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First Midwest Bancorp Inc (NASDAQ:FMBI)
Q3 2020 Earnings Call
Oct 21, 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 Third Quarter Earnings Conference Call. Following the close of the market yesterday, First Midwest released its earnings results for the third quarter 2020 and also 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 to 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. [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 to 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 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 are way down the quarter's production.

Net income for the quarter -- 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 $0.12 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 wants to pick it up.

Mark G. Sander -- President and Chief Operating Officer

Thanks, Mike, and good morning, everyone. Starting on Slide 3 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 gone 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 4, 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 leverage 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 5, we provide detailed information by industry on our loan deferral programs. As we guided to last call, 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%. 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 6 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 7, 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 elevated risk segments we highlighted earlier.

Turning to Slide 8. 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 and 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.

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

Thanks, Mark, and good morning everyone on the call or listening in. Turning to deposits on Slide 9, 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. This decrease is 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 $1 million compared to the prior quarter and down $1 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 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, lower yielding PPP loans as well as higher liquid earning asset balances from deposits, selecting 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 then, 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 and swap terminations, while future of 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 a valuation 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.

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. 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. Final note on this slide, it'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 in 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 $0.14 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.

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

Great. Thanks, Pat. Before we open it up, excuse me, the 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. Our total capital is 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 their 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 talked 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 is that some closing remarks. And let me ask the operator if we can open it up for questions now.

Questions and Answers:

Operator

Certainly. Thank you, sir. [Operator Instructions] And the first question will come from Terry McEvoy with Stephens, Inc. Please go ahead and state your questions.

Terry McEvoy -- Stephens, Inc. -- Analyst

Thanks. Good morning, everyone.

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

Hi, Terry.

Mark G. Sander -- President and Chief Operating Officer

Good morning, Terry.

Terry McEvoy -- Stephens, Inc. -- Analyst

Mark, in your prepared remarks, you talked about line utilization. I'm just wondering -- are they -- is it -- are we below pre-COVID in terms of utilization? And then, you had -- I don't know if that's a positive comments on the pipeline but you said you're starting to see some pipeline building, anything stand out? What's behind that comment?

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

Sure. So, the first part of question, yes, our line utilization is a little bit below where it was pre-pandemic. Again, that reflect, I think, the cautiousness, but also the liquidity that's out there. The pipe -- 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, we just -- as we spent so much over the last six months on portfolio reviews and credit focused and tightening parameters a little bit that evolves as we're, everything's relative right, Terry. We're feeling better about credit than we did six months ago and 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.

Terry McEvoy -- Stephens, Inc. -- Analyst

Thank you. And then, a follow-up question for Pat. The $8.5 million, the 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?

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

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 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. So that -- 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 getting 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. That makes sense?

Terry McEvoy -- Stephens, Inc. -- Analyst

It does. Yeah, understood. Thank you, both.

Operator

And our next question will come from Nathan Race with Piper Jaffray. Please go ahead and state your question.

Nathan Race -- Piper Jaffray -- Analyst

Yeah. Hi, guys. Good morning.

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

Good morning.

Mark G. Sander -- President and Chief Operating Officer

Good morning, Nate.

Nathan Race -- Piper Jaffray -- Analyst

Yeah. I was just hoping to start on the overall size of the balance sheet looking to 4Q. Obviously you've got the plots thrown off and some wholesale funding pay downs 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.

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

Yeah. So, I think the main change in the securities book that we would envision at this point, and that's not withstanding 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 just -- 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.

Nathan Race -- Piper Jaffray -- Analyst

Got it. That's helpful. Just changing gears on capital. Most ratios continue to increase in the quarter and sounds like you guys are pretty comfortable from a credit perspective, despite the increase in criticized loans. It seems like the reserve is sufficient, so 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 the comfort level seems to be a little higher than it was earlier in the year?

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

Well, I can take -- Pat and I [Indecipherable]. 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.

Nathan Race -- Piper Jaffray -- Analyst

Okay. I appreciate the color. Thanks, guys.

