January 5, 2018 / 10:35 PM / a year ago

Fitch Affirms First Midwest's Long-Term IDR at 'BBB-'; Ratings Withdrawn

(The following statement was released by the rating agency) CHICAGO, January 05 (Fitch) Fitch Ratings has affirmed and withdrawn the ratings for First Midwest Bancorp (FMBI) and its principal banking subsidiary First Midwest Bank (FMB) including the companies' Issuer Default Ratings (IDRs) of 'BBB-'. The ratings are being withdrawn with a Stable Outlook. As communicated on Dec. 6, 2017, Fitch is withdrawing the ratings for commercial reasons. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Viability Rating (VR) and IDRs Today's affirmation reflects FMBI's steady operating performance and solid execution of acquisitions to date. Today's affirmation also reflects FMBI's good funding profile, low cost of deposits and reasonable capital levels relative to its rating. Offsetting these strengths is FMBI's modest asset quality variability over recent periods as well as FMBI's geographic concentration within the greater Chicagoland operating market, which continues to be challenged economically and fiscally. After showing improvement for many quarters, FMBI's asset quality has shown variability which was previously incorporated into Fitch's rating expectations. FMBI's non-performing asset (NPA) ratio (inclusive of accruing troubled debt restructures) increased from 0.87% at June 30, 2016 (2Q16) to 1.05% at 2Q17. In 3Q17, the NPA ratio fell back down to 0.83% and net charge-offs (NCOs) increased to 30bps. NCOs have averaged just over 20bps over the last five quarters. Fitch expects FMBI's asset quality to normalize going forward as organic growth over the last few years well-exceeded peers and the industry and the new loans will continue to season. This expectation is reflected in today's rating affirmation. FMBI's earnings performance has remained in-line with expectations and has been incorporated into today's actions. Fitch notes that when excluding significant acquisition-related expenses and one-time gains, FMBI's return on average assets (ROA) has been around or below 1%, in-line with rated and direct peers. FMBI is now subject to the Durbin Amendment, due total consolidated assets exceeding $10 billion. This will adversely impact noninterest income at around $12 million per year, or approximately 7.5% of 2016 noninterest income. However, Fitch expects FMBI's larger loan portfolio to generate sufficient interest income such that the reduction in interchange revenue is reasonably offset. FMBI's solid funding profile continues to support its rating. Similar to most in its peer group and across the industry, FMBI has reduced its exposure to more volatile sources of funding through good core deposit growth enabled by interest rates that remain at historical lows. Fitch also expects FMBI to benefit from the ongoing actions of larger banks that need to comply with regulatory liquidity measures. These banks have been exiting collateralized deposit relationships, primarily with municipalities. Fitch expects these deposits to flow down to FMBI, keeping its loan-to-deposit ratio and funding costs at levels commensurate with its rating level. FMBI's cost of total deposits and interest bearing deposits of 14bps and 21bps, respectively through 3Q17, are considered strong and supportive of FMBI's current rating and Outlook. Fitch expects FMBI's capital position to modestly improve over the near- to medium-term, an expectation incorporated into today's affirmation. At 3Q17, FMBI's common equity tier 1 (CET1) ratio of 9.4% was one of the lowest in Fitch's U.S. bank rated universe. However, Fitch observes that FMBI has kept its dividend payout ratio relatively low compared to others and currently does not have a share buyback program in place. Therefore, Fitch would expect the CET1 ratio to increase into the mid-9% range by the end of 2017 and into 2018. Moreover, Fitch notes that FMBI has a deferred gain of approximately $76 million pretax from its 2016 branch sale-leaseback transaction, which would add approximately 35bps to its CET1 ratio when realized. SUPPORT RATING AND SUPPORT RATING FLOOR FMBI has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FMBI is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES FMBI's subordinated debt is notched one level below its VR for loss severity, while any preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, and trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. HOLDING COMPANY FMBI's IDR and VR are equalized with its operating company, First Midwest Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. LONG- AND SHORT-TERM DEPOSIT RATINGS FMBI's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRs, VR, SUPPORT RATING, SUPPORT RATING FLOOR, SUBORDINATED DEBT, OTHER HYBRID SECURITIES, HOLDING COMPANY, LONG- AND SHORT-TERM DEPOSITS Rating sensitivities are no longer relevant given today's rating withdrawal. Fitch has affirmed and withdrawn the following ratings with a Stable Outlook: First Midwest Bancorp, Inc. --Long-Term IDR at 'BBB-'; --Short-Term IDR at 'F3'; --Viability Rating at 'bbb-'; --Subordinated debt at 'BB+'; --Support at '5'; --Support Floor at 'NF'. First Midwest Bank --Long-Term IDR at 'BBB-'; --Short-Term IDR at 'F3'; --Long-Term deposits at 'BBB'; --Short-Term deposits at 'F3'. --Viability Rating at 'bbb-'; --Support at '5'; --Support Floor at 'NF'. First Midwest Capital Trust I --Preferred stock at 'B+'. Contact: Primary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Fitch Ratings, Inc. 70 W. 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