First Midwest Bancorp's (FMBI) CEO Mike Scudder Discusses Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: First Midwest (FMBI)

First Midwest Bancorp, Inc. (NASDAQ:FMBI)

Q2 2014 Earnings Call

July 23, 2014 10:00 am ET

Executives

Nick Chulos - EVP & Corporate Secretary

Mike Scudder - President & CEO

Mark Sander - SEVP & COO

Paul Clemens - EVP & CFO

Analysts

Mike Pareto - KBW

Emlen Harmon - Jefferies

Brad Milsaps - Sandler O'Neill

Terry McEvoy - Sterne Agee

Taylor Brodarick - Guggenheim Securities

Operator

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp Incorporation 2014 Second Quarter Earnings Conference Call. At this time I would like to inform you all 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 to questions-and-answers, from 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 Incorporation. Sir, you may begin.

Nick Chulos

Good morning, everyone, and thank you for joining us today. Following the close of the market yesterday, we issued our earnings release for the second quarter of this year. If you have not already received a copy of this press release, you may obtain it on our website or by calling us at (630) 875-7463.

Now, before we begin, we would like to cover a few preliminary matters. During the course of the discussion today, our comments may include certain 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 a guarantee of future performance. Our actual results or outcomes may differ materially from those described or implied by 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 we will not be updating any forward-looking statements to reflect facts or circumstances that may arise after this call.

In addition, in light of our recently announced 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 second 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.

Mike Scudder

Thanks, Nick. Good morning everyone. And as always thank you for joining us here today. It is certainly been an active quarter for us and certainly a quarter that was marked by solid execution on a number of strategic fronts. So we will move into that relatively quickly.

As we talk about the acquisition of Popular Community Bank Chicago banking operations, as well as Great Lakes Financial Resources, at length in our earlier call, I will start with a focus on the quarter and then as typically our practice I will turn it over to Mark and Paul for some additional color, and then finally take it back for a quick recap as it relates to the transaction and then obviously open it up for any questions that you may have.

Let's kick it off then with the quarter. Our results for the quarter were solid. We had a nice pickup from the softness attributed to the weather conditions here in the Midwest last quarter.

Our net income for the quarter totaled $18.5 million or $0.25 per share, which is up about 14% that's a sharp increase from this time last year, and on a linked quarter basis we were up about 4%.

Compared to last quarter, the second quarter was highlighted on our end by top-line revenue growth, good underlying business performance throughout a number of our platforms, and again, Mark will cover that here briefly.

At a high level, our net interest income benefited from strong loan growth, 10% annualized, I think roughly since beginning of the year about 11% more broadly, as well as it was also highlighted by some stronger earnings that we saw from our covered loan portfolio. At the same time, we are able to opportunistically move to liquidate certain of our non-accruing securities and lower the gains to lower our federal home loan borrowing cost. So we are fairly opportunistic on that front as well, which helps net interest income. The combination of this loan growth and the action that we talked about help contribute to a 4% increase in net interest income, and a 4 basis point increase in our margin, which now stands at 3.65%.

Our fee base revenues rebounded nicely. As you recall from the first quarter that was relatively soft or we felt soft because of the weather conditions that was up some 8% linked quarter, again, largely on the strength of deposits and card-based fee revenues, while our wealth management trends continue to be positive they were up about 7% on an annualized basis.

From a credit perspective our metrics were relatively stable versus the first quarter and our non-performing assets were down about 25% from a year ago. Our loan loss provisioning was up about $4 million linked quarter, while it was down about 10% versus last year's same quarter. And as you look at the first quarter, in comparison, the majority of the increases is really attributed to the strong loan growth that we posted during the second quarter, and the rest is due to comparatively higher charge-offs. While second net quarter net charge-offs were about 20% lower again than where they were a year ago, we had a particularly strong first quarter, which certainly influences the comparison there. But overall, we feel pretty good about the credit metrics that we posted for the quarter.

