Below is transcript of the First Midwest Bancorp Inc (NASDAQ:FMBI)’s Fourth Quarter 2014 and Full Year Earnings Conference Call, held on January 21, 2015, at 10:00 a.m. EST. Lee Munder Capital Group, Dreman Value Management and Pzena Investment Management was among First Midwest Bancorp Inc (NASDAQ:FMBI) shareholders at the end of the third quarter.
First Midwest Bancorp Inc (NASDAQ:FMBI) is a bank holding company with operations throughout the greater Chicago metropolitan area as well as northwest Indiana, central and western Illinois, and eastern Iowa. The Company’s principal subsidiary is First Midwest Bank (the Bank), which provides a range of commercial and retail banking and wealth management services to consumer, corporate, and public or governmental customers.
Company Representatives:
Nick Chulos – Executive Vice President, Corporate Secretary & General Counsel
Mike Scudder – President & Chief Executive Officer
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Paul Clemens – Executive Vice President & Chief Financial Officer.
Analysts:
Emlen Harmon – Jefferies
Michael Perito – KBW
Brad Milsaps – Sandler O’Neill
Eric Zwick – Sterne Agee
Stephen Geyen – D.A. Davidson.
Operator
Good morning ladies and gentlemen and welcome to the First Midwest Bancorp 2014 Fourth Quarter and Full Year Earnings Conference Call. At this time I would like to inform you that this conference is being recorded and that 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, Corporate Secretary and General Counsel of First Midwest Bancorp. Sir, you may begin.
Nick Chulos – Executive Vive Preident, Corporate Secretary & General Counsel
Good morning, everyone and thank you for joining us today. Following the close of the market yesterday, we released our results for the fourth quarter and full year for 2014. If you have not received a copy of this press release, you may obtain it on our website or by calling us at area code 630-875-7463.
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 current beliefs. These statements also are subject to certain assumptions, risks and uncertainties and are not guarantees of future performance or outcomes. The risks, uncertainties and Safe Harbor information contained in our most recent 10-K and other filings with the Securities and Exchange Commission should be considered when evaluating any forward-looking statements. Lastly, we will not be updating any forward-looking statements in light of facts or circumstances that may arise after this call.
Here this morning to discuss our fourth quarter and full year results and outcome 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.
Mike Scudder – President & Chief Executive Officer
Thanks, Nick. Good morning, everyone. Let me add my thanks for joining us here today. As is typically our practice, my intent would be to cover the highlights of certainly what was a very active and dynamic quarter in the second half of the year for all of us and then let Mark and Paul offer some additional business color.
Over the last five months of the year, we added some $1.2 billion in deposits almost $800 million in loans in about 20 locations on a gross basis as well as acquired the leasing platform that came with the National Machine Tool acquisition. So I’m very pleased to share that all of these acquisitions have been closed, systems conversions are fully completed and all activities are generally or substantially integrated.
So as we start the year, their expected contributions for 2015 performance are right in line with where we thought they would be. Though at the same time, the benefits of these acquisitions and the related organizational activities that come along with them have the obvious impact on our financial comparisons that you have seen this quarter. So we will obviously have to work you through that here today.
At its core, the quarter was strong. It was generally in line with where we thought we would be and really a great testament to the focus and engagement of all of our teams. This is a lot of activity to absorb over that period of time. So we’re very pleased with our overall efforts. You know as we look back on the quarter and certainly as we expand that period and look back on the rest of the year, we’ve talked a lot about our efforts to build our team, grow and diversify our revenues and continue to invest in the business and balance risk all at the same time and all of those efforts are interconnected. So, as you think about that as it’s occurred over the full year, I would hold out that a lot of those activities and those efforts are really evident in the quarter. So we’re very pleased with that overall.
So for the quarter we earned $0.27 after you exclude the $0.08 of integration expenses directly attributed related to the Great Lakes transaction which you all certainly may recall closing in December. If you go to a year over year basis, our earnings-per-share was up about 13% after you exclude the integration activities of the back half of the year that totaled about $0.11 and if you take out from last year’s number, a large windfall that we got from the liquidation of an equity investment or largely due to that that went public, that added about $0.15. If you net those activities out, year over year earnings per share are up about 13%. So strong overall performance through the year.
