First Midwest Bancorp, Inc.
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2017 Third Quarter Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Nick Chulos, Executive Vice President, General Counsel and Corporate Secretary of First Midwest Bancorp. Sir, you may begin.

[Nick Chulos:]

Good morning, everyone and welcome. Thank you for joining us today. Following the close of the market yesterday, we released our earnings results for the third quarter of 2017. If you have not received a copy of this press release, it's available on our website or you may obtain it by calling us at area code [phone]. During the course of discussion today, our comments may include forward-looking statements. These statements are not historical facts and are based upon our current beliefs. Our comments also are subject to certain assumptions, risks and uncertainties and are not guarantees of future performance or outcomes. The risks, uncertainties and Safe Harbor information contained in our most recent 10-K and our other SEC filings should be considered for our call today. Lastly, I'd like to mention it that we will not be updating any forward-looking statements following this call. Here this morning to discuss our third quarter results and outlook are Mike Scudder, President and Chief Executive Officer for First Midwest; Mark Sander, our Senior Executive Vice President and Chief Operating Officer; and Pat Barrett, our Executive Vice President and Chief Financial Officer. With that, I will now turn the floor over to Mike Scudder.

[Michael Scudder:]

Great. Thank you, Nick. Good morning everyone. Let me add my thanks for joining us here today. Performance for the quarter was both solid, but also reflected a high level of activity. At our core, we had a steady, solid underlying business performance. Our earnings per share was $0.37, that's up 9% from last quarter's 6% from a year ago, and overall, returns continue to be strong. Comparisons between the various periods are influenced largely by the impact of growth, regulatory changes, credit costs, secrets activities as well as change in the tax legislation. So that certainly makes it an active quarter and with that in mind, my intent here would be to walk you through the highlights and then leave Mark and Pat to better explain the nuances as you look at the financials. First, this was the initial quarter for the loss of interchange revenue. They came in at about $3 million or roughly $0.02 per share, reflected in the quarter. That was all stemming from the Durban threshold of $10 billion in assets. We won't get into the pros and cons around thresholds, but we will simply leave it as its right in line with where we guided. Our third quarter loan growth came in at over 6% annualized, again, right on line with expectation, but the timing of that growth was a little bit later in the quarter as we saw it flow through volume lines. Net interest income increased to 2%, and allowing for the various and sudden impacts of accretion and everything else, our core net interest margin expanded two basis points to 3.62%. Our fee-based revenues were consistent with the prior quarter, negatively impacted by the loss of interchange revenues that I referenced before. Now, away from Durbin, these same revenues were further distorted by effectively in earnings neutral shift in our merchant card income and expense stream, which I'll lead to Mark to talk further about where we saw a simultaneous drop in both revenue and expense that was offsetting. Taking these distortions out of our fee-based businesses were actually up solidly over last quarter. Asset remediation activity was also heavier versus second quarter. As a result, you saw our non-performing assets drop by about 20% but that also pushed comparatively greater charge-offs in the quarter. So, as a result, linked quarter provision expense was up a little less than $2 million. Half of this was offset by comparatively lower other real estate costs that are reflected in our expense numbers. As a practical matter, credit remediation activity is always what I refer to as non-linear, but our overall trends here continue to look solid as we look forward. Overall expenses were down 3% linked quarter and our efficiency remains -- ratio remains consistent at 59%. The quarter further benefited from security gains activity that added about $0.02 per share as we modestly but opportunistically repositioned our portfolio and took advantage of market conditions to while holding our reinvestment yields and income returns. So, extremely great outcome for us as we manage that through the quarter. We also saw a $0.02 net benefit to earning to due to changes in Illinois corporate tax levels, which had an impact on our deferred tax assets. So, with that kind of as a highlights, let me turn it over to Mark for some additional business color.

