First Midwest Bancorp Inc., the $8.38 billion-asset parent of First Midwest Bank, missed Wall Street’s expectations for its third-quarter results, sending the Itasca-based lender’s shares down 13.7 percent in mid-afternoon trading.

By some measures, credit trends took a turn for the worse.
“While elevated from last quarter, problem assets remain well below peak levels, with the quarter’s increase largely due to three individual borrowers,”   Chief Executive Michael Scudder said in a statement. “During the quarter, we disposed of $30 million of nonperforming loans, contributing to the quarter’s comparatively higher charge-off levels.”

During a conference call, he characterized the economy as “tough and noisy,” the recovery as slow and the real estate market as “illiquid.”

Terry McEvoy, an analyst with Oppenheimer, said First Midwest’s credit-quality trends were  worse than expected.

Non-performing assets were $283.5 million Sept. 30, an increase of $17.5 million from June 30.  First Midwest’s residential construction book has experienced the most pressure.

Also,  charge-offs for third quarter 2010 were $34 million, up from $20.2 million in the second quarter. A  charge-off occurs when a bank feels there is risk to the borrower’s ability to repay the loan.

In the 55-minute call with analysts, First Midwest noted that its fee-based revenues continued to improve.

Starting July 1 for new customers and Aug. 15 for existing ones, banks  needed a consumer’s approval to process everyday debit and ATM card transactions that exceed the account balance. In the past, banks often have covered overdrafts but socked the account holder with a $20 or $30 fee.

“Of those consumers that overdrew their account in the past year,  over 70 percent to date have opted into our programs,” First Midwest said in the call.

First Midwest has bought three failed banks, through financial assistance from the Federal Deposit Insurance Corp., in the last year.

First Midwest said it’s still well capitalized, so it has the ability to do more deals. It said that  FDIC deals appear to be getting more expensive and less frequent, but it remains interested in such assisted deals.

First Midwest also expects to see more “unassisted” opportunities from banks that haven’t failed but that are looking for a partner. And as credit trends become easier to track into 2011, becoming more stable, potential buyers will be more willing to make unassisted  deals, the bank said.

First Midwest was also asked about banks from Akron, Ohio, and Green Bay, Wis., a reference to FirstMerit and Associated Bank, which are becoming more active in the Chicago area.

First Midwest said that it has been in the highly competitive Chicago market for about 65 years, and has learned that a lack of “tenure” can be a “huge hurdle” for new market entrants.

It said the market for commercial and industry lending, or business loans, is “extremely competitive” but one in which it wants to build more business. It said it’s “open for business” in real estate lending but is “extremely selective.”

The recent acquisition of one failed bank, Palos Bank & Trust, gave First Midwest access to 18,000 new households. First Midwest said it also sees “good opportunities” for wealth management.

See its full financial results.