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spk06: Good morning, ladies and gentlemen, and welcome to the First Midwest Bankwork 2020 Third Quarter Earnings Conference call. Following the close of the market yesterday, First Midwest released its earnings results for the third quarter 2020 and issued presentation materials that will be referred 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. The company refers you The forward-looking statement, non-GAAP and other legends included in its 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 presentations by Mike Scudder, Chairman and Chief Executive Officer, Mark Sander, President and Chief Operating Officer, and Pat Barrett, 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 Mr. Scudder.
spk04: Great. Thank you. Good morning, everyone. Thanks to you all for joining us today. It's great to be with you, and I hope this finds everyone and your families doing well and staying healthy. A lot going on this quarter. As we move through the pandemic, Dialogue today, obviously we have the materials that are available to follow along with. I'll start off with some of the highlights and as is typically our custom, I'll turn it over to Mark and Pat to follow along with some further details. So obviously performance for the quarter once again reflects the enormity of the times and the inherent uncertainty of the environment. Encouragingly this quarter, business activity showed signs of recovery. and that's obviously following the widespread shutdowns that we'd seen earlier. Practically, the resulting lag in the recovery of demand from those shutdowns and continued low interest rates weighed on the quarter's production. Net income for the third quarter was $23.4 million, or $0.21 per share. That's up from $0.16 a share in the second quarter and obviously down significantly from where we were a year ago. Operating performance, or what we refer to as pre-tax, pre-provision, away from branch optimization activities, improved 13% to $71 million as we benefited from stronger fee-based revenues and lower expenses. All of this, as we would expect to see as the economy recovers, we should see continued improvement there. Again, Mark and Pat will expand, but recognizing the environment We did take a number of actions this quarter that we believe will hold us in good stead as we move forward. We did announce consolidation of 17 locations, as well as certain optimization efforts relative to our retail distribution and ATM networks that will cost about 12 cents a share, but that will be recovered in roughly two years or a little under that. We did reposition a portion of our balance sheet. unwinding swap and funding commitments, and then liquidating about $160 million in securities, all at effectively no cost, but importantly to the benefit of our future net interest income. And that, again, without the loss of funding flexibility that still remains available to us. We held our loss reserves at about $250 million, or 1.8% if you exclude the PPP from the numbers. Overall, credit performance was solid, notable for stable non-performing assets, and our legacy charge-offs, again, were stable, and delinquencies were lower. We did have about $7 million in charges related to closing out one of our acquired loans, or largely due to one of our acquired loans, which aligned with our original marks. So that's simply an accounting nuance relative to CECL. The most important element of that is For how we marked it, it was how we were able to liquidate it. We have spent a significant amount of time working through our portfolio, working with our clients through the deferral process. And appropriately, the rating migration of performing loans to both special mention and substandard categories increased. And that was largely weighted to our elevated risk categories that we've been talking about for some time. and was aligned with what we felt were very encouraging reduction in the second round of deferrals. Recognizing, as I said earlier, the economic uncertainty, we simply maintained our reserves at $250 million. Near term, we're very comfortable with our reserves, the diversity of our book, and where we're at. But ultimately, as we've said for a number of quarters now, the depth and duration of the pandemic, how stimulus plays out will either drive better or more challenged outcomes as we go forward. With that as an overview, let me turn it over to Mark and Pat, and they can offer some additional color and walk you through the remainder of the deck. Mark, why don't you pick it up?
