Q1 2020 Earnings Call

Dead dead dead.

Dead dead good morning, ladies and gentlemen and welcome to the First Midwest Bank or 2020 first quarter earnings conference call following the close of the markets yesterday. The company released its earnings results for the first quarter 2020 and also issued presentation materials that will be referred to during the call today during the course of the discussion today managing comments and the presentation materials may include forward-looking statements and non-gaap financial information.

the company

Refers you to the forward-looking statement non-gaap and other Legends included in this earnings release and presentation materials, which should be considered for the call today. This call is being recorded and all participants are in a listen-only mode following the presentation by Mike's gutter chairman and chief executive officer Mark sander president and Chief Operating Officer and Pat Burrell Executive Vice President and Chief Financial Officer. The call will be open for questions and answers for analysts only I will now turn the call over to mister Scudder.

Great. Thank you. Good morning. Everyone. Thanks for joining us today. Great to be with you and I hope this finds everyone along with your family's doing well and staying healthy, you know from my perspective as you go through and prepare for these calls. It's really an understatement to suggest that these are unprecedented times certainly not times that we would have anticipated when we began the quarter or certainly time zone. No one would have uh anticipated frankly over the course of our careers from my perspective then so what while we're going to cover the financial today to me on a performance for this quarter is really less about the numbers and more about the strength and character of our company and our team all of which was on display as we had to change debit pretty radically away from what our operating plans were when we started the year and respond to the the necessities of dealing with covid-19 and and the underlying Panthers

Crisix, so this has been an absolutely amazing time as one reflects and frankly. I'm just extremely proud of how our team and the banking industry is a whole is really pulls together. Mark is led the vast majority of those efforts across our company and done a tremendous job. So I want to give him the opportunity to cover the specifics of what we've done on that phone. Now before we start talking about the quarter, we just accomplished a tremendous amount that fell outside of the ordinary course of business and just doing our part to really meet the needs of of our colleagues our teams and and our clients as a whole so and we had to adapt our platforms distribution operations. We had to heighten safety help colleagues and send off line teams, you know work to meet the needs of our clients really hard and do all of that recognizing the stress that's just on individuals and and business cash flow needs dead.

So and simultaneously the the collection of all of that influences our our communities and their need for support as well. So Mark, why don't you why don't you cover that slide that talks specifically about all the efforts on that Arena.

Thanks, Mike and good morning. Everyone. Did you can see on page two of Our Deck, you know, we responded as Mike said on numerous fronts to these unprecedented times, you know, everything we do as always is down to the lens of supporting our colleagues to serve our clients and communities, you know never has that been more important than now, you know as we adapted our operating model, we maintained employment and pay levels former colleagues. And in fact enhanced pay for those who cannot work remotely. We also expanded benefits to support our colleagues in need.

Similarly, we rolled out many programs.

To support all of our clients while maintaining Services as best as we can at levels that have one US Awards in the past, you know, thus far we've approved 1.5 billion in commercial payments a month for over Nineteen Hundred clients representing nearly 15% of this book in addition. We've approved a hundred fifty million dollars in deferrals for 2000 consumer clients or about 5 per month and as the payment Protection Program consumed the lives of hundreds of our colleagues. The last month were pleased to have helped over fifty five hundred clients secure one point two billion in funding importantly, these loans have impacted the lives of over a hundred and twenty five thousand of their employees and then last but not least we have increased our support to our community them committing to an additional two and half million dollar donation from our charitable Foundation, which is of course on top of everything that we normally contribute, you know, so to sum up I just want to reiterate what Mike said wage.

Tremendously proud of how our colleagues have responded to this stress, you know, I think it speaks volumes about the culture of our company really, you know, it's built simply on good caring people doing the right thing. And and that's what we've done so back to you Mike.

All right. Thank you Mark. So with all of that is a lead in I want to talk about the quarter. It was certainly to say the least an active one. And as we said reflects the month practical side of of the need to Pivot and respond to covid-19 as well as the additional implications of the impact of our closing on our acquisition of Park Bank may as well as the accounting implications of transitioning to Cecil so recognizing the need and and you all desire for all of those elements and I'll leave the bank reconciliation of all of that. Dapat Mark is as we walk through it out. I'll keep my comments at a pretty high level and and leave the heavy lifting to them. All right, I would give you a few observations and highlights as Thursday night about the quarter as as we go through this first EPS is as as we booked it was $0.18 but that reflects an additional twenty eight million or $0.19 per share in loan-loss provisioning a month.