[Mark Sander:]

Great. Thanks Mike and I'll start with loans where growth came in as suspected, as Mike mentioned, at 6% annualized in the quarter. We saw modest increases across our range of commercial and consumer platforms this quarter, specifically, our specialty businesses accounted for most of our commercial growth as our healthcare, structured finance, and franchise lending teams, in particular, each had a very good Q3. We had decent investor commercial real estate volume as well although pay off activity here remains robust, so growth was muted. In our retail businesses, we saw solid gains across several channels, including online as well as mortgage flow through and outside of our branch network. In terms of outlook, we would expect modest market level to loan growth across most of our businesses and outsized growth in some of our niches. Payoff activity from some positive outcomes, remain high in the few areas though. Thus, Q4 growth should still be in the range that we guided to, albeit perhaps at a slightly lower level than Q3, which will leave our full year performance away from acquisitions at the mid-single-digit level that we guided to. Moving to fee income. This was also in line with guidance. We absorbed $4 million in anticipated revenue declines in Q3, specifically the $3 million from Durban and essentially profit neutral shift in our merchant card product, where we saw simultaneous $1 million drop in both revenue and expense. Taking away these two distortions, our fee-based businesses were up about $1 million or 3% in -- versus the linked quarter. Year-over-year, service charge income was up 17% this quarter as a result of our acquisition activity. As organically, gains in treasury management were offset by declines in NSF. Both management had another solid quarter sales results and fees were up 20% versus a year ago. The small linked quarter decline here is a result of a couple unusually higher items in Q2, and as such our momentum and outlook remains very positive for our wealth businesses. Other fee income streams were also consistent with expectations. Card, as we said was skewed in the quarter, but we expect to grow from this new base level well going forward. Mortgage continues to be relatively modest part of our overall picture and capital markets is generating a steady flow of opportunities in what I would characterize as a very irregular fee income stream. We previously suggested that second half fee income results will be very similar to what we posted in the first half and away from the decline in merchant fees and expenses, of course, that outlook is unchanged. Shifting to credit, asset remediation activity was heavier versus the prior quarter, as Mike alluded to, causing our non-performing assets to drop by about 20% to $90 million. This pushed comparatively greater charge offs in Q3, in line with the guidance at 30 basis points. As a result, linked quarter provision was up a little less than $2 million, however, I'll point out that half of this was offset by comparatively lower OREO cost in the quarter. Reality is the credit remediation's always non-linear, but our overall trends remain solid. Operating in the low end of our normalized charge-off range and with a relatively consistent allowance level going forward. So, Pat will now add color in a few more areas.

[Patrick Barrett:]

Thanks Mark. Turning to net interest income and net interest margin. Net interest income was up $2.3 million or 2% compared to the prior quarter and $29 million or 32% compared with the same period in 2016, consistent of our overall expectations. Compared to the prior quarter, the third quarter benefited from the impact of higher rates and loan growth, partially offset by a decline in accretion. Compared to the same period in 2016, the increase was driven by higher loan balances and accretion, resulting from the Standard Bancshares acquisition, as well as the positive impact of both legacy loan growth and higher rates. Acquired loan accretion contributed $7.5 million to the quarter, down from nearly $9 million in the prior quarter and $4.5 million in the same period in 2016. At this point, we're projecting accretion to decline by approximately $2 million more in the fourth quarter. Having said that, however, I should remind you that accretion remains one of the more challenging areas to forecast. Moving to margin, tax equivalent net interest margin for the current quarter of 386 was in line with our expectations, down two basis points compared to the prior quarter and up 26 basis points from the same period in 2016. As Mike mentioned in his introductory comments, net interest margin excluding accretion expanded two basis points in the third quarter to 3.62%. Compared to the prior quarter, margin benefited from the positive impact of higher rates and loan growth. This impact was largely offset by the negative effects of decreases in both accretion and lower loan fees, combined with the impact of seasonal municipal deposit inflows. Compared to the same period in 2016, the increase in margin was principally driven by the positive impact of higher rates, but also benefited from higher acquired loan accretion. Turning to earning assets, average earning assets were up $177 million compared to the prior quarter due primarily to loan growth, and up $2.2 billion compared to the same period in 2016, reflecting the Standard acquisition loan growth and securities purchases. While not reflected in average balance changes during the third quarter, the ending balance of our securities, both declined by approximately 9% compared to the prior quarter. This decrease, as Mike mentioned, reflected modest repositioning of the portfolio to take advantage of favorable market conditions that resulted in pretax securities gains of approximately $3 million. This repositioning is not expected to meaningfully impact future earnings, portfolio yield or duration. Third quarter results were generally in line with our expectations for both net interest income and margin. Looking ahead, we expect to see relative stability in the fourth quarter for both reported net interest income and net interest margin as the benefits of earning asset growth and higher rates are expected to be largely offset by declining accretion. Excluding accretion, we expect to see continued steady growth in net interest income and modest margin expansion. As a caveat to our guidance, keep in mind that the timing of any future interest rate hikes and acquired loan accretion can create volatility on a quarter-to-quarter basis. Moving on to expenses, non-interest expense was in line with our expectations, declining 3% from the prior quarter and increasing 17% year-on-year, but our efficiency ratio remains consistent with the prior quarter at 59%. Aside from the decline in acquisition and integration expenses and the drop in margin expense, that Mark referenced, total expenses were down 1% compared to the prior quarter. This decrease reflected modest declines in professional services and net OREO expense, partly offset by increases in salaries due to slightly higher staffing levels. The addition of Standard's ongoing operating expenses was the primary driver of the increase compared to the same period in 2016 in addition to merit increases and investments in additional talent to support growth. Integration costs dropped to approximately $400,000, down from $1 million in the prior quarter and are expected to be largely completed. Accordingly, we expect expenses to remain relatively stable in the fourth quarter, in line with the run rates in the third quarter. And to wrap-up with taxes, our effective tax rate for the quarter was 32% impacted by the net benefit of changes in Illinois tax rates, which included a $2.8 million deferred tax asset benefit, partly offset by a $1 million increase in Illinois tax expense, which will be an ongoing expense. Excluding these items, our effective tax rate would have been 36% in line with our guidance for the second half of the year. Now, I'll turn it back over to Mike for final remarks.

