First Midwest Bancorp, Inc.
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2014 Third Quarter Earnings Conference Call. At this time, I’d like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions-and-answers for analysts only after the presentation. It is now my pleasure to turn the floor over to Nick Chulos, Executive Vice President and Corporate Secretary of First Midwest Bancorp. Sir, you may begin.

[Nicholas J. Chulos:]

Good morning, everyone, and thank you for joining us today. Following the close of the market yesterday, we released our results for the third quarter of 2014. If you haven’t already received a copy of this press release, you may obtain it on our website or by calling area code 630-875-7463. As is customary, during the course of the discussion today, our comments may include forward-looking statements. These statements are not historical facts and are based on management’s existing beliefs and expectations, as well as the current economic environment. These statements are subject to certain assumptions, risks, and uncertainties, and are not guarantee of future performance. Actual results or outcomes may differ materially from those described or implied in our statements. The risks and uncertainties contained in our most recent 10-K and other filings with the SEC should be considered when evaluating any forward-looking statements. And, of course, we will not be updating any forward-looking statements to reflect any facts or circumstances that may arise after this call. In addition, in light of our pending acquisition of Great Lakes Financial Resources and its subsidiary, Great Lakes Bank, I also refer you to the additional information in our earnings release relating to this transaction. Here this morning to discuss our third quarter results and outlook are Mike Scudder, President and Chief Executive Officer of First Midwest Bancorp; Mark Sander, our Senior Executive Vice President and Chief Operating Officer; and Paul Clemens, our Executive Vice President and Chief Financial Officer. With that, I will now turn the floor over to Mike Scudder.

[Michael L. Scudder:]

Thank you, Nick. Good morning, everyone, and as always, thank you for joining us. We have a lot to talk about this morning as this was a very active and what I described in the release as a strategically dynamic quarter for us. So as is our practice, I’ll cover the highlights and then let Mark and Paul offer some additional color. For the quarter, our net income totaled $18.5 million, or $0.25 per share. That was on par with last quarter and down from a year ago. Now, as you look at the comparisons year-over-year, we would simply remind you that we generated about $0.15 in accretion from our liquidation of an equity investment at a large gain that was net of some other treasury-related offsets that combined, as I said, to add about $0.15 per share. As we have shared previously, the quarter was to include and did include about $0.03 attributed to acquisition and integration costs, largely related or entirely related to the Popular transaction. And factoring this out of the quarter, our earnings came in at $0.28, which was up about 9% from the second quarter. So as I alluded to, we closed the Popular transaction in early August, which along with good business momentum overall helped our top line revenues to increase 8% linked quarter. If you look at business away from the acquisitions, our loans increased about 4% annualized and that reflected solid commercial and agricultural growth, offset by what we described previously as some anticipated CRE paydowns or commercial real estate paydowns, and, again, Mark will elaborate on that further. Our net interest margin improved 7 basis points to 3.72%. Our fee-based revenues grew 10%, which was a strong quarter for us and concurrently, the combination of these helped to improve our efficiency ratio to 62%, which continues our goal of driving greater overall efficiency. Now, focusing further on the acquisition front, we’re very pleased to share that we have received all required approvals from the Federal Reserve pursuant to our Great Lakes acquisition and simply await final Great Lakes shareholder and the typical and customary closing conditions. Given that, we remain on pace for both closing and our system conversion by the end of this year. We’re also equally pleased to share that we reached late in the quarter an agreement to acquire National Machine Tool Finance. Now, National Machine has been in the equipment lease and finance business for over 28 years and a customer of ours for well over 15 years. Through this acquisition we add equipment and lease financing to our product set, as well as a talented and experienced sales team. National Machine currently originates about $40 million in leased products per year. So collectively we believe we can expand on that through leveraging our own platform. So we’re very excited to announce that today. Additionally, the quarter evidenced progress on what has been a focus, as I’ve been around talking with investors and certainly publicly hear about our ongoing efforts to optimize our distribution network. So this took the form of what I would call really three separate initiatives or examples of how we continue to work to do that. First, we have been working for a number of years to sell what was our original Company headquarters in Joliet. This was a four-storey, 60,000-square-foot building that we’re able to both market and sell and then that will result in over the next few quarters, we’ll relocate the existing operational and sales activities that are housed into those buildings into our existing location. Second, we’re able to negotiate a swap of adjacent properties and relocate one of our best branches from their existing roughly 17,000-square-foot facility into a brand new less than 3,500-square-foot corner property. So we got, what I call, the daily double. We exited property that had more excess space than what we really required, relocated that into a more efficient newer space, and then in combination realized gains of $4 million on the transactions that will also see us to operate more efficiently into the future. And then finally, away from that, we also saw the closing of two facilities. One of which saw us take a $400,000 charge to lower its carrying value in the quarter. So, again, a very active front in that, but I would offer special thanks to our teams, who have got this done as this was the combination of what I would call multi-quarter and in some cases multi-year efforts to make those happen. Finally, our loss provision for the quarter was inflated by higher charge-offs that came from a single commercial borrower. We were very disappointed, obviously, to say the least, to take a $7.5 million to accommodate a circumstance with a single, larger commercial borrower that presented itself very quickly. Away from this unusual circumstance, our credit performance was right in line with our expectations. With that, let me turn it over to Mark and Paul, who can both offer additional color. Mark, if you could.