Due to covid-19 and in the environment companion to that we had four cents per share and acquisition costs in line with what we expected we were going to do and and just related to the fact that we close down Park Bank on March 9th. We also had certain elements of performance that didn't fall into what I would call normal adjustments, but were the Practical realities of dealing with the operating environment that we were young and we had a penny worth of security losses. We had some uh m s r swings that were probably another Penny and then we'd probably had elevated occupancy pandemic related with us that maybe hit another Penny as you went through it related to cleaning and different things that one did for the the building. So if you add back just the provisioning and the the Acquisitions that puts us about $0.41 a share, you know, you could probably get yourself to $42.43. If you had back some of the other elements related to the environment from a pre-tax pre-provision perspective wage.

Away from Acquisitions and security law.

We really generated a solid seventy-two million for the for the quarter. So as we think about the change from last quarter's performance away from provisioning. It was pretty much what we expected and largely due to the drag that we saw on revenue from the decline in interest rates and just the natural change that goes on relative to a creation and the other element that we saw was we really just had record fee levels in the fourth quarter of of the year. So we were really coming off a period of pretty high and then on a link order basis that goes without saying there's obviously fewer days in the first quarter net interest income is $144 million that's down compared to the hundred Forty-Eight million in the fourth quarter and a hundred up from $1,039 million a year ago or margin was 354. If you think about it relative to the fourth quarter or average earning assets grew 3%

That's 12% analyzed annualized but the benefit was really more than offset by the margin which dropped about 18 basis points again for the combination of shift and Thursday and shift in a in a creation as you go through and think about that and fewer days in the quarter. And then if you look at it relative to a year ago or average earning assets were up 17% which again was offset by them and and the decline that we saw they're largely due to rates loan growth was pretty solid Markle talk about this, but we are lending increased to fourteen billion. That's up about 9% from your office about two-thirds of that growth was related to the closing of Park and the rest was really due to production fee revenues were down as we said from a record fourth-quarter largely due to a line in the more sensitive, you know, Capital markets swap related activity and mortgage income line items, but all in all they were still up 15% from where we were a year ago.

And then finally away from acquisition costs not interest expense was essentially flat if you allow for the incremental growth and really look at things as it relates to a you know expenses as a percentage of of average assets and size. It was improved on a relative basis both from forequarter and and a year ago looking at those those metrics are correct metrics or really distorted by the combined impact of Cecil and Acquisitions and all the oven flow that goes along with that. If you wipe all of that out and all said and done or relative position is it reliable overall asset quality is pretty much unchanged from the fourth quarter. Obviously, we did book the twenty million and additional provisioning for covid-19 and and certainly we can explore that further down and finally very excited about park close great team. Great people. They really stepped up. Our teams are ready to go and we continue to be on Pace for a mid-june.

June systems conversion which then we'll obviously see the contribution from our combined operations really start to grow in the third quarter.

But with all of that, let me turn it over to Mark and Pat and they can give additional color as they walk you through the the remainder of the materials. Yeah. Thanks Mike. And so picking up on page or four loans, you know, we grew one point 1 billion dollars this quarter, you know at a high level the major elements of this were about seven hundred million from Park 210 million from commercial and $520 in consumer fairly. We're delighted to have I'm parked and they're welcome. They're high-quality C and I and c r e e relationships. But you know importantly is Mike alluded to wage. You're really Welcome to our new colleagues, you know, they've been absolutely Stellar in working through the current challenges which just reinforces our optimism about the future of our Wisconsin franchise.

Away from Park and away from the pandemic. We had a really good quarter bloom in commercial. Our growth was 50% line drawers and fifty percent strong production. Well that draws increased about a hundred million and some of that was driven by the pandemic. We typically CNET line increases in q1 and our utilization only picked up about 1% from your end zone more notably. We saw a healthy level of new loan activity from the strong pipeline. I mentioned last quarter each of our Commercial Business lines saw growth this quarter as although payoff activity made. Hi, we had very good production across our commercial segments and we spoken for some time about the advantage of having different levers, but it's really nice when all of them see growth in a single quarter month.

In consumer, we bought them high-quality Helix early in q1 given their attractive risk-return profile. We also held more of our mortgage production on the balance sheet this quarter off. So looking forward while we remain an active dialogue with clients and Prospects. It's frankly pretty tough to project future loan growth at this point given the uncertainty around the time of the resumption of activity and borrower sentiment.

Page five is the first of a couple of slides that speak deeper to the loan book given current circumstances and the anticipation of Greater asset quality stress across the industry. We have a very granular and diversified corporate portfolio with modest exposures to the most stress sectors in the economy these elevated risk segments represent less than 5% of our home phone book and certainly they should all get some measure of relief from their active participation in our deferral programs and the PPP.

Similarly, we feel good about our Consumer Portfolio as demonstrated on page six, given our underwriting parameters over the last several years. We stay at the upper end of Faith scores across all consumer segments and maintain modest loan the values and residential lending the area of consumer lending that we view as highest risk is also a very modest portion of Arabic here and has very high FICO scores more broadly. We've analyzed our entire portfolio much deeper in light of the current environment, of course and believe our divorce underwriting and regular portfolio management disciplines will serve as well as we navigate this uncertain future. So Pat's not going to pick it up and talk about some specifics around credit metrics off.

