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First Midwest Bancorp Inc (FMBI)
Q2Â 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2019 Second Quarter Earnings Conference Call. Following the close of the market yesterday, the Company released its earnings results for the second quarter of 2019 and also issued presentation materials that will be referred to during the call today.
These provide both historical financial information and the Company's outlook for 2019. During the course of the discussion today, management's comments and the presentation materials may include forward-looking statements. These statements are based upon the Company's current beliefs and are not historical facts or guarantees of future performance or outcomes. Actual results or outcomes may differ. The risks, uncertainties and safe harbor information contained in the Company's most recent 10-K and other filings with the SEC, as well as the forward-looking statement non-GAAP and other legends included in the Company's earnings release and presentation materials should be considered for the call today.
Finally, the Company will not be updating any forward-looking statements after this call. [Operator Instructions] Following the presentation 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 opened for questions and answers for analysts only.
I will now turn the call over to Mr. Scudder. Please go ahead.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Great. Thank you. Good morning and thank you, everyone, for joining us today. It's great to be with you. Well, as I opened up in the release and certainly within my quote, it was an active quarter for us on several business fronts, but most notably for our mid-May closing on the Bridgeview Bank acquisition, as well as the completion of the related system conversion.
To help you, we've provided a supplemental presentation to follow along with as we move through our remarks as is typically our practice. I'll cover the highlights, leave it to Mark and Pat to walk you through the components. And certainly, they can add the differentiation of the impact of Bridgeview on our numbers.
Let me start with some of the headlines. We closed the quarter at $17.5 billion in assets, that's up about 10% from last quarter, 18% from a year ago. Bridgeview added about $1.2 billion to this total, and importantly, a talented team to our overall metro Chicago market presence
Combined with our fourth quarter acquisition of Northern States, this puts us in the top 10 for overall market share in Chicago.
We are very pleased with our progress and execution overall on the Bridgeview integration. Our projections remain on track and with the systems conversion behind us and a great team on board, we have some solid momentum going forward .
Away from acquisition costs, our underlying EPS increased to $0.50 , up 9% and 25% from the first quarter of 2019 and second quarter of 2018 respectively. At the same time, our return on tangible common equity improved to 16% . That's up 64 basis points and 114 basis points from the first quarter of '19 and second quarter of 2018 respectively.
From a business perspective, if you look away from Bridgeview for a minute, loans were up annualized about 9% for both the linked quarter and from a year ago. We're very pleased with C&I growth while consumer reflected both solid sales activity as well as our desire to add some duration and diversification of the balance sheet given the evolving rate outlook. At the same time, we saw CRE pay-downs and production timing weighing on growth here for the quarter. Prospectively, we continue to build and strengthen our sales teams as we benefit directly and indirectly from overall market disruption. We move forward with our commercial expansion in Milwaukee adding two more lenders in the market further complementing our acquisition of Northern Oak in the first quarter. We also continue to add lenders locally as we move forward. All of this is in addition to the expansion of our direct mortgage team. Importantly, all of these additions pay future dividends down the road.
Our deposits held up nicely, increasing on average 6% and 14% linked quarter and from a year ago respectively, while our mix was relatively unchanged. Growth in earning assets and accretion saw net interest income grow to $150 million or 8% over the linked quarter, while margin improved to 4.06%. As expected, underlying margin was down about 8 basis points, which was, just to recap, a little bit better than what we would have expected given the rate environment and some of the actions that we took to better position the balance sheet.
Operating efficiency was 55% for the quarter and the year to date, improved from last quarter and 5 percentage points better than what it was a year ago.
Greater revenue has helped this along with higher net interest income as well as our fee-based revenues -- bounced back nicely as well.
Finally, our capital and earnings remain very strong, providing us with flexibility as we navigate today's environment. We closed the quarter with Tier 1 common at 10.11% to risk weighted assets. That's essentially stable, if you compare us to where we were a year ago, and up 40 basis points or excuse me, stable versus year end, up about 40 basis points from a year ago. And that's after having acquired Bridgeview, repurchased -- repurchasing $20 million in shares under our newly authorized program and increasing our dividend to $0.14, and that's up almost 30% from a year ago.
So all in all, another busy quarter. And now I'll turn it over to Mark and Pat for some additional color.