Total revenues for the quarter are 12% higher than the same quarter a year ago. Our margin came in at 3.76 which is about 14 basis points again on a like quarter a year ago comparison. After our acquisitions, our loan portfolio now stands at $6.7 billion, 18% higher than a year ago and consistent with one of our initiatives certainly with a larger mix of commercial and owner-occupied real estate lending.
Sales activity was solid across our business lines. If you factor out the Great Lakes acquisition, some expected pay downs that Mark will talk about relative to the Popular’s healthcare portfolio that we acquired, our loans were actually up about 3% annualized.
At the same time and again going to the focus of the overall groups, our credit metrics have improved significantly. Your NPAs declined 15% to $74.5 million. Our net charge-offs fell to $2.1 million and when we combine that and I do as I think about overall credit metrics and credit costs relative to what I believe is a very conservative valuation position on a large piece of OREO that resulted in a $1.6 million write-down. We still stood at multi year lows in terms of our overall credit costs. So very strong from that perspective and our past due and 90 day past due as well as our 30 to 89 day past due levels continue to run at strong levels.
Our expenses totaled $84.8 million, that’s about $14.5 million higher than last quarter. Obviously distorted by a variety of expenses attributed to the acquisitions, attendant organizational activity that took place in the quarter as well as what I just alluded to where some of the credit costs related to OREO and remediation costs came through in the quarter as opposed to coming through directly through provision expense. So that’s it as far as a quick business overview. I will pick it up at the end with a few closing remarks, but I would now turn it over to Mark and Paul who can offer some additional color. Mark, why don’t you go first?
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Thanks, Mike and as Mike alluded to I’ll cover the quarter, then try to give a little bit of guidance for 2015 outlook as well in my remarks. Loans for the quarter were up $217 million principally as a result of the Great Lakes acquisition which was comprised largely of commercial real estate in our markets. Away from acquisitions, as Mike alluded to our legacy non covered loans were up about $45 million or 3% annualized in the quarter. In our last earnings call, we said our seasonally slow fourth quarter loan growth would be similar to third quarter levels which is precisely what we experienced. This $45 million increase was offset by over $30 million in anticipated pay downs in the portfolio acquired as part of the Popular acquisition in August as several healthcare borrowers refinanced with HUD as these loans were originally underwritten.
We were pleased to maintain positive loan momentum while in the midst of three acquisitions and some repositioning activities. Repositioning activities as we undertook several steps to strengthen our teams in support of anticipated future growth. In mortgage, we added staff almost all with variable compensation to increase our market share in line with our market presence.
In commercial, we reorganized into four business units of business banking, middle market, specialty banking and commercial real estate all of which have nice growth opportunities. We’ve talked for some time about our talent upgrades and how we have broadened our lending platforms in reach as we continue to build on our strong existing teams. I would say that we largely concluded that process in the fourth quarter. In doing so, we have added some incremental cost to our expense rate albeit not as high as the fourth quarter levels which were elevated in this area due to both separation and recruitment costs associated with these realignments. Paul is going to elaborate on the cost aspect of this in a few minutes.
We certainly expect to see incremental growth going forward as a result of these investments. In 2014 in total, we grew loans organically away from acquisitions 6.5%, consistent with the guidance we provided all year. For 2015 against a larger base, we expect growth rates similar to or perhaps a bit stronger than last year’s levels.
Turning to non-interest income, we again closely matched expectations again continuing the strong momentum we’ve experienced all year. Fee revenues were up 6.5% in total this quarter on a year over year basis and 10% year over year in total. This was another solid quarter in fee income driven by the same trends we’ve seen and the same trends we’ve discussed on our earnings calls all year.
Deposit service charges grew 8% in the quarter versus the year earlier period. This was driven by solid growth in treasure management fees and our acquired business units hit their forecasted fee targets which together more than offset the continuing declines in NSF income. In wealth management, our fees were robust up almost 9% relative to Q4 last year, maintaining a strong trend we have generated for several years. Our total managed assets are now $7.3 billion. They continue to grow again a reflection of the quality of our team in this business unit as well.
Card-based fees were up almost 16% year over year in Q4, driven principally by legacy growth. Simply our card population and our number of swipes per card both grew relative to last year. Mortgage volume grew but was still relatively modest I would say, as our realigned and refocused team had just started to operate this quarter. Other service charges lastly, grew nicely relative to both linked and last year’s fourth quarter as we expanded our sales of swaps.
