A Sweet Midwest Bank Recovery Play: Street Whispers

Tickers in this article: FMBI

NEW YORK (TheStreet) -- A Chicago-area bank with a stubborn level of nonperforming assets could be just the ticket for investors looking to get in early on a nice recovery play.

First Midwest Bancorp of Itasca, Ill., has been trying to work through an elevated level of problem loans, with a ratio of nonperforming loans to total loans of 3.90% as of June 30.

FIG Partners analyst John Rodis says that for First Midwest "there is a pretty good chance of a bulk loan sale between now and year-end," allowing the bank to hit the reset button with a clean slate and better support for the shares, with earnings unhampered by continued high levels of reserve provisioning.

"The devil is in the details as far as what sort of pricing they get," says Rodis, "but I think it will be a manageable hit of they do some sort of deal."

First Midwest had $8.1 billion in total assets as of June 30. The company on July 25 reported second-quarter net income applicable to common shares of $6.3 million, or nine cents a share, declining from $7.6 million, or 11 cents a share, in the first quarter, and $8.0 million, or 11 cents a share, during the second quarter of 2011. The decline in earnings 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 the previous quarter, and $18.8 million a year earlier.

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.

Rodis said after First Midwest reported its second-quarter results that it was "a decent quarter for the Company as they continued to work their way through the current operating environment," and that "what was encouraging to see was a pick-up in core loan growth. Core loans increased 3.1% (Q/Q-not annualized) to $5.3 billion."

The analyst also said that First Midwest's "capital levels remained solid," with a tangible common equity ratio of 8.9%. The company reported a June 30 tangible book value of $9.30 a share, and Rodis said that "if FMBI does choose to do some sort of bulk loan sale we believe the ultimate hit to tangible book value (TBV) will be manageable in the 5% area," based on the assumption that the company "sells $200- 300 million in non-performing loans (which is ~ half the current level of non-accruals + potential problem loans) and takes an additional hit of $0.10-0.20 on the dollar ($1.00)." Rodis believes "the after-tax impact on TBV would be ~ $0.25-0.50 per share," on a bulk loan sale of roughly $250 million.

Rodis rates First Midwest "Outperform," with a $12 price target, and estimates the company will report earnings of 45 cents a share for all of 2012,not factoring in a potential loan sale, followed by 2013 EPS of 85 cents. The shares trade for 1.3 times tangible book value and the analyst said "we believe a lot of the bad news is already built into the stock."

First Midwest's shares closed at $11.59, returning 15% year-to-date, following a 12% decline during 2011.

FMBI ChartFMBI data by YCharts

Rodis said that "longer term we believe the FMBI franchise remains one of the more attractive Chicago-based banks. And from a fundamental perspective we believe a number of the operational changes that have been made over the past year are starting to take hold and as a result we think things are moving in the right direction."

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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Tickers in this article: FMBI