[Michael Scudder:]

Thanks Pat. Before I open it up for questions, a couple of comments. As we look forward across the industry and certainly in our case, expectations for higher interest rates and continued or improvement in operating conditions are still there, but as we all know, those remain difficult to fully gauge. At the same time, as we close the quarter, our capital measures, importantly stood near or right on top on where we ended in 2016 or stated differently, we've returned to the levels of capital that existed prior to our acquisitions of both Standard and Premier Asset Management. Regardless of forward expectations, the strength of our balance sheet, our strong capital foundation and our strong core deposit foundation combined with a great team of colleagues, leaves us, in our minds, very well-positioned for continued growth and with continuing opportunities to drive improved operational efficiency and return. So, with that, let's open it up for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Young of SunTrust. Please go ahead.

[Michael Young:]

Hey good morning everyone.

[Michael Scudder:]

Good morning.

[Michael Young:]

Pat, wanted to maybe just to start with that securities, both of kind of restructuring that you did in the quarter. Maybe you could provide a little more color on what exact actions were taken? Did you kind of short duration or improve asset sensitivity as a result of some of the actions and how do you expect the impact of effect going forward?

[Patrick Barrett:]

Sure. So, we -- probably pretty late in the quarter, saw an opportunity as the curve flattened even further than it had been to go ahead and effectively realize some of the embedded gains that we had in the book, as we saw the opportunities that we reinvested virtually identical instruments, same durations, same yields, same life, same sort of mix, at the same levels. And so we just took advantage of that. So, we sold off about $200 million in securities, three quarters of it were mortgage-backed securities and CMOs, all agency-backed paper and a quarter of it was municipals. Importantly, we had three of our 11 CDO positions and a gain position, we went ahead and took advantage of that, although it wasn't -- there's probably only about 20% of the gain was related to those. But when we see that opportunity, we like to lock it in. We've reinvested -- repurchased already almost half of the amount that we sold at virtually identical yields and durations like we actually -- probably shortening our duration by 10th or so, down to about 3.3 and the yields are coming in at about 2.4, I guess. So, it was just one of those interesting opportunistic times to take advantage of interest rate expectations that in our minds, clearly, were unrealistically low.

[Michael Young:]

Okay, great. And then maybe just moving to asset quality and the two kind of larger charge-offs this quarter. Obviously, I understand that there are previously identified, but can you provide a little color around the relationships and maybe just kind of what led you to this point and kind of want the disposition strategy ended up being just a little more color there.

