Mercantile Bank Corp (MBWM) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Mercantile Bank Corporation Second Quarter 2022 Earnings Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Tryka, Lambert, Investor Relations. Please go ahead.

Thank you, Chad. Good morning, everyone, and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the second quarter of 2022. Joining me today are members of Mercantile's management team, including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, Chief Operating Officer and President of the Bank. We will begin the call with management's prepared remarks and presentation to review the quarter's results and then open it up for -- the call to questions.

Before turning the call over to management, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from any forward-looking statements made today due to factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the second quarter 2022 press release and presentation deck issued by Mercantile today, you can access it at the Company's website at www.mercbank.com.

At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob?

Thank you, Jeff, and thanks to all of you for joining us on the conference call today. This morning, Mercantile released its second quarter financial results, which portrayed another solid quarter of earnings and growth, as we reached the midpoint of 2022 and positioned us well for a strong second half of the year.

Our second quarter earnings were $0.74 per share on total revenues of $42.1 million. Earnings when a loss on disposition of a bank properties is excluded were $0.76 per share. The preemptive efforts of our team, along with the strong foundation we have built, have prepared us to be in an excellent position should we see a downturn in the economy, but we'll touch on that more later. Today, we also announced a cash dividend of $0.32 per share payable on September 14th.

During management's comments this morning, we will outline the excellent work of the Mercantile team to successfully deliver positive results for our shareholders and provide best-in-class products and services to our commercial and retail clients. Execution of our short-term and long-term strategic initiatives continues to provide for us the balanced framework to successfully navigate the challenges and leverage the opportunities in this dynamic operating environment.

Highlights for the second quarter and first half of 2022 include expansion of net interest margin, as it start to -- as it starts to increase to a more normally expected level. Robust growth in the loan portfolio with the commercial pipeline remaining at high levels, continuation of outstanding asset quality, diligent management of overhead expenses and growth in several non-mortgage fee income categories. Chuck and Ray will provide more specifics on each of these topics shortly in their comments.

We remain very pleased with the performance of our team, as we continually engage with our clients through the strong relationships we have built to understand their needs and provide solutions to help them reach their financial objectives. The ability to nimbly adjust to the evolving economic and environmental conditions has been a key factor of our organization's success, including the production of consistent organic loan and deposit growth and the expansion of many noninterest income categories.

As was expected this year, rising mortgage rates have significantly dampened the production volumes experienced over the last 2 years. Refinance activity has slowed to a trickle, and the focus of our team, as we have emphasized throughout 2021 and the first half of 2022 is purchase financing opportunities. Tight inventories of available housing for sale in most of our markets have further challenged prospective purchasers' ability to secure a new home. Management continues to focus on hiring proven commission-based mortgage lenders to complement our lending teams in our mature markets, as well as seeking opportunities to bolster talent levels in new markets.

Our leadership team also continues to work with a relentless focus on further development of our digital channels to enhance our customers' experience -- experiences and ensure the most efficient deployment of our Company's resources. Within the next few quarters, for example, we plan on introducing a new business banking product offering that will allow some commercial clients to digitally engage with Mercantile end-to-end for their lending needs. Additionally, our data analytics team is constantly working to utilize the vast array of customer information available at our disposal to better understand and be able to more quickly anticipate customer needs.

The economies in the markets served by Mercantile to -- continued to perform in a steady fashion. The unemployment rate in Michigan is 4.3%, down from 6.2% a year ago. However, most of the metro markets, which contain most of our significant concentrations of assets and business opportunities, it remains below 4%. With this low unemployment rate, the ability to staff at required levels is among the most significant issues for companies, both -- as both hiring new staff and replacing existing staff, while managing payroll costs continue to challenge management teams. Our energy costs, higher borrowing costs with rising interest rates and supply chain issues are also factors requiring much focus for clients at the present time.