Mark G. Sander -- President and Chief Operating Officer
Thanks, Mike, and good morning, all. Loans, as shown on Page 3 of the presentation materials, increased nearly $1 billion in the second quarter, right in line with our expectations. Bridgeview, of course, was the largest piece of that at about $700 million, 65% of which was in commercial real estate. We also acquired over $200 million of 1+-4 mortgages to extend our overall portfolio duration as we signaled in last quarter's call while protecting and growing earnings
Away from these acquired assets, we saw solid gains in C&I and consumer, partially offset by continued pressure from CRE payoff activity. C&I growth was particularly strong and well diversified across middle market and specialty teams, as our previous town investments continued to incrementally build our business quarter by quarter.
Similarly, our consumer direct and mortgage teams had another solid quarter. Our business banking and real estate teams had softer production this quarter, however, and in conjunction with continued refinance and sale activity, resulted in a drop in net CRE loans away from bridgeview.
We believe the modest Q2 production here was more timing than anything and that we can and will grow CRE in the face of payoff pressures in the future. We are thus maintaining our outlook for high single digit -- single to low double digit loan growth for the full year. We think our commercial and consumer businesses in total will each post solid incremental organic growth from here based largely on disciplined prospecting efforts, but also helped by some of the staff additions Mike referenced in his opening comments.
Turning to asset quality on Page 4, results in Q2 were also right in line with expectations. Charge-offs of 31 basis points and NPAs of 0.77% of loans were consistent with the prior quarter.
Our provision expense covered charge-offs and loan growth as expected, yet our allowance fell slightly on a percentage basis as we reduced specific reserves in conjunction with a couple of losses this quarter. We expect all of these asset quality metrics to stay in the same range for the remainder of the year.
While some of the payoff activity we have seen in recent quarters is an indication that the competitive landscape remains aggressive, we will not chase loan growth by sacrificing credit quality. And we believe our broad diversification and conservative underwriting will serve us well going forward.
Relative to deposits, as seen on Page 5, our average deposits are up $1.5 billion over the last year as we have a very high retention rate on acquired deposits due to our very strong customer satisfaction scores. Bridgeview added consistently to our strong mix in Q2 and our core base remained stable.
While we remain competitive across all deposit products, a big strength of our overall franchise is this stable, low-cost deposit base. In Q2, our average cost of deposits was 60 basis points, which will again be among the best in our peer group.
Pat will now translate all that into margin and net interest income.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Thanks, Mark, and good morning, everyone on the call who are listening in. Turning to net interest income and margin on Slide 6, net interest income was up $11 million or 8% from the prior quarter and up $23 million or 18% compared to the same period in 2018. Compared to both prior periods, the acquisition of Bridgeview, securities purchases and loan growth were partly offset by higher funding costs. In addition, the increase compared to the first quarter benefited from an extra day in the quarter, while the increase compared to the same period a year ago was impacted by the acquisition of North States. Acquired loan accretion contributed $10 million to the quarter higher than expected due to the favorable resolution of certain loans.
Moving to net interest margin, tax equivalent NIM for the current quarter of 4.06% was up 2 basis points linked quarter and 15 basis points from the prior year. Excluding accretion, margin was 3.78% for the quarter, down 8 basis points linked and up 1 basis point to the same period a year ago, very much in line with our expectations. Compared to both prior periods, margin compression reflected the mix of interest earning assets acquired in the Bridgeview transaction, purchases of securities and 1-4 family mortgages to mitigate the risk of falling rates, and higher funding costs consistent with our previous guidance.
Turning to earning assets and funding sources, average interest earning assets were up $900 million linked quarter and $1.8 billion compared to the prior year, reflecting earning assets from the Bridgeview acquisition. loan growth and securities purchases. In addition, assets acquired in the North State's transaction impacted earning asset growth compared to the prior year. Average funding sources were up over $900 million linked quarter and $1.7 billion from the prior year, reflecting the impact of both acquisitions and organic growth.
Moving to our 2019 NII outlook, if you recall, our guidance three months ago assumed no additional rate changes this year, rather than attempt to predict the timing or likelihood of future interest rate changes, we want to quantify that each 25 basis point downward adjustment by the Fed would likely result in a $2 million to $3 million decline in NII per quarter. On the positive side, we're updating our accretion guidance to be $30 million to $33 million in the range for the year, up modestly from our previous outlook. Overall, we did not expect either these potential rate cuts or the improved accretion to change our full-year guidance range of low to mid double digit NII growth.
