OREANDA-NEWS. Fitch Ratings has affirmed the Long - and Short-Term Issuer Default Ratings (IDRs) of First Midwest Bancorp, Inc. (FMBI) at 'BBB-"/'F3', with a Stable Outlook following its announcement that it will acquire Standard Bancshares, Inc. (SBI), which had $2.5 billion in assets at first quarter 2016 (1Q16). See the full list of rating actions at the end of this release.

The 100% stock transaction is valued at $365 million and represents a price-to-tangible book value of 1.35x. The deal is expected to be accretive to FMBI's earnings in 2018 with a company-estimated internal rate of return (IRR) of 15%. FMBI is taking a 2.75% credit mark on SBI's loan book. The transaction is expected to close in late 2016 or early 2017, subject to regulatory approval.

KEY RATING DRIVERS

IDRS, VR AND SENIOR DEBT

Fitch's affirmation and Stable Outlook reflect the view that the SBI transaction represents low credit risk and manageable integration relative to FMBI's current rating of 'BBB-'. Moreover, Fitch believes that the company has assumed reasonable cost-save estimates given the significant amount of overlap between the two entities. Further, execution risks are viewed as modest given that SBI is in sound financial condition after capital injections in 2013 by a private equity firm. Finally, the size of the acquisition, its strategic fit and the impact on FMBI's capital ratios are all within Fitch's expectations.

Fitch had been expecting FMBI to announce a relatively larger acquisition in either 2016 or 2017 given its recent crossing over of the $10 billion asset threshold. In the past, management had indicated that the after-tax cost of the Durbin Amendment, which will take effect for FMBI in 3Q17, would be around $5 million and that the bank would take part in more meaningful M&A transactions in order to mitigate the earnings impact of growing past $10 billion in assets.

Today's announcement of FMBI purchasing SBI and Fitch's subsequent affirmation reflects Fitch's view that management continues to execute on its strategic plan to take measured, intentional actions to cross the $10 billion threshold in order to maintain reasonable earnings performance while maintaining adequate capital levels. Moreover, the affirmation reflects our expectation that integration risk is relatively lower given FMBI's previous acquisition experience.

In Fitch's view, today's announced transaction presents good cost-save opportunities of approximately 40%. This level appears reasonable given market overlap in south Chicago and into northwest Indiana between FMBI and SBI. The price of the transaction is also in-line with recently announced acquisitions for banks of similar size as well as deals within the Chicagoland market.

Fitch observes that FMBI's pro forma loan portfolio make-up should remain relatively constant post-closing. The company will remain commercial-loan focused with commercial and industrial (C&I) loans making up around one-fourth of the loan book, and CRE, inclusive of owner-occupied and multifamily, making up just under half. In Fitch's view, this presents positives and negatives to FMBI's overall rating over time. Positively, it shows management's desire to stay within its core lending competencies. Negatively, the bank's pro forma CRE concentration will continue to constrain FMBI's rating over time.

FMBI's capital position is expected to remain relatively stable. Estimated pro forma, combined tangible common equity (TCE) ratio is expected to remain around 8% when the transaction closes, in line with peers, and then climb to the mid-to-high 8% range into 2017, as earnings retention is expected to outpace shareholder distributions as well as asset growth.

Fitch last affirmed FMBI's IDRs and Viability Rating (VR) in September 2015.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

FMBI has an SR of '5' and SRF 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 trust preferred stock is notched four levels below its VR. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, Fitch has affirmed these ratings due to the affirmation of the VR. FMBI's trust preferred stock is notched two times from the VR for loss severity, and two times for non-performance.

HOLDING COMPANY

The IDR and VR of FMBI 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 AND SENIOR DEBT

Fitch believes there is limited upside to FMBI's ratings over the intermediate term given the continued bank's geographic concentrations. Moreover, rating upside is limited as FMBI works on closing and integrating today's announced transaction.

Over a longer period of time, Fitch continues to believe there could be positive rating or Outlook movement for FMBI. Catalysts for such rating actions would include evidence of underwriting standards in-line with higher rated peers as its loan portfolio further seasons. Further catalysts include the ability to generate stronger core profitability measures while maintaining good capital ratios.

FMBI's ratings are sensitive to its ability to achieve many of the key targets in undertaken for this transaction. Today's acquisition should aid in absorbing the adverse impact on revenue related to the Durbin Amendment, allowing FMBI to maintain reasonable profitability going forward. Although not expected, the bank's ratings could be pressured if it is not able to realize/generate the IRR, estimated profitability improvements, and cost saves incorporated in the deal. Further, should unexpected operational and integration risks arise that are material to financial performance, FMBI's rating could likely be reviewed for negative rating action.

Additionally, ratings pressure could ensue should management take an aggressive approach to capital management such as future acquisitions of size or shareholder distributions that push capital meaningfully below peer levels.

Finally, FMBI has a $115 million senior debt issuance maturing in November 2016. Fitch expects FMBI to issue either debt or a hybrid instrument in advance to fund this maturity. However, failure to do so and a subsequent drop in holding company liquidity could result in adverse rating action.

SUPPORT RATING AND SUPPORT RATING FLOOR

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

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Hybrid capital issued by FMBI and its subsidiaries are all notched down from the VRs of FMBI in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in FMBI's VRs.

HOLDING COMPANY

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

LONG AND SHORT-TERM DEPOSITS

The ratings of long - and short-term deposits issued by FMBI and its 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 impacted.

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 debt at 'BBB-';

--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+'.