So for the full year, we grew fee income almost 5%. As you think about it, we forecasted and achieved low single digit growth that we talked about and then our fee incomes were helped slightly by additions from acquisitions in the last four months.
For 2015, we remain optimistic about several opportunities in our fee income areas. Most notably, our treasury management business and middle market and business banking. Wealth management still has several areas that we think can expand further. We’re expecting higher mortgage banking income from our improved team that I talked about and our new fee income stream from the sale of lease volume should add incrementally over 2014 levels.
So as we look to provide guidance for this year, we start with our Q4 run-rate and obviously look forward to a full year’s benefit from the acquisitions of Great Lakes and National Machine Tool. Then as we add our expectations for organic growth which we think will meet or exceed last years’ experience, we believe fee income growth will well exceed our 2014 growth levels.
So now turning to credit for a couple of minutes, we continued here again our strong progress and performance in the fourth quarter. Aggregate credit costs were better than expectations we set in previous calls. Charge-offs dropped substantially to just over $2 million as we generated better outcomes in moving some credits as well as in recoveries. This favorable result more than offset approximately $2 million in incremental and we would expect non-recurring expense in the quarter namely OREO write-downs and professional fees in our special assets area.
NPAs at 1.5% of loans are at a very manageable level for the long term, yet we anticipate further reductions in coming quarters driven by our low levels of past dues that Mike alluded to, as well as the visibility we have around some specific anticipated pay downs. Adverse performing loans also remain at a very manageable level. So in summary, we expect these dynamics to drive further credit quality improvements and lower annual credit costs going forward. And so with that, I will turn it over to Paul for margins and expenses.
Paul Clemens – Executive Vice President & Chief Financial Officer
Okay. Thanks, Mark and good morning, everyone. For the second consecutive quarter, net interest income increased 7% from the linked quarter. The increase from the third quarter was substantially due to the full quarter impact of the August 8th Popular acquisition and some smaller benefit from the December 2nd acquisition of Great Lakes Bank. Some of the key drivers associated with Great Lakes is the $200 million in loans with Great Lakes which added 4% loan growth as well as a higher yield of 4.50% compared to our legacy weight yield of 4.19%. The Great Lakes portfolio much like the Popular portfolio has a slightly greater proportion of fixed rate loans, roughly 60% to 40% ratio and ours is closer to 50/50 or slightly less.
Likewise, deposits increased 4% with the $400 million in deposits from Great Lakes, offsetting the seasonal decline in municipal deposits. The weighted average cost of Great Lakes deposits is 13 basis points which is consistent with our legacy deposit base and we also acquired $210 million in securities from the Great Lakes portfolio, that acquisition.
We anticipated when we talked to you last our net interest margin excluding the impact of acquisitions would be in line with the third quarter and the full quarter impact of Popular would add 3 to 5 basis points including some level of accretion on the Popular loans. In fact for the quarter, we saw a slight decline from lower accretion on our covered loan portfolio of about 5 basis points which tends to jump around from one quarter to the other and some smaller amount of margin compression on our legacy portfolio. This is more than offset by a greater yield on our Popular portfolio which included $1.6 million or roughly 8 basis points from the accretion of the purchase accounting discount recorded on the acquired loans as well as a small benefit from Great Lakes for December.
As we look to 2015, I guess we should weigh in on our outlook for rates. Our current outlook for 2015 is that rates in the one month, the five-year part of the curve which is where we currently invest in lends start to move mid-2015 as the Fed moves on short-term rates. Therefore, margin for the first quarter should generally be in line with the fourth quarter though away from accretion. We will continue to see probably some further margin compression on our legacy portfolio with growth and net interest income driven primarily by the loans, investments and core deposits acquired from Great Lakes.
Let me move on to expenses and give you a little color on the fourth quarter. Let me then tie up for the full year over year comparison and then give you our outlook for 2015 with some run rate outlook. As Mike said, our fourth quarter non-interest expense was $84.8 million, an increase of $14.5 million from the previous quarter which reflects an awful lot of noise, substantially the integration and operating cost of three acquisitions.