spk03: Thanks, Mike, and good morning, everyone. Starting on slide three of our presentation, loans fell $300 million as another strong quarter in mortgage was not enough to offset lagging commercial demand. Corporate borrowers, I would say, remain somewhat cautious and very liquid. So not surprisingly, we again saw line utilization fall significantly this quarter. While we remain active seeking new business, we have been a bit cautious as well, focusing our efforts on taking care of existing clients and maintaining credit discipline. We have recently gotten back to playing offense more, and we're beginning to see a slight pickup in activity, and thus we're optimistic for more stable commercial results going forward. Mortgage had another strong quarter driven by the favorable rate environment and the high performance of our team. We elected to sell a greater percentage of our production in Q3 given favorable prices and thus held total consumer loan balances flat in the quarter. We expect another good quarter in Q4 in mortgage to close out what will be a record year for us in this business. Our loan book is well diversified on slide four with very modest exposures to the highest risk areas resulting from the pandemic. The fact is restaurants, hotels, and recreation are high risk areas in any environment in our view, and thus have always been discouraged industries for us, meaning they just have a very high bar for approval. Of course, the virus has impacted the entire economy, and we highlighted here other areas that we view as of particular concern. I would note that we've talked about retail CRE and leveraged finance as being higher risk areas for the last several years and have managed our individual and total portfolio exposures accordingly. It's important to note that we have seen very little evidence of deterioration in these two areas these past six months, but given the inherent current risk levels, we are closely monitoring them. The outlook for office CRE is murkier in the current environment. How it plays out remains to be seen. but we feel our total exposure in this area, too, is at a very manageable level and well diversified. On slide five, we provide detailed information by industry on our loan deferral programs. As we guided two last calls, deferrals decreased significantly in the second round. We were pretty accommodative in the first round if a client requested a deferral, but subsequently worked with each of them on alternative solutions going forward. The fact is requests were down sharply in Q3, as borrowers accessed other sources of liquidity, and also as operating cash flow improved somewhat as the economy opened to varying degrees. While the three high-risk sectors remain the largest users of loan deferrals, utilization by these clients was also greatly reduced by 50 percent. The outlook has improved overall, seen most notably, I would say, in franchises. While they're not unaffected, they are performing better than they were after the freeze-up in the early spring. So to summarize, round two deferrals were 3% of our total loan book or 20% of the first round level at the low end of our guidance. Slide six displays our consumer loan book, which is dominated by one to four residential. Deferral requests here also dropped significantly and our highest risk sector, unsecured installment, represents less than 2% of total loans and is largely higher end FICO borrowers. Looking a little deeper at credit starting on slide seven, our metrics were stable other than the risk rating migration we expected. Non-performing assets were unchanged and 30-day past due loans actually improved. We did see a large increase in special mention and substandard loans as we projected due to the pandemic. Over half of the total increase in the quarter in these two adverse categories was from the elevator risk segments we highlighted earlier. Turning to slide eight, charge-offs away from PCD loans were flat at 26 basis points. Total charge-offs were inflated in the quarter, as Mike mentioned, by the change in accounting relative to assets we acquired at a discount, as we resolved a couple large acquired credits at losses that closely matched our original mark. We cut our provision in half relative to Q2, but maintained our total allowance levels by adding to our pandemic reserve given the continued uncertain environment, albeit at a much reduced level from the previous two quarters. Trying to give future guidance on credit is difficult given these unprecedented times. While we expect further deterioration, our outlook has actually improved from 90 days ago. We think criticized loans will increase, but at a much reduced pace given our proactive looks across the portfolio thus far. Charge-offs look well contained in Q4 as well, absent a material shift in the environment or one-offs that might come as we resolve PCD credits. But again, we expect any PCD losses to be very close to our original estimates. The credit story will be more evident in 2021 and we'll have a better read next quarter, influenced, of course, by anticipated further stimulus and the outlook for containment of the virus. Now I'll turn it over to you, Pat.