And then, finally, embedded in the quarter's results as I alluded to earlier was some opportunistic actions on our end that added about a penny, roughly of activity for the quarter that included the sale of the CDO. I'll let Paul talk about this more, as well as the liquidation of an FHLB liability and then that was offset by certain acquisition-related costs.

With that as a quick recap, let me turn it over to Mark and he can certainly offer some additional business color.

Mark Sander

Yes, thanks, Mike. And I will start with loans. Loans in the quarter as Mike alluded to were up a robust were $150 million, away from covered, $130 million after that anticipated runoff. Loans, excluding covered are up 10.5% from a year ago, a little higher than we anticipated actually. Based on the same fundamental drivers we discussed the two or three calls, namely a strong diversified team doing a good job. Again, in line with the last two years, C&I lead the way this quarter.

The bank's $230 million in loan growth for the first six months of the year was largely driven by this targeted repositioning of the portfolio towards C&I inclusive of certain specific industry segments. Growth this quarter was again like last very diverse. Of our new loan production, one-third was pure C&I from what I would call our core community and middle market franchise and a little over 20% of production was investor real estate. The other 40% or so was widely dispersed across our four specialty units of asset-based lending, agriculture, agri-business and food, and healthcare. These specialty units continue to provide diversity, strong risk dynamics, and good growth opportunities based on our expertise and talent.

While I'm highlighting these specialty units, I also wanted to have a nod and stress the strong quarter we saw in several core Chicago end markets as well. In total, I would just say our commercial focus and our results are driven far and away by totally new relationships and expanding existing.

I'm also pleased to report that we saw some solid growth in certain retail segments installment loans and home equity, which again continues to lead the momentum here.

Mortgage volumes also rose sharply actually from $25 million of production in Q1 to $40 million this quarter but a still relatively modest in our view and not at the level our branch capabilities and footprints would seemingly allow. We are undertaking some repositioning of our talent in that unit as we have done elsewhere in the company.

We are not looking at structure sales and mortgage by any names, but we certainly like to capture our fair share of our core market. Overall then we would expect further loan growth in most areas the rest of this year although perhaps not as robust as the first six months.

We continue to see loan payoffs particularly in investor real estate and foresee a fair amount more coming this year. This will offset a portion of the continuing very good production we forecast from the solid pipelines we have in versatile business units including CRE by the way.

We have, for many quarters given loan growth guidance away from covered of mid-to-high-single-digit growth.

Given our success thus far, we expect to be closer to the upper half of that range for all of this year.

Switching to fee income, it rebounded nicely in Q2 from the adverse conditions in the rough Chicago winter that Mike alluded to last quarter.

Importantly this are solid year-over-year increases in the three areas we continue to emphasize wealth management, card income, and treasure management.

Wealth management was up 7% year-over-year, based on strong sales and helped by market results. And we've highlighted wealth management for several quarters in a row; we continue to believe that we have excellent growth opportunities in the future in this business. Growth of 5% in business checking service charges year-over-year was driven largely by price increases. Here also we think greater penetration and some more pricing discipline in the future bodes well for growth opportunities in our treasure management business.

In retail, while we have a more mixed story consistent with prior quarters, we are growing overall. Card based income was up 7.5% year-over-year driven largely by 6% increase in the number of transactions. We literally saw increases in everything; number of cards outstanding, increase in the average number of swipes per card, and a little bit better revenue mix per swipe as well.

This strength, as well as other pricing changes around other deposit services, more than offset the weakness that although stabilizing is still weak that we continue to see an NSF charge. These piece recovered nicely from the first quarter but that's not the best comparison for several reasons, year-over-year is a better comparison and NSF fees were down by 6% year-over-year, again a continuation of the trend we talked about for some time in these calls.

In summary, strategically again our story remains the same in noninterest income as we look to further capitalize on these strengths I mentioned. Our previous guidance of low-single-digit fee growth for 2014 remains intact as we believe the growth we saw year-over-year in our second quarter numbers are representative of the opportunities ahead as well.

