Fitch Affirms First Midwest's LT IDR at 'BBB-'; Outlook Stable
Fitch recently affirmed FMBI's rating and maintained the Stable Outlook when the company announced the acquisition of Standard Bancshares, Inc. (SBI) in June 2016. For more information, please see the press release titled 'Fitch Affirms First Midwest at 'BBB-' following Acquisition Announcement; Outlook Stable' published June 29, 2016.
KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The affirmation of FMBI's ratings reflects its steady operating performance and solid execution of several acquisitions. The affirmation also 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.
These strengths are offset by relatively high volatility in asset quality metrics through down credit cycles, stronger loan portfolio growth than peer institutions, and its geographic concentration within the Chicagoland region, an area that has a comparatively weaker fiscal and economic profile.
Fitch notes that FMBI's asset quality has continued its steady improvement over the past year. FMBI's non-performing asset (NPA) ratio dropped from 1.1% at June 30, 2015 (2Q15) to 0.9% at 2Q16. Nevertheless, in Fitch's view asset quality metrics have benefited from limited portfolio seasoning and a sizable level of organic growth in recent periods coupled with low debt servicing requirements in the current rate environment. Fitch expects FMBI's level of NPAs to remain relatively flat in the near term as the commercial loan portfolios season. This expectation is reflected in today's rating affirmation as well as the Stable Outlook.
As noted above, FMBI's loan growth has been outsized relative to peers and the industry. Organic growth continues to be predominantly in the Commercial & Industrial (C&I) loan portfolio and has been driven by FMBI's entrance into several specialty lending segments including asset-based lending (ABL), healthcare lending, agribusiness lending and equipment leasing. These platforms tend to have wider geographic reach than FMBI's local business banking which tends to be constrained Chicago's aforementioned economic challenges.
While generally viewing FMBI's balance sheet diversification as positive, Fitch continues to maintain a cautious view of strong C&I growth across the industry. Accordingly, we will continue to monitor C&I loan growth relative to peers and assess any deterioration in asset-quality leading indicators. For the time being, FMBI's outsized growth remains a rating constraint.
After the closing of SBI, Fitch observes that FMBI's pro forma loan portfolio make-up should remain relatively constant. The company will remain commercial-loan focused with 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 ratings are supported by a solid funding and liquidity profile. Similar to most in its peer group and across the industry, FMBI has reduced its exposure to more volatile sources of funding through good core deposit growth enabled by interest rates that remain at historical lows.
As expected, FMBI's loan-to-deposit ratio has risen over the past year to 89% at 2Q16 as loan growth has outpaced deposit growth. However, the ratio remains within Fitch's expectations and reasonable relative to FMBI's rating. Moreover, FMBI's cost of deposits and interest bearing funds of 11bps and 41bps, respectively through 1H16, are considered strong and supportive of FMBI's current rating and Outlook. While Fitch expects FMBI and other banks to experience deposit run-off once rates rise and economic activity increases, the agency does not expect FMBI's overall funding profile to revert to an outsized reliance on wholesale funding.
Fitch expects FMBI's capital position to remain relatively stable over the near - to medium-term. Estimated pro forma, combined tangible common equity (TCE) ratio is expected to remain around 8% when the SBI transaction closes. After closing, Fitch's expects core capital levels to climb to the mid-to-high-8% range into 2017, as earnings retention is expected to outpace shareholder distributions and asset growth. This expectation is incorporated into today's affirmation and the Stable Outlook.
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.
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
FMBI's IDR and VR 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
Consistent with what was communicated in June 2016, 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.
FMBI's ratings are sensitive to its ability to achieve many of the key targets undertaken for the SBI transaction. The 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 internal rate of return (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.
Over a much longer horizon, Fitch believes there could be limited upside rating momentum. Catalysts for such rating actions would include evidence of underwriting standards and performance in-line with higher rated peers as its loan portfolio further seasons. Further these would include the ability to generate stronger core profitability measures while maintaining good capital ratios. Lastly, Fitch would consider evidence that operational infrastructure has kept pace with FMBI's expanded scale.
Finally, FMBI has a $115 million senior debt issuance maturing in November 2016. FMBI's ratings are sensitive to the manner in which this maturity is addressed. A significant usage of liquidity at the holding company could put pressure on the rating or Outlook.
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 affected.
The rating actions are as follows:
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+'.
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