DBRS Downgrades First Midwest Bancorp, Inc. to BBB (low); Trend Stable

DBRS, Inc. (DBRS) has today downgraded most ratings of First Midwest Bancorp, Inc. (First Midwest or the Company) and its primary banking subsidiary, First Midwest Bank (Bank), including the Company’s Issuer & Senior Debt rating to BBB (low) from BBB. At the same time, DBRS confirmed the Bank’s Short-Term Instruments rating at R-2 (high). The trend for all ratings is now Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

While DBRS acknowledges the progress made by First Midwest in reducing the Company’s risk profile over the past several years, these remediation efforts have been more costly than we originally expected resulting in annual losses in three out of the past four years. Moreover, restoring the full earnings power of the Company will take time given the still elevated levels of non-performing assets on the balance sheet primarily related to a still fragile Chicago-area real estate market, the low interest rate environment, and the increasing regulatory burden placed on all banks.

The Stable trend reflects the progress the Company has made in reducing its reliance on commercial real estate lending, working through problem assets and investments made in building the franchise. These investments include the relaunching of First Midwest’s mortgage banking platform and the build out of its commercial and industrial lending platform including several asset-based lending niches that are all gaining traction. If the Company successfully executes on its strategic initiatives and returns to higher levels of consistent profitability, the ratings could be upgraded. Conversely, if the latest large credit mark taken in 3Q12 proves insufficient, or the Company doesn’t successfully execute on its various diversification efforts, the ratings could come under pressure. DBRS notes that it has little tolerance for another material charge that would invade capital.

First Midwest’s ratings reflect its solid community banking franchise located primarily in the suburban Chicago metropolitan area that is underpinned by a stable, low cost deposit base. Despite losses, the Company has maintained solid capital metrics, which should support both organic growth, as well as potential acquisitions. The ratings also consider still elevated, albeit improving, asset quality problems from a loan portfolio that is heavily concentrated in commercial real estate.

For the fourth quarter, First Midwest reported net income applicable to common shares of $13.0 million, up from a net loss applicable to common shares of $47.8 million in 3Q12 and from net income applicable to common shares of $3.9 million a year ago. DBRS notes that 3Q12 results included a provision for loan losses of $111.8 million primarily related to a more aggressive problem asset remediation to improve the risk profile of the Company. For the full year, First Midwest reported a net loss applicable to common shares of $20.7 million compared to net income applicable to common shares of $25.4 million in 2011.

Adjusting for expenses related to the loan bulk sales, covered loan asset adjustments and other non-core items, FY12 expenses were flat. Investments in commercial, retail and wealth management teams were offset by the headcount reductions and branch rationalization that took place earlier in 2012. Given the difficult revenue environment, controlling expenses will remain vital in 2013 and beyond, especially as the Company tries to bring its efficiency ratio back below 60%. To this end, First Midwest just announced two branch closings, which brings their overall branch count to 93.

Asset quality metrics continue to improve, but remain elevated. Specifically, non-accrual loans declined by 15.1% during the fourth quarter to $84.5 million. Overall, special mention, substandard, and non-accrual loans totaled $303.6 million, which was consistent with 3Q12 levels. NPAs, excluding covered loans and OREO declined $15.0 million to $140.0 million, or 2.68% of loans plus OREO. This was greatly reduced from the 4.85% reported in 4Q11. Net charge-offs were $7.7 million, or 0.48% of average loans, excluding covered loans (annualized), following net charge-offs of $125.5 million in 3Q12 reflecting the accelerated credit remediation actions taken for select credits. The allowance for credit losses was 107% of non-accrual loans, excluding covered loans.

Capital remains solid and helps support the rating. The return to profitability in 4Q12 contributed to higher sequential quarter capital metrics, but capital metrics were down compared to a year ago reflecting the loss. At year-end, the Company’s Tier 1 common capital to risk-weighted assets ratio and the tangible common equity to tangible assets ratio were a solid 9.33% and 8.44%, respectively.

First Midwest Bancorp, Inc., a bank holding company headquartered in Itasca, Illinois, reported $8.1 billion in assets at December 31, 2012.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments and DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities. These can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer. This rating was assigned without participation by the issuer or any related third party.

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

[Amended on August 27, 2014, to reflect actual methodologies used.]

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan G. Reid
Approver: Alan G. Reid
Initial Rating Date: 27 May 2010
Most Recent Rating Update: 19 August 2011

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