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First Midwest Bancorp Inc (NASDAQ:FMBI)
Q2 2020 Earnings Call
Jul 22, 2020, 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 2020 Second Quarter Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the second quarter 2020 and also issued presentation material 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 to the forward-looking statement, non-GAAP and other legends included in this earnings release and presentation materials, which should be considered for the call today. [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.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Great. Thank you. Good morning, everyone. Thanks for joining us today. It's great to be with you. I hope this finds everyone and your families doing well and staying healthy. Obviously, a lot going on, equally obvious is performance for the quarter certainly reflects the enormity of the times and the magnitude of underlying governmental response. But at the same time, it also reflects the actions we took and that were prudently initiated to simply go through and fortify the balance sheet as well as successfully conclude the conversion for Park Bank, which occurred this quarter as well.

So before I turn it to Mark and Pat for some more detailed coverage of financial performance, let me start with this broader recap and say at the core of the quarter, performance was once again in my judgment displayed the strength and character of our company and of our team. All of which I thought was really on display over the entire course of the quarter. This has been an amazing and unforeseen time. And frankly I'm very, very proud of how our team and our industry has pulled together to help our clients and our communities and each other during these times.

From a performance perspective, I would highlight the following for the second quarter. We generated EPS of $0.16, that's down slightly relative to the $0.18 we saw for the last quarter. Not too dissimilar for the last quarter. The major drive of the change between quarters was the fact that we elected to build loan reserves by $0.17 per share, about $25 million for the second quarter and then increased our reserves to 1.8% away from the impact of PPP loans. In the aggregate that level of build was slightly below the $0.19 share -- $0.19 per share impact from last quarter. Obviously, we're dealing within the aggregate a more severe economic scenario though credit performance and Mark will expand on this has actually been relatively solid and stable in the environment.

Also this quarter, we concluded our acquisition of Park Bank to our systems on boarding conversion. We recorded $0.03 per share or $5 million of integration-related expenses as we finished up the system conversions and concluded the onboarding. This was contrasted to $0.04 last quarter. The team here, has just been absolutely outstanding, client retention has been great and well beyond our expectation and in any other time, utilization of virtual training to the levels that we did to facilitate the conversions would be a success story in and of itself. We also had $0.02 of singular net impact or negative impact specific to pandemic-related costs, fee accommodations and colleague incentives, following the crisis. All of which was as subsequently lapsed with our return to work in the third quarter.

Finally, we opportunistically added $231 million of preferred stock, which took our Tier 1 capital to 11.2%. The impact of that was about a $0.01 per share in dividends that we accrued for the quarter and then obviously the full run rate for that will be in the second quarter. And then I guess additionally we saw the full impact of funding $1.2 billion in PPP loans during the quarter that yielded about 2.4% or 2.45% and was provided to some 6,500 clients. The majority of that lending, as well as the proceeds stayed on balance sheet, which had the impact of 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 was the pandemic and the impact on revenues resulting from the dual realities of the drop in interest rates and the rapid fall off 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-indexed deposits, which we talked about last quarter. Legacy loans away from PPP were relatively stable. Corporate lending is seeing the impact of lower seasonal draws in production.

As I said earlier, credit performance was actually pretty stable to improve in the second quarter and then obviously follows the first quarter, as adoption of CECL. NPAs and delinquencies came in slightly improved from where we were at the end of last quarter. Net charge-offs decreased slightly to 36 basis points of loans, but 9 basis points of that related to charge-offs in PCD loans, which in my simple mind represents previously identified problem assets, we simply bought at a discounted price.

Non-interest 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 unfolds. And then non-interest expense increased to $115 million away from acquisition and integration expenses. And that's largely due to the full impact of Park as well as some of the higher costs, I alluded to relative to occupancy and incentives, given the requirements of the pandemic response.

So with that, let me turn it over to Mark and Pat for additional color and they can walk through the remainder of the presentation materials. Mark?

Mark G. Sander -- President and Chief Operating Officer

Thanks, Mike and good morning, everyone. Now looking at loans on Slide 4 of our presentation, a 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 6,500 small and mid-size business clients. Approximately 75% of these 6,500 clients received a loan of less than $150,000. To us, indicating the program worked 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. And 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 closed down.

Consumer loans on the other hand, were 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, though 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 the evolving landscape, but we just think it's too early to offer much in the way of loan growth guidance at this point.

