DBRS Comments on First Midwest Bancorp, Inc.’s 2Q12 Results–Issuer & Senior Debt at BBB, Trend Neg.

DBRS, Inc. (DBRS) today commented that its ratings for First Midwest Bancorp, Inc. (First Midwest or the Company), including its Issuer & Senior Debt rating of BBB are unchanged following the release of the Company’s 2Q12 earnings. The trend on the Company’s ratings remains Negative. For the quarter, First Midwest reported net income applicable to common shareholders of $6.3 million, down $1.5 million from 1Q12.

DBRS sees First Midwest’s 2Q12 earnings as evidencing some improvement in the Company’s core earnings capacity. This is reflected primarily in good loan growth (especially in C&I) despite the sluggish environment. In addition, increasing core fee revenues and lower expenses highlight that First Midwest is seeing some benefits from its ongoing cross-selling initiatives as well as its prior cost-cutting initiatives, which reduced headcount by approximately 100. However, in DBRS’s view, 2Q12 results also highlight that asset quality remains a significant challenge for the Company and the pace of improvement continues to lag most peers. Nonperforming assets (NPAs) remain elevated and the provision for loan losses continues to represent a significant portion of income before provisions and taxes. Positively, First Midwest continues to aggressively remediate its problem assets and potential problem loans continue to trend lower.

Total revenues (on an FTE basis) increased 1.0% from 1Q12 to $94.1 as a 2.3% increase in net interest income to $70.0 million offset a 2.6% decline in total noninterest income. However, DBRS notes that operating noninterest income increased 2% quarter-on-quarter (QoQ) to $24.5 million. Period-end loans, excluding covered loans, increased $160.7 million from the end of 1Q12, led by C&I lending which was up 6.7% from the prior quarter. Positively, a favorable mix shift in funding sources, particularly with growth in demand deposits offset by declines in the other categories of interest-bearing liabilities resulted in the NIM being unchanged at 3.88%, despite pressures from the low rate environment.

Nonperforming assets remain high relative to historic, pre-crisis levels but continued to reflect a slow-paced improvement. NPAs, excluding covered loans, declined marginally by 0.7% from 1Q12 to $242.8 million and represented a still-elevated 4.56% of loans plus OREO. While non-accrual loans remained relatively flat versus the prior quarter, the mix of NPAs improved as TDRs increased $5.7 million and the Company sold $13.4 million of OREO for proceeds of approximately 94% of carrying value. In addition, First Midwest recorded an additional $1.7 million in OREO write-downs reflecting its more aggressive approach to problem asset liquidation and disposition.

Net charge-offs ticked up 5.3% QoQ, but declined as a percent of average loans to 1.55%, down from 1.67% at 1Q12, thanks to the noted loan growth. The provision for loan losses increased by $4.2 million from the first quarter, which maintained the allowance for credit losses at $118.7 million, or 60% of nonperforming loans excluding covered loans. Positively, special mention and substandard accruing categories came down approximately 7% in the quarter and are down around 20% year to date.

In DBRS’s view, capital remains sound, as the Company continues to generate positive, albeit low, earnings. At June 30, 2012, First Midwest reported a tangible common equity ratio of 8.91%, down 4 bps from the prior quarter, and a Tier 1 common ratio of 10.21%.

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

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

The sources of information used for this commentary include company documents and color from the quarterly conference call. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This rating did not include participation by the rated entity or any related third party, and is based solely on publicly available information.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Schaller
Approver: Roger Lister
Initial Rating Date: 27 May 2010
Most Recent Rating Update: 19 August 2011

For additional information on this rating, please see the linking document under Related Research.