Q2 2020 First Midwest Bancorp Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the first Midwest Bancorp 2022nd quarter earnings Conference call.
Moving to close the market yesterday the company released earnings results for the second quarter 2020, and also issued presentation material.
Let me refer to during the call today.
During the course of the discussion today management's comments and the presentation materials may include forward looking statements and non-GAAP financial information.
How can it refers you to the forward looking statement non gap and other legends included in its earnings release and presentation materials, which should be considered the call today.
This call is being recorded.
All participants or any listen only mode.
Following the presentation by Mike Scudder, Chairman, Chief Executive Officer, Mark Sander, President and Chief operating Officer, and Pat Barrett Executive Vice President and Chief Financial Officer call will be open for questions and answers for analysts soundly.
Well now turn the call over to Mr. scattered.
Great. Thank you good morning, everyone. Thanks for joining us today, it's great to be with you hope this finds everyone.
And your family's doing well staying healthy obviously a lot going on equally obvious is performance for the quarter certainly reflects the enormity of the times the magnitude of underlying governmental response.
But at the same time. It also reflects the actions we took a and that was prudently initiated to simply go through and fortify the balance sheet as well as successfully conclude the conversion for park, which occurred this quarter as well.
So before I turn it to more Tamarkin Pat for some more detail coverage of financial performance. Let me start with this brought a recap say at the core of the quarter performance was once again in my judgment displayed at the strength in character of our company and of our team.
All of which I thought was a really on display the entire course for the quarter. This has been an amazing an unforeseen time and frankly, I'm very very proud of our team and our industry as pulled together to help our clients in our communities and each other during these times.
From a performance perspective, I would highlight the falling for the second quarter, we generated F 16 cents, that's down slightly relative to the 18 cents. We saw for the last quarter I'm not too dissimilar from the last quarter. The major driver the change between quarters was the fact that we elected to build loan reserves by 17 cents per se.
There are about 25 million.
For the second quarter and that increased our reserves to 1.8%.
From the impact of PPP loans.
In the aggregate that level of build was slightly below the 19 share 19 cents procured back from last quarter.
Obviously, we're dealing with in the aggregate or more severe economic scenario, so credit performance and Mark will expand on this has actually been relatively solid unstable and the environment.
Also this quarter, we concluded our acquisition of apart bank or our systems Onboarding conversion, we recorded three cents per share or $5 million an integration related expenses as we finished up the system conversions and concluded the onboarding. A this was contrasted to four cents last quarter.
The team here, it's just an absolutely outstanding client retention has been great and well beyond our expectation and any other time.
A utilization of virtual training to the levels that we did to facilitate the conversions would be a success story in of itself.
We also had two cents of singular net impact or negative impact specific to that dynamic related cost fee accommodations and colleague incentives.
During the crisis, all of which was as subsequently lapsed with our returned to work in third quarter.
Finally, we opportunistically added $231 million of preferred stock, which took our tier one capital to 11.2% or the impact is that was about a penny per share and evidence that we accrued for the quarter and then obviously the full run rate for that'll be in the second quarter.
And then I guess Additionally, we saw the full impact of funding $1.2 billion.
Pp loans during the quarter.
That yielded a about 2.42 0.4 or 5%.
And was provided to some 6500 clients the majority of that lending as well as the proceeds stayed on balance sheet, which had the impact of groping grossing up assets over the course of the quarter. Our teams really did a great job across the board here and really stood up.
From a business perspective, the story of the quarter again with the pandemic and the impact on revenues, resulting from the dual realities of the drop in interest rates and the rapid falloff in demand and that type of environment. Net interest income of 145 million was relatively stable that reflected the full quarter impact of the drop in rates importantly.
We made good progress in adapting credit spreads as well as adjusting interest rates for non interest deposits non index deposits, which we talked about last quarter.
Legacy loans away from PPP were relatively stable corporate lending thing the impact of lower seasonal draws and production.
As I said earlier credit performance was actually pretty stable to improved.
In the second quarter and that obviously files. The first quarter's adoption of Cecil mph in delinquencies came in slightly improved from where we were in the last quarter.
Charge offs decreased slightly to 36 basis points, the loans, but nine basis points of that related to charge offs and PCD loans.
Which in my a simple mind represent a previously identified problem assets, we simply bought at a discounted price noninterest income was down about 16% and the impact there was largely reflective of drop off in transactional volumes.