[Mark Sander:]

Sure. So, the -- one has been largely taken care of and the other is we think we've taken a full charge certainly for them, but one is still in processing I would say. But disposition strategy one was a multibank deal that really the company effectively liquidated. And so there's -- that one is by and large done. The other the liquidate -- the strategy was working with an existing client who still is with us, but restructuring their debt and a sole bank deal. So there, we have a little more control over the outcomes and we think concluded to a good position although it did bring a charge forward into the quarter.

[Patrick Barrett:]

Both of that credit flowing to TDRs as well and you will see those when you get to that 10-Q part of the year in a couple of weeks.

[Michael Young:]

Okay. And how much is -- the one that's remaining, how much was charged down and what's the size of the remaining balance?

[Mark Sander:]

Yes, it's high, six figures, I guess, seven figures?

[Patrick Barrett:]

Teens.

[Mark Sander:]

Yes, teens. Yes, thank you. I was thinking about the numbers but it was, right, around the $10 million range.

[Michael Young:]

Okay. And just maybe lastly touch on that. Just what is there commonality between the 2, they may kind of sound different, but were they in some of industries or anything like that?

[Mark Sander:]

No, commonality at all. One was a manufacturer, one was a distribution company, one a multibank deal, one all-bank deal. So, really very little -- no commonality, I would say.

[Michael Young:]

Okay. Thanks. I'll hop back.

[Operator:]

Our next question comes from Brad Milsaps of Sandler O'Neill. Pleased go ahead.

[Brad Milsaps:]

Hey good morning.

[Michael Scudder:]

Good morning Brad.

[Brad Milsaps:]

Hey Pat, just on the NIM. I was just curious if you were surprised with only kind of two bps of core expansion during the quarter given that the late June hike in what you saw in the second quarter, I think around eight or so basis points of core NIM expansion. Just going to see if you could speak to that a little bit maybe? And then maybe Mark, just talk a little bit about where loan yields are, coming on the books versus kind of -- where the book yield is now and what impacts that's having?

[Patrick Barrett:]

I'll take the first one first I guess. We were expecting someone to be a bit higher, little more than 365, 367 range. We just have higher than predicted cash on hand that was that wasn't readily investable or deployable combination of seasonal muni inflows or the cash retention was a bit higher than we expected at -- for the averages for the quarter, but also the loan growth for the quarter, we pretty funded and had some good bit of extra cash in anticipation of that, but also wasn't readily deployable so as [Indiscernible] said.

[Mark Sander:]

And Brad, we saw a little bit of spread compression in Q3. I would say, couple of comments there. That's an item that been very stable for us over the last several quarters. This quarter came down a little bit. We don't think it's a trend, partially because one quarter to trend, we think. Two, I think it's really more for effective of the risk rating profile that you put out. We just put on high quality assets this quarter a little bit better risk rating on average than our portfolio. So, I think the compression you see is more a reflection of that than anything else. But if something, we're watching infighting every day.

[Brad Milsaps:]

And also, obviously, I understand the loan growth will catch up in the fourth quarter. But just back to the cash comment, as I look at the average other interest earning, you're actually down a linked quarter. So, I'm just kind of curious, where that kind of leverage comes from as you talk about having more liquidity on hand and deploying that as you move forward?

[Patrick Barrett:]

Well, that was really just relative to our expectations versus relative to prior quarter that I was commenting on. So, it doesn't -- I wish it clearly jumped out as being $200 million that was higher sitting in a clearly the balance sheet item. It doesn't, it's embedded in the mix. And sorry, what was the second part of that?

[Brad Milsaps:]

That was it. Just maybe to follow with kind of bigger picture question, maybe for Mike. As you kind of think about kind of what leverage you have to improve going forward, I'd be curious kind of what kind of what you're thinking about, they kind of look at the year-over-year performance, your EPS, on a core basis, kind of flattish. I know you had Durbin deals this quarter, but you'll also save more accretion income. As does that rolls off in your mind is it holding expenses flat and really you have that much opportunity go in the infrastructure, just kind of looking for your thoughts around sort of where the juice comes from, so to speak to push things forward?