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Cecil to start with on slide seven or allowance increase by $118 billion from December thirty first two thirds of this increase was due to the adoption of Cecil and January 1st. I'm hoping in a total increase in Seventy-Six million to our allowance in line with our previously communicated day one expectations.

Approximately half of the $76 million increase was driven by the transition of credit marks to allowance previously acquired credit impaired loans.

In addition the current quarter allowance increased by $28 billion reflecting day to reserving for the expected deterioration of economic conditions due to covid-19.

It was minimal impact to a regulatory capital is we elected the Cecil transition in covid-19 regulatory Capital relief deferrals, which allowed us to retain approximately 20 basis points in common equity and Tier 1 Capital excluding the deterioration of economic expectations. We actually experienced modest reduction or improvement in our allowance of approximately 2 million dollars a month.

Final piece of a very noisy quarter of a credit reserving was the addition of Park Bank driving increased reserves or approximately $16 virtually all of which related to acquired P C D E Credit impaired loans are provision expense of $40 reflects the $28 million dollar increase in allowance established for covid-19. Two million dollars for Park reserves replenished on charge off around $10.

Moving to asset quality on slide 8 so an increase in non-performers in the first quarter largely driven by the adoption of the Cecil and the recharacterization of existing purchase credit. Loans to non-performing.

No, this is not suggest that there's been any deterioration in the category only a change in definition, excluding this impact non-performing loan and asset increases were modest and consistent with normal normal quarterly fluctuations. Similarly, the four basis point increase in net charge-offs during the quarter was entirely driven by the requirements of Cecil accounting absent this change charge out actually declined modestly.

Briefly touching on deposits on slide nine. This continues to be a good story and a real strength of our franchise. We did see normal seasonal declines in certain segments as well as in Thursday's all set by the addition of part.

Or 78% deposit ratio continues to leave us with an advantageous cost of funds. Although in this low-interest-rate environment that competitive difference is narrowed somewhat nonetheless. It's nice to remain at the low end of the industry's cost structure here in the near-term. We'd expect further declines and costs combined with likely growth and balances.

During the funding and liquidity on slide ten or thirteen billion dollar granular and stable long-term deposit base is our primary source of liquidity. Additionally. We have over six billion dollars funding sources that provide ample capacity support clients colleagues and communities.

No part of our funding sources or highlighted is capacity for increased borrowing through brokered CDs. This capacity is relative to our internal policy limits, excluding brokered CDs. Our capacity that is significantly higher than our total unfunded loan commitments of approximately 3 billion dollars.

The net interest income and margin on slide eleven that interest income decreased 3% compared to the prior quarter about 5 million dollars or 3% compared to the same period between nineteen month decrease compared to the prior quarter was due to lower interest rates and acquired location partly offset by lower cost of funds compared to the prior-year. The increase was due to the acquisition of Bridgeview that closed in May 2019 Securities purchases loan growth and accretion and lower funding costs significantly offset by the impact of lower interest rates.

Acquired loan accretion contributed nearly $7 to the quarter down from ten million in the prior quarter and roughly flat to the same. A year ago accretion was higher than expected. Need a verbal resolution that certain acquired loans as well as finalization of Cecil adoption in the allocation of credit marks to the allowance.

Moving to net interest margin tax-equivalent name for the current quarter of $354 was down eighteen basis points link order and fifty basis points from the same. A year ago about excluding a creation margin was $337 for the quarter down 11 basis points from the prior quarter and 49 basis points from the same period a year ago.

Margin compression was primarily driven by the impact of lower Market rates on loan yields compared to both prior periods compared to the prior quarter. This was partly offset by lower cost of funds compared to the prior-year margin compression also reflected actions. We took to produce great sensitivity.

Moving to our 2020 Outlook, excluding the impact of loan growth for the remainder of the year. We expect modestly lower nii, excluding accretion compared to the prior-year Dead.

Assuming the current rate environment continues for the rest of the twenty-twenty accretion is expected to be approximately $22 down nearly 40% from 2019 at about five million dollars per quarter for the remainder of the Year note. This is after adjusting for the impact of Cecil which results in approximately 3 million dollars of accretion being reflected as a reduction in loan-loss Vision throughout the year.

Our outlook for corn M is for continued compression in the near-term has continued loan repricing expected to bring yields down by more than deposit costs can fall.

Given the unpredictability of earning asset growth through the remainder of the year or ability to project we're ultimately settled as challenging and accordingly. We're not offering more detailed forward guidance.