[Mark G. Sander:]

Thank you, Mike. Starting with loans, our activity and results this quarter match expectations. New loan production was within the same strong range that we have generated all year, although, as Mike alluded to, anticipated paydowns held our quarterly organic growth to about 4% annualized. In our last earnings call, we talked about this. We noted that we foresaw significant repayments in our commercial real estate book, which away from acquisitions actually shrunk a little bit this quarter despite good production there, I would say, due to these anticipated property sales and some long-term refinancings with some insurance companies. So organic commercial loan production was almost entirely this quarter from our legacy teams, split about two-thirds in C&I including our long-tenured agricultural team and about one-third in commercial real estate. As we’ve stressed previously, we believe our multiple asset formation strategies provide for greater consistency in meeting or exceeding our asset formation growth targets. This quarter’s production was like last, again, very granular as we had very few new loans greater than $10 million in fundings. This space is an area of ongoing focus for us, as we believe there are good opportunities with small to mid-sized companies and real estate investors who value relationship, I will say, in our footprints. We are pleased to be getting more looks at solid deals this year versus last and it’s a sign we believe that our investments and marketing efforts are paying off. This quarter our acquisition of Popular added about $530 million of loans to our September balance sheet, most notably in multi-family. That CRE category grew over $200 million from last quarter, largely through the acquisition, but we also booked a couple of good deals from our Legacy Group here as well. As we stated previously, we’re staying conservative in our underwriting parameters, which include stressing real estate loans at higher cap rates, than currently exist in the marketplace. The acquisition also included about $30 million of consumer loans, which accounted for most of our growth in that category. While we continue to generate steady, organic, installment loan growth, our one to four totals actually fell slightly, as we sold the majority of our $40 plus million of production and through normal amortization. Thus overall, we were pleased with our loan generation in the quarter. Total loans away from covered are up almost $1 billion from a year-ago and notably are up $450 million from last September, exclusive of our Popular acquisition. Again, I’ll say, $450 million or 8% year-over-year growth excluding Popular. Our seasonally slow fourth quarter loan growth is looking to be fairly similar to our third quarter levels. Shifting to fee income, we posted strong results in several areas in Q3, again consistent with our strategic focus and previous guidance. Clearly, our acquisition contributed modest growth in the quarter, but I would stress organic results in several areas drove the numbers and were very encouraging. For instance service charges are up 10% from last quarter and 4.5% from a year-ago, largely on the strength of treasury management growth of 8% year-over-year, which more than offset expected declines in NSF fee income. Card-based income was again very strong in the quarter. Year-over-year growth from our retail and corporate purchasing card income streams were up $1 million in total, but importantly, $650,000 up, exclusive of benefits we received from a contract negotiation in the quarter. Mortgage banking quarterly income comparisons were flat, consistent with production. We expect better results in the future here and just added some talented originators and a leader for this effort to generate our fair share of mortgage volume within our markets. Turning to wealth management, wealth management was yet again a strong performer in Q3. We continue to see solid growth in all areas of wealth management, guardianships, personal trust, employee benefits, retail brokerage, and private banking. Clearly, we benefit from diversity and the sources of our revenue and remain optimistic about our future here. Continued expansion across our entire footprint, including bringing these enhanced capabilities to all acquired operations should provide more growth opportunities. So in summary, on fee income, our strong results in the third quarter suggest good momentum into the fourth, as well. Before I conclude the revenue story, I want to just note that the integration and early signs relative to our Popular acquisition are a very positive story. Operational and personnel conversions were smooth, morale is high, and early reads – they are early, but our early reads on client retention and revenue growth opportunities are at or above our expectations. So now turning to credit, clearly we were disappointed, as Mike mentioned, by an unexpected large corporate charge we took, but otherwise the quarter was in line with expectations. This isolated and unique event resulting from a material misstatement of tenured borrower’s financial statements, caused a $7.5 million charge-off this quarter. This was a circumstance that manifested quickly as it was underwritten to appropriate standards and the fact that the company’s financial statements were not reliable was of course a surprise to us. In these situations, you have to call it like you see it and deal with it quickly, which we have, and we remain in active resolution mode. In addition to this charge-off that we took, we also provided specific allowance reserves, such that we believe we are sufficiently reserved for this credit. Away from this event, charge-offs would have been right in line with our second half guidance that we provided during our Q2 call. We reiterate that guidance for Q4, namely charge-offs to be roughly equal to the normalized Q2 and Q3 levels. Despite the noise this quarter, our metrics at quarter end are where we expected them to be. Our levels of NPAs and adverse performing credits are lower than pre-cycle levels, remain very manageable and are well within industry norms. So, Paul is going to take it from here.

