DBRS Initiates Coverage of First Midwest Bancorp, Inc. – Issuer & Senior Debt at BBB, Trend Negative

DBRS has today initiated coverage of First Midwest Bancorp, Inc. (First Midwest or the Company) and its primary banking subsidiary, First Midwest Bank (the Bank). DBRS has assigned an Issuer & Senior Debt rating of BBB to First Midwest and a Deposits & Senior Debt rating of BBB (high) to the Bank. At the same time, First Midwest has been assigned a Short-Term Instruments rating of R-2 (middle), while the Bank has been assigned a Short-Term Instruments rating of R-2 (high). The trend on all ratings is Negative.

The ratings reflect First Midwest’s solid community banking franchise located primarily in the attractive suburban Chicago metropolitan area that is underpinned by a stable, low-cost deposit base. Positively, the Company recently bolstered capital levels through a common equity offering that raised $196.7 million in net proceeds, which considerably strengthened the balance sheet. The ratings also consider a loan portfolio that is heavily concentrated in commercial and commercial real estate loans, which represent a combined 87.5% of the total loan portfolio. Like most banks, the residential construction portfolio (includes construction and land) has been the most problematic.

The ratings and Negative trend incorporate First Midwest’s elevated asset quality problems that are likely to subdue earnings in 2010. DBRS notes that if asset quality problems persist and pressure capital over the intermediate term, the ratings would likely be downgraded. Conversely, if asset quality stabilizes and the Company returns to sustainable profitability, the ratings would likely be placed on Stable.

With an attractive and defensible footprint of approximately 100 offices primarily located in the suburban metropolitan area of Chicago, First Midwest has been able to build a strong deposit franchise, as evidenced by its low cost of funds of 0.85%, which is below the median of 1.40% for banks with $1 to $10 billion in assets at March 31, 2010. DBRS notes that the Company has a greater than 20% deposit market share in 60% of the cities it operates in, which is above the DBRS-rated peer median of 51%. Moreover, core deposits virtually fund the entire loan portfolio. Although highly competitive, the Chicago MSA ranks 3rd in population, 3rd in total businesses, 12th in average household income, and 12th in median income producing assets and should provide ample growth opportunities for the Company. Already with two FDIC-assisted deals completed, First Midwest will likely have additional opportunities in this space, as many Chicago-area banks are struggling with severe asset quality issues, which could further improve the Company’s franchise strength.

Excluding covered loans, non-performing assets (NPAs) declined to $291.8 million to a still elevated 5.55% of loans + OREO at March 31, 2010 from 6.39% in 4Q09. The decline was driven by increased disposal of OREO properties, charge-offs and the return of $27.9 million in restructured loans to performing status. Even though the problematic residential construction and land loan portfolio represented $276.3 million, or just 5.3% of total loans, this portfolio comprised 43.2% of 1Q10 non-performing loans (NPLs) and 24.3% of all net charge-offs (NCOs) as well as 38.0% of all NCOs in 2009. DBRS notes that approximately 80% of the non-performing residential construction portfolio received updated appraisals during 4Q09 and contributed to the large amount of provisions and NCOs seen that quarter, as the Company addresses falling property prices. While most of the residential construction problems are likely behind First Midwest, DBRS notes that other CRE asset classes like commercial construction and land, retail and multi-family exposures are under pressure as well and will likely weigh on operating results in 2010. Positively, delinquencies were down for the fifth consecutive quarter and totaled $28.0 million, a $9.9 million sequential quarter improvement.

The securities portfolio has also hurt results. Indeed, First Midwest took $24.6 million in other-than-temporary-impairment (OTTI) charges primarily related to trust preferred CDOs in 2009 and another $2.8 million in 1Q10. The Company has 7 trust-preferred pooled debt securities with a total remaining book value of $51.5 million and a fair market value of only $12.2 million resulting in an unrealized loss of $39.4 million. DBRS notes that management does not expect any additional changes to cash flows associated with these problematic securities. Since the downturn started back in 2007, the Company has taken a total of $122.0 million in OTTI charges from various securities. In aggregate, the available-for-sale securities portfolio is in an unrealized loss position of $21.7 million.

As a result of these elevated asset quality issues, First Midwest reported a net loss of $25.8 million in 2009 despite recording a gain of $13.1 million on the First DuPage FDIC-assisted transaction and a gain of $15.3 million on the early extinguishment of debt. This was down from net income of $49.3 million in 2008. The decline was driven by higher incremental loan loss provisioning of $145.4 million, higher FDIC expenses and higher loan remediation expenses. Most recently, the Company reported net income of $8.1 million, as the provision for loan losses came down dramatically. Even though delinquency trends continue to improve, high levels of problem loans will likely keep loan loss provisioning elevated in 2011 and negatively impact earnings.

To strengthen the balance sheet, First Midwest has taken numerous steps to bolster capital metrics and improve loan loss absorption capacity. These steps included a common equity offering, debt exchanges, debt repurchases and a dividend reduction that helped improve the Company’s tangible common equity (TCE) ratio to a robust 9.17% compared to 5.36% a year ago. The strong capital cushion positions First Midwest nicely to capitalize on growth opportunities and to eventually repay the $193 million it received from the U.S. Treasury’s Capital Purchase Program.

First Midwest Bancorp, Inc., a bank holding company headquartered in Itasca, Illinois, reported $7.6 billion in assets at March 31, 2010.

Notes:
All figures are in U.S. dollars unless otherwise noted.

This rating did not include issuer participation and is based solely on publicly available information.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.