Some additional staffing and higher salaries and recruiting costs in response to growth and organizational needs that Mark just alluded to. Some targeted remediation actions and the timing of certain comp and benefit accruals impacted in part by the strong performance and timely integration of our acquisitions.
Specifically, we have $5.5 million of additional integration and conversion expense and for your benefit, we’ve broken it out separately on a single line item. That is simply the integration costs associated with the acquisitions and not the ongoing operating cost of these entities. $2.5 million additional costs to operate and manage the acquired banks, including Great Lakes for one month and National Machine Tool as well as certain one-time recruitment and sign-on bonuses related to the additional staff to come meet these acquisitions and these were primarily sales staff. $2.1 million for the targeted remediation actions to work out a number of substantial credits which contributed as Mike alluded to, to the overall improvement in our credit metrics which included a $1.6 million write-down on our single largest OREO property. That property makes up about 1/6th of our total OREO balance.
Then we had some a $900,000 increase from the third quarter into the non-qualified deferred comp expense that just bounces around from one quarter to another and is offsetting fees. In this case, it added $900,000 to our expense relative to the previous quarter. And the remainder relates to compensation of benefits adjustments comprised of lower deferred loan origination expense as we had slightly lower loan production than what we had anticipated and adjustments to the annual retirement in short-term incentive comp accruals which were impacted once again by the timely integration, the earlier acquisition of Great Lakes quite frankly and just the strong performance associated with credit.
Obviously, a lot of noise in the quarter that makes it difficult to project a run-rate, but before I get to that, let me cover the year over year comparison of expenses by will. Non-operating expenses for the full year were $283.8 million which included $14 million of integration costs for the full year and $6 million of operating costs associated with the three acquisitions. Excluding the costs associated with acquisition expenses increased 2.8% from 2013 which we think is evidence of pretty good cost control efforts to our core structure given that we are supporting a bank that grew nearly 15% over the back half of the year as Mike mentioned.
Now let me move to our expectations for 2015. Given all the integration noise in the fourth quarter, I think it’s probably easier to use the third quarter as a base and eliminate the $3.7 million of integration costs in that quarter as well as the $2 million of proper operating costs in that quarter and just talk about the core for just a second. This results in a quarterly core operating expense of around $64.5 million to $65 million. If one presumes our core increase of 2% to 3% as it did in 2014 which will take into consideration the realignment in addition that Mark alluded to, as well as the standard salary increase in those types of things, offset by initiatives that we have planned. If you assume that and then you simply add about $5 to $5.5 million which is what we think is the ongoing recurring operating cost of these acquisitions, you get to roughly $72 million.
We have the benefit of going through our budget process and feel pretty confident about the additional cost those acquisitions will throw onto our income statement and I will add that those reflect the 30% cost savings and the 40% cost saves that we performed in our acquisition of both those Popular and Great Lakes respectively.
So the first quarter I would say well, let me reiterate. So we think somewhere around $72 million is ongoing on average for the four quarters per quarter expense. The first quarter could be somewhat higher due to seasonal weather related costs, knock on wood. We haven’t had the snow for six weeks that we had at this time last year. The frontloaded employee payroll cost impacts us somewhat and some relatively small amount remain for integration. I will add that just so in case we had planned the closing of two branches of Great Lakes as well as to drive ups that will take place after the full notice period expired at the end of March. So those types of things won’t fully benefit us until later on in the year, but that’s really the kind of issues we’re talking about doing. So with that let me turn it back over to Mike.
Mike Scudder – President & Chief Executive Officer
Thanks, Paul. Now, just before we open it up for your questions just some further remarks. Generally, operating conditions here in our broader markets continue to improve. I think the overall environment is still challenging. I would suggest to say 2014 was still a challenging year and the business itself is getting increasingly complex. However, having said that, we feel pretty good going into next year. Operating conditions are getting stronger and as I said while interest rates remain low that is still a challenging environment, but the expectations for higher rates are looming.
Against the backdrop of that environment, our priorities from 2014 to 2015 really won’t change. We continue to be focused on strengthening our team, positioning ourselves to grow and not just our loan portfolio, but also broaden our revenue streams as we’ve done throughout [inaudible] and you have to maintain that interconnectedness if you will on balancing the timing of business investment against investment in risk management as you navigate that type of environment.