If we do get 75 basis points of Fed rate cuts, as many predict, expect to see a relatively flat NII compared to the second quarter run rate adjusted for day count. If we do not get those rate cuts, expect $6 million to $9 million of incremental NII growth.
From a NIM and earning asset outlook perspective, as we've said previously, we'll likely institute further actions to protect against future rate cuts as well as any further declines in market rates. These actions would likely continue to drive earning assets both securities and mortgages higher as a percentage of total learning assets and at the same time should be expected to result in quarterly NIM compression similar to what we saw in the second quarter for at least the next one or two quarters or as long as these actions and rate changes continue.
Once again, I want to remind you that projections are subject to volatility due to movements in interest rates, pace of loan growth and the impact of acquisitions.
Mark, turn it back over to you to discuss non-interest income on Slide 7.
Mark G. Sander -- President and Chief Operating Officer
Thanks, Pat. Non-interest income rebounded as expected in Q2, up 10% versus linked quarter and 4.3% higher than a year ago. At the core, these comparisons reflect what we view as our normal organic growth trajectory of low single digits overall, plus the benefit of acquisitions. We were pleased with our consistent performance here following Q1 results that were skewed lower by a couple isolated items. Our primary fee income growth streams, wealth management, treasury management and card services all posted solid organic growth results in Q2.
Capital markets and mortgage rebounded sharply from Q1 really just to levels we consider normalized and thus we look to grow both of these from here. We have updated our non-interest income guidance for the full year as shown on Page 7 to mid to high single digit growth as a result of the impact of market conditions on the first part of the year and overdraft fee pressures. More simply stated, we think each of the next two quarters we can generate solid mid single digit growth over what we posted in Q2.
Back over to Pat to talk about expenses.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Moving on to expenses on Slide 8, please note the current quarter includes $10 million of acquisition and integration related expenses associated with the BridgeView acquisition and to a lesser extent some lingering Delivering Excellence implementation costs, both of which we believe will remain at or better than original expectations for the full year.
Away from these items, total expenses were up 6%, in line with our guidance compared to about the prior quarter and the year. The increase linked quarter reflects additional operating costs associated with Bridgeview, merit increases to salaries, valuation adjustments on certain properties and other expenses related to organization growth, partly offset by lower occupancy costs.
The increase compared to prior year is reflective of increased operating costs associated with the Bridgeview, Northern Oak and Northern States acquisitions, merit increases and higher other expenses, partially offset by the full incremental benefit of Delivering Excellence expense initiatives. Our efficiency ratio of 55% improved from 56% linked quarter and from 60% a year ago.
Our outlook for 2019 legacy expenses is unchanged, which was the fourth quarter of 2018 run rate of $98 million plus 3% inflation with $4 million in additional expense in second quarter plus $6 million in each of the third and fourth quarters related to Bridgeview .
Said in another way, our second quarter run rate of $104 million plus an additional $2 million spread across staff costs and occupancy expense to reach Bridgeview's full quarter run rate is a good quarterly estimate for the remainder of the year.
Last note on taxes before I leave this slide. Our effective tax rate for the quarter was approximately 25% in line with our guidance. And it remains our expectation for the full year.
Moving the capital on Slide 9. As Mike highlighted, we continue to maintain capital at strong levels and are pleased with our track record of rapidly earning back the capital we've deployed on acquisitions. Excess earnings combined with the benefits of the change in accounting for our sale leaseback transaction during the first half of the year, essentially funded our acquisitions of Northern Oak and Bridgeview, plus the repurchase of approximately 1 million shares and a 17% dividend increase during the first half of 2019. Note that on an annualized basis, as Mike said, dividends are up approximately 30% compared to a year ago. We expect continued capital accretion from excess earnings, providing further capital deployment flexibility to fund growth or continued share repurchases.
And finally, consistent with our usual practice, we've summarized both our outlook and current quarter's earnings on Slides 10 and 11 respectively.
Now, I'll turn it back over to Mike for final remarks.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Thanks, Pat. So just to recap, we continue to like where we're positioned even as we navigate what I call the realities of an evolving rate outlook. Since 2015, we've grown core EPS by 14% compounded and are well on that pace for 2019. Our focus remains on building talent, expanding our business and leveraging our teams and technology to drive a better and more efficient client experience.