[Michael Scudder:]

I think it's pretty consistent with what we've been talking about, Brad. Strategically, the opportunities given the capital to continue to leverage and grow. So, we have the ability to add on assets and continue to expand the balance sheet from that perspective. And while certainly as we look at the deposits that are out there, our Loan to deposit levels are still relatively modest compared to others, and we have certainly access to wholesale as we to expand it and grow on those avenues. And then we've talked about this before, I continue to believe there's on ongoing opportunities to enhance our operating efficiency and we're going to continue to look very hard at those and look for improvement off of that. With a $400 million cost base, as we operate today, any incremental percentage improvement that you can make in that is meaningful relative to performance. So, we'll continue to look at those.

[Brad Milsaps:]

And maybe just one final follow-up to that. I know you guys aren't giving 2018 guidance yet, but some of recent meetings you had handed -- maybe our maybe opportunities to come off of that $400 million base in 2018. Just kind of curious, any update on that thinking or do you think that is more stable to have some upside as you look out to next year?

[Michael Scudder:]

Well, we're in the midst of our plan process for 2018, so it's probably premature to give guidance around what that is broadly. And then in some cases, he had to be sensitive to as you think about that and some investments have to be made to become incrementally more efficient. So, we've got our evaluate both the nature of those in the timing. But suffice it to say, we've grown significantly over the last two years. I just continue to believe there's opportunities as the markets of our technology continues to advance, our business continues to mature relative to a size that we've got more opportunity that's out there. So, we'll continue to evaluate that.

[Brad Milsaps:]

All right, great. Thanks for the color. I appreciate it.

[Michael Scudder:]

You bet.

[Operator:]

Our next question comes from Chris McGratty of KBW. Please go ahead.

[Christopher McGratty:]

Hey good morning everyone.

[Michael Scudder:]

Good morning.

[Christopher McGratty:]

Mike, your comments suggested you talked about the rebuild of capital that's occurred over the past six to eight quarters. I'm interested in your update on what you're seeing potentially from an M&A angle? You guys have done a couple of pretty good deals in last couple of years. Some of your competitors have talked about pricing moving away, but I'm interested in kind of what you seeing maybe up tide [ph] into 2018?

[Michael Scudder:]

Well, again, you try to be consistent and disciplined, which is the key for us as we look at the environment. To me, the business case for continuing consolidation remains across the platform and as if nothing else, dialogue remains active. We're trying to stay disciplined to philosophically trying to make sure that as we consider our opportunities, those are aligned with our strategic goals of the company and that they're both, what I call, strategically and financially accretive as we do that. And in the world of this, as you will know, Chris, there's many different opportunities and reasons in underlying structures, as they seems there are snowflakes out there. So, you have to look at each of those individual and see what fits best for you. But I don't -- we said before, we don't feel M&A per se as a strategy. To me, it's been an accelerator of a strategy. So, as long as it's aligned with what we do, we'll continue to consider those opportunities and we have the capital to be able to do that.

[Christopher McGratty:]

That's great. Thank you for that. If I could ask a follow-up on non-interest income. I understand the Durbin impact this quarter was still down relative to expectations, other income was one -- maybe you mentioned in your prepared remarks, maybe I missed, obviously, and that would be one of the other service cars [ph] line, being a little bit soft. How should we be thinking about kind of non-interest income into Q4?

[Michael Scudder:]

So, specifically, to the other income line, it was skewed high in the second quarter, Chris. So, I wouldn’t look at our other income number that we posted in Q3 as more of a baseline than the normal level, I would say. As you go back up to the fee-based revenues line, $38 [ph] million this quarter. We think we can grow a number of revenue streams in mid-single-digits. We think that in a treasury management and wealth management, both have good growth potential ahead of them. We face the ongoing pressure of NSF that we've had for a number of years so our NSF revenues have declined 3% to 4% annually. We think that will probably continue. But between card, wealth, and treasury management, we think there's good mid-single-digit growth rates in all three of those line items.

[Christopher McGratty:]

Okay, great. And maybe Pat, for you. I think I missed it, the tax rate, you suggesting it's going back to 36% and that is kind of one quarter adjustment -- a $0.02 adjustment that you call out in the release, 36% is kind of how we think about going forward?

[Patrick Barrett:]

Yes, that's right. We have a bunch of NOL carryforwards in our DTA that are Illinois based and counterintuitive you become more valuable when the tax rate goes up. So, it was a one-time right-up, but we did have the underlying higher expense of almost $1 million a quarter on our Illinois state tax. So, that would be -- that would drive us back to a higher than historical 36% tax rate.

