Q2 2020 Midwestone Financial Group Inc (IOWA) Earnings Call
We as with many weeks back that forgiveness will occur in the fourth quarter of this year. And we think the fourth quarter will shape up to be a pretty good quarter of an interest. Margin as we look ahead. We do believe that we have some more room to lower deposit costs in the third quarter. We started that uh at the end of July, we're going to take a further look at that during the month of August. So we do think there's some room to bring deposit the cost down further from what they were in the second quarter our loans Chef PeePee. We're down as stated in the earnings release. We did have lines of credit that paid down there were a number of borrowers who would normally carry lines of credit line. I took it balances at this point the year that completely paid out. We also had several borrowers that have lots of liquidity on their balance sheet, uh, either pay off their loans entire birth.
Or pay down their loan.
Substantially and that contributed to the decline in our loan out loans outstanding during the quarter. We can't predict payoffs in the third quarter, but I think there's a reputable pipeline as we enter the second quarter. I would not call it a robust pipeline, but I would call it a reasonable pipeline of new loans as we look forward.
Not interested in come very very pleased with the mortgage results. And most of the mortgage results were driven from our Iowa footprint just as a dog sort of marking the progress we have in mortgage our volume for the first six months of 2020 is 114% higher than it was for the same period in 2019 in the second quarter of 2020. We doubled our production from the first quarter and the other thing unlike some of our competitors around our footprint. We have not shut off our business and we're taking all applications as they come even though close times tend to get a little bit longer due to the volumes.
Very happy with the wealth management results for the first six months of this year trust and Investment Services are both ahead of their budgets respective budgets for the first six months. I think it's fair to say they do face some headwinds that I would categorize the head with that they face primarily as being Market volatility as well as just in the Coban age. It's just harder to undertake new business development, but they've hung in there very very well for the first six months and we're very very pleased with the results. If you are familiar with our company that you know, that two-thirds roughly two-thirds of our trust assets are located in the Dubuque footprint and that merger seems to be working very very well with with good client retention and continued growth and fee income.
Our swap income was down in the second quarter. I think we previewed that in the in the first quarter earnings call and and that's really due to the significant drop in short-term rates that makes the math not work quite as well for us whenever we take the variable side of swaps. Also we've seen some of our competitors who have been slightly more often than we have with their SWAT terms and offered for longer period of times that we've been willing to that we typically offer so we would think that swap revenues will continue to be lower we go forward in time on expenses. We continue to focus on the expense line. We recognize that's one of the few levers that we have to pull and we announced that we offer as we announced in the earnings release. We are closing our Newport Minnesota office are South Saint Paul Minnesota offices five and a half miles from our Newport location and as wage,
Disclosed in the earnings relieves. We think we'll save once this is all.
Through the system about $360,000 in annual expenses. If you look at our footprint around the Midwest, I think we have limited opportunities for outright closures because we operated many communities where we only have one office in that community. So it makes it much much harder for us to think about closing a great deal of offices, but we will continue to look at this as we go forward. We also recognize that we have to continue to focus on not interest expense control and we will continue that focus on reducing are not interest expense into the third quarter of this year.
I want to make just a couple of comments on asset quality Gary Sims talk about this more completely when he speaks we did try to get ahead of the curve in the fourth quarter with our credit loss expense and at four point seven million dollars for this quarter. That's still what we consider about twice our annual what we wouldn't be an annual run radar or a quarterly run rate. I should say quarterly run rate the allows for credit losses at 1.70% of total loans x p p p we think is in a puts us in a strong position and I also note that our non-accrual loans were down slightly to 1.15% of total loans and that decreased from 1.28% at the end of the first quarter.
Just a few comments on egg. We always get a lot of questions on and if you look at our watch Plus substandard Loans as a percentage of total a loans, it's just quarter we've had in several years of 18.1% of our loans were rated either watch or substandard at the end of the second quarter and to give you an idea in March of 2018 just over two years ago. That number was 23.6% So we've done a nice job of moving the watch and substandard egg loans down as a percentage of AG loans off loans is a percentage of our total portfolio stand at 8.4% at the end of the second quarter that's down from 9.2% at the end of quarter one weeks back that to stay the same go down as we move forward, but I think the most important thing for the outlook for our our Borrowers is that crops in our footprint look very good job.