Turning to Slide 5. We break down our corporate portfolio to give a sense of both its diversity, as well as the view of higher pandemic related risk segments. Early on the pandemic significantly impacted the sectors that we detailed in the list on the right, but these represent just 5% of our total -- 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. They're all inherently higher risk away from the current challenges and we believe the mitigants that we list here should help our ultimate exposure.

For greater transparency in the pie chart to the left, we expanded this and 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 exposures also helps temper overall risk. Again, I would note the purposefully broad diversification of our corporate portfolio. So while we certainly expect to see increased stress in some of these areas, we feel confident that the risks are well-identified and are being properly mitigated.

Turning to consumer credit on Slide 6. 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 7 was in line with expectations. Given the collective response to 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 PCD and PPP loans improved slightly and NPAs 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 COVID-19. Replenishing reserves for non-PCD charge offs brought the total provision to $33 million in Q2 and our allowance up to 1.66% of total loans, including PPP at quarter's end. Taking PPP loans out of that equation given the risk profile, raises the allowance to a very robust level of 1.8%.

I also note for this and the next slide that we anticipate the normal work out of acquired PCD loans in line with our purchase price will impact our reported charge-off and NPA metrics over the remainder of the year, but not our provision requirements. Said another way, we intend to move acquired PCD loans at a price levels that our existing allocated reserves should absorb.

Slide 8 displays the stable performance in Q2 of our NPAs and adversely rated loans. Not shown here, but also consistently stable, our 30 to 89-day past dues returned to normalized levels after some one-time events that skewed them higher at March 31. All these metrics are relatively unchanged from a 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 9. Deposits were also skewed because of 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 CARES 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 and guided to last call. We cut the average cost on our $15 billion deposit base in half from a quarter ago to 26 basis points.

Pat will now pick up that discussion of liquidity, a little more broadly. Pat?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Thanks, Mark and good morning from me to everyone on the call. Turning to Slide 10 and just following on with Mark's trailing remark on deposits. Our $15 billion granular and stable long-term deposit base is our primary source of liquidity. Additionally, we have over $7 billion in additional funding sources providing ample capacity to support clients, colleagues and communities. Note that part of that funding basket is highlighted as capacity for increased borrowings through brokered CDs. This capacity is merely against our internal policy limits for those types of borrowings. Excluding brokered CDs, our 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 or 3% compared to the same period in 2019. The decrease compared to both prior periods reflected the impact of lower rates offset by the full quarter impact of the Park acquisition, $5 million in 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 Bridgeview acquisition in the second quarter of 2019 was offset by the impact of lower rates. Acquired loan accretion contributed nearly $7 million to the quarter, consistent with the prior quarter and down $3 million compared to the prior year. 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 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 2.98% for the quarter, down 39 basis points linked quarter and 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, origination of lower yielding PPP loans as well as higher liquid earning asset balances from deposits reflecting PPP loan fundings and stimulus actions. These were partly offset by 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 actions we took to reduce rate sensitivity. Our outlook for both NII and NIM, 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 PPP loan forgiveness increases. The 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. Note, this is after adjusting for the impact of CECL, which results in approximately $3 million of accretion being reflected as a reduction in loan loss provision.

Turning to non-interest income on Slide 12. Non-interest income fell broadly as we expected as swap activity, excuse me, part income and NSF fees were severely impacted by the decline in economic activity and customer volumes. Our 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 and solid results in wealth management and treasury management helped stabilize total fee income. We do not see second quarter as a 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 year.

Moving onto expenses on Slide 13. Note that the current quarter includes $5 million of anticipated acquisition and integration-related expenses, largely driven by costs 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 a valuation adjustment on a single foreclosed asset, partly offset by lower workout remediation costs and employee benefits. In addition, higher professional services related to continuing invest -- 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 ticked up due to revenue declines, overall annualized expenses as a percentage of average assets away from PPP loans was 2.32%, down 5% from the prior quarter and down 7% from the prior year. Our outlook for the third quarter is that expense run rates, excluding acquisition and integration costs will likely tick down modestly from the second quarter due to lower pandemic related costs, hopefully returning to levels similar to Q1. Last note on taxes, before I leave this 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 of preferred stock added about 140 basis points to both total and Tier 1 capital. In addition to solid credit reserves and ongoing capital generation through earnings, our capital levels are strong and in excess of well-capitalized levels providing robust loss absorption capacity if needed. During the quarter, we paid a dividend to shareholders of $0.14 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 for this quarter is very limited as future results are dependent on the persistence and impact of the pandemic customer behaviors and the impact of government stimulus actions. We've also included for convenience a summary of our financial results for the quarter on Slide 16.