Mercantile lending teams continue to stay closely engaged with clients to identify any signals of stress in the portfolio that may be emerging with these conditions. Just as they did during the last 2-plus years with the COVID-19 pandemic, the Mercantile client base continues to directly manage their business and personal finances and maintaining -- and maintain a steady performance.

As the FOMC acts to slow the rate of inflation in the U.S. economy, we believe we are well positioned to continue delivering solid results for our shareholders, as we continually work to leverage opportunities and mitigate risks. While our markets and our customers remain strong, we vigilantly look on the horizon to assess the possibility of a recession, as the Fed works to attempt to thread the needle to reduce inflation with a soft landing.

Mercantile's balance sheet will allow us to make gains in a rising rate environment, and we also fully understand and work to anticipate potential strains on the loan portfolio, as a result of increased borrowing costs and the impact of a potentially slowing economy on our client base. We firmly believe, however, that our consistent credit underwriting and loan administration will continue to serve us well.

Finally, I want to acknowledge the dedication and hard work from the Mercantile team for the continuation of their stellar performance in the second quarter. Their efforts to develop new relationships and enhance existing relationships, which is the foundation of our culture, has positioned Mercantile for success for the rest of '22 and beyond. Those are my prepared remarks.

I'll now turn the call over to Ray.

Thank you, Bob. My comments will center around dynamics in the following areas: the commercial and mortgage loan portfolios, noninterest income and branch optimization activities.

We reported annualized core commercial loan growth of 10% for the second quarter and 11% for the first 6 months of 2022. This growth was achieved despite payoffs related to asset or business sales of $124 million year-to-date and has been possible due to the efforts of our commercial team and their focus on relationship building and the community bank value proposition. Our commercial backlog remains consistent with prior periods, as we fund this impressive level of growth.

Availability under construction commitments that we expect to fund over the next 12 months to 18 months totaled $175 million. Presently, line of credit usage is 34% compared with 30% a year ago. However, bank commitments in aggregate have increased $438 million over the past year. The portfolio is also well positioned for an increasing rate environment, as 63% of the portfolio is floating rate loans, up from 50% at March 31, 2021, accomplished largely through our swap program.

Asset quality is pristine with nonperforming assets of 3.5 basis points of total assets and nominal amounts of past due loans. Watch list credits are 29% lower than year ago levels. While we are proud of our asset quality numbers, we are vigilant in monitoring efforts relative to a potential recession. Our lenders are the first line of defense, as they seek to identify areas of emerging risk. Our risk rating process is robust with an emphasis on current borrower cash flow in our rating model, providing sensitivity to any emerging challenges in the borrowers' finances.

All that said, our customers have reported strong results to-date and a recessionary environment is more anticipation than actual experience. We also closely monitor exposures in the automotive industry and commercial real estate concentrations as well.

The mortgage business has slowed due to the rising rate environment and lack of available housing inventory in the markets that we serve. Higher rates have led to more demand for adjustable rate mortgages and the lack of inventory has led to more construction lending activity. We hold each of these types of loans on our balance sheet, and as a result, residential mortgages have increased 52% over the prior year.

Compared to a gain on sale event and immediate recognition of income, a portfolio loan takes about 24 months to generate an equal amount of income. We continue to increase share in the purchase market with originations up 9% over last year's comparable quarter. Availability under residential construction loans is $85 million compared to $48 million 1 year ago. Refinance activity is 36% of last year's comparable quarter.

Noninterest income for the second quarter is down 43% compared to the second quarter of 2021 when adjusted for a gain on the sale of a branch in 2021. The primary contributor to the overall reduction was the previously described decrease in mortgage banking income of 75% and a reduction in swap income of 71%. Positive contributors were a 24% increase in service charges on accounts, a 15% increase in payroll services, and an 11% increase in credit and debit card income.