Our footprint being mainly Eastern Iowa for Eastern South Eastern Iowa for parag loans and our crop Growers the government support programs that came from a stimulus program provided a nice boost to our Growers and prices have plateaued corn and soybean prices have plateaued and at slightly lower levels that they were before it covid-19. They're off well off the lows that we saw, you know during the first outbreaks of covid-19 land prices are basically unchanged from last quarter, which would be down to 6% year-over-year and down 13% from the peak. So a little bit weaker, but certainly they have not fallen precipitously. So overall I would say that the Outlook is off about the same as it was three months ago and I would I would think that we're starting to see some stability in the egg sector although at a at a lower level than certainly the peacock.
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As well when thirteen still a tough environment, but it's not spiraling down as as we sit here today. As I said Gary will cover this in more detail when he speaks, We do expect deferrals to be materially lower than than what was reported at the end of the first quarter and when that off flushes through we think only about 25% of borrowers will request another 90 days. So we feel very comfortable in our ability to Monitor and manage our loan portfolios as we look forward.
A few comments on Capitol. We think we shored up our regulatory capital in in a good way with our $65 sub debt issue. I'm not well received in the marketplace and we appreciate all those who invested in our company. We also feel comfortable and confident in the current levels of capital x p p p tangible common Equity stood at 8.35% at quarter-end. And we do know that are tangible book value per share increased to twenty four point seven $24.74 and was up 5.8% during the quarter. We also were very pleased to welcome Linda Baker as our new president and Chief Operating Officer that share has been empty for a year and we appreciate I especially appreciate the way that the entire management team step forward came together to keep our company moving forward and I do think we've moved forward birth.
This time so overall I think it was a good quarter for our company certainly operating in difficult circumstances and based on what we see today. We're confident in our ability as well to to maintain our dividend on a go-forward basis with that. I will turn it over to very Ray. Thank you Charlie unless otherwise noted my commentary a day will be a comparison of the second quarter of 2020 results to the first quarter of 2020 as an overview of the company reported. Net income of 11.7 million or 73 cents per diluted share compared to a net loss of two million or $0.12 per diluted, share in the linked quarter on a pre-tax pre-provision basis net revenues were eighteen point nine million for the second quarter of two thousand twenty eight percent from 17.6 million in the first quarter 2020.
The increase in Revenue resulted from a higher net interest income and lower expenses partially offset by lower fee income credit loss expensive four point seven million reflected loan credit off of 6.3 million partially offset by a 1.6 million reversal of credit lot of expense related to off-balance-sheet credit exposures on the balance sheet aided by the SBA wage Protection Program activity average loans grew 6% an average deposits were up 11% the companies tangible Book value grew 6%
Returning to earnings components net interest income of 38.7 million was at one point three million from 37.4 million in the latest quarter as greater average earning asset balances set a 22 a month to Klein and the company's tax equivalent net interest margin.
An average earning assets were driven by the origination of PPP loans as well as investment of excess liquidity into debt Securities the decline in the company's Mars and reflected the full quarter impactful and fifty basis point drop in the federal funds Target rate in March and 2020 a shipment earning asset mix to lower-yielding assets and the lack of meaningful term premium on the yield curve particularly in a night the 5-year term, which is most relevant to the company.
Earning asset yields decline 47 basis points 8 basis points at which was attributable to the SBA Loans, which yielded only 2.68% 7 basis points was a terrible the loan purchase discount application and 7 basis points of of mix.
Total deposit cost declined 23 basis points as we continue to manage our funding costs directly consistent with asset yields, finally while there remains some uncertainty as to the timing of home loan forgiveness. We expect 70% or more of a PPP loan fees to be recognized by the fourth quarter of this year, which should otherwise bolster their margin in the near-term.
That PPP loan origination fees total about ten point four million and during the quarter. We recognized approximately 1.1 million of those fees and spread income.