We would obviously expect those to recover as reopening unfold.
And then noninterest expense increased to 150 million.
Wave from acquisition acquisition and integration expenses, and that's largely due to the full impact park as well as some of the higher costs I alluded to relative to occupancy and incentives given the requirements of the kind of add Democrat stuff. So with that let me turn over to Mark in path for additional color and they can walk through the remainder of the presentation.
Material smart, thanks, Mike and good morning, everyone I look at at loans on slide four of our presentation. PPP was of course. The main story this past quarter as Mike mentioned, we funded 1.2 billion in loans under this program to over 6500 small and mid sized business clients.
Next nearly 75% of these 6500 clients received alone of less than $150000 <unk> toss, indicating the progress the program work as intended very well.
This effort skewed our balance sheet higher of course, but we expect the vast majority of these loans to be forgiven and the money is spent over the next three quarters.
Away from PPP coming off a very strong first quarter production was disrupted immediately in Q2.
In contrast to the usual seasonal increase we see in line utilization and commercial activity more broadly this quarter.
Outstandings under revolvers and pipelines both fell as the economy close down.
Consumer loans on the other hand, we're up about $100 million in Q2 on the strength of the mortgage market and our team.
Record quarterly organic mortgage production of over $450 million allowed us to grow earning assets with very strong credit metrics, while also increasing the amount sold to generate additional fee revenue.
As a result of all these factors and again away from PPP total loans were down slightly this quarter was still up 4% excluding acquisitions year over year, given our solid results in the prior three quarters.
The environment has firmed up somewhat over the last month and businesses are adapting as necessary to evolving landscape, but we.
Just think it's too early to offer much in a way of loan growth guidance at this point.
Turning to slide five we break down our corporate portfolio to give a sense of both its diversity as well as a view of higher pandemic related risk segments.
Early on the pandemic significantly impacted the sectors that we detail in the list on the right, but these represent just 5% of our told of our total portfolio.
We feel our original underwriting in these segments will help minimize potential losses as we were never really very aggressive in these sectors are all inherently higher risk Oh away from the current challenges and we believe the mid against that we list here should help our ultimate exposure.
For greater transparency in the Pie chart to the left we expanded this in highlighted some other segments that have attracted greater attention in these times and or just inherently riskier segments.
We strongly believe again that our original underwriting in all these segments was strong and conservative and that the granularity of our exposure is also helps tempur overall risk.
Again, I would note the purposefully broad diversification of our corporate portfolio.
So while we certainly expect to see increased stress and some of these areas. We feel confident that the risks are well identified and are being properly mitigated.
Turning to consumer credit on slide six we highlight some of the underwriting parameters behind our relative comfort in this portfolio as well.
The consumer segment with the highest risk elements unsecured installment also has historical high FICO scores and represents less than 2% of our total loan book.
Credit performance in the quarter, beginning on slide seven was inline with expectations.
Given the collective response, the pandemic all of our credit metrics as Mike pointed out were largely stable or improved from Q1.
Net charge offs of 27 basis points away from PCB, and PPP loans improved slightly and NPS also fell in line with charge offs.
However, given the outlook and greater potential for risk migration, we again chose to build reserves this quarter.
Based on multiple views as to economic forecasts and our detailed portfolio review, we added $25 million to our allowance to incorporate the estimated impact of covert 19.
Replenishing reserves for non PCD charge offs brought the total provision to to $33 million in Q2, and our allowance up to 1.66% of total loans, including PPP at quarter's end.
Taken PPP loans out of that equation, given the risk profile raises the allowance to are very robust level of 1.8%.
I'd also note for this and the next slide that we anticipate the normal workout of acquired PCD loans inline with our purchase price will impact our reported charge off and pay metrics over the remainder of the year, but not our provision requirement.
Said another way, we intend to move acquired PCD loans at a price levels that are existing allocated reserves should absorb.
Slide eight displays the stable performance in Q2 of our NPS and adversely rated loans.
Not shown here, but also consistently stable our 30 to 89 days past dues returned to normalized levels. After some onetime events that skewed them higher at March 31st.
All of these metrics are relatively unchanged from year ago.
Frankly, it's simply too early to call some of the risk rating migration, though we certainly expect the adverse performing categories to grow in subsequent periods, given the economic outlook and absent any further relief efforts.