Turning to credit for a moment, as Mike offered, our metrics were largely unchanged in the quarter and in line with guidance we gave and prior guidance. Of note, relative to our portfolio of quality overall our NPAs and potential problem categories are 1.8% and 3.4% of loans respectively. These levels remain well below a year ago and within industry norms and are well-manageable at these levels in going forward.

As we have talked about throughout the year, we continue to actively work through our renewing consumer and small business portfolios, which drove approximately half our charge-offs in last two quarters. Our charge-offs were about 1.6 million higher than last quarter but within our guidance range, as we also move to handful of commercial credit along in their remediation or restructuring process. Our provision was elevated this quarter largely to support our continuing strong loan growth and responsive to this lumpiness.

As we look to the second half our HELOC restructuring then remediation of the small business portfolio will continue, but largely be completed by year-end resulting in a more normalcy in 2015.

Corporate portfolio activities a little more difficult to project, but it will be safe to assume that second half charge-off levels will be consistent with second quarter trends.

With that, I will turn it over to Paul.

Paul Clemens

Okay, thanks, Mark. Let me cover net interest margins and income and then some expense narrative. Net interest income increased $2.6 million, nearly 4% from the first quarter on strength of a couple of things continued double-digit loan growth as Mark and Mike both alluded to, 4% growth on average core transaction deposit, which continue to be a strength of ours. The reduction of a $114.6 million in FHLB borrowings, they were at a weighted rate of 1.33% and higher covered asset interest, which accounted for about $700,000 of the increase, due to improved cash flow estimates and basically better remediation then was anticipated, basically better payoffs.

In combination, these increased our net interest margin by about 4 basis points to 3.65%. Within that the overall loan yield declined a modest 2 basis points, primarily due to the continue roll off of rate floors on our floating rate loans. This time last year we had approximately 40% of our floating rate loans that had floors that were in the money. Currently, that's down to around 16%. The flattening of the yield curve and its impact on new loans into a lesser extent, has gained shift to floating rate loans. All this was offset in part by the increased yield on covered assets.

On the plus side, the yield on our investment portfolio improved 13 basis points as we adjust our MBS yield for flat updated assumptions around prepayment and extension. And we recorded additional income on selected CDOs as we continue to see improvement in that portfolio.

Our expectations for the remainder of 2014, as we talked previously, we expect net interest income to build over the year albeit at a somewhat slower pace than that of the second quarter, given the recent flattening of the yield curve and we will be influenced by the pace of loan growth, of course the shape of the yield curve going forward, and the resolution that cover loan portfolio, which can introduce some volatility.

I will remind you that the margin will typically see a drag in the third quarter due to the temporary buildup of the real estate tax deposits from municipal customers that occurs during this period every year.

Given the current low rate environment, and our asset sensitivity, we continue to manage our interest rate risk to strike a balance between near and longer-term net interest earnings. And we believe the strength of our core deposit base serves as natural hedge against rising rates and the structure rather funding sources provides us with some flexibility as the market environment transitions.

The addition of approximately $525 million loans and $700 million of deposits from the Popular acquisition scheduled to close in the third quarter, will of course add as its income, primarily in the fourth quarter. And likewise, the Great Lakes acquisition when closed will add another roughly $250 million in loans, $300 million in securities, and $500 million in deposits so we will likely have a normal impact since the expected close is year-end.

As we look at net interest and noninterest expenses, our efficiency ratio on a linked quarter improved from 66.7% to 63.6%. And our second quarter noninterest expense was in line with our guidance, excluding approximately $830,000 of integration expenses associated with the Popular acquisition.

In comparison to the first quarter, occupancy cost declined due to significantly lower snow removal and utility cost. This decline was offset by higher salaries and benefit cost associated with generating greater sales production in the time you serve an incentive accrual.

The increase in professional service expense is primarily due to the aforementioned acquisition expenses and some slightly higher accruals for real estate taxes. All other expense categories were in line with the linked quarter with the exception of advertising, which reflects the seasonality of our marketing, which is generally great in the second and third quarters.

Excluding the cost associated with Popular and Great Lakes, we expect noninterest expense to approximately $64 million, depending upon our efforts to move OREO property, which can move that plus or minus. This is consistent with our comments from the prior quarter.