We recognize credit loss expensive approximately four point seven million in the second quarter of two thousand twenty down markedly from the twenty one point seven million in the first quarter. However, that smaller credit loss expect it and continue Reserve Bill to June 30th increasing our allowance for credit losses as a percentage of loans held for investment to 1.55% or 1.70% excluding the SBA PPP loans.
Turning to C Income fees were down 1.9 million from the linked quarter as solid solid mortgage production included in the loan Revenue line item was more than offset by reductions in most other line items off mortgage revenues at one point seven million eight hundred fifty five thousand from the linked quarter as mortgage production volumes increased 141% from the linked quarter.
The revenue increase included a $745,000 negative valuation adjustment to their mortgage servicing right in the second quarter of 2020 compared to a $447,000 negative adjustment at least Court.
The decline in other dinosaurs income was driven by reduced income from our commercial back-to-back swap program and as noted in our public release, the decline in service charged in fees line item reflected lower customer overdraft experience as well as in Chrome waivers of such fees.
Movie briefly do expenses the two million dollar decline in total non-issue expense resulted primarily from a one point four million dollar benefit to compensation and employee benefits from origination costs related to s p a p p p loans wage generally other expenses were well controlled and down from the linked quarter say for equipment which was up slightly due to additional purchase of equipment to support the company's work from home efforts are targeted efficiency ratio remains at least 60% into that and we continue to evaluate opportunities to improve efficiency including Branch consolidation activities as discussed in our public release this quarter.
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Is the company's effective tax rate for the quarter was 18% and we expect the tax rate for the year to be Seventeen to eighteen percent below the statutory tax rate due primarily to benefits from taxes and instruments and tax credits.
In my remarks with some commentary on Capital companies tangible common equity ratio was 7.8% at June thirtieth down from 8:11, % 8.11% at March 31st, 2020, excluding TTP loans and three or twenty seven point six million. The tangible common equity ratio was 8.33% our Target for this ratio remains 8.59% and we expect to return to that range in the coming Quarters off.
Finally earlier this week. We announced the completion of the private placement of 65 million dollars of the companies fixing quoting subordinated notes the notes carry an initial fixed rate of five seventy-five percent and are structured account is Tom the holding company.
That Capital bolsters our company's Capital levels as we position our balance sheet to whether these uncertain Economic Times and with that I will hand it off to Gary Sims 4 credit. Thanks Barry. Good afternoon or good morning, depending upon where you are. We where you are at today. I wanted to just take a minute and focus my comments on page three areas of of detail all of which are outlined in the supplemental Financial disclosures provide a bit more color to Thursday from what we provided to you in in the in that in those documents. Um, first thing I wanted to kind of walk through was our enhanced credit monitoring. Um, and that's what we as as we finished the first quarter and identified what we believed could be our possible vulnerable Industries within our port phone number.
Yo Vi vulnerable industries that we identified at the end of the first quarter. We undertook a uh, an effort to build upon our existing monitoring processes and create some enhanced monitoring appropriate for the the current economic position that we find ourselves in. So so what we did was we identified all of those loans in the vulnerable Industries greater than $1000000 and we also identified rm30 relationships. So we focused on higher risk, and then we focused on higher exposure for those two categories and we put together a a monitoring process for those two categories that we completed at the end of the second quarter, which really took a deep dive into all of those relationships job.
And gave us the ability to to clearly understand where those relationships were and where we believe they were going over the course of the of the current economic cycle and to give you an idea of just you know, the penetration when we combine that with our existing monitoring processes associated with our watch and wager credit when we combine all those efforts, we we took a I would consider it to be a deep dive into 1.04 billion dollars of our portfolio which represented 29% of our portfolio. So so I wanted to share with you what the key takeaways from our efforts in the second quarter were first of all, we experienced migration in the portfolio. We expected that we you know based on our identification of birth.
vulnerable Industries we
We expected to start seeing some of those credits migrating to you know, pasta watch watch to substandard and that was identified in the supplemental information as well, you know, primarily within that migration you saw three three of the vulnerable industry categories migrating hotels restaurants and Retail and it's not to say that within the vulnerable Industries. We won't see additional migration from other Industries. It's just that those those categories had the most immediate negative impact from from the pandemic the second thing that that we experienced from our due diligence was the non-performing assets were relatively stable for the quarter. That was also expected as we looked at our you know, our migration Trends. Yep.