Turning to deposits on slide nine deposits were also skewed because the PPP as we estimate that most of the $700 million average increase in commercial was due to this program.
In a similar vein consumer deposits rose by 600 million on average due to the added liquidity provided by the Cures Act stimulus program and the delay in tax filing requirements.
We also saw our normal seasonal build this time of year in public funds. So in total we are very liquid.
As a result, we remain competitive but certainly are not aggressive in deposit pricing.
Reflecting this importantly, our cost of deposits substantially lowered in Q2 as we expected in guided to last call. We cut the average cost on our 15 billion dollar deposit base and half from a quarter ago to 26 basis points.
Well I'll pick up that discussion of liquidity, a little more broadly Pat.
Thanks, Mark and good morning to meet everyone on the call turning to slide 10, and just following on with landmarks trailing remark on deposits are 15 billion dollar granular and stable long term deposit base is our primary source of liquidity.
Additionally, we have over $7 billion and additional funding sources, providing ample capacity to support clients colleagues and communities.
Note that part of that funding basket as highlighted as capacity for increased borrowings through brokered Cds.
Capacity is merely against our internal policy limits for those types of borrowings.
Excluding brokered Cds are funding capacity remains significantly higher than our total unfunded loan commitments, which approximate $3 billion.
Turning to net interest income and margin on slide 11.
Net interest income increased 1% compared to the prior quarter and was down $5 million were 3% compared to the same period in 2019.
The decrease compared to both prior periods reflected the impact of lower rates.
Set by the full quarter.
The impact of the park acquisition.
$5 million, an interest and amortization of origination fees on PPP loans, and a dramatically lower cost of funds.
In addition, compared to the prior year growth in loans and Securities and the bridge you acquisition and second quarter 2019 was offset by the impact of lower rates.
Acquired loan accretion contributed nearly $7 million to the core consistent with the prior quarter down $3 million compared to the prior year.
Accretion was higher than scheduled due to favorable resolution at certain acquired loans.
Continuing on the same slides with net interest margin.
Tax equivalent NIM for the current quarter of 3.13%.
Was down 41 basis points linked quarter, and 93 basis points from the same period a year ago.
Excluding accretion margin was to 98 for the quarter down 39 basis points linked quarter, an 80 basis points from the prior year.
Compared to both prior periods margin compression was primarily driven by the impact of lower rates on loan and securities yields a.
Origination of lower yielding PDP loans, as well as higher liquid, earning asset balances from deposits, reflecting PPP loan fundings and stimulus actions.
These were partly offset by the dramatically lower cost of funds.
The seasonal increase in municipal deposits also contributed to the linked quarter compression.
Compared to the prior year margin compression also reflected a actions we took to reduce rate sensitivity.
Our outlook for both in <unk>, and and I am excluding the impact of potential earning asset growth is for modest continued near term decreases in the third quarter.
With stabilization or modest increases in the fourth quarter as the benefit of BPP loan forgiveness increases.
Accretion is expected to be approximately $25 million for the year down nearly 30% from last year.
Around $5 million per quarter for the remaining half of the year.
No. This is after adjusting for the impact than seasonal which results in approximately $3 million of accretion being reflected as a reduction in loan loss provision.
Turning to noninterest income on slide 12.
Noninterest income fell broadly as we expected swap activity.
Excuse me.
Our income.
And NSF fees were severely impacted by the decline in economic activity and customer volumes.
A relief programs contributed to the decrease as well, but the lack of activity across multiple sectors drove the bulk of the decline.
Market conditions led to a very strong quarter in mortgage.
Solid results in wealth management, and Treasury management helps stabilize total fee income.
We do not see second quarter isn't new baseline, but rather expect to return to historically normalized growth levels as the economy stabilizes and hopefully, we'll see improving trends throughout the second half of the here.
Moving onto expenses on slide 13 note that the current quarter includes $5 million anticipated acquisition integration related expenses, largely driven by cost associated with the park acquisition.
Away from these items total expenses were up 3% linked quarter and 10% compared to the same quarter a year ago.
The increase compared to both prior periods was driven by our larger operating base due to acquisitions.
Higher staff cost and mortgage commissions combined with elevated pandemic related expenses and evaluation adjustment on the single foreclosed asset.