The optimization of our branch network is an ongoing endeavor that has yielded 7-figure savings, utilizing tools, such as appointment banking, limited service branches, live ATM machines and branch consolidations, complemented by investments in our remaining facilities have resulted in nominal deposit attrition of less than 1% in the impacted markets. That concludes my comments.

I will now turn the call over to Chuck.

Thank you, Ray. As noted on Slide 10, this morning, we announced net income of $11.7 million or $0.74 per diluted share for the second quarter of 2022 compared with net income of $18.1 million or $1.12 per diluted share for the respective prior year period.

Net income during the first 6 months of 2022 totaled $23.2 million or $1.47 per diluted share compared to $32.3 million or $2 per diluted share during the first 6 months of 2021.

Higher net interest income stemming from improving net interest margin and ongoing strong loan growth, combined with continued strength in asset quality metrics and increases in several key fee income revenue streams in large part, mitigated a significant decline in mortgage banking income revenue, as industry-wide originations come off the record levels of 2020 and 2021, which were driven by lower mortgage loan rates and results in refinance activity. Our earnings performance in the 2021 period also benefited from large negative loan loss provisions, reflect -- reflecting improved economic conditions and expectations.

Turning to Slide 11. Interest income on loans increased during the 2022 period compared to the prior year period, reflecting growth in the core commercial and residential mortgage loans. The yield on loans during the 2022 periods was relatively similar to that of the 2021 period, as an increased interest rate environment during the first 6 months of 2022 mitigated the significantly higher level of PPP net loan fee accretion recorded during the 2021 period.

Interest income on securities also increased during the 2022 periods compared to the prior year periods, reflecting growth in the securities portfolio to deploy a portion of the excess liquid funds position and the higher interest rate environment.

Interest income on other earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago increased as well during the 2022 periods compared to the prior year periods, generally reflecting higher average balances and the higher interest rate environment. In total, interest income was 3.8 and $4.9 million higher during the second quarter and first 6 months of 2022 when compared to the respective time periods in 2021.

Interest expense on deposits declined during the 2022 period compared to the prior year period, as lower deposit rates more than offset increased interest-bearing deposit balances.

Interest expense on other borrowed money increased during the 2022 periods compared to the prior year periods, reflecting interest costs associated with the $90 million in subordinated notes issued between December 2021 and January 2022. In total, interest expense was 0.3 and $0.1 million higher during the second quarter and first 6 months of 2022 when compared to the respective time period in 2021.

Net interest income increased 3.5 and $4.8 million during the second quarter and first 6 months of 2022, respectively, compared to the respective time periods in 2021.

We recorded a credit loss provision of 0.5 and $0.6 million during the second quarter and first 6 months of 2022, respectively, compared to a negative provision expense of 3.1 and $2.8 million during the respective time periods in 2021. The provision expense recorded during the second quarter of 2022, mainly reflected allocations necessitated by net commercial and residential mortgage loan growth, increased specific reserves on certain commercial loans, and a higher reserve on residential mortgage loans stemming from a projected increased average life of the portfolio, which in total were not fully mitigated by the combined impact of a reduced COVID-19 environmental allocation, net loan recoveries and continued strong asset quality metrics.

The negative provision expense recorded during the second quarter of 2021 was mainly comprised of a reduced allocation associated with the economic and business conditions environmental factor.

Continuing on Slide 13, excluding a $0.5 million contribution to The Mercantile Bank Foundation, overhead costs were relatively unchanged during the 2022 periods compared to the prior year periods. Overhead costs increased $0.2 million during the second quarter of 2022 compared to the second quarter of 2021 and were up $0.9 million during the first 6 months of 2022 when compared to the same time period in 2021.

We recorded a loss of $0.4 million on the sale of our Lansing facility during the second quarter of 2022. The sale of our facility is part of our relocation efforts of a lease -- to a lease facility that better aligns our operations in the Greater Lansing area and provides for lower operating costs.