Didn't expect a lot of migration to non-performing this quarter and it turned out that was the case another deliverable that was uh, possibly as not as expected was that we had identified two categories within vulnerable that you know, based on our analysis of our customers. We feel like that. They're not going to change the materially more vulnerable than our average portfolio over the course of of the cycle and those categories were senior living and our thoughts are or quick service restaurant portion of our restaurant portfolio as a result of you know, what we actually saw from our customers performance package did remove those two categories from our vulnerable Industries calculations. And so what you saw as a result was are vulnerable industries that we are identifying.
represent 14% of our portfolio on a go-forward basis
and then and then the last thing I wanted to point out in terms of what we found was our our Deep dive into our portfolios gave us the ability to provide significantly more detail around each one of those categories as as is that line from pages and I believe Pages 9 through 13 a lot more detail for you to dive in to and and understand what those portfolios look like and how we believe they'll perform over the course of the cycle last thing. I did want to point out about this enhanced level of credit monitoring is we do we do expect this to continue for the foreseeable future as we manage through this cycle. We expect to be doing this enhanced monitoring through the cycle.
So the second thing I wanted to share with everyone was, you know, kind of our experience with deferrals and and and Charlie had alluded to it earlier as we've finished up the second quarter for the most part the first round of deferrals that we have grounded were put in place and and that represented 13% of our total portfolio 14 and a half percent x p p p based on what we're seeing and what we're talking about with customers right now because for the most part that first round starting to roll off and we're seeing customers go back into repayment mode, but we're also seeing customers ask for a second round based on what we're hearing from our customers. We as in Charlie alluded to we expect compared to the 13% of total portfolio 14 and a half percent PPP we expect from me.
5%
To be the range of second round of deferrals, uh of total portfolio and then you know, the last thing that I'll I'll highlight there was are vulnerable Industries wage are we're heavy users of our deferral program as you would expect and and even more specifically hotel and um retail office were were heavy users of the of the program. So it it's served the purpose that was that it was intended to to serve no question. And then the last thing I wanted to touch on break was the PPP program as we said earlier PPP it, you know, roughly $345 off and and um, um in in PPP loans over the course of the program as Barry mentioned, I'll I'll emphasize it as well based on the cob.
Stations that were having with our customers and we're having conversations with all of the major users of the PPP program. We expect a a very high percentage of forgiveness as a result of their utilization of the PPP program and then enhancements in the PPP program over the course of the past few months back and and then the last thing I'll emphasize there. I mean what we're in in Charlie alluded to it in his comments relative to you know, the usage of the month and and the deposits that we've had on hand as a result and you know, we're experiencing from our customers is that many of our customers the PPP program will make a very nice material difference in how they are able to survive and thrive through this pandemic cycle. So we're we were we were yep.
Two participants and we're big big proponents of the program as it played out. So with that that's uh, that's the some of my comments and I believe I need to yeah, I'll take the back just one clarification in my comments. I had mentioned the overall yield on the PPP. We all end the yield on the CPP loans was 170. It was actually 2.6% I picked up a wrong number of my comments and I apologize for that 2.68% all in yield on t p and with that Sean. We will send it back to you.
Thank you. We will now begin the question-and-answer session to ask you a question. You may press star and then one on your touchtone phone. If you are using a speaker phone pick up your handset before pressing the keys is that any time your question has been addressed you would like to withdraw your question, please press star then to our first question will come from Brendan with Piper Sam, please go ahead.
Hey, good morning. Everybody. How are you?