Mike mentioned a couple other events that we were able to conclude that were very positive on our earnings for the quarter. We were able to realize $4 million in security gains, primarily from the sale of a non-accruing, I repeat a non-accruing CDO for a $3.5 million gain. And we continue to see the rest of our portfolio fair value improve in whole. Also, given the deposits, we are going to acquire in the recently announced acquisitions, we saw an opportunity to share some excess funding and reduced our borrowing cost by prepaying a $114.6 million of longer duration FHLB borrowings. While costing us $2.1 million to exit the arrangement, we just see that returned to us in lower interest cost over the term. And by concurrently entering into a couple of forward borrowing arrangements beginning next year we retain future funding.

The net of these transactions and the net of the $830,000 in integration expense we incurred in the second quarter, added approximately $0.01 into our quarterly results. And with that, let me turn back over to Mike.

Mike Scudder

Okay. Thanks, Paul. So just carrying out little further with some of Paul's remarks and just generally what will be inherent in our balance sheet relative to the additions of Popular and Great Lakes. Let me offer some supplemental comments to what we would have said a few weeks back.

There is really no change. Both transactions are progressing relative to our plan. As a reminder, the Popular transaction is on pace to close by the end of August. And as Paul suggested our pool of acquired loans has grown to $550 million to $575 million. That's up about 50-ish million as we elected subsequently to purchase some selected health care loans out of their separate portfolio, which were market reflected loans but will add to the pool of assets that we acquired. We expect some $1.8 million in after tax integration cost, again consistent with what we disclosed earlier, largely in the third quarter.

Our fourth quarter should benefit by about given the addition of the Popular transaction about $0.025, given that we were able to receive relatively prompt regulatory approval and move to a third quarter close in system conversion, which positions us to move probably about 90 days earlier that what we might have guided to when we first announced the transaction. So those are all relatively helpful.

Integration planning for Great Lakes has become. We are still targeting on a fourth quarter close and conversion obviously that's subject to a number of regulatory approvals pending purchase and assumption requirements. But fundamentally that remains on plan as well.

More importantly or I guess of equal importance from a strategic standpoint these transactions will about a$1.3 billion in deposits and I would remind you that's about 90% to 96% of which are core. Combined the two transactions would see us also add some $800 million now in loans and that's little more than half of the acquired deposits.

So the terms of the transactions are such that with those additions of deposits in loans we would expect solid earnings accretion from the transactions themselves on a full year basis in 2015 and again as we have discussed previously relatively accelerated capital recovery for the investments that we make. So these transactions not only strengthen what we believe is a best-in-class core deposit foundation but they further position us to leverage our lending capacity and our expertise across some of our specialty units to continue grow and expand our ending portfolio and obviously drive stronger ultimate performance.

As we look to the second half of 2014, and into 2015, we are really excited about our positioning. While inauguration efforts relative to the two transactions dominate in the short run, we have an experienced team and expect a seamless transition from these transactions. Over the last few years we've greatly improved our earning asset generation capabilities and as the economy improves, and as Paul alluded to, as the rates eventually move higher, these transactions help strengthen our core deposit base, provide us with balance sheet flexibility, again that positions us very well to provide stronger performance and continue to pursue opportunities to grow.

So with that that would conclude our remarks and I would be happy to turn over and open it up for question.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will begin at this time. (Operator Instructions).

And the first question comes from Chris McGratty of KBW. Please state your question.

Mike Pareto - KBW

Hey, good morning guys. It's actually Mike Pareto stepping on for Chris.

Mike Scudder

Hi Mike.

Mike Pareto - KBW

Hey, quick question on the provision so I guess putting with your upper single-digit loan growth guidance back half of the year and then your comments also about charge-off levels kind of staying consistent here. Is it fair to assume with this kind of $5 million to $6 million provisioning range will persist over the next couple of quarters?