We have a strong balance sheet, engaged team, solid underlying momentum. We've got the flexibility to manage our capital to both invest in our business as well as pursue opportunities to expand both in existing and adjacent markets. Always, we do so with an eye on maximizing long-term shareholder returns. So with that, let's open it up for questions.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from Brad Milsap of Sandler O'Neill. Please state your question.
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
Hey, good morning, guys.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Good morning.
Mark G. Sander -- President and Chief Operating Officer
Good morning, Brad.
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
Mark, in the release and in your prepared remarks, you touched on the purchase of some consumer and 1-4 family residential loans during the quarter. I was curious if you could give us the amount and what your appetite would be for future purchases. maybe in lieu of continued CRE pay-downs or other softness in the book?
Mark G. Sander -- President and Chief Operating Officer
Sure. The amount in Q2 was a little bit over $200 million to answer that question. Our appetite going forward, it's partially about earning assets, Brad, but it's partially about the duration of our book, and what we want to do to position our balance sheet for the rate environment that we see. So as we both opportunistically as well as also strategically kind of look at where we want that balance of fixed versus floating to be against the backdrop of earning assets, we might do some additional purchases. We've stayed on the higher credit quality side of 1-4 mortgages, and so there is a certain element of just a good attractive risk return to what we've purchased as well.
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
That's helpful. And then just to follow up on the whole extension of duration discussion, maybe switch to Pat. I'm curious, with your appetite for additional securities purchases, it looks like you may have bought, ex-Bridgeview a few hundred million during the quarter. Also, the borrowings were up quite a bit. I don't think Bridgeview had a lot of borrowings. Can you talk about what you're doing there in terms of additional securities purchases, kind of funded with borrowings?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Sure. The borrowings are a little bit independent of that because we've already locked in and committed to forward fundings in previous years. And as those come in, there's probably about $400 million of maturing FHLBs that those are replacing. So there's a little bit of a timing lag on the FHLB side. But as we're able to find forward funding at attractive rates in this down curve environment, we're certainly looking for opportunities to lock in more future funding at pretty attractive long-term rates.
On the securities side, we put on between this quarter and the first quarter, probably $600 million of net securities and we're able to get reasonably attractive rates, if you just kind of watch the intraday pricing. On average, we've been putting those on at about 3% and these do serve to extend out the duration modestly, not huge. So we're not taking super long-term bets on it. But net-net, we are able to improve our asset sensitivity that way.
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
And then just a follow-up on that, and I'll hop back in the queue. But it seems your $2 million to $3 million of NII pressure for each 25 basis point rate cut, that's been pretty consistent. I think that's what you said last quarter as well, in spite of these moves you've made, I guess, it hasn't changed the impact on NII in spite of some of the duration you've added to the balance sheet.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Yeah, well, the big question is how fast can we lower our deposit and funding costs and without having had our deposit costs rise further and faster than they have during the cycle, we have very little on an index side that will automatically go down maybe a $0.5 billion in public funds and that's it. So the remainder is things that we have to go after customers and try to reduce rates as rates do fall. And I will say that we've also been still actively promoting money market specials and have been pretty successful in those throughout the course of the second quarter because we think long term these are the things that we're going to need to have to remain competitive, but we will remain competitive on deposit rates regardless.
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
Thank you, guys, I appreciate the color.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Thank you.
Operator
Our next question will be from Michael Young of SunTrust. Please state your question.
Michael Young -- SunTrust. -- Analyst
Hi, thanks, wanted to start on just kind of balance sheet mix on the assets side. You kind of mentioned, obviously that you guys are trying to extend duration, but can you just remind us of kind of where your fixed, floating and variable rate books stand now and then what your sort of desired, I guess, outcome would be down the road in terms of those books?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Sure, I'll take that Michael, it's Pat. We typically, just based on our natural origination, would migrate to around a 60/40 floating fixed split. We employ balance sheet strategies to bring that swaps to bring that back to a 50/50 mix, which is our general target. Bridgeview was ever so slightly more fixed than floating. So it didn't really move the needle on that. And so we rather than taking big interest rate bets, our goal is to really just a fairly evenly balanced with the understanding that our floating rate book is going to reprice a lot of it, probably over half of it on a 30-day LIBOR, whereas the fixed book with its remaining life is going to reprice on average every three years, a third year.