[Paul F. Clemens:]

Thank you Mark and good morning everyone. Let me cover the net interest income and margin and then I’ll cover operating expenses as well. You got the highlights with regards to the increase. Let me take you through the nuts and bolts of what actually happened. Net interest income increased 7% from the second quarter and 2% if you exclude the contribution from the Popular transaction, which closed in early August, around the 8 of August, not around on the 8 of August. The key drivers includes the $550 million in loans from Popular, which added roughly 10% to loan growth, as well as a higher yield on these loans of 5%, given the greater proportion of fixed-rate loans as compared to our legacy portfolio, which has a weighted yield of 4.21%. The $732 million deposits from Popular accounted for the bulk of the 10% increase in linked-quarter deposits, as well. The weighted average cost of these deposits are slightly more at 33 basis points, compared to our 2014. Combined Popular accounted for probably two-thirds of the increase, and the net interest income were about $3.5 million. In addition, we fixed $325 million of floating rate loans during the quarter to an interest rate swap, excuse me, that contributed approximately $800,000 in additional net interest income for the quarter, and by matching this off against the four year FHLB commitment, we were able to essentially up our fixed rate position with operating on duration. And finally, we realized a full quarter impact of the second quarter prepayment of $115 million in FHLB borrowings, which generated additional interest savings of approximately $200,000 – approximately $150,000. A combination of all these increased our net interest margin by seven basis points as Mike said on a linked-quarter basis to 3.72%. As we’ve talked about before we continue to see roll-off the drag from rate floors on our floating rate loans, down to 21%, have floors now compared to 24%, that’s steadily marching down. But a shift to floating rate loans and in particular LIBOR-based floating rate loans, including Popular continue to pressure our loans yields. As we look to the fourth quarter, compared to the 7% increase in net interest income, we saw for the third quarter, we expect somewhat less growth for the fourth quarter. We’ll see the full quarter impact of Popular, which roughly in other $1.5 million, I would guess, our estimates. Some further lift from the loan swap, roughly an additional $200,000 and some from additional legacy loan growth. We wouldn’t expect much of any impact from Great Lakes, given the expected close late in the quarter. However, at acquisition, Great Lakes we add another $250 million in loans, $300 million in securities and $500 million in deposits. Net interest margin, exclusive of the impact of Popular and Great Lakes should be about neutral to the third quarter with Popular, and the other item that I’ve just mentioned adding roughly three to five basis points. And we move to the noninterest expense, for a minute. Our third quarter noninterest expense was $70 million, and includes $3.7 million of integration costs, and probably $2 million recurring operating costs of the acquired Popular branches, for two thirds of the quarter. Excluding these, we would have been in line with our guidance of roughly around $64 million. Our efficiency ratio as Mike mentioned improved from 63.06% for the quarter to 62% excluding all the integration cost. As we look to the fourth quarter, our number will increase as we absorb, obviously, the recurring operating costs of the Popular full quarter, which would be another $1 million, roughly. And perhaps some initial costs from operating Great Lakes. In addition, we expect to incur approximately $10.5 million to $11.5 million of integration cost associated with Great Lakes in fourth quarter and hope to absorb all that in the fourth quarter and have no lingering integration cost in 2015. For the fourth quarter, we expect noninterest expense, excluding integration cost, to approximate $67 million to $68 million, which would vary somewhat by some seasonal expenses, perhaps related to marketing. In subsequent quarter we’ll an increase related to the Great Lakes acquisition but we’re currently working through our 2015 plan and we’d integrate Great Lakes before we’re ready to actually put a number on what we think our normal lies recurring operating expenses are. So with that let me turn it over to Mike.