We closed the year with total assets at about $9.5 billion up 15% from where we started the year. Loans are up almost 20%. Our mix of commercial lending activity is stronger. Equipment lease is now a part of our product set. Wealth management continues to be a real source of strength for us overall and our nationally recognized retail platform continues to be a great source of core deposit strength. Through the acquisitions, our core deposit base got even stronger. It provides us with ample liquidity, our overall level of funding attributed to core deposits now stands pretty close to 85% and frankly we’ll be a little stronger once that average includes Great Lakes and then importantly our credit metrics as Mark alluded to, are significantly improved.
So as we start the year, we feel pretty good about our momentum and our positioning. As I suggested, our product lines and distribution channels are broader. We’ve got great opportunities to expand our business banking platforms and treasury management activity, leveraging our investment in our existing teams and added talent both on the sales and the risk control process. We’re definitely positioned to operate as a larger company.
We remain sensitive to the expected rise in interest rates which in turn requires balanced navigation of short-term margin pressures. Our liquidity and core deposit base offer us an advantage that I would suggest few enjoy as we enter into such an environment, but it also requires us to carefully manage our risk and be patient as it relates to management of short-term earnings.
I do not want to trade or inhibit our ability to grow and respond to higher interest rates just to knock off or change a position relative to a couple of quarters. So we are going to remain very focused on our overall cost control and tight cost control on that environment, but we’re also going to be continuing to balance what we need to do to position ourselves to grow. So we feel we’re very well-positioned to do that. We have the opportunity as I said to leverage culture, infrastructure and capital to produce overall stronger returns for our shareholders. So we are anxious for the year to start certainly to say the least.
Before I open it up for your questions, I would also take this opportunity as I know a number of our colleagues happened to listen to the call to thank all of them for their hard work and engagement on driving our success over the course of this year. So with that, let’s open it up for your questions. Thank you.
Operator
Thank you, sir. The question and answer session will begin at this time. If you are using a speaker phone please pick up you handset before pressing any numbers. If you have a question, please press * then 1 on your phone. If you wish to withdraw your question, press * then 2. Your question will be taken in the order that it is received. Please stand by for your first question, sir. The first question comes from Emlen Harmon of Jefferies. Please go ahead.
Emlen Harmon – Jefferies
Good morning, guys. Good to hear that you are that positive on the loan growth outlook for next year. I think, one thing I’ve noticed is that the organic growth has been kind of flattish the last couple of quarters. Can you give us a sense just kind of which businesses you feel like are going to start picking up performance to drive that loan growth as we head into next year? And just kind of any weights you might have seen in the fourth quarter where I think the loan growth, the loans were effectively flat on an organic basis quarter over quarter?
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Sure. This is Mark. And I guess I would just phrase it a little bit differently. We saw more modest growth in the last two quarters but we still saw growth. When we look at the fourth quarter specifically in the $45 million of growth that we look at organically, we knew when we bought Popular they had this portfolio of healthcare loans that we’re going to pay down. They paid down a little sooner than we thought they were going to, the refinance with HUD. So we did have some organic growth in the fourth quarter, but our growth rate in Q4 was a little slower than it was all year long.
But again, I would say a couple of things. One, a quarter does not a trend make and two, I would say that to specifically answer your question, I think we’re going to see growth in all of our areas. We’ve got four teams, business banking, middle market, commercial real estate, specialty banking and we expect all four of them to grow this year.
I would think that commercial real estate would have the lower growth rate. Again, we still have, it’s a competitive market out there, so we’re seeing a lot of properties still refinance out. So I would say our commercial real estate would be modest growth, but our C&I growth, we’re looking for some nice growth there. I think we will see our mortgage volumes increase a little bit this year, you’ll see us put some leasing volume on the books. And so a combination of, it’s nice to have, we’ve got a number of niche businesses, healthcare and ABL that have done nicely for us. Our core C&I I think will have a nice solid year and it’s nice to have a few different levers to pull and in a year where [inaudible] will probably be a little softer given where crop prices are, it’s nice to have things like mortgage and healthcare and leasing to kind of pick up the slack. So long answer to your question, I would say that’s why we feel confident that we can meet or exceed the growth rates that we had in ’14.
