Fitch Affirms First Midwest's LT IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) and Viability Rating (VR) of First Midwest Bancorp (FMBI) and its primary bank subsidiary, First Midwest Bank, at 'BBB-'. The Rating Outlook remains Stable. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT

The affirmation of FMBI's ratings reflects its continued improved credit metrics and steady operating performance over recent periods while maintaining reasonable capital levels. FMBI's current rating reflects its relatively elevated level of non-performing assets (NPAs) and its geographic concentration within the Chicagoland region, an area that has a weak fiscal profile. Furthermore, its current rating of 'BBB-' reflects what Fitch considers to be outsized loan growth in competitive asset classes such as commercial and industrial (C&I) and multi-family. The Stable Outlook reflects Fitch's expectation that growth (both organic and acquisitions) will be adequately managed in relation to capital and the bank's overall strategy.

FMBI's NPA ratio has fallen nearly 300 basis points (bps) since the middle part of 2012. While the improvement has outpaced many within the community bank peer group and within Fitch's rated universe, Fitch notes that NPAs remain fairly elevated in relation to higher rated banks as well as higher credit-related costs that weigh on earnings. Fitch expects NPAs to continue on a downward trajectory over the intermediate term along with associated credit costs. This expectation is reflected in today's rating affirmation as well as the Stable Outlook.

Recent strategic initiatives have included a branch acquisition as well as a whole-bank acquisition. In August 2014, FMBI purchased 12 Popular, Inc. branches in Chicago which included $723 million in deposits and $562 million in loans, paying a 2.5% premium for the deposits. In July 2014, FMBI announced that it had reached an agreement to purchase Great Lakes Financial, a $582 million bank in south suburban Chicago. The purchase price was around 1.3x Great Lakes' first quarter 2014 (1Q'14) tangible book value (TBV) and the deal is scheduled to close in 4Q'14.

Given the delay of various M&A transactions at similarly sized banks, Fitch believes FMBI's ability to close on the branch acquisition in a fairly short timeframe reflects that risk management systems at FMBI are adequate, particularly in the compliance space.

Fitch observes that on pro forma basis, FMBI will have $9.6 billion in assets. Management has indicated FMBI would likely surpass $10 billion mark in late 2015 or into 2016. Crossing $10 billion in assets would result in FMBI being affected by the Durbin Amendment as well as more strenuous and costly stress testing. Management anticipates the after-tax cost of the Durbin Amendment to be around $5 million but that the earnings accretion generated by these and future transactions will exceed Durbin's impact. Today's affirmation reflects Fitch's expectation that these recent acquisitions will ultimately be neutral to FMBI's overall risk profile over the rating horizon (typically two years). Fitch also expects management to make measured decisions to cross over the $10 billion threshold in order to maintain reasonable capital levels and earnings performance.

FMBI has been able to generate more reasonable returns over recent periods, primarily due to lower credit-related costs (provisions, litigations costs, OREO expenses, etc.). Through 2Q'14, the company generated a return on assets (ROA) of 87bps which has been supported via reserve releases. Fitch notes that reserve releases have accounted for 13% of pre-tax earnings on average over the last five quarters. That said, Fitch sees reserve releases diminishing going forward given continued loan growth and as allowance levels approach more normalized levels. Fitch expects that earnings will remain in the 75bps to 90bps ROA range over the near- to mid-term, a level relatively lower than higher rated peers and a rating constraint.

Similar to most in its peer group and across the industry, FMBI has migrated its deposit profile into less reliance on wholesale funding, enabled by interest rates that remain at historical lows. While Fitch expects FMBI (as well as many banks) to experience deposit run-off once rates rise and economic activity increases, Fitch does not expect FMBI's overall funding profile to revert to an outsized reliance on wholesale funding. This expectation is incorporated into FMBI's rating and Outlook.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Fitch believes there is limited upside to FMBI's ratings over the intermediate term given the bank's geographic concentrations along with its expected earnings performance.

Moreover, Fitch believes that the bank's level of recent and expected loan growth constrains its rating over the near- to medium-term. FMBI has experienced greater than average year-over-year loan growth in multiple product lines (C&I at 18.9%, Multifamily at 14.5%, Home Equity at 29.6% and total loans at 10.5%). As a point of reference, FDIC data shows that the industry has grown or shrunk the same asset classes by 4.9%, 11.6%, -4.9% and 2.9%, respectively. To the extent that the bank continues to exhibit loan growth that not only outpaces peers but also the industry and other Fitch-rated banks by multiples, pressure could be placed on the rating or Outlook.

As noted above, FMBI is approaching the $10 billion mark through organic growth as well as through acquisitions. Crossing over $10 billion results in a loss of revenue and heightened regulatory expectations that can lead to depressed earnings. Fitch's baseline expectation is for FMBI to take a measured approach to crossing over $10 billion in assets. Should the threshold be crossed over in a manner which Fitch believes is aggressive or outside of the bank's stated strategy, negative pressure could be placed on its current rating and/or Outlook.

Finally, although not expected, negative rating pressures could result if FMBI were to manage capital more aggressively in payout levels or through acquisitions. Moreover, should wholesale funding revert back to the level it was leading up to the 2007-2009 financial crisis, negative rating action could ensue.

KEY RATING DRIVERS - 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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by the trust banks and their subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings could be similarly affected.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FMBI's subordinated debt and other hybrid securities ratings are notched below its VR of 'bbb-' in accordance with Fitch's assessment of the instruments non-performance and loss severity risk profiles.

KEY RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of other hybrid securities are sensitive to any change in the company's VR.

KEY RATING DRIVERS - 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.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

FMBI's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - HOLDING COMPANY

The IDR and VR of FMBI is 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.

KEY RATING SENSITIVITIES - HOLDING COMPANY

If FMBI became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has affirmed 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-';

--Senior unsecured at 'BBB-';

--Subordinated debt at 'BB+';

--Support '5';

--Support Floor '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 '5';

--Support Floor 'NF'.

First Midwest Capital Trust I

--Preferred stock at 'B+'.

Additional information is available at www.fitchratings.com

In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria (Jan. 31, 2014');

--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)';

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014)';

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014)';

--'U.S. Banking Quarterly Comment: 2Q14 (July 2014');

--'U.S. Banks: Liquidity and Deposit Funding (Diminishing QE Effectiveness and its Impact on Systemic Liquidity and Funding)' (Aug. 8, 2013);

--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In? (July 11, 2013)

--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013)

--'U.S. Banks: Home Equity Reset Risk Hitting the Reset Button in 2014' (April 29, 2013)

--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);

--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);

--'Risk Radar' (April 2014);

Applicable Criteria and Related Research:

Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330

U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706915

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=878894

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