 113,673 129,431
Reserve for loan losses (100,756) (62,431)
Other assets 772,922 724,632
Total assets $ 8,428,879 $ 8,070,724
Liabilities and Stockholders' Equity:
Savings deposits $ 748,350 847 0.46 $ 814,764 2,671 1.32 (202) (1,622) (1,824)
NOW accounts 893,687 969 0.44 880,505 2,812 1.28 43 (1,886) (1,843)
Money market deposits 768,202 2,104 1.11 822,154 4,532 2.22 (280) (2,148) (2,428)
Time deposits 2,069,671 15,007 2.94 2,175,183 24,195 4.47 (1,124) (8,064) (9,188)
Borrowed funds 1,694,928 4,632 1.11 1,307,398 12,076 3.71 5,411 (12,855) (7,444)
Subordinated debt 232,391 3,702 6.46 230,458 3,689 6.44 31 (18) 13
Total
interest-bearing
liabilities 6,407,229 27,261 1.73 6,230,462 49,975 3.23 3,879 (26,593) (22,714)
Demand deposits 1,028,617 1,025,320
Other liabilities 79,224 82,484
Stockholders' equity -
common 720,809 732,458
Stockholders' equity -
preferred 193,000 -
Total liabilities
and
stockholders'
equity $ 8,428,879 $ 8,070,724
Net interest
income/margin (2) $ 69,647 3.67 $ 64,054 3.53 $ 3,673 $ 1,920 $ 5,593
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Quarterly Net Interest Margin Trend
2009 2008
First Fourth Third Second First
Yield on interest-earning assets 5.12% 5.43% 5.69% 5.81% 6.29%
Rates paid on interest-bearing liabilities 1.73% 2.03% 2.40% 2.61% 3.23%
Net interest margin (2) 3.67% 3.71% 3.63% 3.58% 3.53%
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(1) For purposes of this table, changes which are not due solely to volume
changes or rate changes are allocated to such categories on the basis of the
percentage relationship of each to the sum of the two.
(2) Interest income and yields are presented on a tax-equivalent basis, assuming
a federal income tax rate of 35%.
Noninterest Income
Table 4
Noninterest Income Analysis
(Dollar amounts in thousands)
Quarters Ended March 31,
2009 2008 % Change
Service charges on deposit accounts $ 9,044 $ 10,422 (13.2)
Trust and investment advisory fees 3,329 3,947 (15.7)
Other service charges, commissions, and fees 4,006 5,002 (19.9)
Card-based fees 3,755 3,898 (3.7)
Subtotal fee-based revenues 20,134 23,269 (13.5)
Bank owned life insurance ("BOLI") income 541 2,462 (78.0)
Other income 496 740 (33.0)
Subtotal operating revenues 21,171 26,471 (20.0)
Trading (losses) gains, net (622) (1,420) (56.2)
Gains on securities sales, net 11,160 7,249 54.0
Securities impairment losses (2,938) (2,281) 28.8
Total noninterest income $ 28,771 $ 30,019 (4.2)
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Our total noninterest income decreased $1.2 million, or 4.2%, for first quarter 2009 compared to first quarter 2008. Fee-based revenues decreased 13.5% for first quarter 2009 from first quarter 2008. This decrease largely stems from the impact of lower transaction volumes caused by reduced consumer spending on overdraft fees as well as card-based fees. Further, trust and investment advisory fees declined 15.7% as compared to first quarter 2008, resulting from the adverse impact of lower asset values on revenues.
Other service charges, commissions, and fees declined 19.9% for first quarter 2009 compared to first quarter 2008 primarily due to a $501,000 decline in commissions received from the sale of third-party annuity and investment products as compared to first quarter 2008.
BOLI income represents benefit payments received and the change in cash surrender value ("CSV") of the policies, net of premiums paid. The change in CSV is attributable to earnings or losses credited to policies, based on investments made by the insurer. In comparison to first quarter 2008, bank-owned life insurance income declined $1.9 million for first quarter 2009. In the current environment, management elected to accept lower market returns in order to reduce its risk to market volatility through investment in shorter-duration, lower yielding money market instruments. The tax-equivalent yield on BOLI was 1.69% for first quarter 2009 compared to 6.99% for first quarter 2008. See the section titled "Investment in Bank Owned Life Insurance" for a discussion of our investment in BOLI.
Other income, which consists primarily of safe deposit box rentals and miscellaneous recoveries, declined for 33.0% for first quarter 2009 as compared to first quarter 2008.
Trading (losses) gains result from the change in fair value of trading securities. Such change is substantially offset by an adjustment to salaries and benefits expense. Our trading securities represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock.
We recognized a net securities gain and securities impairment losses for each period presented. For a discussion of these items, see the section titled "Investment Portfolio Management."
Noninterest Expense
Table 5
Noninterest Expense Analysis
(Dollar amounts in thousands)
Quarters Ended March 31,
2009 2008 % Change
Compensation expense:
Salaries and wages $ 17,090 $ 19,024 (10.2)
Retirement and other employee benefits 6,221 7,166 (13.2)
Total compensation expense 23,311 26,190 (11.0)
Net occupancy expense 6,506 6,151 5.8
Professional services 2,934 2,294 27.9
Federal Deposit Insurance Corporation ("FDIC") insurance 2,361 252 836.9
Equipment expense 2,331 2,567 (9.2)
Technology and related costs 2,240 1,771 26.5
Advertising and promotions 1,082 1,037 4.3
Merchant card expense 1,538 1,646 (6.6)
Other real estate owned ("OREO") expense, net 1,004 318 215.7
Other expenses 5,087 7,117 (28.5)
Total noninterest expense $ 48,394 $ 49,343 (1.9)
Full-time equivalent ("FTE") employees 1,767 1,833 (3.6)
Efficiency ratio 52.33% 54.02%
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For first quarter 2009, noninterest expense declined by 1.9% compared to first quarter 2008, largely due to a $2.9 million decline in salaries and benefits expense resulting from a 3.6% reduction in FTEs. This reduction substantially offset a $2.1 million increase in FDIC insurance premiums and a $1.4 million increase in legal and operating costs associated with credit remediation and OREO.
Salaries and wages decreased in first quarter 2009 compared to first quarter 2008 as annual general merit increases were more than offset by targeted staff reductions and declines in incentive compensation and share-based compensation expense.
Of the $469,000 increase in technology and related costs from first quarter 2008 to first quarter 2009, $253,000 was due to a new voice over internet protocol (VoIP), which is a used for the delivery of voice communications over IP networks such as the Internet. This investment in technology positions us for the future by providing us with a much more cost-effective means of communicating and transferring data. This cost also provides a savings in telephone expense, which is included in other expenses. The remaining variance in technology and related costs resulted from standard contractual increases.
The increase in professional services was due primarily to increased costs associated with credit remediation and OREO.
OREO expense increased in first quarter 2009 compared to first quarter 2008 as the balance of OREO properties increased from $8.6 million at March 31, 2008 to $39.0 million at March 31, 2009.
The decline in other expenses was spread over various noninterest expense categories including freight and expense, telephone, and supplies and printing.
The efficiency ratio expresses noninterest expense as a percentage of tax-equivalent net interest income plus total fees and other income. Operating efficiency for first quarter 2009 improved to 52.33%, compared to 54.02% for first quarter 2008.
Income Taxes
. . .
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