That'll turn it back over to Mark to discuss not interested in, It's like 12.

Thanks here. You see that's like twelve not interested come we had a very solid quarter and right in line with our guidance. We were down link quarter as expected and as Michael louda Tu given normal seasonality as well as the elevated levels of mortgage and capital markets revenues and Q4. We think a better measure of our performance as the year-over-year comparison where we were up five million dollars despite a $1000000 Securities laws and a $1000000 decline in the valuation of mortgage servicing rights. We did benefit this quarter from almost two million dollars in additional fees from our acquisition off.

Away from all of that. Our Legacy fees were up.

Percent year-over-year in q1 swaps remain strong albeit lower than our record levels last quarter and we saw modest incremental growth in most other categories.

Going forward we will see some pressure off our normal fee run rate in Q2 as our client accommodation programs are expected to cost about one point five million dollars and activities the the service charges card income and swaps of all slowed given the pause and economic activity.

As a result the impact of the pandemic will likely Drive full year non-interest income down modestly from 2019 levels back over you thou pet.

Moving on to expenses on slide thirteen note that the current quarter includes $5 of anticipated acquisition integration related expenses. Largely driven by cost associated with the park acquisition away from these items total expenses were consistent with the fourth quarter and up 14% compared to the same quarter a year ago. The increased compared to the prior-year was driven by our large operating base due to Acquisitions combined with higher salary extends reflecting Merit increases higher mortgage commission due to higher production volumes and hire Professional Services related to continuing investments in technology and process enhancements compared to the prior quarter expenses reflected increases occupancy related to snow removal and ongoing technology-related Investments month.

We continue to be focused on our expense run rate. And while our efficiency ratio is kicked out due to revenue declines in the first quarter overall annualized expenses. As a percentage of average assets was $44 down 3 basis points from the prior quarter down ten basis points from a year ago.

Our outlook for the second quarter is the expense run rates away from acquisition and integration costs will likely pick up modestly reflecting a full quarter run rate from the park Bank acquisition combined with endemic related costs that we expect will normalize along with the operating environment.

Annualizing q1 expenses should be a reasonable estimate for full-year total expenses based on our current output.

Last note on taxes before I leave the slide or effective tax rate for the quarter was approximately 25% consistently our guidance and we expect that to continue through the year.

Moving the capital and slide fourteen in addition to solid credit reserves and ongoing Capital generation through earnings. Our Capital levels are strong and has excess of well-capitalized levels wage assumed around ninety five basis points during the first quarter as a result of the park acquisition, which had a 50 basis-point impact share repurchases at the beginning of the quarter with a 15% 15 basis. In fact as well as the impact of loan growth. We like to the Cecil transition for regulatory Capital relief, which allowed us to retain about twenty basis points in common Equity into a capital in addition are tangible book value. $13.14 per share is up nearly 4% from a year ago during the quarter. We repurchased 1.2 million chairs, stock at a total cost of around $23 million dollars during the quarter.

In March, we suspended Sherry.

Purchases to strategically focus on Capital deployment supporting clients colleagues communities and the broader economy and we'll reassess this over time as the operating environment stabilizes off during the quarter. We paid a dividend representing more than a 17% increase from the same period of year ago.

Consistent with our usual practice which summarized our outlook for 2020 on slide fifteen. I'd emphasize that we've formally withdrawn for your guidance for 2020 that we had communicated the beginning of the year any remaining updated commentary or Outlook. This quarter is limited as future results are dependent on the persistence and impact of the pandemic customer behaviors and the impact significant Federal stimulus activities also included for your convenience to summary of our financial results for the quarter on slide sixteen and an update on the status of the park Bank acquisition and Thursday and slide 17.

Now, I'll turn it back over to Mike for final remarks.

Thanks. So sure anxious to get to your question system further remarks and then then we'll open it up. I just add on to what Pat said from my perspective and that of the company is as wage think about it though the Practical reality in this environment is that absolutely no one can predict the future or where that outcome is going to come at this juncture as I think about it and as we think about it, the quarter this quarter is I started off with was largely a pivot simply had to take your Tactical plans drop them and put your energy in focus in to where it really needed to be invested the most and that was in the health and safety and response to the needs of you know, your colleagues your clients and and the operational needs of of continuing to execute the second quarter as we look for and we'll see the impact of those Investments and and the shift as you start to do that. You'll see the revenue and costs associated with

Programmatic impacts of colleague incentives and client accommodations and those things full through you'll see the full impact of rates going to zero and the move from that standpoint and you'll see as Mark alluded to the impact of business and consumer distraction on production and and operations for the quarter and all of that to some degree will be offset by the impact of the PPP program and funding and the the influence of stimulus is that rolls out so and then lastly in in that circumstance as it relates to the second quarter will also see the condition and onboarding of parks full team and and clients which we're very excited about so as the second quarter unfolds that we would obviously expect to have a better read on a on a return to whatever the definition of a a new normal is as folks are looking at and also a better read by extension and what the impacts are and reserves and economic outlooks and and credit outlooks as you go forward but away from all of that wage.