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

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Thanks, Pat. Here before we open it up for questions, just a few further remarks. As Pat alluded to in the summary on the outlook. It's still pretty murky out there. As a practical matter, there is 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 and equally unclear as to how effective government stimulus is going to be and what form it will take as the [Indecipherable] plays out. So obviously those answers are going to shape demand and asset quality. As we move through the third quarter, we expect to get a better read -- continuing to get a better read is on what a return to more normal can look like as well as what the reserve impact as economic and credit outlooks firm.

At the same time, and Mark and I were talking about just in advance of the call, this is a world where you're dealing with obviously the uncertainty of the environment and the nature, but the blocking and tackling of what we do and what we're about is still critical to the long-term success of the company. And we think we're extremely well positioned to continue to execute on that. We've taken the 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 and engaged team of colleagues out there, who are working in these markets and generating business.

So obviously, the environment to a degree, cost to pause on our part and our ongoing focus is going to remain on the safety of our clients and our colleagues. At the same time, we also have our focus on continuing our business priorities and Mark alluded to this as he talked about our overall financial performance. That's the talent of our teams, our diversification of our risk and our portfolios 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 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 in our control. So 2020s 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 questions.

Questions and Answers:

Operator

Thank you, sir. A question-and-answer session will begin at this time. [Operator Instructions] And the first question comes from Michael Young with SunTrust. Please state your question.

Michael Young -- SunTrust -- Analyst

Hey. Good morning, everyone. Wanted to start off with Mark your comments about the adversely created credits potentially moving higher over the medium term. Could you maybe just give a little more detail there on maybe what categories you expect to drive that? And is that due to PDRs and loan modifications or something else that we should be thinking of?

Mark G. Sander -- President and Chief Operating Officer

I think it's a little bit of everything, Michael. It's certainly, we started with the highest risk -- highest risk segments and what we view as the most more moderate segments. We did a second level of a portfolio review deeper -- an even deeper dive over the course of the quarter. And so it's a combination of all that and our view of an uncertain, but certainly a slow recovery. We're not looking for a quick bounce back. So against that backdrop, there are certain segments that again we've highlighted on Page 5 of those risks elements. There is, we 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 trying to project out-of-view of risk migration without financial statements that would at this point indicate a risk migration. So I don't know if that answers your question, if there is a segment or two, you'd like to talk about in specific, I'd be happy to.

Michael Young -- SunTrust -- Analyst

Yeah. I think, just it would be helpful to get an idea of sort of what modifications you're making in some of these areas and how you're kind of managing the risk. I know it's going to be diverse across borrower and category, but just a little more detail would be helpful to understand what we should expect?

Mark G. Sander -- President and Chief Operating Officer

We certainly try to layer in the impact of all the client 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 and less than 5% by each segment within consumer. Commercial deferrals were $1.7 billion in round one, so about 16.5% of our commercial books. Round two has just begun over the last few weeks, so it's too early to have a firm conclusion, but we certainly have a strong view given the fact that we've been talking to our clients regularly over the quarter. We think consumer is likely to come in a little lower in round two.

Some people ask for it in round one that maybe didn't need it. And while you'll have a few new [Indecipherable], we think we will be under 5% there as well in round two. Since commercial, we expected to fall dramatically in round two. As we've talked to clients and as we think those will be less than half and round two, than we had around one as people open up. There is greater clarity and frankly clients have other priorities than the loan deferrals, as they're looking for other things.

Relative to the PPP, PPP certainly as you look at that Slide 5, the list on the right franchises for instance used PPP very strongly 80% or so. Some of those other industries used it more than 40% because their decisions around personnel were different than the other. So active users of all these client accommodation programs again we, as we factor that into all the segments in the pie chart as well. Again, that's kind of as we think about who's used what and what the outlook is for them in an uncertain time. It's hard to put numbers around that migration and yet, it's clear that there is some coming.

