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First Midwest Finally Cleans House

First Midwest Bancorp's capital ratios declined as a result of the credit actions, but remained strong relative to regulatory requirements. The regulatory ratio of total capital to risk-weighted assets declined to 11.65% as of Sept. 30 from 13.68% the previous quarter, but was well above the 10% required for most banks to be considered well-capitalized. The company's ratio of tangible common equity to tangible assets was 8.26% as of Sept. 30, declining from 8.83% the previous quarter.

First Midwest CEO Michael Scudder said during the company's earnings conference call that "the remaining pool of non-performing and potential performing problem assets are better situated to improve or, as necessary, be liquidated," which "positions us for significantly lower future credit costs and we expect the resulting capital pressure to be relatively short-lived when these benefits are added to our current business momentum."

The company's total portfolio loans declined by 2% during the third quarter, to $5.4 billion, as a result of the loan transfer. Commercial and industrial loan balances grew 1% sequentially and 9% year-over-year, to $1.6 billion as of Sept. 30.

Third-quarter net interest income totaled $70.6 million, increasing from $70 million in the second quarter, but declining from $73.9 million a year earlier, as yields on interest-earning assets declined, following the industry trend. The company's third-quarter net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was 3.83%, narrowing from 3.88% the previous quarter, and 3.97% a year earlier.

First Midwest CFO Paul Clemens said during the conference call that "even with $250 million of average earning asset growth over the past two quarters, we continue to maintain over $400 million in short-term overnight instruments." This liquidity, along with our significant decline in non-accrual loans should enable us to further mitigate market pressures" on asset yields.

Clemens also provided some forward guidance on the margin, saying "we think the margin is going to hover around where it is right now," and "maybe actually improve a little bit because we're going to be redeploying first of all about $70 million worth of non-performing, non-accruing loans."
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