[Christopher McGratty:]

Got it. Thank you.

[Operator:]

Our next question comes from Nathan Race of Piper Jaffray. Please go ahead.

[Nathan Race:]

Hey guys. Good morning.

[Michael Scudder:]

Good morning.

[Nathan Race:]

Just a question on deposit pricing and you've seen some of your competitors that may be a little more aggressive and kind of preempting the less rate hikes. And it looks like your rates are a little bit sequentially, so just curious how you guys think about deposit rates and what the magnitude of future increases could look like if we get a rate hike upcoming in December?

[Mark Sander:]

So, thinking about it constantly, we haven't seen a lot of pressure yet. We -- sequentially as you just alluded to increase them slightly and we've gotten promotional with a couple of CDs. But in our core products, in our core deposit base, seen very little increases. We're modeling a little bit more for the future, for the next rate increases but thus far, seen very, very modest increases. Pat, any color you want to add there?

[Patrick Barrett:]

I would echo what Mark said. Probably echo what a number of other institutions have said that there continues to be exception based pricing upon demand for certain customers segments, primarily, the more sophisticated and larger ones, larger corporates or the higher net worth, tend to be the first to come back and ask for higher rate on that. So, that continues, but it isn't something that is at high enough rate that's caused us to make large scale repricing decisions and we're going to continue to lag as far as -- as long as we can.

[Michael Scudder:]

Maybe just a little color philosophical color on that, broadly. We -- particularly, in the retail consumer space, we don't per se drive the market in terms of where rates are across the different product spectrums that are and we will always be competitive in the marketplace. So, philosophically, we'll continue to monitor the market conditions that are out there. Where we gain the benefit from is just a mix of our overall deposit base the broadly because of the strength of the core deposit foundation. You see that so even it may look like, perhaps the market or others are following are seeing rates adjust, ours may well continue to lag, simply as a function of the mix of what we have. So, don't lose sight of that. That's a real ongoing advantage that we have.

[Nathan Race:]

Absolutely, got it. I appreciate that color. And then just going back to the two credit items in the quarter. Mark, you kind of speak to the magnitude of credit duration that you saw during the third quarter versus the last quarter that may be led you guys to charge it off here in 3Q versus 2Q?

[Mark Sander:]

Let me make sure I understood your questions. I do know what I would say deterioration as much as the cycle of things. The lumpiness that's inherent in this. So, we identified these in Q2, move them into NPAs in Q2 and as we work them through, the charges came through in Q3. So, I would say it's more the lumpiness inherent in this than it is anything else.

[Nathan Race:]

Okay, that makes sense. I appreciate all the color guys.

[Michael Scudder:]

Great. Thanks.

[Operator:]

Our next question comes from Terry McEvoy with Stephens. Please go ahead.

[Terry McEvoy:]

Good morning everyone.

[Michael Scudder:]

Hi Terry.

[Terry McEvoy:]

Maybe just to start, could you talk about the health of the CRE markets in and around Chicago? And maybe shed some light and color around what type of multifamily projects you're financing that number moved up again this last quarter?

[Mark Sander:]

Sure. The health is quite strong. It's interesting. There has been a lot of units being built and coming online in Chicago proffers, specifically, but in Greater Chicagoland. But the absorption rate has been quite strong. So, and the investor appetite in terms of folks that are in our portfolio able to sell their properties at early stages, if you will, stabilize multifamily is a very attractive asset class for all sorts of investors and there's lot of activities happening. So, as much as you seen it go up, which you've seen it go up as a much of a migration out of our construction book into finished projects, that's what you saw this quarter more than anything else. So, I think we'll continue to keep our multifamily exposure kind of in this range, if you will, in terms of a percentage of our portfolio. We like where we're at in multifamily, but have been watching it for some time, again, just because the amount of construction that's happened in various Chicagoland has us wanting to perhaps grow this a little less over the next couple of quarters.

[Terry McEvoy:]

And then just a follow-up on Brad's question, just thinking about improving efficiency and expenses. You've done a lot of work over the years on the branch network, just fine-tuning, bringing down the number and improving efficiency. Is there further -- are there further opportunities to go on the branch network? In 2018, should we expect something similar to past years in terms of a branch reduction production plan?

