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First Midwest Finally Cleans House

Rodis has a neutral rating on First Midwest, with a price target of $13, and said on Thursday that the level of write-downs on the transferred loans "was somewhat higher than expected," and that tangible common equity "remained solid at 8.26% vs. 8.91% at June 30th while total risk-based capital (TRBC) fell to 11.65%. We expect TRBC to be back above 12% in the next few quarters."

The analyst said that "overall, we were pleased to see the Company get more aggressive with its problem assets this quarter," but expressed some caution, saying that "we believe investors will be happy with these actions but may be surprised by the additional 'hair-cuts' taken to get these loans ready for accelerated resolution/sale," and that "the fact that these loans have not been sold yet also poses some added pricing risk when the loans are ultimately sold or returned to performing status."

Rodis raised his 2013 earnings estimate for First Midwest by a dime to 95 cents, "driven by lower provisioning as the actions taken this quarter should lower credit cost going forward," and also a decline in his 2013 operating expense estimate by $5 million, to $240 million. The revised estimates assume "the margin is in the 3.80-3.85% range for 2013 with core loan growth of 6-8%," and an increase in loan loss reserves to a level covering 1.80% of noncovered loans by the end of next year."

Jefferies analyst Emlen Harmon rates First Midwest a "Buy," and on Monday raised his price target for the shares by a dollar to $15, "as the announcement of the bulk sale of assets reduces tail risk."

Harmon lowered his 2013 EPS estimate by five cents to $1.00, "on a higher than expected expense" into the first half of next year, but maintained his 2014 EPS estimate of $1.20, "as we continue to expect normalized charge-offs around 45bp and credit-related expenses roll off."

Harmon's price target "is based on a 12.5x multiple on '14 EPS of $1.20. This multiple is a shade above our regional bank universe given improving growth prospects."

First Midwest's shares closed at $12.66 Friday, returning 25% year-to-date, following a 12% decline during 2011.

The shares trade for 1.5 times tangible book value, according to Thomson Reuters Bank Insight, and for 11 times the consensus 2014 EPS estimate of $1.16, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is 95 cents.

FMBI Chart FMBI data by YCharts

Interested in more on First Midwest Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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