Morning, good morning. Just want to start off on the on the reserve. So I guess you know, you did this pretty in-depth review of your entire or most of your portfolio disco. And as you said there was some negative migration as expected, but the provision was still relatively low in comparison to the first quarter, you know, still built the reserve but a a much lower level. So just based on what you can see at this point. Do you expect to keep building the reserve throughout the the second half of the year or are you pretty happy with the the 170 level you're at to that?
I'll I'll start Brendan. This is Gary and I'll start to answer the question if I miss any highlights, I'll ask Charlie or or buried add in as well. You know, what you've seen from our reserve and the provisions that have gotten us to where we're at is in the first quarter based on the expected migration. We saw in our portfolio over the course of time and even more specifically in the second quarter. We we did put together a pretty significant provision which which materially bolstered our Reserve as we finished up the first quarter.
As the quarter really played out the way we believed it would that allowed us to moderate the level of provision that we were putting in place for the second quarter. And as we as we, you know provided more than than our net charge-off that created The the Reserve bill that you alluded to what we I mean what we anticipate happening and this quarter and and on a go-forward basis is will continue to monitor that you know that migration and match it up against our belief about the the you know, where the portfolio's go and you know Cecil has given us very good tools with which to you know, manage that that reserved but at the end of the day, it is Management's some responsibility to estimate the reserve based on what they're seeing in the portfolio. So, uh if I had to birth
You know Venture a an estimation right now. I believe that for the third quarter will continue to moderately build Reserve until such time as we actually start seeing the losses that we've been building towards.
I mean that's helpful to hear your thoughts on that. So thank you. Just one more from me just on the Goodwill or the potential for a Goodwill impairment that you alluded to Thursday. He's is that you complete or is it still ongoing?
The review is complete.
Got it. Perfect. And then if I can just sneak one more in there just curious for your thoughts on how the cord and then behaves from here, you know, once you factor any kind of the subject events, perhaps offset by the the flex you still have on the funding side just the the core margin kind of the rest of the year.
Brenda this is Jim Cantrell. It is a difficult thing to forecast we've had some discussions internally about the the margin I do think you're right. The subject will provide a list of a drag on the margin going forward that came on the books here right at the beginning of the third quarter aside from that and aside absent any well, let me back up and recognize there will be noise in the men from the program and from any shift in mix. I think in the second quarter our our corneum absent, you know, the exchange in the lungs and and the month purchase accounting adjustment was pretty flat, you know, the rates on our deposits came down pretty comparably with our rates on on earning assets, but the mix shift and those low-yielding fifteens really cause some some narrowing we do think that the fourth quarter for the name because of the PPP is going to be significantly improved if we if we get the Forgiveness that we expect in the fog.
Number so all that is to say there's going to be a lot of noise. The core of it I think is going to be for pretty flat to maybe some some pressure on the name as we move forward with. All right. Well, thank you all for taking my questions bringing. This is very I'll clarify on the Goodwill when I complete. We've managed this completed their review. I would say it's 99.9% complete off. Our Auditors would have his tell you that their their reviews not complete until we politic you but right now all indications are that the reviews 99.9% complete. I got it. Thank you.
And the next question today will come from Jeffrey, please go ahead.
Thanks. Good morning. Gary. Appreciate the color on the credit detail that was informational. I guess the on the deferrals I did it want to clarify the so it if you're a 14 and a half percent of loans XP PV quarter-end. I wanted to the back in about when you when you get to the second round of deferrals you expect there was a three to five percent number is that equate to the you expect Fourteen and a half percent on the Pearl the fall the truck and all of a sudden. Maybe I
Right. Yeah that that's correct the 14 and half percent to fall to 3 to 5% of the portfolio for that second round of deferrals.
Okay, great. And the majority are on 90 day or I mean how I guess how far are you through that. Yes. It was the sorry didn't mean to interrupt. Yes. The the program is as we formulated it and and put it put forward was we offered an initial 90 day for the most part an initial 90-day deferral opportunity and then we have followed up with a second 90-day deferral opportunity for those who have asked for it as a second round has been requested from customers and as as we've we've noted our expectations is materially less usage in the second round. We are asking, you know more we're at we're dead.
contemplating
More about what that second round means for the credit risk profile of the customer asking for that deferral. So it's being incorporated into our own thought processes around risk profile makes sense. Maybe just a question on the on the fee income side obviously kind of service charges and and maybe swaps less so but a little bit of customer Behavior and the mortgage, I think Charlie referenced is still going strong into the court. I guess maybe we don't get off the ceiling on service charges immediately, but just thoughts on how the fee income line transitions through the back half of the year would be would be helpful either specific or or or speaking.