Michael Young -- SunTrust -- Analyst

Understood. And maybe for Pat, 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 what your expectations are given that we may see some increases in adversely graded credits etc. Do you feel like we've kind of captured all of that already in the credit reserve or do you think that there is going to be additional build necessary going forward.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Michael, that's probably the $64,000 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 is probably covers about two-thirds of our total commercial loan book. 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 took our models, our CECL models and excluded the third and fourth quarter economic outlook and just resumed in the first quarter, I think when deferrals and PPP loan impacts will subside that would suggest that we don't need any further reserve build. If you keep those quarters in depending on what you assume on the recovery it would suggest continued further reserve build. Our reserve build this quarter was essentially kind of a split the difference between those two outlooks 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 that typically would reflect some sort of deterioration. So we're being cautious across the board.

Michael Young -- SunTrust -- Analyst

Okay. Thanks. I'll step back.

Operator

Our next question will come from Terry McEvoy with Stephens. Please state your question.

Terry McEvoy -- Stephens -- Analyst

Good morning, everyone. Question for Pat. When you were running through the slide, your comments on expenses will hopefully come down in the third and fourth quarter to first quarter levels. And then, on the official outlook slide, it says expected to come down. So is there still a possibility that kind of COVID-related costs kind of keep the operating expense line above the first quarter level this year. Is that what you were getting at?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

No, I probably should have used the same word in both places I was trying to suggest the level of precision around our outlook is less reliable than it otherwise would be because of uncertainty around pandemic related costs and expenses and how rapidly those will subside or reoccur or persist, but for our best estimates, we would expect that the third and fourth quarter are going to resume back to near, if not at Q1 levels, which I think at the end of last quarter, our guidance was annualized this quarter as a proxy for the year and that's still our best estimate.

Terry McEvoy -- Stephens -- Analyst

Okay. And then just moving up to non-interest income, you told that normalized growth levels and then on the slide here, it's modest improvement in the third and fourth quarter and I get it, there is a lot of moving parts, but as you think about some of the major fee areas where do you expect to see that improvement 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.

Mark G. Sander -- President and Chief Operating Officer

Sure. Pat, do you want me take that? So it's...

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yeah.

Mark G. Sander -- President and Chief Operating Officer

Terry, thanks. So, to that last line, certainly, we would expect all of those activity based and I'll put capital markets, which is for again for us is largely swaps in that category as well. CRE production 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 think it has almost nowhere to go, but up from here, in terms of what we expect in production. I don't think you'll see us get back to the 6.2% and the 4.7% we did in the prior two quarters. The two record quarters we had 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 around liquidity and lack of activity and frankly our relief programs. So we expect all of those factors, liquidity will come down eventually, presumably, but more importantly activity is returning in some of those areas and our relief programs are largely ending in those areas. So we should see incremental build from here. We still think on a long-term basis, like Mike alluded to that we have solid treasury management and wealth management businesses that can grow in a normalized environment and we'll continue to grow in this environment, and those other ones we think we will recover off of the low in Q2.

Terry McEvoy -- Stephens -- Analyst

Great. Thank you both for the insight. Appreciate it.

Operator

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race -- Piper Sandler -- Analyst

Yes. Thanks. Hi, guys. Good morning.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Good morning.

Nathan Race -- Piper Sandler -- Analyst

Just going back to the reserve discussion was hoping, Pat, perhaps maybe you can kind of just parse out some of the factors that contributed 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 CECL model versus maybe just downgrades that you guys alluded to earlier in the portfolio?

Mark G. Sander -- President and Chief Operating Officer

You want me to take that one, Mike?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Yeah. Please go ahead.

Mark G. Sander -- President and Chief Operating Officer

Okay. Yeah. I would say that the incremental build was entirely to factor driven. The model inputs that we have on our specific credit and rating -- risk rating migrations was very stable. So it really, as I probably didn't word well answering the last question on this 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. We were -- our models were telling us anywhere from $0 to $50 million of incremental reserve build. And so we judgmentally with the midpoint on those that just reflects our uncertainty around exactly what the environment, economic environment is going to bring to us as we progress through the year.

Nathan Race -- Piper Sandler -- Analyst

Okay. Got it. And then just staying on credit for a second. Mark, I think you alluded to 17% of commercial book went through the first half deferrals. And I believe you alluded to, you're going through the second round right now, so I guess, any sense for -- of that 17% of commercial loans, what amount may need additional support past that 90-day period that you guys granted [Indecipherable]?