Partly offset by lower workout remediation costs and employee benefits.
In addition, higher professional services related to continuing and best related to continuing investments in technology and process enhancements contributed to both prior period increases.
We continue to be focused on our expense run rate and while our efficiency ratio has picked up due to revenue declines overall annualized expenses as a percentage of average assets away from PPP loans.
2.32% down 5% in the prior quarter and down 7% from the prior year.
Our outlook for the third quarter that expense run rates, excluding acquisition and integration costs will likely ticked down modestly from second quarter due to lower pandemic related costs, hopefully returning to levels similar to Q1.
Last note on taxes before I leave the slide our effective tax rate for the quarter was approximately 25% consistent with our guidance and we expect that to continue throughout the year.
Moving to capital on Slide 14.
During the quarter, we issued $230 million or preferred stock added about 140 basis points to about total and tier one capital.
In addition to solid credit reserves and ongoing capital generation through earnings our capital levels are strong and an excess of well capitalized levels, providing robust loss absorption capacity if needed.
During the quarter, we paid a dividend to shareholders of 14 cents per share consistent with the prior quarter.
And consistent with our usual practice, we've summarized our outlook for 2020 on slide 15.
I would emphasize that our commentary on the outlook. This quarter is very limited as future results are dependent on the persistence and impacted the pandemic customer behaviors and the impact of government stimulus actions.
We've also included for convenience summary of our financial results for the quarter on slide 16.
That I'll turn it back over to Mike for final remarks.
Hi, Thanks that here before we open it up for questions. Just if you see further remarks as Pat alluded to in the summary on on the outlook.
It's still pretty murky out there for as a practical matter Theres absolutely no one who can predict the future in this type of environment.
While recent data has been pretty encouraging it's still pretty mixed and it's simply unclear how long and how severe the pandemic is going to play out.
Equally unclear as to how effective government stimulus is going to be and what form it will take it fully plays out. So obviously those answers are going to shape.
Demand an asset quality as we move through the third quarter, we expect to get a better read continue <unk> continuing to get a better read is on what a return to more normal can look like.
As well as what the reserved impact as economic and credit outlooks from.
At the same time, it and Mark and I were talking about this is just in advance of the call. This is a world where you're dealing with obviously the uncertainty the environment and the nature of the blocking and tackling of what we do and what we're about I still critical to the long term success of the company and we think we're extremely.
And to continue to execute on that we've taken steps necessary to build a very robust capital base, which gives us a tremendous amount of flexibility. We've got very strong franchise and most importantly, we've got a talented engage team of colleagues out there working the markets and generating business. So obviously.
The environment to a degree cost a pause on our part.
And our ongoing focus is going to remain on the safety of our clients in our colleagues at the same time. We also have are focused on continuing our business priorities and Mark alluded to this as you talked about our overall financial performance. That's the talent of our teams our diversification of our risk and our portfolios are continuing.
Risk management, and we're going to continue to explore opportunities to leverage our investments, particularly in our digital capabilities.
Our infrastructure and our control systems, all with an eye toward recognizing a evolving client needs and the goal of operating more efficiently.
Our technology spend year over year by itself is up about a little over a third from last year.
Particularly that makes us feel good about the investments, we're making there and as I said in our digital capabilities and our infrastructure and our control. So 2020 is environment really doesn't change that but in my mind. It provides both the opportunity and certainly greater incentive to continue to move forward on these initiatives.
So with that that would conclude my remarks, let's open it up for your question.
[noise]. Thank you Sir the question and answer session will begin at this time, if you're using a speakerphone. Please pick up the handset before pressing any numbers.
If you have a question. Please press star one on your push button telecom.
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Your question will be taken in the order that it has received please standby for your first question.
And the first question comes from Michael Young with Suntrust. Please state your question.
Hey, good morning, everyone.
I wanted to start off with Mark a your comments about the adversely graded credits up potentially moving higher over the medium term could you maybe just give a little more detailed air on you know maybe what categories. You expect to drive that it is that due to you know TDR is in loan modifications or something else that we should be thinking out.
I think it's a little bit of everything Michael yachts. It certainly you know we started with the highest risk highest risk segments and what we view as most modern more motorists segments. We did a second level of a portfolio review a deeper than even deeper dive over the course of the quarter and so it's a combination of all.
That and our view of.
No I.