Emlen Harmon – Jefferies
Got it, that’s helpful. Thank you very much, and then just a second one, if we look at, if we think about charge-offs kind of year over year in 2015, 2014 there was still kind of a low 50s on an annual basis. 2015 the year that you guys get to normalize charge-offs and how do you think about, what do you think is your normalized charge-off rate?
Mark Sander – Senior Executive Vice President & Chief Operating Officer
I would say the short answer to your question is yes, we think 2015 is the year that we get to normalized charge-offs. We think 2015, we will be more in-line with our peers at a normalized level. As we think about long term sustainable levels for various credit quality metrics, we think we’re going to be there in ’15. We think we are there with NPAs and adverse performing and even though we think we are going to see further improvement, those are at normalized levels. Charge-offs for our peer group generally range in that 25 to 40 basis points over the long haul. We think the industry will normalize there in ’15 and we think we will be in the lower half of that range.
Emlen Harmon – Jefferies
Got it. Thank you very much, I appreciate it.
Operator
The next question comes from Michael Perito of KBW. Please go ahead.
Michael Perito – KBW
Good morning everyone. Mike, I had a quick question on capital. The total capital ratio is hovering around 11% today and when I look back over the last few years, it’s a little lower than where it’s been. Obviously it was a little, probably too high a few years back, but how are you guys thinking about your total capital ratio in the context especially of eventually crossing over $10 billion and having a larger balance sheet? And maybe more specifically would you consider debt or preferred offerings? Just maybe any thoughts on how you are thinking about capital would be helpful?
Mike Scudder – President & Chief Executive Officer
Yes, we have a very strong what I will call Tier 1 common level of capital today given both the profitability of the company and the ability to fund that is creating a quick recovery particularly as it relates to the acquisitions of our capital position. We think we will certainly not be right back to where we were before the Popular acquisition but we will be significantly progressed back to being at the same levels by the end of ’15 which gives us some flexibility as to how we manage that balance sheet mix.
We have and continue to look at what our mix is given as you look out into ’16 and late ’16 that we have both our senior notes coming due and then we also have some sub debt that is coming due out of it. So we’re going to continue to evaluate that, but I think there is room for our mix to shift to what I’ll call more debt, more Tier 2 certainly as we look to grow and expand.
Michael Perito – KBW
Alright, thanks. That was helpful. And just a quick question on loan yields. Appreciate that the color of Great Lakes was accretive to your loan yields, but maybe just where are new originations kind of coming on average versus where your loan yields are today?
Mike Scudder – President & Chief Executive Officer
New and renewed spreads in the quarter were down slightly from the third quarter, but I would stress slightly. We had stabilization in Q2 and Q3 and we saw a slight decline in Q4, a few basis points in our new and renewed spreads. So nothing, I guess I would say we are maintaining strong discipline in pricing, but that remains a constant battle frankly. Everybody wants to blame the other guy. We have lost some opportunities based on price. I will just say that we rarely miss our hurdle rate which we think is a conservative hurdle rate and when we do, it’s because we see upside elsewhere in the relationship. So again as much as we saw a little bit of slippage this quarter, it wasn’t a couple of basis points and we’re still getting our pricing hurdles on our new and reneweds.
Michael Perito – KBW
Just what’s the gap I guess, though, if the new yields are flattening but versus or relative to the 4.45 loan yield, the yield on the total portfolio today. I guess what’s the, is there still a gap there or?
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Certainly the new and reneweds are coming out at a slight lower rate than what’s coming off. Yes, principally in the fixed rate, we still have some fixed rates that mature from a few, that were underwritten three, four, five years ago in a higher rate environment. So while the spread might be holding up, the base rate is down a little bit, right?
Mike Scudder – President & Chief Executive Officer
Yes and it also depends on the mix. Mark talked about the different business lines and the rate of growth that they are producing back off of that. Certainly the leasing platform comes with the higher overall spread relative to LIBOR, although it tends to be a little longer duration. You start moving into middle market, it tends to be more LIBOR-based. The spreads are a little tighter. Business banking, spreads are tight, but it’s a little different metric.
Paul Clemens – Executive Vice President & Chief Financial Officer
And business banking, good point, Mike. Business banking in general has 75 basis points probably higher spread than the middle market portfolio and as we’ve done these acquisitions, those have come on at higher yields than our existing portfolio. So a little bit of balancing the levers if you will relative to margins.