Mark G. Sander -- President and Chief Operating Officer

Sure, Nate. Yeah. It was, as you say, 17% in round one. I think it will be less than half of that in round two. Could be significantly less than half of it, but that's, as we've talked to our clients. I think it will be in that 25% to 40%-ish of who ask for it in round one, ask for it [Phonetic] in round two. As I said in my remarks, all right, some people have opened back people have adjusted, there is some greater clarity and folks have other priorities than a loan deferral that still needs to be paid some along the way. So as we talked to them about all the things they want to do -- franchises are the best example. They needed a loan deferral to get them over, who knows what's happening in the period and then they've adapted. And so they were 80%, 85% loan referrals in around one, I think there'll be 20%, 25% in round two reflecting how they've adapted to the environment.

Nathan Race -- Piper Sandler -- Analyst

Got it. I appreciate that clarification. And then just lastly on the core margin going forward. Obviously, a very strong exit liquidity growth in the quarter with impressive deposit growth. Any sense for how much of that deposit growth is kind of transitory i.e. tied to the Payment Protection Program versus maybe just clients' kind of onboarding cash at this point in terms of how we should think about deposit balances through the third quarter of this year?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Go ahead, Mark.

Mark G. Sander -- President and Chief Operating Officer

Nate, you cut out a little bit there, so I want to make sure I get your question right, if I didn't please clarify. But in terms of the deposits, 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 will be utilized and spent over these next couple quarters as that period of time that they can do so has been extended, so we think those will come down. The consumer side is a little different. Consumers are largely flushed with cash as well. What's going to happen 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 less clear that we will at this point.

Did that answer your question?

Nathan Race -- Piper Sandler -- Analyst

Yeah. That's helpful. I appreciate all the color. Thank you, guys.

Mark G. Sander -- President and Chief Operating Officer

Thank you.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Nate, while we're waiting for the next caller so your question just also recognize that cash and funding levels typically evolve over the second and third quarters for us, as we start to enter tax seasons. The seasonality, municipal flows, all of which have been impacted to a degree. And fundamentally, consumers are carrying a little extra cash, are recognizing some of the due dates for tax payments have been delayed. So there's a lot of factors that are moving around.

Operator

Thank you. [Operator Instructions] The next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo -- Raymond James -- Analyst

Good morning, everybody. So, just to follow-up there real quickly and then I'll move on. But did you guys give an impact from a NIM perspective from excess liquidity in the quarter?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Pat, why don't you take that?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Sure. We say excess liquidity I'll break that down a couple of ways the related PPP excess liquidity that Mark was just speaking to was likely call it 4 basis points to 5 basis points of compression. And the -- on the municipal side, we had a couple of years where we nicely didn't have to talk about municipal liquidity affecting them, because we could actually deploy that excess cash at 2%, 2.5% at the Fed. Now it's zero. So we're coming back to a period where we'll 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 rate driven, even with the really strong decline in funding costs, just the overall drop in earning asset yields was the biggest driver of that. And then we also had the impact of Park coming in which changed the mix, but it was not particularly meaningful. Although, the dollar amount is contributed were certainly noteworthy.

Daniel Tamayo -- Raymond James -- Analyst

All right, terrific. And then maybe getting ahead of myself here. So, you obviously did the preferred issuances in the second quarter, strengthening capital levels there. How are you thinking about potential acquisitions as you -- as we perhaps get -- start to get through this or when we get through this? And what has to happen for you to have start to have meaningful conversations with potential targets again?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Well, I can certainly take this one, Dan. As you go through this, 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 or different consolidations that once move through. They tend to stabilize as stock markets stabilize, because that gives a level of consistency around outlook and expectation. So, I think certainly as we progress through the year as one gets a level of confidence and 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 '08 crisis, as you would have 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, the drive 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 a while for those things to unfold. But I think responsive to your specific question is when do you see that, as soon as the read on the environment gives greater confidence and the bid as spreads that are out there then I think those conversations will likely pick back up.

Daniel Tamayo -- Raymond James -- Analyst

Thanks for the color.

Operator

And the next question will come from Chris McGratty with KBW. Please go ahead.