Michael Young -- SunTrust. -- Analyst
Okay, so are you saying you're pretty close to the fixed-floating mix that you want to be at currently?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
We are. I think you shouldn't be surprised to see us continue to add a little more duration through a combination of incremental securities and/or 1-4 family purchases in the remainder of the year, again, in recognition of the fact that we don't expect rates to rise going forward, whether they fall and how long they stay depressed. You tell us. But we still think for our size and profile trying to stay balanced, generally balanced over time is the right posture.
Michael Young -- SunTrust. -- Analyst
Thanks. And then maybe just one more on capital returns. The total capital ratio has gotten a little bit thinner. Would there be an interest in issuing some sort of sub debt or preferred to continue to be able to buy back stock? Or do you feel like you'll get to the level you need to be to continue the share repurchases going forward?
Mark G. Sander -- President and Chief Operating Officer
Yeah, well, we throw off about $25 million or 15 basis points of Tier 1 capital every quarter in excess earnings. So we're fighting a rising tide with capital. I mean, it's a good problem to have. We generally like our capital levels where they are and tend to fund acquisitions as they occur. So I think the main focus on raising incremental capital would be able -- would be to take advantage of current market conditions for liquidity more than capital. And we continue -- we always evaluate that based on what our long-term needs we think are versus the opportunities in the market.
Michael Young -- SunTrust. -- Analyst
Okay, maybe just quickly on M&A. Are you seeing many of those opportunities or have conversations kind of just generally cooled?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
The M&A environment is stated back. The dialogue and the strategic dialogue that people have relative to what they perceive they're going to do with their particular franchises, state tends to stay pretty constant. So I haven't seen any of those things in terms of cooling. Now, whether that means that will translate to activity, I guess remains to be seen. But I haven't seen any shift. I mean, the activities that propel an increase and that generally fall either toward succession issues or just people's perception of where the operating environment is going to go. So I don't think that necessarily shrinks that.
Michael Young -- SunTrust. -- Analyst
Okay. Thank you.
Operator
Our next question is from Chris McGrady of KBW. Please state your question.
Chris McGratty -- KBW -- Analyst
Good Morning. Pat, I want to go back to the margin for a second to make sure I understand it. So on a core basis, excluding accretion, it was 3.78% this quarter. I think last quarter you said Bridgeview was kind of mid to high single digits [Indecipherable] for two-thirds. So call it a couple of basis points that need to come off next quarter. And then obviously the rate environment, so you're kind of basically saying somewhere between [Indecipherable] a quarter based on each 25. If we get a couple [Indecipherable] if we get a couple cuts, you're suggesting that the NIM on an adjusted basis should be in that kind of 3.60% range in next two quarters, is that right?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
I think that's fair. You can think of each rate cut as being maybe 3 basis points to 5 basis points of impact. And then the balance of the compression would be through anticipated further duration adding through the securities book.
Chris McGratty -- KBW -- Analyst
Okay, that's helpful. The securities book is about 18% of earning assets. Is there a targeted level? I think you said you added $600 million in the quarter. Given your liquidity, is that a number a kind of proportion that will continue to grow or kind of stay relatively in that 18% range?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
We generally have a range that's 15 to 20 in that and then we monitor and plan accordingly. Could it go a little lower? Could it go a little higher in certain conditions? Sure. But it's important for us to keep for certainly for liquidity purposes. And just a follow-up to what you said earlier. As we do add duration, it'll add earning assets. So it does contribute to NII growth. So there's a purpose other than just interest rate risk management to this. It'll just be at a lower margin than if we were adding commercial loans or consumer loans.
Chris McGratty -- KBW -- Analyst
Got it. Maybe one more on the accretable -- with CECL coming. I mean, this quarter, you earned a little bit more on accretion given that kind of early stage of the deal closing. How do we think about level of what's remaining going into next year? I know the guide for this year is kind of 30 to 33, which I assume which basically says it's going to go down to like 8 a quarter. How do we think about that going into next year?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
It'll fall off by about a third, something in the low 20s for the full year. And that's all other things being equal, which they never are. So this quarter's outperformance was really resolution of the loan that we acquired several two or three years ago.
Chris McGratty -- KBW -- Analyst
Okay. Got it, all right. Thank you.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Did that answer your question on CECL? Did you have a question on CECL?