Michael Perito – KBW
Alright, great. Thanks guys.
Operator
The next question comes from Brad Milsaps from Sandler O’Neill. Please go ahead.
Brad Milsaps – Sandler O’Neill
Hey, good morning. Mark, just to follow up on some of your commentary around fee revenues. I know you’ve got a lot of moving parts in the quarter, but maybe just a little surprised to see them sort of flattish if not down a little bit. Just curious in the conversion and integration process, did you guys waive fees for acquisitions or is there something else that maybe happened in the quarter? Any additional color around their contribution and certainly appreciate the guidance that you expect growth to be better in ’15 and ’14, but just kind of curious on the moving parts in the fourth quarter.
Paul Clemens – Executive Vice President & Chief Financial Officer
So let me just clarify, you’re specifically looking at deposit service charges, right?
Brad Milsaps – Sandler O’Neill
No, no, fees in general. I mean it looked like most categories were kind of flattish to down linked quarter.
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Yes, but again we always view the year over year comparison as kind of a better, there is some seasonality in a couple of those revenue streams, NSF and card-based in particular that have a real seasonal component to it, if you will. So I guess I would look at it this way, Brad. From a service charges perspective, the acquisitions certainly were additive. We had nice treasure management growth about 9% in the quarter which offset about a 5% decline in NSF income and so then the fees that we got from our acquisitions is what drove the $800,000 of increase year over year growth in deposit service charges.
Wealth management again, solid story there, so that’s 8%, 9%, 10% growth quarter over quarter card-based fees. Again, we view that comparison as much more appropriate to last year’s fourth quarter than we would to a linked quarter. There is very little acquisition revenue in our fourth quarter there. So virtually all the growth you see quarter over quarter of 16% is from our legacy portfolio. So again, I would say a little different view and against the last item that or other service charges is really mostly lumpy swaps when they come in and when they don’t and again, up decent both linked quarter and versus last year’s fourth quarter. So again, it’s a little different perspective than how you may be looking at it. Does that help or does that answer it?
Brad Milsaps – Sandler O’Neill
Yes, no, no, that’s helpful and then just to follow up on your commentary around credit costs, I think you mentioned that you expect those to continue to go lower. Would that really just encompass sort of, were those comments more encompassing credit remediation costs OREO costs or would that also encompass thoughts around provisioning in light of your comments around potentially better loan growth in 2015 with sort of the adjusted reserve around 1-1/4 of loans? Just kind of get a sense of what those comments included. Did that include provisioning? You are around $1.7 million this quarter, it had been higher than that sort of looking at the second quarter absent what happened in the third. So any thoughts or color there would be appreciated.
Mark Sander – Senior Executive Vice President & Chief Operating Officer
Yes, Paul and I will probably tag-team this one I would say. My comments were around all of the above Brad, I guess I would say. So certainly remediation costs we expect to come down a little bit just through the pure dollars to move assets, if you will, right. The cost of operating the department has come down nicely. We anticipate further declines in ’15. The fourth quarter in particular had probably $0.5 million of elevated credit remediation costs to try to, to generate the outcomes that we did in terms of driving NPAs down. So that’s the remediation side of things.
Charge-offs certainly we expect to be lower in ’15 than in ’14. Where we will and won’t do, we will reserve release, I will leave it to Paul here in a second and then OREO is the other one. We had one write-down of $1.6 million on a property that we can chat more about if you like, but fundamentally, we think our OREO portfolio in general is conservatively valued at this point and don’t expect that we will see that kind of magnitude of charge-offs either or write-downs either. So kind of all of the above relative to…
Paul Clemens – Executive Vice President & Chief Financial Officer
Yes, let me pick out what you just said. So you covered the remediation costs and the charge-offs and so obviously, we saw our reserve release go, we were at an allowance of somewhere around $150 million. Now we’re down to around $124 million. You won’t see that repeat.
Somewhere in the $115 million to $123 – $124 million range we think is probably appropriate, depends on the credit metrics. But what’s helping that is the, so long story short, you’ll see a much closer match of provision and charge-offs and we’re delighted that the charge-offs are coming in where they are and where we think they’re going to come. So I think that you simply won’t see the reserve release and we should still hover somewhere around $115 million to $124 million. I would say somewhere $124 – $125 million.