Chris McGratty -- KBW -- Analyst

Hey. Good morning. Mike or Pat or Mark, and I jumped on late, so apologies. Some of your peers have talked about loan growth expectations excluding the PPP, as more hey, we want to we want to work with our customers versus prospects for new. Obviously, the utilization has been a dynamic in the second quarter for the banks. How do we think about near to medium-term loan growth for the company?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Go ahead, Mark.

Mark G. Sander -- President and Chief Operating Officer

I'd say, consumers are little easier to predict because we know we have a certain limited product set and we have good visibility there. And if mortgage rates stay at this level, while lots of people have refinanced, there's still a good level of activity there. So we think we'll see some consumer growth in the next couple quarters. Commercial is a little murkier. We certainly are doing everything you just said, Chris relative to prioritizing clients and talking to clients often. But still getting back to prospecting a little bit where you can. I don't think you ever completely end there. And as we helped a few people, a couple hundred plus prospects in the PPP, 97% of our PPP loans went to clients, we did those first. Once we satisfied all of them, we open into prospects and have some.

So we're looking to build those relationships always need to, but it's all about clients. And the client picture is a little mixed. There are certain sectors of the economy that the construction trades are humming along nicely, frankly. There are other sectors that are almost completely shut down, as you know, the hotel business. And so we don't have much in hotels. My point is it runs at range. So it's hard to predict to put number on it. We're looking to -- I don't know, I think you'll see the decline that you saw in Q2 going forward because there's a large amount of line utilization drop in Q2 that I don't see repeating itself going forward. So, I think it will be a better picture than Q2. But again, pretty murky to see much slow growth in Q3, so to speak.

Chris McGratty -- KBW -- Analyst

That's a great color. Thanks, Mark. Just on bringing it back to NII because a margin I think is a challenge given the balance sheet ballooning of the industry. If we exclude the PPP fees and the accretion income, how do we think about just the core NII 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?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Go ahead, Pat.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

I do think Q3 is going to still remain very noisy and impacted by kind of non-recurring actions and activities. But I would expect that we're hitting close to kind of a normalized zero rate environment level, with what we're reporting this quarter. I don't know if we'll recover back to sort of the high 2.90%, to 3%, 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 that's given what we're seeing, earning asset yields, spreads, the outlook for how much of that will continue to come down and reprice both as our fixed book role, but also with competition. We don't think yields are going to compress dramatically more than 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 costs too much closer to zero. They're quite low right now. We've turned out a ton of our borrowing costs, so we feel really good about that. So a lot of the yield volatility would probably come from just earning asset, volume and volatility, which as Mark said, we don't see in the near-term that's going to 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 is a bad proxy for longer-term core.

Chris McGratty -- KBW -- Analyst

Great. One more if I could, you guys were fairly aggressive a couple of years ago with the delivering excellence program with reducing costs. How do we think about maybe any stones yet to be uncovered from efficiencies? Maybe what you've learned in the last 90 days to potentially go back and see if there's more costs to bring out of business?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Well, I can take that one, Chris. As a practical matter, we're operating in a world where you've seen an accelerated change in consumer, and I'm talking about business and individual consumer behavior. So it's hard to translate that into what the longer-term outlook looks like. We have been on a path for a while. We even talked about it in the first quarter of taking our investments in technology and doing more to leverage how that works and that plays out.

So, 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 give you any more incremental direction, like delivering excellence initiative, because it's right now, the environment is still a little too murky to 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.

Chris McGratty -- KBW -- Analyst

Thanks, Mike.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

That's, vague, [Indecipherable] Chris.

Chris McGratty -- KBW -- Analyst

Perfect. Thanks.

Operator

[Operator Instructions] If there are no further questions, I will now turn the call back over to Mr. Scudder for any closing comments.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

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've shared before, I know a number of them listen to our call and I just want to take the opportunity to thank them for their response during their time, these times. Their commitment to living, what we do and what we are all about is what really sets First Midwest apart. And that makes First Midwest 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 every day for our clients, and our communities and for each other. So, with that, I would close it by saying thank you all for your interest in and attention to our story. As we share our ongoing belief that First Midwest is a great investment. And I wish you all a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 50 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 -- Executive Vice President, Chief Financial Officer

Michael Young -- SunTrust -- Analyst

Terry McEvoy -- Stephens -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Chris McGratty -- KBW -- Analyst

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