Cuz you think about the course of business.

If things start to normalize, I think it's important and we've talked about it internal here. It's particularly important to continue to invest and execute on your business priorities. And just those are our talent the teams diversification. What are you doing to manage your wrists? How are you investing in your systems? And we talked about it ninety days ago where we said our efforts in twenty-twenty. We're going to continue to see us invest and worked a better leverage our resources the technology in our processes to be more efficient and deliver a better and more efficient experience for our clients by extension wage. You know, I I think even then we thought that the opportunity of twenty twenties environment and and the capabilities from a technology standpoint. We're going to create a greater incentive do that in my view the environment we're living today hasn't diminished that as off at all. So we actually started this year looking to make those Investments and starting the automation processes and a number.

Things with that in mind and while all of that has been slowed by the response to covet and in early to queue that objective still there and the incentive remains and and I think it's more important to get you to execute on those as the environment stabilizes in this environment. We've learned a lot and as that work picks back up. I think that will leave us well-positioned as we drive into age Twenty-One. So in summary is as we go back and I'll open it up for questions. We've got a strong balance sheet. We got engaged team. We're going to continue to invest in our systems and our capabilities and I think my extension that leaves us well-positioned and committed to supporting our clients in our communities and executing on our plan as we navigate whatever New Normal means here is as we go forward. So with that I'll open it up for questions. I'll kind of serve as a quarterback and given that we're all in disparate locations kind of Q Mark and Pat and others to respond to the questions.

But let's open it up.

Thank you, sir. The question and answer session will begin at this time. If you're using a speaker phone, please pick up your handset before pressing the keys. If you have any questions, please press * then 1 on a push-button telephone. If you wish to withdraw your question, please press star then to your question will be taken in the order that it is received please standby for your first question, sir.

The first question comes from Christmas, please. Go ahead. Hey, good morning. Thanks for the question. Hey guys, Mike or Pat or more of the disclosures in the deck were great. Just had a couple of follow-ups on a couple other sectors, you know, you call out I think six sixty million bucks of retail exposure that that would imagine that's just direct retail, but you also have correctly from running around 600. So over retail c r e I guess number one. Is that about the right exposure? And then how are you feeling about that portfolio and second second senior housing has gotten a lot of attention. So maybe you could remind us the exposure to do housing and in healthcare nice. Be great. Yeah. So Chris know the answer. Your first question is no that that you're a little higher or retail or cre retail is more about 450 million dollars not six hundred and how long

About it is you know as good as you can, you know, I mean, it's we don't have big box. We have small script centers service-oriented properties. So, you know, obviously it's it's impact.

Did but I I like the makeup if it's a relatively modest portion of our Theory Book and I like the composition of it as well as you can in a in a world where shopping is has been pulled back. So that's that's that's what I say. It's more like 450 relative to a senior housing that portfolios around seven hundred million dollars again feeling good there it's you know, obviously it's a high-risk area as well. You know, that is an industry that has dealt with infectious diseases as a matter of course, and so don't mind be home earlier about it by any stretch and the other hand. We don't we have one. I think that has had some a case and and they kept it contained so so far really feel good about mostly multi-system multi facility operators is what that portfolio consists of

Great. Thanks for that Mark. I missed it in your prepared remarks the deferral could you just repeat the the deferral that have been discussed or executed for the commercial and the consumer and then how that has been trending maybe over the past few weeks? Yeah, that's a great question the so the specifics are it's about 1.5 billion in commercial deferrals off and about a hundred fifty million dollars in consumer referrals. And as you suspect they've been trending down rather significantly the last two weeks, so they're still coming in but I'm turning down again rather substantially.

Great, and then maybe I can take one in for Pat. I want to leave you out the the mark. Could you remind us what the remaining Mark is over the pro? Forma? Mark is on the on the balance sheet from home positions, you know, maybe if you had any color between rate and credit. Thanks.

Yeah, I think we're hovering around. You know, we we ran some off and then added some back with Park and we remain somewhere in the sixty million range and that's split off about two-thirds credit and one-third interest rate.

Great. Thanks a lot.

Our next question comes from Terry McEvoy of Stevens, please go ahead. Hi Karen. Hi, good morning. Just maybe starting with a question or two on page Seventeen of the release the increase in construction non-accrual loans from essentially zero up to 18 million plus just curious if you have any comments there and then also the bulb in 3289 days past due.