[Michael L. Scudder:]

Thanks, Paul. Well, as you can see it was obviously a very active quarter. Before I open it up for questions, let me offer further remarks. We feel very good about where we’re positioned right now. Our business momentum is solid and we think we’re well positioned. Through the acquisitions we’ve added, strong talent to what is an already talented and engaged group of colleagues, while simultaneously broadening our product lines and distribution. This has allowed us to leverage our culture and don’t underestimate that, infrastructure and capital to produce stronger returns for our share holders, while strengthening our liquidity and core deposit foundation. So as we look ahead, we’re very excited about our opportunities and the opportunities that lie before us. We feel we’re very well positioned to continue to grow and expand our business. And certainly as we operate and navigate an operating environment that certainly is challenging for some of our peers. So with that let me open it up for questions.

[Operator:]

(Operator Instructions) Please standby for your first question sir. And our first question comes from Chris McGratty from KBW. Please go ahead with your question.

[Michael Pareto:]

Hey good morning everyone. This is actually Mike Pareto stepping in for Chris.

[Michael L. Scudder:]

Hi Mike.

[Michael Pareto:]

Hi. On the commercial credit, was that a share national credit, or was that a sole credit for you guys? And is there anything else in your portfolio that has any similarities to that one credit?

[Paul F. Clemens:]

I’ll answer it was actually neither of those. It was a shared credit, but not a shared national credit if you will, okay. So there were three banks in the deal in total, but not three national banks. So that’s what would make it a shared national credit. To answer your question, do we have other exposures as large? Yes, but a handful of exposures this large. And again, I would just stress this one, when you say do we have anything else like it in our portfolio, I’d said no. I mean, the circumstances that happened in this highly unusual circumstance, we surely don’t believe we have anything else like it in our portfolio.

[Michael Pareto:]

All right.

[Mark G. Sander:]

Let me add to add to that, as you think about it, well it was shared with a couple of other banks, we were the lead on the relationship itself. So this was a client of ours that we had frankly participated with some other institutions out.

[Michael Pareto:]

All right, great, thanks. Then just ex that, on the charge-offs you guys have been running in like the 40-ish, 50-ish basis point range this year on a normalized basis, which is still a little bit above where some of your local peers are running. Is there anything that you guys have going on that you can link that to, and do think there is room for that charge-off rate to go down as we go forward here or is that something you expect to remain pretty stable?

[Michael L. Scudder:]

Well, this is Mike and I can let Mark to move back into it. We talked a while about how consumer and the push through on home equity and those particular products that had an impact on our charge offs through the first two quarters and guided towards the fact that that was going to have some relative impact on over the last half of the year as we push through the final pieces of that. You saw some portion of that even in this number as we move through it. So we would look for continued improvement in that particular segment going over time. So I think the answer to your question is yes, I think that’s had an influence that we talked about for a while will be relatively short lived, it’s felt longer lived, but it will pushed through the rest of this year.

[Michael Pareto:]

Okay, so is the right way to think about the charge-off rate, then, consistent with your comments earlier in the call, that fourth quarter will be more normalized like in the beginning of the year, but you do expect that there is room for improvement going forward?

[Michael L. Scudder:]

Yes, I would say this. We’ve given guidance all year of 35 basis points to 55 basis points for the year as we pushed throughout 2014 this consumer book that we’ve talked about in previous quarters. And so that’s a largely a through 2014 event. As you look at our charge-offs even this quarter, all three quarters, we would be right in the middle of that range, it’s just about this one event.

[Michael Pareto:]

All right, great. Thanks for the color guys.

[Operator:]

Our next question comes from Brad Milsaps from Sandler O’Neill. Please go ahead with your question.

