In taking a piecemeal approach to selling problem assets, First Midwest Bancorp Inc. seems to be pleasing only itself.
The Itasca, Ill., company booked a larger-than-expected loss in the fourth quarter after taking a hard line against its construction and development portfolio through mark downs.
To some industry observers, however, the steps were insufficient. Several analysts suggested that First Midwest tackle its persistent problems with a bulk loan sale, as other area banks have. One analyst said the company was falling behind other Midwestern banks, and another said the results had called into question management's credibility.
"If you are going to take the steps to be more aggressive, why not be the most aggressive as possible?" said John Rodis, an analyst at Howe Barnes Hoefer & Arnett Inc., referring to the $8.1 billion-asset company's decision to mark certain commercial credits to retail pricing rather than bulk-sale pricing. "They are going to have show several quarters of progress before people start to believe in them again."
Bulk sales of problem assets are gaining in popularity as a way to purge portfolios and move on.
Flagstar Bancorp in Troy, Mich., sold $474 million worth during the fourth quarter, reducing nonperformers by more than half from a quarter earlier, to $498 million.
First Busey Corp. in Champaign, Ill., sold $73 million of problem assets in the fourth quarter of 2009. Late last year, First Busey raised $84 million of capital to fuel growth.
First Midwest sold $30 million in problem assets in the third quarter, but Michael Scudder, its president and chief executive, said in an interview that it decided to deal with its construction and development portfolio by pricing it to retail market, where it can sell loans individually to investors.
That is a more methodical approach, Scudder said, and it does not preclude First Midwest from deciding to pursue a bulk sale. In fact, Scudder said the most recent markdowns would narrow the bid-ask spread for such deals.
"The more you look to accelerate a sale, the deeper the discount you have to take. That's why we felt that a retail approach was our best option," Scudder said. "We are trying to be economically responsible."
Van A. Dukeman, First Busey's president and chief executive, said his company decided to sell to centralize its problems.
"To us, it made sense to have the pain all happen at once," Dukeman said in an interview Wednesday. "After a long assessment, we said, 'Let's take the most acute toxicity and remove it.' "
First Midwest's net chargeoffs led to a provision of $74 million, up 120% from the third quarter but down 20% from a year earlier.
Despite the loan-loss provision, the company's nonperforming assets fell only 8% from the third quarter to $269.5 million.
First Midwest reported that its narrowed its loss by about 25% year over year in the quarter, to $30.3 million. Earnings of 41 cents a share were short of the average analysts' expectations by 38 cents, according to Thomson Reuters.
"Following last quarter's credit surprise, we believe the near-term focus for management and for investors will remain with addressing the credit situation, which we expect to occur throughout 2011," Christopher McGratty, an analyst at KBW Inc.'s Keefe, Bruyette & Woods, wrote in a note to clients.
That view is in opposition to several of First Midwest's Chicago-area peers that, although still dealing with problem assets, have begun to return to sustained profitability.
The $12.5 billion-asset PrivateBancorp Inc. in Chicago reported fourth-quarter earnings of $8.5 million earlier this week, its second consecutive quarter in the black, as its provision halved from a year earlier and its problem assets remained stable for a third consecutive quarter.
Analysts said they would prefer to see a bulk sale because, minus its credit issues, First Midwest is one of the better banks in the Chicago market, which has been long considered ripe for consolidation.
Scudder said he doesn't see First Midwest falling behind the pack, given its strong core operating results and its aggressive use of reserves, particularly as they pertain to the construction and development portfolio.
At the end of the fourth quarter, the construction and development portfolio had a 16% reserve, while the consolidated bank's portfolio was reserved to 2.84%.
"I don't run other people's balance sheets, but I don't think we are behind anyone," Scudder said. "We've had such strong core operating performance, and if you take away the residential development component, our credit quality is equal if not better than our peers'."
For Rodis, that is a big if.
"Their earnings power is not the highest, but they have a very attractive franchise, probably the lowest cost of funds in the market. They should be one of the best of the Chicago banks," Rodis said. "But credit is still a big issue for them. When will they get through these issues?"
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