An uncertain, but certainly a.
Slow recovery, we're not looking for a quick bounce back so against that backdrop. You know there are certain segments that again, we've hired highlighted on page five those risk elements. There was certain also in the Pie chart. There as I said in my remarks are inherently have some additional risk and or impact here and so it's kind of a try.
Trying to project out a view of risk migration without financial statements that would at this point indicate [laughter] a a risk migration, so and hope that answers. Your question. There's a there's a segment or two you'd like to talk about specific I'd be happy too.
Yeah, I think you know just it'd be helpful to get an idea sort of what modifications, you're making some of these areas and how you're kind of managing the risk I know, it's it's going to be sure diversity across a borrower and category, but it just a little more detail would be helpful. I'm sure understand what what.
What we should expect.
We certainly.
Try to layer in the impact of all the clan accommodation program. So let me give a quick summary, there I guess in terms of loan deferrals in our first round, which ended last month, we had $170 million in the consumer segment, so less than 5% of that book in less than 5% by each segment within consumer.
Commercial deferrals were 1.7 billion in the for in round, one so about 16.5% of our commercial book.
Around too is just be gone over the last few weeks. So it's too early to have a firm conclusion, but we certainly have a strong view given effective.
Been talking to our clients rarely overlap or the quarter within consumer is likely to come in a little lower in Rome too.
Some people asked for and round, one that maybe didnt needed and while you have a few new ask for it we think will be under 5% there as well in around too 'cause commercial we expected to fall dramatically in and around to as we've talked to clients and is.
No we think those will be less than half and round two than we had around one as a as people open up there's greater clarity and frankly clients have other priorities then the loan deferrals as they're looking for other things.
Relative to the PPP PPP certainly, though as you look at this slide on slide five the list on the right.
You know franchises for instance, use PPP very strongly 80% or so some of those other industries used in more and 40% because their decisions around personnel were different than than the other so active users of all these kind of combination programs again, we as we factored that into all the.
Segments in the Pie chart as well.
Again, that's kind of.
As we think about who's use what and what the outlook is for them in an uncertain time, it's hard to put numbers around that migration, yet it's clear that theres some coming.
Understood and maybe you know for Pat you know just on the loan loss reserve as we move forward, 1.8% kind of ex PPP, that's pretty strong level I think even relative to peers, but could you just talk about you know what's your expectations are.
Given that you know we may see some increases in adversely graded credits cetera on do you feel like we kinda captured all that already in the the credit reserve or do you think that there's going to be additional build necessary going forward.
Yeah, Michael that that's probably the 64000 dollar question for everybody quite frankly and at this point at the end of the second quarter and based on our modeling.
As well as based on a very comprehensive bottoms up loan by loan customer by customer review that we've done over the last quarter, which probably.
Finally covers about two thirds of our total commercial loan book.
You know, we're not seeing evidence that would suggest we need to continue building.
So anything that would suggest further reserve build would just be because of deteriorating environmental factors think unemployment being the biggest driver and we've actually seen that recover pretty nicely.
Interestingly if you take took our models are Cecil models excluded the third and fourth quarter or economic outlook.
And just resumed in the first quarter think when deferrals and PPP loan impacts will will subside.
That would suggest that we don't need any further.
Reserve.
If you keep those quarters again, depending on what you assume on the recovery.
It would suggest continued further reserve build our reserve build this quarter was was essentially kind of split the difference.
Between those two outlooks are reflecting the uncertainty about what's going to happen in the economy, but as Mark said I'll, just reiterate without going too far into it.
We're just not seeing the specific migration in any sector and that's very much evidence. If you look at all of our asset quality measures.
Typically would reflect some sort of deterioration.
So.
We're.
Being cautious across the board.
Okay. Thanks, I'll step back.
Our next question will come from Terry Mcevoy with Stephens. Please state your question.
Hi, Good morning, everyone question for Pat when you were running through the slide your comments on expenses were hopefully come down in the third and fourth quarter to first quarter levels, and then you know and the official outlook slide. It says expect to come down. So is there still up a probability that kinda cobot related cost.
On to keep the operating expense line above the first quarter level. This year is that what you were getting out.
No I probably should have used the same word in both places I was trying to suggest that level of precision around our outlook.
Is a less.
Reliable than otherwise would be because of uncertainty around pandemic related costs and expenses and how rapidly those will subside or re occur for.