spk02: Thanks, Mark, and good morning to everyone on the call or listening in. Turning to deposits on slide nine, our $16 billion in granular and stable long-term deposit base remains our primary source of liquidity, combined with over $7 billion in additional funding sources that provide us with more than ample capacity to support clients, colleagues, and communities. Deposit growth continues to be robust, reflecting both the normal seasonal municipal inflows as well as customers retaining higher liquidity stemming from government stimulus actions and just overall reduced spending. Funding costs continue to outperform relative to industry benchmarks, although the size of this advantage is diminished in today's near zero interest rate environment. Turning to net interest income and margin on slide 10, and I'll apologize for the length of my comments, but we had a lot of moving parts this quarter in this area. Net interest income decreased 2% compared to the prior quarter and 5% compared to the prior year. These decreases compared to both prior periods, reflecting the impact of lower rates, partly offset by lower cost of funds, combined with a $7 million positive impact from PPP loans, outstanding in the quarter, up from $5 million in the prior quarter. Compared to the prior quarter, modestly lower loan and securities balances also contributed to the decline, while compared to the prior year, growth in loans and securities and the Park Bank acquisition partially offset the impact of lower rates. Acquired loan accretion contributed nearly $8 million to the quarter, up a million compared to the prior quarter, and down a million compared to the same period a year ago. Accretion was higher than scheduled due to favorable resolution of certain acquired loans. Continuing on the same slide, with net interest margin, tax equivalent NIM for the quarter of 2.95% was down, as we expected, by 18 basis points, linked quarter, and 87 basis points from the same period a year ago. Excluding accretion, margin was 2.79% for the quarter, down 19 basis points linked, and 80 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, lower yielding PPP loans, as well as higher liquid earning asset balances from deposits, collecting PPP loan fundings and stimulus actions. This was partially offset by lower cost of funds. The seasonal increase in municipal deposits also contributed to the linked quarter compression, as did the normalization of borrowed fund costs from the exceptionally low second quarter levels we were able to opportunistically achieve. Our outlook for the fourth quarter for NII, excluding the impact of potential earning asset fluctuations, is to see relative stability in revenue, while NIM is likely to see a reversal of the third quarter compression, reflecting runoff of seasonal deposit outflows as well as potential PPP funding outflows. The magnitude of this will be dependent upon PPP loan forgiveness, which is expected to occur primarily over the next two quarters. Some will go into the second quarter of next year, likely. Accretion is expected to be approximately 27 million for the full year, down nearly 25% from the prior year, with 5 million expected in the fourth quarter. And in finalization on this slide, I'd also highlight that during the quarter, In light of current market conditions, we executed a balance sheet optimization strategy to deploy excess liquidity and unrealized securities gains. This involved terminating $1.1 billion in longer-term interest rate swaps, resulting in reductions in both current and expected future wholesale borrowings in both the third and fourth quarters of this year. These actions are neutral to our third quarter net income, with $14 million in pre-tax gains on sale of securities fully absorbing the costs of swap terminations. while future net interest income will benefit by approximately $5 million annually. This optimization also provides further flexibility to take advantage of lower costs on any needed future borrowings. Moving on to expenses on slide 12. Note the current quarter includes $1 million of anticipated acquisition and integration related expenses, largely driven by costs associated with the park acquisition. as well as $18 million in optimization costs associated with retail optimization strategies. Away from these items, total expenses were down 3% linked quarter and up 7% compared to the same quarter a year ago. Compared to the prior quarter, lower professional services and occupancy, as well as lower other expense, including the absence of evaluation adjustment on a foreclosed asset that we had in the second quarter, were partly offset by lower deferred loan origination costs and higher computer processing. Compared to the same quarter a year ago, our larger operating base, due to the park acquisition, higher staff costs, including mortgage commissions, combined with elevated pandemic-related expenses and technology costs, were partially offset by lower professional services and employee benefits. We continue to be focused on our expense run rate. While our efficiency ratio has ticked up due to revenue declines, Overall annualized expenses as a percentage of average assets, excluding PPP loans, was approximately 2.2%, down 6% from the prior quarter, and down 7% from a year ago. Our outlook for the fourth quarter is that our expense run rates, excluding acquisition and integration costs, will likely tick up modestly from Q3 due to intentionally delayed Q3 expenses, combined with costs associated with the reopening of branches that were previously closed due to the pandemic. A last note on taxes before I leave this slide. Our effective tax rate for the quarter was approximately 24%, modestly lower than our guidance and reflective of lower taxable income. We continue to expect that our effective tax rate, however, will approximate 25%. We've included a summary on slide 13 that reflects our optimization strategies, both retail and balance sheet. Let me see. including the upfront pre-tax costs included in the third quarter results of 18 million from the retail optimization and the ongoing 8 million of annual run rate benefit that we'll see in 2021, increasing to 9 million annually thereafter. I would highlight that we continue to see a steady shift to more digital transaction volumes, comprising both online and mobile banking. This is not a new trend for us, but clearly has accelerated during the pandemic. and you should expect to see us continue to make technology investments to further enhance our digital platform capabilities. A final note on this slide that's worth repeating. The upfront impact of our balance sheet optimization is entirely neutral, with a pre-tax benefit to NII of $5 million annually, starting in the fourth quarter. Moving to capital on slide 14, capital levels continue to be strong, with retained earnings and the volume and mix of risk-weighted assets contributing to third quarter growth. These levels support our robust allowance for credit losses and our third quarter dividend of 14 cents per common share, consistent with the prior quarter. Consistent with our usual practice, we've summarized our outlook for 2020 on slide 15. I would emphasize that our commentary for this outlook this quarter is very limited, as future results are dependent on the persistence and impact of the pandemic, customer behaviors, and the impact of any further federal stimulus activities. We've also included for convenience a summary of our financial results for the quarter on slide 16. Now I'll turn it back over to Mike for final remarks.