Mark once you cover that too sure. So the first one is was largely One loan that I have to say as much as we had to go now too cruel because the dog owners are are fighting amongst themselves. I feel good about that exposure. It's cuz you can feel about a non-performing asset. You know, I think that building will be completed the owners have a lot of equity in it off and and it's in a terrific location. So it's unfortunate to see it going on a cruel but I feel it's good about that. Not a cruel if I can't about any honestly, but there's a thirty $89 was informed, you know a little bit of that got caught up in the pandemic. Unfortunately, it was largely driven by two large borrowers one. Where were the lead agent on a three Bank deal and candidly our participants didn't get their their approvals done in time. And so that that slipped over to 3 days and the other was a borrower who's disputing some payments through the good news of all that is both of those dead.

Became current a week later.

In the first week in April, so frustrating to see it there at the end of March, but the whole the whole increase was driven by those to which have both been cleared up.

And also thanks for the comments on can you just run through again your thoughts on got a step down and carve the service charges Capital markets and I'm trying to maybe get a better understanding of the base level in the second quarter to then model out the recovery that's mentioned on the Outlook slide. Sure. So again our slots will take more than swaps, you know came down from 6.2. I think it was the four seven. So again, those are still are two best quarters ever even though that's a 1.5 million dollar drop swaps. This next quarter is going to be tough, you know activity has a pullback new new loan origination are hard to come by right now. So I think swaps will be quite light in the second quarter frankly hard again was one where Ross you know, normally, it's February to March last year. We saw an increase this year. We saw almost a 20% drop so you can I think you can almost entire life.

Tribute that dropped to the pandemic and again until people get out there spending. We're a little cautious as to where that recovery comes back in our fee waivers alone. I think will cost us as I alluded to about a million and half dollars in Q2. So that's kind of is that answer fully? It's hard to get a give you a number to run right? That's why we try to project out a full year that says we'll probably be down modestly on a year-over-year basis.

That's great understood and then just one last quick with the acquisition and integration related expenses. I mean if I just look across the last five quarters, it's pretty pretty sizable number. When does that kind of Trail off? Is it after the June system conversion? If I so by the fourth quarter of this year will those be pretty close to zero?

Yeah, yeah, Terry, they'll likely largely drop off by mid-year. So we had five and half million this quarter this past quarter and we'll have roughly five million in the second quarter which should drop down to at most a million in the third quarter and then nothing afterwards.

Thanks, everyone. Stay healthy.

Our next question comes from Michael Young of SunTrust, please go ahead. Thanks. Wanted to just ask about I guess it's generally Mark you mentioned, you know that there wasn't maybe a whole lot of demand out there. But even if there were some demand I mean would would you guys kind of be pulling in and you know, batten down the hatches for what she wasn't could or maybe coming or are you kind of still open for business and looking for growth? And then I guess the second part of that question would be you know, how are you viewing consumer loan purchases in this environment and Thursday 1 to 4 family on the balance sheet, right? So the first one is I'd say somewhere in between. You know, we're we're still open for business very much. So but we may take a look and figure out where should we dial it back a little bit and and you know, you just can't um, you can't assume that when things are going to return to normal and so

Therefore you have to get a little more concerned.

Leaving your underwriting practices. I just think that's prudent. Um, so we we've taken a look across the portfolio and and have as I say dialed back a little bit in certain areas, but we are still very much open a business. It's just um, you know where you're willing to go get gets pulled in a little more conservatively relative asset purchases. I don't I don't think you'll see us back row that's transactional purchases. We may look to do some just to keep flat perhaps we haven't made final decisions there. I would say in this environment. There's people are loading up their balance sheets with people either actually could be some decent access to to buy but I don't I don't think you'll see us do you I don't think you see us grow that activity Michael and you know, that that's still to be determined. I would say off of mortgages. We we still had a good April and mortgage. So um, so we'll we'll continue to you know, we're still open for business there and um, you know, we have a model that that a certain

Twice we believe is it's warrants us keeping them on the balance sheet. And so we'll keep keep putting them through that lens.

Okay, and then maybe just on the loan diversification page number 5 the health care segment that you show there. I know you guys have found some some bankers and something left out about business up over the last several years. Can you just kind of give us a a variety of what's in that that book and any thoughts around that would be helpful sure. We we we have in total about as I said earlier about seven hundred million in in long-term care, I would say then we have a couple hundred million dollars and fifteen practices. We highlighted the dental. We have other physician practices as well determine other hundred million their valves and then we have you know, a couple hundred million relative to hospitals. Yes, I would say so that's all captured there.