Chris McGratty -- KBW -- Analyst
Yeah, I think you answered it. I think there was previously a concern in the market for banks that have been acquisitive that there was going to be a fall off at accretion income. But I think, you know, the work we've done in some of the conversations we've had, it would suggest that it's not as precipitous as a decline that I think someone had feared maybe six months to 12 months ago.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Right. It just moved geographically out of NII and into [Indecipherable], so it will change ratios.
Chris McGratty -- KBW -- Analyst
Got it, thanks, Pat.
Operator
Our next question comes from Kevin Reevey of DA Davidson. Please state your question.
Kevin Reevey -- DA Davidson & Co. -- Analyst
Good morning.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Good morning.
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Good morning.
Kevin Reevey -- DA Davidson & Co. -- Analyst
So I was just curious, first of all, the new loans you're booking, are you adding floors to those those loan agreements and then kind of looking at your overall loan book, what percent of your loan book has floors as a way to protect you from falling rates?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
I like the notion, Kevin, but unfortunately the market won't let us in the commercial space right now add floor. So the answer is no. We're monitoring it, but we're just not seeing that competitively in the marketplace. In our consumer book, we do have floors in our HELOCs. They're almost a standard across our entire portfolio. So that's not new. That's always been there, but that's a relatively modest part of our entire loan book.
Kevin Reevey -- DA Davidson & Co. -- Analyst
And then, i know earlier in the quarter, you announced a branching initiative. You're opening a branch up in the Quad Cities area and then you've been growing in Milwaukee. Can you kind of talk about future branching strategies on a de novo basis in the light of your efficiency initiatives that you've undertaken?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Yeah, I think we will be very select in terms of de novo openings. I will say that the opening in the Quad Cities, we're closing and that's a relocation to a better location, a better facility and brand new. So there's -- we have the deposits already in that marketplace that will shift to make that branch positive, earning up from day one.
In Milwaukee, we have not announced any branches, but we certainly will look to grow our business in that marketplace. We like it. We have a nice wealth business now and we've added commercial. And over time, we'd like to do more in southeast Wisconsin. But we have no plans at this point to open a branch.
Kevin Reevey -- DA Davidson & Co. -- Analyst
And then lastly, year-to-date, your stock has underperformed KLX, but it looks like you guys are doing all the right means in terms of your efficiency initiative, you're buying back stock, you're increasing the dividend and then you're putting up great numbers. Why do you think your stock has underperformed?
Mark G. Sander -- President and Chief Operating Officer
That's an interesting question. I think a sharp analyst would write a report that would correct that, Kevin, and I suggest you to do that.
Kevin Reevey -- DA Davidson & Co. -- Analyst
I appreciate the comment there.
Mark G. Sander -- President and Chief Operating Officer
I think somebody has got a great opportunity and they could take advantage of it. That's the way I look at it. But we're -- our job is we're running the company for the long term. We're doing the right things. And it's all about execution.
Kevin Reevey -- DA Davidson & Co. -- Analyst
Okay, fair enough. Thank you.
Operator
Our next question comes from Terry McEvoy of Stephens. Please state your question.
Terry McEvoy -- Stephens Inc -- Analyst
Good morning, guys.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Hi, Terry.
Terry McEvoy -- Stephens Inc -- Analyst
Pat, earlier, you mentioned that deposit rates will be important for the NIM, assuming the Fed does cut rates. So I guess my question for you is what is -- what are your assumptions in that $2 million to $3 million drop in NII? And then just maybe as a follow-up, have you seen an opportunity at all either in the second quarter or early in the third quarter to begin cutting rates?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Well, I think if we got three rate cuts throughout the year, then we would be able at a minimum to keep our funding costs flat overall, you know the growth in our CD book over the last one year to two years to a certain extent means that you're locked into those rates rolling off. We've already reduced rates and no longer have any promotional rates on two-year or one-year. I think the only one we have is a seven month and we've already reduced the rate on that by 25 basis points from when we launched it a quarter earlier.
So on that pricing, we've been able to do that. I mentioned briefly earlier about $0.5 billion of our public book, public funds book is index linked. So that'll naturally move with whatever the rates are. But we're actually trying to grow organic deposit production and money market as a product where we haven't really competed on money market products or had to for the last decade. And we think long term, that's more important than a short term save a few very small basis points on our overall funding cost. So as Mike said, we're really looking to stick, stay very competitive and run it for the long term. And while we will be aggressive to take every opportunity we can find to lower our deposit costs, we're not going to do it at the risk of not being at or better than market average rates.
