First Midwest Snaps Up Failed Bank

NEW YORK ( TheStreet) -- First Midwest Bancorp ( FMBI) on Friday made its first acquisition of a failed bank in nearly two years.

The Illinois Department of Financial and Professional Regulation shuttered Waukegan Savings Bank, which had been included in TheStreet's Bank Watch List of undercapitalized institutions for more than a year.

When it failed, Waukegan Savings Bank had two offices, $88.9 million in total assets and $77.5 million in deposits. The Federal Deposit Insurance Corp. was appointed receiver, and sold the failed bank to First Midwest's main subsidiary, First Midwest Bank, of Itasca, Ill.

The failed bank's two branches will reopen during their normal business hours as branches of First Midwest Bank. The FDIC estimated that the cost of Waukegan Savings Bank's failure to the deposit insurance fund would be $19.8 million.

First Midwest CEO Michael Scudder said that "with our complementary branch locations, business lines, and community banking values, Waukegan Savings Bank and First Midwest are a great match." First Midwest said that it picked up $63 million in loans as part of its deal with the FDIC.

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First Midwest's previous failed bank acquisition was Palos Bank and Trust of Palos Heights, Ill., which failed in August 2010, and had $493 million in assets, with five branches.

First Midwest Bancorp had $8.1 billion in total assets as of June 30. The company on July 25 reported second-quarter net income of $6.3 million, or 9 cents a share, down from $8.0 million, or 11 cents a share, a year earlier. Earnings also fell sequentially, from $7.6 million, or 11 cents a share, in the first quarter of 2012.

The declines mainly reflected an increase in the company's provision for loan loss reserves to $22.5 million in the second quarter, from $18.2 million in the first quarter and $18.8 million a year earlier.

First Midwest has been trying to work through an elevated level of problem loans, and its ratio of nonperforming loans to total loans was 3.9% as of June 30.

The year-over-year earnings decline also resulted from a narrowing of the company's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- to 3.88% in the second quarter and the first quarter, from 4.10% in the second quarter of 2011, following the trend for many regional banks in the prolonged low-rate environment.

KBW analyst Christopher McGratty rates First Midwest outperform and has a $12.50 price target on the stock.

He says that "the risk-reward remains favorable" because of relatively low stock price multiples, "particularly given the event-driven catalyst that may emerge," if the company pursues a bulk sale of nonperforming loans.

McGratty notes that First Midwest has a Tier 1 common equity ratio of 10.2% and a tangible common equity ratio of 8.9% as of June 30.

The analyst says that means the bank has more than enough capital "to absorb any potential capital hit." What's more, he says, a potential bulk sale of problem loans could "serve as a meaningful positive catalyst for the shares."

McGratty estimates that First Midwest will earn 44 cents a share for all of 2012, followed by EPS of a $1.00 in 2013.

First Midwest's shares closed at $11.52 Friday, which means they have gained 14% year to date, following a 12% decline during 2011.

FMBI Chart FMBI data by YCharts

The shares trade for 1.2 times their reported June 30 tangible book value of $9.30, and 13 times the consensus 2013 earnings estimate of 89 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 45 cents.

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

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

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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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