spk04: Great. Thanks, Pat. Before we open it up, a couple of kind of recap comments here, if you would. The actions we took this quarter, in our judgment, we really feel improve our positioning, certainly as we look to navigate the fall, the winter, and drive 2021 performance. Again, just to recap, our balance sheet is very strong. Liquidity is there. Our reserves are robust. Our capital position has been growing. Total capital to over 14%, as Pat said, Tier 1 to over 11, and all of that even as we built reserves and held our dividend. As we discussed on our last earnings call, we opportunistically raised some $230 million of additional Tier 1 capital through our preferred stock issuance. Volumes are recovering. and our core deposit base remains an undervalued strength in this environment. The optimization activities we undertook, most importantly, are aligned with how our clients are using us, and our distribution network remains robust, and a byproduct of this environment is our digital and online skill sets continue to be enhanced and are maturing, all of which we think will help us become more efficient in our processes as we go forward. The balance sheet repositioning we undertook will also help as our teams are working hard as we wait for demand to rebuild and our capital flexibility allows us to get ahead of cash flow needs. As we look ahead, we will continue to invest in our business. We're going to continue to take on those enhancements of our technology. We're going to drive further efficiency. And we certainly, as I said, have the flexibility to take advantage of opportunities to grow our business. We talk about this all the time when we talk with our teams. Times such as these often present challenges, but they also provide opportunities to leverage the strength of our teams, the strength of our company, and to enhance the relationships with our clients, all of which adds to the value of the franchise as a whole. So with that as some closing remarks there, let me ask the operator if we can open it up for questions now.
spk06: Certainly. Thank you, sir. The question and answer session will begin at this time. If you are using the speakerphone, please pick up the handset before pressing any numbers. If you have a question, please press star then one on your telephone. If you wish to withdraw your question, please press star then two. Your question will be taken in the order that it is received. Please stand by for your first question, sir. And the first question will come from Terry McEvoy with Stevens Inc. Please go ahead and state your question.
spk07: Thanks. Good morning, everyone.
spk04: Hi, Terry.
spk07: Mark, in your prepared remarks, you talked about line utilization. I'm just wondering, are we below pre-COVID in terms of utilization? And then you had some, I don't know if I should say positive comments on the pipeline, but you said you're starting to see some pipeline building. Anything stand out? What's behind that comment?
spk03: Sure. So the first part of your question, yes, our line utilization is a little bit below where it was pre-pandemic. Again, reflecting, I think, the cautiousness, but also the liquidity that's out there. What's behind my comment relative to activity building is we're starting to see our pipelines increase a little bit, I would say. And fundamentally, as we spent so much over the last six months on portfolio reviews and credit focused and tightening parameters a little bit, You know, that evolves as we're, everything's relative, right, Terry? We're feeling better about credit than we did six months ago, and yet, obviously, the story remains to be played out. But getting our teams back into some sense of normalcy of not just servicing clients, but prospecting in a virtual world. So we're just starting to get back to playing offense a little bit, I would say.