Persist, but for our best estimates.
We would expect that but the third and fourth quarter are going to resume back to near if not at Q1 levels.
Which which I think at the end of last quarter.
Our guidance with the annualized this quarter as a proxy for the year and but that's that's still our best estimate.
And then I'm just moving up to noninterest income you know you to the normalized growth levels and then on the slide here it's.
Modest improvement in the third and fourth quarter, and and I get it there's a lot of moving parts, but as you think about some of the major fee areas, where do you expect to see that that improvement and and I guess, just looking at capital markets, which took a pretty big dip down kind of what happened there and what's the outlook specifically to that line. Thank you.
Sure pay you I may take that so that yeah arc Terry. Thanks, So two to that last line certainly we would expect all goes activity base output.
Capital markets, which is for again for us is largely swaps in that category as well see our reproduction was low in Q2 I mean, that's what drove it that's as low as we've seen a capital markets. So I candidly I think it has almost nowhere to go but up from here in terms of what we expect in production.
[music].
Well I don't think you'll see us get back to the six two in the four seven we did in the prior two quarters. The two record quarters, we had a by any stretch, but I think you'll see us all incremental build from here and again card and overdraft frankly are the two that also took big decreases in the quarter for all the reasons that everyone knows.
As around liquidity and lack of activity and frankly, our relief programs. So we expect all those factors.
Liquidity will come down eventually, presumably but more importantly activity is returning in some of those are areas and our relief programs are largely ending in those areas. So we should see incremental build from here, we still think under long term basis like Mike alluded to the we have solid treasury management and wealth management businesses that can.
Can grow in a normalized environment and we'll continue to grow this environment than those other ones that we think we'll we'll recover off of the low in Q2.
Great. Thank you both for the inside appreciate it.
Your next question comes from Nathan race with Piper Sandler. Please go ahead.
Yes. Thanks.
Hi, guys good morning.
Just going back to the reserve discussion I'm, just hoping Pat perhaps maybe you can kind of just parse out some of the factors that contribute to the reserve.
Increase this quarter I'm, just curious maybe how much of the provision was just a function of qualitative factors within the seasonal model versus maybe just downgrades that you guys alluded to earlier.
The portfolio.
You want to take that one Mike.
Yes. Please go ahead.
Yeah, I would say that the incremental build was entirely to factor driven.
On the model inputs that we had on our specific.
Credit and rating risk rating migration.
I was very stable.
So it really has as I.
Probably didnt word well.
Answered in the last question on this.
It was very much the external environmental assumption factors.
That drove the range of outcomes and depending on changes in timing and magnitude or depth of recession and persistence of recession versus recovery.
Yeah, we were.
Our models were telling us anywhere from zero to 50 million incremental reserve build and so we judge mentally.
Went with the midpoint on those that just reflects our uncertainty around exactly what the environment economic environment, there's going to bring to us as we progress through the year.
Okay got it and then just staying on credit for second Mark I think you alluded to 70% of commercial book went through the first job deferrals.
I believe you alluded to your go into the second right now so I guess any sense for that 17% of commercial loans, what amount may need additional support pass that 90 day period that you guys granted.
I'm sure we diplomat [noise].
Sure Yeah, Yeah. It was just say 17% in round, one I think it'll be less than half of that in round to.
Could be significantly less than half of it but that's as we've talked to our clients I think it'll be in that 25.
The.
40 ish percent of who asphalt and round one ask for him and round two and as I said in my remarks, it alright somewhat.
Well people both in back people have adjusted there is some greater clarity and folks have other priorities that alone deferral that I'm still.
These repaid somewhere along the way so as we talked to them about all the things. They want to do franchise is the best example, they they needed a loan deferral to get them over Oh, who knows what's happening period, and then they've adapted and so they were.
80, 85% loan deferrals around one I think they'll be 20, 25% around to reflecting how they've adapted to the environment.
Got it that appreciate that clarification and then just lastly on the <unk>.
HM core margin going forward I'm, obviously very strong excess.
Liquidity growth in the quarter with you know impressive deposit growth.
Any sense for you know how much of that deposit growth is kind of transitory or you tied to.
Yep.
[noise] person program versus maybe just clients then Oh onboarding cancer. This point in terms of how we should think about deposit balances to the.
Third quarter of this year.