Mike Scudder

I would say that is relatively fair to may be a little on the high-ish end, but it's above park. What Mark was alluding to Mike, was that within the embedded cleanup of consumer and some of the small business activity those trends will hold. And then away from that you've got a corporate portfolio that's a little more difficult to predict.

But as we look to our provision expense some of that goes ultimately to what you manage the loan loss reserves to. And again we are running probably about 134, 135 loan loss reserve level. As we look out you could see that draft to may be the 120ish, 125 level but that again is going to be dependent on the underlying credit metrics away from that within the remainder of the portfolio. But as you start to use some of those metrics around it -- I think the important thing to consider as we go through this is as levels get lower and as our loan portfolio growth grows and our mix of credit starts to move more toward a larger C&I platform the dynamics around those activities just become different as you move forward.

And we're going to continue to be again as we have done throughout the cycle in this world as you move through it, a spade is a spade, we're going to be proactive on credit. But we feel pretty good about where we are at relative to those metric.

Mike Pareto - KBW

Okay. Thanks for the color. And then may be just moving to the margin quickly there. Paul, I appreciate the color on a couple of the moving pieces. In the release there is a comment that the prepayment of the FHLB that the full benefit will be in the third quarter and then -- but then you guys also mentioned that there is a typical drag in the third quarter. So I guess near term what's your outlook for the margin next quarter also may be taken into context the covered loan yields this quarter as you guys mentioned were elevated?

Paul Clemens

Yes, there is a lot of going on in the third quarter -- in the second quarter. The margin generally will go down in the third quarter simply because we could see $300 million to $500 million of tax receipts that come in that we invest at 25 basis points for a 90-day period. So that drags our margin down, that's why we try to speak to just the net interest income itself in the third quarter. Those deposits obviously don't add much to the net interest income, but they do cause a drag on our margin.

I did -- I will say that the covered loans, as I said brought about $700,000 of interest income this quarter that was unusual simply because we settle things better than we thought we would and we did a revised cash flow estimate, we do that generally every six months.

We expect to still see good news; we general don't predict that though in the quarter. So we are fairly conservative in terms of what we would see in covered. So we would see the covered interest income drop. So the covered interest income we just don't anticipate the $700,000 in the next quarter. We expect some marginal increase from the $300 million or $500 million of deposits and the rest of it I would say Mark will see with nice loan growth. We will see full impact of that and the full impact of the FHLB prepayment so.

I guess I would just have to answer this way. Margin will be down slightly. The net interest income will be up at a little lesser pace than what we saw in the second quarter.

Mike Scudder

Mike the other way -- this is Mike. The other way to think about it is as you do that is generally the inflow of seasonal deposits drags on what these stated margin yield is, but has modest impact on net interest income. If you factor that out generally our margin would be flattish as we move through that plus or minus.

Operator

And our next question comes from Emlen Harmon of Jefferies. Please state your question.

Emlen Harmon - Jefferies

When I look at the expenses this quarter they're kind of above the normal range than I would expect and we can kind of tease out line by line. But I think last quarter you talked about expenses kind of flattish and I'm looking them on a core basis kind of up a million bucks over a quarter after backing out some of the merger expense and the retirement program. I mean, should we think about the second quarter run rate as -- second quarter as the run rate for expenses going before. Are we thinking about the first quarter? Just a little bit more color around what we should expect directionally would be helpful?

Paul Clemens

Well, Emlen, this is Paul. As I look at the expense if you back out the $830,000 of acquisition expense, and you back out the nonqualified plant expense, we're back down to the first quarters expenses was 53.7 that's roughly where we were. So I think you could expect to see that subject to, as Mike mentioned, these acquisition expenses now that will start getting layered on.

Emlen Harmon - Jefferies

Okay, got it. Thanks. And then Mike, were your BSA/AML procedures kind of reviewed my regulators as part of the Popular transaction and just kind of given delays that we've seen with some other banks, just want to get your kind of level of comfort if that's not going to be an impediment to the Great Lake sales as we roll into the fourth quarter here?

Mike Scudder

We spend a significant amount of time reviewing and maintaining and our support of the AML/BSA activities. So we've invested a lot in that previously. I don't know obviously anything that goes on from a regulatory standpoint gets considered as part of an application for merger.