spk07: Thank you. And then a follow-up question for Pat. The $8.5 million of expected run rate impact from the retail optimization. I just want to make sure I'm not kind of overstating it in the model. Will some of that be utilized to reinvest in the digital platform and continue to invest in technology? Or is that what you'd expect the actual benefit to be next year?
spk02: Well, I would say, Terry, that the answer would probably be yes to both sides of that question. And let me explain why I say that. We'll see a benefit that will come rolling through from retail optimization. that will be almost entirely driving through the staffing, staff cost, benefits, and occupancy lines. Now, some of that we would expect to see our technology-related costs continue with a steady growth. So we're on a long-term commitment that would probably have us incrementally investing more in technology consistently than any other area, probably not unlike others. But that will flow through on a different line item that you'll see. And I'll caveat that with saying that with investments, sometimes there's a cash investment that precedes hitting your income statement. So, for example, upgrading a platform could take a year to do that, and you won't really see the P&L impact of that until it's implemented and you start depreciating it and running it down. Does that make sense to you?
spk07: It does, yeah, understood. Thank you both.
spk06: And our next question will come from Nathan Race with Piper Jaffrey. Please go ahead and state your question.
spk05: Yeah. Hi, guys. Good morning. Good morning. We're just hoping to start on the overall size of the bail-in sheet looking to 4Q. Obviously, you've got the swaps rolling off and some wholesale payments. funding paydowns as well, and it also sounds like we should expect some public fund outflows as well in the fourth quarter. So just trying to kind of size up the size of the securities portfolio and just the overall balance sheet into the fourth quarter as a starting point.
spk02: Yeah, so I think the main change in the securities book that we would envision at this point, and that's notwithstanding anything we do that we haven't announced, would really just reflect the sale of the $160 million that we have. So We've been trying to pretty consistently reinvest cash flows, which are actually coming in at probably triple the levels they were at the beginning of the year before rates dropped because of much higher prepayments on the mortgage-backed portfolio. From an overall balance sheet perspective, we'll definitely see earning assets come down as the cash that we have runs down. Part of that is seasonal municipal rundowns. And part of that is that we continue to expect to see customer liquidity, whether it's from PPP stimulus or just reduced spending levels, we continue to think that that is going to come down because those are at kind of abnormally, unusually high levels. And then the last piece of that would probably be, the material piece, would just be net loan growth. And as Mark and Mike have both, I think, said that loan growth is tough to come by within your credit risk appetite without stretching credit risk, and payoffs continue at higher levels. And so the results that we saw during this quarter, unless there's a material change in the environment, probably will continue for the near term.
spk05: Got it. That's helpful. And just changing gears on capital, you know, most ratios continue to increase in the quarter. And it sounds like you guys are pretty comfortable from a credit perspective, you know, despite the increase in criticized loans. It seems like, you know, the reserve is sufficient to manage that increase that we saw this quarter. So I guess on buybacks, what would you guys need to see in the market or in the environment to resume those, just given, you know, the comfort level seems to be a little higher than it was earlier in the year?
spk04: Well, that I can take. Yeah, the answer on buybacks is really a function of outlook and credit. Certainly you're going to have to see economic conditions and the outlook stabilize as we go through that. And then functionally, as we've managed our capital, those elements certainly start to look to what are the different opportunities that are available relative to deployment of capital and what provides the highest return for the shareholders. But certainly some stability in the operating environment is going to be critical to looking at decisions relative to how you deploy the capital in this going forward.
spk05: Okay. I appreciate the call. Thanks, guys.
spk06: And the next question will come from Chris McGrady with KBW. Please go ahead.
spk00: Hey, good morning. Morning, Chris. Morning. Pat, I just want to make sure I fully understand the expenses. So the guide for next quarter was a slight increase from the core number of like $112 this quarter. And then you're going to get basically $8 million out next year. Is it as simple as taking that, call it $113 number, factoring in a slight inflation number, and then backing out $8? Is that the right way to think about it? you know, full year expenses.
spk02: For next year?
spk00: Yeah.