I'll start off. I think that yeah, I think as we articulated last quarter, we thought that the ten plus million that we had was a high-water Mark. I I think that I would say that God only eight point three eight and half million dollars per quarter of a fee income run rate is what we would expect I would also just add to that Jeff that your customers it appears or keeping larger balances. And therefore we don't have as much in SF income which is understandable in light of the current circumstances. If our government stimulus programs don't come through you might see this some of the deposit start to run down and you might see a little bit more of that activity. I I personally think that you might be a little bit of uptick in the service charges, but I don't know little to return to Prior levels any time soon, but that's just a guess.
And maybe last one Charlie just discussed the Goodwill but the any further thoughts on the dividend, I think if you've got certainly more clarity or the Deep dive on the credit side of short up with kind of the sub debt issuance a bit, but you do have a little higher payout ratio. I just interested in the conversation about that, you know, imagine it's it continues to be monitored but it dots on the dividend. Thanks. Yes, we've, you know, we started running stress tests and the February March time frame and we clearly think that based on what we see now the dividend is secure and we're committed to the payout if circumstances change. We're certainly we will serve review that and that's probably the best guidance I can offer you right now as we look at things right now. It's a secure dividend.
Okay. Thanks.
And the next question will come from Terry McEvoy with Stephen, please go ahead I think you're good morning morning. Thank you for the presentation. I had a question. Is it slide six the enhanced credit monitoring? It sounds like in the second quarter you look at your 30 largest loan relationships 16 to 35 million dollars in size wage any of the vulnerable Industries fall into the your 30 largest loans and then just broadly speaking. We're there any downgrades upgrades or any actions as it relates to those larger credits.
Yes, this is Gary. I'll I'll I'll start to answer that question as well. There is overlap between are vulnerable Industries and our top 30 days within our top 30. We do have to Hotel relationships. And we also had you know from our original vulnerable list. We had several Senior Living relationships. And then we had one quick service restaurant relationship. So there is overlap between the two and as a point of clarification because we will continue our quarterly review of those larger relationships, you know, each one of those will stay in the in the mix as we you know, as we look at that top 30 list the two Hotel relationships in that top 30 top 30 list were downgraded to watch dead.
None of the rest of the top thirty either in the vulnerable or outside vulnerable were downgraded as a result of that reviews.
Thanks for that. And and then just as a follow-up question. I thought it was interesting earlier and I can't remember who said it but the quarterly provision of four point seven. I think it was mentioned as being kind of two times in normal quarterly run rate, and I guess my question is was that a pre Cecil comment or what was behind that statement? Cuz so much has changed this year as it relates to reserving and provision and I just want to make sure I understand where that Steven was coming from. Thank you. That's a good question And to clarify that I was the one that made the statement and and I was referring to what we budgeted going into the wage which we would consider normal times. And so we use roughly 2 million dollars as a as a normal provision, but clearly we're in different times now, and we're reserving appropriate.
Thanks for clearing that up. Thank you.
As a reminder to ask a question it is still then the next question will come from Damon Delmont a with KBW, please go ahead.
Hey, good morning, guys. Thanks for taking my question my question. I just want to relate to the outlet for expenses very could you just kind of go over your your thoughts again on on what a normal eyes expense base with them kind of when you factor in, you know, the Deferred expenses from the PPP loan origination.
We'll do Damon. Yeah in the in the Deferred PPP loan origination benefit. That's really a one-time benefit this quarter. And so I would say I would say our record a expense run rate down somewhere 29 to 30 million dollars.