[Michael Scudder:]

Again, Terry, it's a great question. It is an ongoing source of evaluation from our perspective. I think we've been pretty active in adjusting. We're just in a world where we're constantly having to reevaluate where customer preferences are driving the business and making the investments or the reallocation of investments into those areas that kind of maximize where you're most competitive. I think there's opportunity as you think about that evolution. But there's also opportunity candidly just in what we do of keeping the customer first and making our processes as simple and as effective and as efficient as you can make them. And I think there's opportunities there as well.

[Terry McEvoy:]

And then just a last question. On wealth management fees, they were up $1.5 million, a little more than that, how much of that came from Premiere, how much of that came from core -- growth in your core business? And then I'm just trying to think of some of the offsets on the expense side, specifically with the Premier, what would be the efficiency ratio or the expense offset there?

[Mark Sander:]

Premier fees are approximately $1 million a quarter. Efficiency ratio I should think of that in my head is about 40%?

[Patrick Barrett:]

Less than that, expenses are about 60% a quarter so.

[Mark Sander:]

35%?

[Patrick Barrett:]

Yes.

[Michael Scudder:]

For wealth management that's pretty good margin business, so you'll see about 35% to 40% of that hit the market.

[Terry McEvoy:]

Perfect. Thanks again.

[Operator:]

[Operator Instructions] Our next question comes from John Rodis of FIG Partners. Please go ahead.

[John Rodis:]

Good morning everybody.

[Michael Scudder:]

Hi John.

[John Rodis:]

Hi Mike. Pat, maybe just back to you on the securities portfolio. After selling the $200 million or so, would you expect it to sort of stay around this current level going forward or any more opportunities out there?

[Patrick Barrett:]

I would not expect it to stay at this level. I would expect it to grow back to around the level it was, I think by the time we get to the fourth quarter into the year, it should be backed sort of from an ending balance perspective, about where we started in the 1.9-ish range, average at which, of course, is going to lag a little bit, just because it's inter-quarter. And at this point, subject to kind of where we are on a liquidity and deposit flow perspective combined with the kind of growth trajectory we have on lending, I think we like it about there it is. I don't you will take it much further down on a longer term basis, but as far as growth in that, not quite sure we're close enough to the terminal point of the interest rate cycle to really want to start rolling it back up.

[John Rodis:]

So, from a balance sheet, I guess from a total asset perspective though, it's probably somewhat neutral because your excess liquidity that was higher this quarter goes back into the securities portfolio, is that the right way to think about it?

[Patrick Barrett:]

Correct.

[John Rodis:]

Okay. And Pat one other -- just follow-up. I wanted to make sure, I don't know if I heard you correctly, but regarding the non-accrual loans, they were obviously down this quarter as you made some charge offs. But I thought I heard you say that in the 10-Q, you would see that TDRs would be higher, is that right?

[Patrick Barrett:]

Yes. The two credits that we've been talking about that we identified as non-performers in the second quarter that flowed through largely through resolution and charge-off this quarter, both technically will end up being classified as restructurings. So, on their way from deterioration to non-accrual and an ultimate resolution, they will flow through the technical definition of that. So, you will see TDRs.

[John Rodis:]

I guess, my question is, you guys provide TDRs in the press release and the TDRs stayed or were basically flat at $1.8 million. So, what's the difference between what's in the press release and what would be in the 10-Q? Because you've got accruing TDRs.

[Mark Sander:]

Yes, accruing versus not accruing TDRs. They're both fundamentally in NPAs. You're right, but as a separate schedule of -- we breakout accruing TDRs in separate item, but non-accruing TDRs are up in non-accrual loans. So, it's just more -- it's not anymore in terms of troubled assets than what you see here in our Q, in our press release, excuse me.

[John Rodis:]

Okay. I think I get it. We can -- I can follow-up, if it sound different so. Okay. Thanks guys.

[Michael Scudder:]

Thanks John.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Michael Scudder for any closing remarks.

[Michael Scudder:]

Thank you. Well, let me close with just thank you all for your interest. We greatly appreciate your interest in and attention to our story. And as we always close, we continue to believe that first and less is a great investment opportunity and we would wish you all have a great day. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.