Terry McEvoy -- Stephens Inc -- Analyst
Thanks, Pat. And then just a follow-up for Mike. In the release you mentioned navigate an evolving landscape. As I look at just the headlines in the last kind of 90-days, you recently acquired a national lending team on the ESOP side. And then you also obviously integrated Bridgeview during the quarter. So were your comments there more reflective on a national basis where we should expect to see the company continue to grow on a national basis? Or was it evolving landscape within Chicago, given M&A and the opportunities in market to to take advantage of?
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
I think it was candidly more on a national landscape. I frankly, when I was crafting that, or at least while I was thinking, a lot of the evolving landscape was going to what's the rate environment looked like and what's the outlook for that, but it's, you know, certainly you're seeing shift locally in the markets and I think we're well positioned to take advantage of those opportunities as we go through and see that.
Terry McEvoy -- Stephens Inc -- Analyst
Great. Thank you.
Operator
Our next question comes from Nathan Race of Piper Jaffray. Please state your question.
Nathan Race -- Piper Jaffray -- Analyst
Hey, guys. Good morning.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Good morning, Nat.
Nathan Race -- Piper Jaffray -- Analyst
Question on capital. Just curious if you guys have any updated thoughts on maybe what the targeted TCE range or kind of what coverage you guys are seeing around capital levels at this point? And along those lines, if we can expect this magnitude of buybacks to persist, at least in the back half of this year, just given where the stock is today?
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Yeah. I'll try to answer that without answering that, exactly. But as we've said before, the levels that we have right now, we're very comfortable with. These carry us well through our periodic stress testing exercises for the portfolio that we have and leave us comfortably positioned to continue to grow as we've been growing both organically and through M&A. So we're not looking to really reduce our overall capital levels at this point. And with the stock buyback in place, that gives us a tool when we don't have opportunities to deploy our excess earnings, which again is around $20 million to $25 million per quarter. That gives us a lever to pull if we don't have other growth or higher priority growth opportunities to fund with. And, you know, we also have in the near-term horizon, we still have to be able to accommodate the impact of CECL, which will be a one-time hit to capital. We don't think it's going to be material, but it probably will consume a quarter or two quarters worth of excess earnings. So we'll make decisions on that as we go through the second half of the year and get into next year.
Nathan Race -- Piper Jaffray -- Analyst
Understood. Okay, that's helpful. And then if I could just ask one kind of housekeeping question. Card-based fees, typically we tend to see some strength in the back half of the year within that line in particular. Have you guys seen anything within that business to suggest that that may not occur to the same magnitude that we've seen in years past?
Mark G. Sander -- President and Chief Operating Officer
No, I would say there's nothing that would deviate from kind of the plan we've been on it. It's all about household growth and net household growth, active checking. And I think we're on a nice trajectory there.
Nathan Race -- Piper Jaffray -- Analyst
Understood, I appreciate you guys taking the questions.
Mark G. Sander -- President and Chief Operating Officer
Thanks.
Operator
[Operator Instructions] As there are no further questions, I will now turn the call back over to Mr. Scudder for closing comments.
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Great. Thank you. Before I close it out, I want to take the opportunity to thank all of our colleagues for their many contributions to an endorsement on our performance. They really make it happen, as we go through and perform as a company, I also want to particularly welcome our newest colleagues from Bridgeview, who I know a number will be listening to the call and certainly thank them as well as others on our team who work so hard to make our systems conversions a success and seamless, most importantly, to our clients. So I appreciate all the hard work that goes into that.
With that, I also want to thank all of you listening for your interest in investment in First Midwest.
Have a great day, everybody.
Operator
[Operator Closing Remarks]
Duration: 40 minutes
Call participants:
Michael L. Scudder -- Chairman of the Board and Chief Executive Officer
Mark G. Sander -- President and Chief Operating Officer
Patrick S. Barrett -- Chief Financial Officer, Executive Vice President
Bradley Jason Milsaps -- Sandler O'Neill -- Analyst
Michael Young -- SunTrust. -- Analyst
Chris McGratty -- KBW -- Analyst
Kevin Reevey -- DA Davidson & Co. -- Analyst
Terry McEvoy -- Stephens Inc -- Analyst
Nathan Race -- Piper Jaffray -- Analyst
