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10 Community Bank Takeover Targets

3. First Midwest Bancorp

Company Profile

Shares of First Midwest Bancorp (FMBI) of Itasca, Ill. closed at $12.50 Monday and were flat from a year earlier.

The company is one of two Chicago area banks mentioned as possible targets by John Rodis of Howe Barnes Hoefer & Arnett, because of "scarcity value" for acquirers seeking an entrance into the local market and because of the "renewed interest in non-assisted M&A, like we saw in Texas." Following a disappointing fourth-quarter earnings release, Rodis downgraded his rating for the company and said there was "no doubt" that First Midwest was a potential takeout target at $15 to $18" a share, based on his "internal burn-down assumptions."

Regarding the long-term prospects for the company and the possibility of a take-out, Rodis said "historically, First Midwest has had solid fundamentals. It's still very viable and very attractive which should ultimately bode well, one way or another, for shareholders," he said.

First Midwest has acquired two failed banks over the past year with assistance from the FDIC, including Palos Bank & Trust of Palos Heights, Ill. in August and Peotone Bank & Trust of Peotone, Ill. in April.

Income Statement

First Midwest reported a fourth-quarter net loss applicable to common shares of $30.3 million, or 41 cents a share, after breaking even the previous quarter. A year earlier, the company reported a net loss applicable to common shares of $39.5 million, or 73 cents a share.

CEO Michael Scudder said First Midwest's "year-end assessment of market realities" for its nonperforming land and construction loans, as well as repossessed property, led the company to "more aggressively pursue disposition, significantly increasing our fourth quarter credit costs." He added that the moves would "better position the Company to remediate problem assets sooner, lower future remediation costs, and expand and stabilize earnings."

The fourth-quarter provision for loan losses was $73.4 million, as the company recorded net loan charge-offs of $73.8 million.

On a brighter note, the First Midwest reported that its average transactional deposits were up 18% year-over year and its net interest margin during the fourth quarter was a competitive 4.02%, down slightly from 4.04% a year earlier.

On Thursday, Christopher McGratty of KBW maintained his neutral rating on First Midwest but lowered his earnings estimates for the company, as "the focus will remain on improving asset quality trends. For 2011, McGratty now expects First Midwest to lose 10 cents a share when he previously estimated earnings of 33 cents a share. He lowered his 2012 earnings estimate to 80 cents a share from a dollar.

Balance Sheet

Total assets were $8.1 billion as of December 31 and with the aggressive credit actions in the fourth quarter, nonperforming assets totaled $269.5 million, or 3.06% of total assets, improving from 3.39% the previous quarter and 4.36% a year earlier.

The fourth quarter net charge-off ratio was 5.61% and reserves covered 2.84% of total loans as of December 31.

The company owes $193 million in TARP money and reported a Tier 1 leverage ratio of 11.10% and a total risk-based capital ratio of 16.18% as of December 31. The tangible common equity ratio was 7.99%.

Stock Ratios

The shares trade for 12 times the consensus 2012 earnings estimate of 97 cents a share.

Analyst Ratings

Two of the 12 analysts covering First Midwest rate the shares a buy, nine have neutral ratings and one analyst recommends selling the shares.

Following the fourth-quarter earnings release, Rodis said that "any time you see a big loss like this which wasn't previously telegraphed, management's credibility is called into question," but bad news is potentially good news from an investor's standpoint," since a take-out for a premium could be more likely. He lowered his rating to neutral following the earnings release, and said that "while we applaud this more realistic approach to valuing troubled assets we wonder if this quarter's marks were enough or if more will be needed in the future."

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