Okay, and then maybe just last on on Capitol maybe big picture of thoughts on just the dividend and sustainability of that. We saw One Bank cut the dividend today, but wage doesn't seem like that's necessarily going to be an issue for a lot of people. Just curious what you're what you're thinking is there. Yeah, you know we've talked about you know, just broadly overall Capital mix and continue to do that with with the Borg and have those conversations. I mean if I go back to you know, you know 2008/2009, you know, and as I started off with it, I think what you have to do is look at your overall Capital mix and make those decisions as you navigate the environment, you know at this juncture is Pat alluded to it. You know, we've got good strong operating leverage. We've got you know, that's a nice solid Capital base and our Reserve levels at least of what I've seen people reporting at are pretty pretty healthy even allowing for some of the expansion that comes back through Friday.

Transition to Cecil. So we like where we're positioned. But obviously that's something we're going to continue to talk about with the board and we'll talk about it with our shareholders, too.

Okay. Thanks.

Our next question comes from Nathan race of Piper. Jaffray, please go ahead. Hi guys. Good morning. Hope everyone is doing well. Thanks Nathan Choi start on Slide Five and I know the general scene. I he doesn't really show up within the kind of more elevated risk sagna, excuse me, but when I look at, you know charge of the last five quarters that's constituted both of what you guys have recorded there. So just curious maybe Mark, and just how you think the general scene iBooks going to hold up as we enter this downturn. I'm just giving it seems have been like I said a bulk of the charge-offs historically

You know again, I would point to our well-diversified book and modest exposure to the most stress sectors name again. That's a nice backdrop of what is this recovery look like how quickly does it happen and if it happens and and you know, what what shape it takes. So it's a little hard to give them their hands why we've pulled back a little bit there. You see the estimate we put forward relative to what we added the loan loss provision as a direct result of the portfolio analysis wage did so I guess that's the best answer I could give you is, you know, we we packed away another twenty eight million dollars to uh to to take care of, you know, as our best estimate of what that might look like.

Yep, totally understood that obviously incredibly difficult to predict future credit cards across the industry appreciate that and then just stay on the keys for a moment. He's like, you know, there was some good kind of organic strength in that segment in the quarter stripping out the part feel just curious how much of that was slightly credit draws versus just taking market share and you know as clients made to down on their lives, but that just largely sit in the bank or did you see them kind of utilize that liquidity just given some constraints out there today?

Yeah, so it was the growth was 50% line drawers and 50% production was the line draws. It it did sit I'd say about half of it sat there because I thought that I would tribute to just kind of normalcy last year in the first quarter. We saw about sixty million dollars of Lindros. So this year we saw about a hundred, you know, it doesn't seem unusual and the ones that I can really point to the pandemic kind of driven or maybe half of that hundred million dollars. So not really significant. In fact, it's starting to come down. You know, I just don't see the fact that it's a big significant factor. We what I was pleased about was, you know again what gets lost in all this is we had a really good quarter for a loan growth because we had a good pipeline going into the year and so long and I I don't know that second quarter will be the same but it was nice to see it in in q1 where all of our business units had met growth. It was great to see

Yep.

For sure, and then maybe changing gears for pad on the margin on a core basis looking forward. I know it's difficult to provide guidance to all the various moving pieces with PPP and so forth. But if you just think about the trajectory of Corleone x p p p and the second quarter, you know, you guys have the excuse some old-time Hedges late last year that brought I think you're pulling rate exposure down to roughly half of the portfolio sister's house speaking to think about, you know, we're kind of coral O'Neill's go in the second quarter from 4:34 and one Q just given the recent fed cut off and and again, maybe just excluding for the sake of this exercise.

Yeah, thanks for the question babe. And we're spending a lot of time trying to exclude PPP from lots of our discussion cuz it just really clouds a lot of metrics. But um, we're we're likely going to see that yield will continue to drop you'll recall that probably 60% of our floating-rate book is tied to Libor bought a 1-month Libor and the fall and those rates lagged the the drop in the the FED rates pretty meaningfully. So while fed cut off a fifty basis points in March 1-month Libor was only down about fifty basis points. So as we see the the the ketchup of that page the relocation of those benchmarks, we're going to continue to see some pressure on repricing will also see kind of a full quarter run rate of just natural and normal repricing dead.

All of the things being equal would expect that organic origination yields are going to come down. Although I would say that spreads held up pretty well through the first quarter Soul be touch wood on that. Maybe we can maybe all the car.

Okay, got it. Got helpful and then just on operating expense fundraiser. I think you said you clicked a modest uptick in the second quarter with part in the middle class. Can you bring that up just in terms of the dollar amount terms of what you're expecting?