spk02: You know, I want to answer you in the worst possible way because it is pretty straightforward. However, I'm probably going to defer on that until we're ready to think about a more fulsome discussion of our outlook for 2021, which I think is really going to be 90 days from now. Absent anything else, That would be the right way to think about it, but as I said to Nate a few minutes ago, we are expecting certain areas to go up and particularly in technology spend as we go through the course of the year. We're still in the process of figuring out what sort of inflationary increases will there be for staff for salary levels. I think we're going to remain extremely vigilant and focused on expenses across the board. But at the same time, we're not going to abandon a lot of the ongoing efforts we have working on both our platform and our overall ability to deliver very competitive products and services to customers. So you will see a decline next year. The magnitude of that, I'm going to probably hold off and revisit that in January.
spk00: No problem. Worth a shot. Yep. Maybe a question on credit. So if I'm looking at the provision, it was down about 50% sequentially. You know, you held the reserve dollars similar. But the increase in the adverse rated loans that you talked about, can you just walk me through, you know, kind of that dynamic? You know, were those loans... proactively put on a downgrade because you saw something or out of COVID or is it, you're seeing, you know, a little bit more weakness in the structure of these loans since, since the last month. I'm just trying to get, just trying to square that concept up. Thanks.
spk03: Yeah. Yeah. So, I mean, obviously Chris, as you know, we have a, you know, regular rhythm of portfolio management practices. And then in these times you, you amp that up several notches and we've done deeper dives on our, higher risk areas, and not just those three, but across the portfolio, three different times over the course of these last seven months. So some element of that is migrations as expected. Some is getting in advance of it, right? You know, you don't need financial statements to know that, you don't need the full financials to know that the hotel industry is suffering and you're going to see a risk migration there. So, you know, you can be more proactive in a segment like that than, some others where, you know, things are holding up and you want to see the financial statements come through before you downgrade. I guess, you know, I'd say it this way, Chris. The migration that we saw in Q3 was as we expected. It was dominated by those high risk categories. Over half, as I said, were of the $250 million increase in special mention and substandard were in those three categories. And we, I think, are well ahead of all the risk ratings that we'll see. or largely that we'll see in those areas so it's like anywhere you try and get ahead of the portfolio as much as you can you don't use both financials and your judgment in terms of what the sector outlook looks like and then there are other sectors like in commercial real estate where we're anticipating some migration but things are really holding up quite well at this point so um I'm trying my best to answer your question. It's a little bit of everything, right? It's judgment, it's financials, it's outlook. And as we said, we held the reserves. We could have set aside monies for the PCD credits. We could have released reserves. We didn't think releasing reserves was the right thing to do in this kind of an environment, even though as we think about the liquidity that our borrowers have accessed and the fact that cash flow has improved in a number of areas, that's what's behind our outlook improved comments. And yet, again, in the face of this kind of credit deterioration in a quarter and the outlook for a little bit further, we just didn't think release in reserves was appropriate at this time.
spk00: No, it's good, Collier. Thanks, Mark. Pat, maybe just one last one. A lot of attention on taxes given the potential change in administration. Is there anything different in your – in your tax structure today that would make the math from the 2016 election not to the same proportional increase?
spk02: Short answer is no. Whatever changes in tax rates we have probably equates to around $2 million, a little under $2 million per percentage change. We don't have a complex tax structure. We do have some some offshore real estate, some REMICs that really help with our state tax burden more than federal. But aside from that, we're not heavily invested into the credit universe or anything else. That's great. Thank you.
spk06: Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one. The next question will come from Michael Young with Truist Securities. Please go ahead.
spk01: Thanks for the question. Quick follow-up first on just the reserve. You know, given the kind of increase in special mention and substandard, I guess I was a little surprised that the ACL actually went down from $151 million to $147 million. Does that just imply that, you know, you guys are downgrading stuff proactively, but you don't necessarily see lost content there or – Is there another message that should be taken from that?
spk03: Mark, you want to take that? Well, when you say the allowance came down, you're throwing – we held our allowance at $250 million.