[Brad Milsaps:]

Hi, good morning.

[Michael L. Scudder:]

Good morning, Brad.

[Brad Milsaps:]

Paul, thanks for all the color on the expenses. Just to maybe delve in a little bit more, some of the merger costs and restructuring charges that you had, can you give me a sense of kind of what categories they were in? I assume all that wasn’t buried in other, but maybe some in professional fees or maybe some in the occupancy line? Just kind of trying to get a sense of kind of where some of those line items will trend over the next few quarters.

[Paul F. Clemens:]

Yes. That’s a good question. Probably in the Q, you’ll see a better break out this. It’s in salaries, it’s in professional expenses, occupancy and then down in the other expenses. I guess it colors all three or four of those lines to be honest with you.

[Brad Milsaps:]

Okay, so it’s best…

[Paul F. Clemens:]

I know it is a good answer for you today.

[Brad Milsaps:]

So best probably just to use kind of your net guidance at this point?

[Paul F. Clemens:]

That’s right.

[Brad Milsaps:]

Okay, okay. And then assuming you guys get the Great Lakes deal closed by the end of the year, when are you thinking about a conversion date? Just thinking about sort of when you can start to see some of those, I think you guided to 35% cost savings with that acquisition.

[Michael L. Scudder:]

Yes. Brad, this is Mike. Actually, what I was trying to share in my remarks is, we think we’ll both close and convert this year.

[Brad Milsaps:]

Okay.

[Michael L. Scudder:]

I think you’ll start to see some of the cost saves push through in terms of the impact on their branch network and those that start to move through late in the first quarter.

[Brad Milsaps:]

Okay, great. Then, I apologize, I joined a few minutes late, just too many calls, but on the National Tool acquisition, I assume that’s going to be a fee income generator for you guys. Can you kind of quantify I know you included kind of $40 million of annual production here, but can you tell us sort of what that might mean for your P&L and sort of where you think – obviously, there is some synergies there, and kind of can you help them grow that business to a bigger run rate or kind of what is your thoughts around that acquisition?

[Mark G. Sander:]

Let me give you some thoughts if not specific percentage if you will, Brad, and then I guess is how we’re thinking about that is – you’re right, they do $40 million of volume now. We think that between what they do, what they do quite well, again we’ve watched them for 15 years to do this. And with what they can bring to our client base, we would hope to do more than $40 million in volume going forward on an annual basis. Historically, the company has sold almost all of their production for fees and we would anticipate we would still continue to do that, but we may over time – balance sheet certainly for our existing clients and we make balance sheet some of the loans, the leases over the long haul. So we haven’t fully decided which way. We would like the underwriting they do and so there is a couple of different options for ways for us to monetize this relatively modest investment.

[Brad Milsaps:]

So, initially, it’s likely to show up mostly in fee income, and you guys – will you guys take residual risk here as well or…

[Mark G. Sander:]

No, they don’t residual risk and yes it’s very likely that most of it will show up in fee income at least still now to blocks and few most of 2015.

[Brad Milsaps:]

Okay.

[Michael L. Scudder:]

Yes, Brad, as we’d modeled that just to help you a little bit internally, we’ve thought it in terms of building the business, so the ramp-up on that will take some time to work through over a few quarters. So the impact that one would see say in at 2015, while it might have some line item impacts. I don’t think it will have material bottom-line impact.

[Brad Milsaps:]

Okay. Now – yes, that’s very helpful. Okay, thank you guys.

[Operator:]

Our next question comes from Terry McEvoy from Sterne Agee. Please go ahead with you.

[Terry McEvoy:]

A question for Mike or Mark. Anything you could have done differently to get ahead of the commercial charge-off or is that just the nature of the business?

[Michael L. Scudder:]

Well, it’s a great question. We ask it all the time on every credit. I think the short answer on this one is no. This one as I said manifested quickly and came as a surprise and that doesn’t say we don’t look in the mirror and try to figure out what could have done differently and I don’t know what we could have done differently candidly to get this. This has happened just recently and we dealt with it very quickly.

[Mark G. Sander:]

Yes, I would second that, Terry. It’s simply a matter of going through and looking and obviously any time you have a loss of size, you go through and review your own procedures, but this is an unusual circumstance. And as Mark said, you have to deal with it, you have to call it like it is and you’ve got to move on. But in terms of underwriting standards and parameters, those were sound. And so there will be certainly more to come as this starts to evolve not in terms of exposure per se, but in terms of our ongoing remediation effort.