Operator

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

Chris McGratty -- KBW -- Analyst

Hey, good morning.

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

Good morning, Chris.

Chris McGratty -- KBW -- Analyst

Pat, I am just trying 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 million. Is that the right way to think about full year expenses?

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

For next year?

Chris McGratty -- KBW -- Analyst

Yeah.

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

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.

Chris McGratty -- KBW -- Analyst

No problem, worth a shot.

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

Yeah.

Chris McGratty -- KBW -- Analyst

Maybe a question on credit. So if I'm looking at the provision, it was down about 50% sequentially. You held the reserve dollars similar. But the increase in the adverse rate of loans that you talked about, can you just walk me through kind of that dynamic, were those loans proactively put on downgrade because you saw something out of COVID or is it you're seeing a little bit more weakness in the structure of these loans since last month? I'm just trying to get -- just trying to square that concept up. Thanks.

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

Go ahead, Mark.

Mark G. Sander -- President and Chief Operating Officer

Yeah. So I mean, obviously, Chris, as you know, we have a regular rhythm of portfolio management practices. And then, in these times, 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 gaining in advance of it, right. 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 can be more proactive in a segment like that than some others where things are holding up and you want to see the financial statements come through before you downgrade. I guess, I would 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 anyway 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, 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 -- we'd 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 time and 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 the quarter and the outlook for a little bit further, we just didn't think releasing reserves was appropriate at this time.

Chris McGratty -- KBW -- Analyst

Yeah, it's good color. 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 tax structure today that would make the math from the '16 election not to the same proportional increase?

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

Short answer is no.

Chris McGratty -- KBW -- Analyst

Okay.

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

So, 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 offshore real estate, some [Indecipherable] 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.

Chris McGratty -- KBW -- Analyst

That's great. Thank you.

Operator

[Operator Instructions] The next question will come from Michael Young with Truist Securities. Please go ahead.

Michael Young -- Truist Securities -- Analyst

Thanks for the question. Quick follow-up first on just the reserve. Given the kind of increase in special mention in sub-standard, I guess I was a little surprised that the ACL actually went down from $151 million to $147 million. Did that just imply that you guys are downgrading stuff proactively but you don't necessarily see loss content there or is there another message that should be taken from that?

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

Mark, you want to take that?

Mark G. Sander -- President and Chief Operating Officer

Well, when you say the allowance came down, we held our allowance at $250 million. So when you say that, Michael.

Michael Young -- Truist Securities -- Analyst

Yeah. So, the -- I guess, the pandemic portion, which I take to mean kind of the environmental factors went up, but the actual 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 there was kind of a downgrade and expectations on realization or collateral levels on this credit?

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

Yeah. 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 on 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 and answering.

Michael Young -- Truist Securities -- Analyst

Okay, thanks. And 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 use to move those off of deferrals that 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?

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

Go ahead.

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

A couple of ways. The number one, I would say, additional cash to the table that happened in a number of cases across virtually every industry, I would say. Sometimes cash to the table is personal equally, sometimes it is asset sales, sometimes it's leveraging assets either with us or somebody else to put debt on unencumbered 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 that the frills came down.

Michael Young -- Truist Securities -- Analyst

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 2021? Is that before that? Later? I'm just kind of trying to gauge the timing.

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

Yeah. We are just out of 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 or the middle part of the year, it's really harder to gauge, but we certainly don't see it sooner than that.

Michael Young -- Truist Securities -- Analyst

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 your assumptions for resolution and timing on PPP?

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

So we've just -- Mark, are you OK with me taking this?

Mark G. Sander -- President and Chief Operating Officer

Sure.

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

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 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.

Michael Young -- Truist Securities -- Analyst

Okay. Thanks.

Operator

[Operator Instructions] If there are no further questions, I would like to 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. 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.

Operator

[Operator Closing Remarks]

Duration: 41 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

Terry McEvoy -- Stephens, Inc. -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Chris McGratty -- KBW -- Analyst

Michael Young -- Truist Securities -- Analyst

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