spk01: So when you say that, Michael – Yeah, so the – I guess the pandemic portion, you know, which I take to mean kind of the environmental factors went up, but the actual, you know, allowance for credit losses kind of went down. So I was just trying to understand if that just implied that you guys are downgrading credits, but you don't actually see a lot of loss content yet. And we wouldn't expect the allowance, I guess, in the future to respond unless, you know, there was kind of a downgrade in expectations on realization or collateral levels on those credits. Yeah.
spk04: Let me help there, Mark. The answer to that is just as you described it. Any shift in the allowance is reflective of the shift that we saw in the risk migration and the content of the risk migration and the level of exposure there didn't shift our view relative to what the size of our reserves were needed to be. And the other element of Mark as we talk through that is as we look at future charges that may come through, some portion of that certainly has been allocated to acquired loans. So those are simply liquidation of assets that we saw from an acquisition standpoint. But no, I think you've stated your answer to your own question in answering.
spk01: Okay, thanks. And was I was curious to dig a little deeper maybe into the loan deferrals. Obviously, good movement seeing those come down to just 3%. Could you maybe talk about some of the additional strategies that you used to move those off of deferrals? Did you have a lot of clients bring extra collateral or cash to the table? Or just maybe if you could talk about how you kind of got those levels down.
spk03: Go ahead, Mark. A couple ways. The number one would say additional cash to the table. That happened in a number of cases across virtually every industry, I would say. Now, sometimes that cash to the table is personal liquidity. Sometimes it is asset sales. Sometimes it's leveraging assets, either with us or somebody else, to put debt on encumbered assets. So a little bit of all of the above, access to liquidity was the number one. But as I also stated in my prepared remarks, the improved cash flows in certain of these industries. Franchise is the best example, but there are others where they're operating a lot better now than they were in April and May. So those would be the two primary ways the deferrals came down.
spk01: Okay. That makes sense. And maybe just as we look at timing of kind of resolution of some of the more troubled loans maybe that you've gone through, When do you all kind of expect to maybe try to seek some sort of resolution there? When would that be possible? Is that first quarter of 21? Is it before that, later? I'm just kind of trying to gauge timing.
spk04: I'll help there too, Mark. It's hard for us to gauge specifics around timing because for the credits that we see today, they continue to perform. So that'll really be a function of continued performance, which in some degree, shape, or form may be influenced by how things evolve relative to the pandemic or how stimulus unfolds from there. All things being equal, we don't see that starting to manifest itself this year, which by definition pushes it into 2021 and whether that's Earlier in the year, the middle part of the year, it's really harder to gauge, but we certainly don't see it sooner than that.
spk01: Okay, and last one for me, Pat. Just on the NII NIM guide, you said it includes potential impacts from PPP, so just wanted to make sure, sorry if I missed it earlier, what is included in terms of y'all's assumptions for resolution and timing on PPP? Okay.
spk02: Sure. Well, we've just, Mark, are you okay with me taking this? Sure. Yeah. So we have just gotten kind of our first big slug of loans into the SBA for forgiveness, about a quarter of the total outstandings, and have seen virtually zero forgiveness actually occur. And there's not a commitment from the government on turnaround time at all. But I've I think just for sake of ease, we would expect to see the majority of the portfolio forgive on an even basis from the time when we probably start seeing forgiveness this quarter through the second quarter of next year. So $150 million, $175 million a month on average, but really hard to predict how lumpy that may be and whether it'll be sooner versus back-ended.
spk01: Okay, thanks.
spk06: Ladies and gentlemen, again, as a reminder, if you would like to ask a question, please press star then one. If there are no further questions, I would like to turn the call back over to Mr. Scudder for any closing comments.
spk04: Great, thank you. You know, before we close it up, I always like to take the opportunity to thank all of our teams and colleagues across the company, because I know they listen to our calls and acknowledge their response and what they're doing for our clients during these times. Their commitment to living what we're all about is what makes First Midwest and the First Midwest franchise so special. So we're very proud of them. and their efforts to do the right thing every day for our clients and our communities and for each other. So once again, I would thank all of you for your interest in and attention to our story as we share our ongoing belief that First Midwest is a great investment. So have a great day.
spk06: Thank you, sir. Ladies and gentlemen, this concludes the conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
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