But fundamentally that's looked at on a regular and recurring basis by the regulators. We feel very good about where we're at and we consider our program to be one of the strongest around so.

Emlen Harmon - Jefferies

Got it, okay, thanks. And then just one thing on the credit side that stood out to me this quarter as you did see a bit of an uptick in the potential problem loans, could you give me a little bit of color on where that was and I would also be curious if you guys gotten your SNC results back yet this quarter?

Mark Sander

So I mean, that was around I guess I'd say that the normal ebb and flow of corporate credit really. I wish I would give you a more specific answer than that. But it's -- that's kind of what you saw there in this quarter. As I said it's a, as a percentage of our loan portfolio it really is unchanged slightly, tiny uptick in the second quarter. So that's -- there is no greater story there I would say than that, kind of I say the ebb and flow of corporate deals, if you will.

Mike Scudder

Yes. The only thing I would offer that as well if you look at the underpinnings of what changed within the potential problems, it was more weighted or heavily towards what we would call a special mention category and of course subcategory which is generally condition with what Mark said -- it's more of the ebb and flow of what goes on within the loan portfolio.

Emlen Harmon - Jefferies

Got it. And did --?

Mark Sander

So we don't lead a whole lot of SNCs. So we got our SNC results, right. And it will have virtually no impact on us. We just don't do the kind of SNCs we're in some but the results we got, I think there is one downgrade in it and that's it.

Operator

Our next question comes from Brad Milsaps of Sandler O'Neill. Please state your question.

Brad Milsaps - Sandler O'Neill

Hey Paul, thanks for the color on the margin. Just kind of curious, you guys show in your filings that you're fairly asset sensitive when and if rates do rise, I'm just curious how the two pending acquisitions might change some of the assumptions you have in those tables, if at all?

Mike Scudder

You know we talked about -- this is Mike, Brad. When we were doing the earlier disclosure relative to it, they are really relatively neutral. We have a really strong asset sensitivity position right now largely led by the quality of our core deposit base. The addition of these transactions don't meaningfully alter it, frankly what they do is give us a little more flexibility, given the fact that as part of those asset pools as you acquire particularly within the securities portfolio, that whole portfolio gets marked, which then gives us some ability as we move on toward the end of the year, more flexibility as to how we manage that.

Brad Milsaps - Sandler O'Neill

Sure, absolutely. And then just a follow-up on the some discussion on asset quality. Mark, I appreciate the guidance on charge-offs. Just kind of curious, some other folks in your region are beginning to see recoveries. I know you guys have rolled it more of a consumer piece that that might inflate the charge-offs numbers a bit. But any particular segments or particular buckets of loans that you're seeing more charge-offs from at this point in a cycle that might be driving some of those numbers up a bit kind of relative to other folks?

Mark Sander

I would say nothing that we haven't talked about before Brad so to speak. So as we think about it's always hard to compare this category in particular to other folks as what they are doing or not. But as we talked about for a while, we -- our consumer and that the smallest part of our small business portfolio, which tend to be roughly supported by personal assets kind of thing, those two portfolios we talked about that will take us most of 2014 to all of 2014 to remediate and run through things before we got back to normalcy. So I think you're seeing a bit of that. That as I alluded about half of our charge-offs in the first and second quarter were from those portfolios.

And then, as we think about there is a -- the other -- about two-thirds of our portfolio probably is that and of our non-performing assets are that and a handful of our corporate credit. And there is where the lumpiness that we talked that came in. We had a little bit -- we saw a little bit of that lumpiness in this quarter's charge-off number from a credit or two. So that's the best guidance I can give you. I think it's consistent with the story we've been telling you for some time. And it's going to take us the rest of the year burn through some of those last parts of those portfolios.

Operator

(Operator Instructions).

Our next question comes from Terry McEvoy of Sterne Agee. Please state your question.