Okay, and then Charlie you I think you had mentioned that there was some decent pipeline activity for for loan growth, you know, you didn't characterize as robust but you said there was definitely some activity could just talk a little bit about that is that from existing customers? Have you guys been able to win new relationships from from the PPP lending program where you're able to bring over new customers through that just a little background then what you know what you're seeing with the pipeline.
a little bit of both
There's a little bit of transition on PPP. I would say that most of the pipelines that we've seen have been existing customers. And you know, we have a number of existing customers who are still doing pretty well and and they're running their businesses and and they seem to be you know doing quite well financially in Denver. We've got we hired a new Banker earlier this year and he's Source some relationships and I I still think there's a lot of potential in Denver. We obviously have to be careful during these Economic Times, but in Denver CO, there's still some transition from some of the larger competitors and the may not have handled the process very well. And so our Denver group actually is had a conversation with them a couple of weeks ago and they're still very confident that they can make their budget numbers and it's just because they're finding opportunities that appear to be good opportunities. So a little bit of both and but yep.
Actually in Denver, I think we've been able to find some new opportunities.
Got it. Okay, that's helpful. Thanks. All my other questions have been asked and answered. So, thank you.
And the next question will come from Brian Martin with Janney Montgomery, please go ahead.
A good morning Brian Brian it just maybe two From Me Maybe 1414 gym. I'm just going back to the margin. You know, I guess for I guess a minute Jim. I guess your thoughts on the you know, the mix change or Charlie's comments about the mix change and kind of volatility. I mean, I guess if if the loan pipelines aren't super robust at this point, I guess is your expectation that you know that mixed you know that we're seeing this quarter based on Trends really doesn't change in the near-term where I guess are you expecting you know that any significant changes or should we just kind of continue to think about it the way it is today? Yeah. Well, thanks Brian. I'll give you my best answer and cuz you're asking about the future. I think we've seen a big the biggest part of the shift makes I suspect his already happened. That's my that's my gut tells me having said, you know, so we've increased the Investment Portfolio several hundred million dollars relative to the loan book club.
What is I think an offset that a little bit is we're going to get some we think we're going to get some PP loan forgiveness in the fourth quarter and my suspicion is that the Pistons will be forgiven at a faster rate than the corresponding deposits that were attached to those loans will run out of the bank. That's that's my that's my gut that that's that's my guess. And so, you know, we'll get some additional income because we're releasing fees upon forgiveness, but the result may be that the balance she could possibly become even a little more skewed towards Investments. But but that's you know, how much of that will happen. I don't know that it's very much an unknown at this point.
Okay, perfect. I appreciate it.
Maybe just one for Gary I guess on the you know, when you look at these vulnerable into Industries. Can you just talk a little bit about the the consistency of what's in the C our retail bucket? I mean that seems to be the biggest biggest one out there and just kind of odd. I don't know if you can offer kind of where the reserves are on that portfolio today or just you know anymore, you know a little bit more detail on just that portfolio how you're thinking about it today?
Sure, and I don't have a specific break out of the reserve specifically tied to the cre retail. It's it's part of the improved commercial real estate category in the Cecil detail there. So it's it's a subset of that particular category what we're seeing in the cre retail is it's it's actual held up to date pretty well. And as we talk to our customers, we think the dynamic that's happening. There is many of their customers small business office, you know dominated by small business customers have been have benefited from the PPP program such that they've been able to on balance off stay relatively current on their on their rents. So we haven't seen just wholesale rent abatement abatement necessary.
But you know what what we see in the future is probably two quarters into the future 3/4 into the future. We're going to see the small businesses struggling more than they have over the past quarter and then you know rent will be challenged to be collected and we'll start to see deterioration in that particular space in Into the Future. Does that help in terms of additional color there? Yeah. No, I think it does and it just sounds like it's more, you know continue monitoring. It's more more issues potentially down the road as opposed to near-term here. So thank you for the additional color. So, okay. That's all I had guys other stuff was answered.
Thank you. Brian, Brian.
This concludes today's question-and-answer session as well as the conference. Thank you for attending today's presentation and you may now disconnect.
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