Brad Milsaps – Sandler O’Neill
Thanks Paul I appreciate it, thanks, Mark.
Operator
Ladies and gentlemen, as a reminder, please press * 1 if you have a question. Our next question comes from Terry McEvoy of Sterne Agee. Please go ahead.
Eric Zwick – Sterne Agee
Hi, this is Eric Zwick on for Terry. Good morning. Just first, if I look at the comments in the press release, you mentioned that some of the benefit from the margin came from bringing on fixed-rate loans from Great Lakes and maybe potentially Popular as well. I’m just curious, I know we will get the updated asset sensitivity whenever the Q is out, but in the update did that have any material change on what was disclosed in the third quarter?
Mike Scudder – President & Chief Executive Officer
No. This is Mike, the addition of those assets to the pool have been a little bit offset by the fact that most of the loan volume that’s been coming on has been floating rate. So you shouldn’t see a material shift in what the asset sensitivity is around what’s been disclosed.
Eric Zwick – Sterne Agee
Ok, great. And secondly, you obviously had a busy year in 2014 with three acquisitions. Just your thoughts on the market today. The pace or activity in terms of discussions and your thoughts in terms of whether you are looking at more bank acquisitions or something more along the lines of the leasing? I’m just curious what you are seeing today?
Mike Scudder – President & Chief Executive Officer
Well, consistent with what I talked about strategically what we’ve been doing is positioning ourselves to grow. Certainly in the low-interest rate environment where you’re operating in today, the opportunities that are there to leverage both your infrastructure from an expense standpoint and your capital base through any M&A opportunity that fits kind of your strategic needs makes sense. I mean there is the ability for us to continue to do that.
The dialogue, it’s always hard to gauge the difference between what is serious dialogue and just general dialogue. It’s kind of I would say those kind of things tend to look like an EKG chart when you’re still alive. So, as you move through that, it tends to bounce around quite a bit. Comparatively, I would say it’s a little more active this year in terms of dialogue than what it was last year. And part of that’s the reality of certainly expectations around us both having a willingness and an ability to partner to be able to do that.
Eric Zwick – Sterne Agee
That’s helpful, thank you.
Operator
And our next question comes from Stephen Geyen of D.A. Davidson. Please go ahead.
Stephen Geyen – D.A. Davidson
Hey, good morning. I was just curious about maybe just a little more clarification. On the Popular bank, you had talked about some of the pay downs. Do you expect those to have a level off going forward? And you had mentioned also the commercial real estate just the legacy portfolio, the uncertainty but just a little more clarification if you could.
Paul Clemens – Executive Vice President & Chief Financial Officer
Sure. In two pieces, the first one is a short answer which is yes. Most of the pay downs that we anticipated that would happen over a period of time happened, have already happened in the Popular. So we would expect that portfolio to grow from here like the rest of our portfolio.
Growth of the commercial real estate, I would say the pay downs are still going to happen Stephen, so we still see a number of those, but our new volume there is quite strong. So we can more than offset it and have net growth, but I do still think there are a fair amount of pay downs coming in our commercial real estate. Fortunately, our pipeline there is really strong that we can, as I say more than offset it.
Stephen Geyen – D.A. Davidson
Ok. And comments about the margin, just curious the level of accretion that you saw adjusted for the quarter, do you kind of expect that to continue through 2015?
Mark Sander – Senior Executive Vice President & Chief Operating Officer
That’s a great question, Stephen. I would say yes. Short answer, right now, the answer is yes. We have been $1.6 million. We will add a little bit more for Great Lakes as we finalize the marks on Great Lakes, but we will just have to manage it. These are small, homogeneous loans that are, we don’t think will provide us the volatility that we had with our covered portfolio. So the answer is, for the time being I would say 1.6, maybe closer to 2 x 4, but we will have more guidance on that as the next quarters go.
Stephen Geyen – D.A. Davidson
Ok. Thank you.
Operator
Ladies and gentlemen, as a reminder please press *1 if you have a question. If there are no further questions, I will now turn the call back over to Mr. Scudder for closing comments.
Mike Scudder – President & Chief Executive Officer
Thank you. I would just close with a sincere thank you for joining us today. We greatly appreciate your interest in First Midwest Bancorp. Have a great day.
Operator
Ladies and gentlemen, this concludes the conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.