Terry McEvoy - Sterne Agee

A question for Mark. You said that you are not expecting as robust loan growth in the second half as the first half. And is that just -- are you just trying to keep expectations in check or is there something you're seeing or hearing that's behind that statement?

Mark Sander

Yes. There is plenty that's behind the statement I guess. But thanks for the question Terry. I would say that we expect our production of new loans in the second half to be about the same as the first. Candidly, we just expect to see more loan payoffs in the second half than we saw on the first. And so the net growth will be lower, it is the conclusion of it if you will.

You're seeing the smallest business segments, the small businesses; it's pretty stagnant right now I would say in C&I. The middle market is pretty healthy and robust in all those competition of the others. There is things that are -- there's good stuff happening. Line utilization was up slightly again this quarter as it was in the first quarter. Well, there are some good signs there folks investing in plant and equipment expansions of current clients. So I think it's again more reflective of payoffs that we foresee as I alluded you to principally in commercial real estate where you have conduits and/or people that are planning to sell the buildings that we have some visibility to, that's going to hold on the net number over the first half. And again, I would stress the first half number was a little higher than we thought it was going to be. So we're pleased with that but we don't expect to grow 11% annualized in every six month period.

Terry McEvoy - Sterne Agee

Thanks. And then, Mike a question for you. You've done two deals this year. I saw in the press release you bought a portfolio of home equity loans. I mean, this is a different First Midwest that we've seen in a while. And my question is, is this a change in strategy from the top or is it more of a function of being more opportunistic today, whereas the last few years there has been more of an inward focus on strengthening the balance sheet?

Mike Scudder

I would say Terry it's not really a change. I mean, we've always been on what I would call opportunistic as we look at the balance sheet broadly. You must take those in sequence. The home equity transactions that we purchased were just back home equity transactions reflective of the fact that we had significant liquidity and felt that we had good insight into our home equity portfolio that would provide solid returns for us. So that -- I'd kind of move that as a just an active balance sheet management element. But I wouldn't give a $100 million for the home equity as material change than what we are doing.

As far as the acquisitions go, I think we've always said that we were going to be opportunistic within the market. We did five FDIC. We simply looked and as the opportunities have become available, it makes sense for us and frankly they make sense for the counterparties as well, then we will be very proactive in terms of moving ahead.

So no, I don't think so Terry. We've invested and as we talk about, we've invested a significant amount of time and energy into augmenting our teams and our talent with the activities over the last five years, over the activities that -- not over the activities, reflective of our planned activities that you're starting to see move forward today. It's just that space isn't linear, it just becomes opportunistic.

Operator

Our next question comes from Taylor Brodarick of Guggenheim Securities.

Taylor Brodarick - Guggenheim Securities

Hey, yes, how is everybody? Just a quick question on wealth, I know Mark said it has been the focal point in the release since the last couple of quarters. Just kind of thinking what the opportunity to cross-sell with the two pending acquisition and I guess any other detail as far as asset base revenues versus transaction revenues in the past quarter?

Mark Sander

So think the opportunity with the new -- soon-to-be new partners is quite high and I guess a better reflection of that is they're quite excited about it as we talk to the colleagues there. So that's an indication they certainly believe it's high.

So I would say we also have a number of well penetrated in certain of our markets in wealth management, extremely well penetrated, and others were not as well penetrated as we would like to be and think we can be. So I think there is some growth opportunities in our existing franchise and that's what I've been alluding to the last couple of -- almost really the last couple of years as well.

Relative to the mix of sales versus markets it's a good mix of that I would say our sales results we're really pleased with. We measure sales based on annualized net revenue increase and those numbers have been very robust over the last really several quarters and then that's again continues our pipeline in that business is quite strong from our existing franchise.

Operator

(Operator Instructions).

If there are no further questions, I would now like to turn the call back over to Mr. Scudder for any closing comments.

Mike Scudder

Okay, thank you and thank you all for joining us here today. We greatly appreciate your interest in First Midwest Bancorp and wish everyone to have a great day.

Operator

Ladies and gentlemen, this concludes the conference for today. Thank you for participating. And have a nice day. All parties may now disconnect.

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