First Midwest Chief Entering New Year on High Note

Michael Scudder, chief executive of First Midwest Bancorp, believes the Itasca, Ill., company has built up a head of steam as it chugs into 2015.

"I'm very encouraged," Scudder, who is also the $9.6 billion-asset company's president, said in a recent interview. "We've had an extremely active fourth quarter and the environment is improving. I think we're going to see [economic growth] really begin to manifest itself in the second half" of the year.

Plenty of evidence supports his view. First Midwest's rosy outlook, which could push the company closer to $10 billion in assets, prompting more regulatory burden, makes Scudder one of American Banker's five community bankers to watch in the upcoming year.

First Midwest has reported a profit for eight straight quarters, and its credit quality continues to improve. More importantly, the company is set to reap a full year's benefit from its purchases of a dozen Chicago-area branches from Popular, equipment lessor National Machine Tool Financial, and the $558 million-asset Great Lakes Bank in Blue Island, Ill.

Those deals added about $1.2 billion in deposits and $800 million of loans, adding to the heft Scudder gained from four government-assisted deals that took place from 2009 to 2012. While the company's earnings fell 9% through Sept. 30, compared to a year earlier, the results included $4.6 million of one-time merger-related costs.

First Midwest refers to itself in advertising as a "bank with momentum" and, broadly speaking, investors are buying into the narrative. Four of 11 analysts who cover First Midwest give its stock a "buy" rating, and consensus estimates forecast 27% earnings growth in 2015.

Strong results and no apparent hiccups are expected next year, said John Rodis, an analyst at FIG Partners. "Their underwriting, their credit quality, everything is moving in the right direction," Rodis said, adding that First Midwest seemed to have little to no trouble integrating its trio of deals.

"The lack of bad news tells me they're doing fine," Rodis said.

The Popular branch purchase and the pick-up of Great Lakes Bank took well less than six months to complete, leading Scudder to comment that he was "ecstatic" with how those deals played out.

And the acquisition of National Machine Tool added a leasing company that books about $40 million of business annually. Rodis said joining First Midwest would almost certainly result in reduced cost of funds for National Machine Tool, while Scudder said he expects the unit to increase business significantly by marketing to his company's existing clients.

National Machine Tool also diversified First Midwest's loan book, which totaled about $6.7 billion after the addition of Great Lakes Bank. The company also focuses on health care and asset-based lending, while ranking as Illinois' top agricultural lender. There is ample funding, too, with $8.1 billion in deposits at Sept. 30.

The deals, paired with organic growth, have pushed First Midwest's assets closer to $10 billion. First Midwest has estimated that stress testing and other regulatory burdens tied to hitting that threshold will result in about $5 million of annual expenses, though the company has said it is unlikely to occur until 2016 — barring another big deal.

If anything were to stymie First Midwest's momentum, it would likely involve a hiccup with asset quality. The company suffered a minor setback in the third quarter, when it was forced to charge off a $7.5 million commercial credit after accounting irregularities were discovered in the statements of a longtime client.

First Midwest termed the hit a "singular, anomalous" event, and overall credit trends remain pointed in a positive direction. Nonperforming assets totaled $104 million on Sept. 30, or 1.14% of total assets, down from $120 million, or 1.45% of total assets, at the end of 2013.

Like most banking companies, First Midwest saw problem loans spike during the financial crisis. Its turning point came in the third quarter of 2012, when Scudder sold $172 million of problem loans, which led to an $80.3 million chargeoff and a $20.7 million loss for the year.

Scudder said the loan sale marked one of the biggest decisions in his six years as CEO; problem assets have consistently declined since that sale. Still, he said the accomplishment of which he is most proud is simply keeping First Midwest viable during the turmoil of the financial crisis and its aftermath.

"I think the biggest lesson we learned was to never lose sight of our mission, to help our clients be financially successful," Scudder said. "That's the flywheel that drives our success."