[Terry McEvoy:]

And then, a question for Paul. Could you talk about covered loan yields in the third quarter? I know it’s so small maybe it’s not worth discussing. And then, looking ahead, the mark on the loans you just acquired and how will that create any potential NIM volatility as you think about purchase accounting accretion?

[Paul F. Clemens:]

Well that’s good question. The net interest income on the covered loans this quarter was similar to what we saw in the second quarter, didn’t have any, but having said that the – it wasn’t terribly material, okay. As far as the mark on the $533 million worth of loans that we acquired, you’ll see in our Q that we filed, it’s probably a $15 million mark and that will be accredited to income over the next roughly three to five years. So I don’t know there is a lot of volatility there, but there will be some.

[Terry McEvoy:]

Then just one last question. The deposit composition looks really solid, 83% transactional. Have you seen the larger banks you compete with change their deposit strategy now that the LCR guidelines are finalized and retail deposits have a greater value than commercial deposits?

[Paul F. Clemens:]

There’s been a good deal of talk about it, but there haven’t been a lot of actions yet. So to answer your question, I’d say, we haven’t really seen the large banks get more aggressive in promotional to garner it, but we’re bracing for it if you will. So we’re thinking a fair amount about what we will do to respond in and frankly be proactive to keep that strong deposit franchise value that we have.

[Michael L. Scudder:]

I think the advantage that we have to add to that is the tenure of our deposit base and our core deposits is a real strength of the company. And both the tenure of what was acquired from Popular in combination with what we anticipate from Great Lakes is absolutely tremendous, so I think that leaves us very well positioned as we operate in the space where we expect that competitiveness to increase.

[Terry McEvoy:]

Thanks Mike.

[Michael L. Scudder:]

You’re welcome.

[Operator:]

(Operator Instruction) Our next question comes from John Rodis from FIG Partners. Please go ahead with your question.

[John Lawrence Rodis:]

Good morning guys.

[Michael L. Scudder:]

Good morning John

[Mark G. Sander:]

Good morning John.

[John Lawrence Rodis:]

Maybe a question, I guess back to the one large credit, how much of the provision was directly related to that credit?

[Michael L. Scudder:]

Right, it’s hard to say what’s directly related other than fundamentally I would say the vast majority of the increase in the provision. You’ve got a couple of dynamics going on, you’ve got long growth, you’ve got everything else that’s moving through it. But I would say virtually all of the increase in provision that came from that growth.

[John Lawrence Rodis:]

So we will call it $6 million to $7 million, Mike, roughly?

[Michael L. Scudder:]

Whatever the quarter-over-quarter increase was I would say that’s about it, but yes I’d say in that ballpark.

[John Lawrence Rodis:]

Okay. And Mark, in your prepared comments, I think you talked a little bit about card-based fees and you said there were some incentive fees in there. I think it looks like, just sort of back of the envelope, it looks like that was about $300,000 to $400,000, is that correct?

[Michael L. Scudder:]

That’s correct. So card income was about $1 million year-over-year, $350,000 of that, thereabouts, was related to re-negotiations, so $650,000 organic growth.

[John Lawrence Rodis:]

Okay, so that $350,000, I don’t know if I should call it one-time, but that probably won’t occur going forward?

[Michael L. Scudder:]

I think that’s correct.

[John Lawrence Rodis:]

Okay. Then either Mike, a question for you, or Paul, I guess, just on capital levels. If you look at your total capital level, the risk-weighted assets, it was about 10.9% at the end of the quarter. So then, obviously, you’ve got the Great Lakes transaction coming up. How are you kind of sort of looking at that going forward? Will you just tend to grow that organically, or what are you thinking?

[Paul F. Clemens:]

Well, I guess a little bit of both. Yes, it came down from around 12.2% and we basically added $700 million worth of risk-weighted assets, and that’s obviously what drove it. And the Great Lakes will add another $300 million worth of risk-weighted assets. So it will come down a little bit more. Organically, we’ll generate roughly $12 million to $15 million worth of capital after dividends each quarter, so we will organically earn that back over the next year. Then it depends on what other M&A transactions we might undertake than any other capital. We obviously have access to the debt markets that we need to as a rated bank, so we’re not terribly concerned about that, but we’ll continue to monitor that.