Yeah, we had it was less than a month to call it a month a park in q1 and the full quarter run rate will add about 2 million wage loss various categories, but you know, the the biggest categories will obviously be the most impacted plus Staffing and away from that as Mark already said I'm a democratic related impact will continue to have a run rate increase in costs because uh, you know with uh pay the premiums and and occupancy increases due to cleaning increased cleaning activity and things like that and probably expect to see a month notice noteworthy up taking occupancy as well.

understood and if I could just have

Just one more on the buyback looking forward. Just curious maybe Mike or Pat. If you can just make your point. So one or two things that's kind of the top of your list that you're looking at in terms of when it would be appropriate to page the buyback. Um

I think you know that kind of goes to my comment. You've got to get certainly some sense of what normal looks like and some sense of of overall stability. I think pad alluded Thursday and his remarks where he was talking a little bit about the buyback being suspended until we have that, you know, and I started off that that's really hard to gauge when that would raise a gauge because all that requires is The View on when things are are more normal as they go through it. I certainly don't see it here in the in the immediate near-term though.

I'd add to that that I think just as long as there's so much government and taxpayer-funded stimulus activities that are flowing through industry. And this is just an observation that that I think that it's unlikely you'd see much buyback activity resuming.

If for no other reason than you know just feels wrong to be buying shares back at the same time that you're blowing government funds through your your balance sheet.

Understood agreed and just to clarify with the buy backs in the first quarter. I think he gave him a approximate nations in the release of what was the average price that you guys bought back shares that in the quarter, but I was around is around nineteen seemed like seemed like a good deal at the time.

But it's less about opportunistically taking advantage of price fluctuations and really programmatically just making sure we're deploying excess or anticipated wage earnings.

Yep, understood. I appreciate you guys taking all the questions on the caller. Great. Thanks.

Ladies and gentlemen, as a reminder, please, press * then 1 if you have a question and our next question will come from John please go ahead. Good morning, Okay, good morning. Hope you're all well. Maybe just a question on the PPP loans. What is the average fee on that? One point two billion that you expect right now.

I don't pat or Mark which one one of you guys would take that so great about 3% on those and net around 2% after costs and we partner with a third party or origination and processing application. So that suggests an average size of somewhere in that middle bucket between 350 and 2 million dollars based on faith the prices based on the number of loans that we have.

The dollars the vast majority or or well below the $350,000 lowest limit category.

Okay, so so bad so that the net fee around 2% roughly and I would assume you probably would expect to get the majority of that over the next couple. Of course, correct? Okay, and then so you guys have been approved for 1.2 billion is what is the pipeline look for doing additional PPP loans today with Mark? Why don't you take that I appreciate the question because we did open it back up as we were getting virtually everything in our pipeline through earlier this week and so off we still have about three 350 more applicants. We're trying to work through that was as of last night. So they might have made progress cuz I haven't checked this month. But since they're working through the night, I'm hoping that that's down but as of yesterday is about 350 that we're still trying to work through through and fifty applications relatively modest dollar amounts, frankly.

Okay.

Okay, maybe Pat may be a question for you just on the Securities portfolio. You guys grew that some this quarter. Just how should we think about the the size of the portfolio going forward?

Yeah, I think in general over time. We like the kind of mix of earning assets. So with overall balance sheet and Loan growth expect that to say roughly similar. We're not running it down for liquidity needs or really growing it as a percentage of total just because of the kind of harsh wage reinvestment environment. We're in the growth that we had during the quarter was kind of a bit of a catch-up and a little bit of a pre-funding in anticipation of grocery store in the year at that time. This is pandemic. So we we put on about three hundred million in the first half. So January and February

Okay, so it sounds sort of flattish going forward. I guess the size of the portfolio. Yeah, I think just reinvestment of cash. Okay, and I just wanted to make sure I heard you on a price question about expenses. I think you said as far as Park goes going from the first quarter of the second quarter. You said a full quarters around two million dollars?

Correct. Okay, and then I guess that would be two million running down some I guess would cost to start. Sorry. Sorry. Just just let me let me restate that 2 million incremental in the second quarter to the first quarter. So park adds about $14 million on a full-year run-rate and because it was a part quarter. We we only recorded off of a million million and half into one. So that'll take up to about a 3 and 1/2 million run rate. So an incremental increase across categories of about 2 million hours for Park.

And and and that's what cost says 14 million, correct? Okay. Thanks guys majority of yep. Okay. Thanks guys. Take care off.

Ladies and gentlemen as a reminder, please, press * then 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. Thank you. So before closing appreciate all the questions wrong, and hopefully you valued the presentation materials that we were able to pull together before I close it. I I do want to take the opportunity. Once again just to thank our colleagues. I know they need to the calls and their response during these times have been absolutely amazing to me their commitment to living what we're all about. And what what First Midwest really is and what makes us special is just been absolutely tremendous. I'm very proud to be surrounded by so many good people who are working their fannies off to do the right thing every day for our clients in our communities and and for each other, so let me leave it with thank you for your interest and attention to our story. We continue to believe First Midwest is a great investment Club.

These are difficult times will work through them and come out on the other side stronger for it. So have a great day everybody and please stay safe. Thank you.

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