[noise], so and now you cut out a little bit Theres I want to make sure I get your question right. If I didn't Oh. Please please.
Clarify, but in terms of deposits you know again, we're up about 700 million in commercial we think the vast majority if not all that is due to PPP money still around we do think it'll be utilized and spent over these next to a couple of quarters as that period of time that they can it can do so it has been extended so we think those will will come down the consumer side is a little.
A different they don't consumers are largely flush with cash as well that's going to happening with the stimulus programs round two and the like will have an impact on whether we'll see a decline there or not it's it's less clear that we will at this point.
Did that answer your question.
That's helpful.
I appreciate the color. Thank you guys.
Thank you.
Well, we're waiting for the next caller for your question just also recognize that cash and funding levels typically evolve over the second and third course for US We center tax seasons, the seasonality of municipal flows all of which have been impact into a degree and fundamentally consumers are carrying a little extra cash.
Recognizing some of the due dates for.
Tax payments have been delayed so there's a lot of factors.
Thank you, ladies and gentlemen, as a reminder, please press Star then one if you have a question.
The next question will come from Daniel male with Raymond James. Please go ahead.
Good morning, everybody.
So just to follow up their real quickly now I'll move on but did you guys given impact from a NIM perspective from a excess liquidity in the quarter.
That once you data.
Sure.
The <unk> when you say excess liquidity I'll break that down a couple of ways that the related P. P. P excess liquidity that Mark was just speaking to.
Was likely.
College, four to five basis points.
Compression.
And the on the municipal side.
We had a couple of years, where we'd nicely didn't have to talk about municipal liquidity affecting them, because we could actually deploy that excess cash.
You know two 2.5% if the fed now it's zero or so we're coming back to a period, where where it will also be calling that out and I think that was similarly kind of low single digit basis point.
Impact the vast majority of compression was really a rate driven even with the the really strong decline in funding costs.
Just the overall drop in earning asset yields.
What's the biggest driver of that and then we also had the impact.
Apart coming in which change the mix, but it was not a it was not particularly meaningful although the dollar amount just contributed we're certainly noteworthy.
Alright terrific.
And then maybe getting ahead of myself here.
So.
You, obviously did the preferred issuances and the second quarter a strength in capital levels there.
How are you thinking about potential acquisition you know as you as we perhaps good start to get through this or or when we get through this and what has to happen for you to have sort of meaningful conversations with with potential targets again.
Well I can certainly take this one Dan as you go through this idea again, we've been doing this for a long time and over the course of.
My career, we probably had 35 or 40, various acquisitions are different consolidations that one's been through they tend to stabilize the stock market stabilize because that gives the level of consistency around outlook and expectation. So I think certainly as we progress through the year.
As one gets a level of confidence in what the outlook for credit.
And.
Business production is then those conversations will be more productive.
I think the impetus that would have driven consolidation, even if you look at coming out of the O. eight crisis as you would've seen consolidation start to move through that was generally the broader objectives of needing additional scale and the benefits of scale that would have gone through that and then obviously that the.
Right for that scale was to improve overall business margins. If you will as you navigate a tougher operating environment I don't think those conditions will likely be any different coming out of.
The pandemic circumstance that we find ourselves in today simply going to be awhile for those things done.
But I think responsive to your specific question is when do you see that is as soon as the read on the environment gives greater confidence in the bid ask spreads that are out. There then I think those conversations will likely pick back up.
Thanks for the color.
And the next question will come from Chris Mcgratty with KBW. Please go ahead.
Hey, good morning.
[noise], Mike or patter, Mark I jumped on late so apologies D or some of your peers have talked about loan growth expectations. You know, excluding the triple P. as more hey, we want it we want to work with our customers versus prospect for new obviously, the utilization has been a dynamic in the clinic.
Second quarter for the banks, how do we how do we think about near near to medium term loan growth.
For the company.
Yes.
I'd say on the the consumers a little easier predict because we know we have a certain limited product set than we have good good visibility there and if mortgage rates stay at this level, while lots of people refinance there's still a good a good level of activity. There. So we think we'll see some consumer growth in the next couple of quarters commercials, a little mercury.
Sure. We certainly are doing everything you just said, Chris relative to prioritize and clients and talking to clients, often but still getting back to.
Prospect in a little bit where you can.