[Michael L. Scudder:]

Yes, I think from my perspective and the way we’ve managed our capital, John, it’s we viewed these as very accelerated organic recovery transactions, so that we have that flexibility to both build that back quickly and then, as Paul suggested with our debt ratings and where those are at, we also have the flexibility to access the markets as we continue to grow and expand. So we’ve got a lot of flexibility on that front.

[John Lawrence Rodis:]

Okay, that makes sense Mike. I guess one other question on, I guess the transactions the increase in goodwill during the quarter, what was the sort of the split between the Popular transaction and then the leasing transaction?

[Michael L. Scudder:]

The leasing transaction was de minimis, so it would be virtually almost all related to Popular, in terms of goodwill element.

[John Lawrence Rodis:]

Okay, and Mike, maybe just sort of big picture your thoughts on M&A going forward with Great Lakes having approval and so forth?

[Michael L. Scudder:]

Yes, as we look at it and I alluded to it in some of my remarks before the question. As the environment is still challenging for what I’ll call institutions that are smaller in size, I mean the regulatory environment is still elevated, increasing costs for that group particularly for all of us. The interest environment makes it difficult from an earnings perspective. And for those that are viewing what their alternatives are, a number of them are considering do they partner up with somebody, as they do that we think we have an attractive franchise and attractive culture and attractive business, you know that has appeal there. So I think the opportunities will be there certainly in perhaps building over the next couple of years having said that I would have said that three or four years ago as well. So it still remains a space that that bounces around a little bit, but I would anticipate it to continue to be there and frankly at some point to continue to grow.

[John Lawrence Rodis:]

Okay. It makes sense. Thanks guys.

[Michael L. Scudder:]

All right, thanks John.

[Operator:]

Our next question comes from Taylor Brodarick from Guggenheim Securities. Please go ahead with your question.

[Taylor Brodarick:]

Great, thank you.

[Michael L. Scudder:]

Hi, Taylor.

[Taylor Brodarick:]

Hi everybody. Paul, would you mind reminding me, I think I missed what you said on the fee income side, maybe what the breakdown was from new customers that you have acquired organically and Popular customers as far as driving that growth?

[Mark G. Sander:]

This is Mark and I’ll take that if you don’t mind. So our fee income was up about $1.8 million year-over-year third quarter to third quarter about roughly $400,000 of that was from Popular, so $1.4 million of that is from our organic legacy businesses, split across those various streams that we talked about, wealth management, led – treasury management including corporate card and then debit card accounted for the increases.

[Taylor Brodarick:]

Great, thank you. And then I guess you’ve been generating assets organically very strongly this year. Looking at 2015, do you anticipate having to take any other strategic option? Would you want to hold firm before $10 billion before December 31 of next year or you are not going to delay organic growth just to stay below that number?

[Mark G. Sander:]

No, we aren’t. And again as we thought about it from a pro forma perspective the combination of Great Lakes plus Popular, we’ll probably see our loan to deposit ratio fall somewhere in the 82% range. So if you give us whatever incremental growth we would anticipate even the same growth you would saw over next year. We could theoretically absorb that and that push loan to deposits too much higher than the 92%, 93% range. So we have some flexibility there.

[Taylor Brodarick:]

Great. I guess last question, any change, just looking at restructuring charges for this quarter, 4Q, related to Great Lakes or just look at what – when the deal was announced, that’s still on track?

[Michael L. Scudder:]

Yes, the fundamentals around the Great Lakes transaction are on track, still there, and frankly look equal to or as more positive than we thought they might have been. We guided towards mid to kind of single digit accretion for 2015 there. We haven’t deviated from that. Paul offered some earlier guidance in terms of what we would expect integration and acquisition cost assuming closing in the fourth quarter to give you some sense of what potential is come there.

[Taylor Brodarick:]

Great, got it. I appreciate that.

[Operator:]

(Operator Instruction) Our next question comes from Stephen Geyen from D.A. Davidson. Please go ahead with your question.

[Stephen Geyen:]

Hi, good morning.

[Michael L. Scudder:]

Good morning.

[Stephen Geyen:]

Maybe just a couple questions on the loan portfolio. You’d mentioned that the core loans was relatively flat quarter-to-quarter, due in part to paydowns, and just wondering what the new loan formation was in the quarter and how that compares to last quarter?

[Mark G. Sander:]

Yes, I’ll take it this way Stephen. So that wasn’t flat. Our organic growth was just under 1% or 4% annualized in the quarter away from Popular. And so to answer your question the production was about equal to what we did in Q2 and Q3. The new loan production, we just saw a higher level of payoffs this quarter than we did in the previous. So as you think about it, first quarter we grew loans about away from covered $110 million. We grew about $150 million in the second quarter and we grew a little over $50 million in the third quarter. Again production was pretty similar in those three quarters. I really had more to do with payoffs when that changes.

[Stephen Geyen:]

Okay, and you had given some guidance on the fourth quarter, and appreciate that, as far as the seasonality. Just curious if – talking to customers, if you have any thoughts about just fourth quarter and kind of heading into the year as far as their expectations and confidence in businesses?

[Paul F. Clemens:]

I would say it’s a slow and steady wins the race, if I may. I think manufacturing and distribution in our markets has recovered nicely and as I say I define that as, it’s not like it’s incredibly robust, but it’s a nice slow and steady growth rate that clients are experiencing and feeling pretty good about, similar with commercial real estate markets. There’s been steady improvement. Chicago had lagged coming out of the great recession, earlier part of this decade, and now 2014 has been a really good solid year in virtually all commercial real estate segments. Again that gangbusters, but a nice solid growth and, I think, the anticipation is that that will continue into 2015 as well.

[Stephen Geyen:]

And Pete may be, I don’t know if you keep a pipeline and if you have given guidance on this in the past, but a pipeline on C&D loans and the funding, but any thoughts on how that look might look over the next couple of quarters?

[Paul F. Clemens:]

Well, we certainly keep pipeline and monitor it closely all the time. We don’t provide guidance on this. I would say again our, what I have said in the past is the same answer I give now, because it is the same answer, our pipeline looks solid. And so we feel good about our ability to maintain the momentum we have in our loan growth.

[Stephen Geyen:]

Great thanks for your time.

[Paul F. Clemens:]

Thanks.

[Operator:]

(Operator Instructions) We do have an additional question, this comes from Emlen Harmon from Jefferies. Please go ahead with your question.

[Travis Potts:]

Hi guys this is actually Travis Potts on for Emlen.

[Michael L. Scudder:]

Hi Travis.

[Travis Potts:]

I just had a follow-up question on the NIM guidance. I think you said ex the Popular, it should be flattish going into 4Q. I was just wondering how you are thinking about if we get moving the short end of the curve only as opposed to a parallel shift and how that would impact NIM?

[Paul F. Clemens:]

Travis I don’t think it’s going to make a whole lot difference for us in the short term to be honest with you. We’re going to have a, we still have such a preponderance excess cash for the time being that, I don’t think it’s going to move in whole lot in the for the one quarter.

[Travis Potts:]

Right, and then, I guess, looking out a little bit father into 2015, do you have any thoughts on that?

[Paul F. Clemens:]

That’s a good question. Everyone has been asking that question. If you can tell me what’s going to happen to the interest rates, I will be more than happy to answer. What we try to do in our Q is what everyone else does, we provide a sense of our interest rate sensitivity, given a static balance sheet. And we think we’re very asset sensitive on the strength of our, as Mike has alluded to, our significant core transaction deposits, which will lag the market increases. We still think, in line with the market consensus, that movement will take place mid-to-late next year. I mean, when that happens, you should see better performance by all of us.

[Travis Potts:]

All right, great. Thank you.

[Operator:]

And at this time I’m showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks.

[Michael L. Scudder:]

Thank you. Before I leave just as I know there’s a number of our colleagues, before I offered final remarks. I know there’s a number of our colleagues who listen to the call. And this would be an opportunity for me to publically acknowledge both for our existing or legacy teams that have joined us through acquisition and colleagues, as well as the folks at Great Lakes, who are working to join us here by the end of the year, a public thank you for their hard work. You don’t execute as quickly, and as efficiently, as we do and as we have relative to these transactions without a lot of work on behalf of all the colleagues that are involved, so I would offer that as a thank you. Separately, or I guess in final closing, let me acknowledge and thank all of you for joining us here today. Thank you for your interest in First Midwest Bancorp, and I would wish everyone a great day.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating. Have a nice day. All parties may now disconnect.