I don't think you ever completely end, there and as we helped the few people a couple of hundred process prospects in the PPP, 97% of RPP loans went to clients. We did those first once we satisfied all them, we open into the prospects and have some so we're looking to build those relationships always need to but it's all by clients and.
The client pictures of a mixture there are certain sectors of the economy that.
The construction trades or ER humming along nicely frankly, I'm. There are other sectors that are almost completely shut down as you know so the hotel business and so we don't have much in hotels mice. My point is it it runs that range. So it's hard to predict a pin number on it we're looking to.
I don't I don't know I think you'll see the decline that you saw in Q2 going forward because that was there was a large amount of line utilization drop in Q2 that I don't see repeating itself going forward. So thing would be a better picture than Q2, but again pretty murky to see much slowing growth in Q3, so to speak.
That's great color. Thanks, Mark.
Just on bringing it back to Eni tax it because the margin I think it is a challenge given that the balance sheet ballooning of the industry.
If we.
If we exclude the triple p. fees and the accretion income.
How do how do we think about just the core Eni troughing process to resumption of growth I think Pat you alluded to in your remarks about the quarter, but any further comments would be great.
[laughter] Oh I do think I do think Q3 has gotten a still remain very noisy and and impacted by kind of nonrecurring.
Actions in activities.
But I would expect that we're hitting close to kind of a normalized at zero rate environment.
Level with what we're reporting this quarter or I don't know will recover back to sort of the high to 90 days you know thing to 90 degree in that range.
On a quarterly run rate I don't know, if we'll get back to that.
Immediately in the fourth quarter, but I think that.
Given given what we're seeing earning asset yields spreads.
The outlook for how much of that we'll continue to come down and reprice, but as our fixed book role, but also with competition.
We don't think yields are going to compress dramatically more.
And where they are today as of today anyway.
And frankly on the funding cost side, it's pretty tough to imagine that we're going to be able to bring funding cost too much closer to.
Europe, there are quite low right now we've termed out a ton of our of our borrowing costs. So we feel really good about that.
So a lot of the yield volatility would would probably come from just earning asset a volume embolic volatility, which as Mark said, we don't see in the near term, that's gonna be particularly meaningful growth on the loan side and how that recovers going forward is very tough to predict.
Right now.
So I don't think this quarter's a bad proxy.
Whoever under term core.
Great one more if I could you guys were fairly aggressive a couple years ago with with the deliberate actions program with reducing costs.
How do we think about maybe any stones uncover yet to be on from efficiencies or maybe what you've learned in the last 90 days to potentially go back and see there's more cost it to bring out the business [noise].
Well I can take that one Chris.
As a practical matter, we're operating in a world, where you've seen a or an accelerated changing consumer and I'm talking about business and individual consumer behavior. So it's hard to translate that into what the longer term outlook.
It looks like we we have been on a path for a while even talked about it in the first quarter of taking our investments in technology and doing more to leverage.
How that how that works in that plays out so Ah that's something we're going to continue to work on and continue to focus on here over the next couple of quarters and see if we can drive that more in there I can't I can't give you any more incremental direction like and delivering excellence initiative, because right now the environment still a little too murky to try.
Translate what you've seen in changing consumer behavior as to what that means specifically in the longer term, but certainly you can see a directional change where our clients are using our services differently and then we'll obviously have to adapt to that.
Thanks, Mike that today, there Chris [laughter].
Perfect. Thanks.
Yeah.
Ladies and gentlemen, again. It's reminder, please press Star then one if you have a question.
If there are no further questions I will now turn the call back over to Mr., Scott or for any closing comments.
Great. Thank you so before closing here today I just want to once again take the opportunity to thank all of our colleagues as I shared before I know a number of them listen to our call and I just want to take the opportunity. Thank them for their response during their time.
These times.
Their commitment to living what we do and what we're all about.
Is what really sets first Midwest apart.
And that makes a first and west a great place to work and a great place to do business. So I'm very proud to be surrounded by so many good people doing the right things everyday for our clients and our communities and for each other so ER with that I would close it by saying. Thank you all for your interest in an attack.
Into our story.
As we share our ongoing belief that first Midwest is a great investment so and I wish you all day. Thank you.
Thank you, Sir ladies and gentlemen, this concludes the conference for today. Thank you all participating and have a nice that all parties may now disconnect.
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