Continuing on Slide 14, our net interest margin was 2.88% during the second quarter of 2021, up 31 basis points from the first quarter of 2022 and up 12 basis points from the second quarter of 2021. The improved net interest margin is primarily a reflection of an increased yield on earning assets in large part reflecting the increase in interest rate environment thus far in 2022.

As I noted earlier, we recorded increased interest income on loans during the 2022 periods compared to the 2021 period, which was achieved despite a significant reduction in PPP loan fee accretion. During the first 6 months of 2022, PPP net loan fee accretion totaled $1.0 million compared to $5.7 million during the same time period in 2021.

Our average commercial loan rate increased 61 basis points from year-end 2021 to June 30th, a significant increase in our loan portfolio that averaged just under $3 billion during that time period.

Our net interest margin continues to be negatively impacted by excess liquidity. However, the impact declined during the second quarter due to a lower volume of excess liquidity, reflecting balances used to fund loan growth and deposit withdrawals. The negative impact on our net interest margin from excess liquidity equaled 23 basis points during the second quarter of 2022 compared to 40 basis points during the first quarter of 2022. We expect the trend to continue to decline, as excess monies are used to fund future loan growth and FHLB advanced maturities.

Given the asset-sensitive nature of our balance sheet, which includes 63% of our commercial loan portfolio comprised of floating rate loans, any further increases in short-term interest rates would have a positive impact on our net interest margin and net interest income.

We remain in a strong and well-capitalized regulatory capital position. The Tier 1 leverage capital ratio continues to be impacted by excess liquidity, although there is no similar impact on the risk-based capital ratios, as deposits maintained at the Federal Reserve Bank of Chicago are assigned a 0% risk weighting. Both our Tier 1 leverage capital ratio and total risk-based cap ratio have also been impacted by strong commercial loan growth over the past several quarters.

Our total risk-based capital ratio and all of our bank's regulatory capital ratios were augmented this past December and January with an aggregate $90 million issuance of subordinated notes, of which a vast majority of the funds were downstreamed to the Bank, as a capital injection. As of June 30th, our bank's total risk-based capital ratio was 13.4% and was $149 million above the minimum threshold to be categorized as well capitalized at the end of the second quarter. We did not repurchase shares during the first 6 months of 2022. We have $6.8 million available in our current repurchase plan.

On Slide 18, we provide some thoughts regarding the remainder of 2022. As we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of the year, with the caveat that market conditions remain volatile, making forecasting difficult. We are forecasting an improved net interest margin due to loan growth and the interest rate environment over the next 2 quarters with fee income, overhead costs and our tax rates to remain relatively consistent. This forecast is predicated on several additional increases in the federal funds rate, including a 75 basis point increase next week and a 50 basis point increase in September.

In closing, we are pleased with our operating results and financial conditions through the midway point of 2022 and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all of us. Those are my prepared remarks.

I'll now turn the call back over to Bob.

Thank you, Chuck, and that concludes management's prepared comments, and we'll now open the call off for the question-and-answer period.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question will be from Brendan Nosal with Piper Sandler.

Maybe just to start out on the margin outlook you provided, hey, first, thanks for offering the detail again on your rate expectations there. So I guess kind of looking at year-end 3.80% to 3.90% margin, assuming another 150 bps of Fed fund increase. Can you just help us understand how much of that improvement is due to the continued rotation of liquidity into loans? And then what underlying deposit beta assumptions you're using in that modeling?

Yes. Sure. Brendan, this is Chuck. In regards to the excess liquidity, we think we'll be down to in excess of probably somewhere between 50 and $100 million by the end of this year. Again, most of that being funding loan growth, as well as we have about $50 million, $54 million in Federal Home Loan Bank advances that at this point in time, as long as they have that excess liquidity, we do not plan to replace. So that gets our balances down little -- certainly a lot closer to normal than they certainly have been over the last couple of years.

That assumption also assumes that we do not have any material changes in deposit balances. Excluding the transactions by one larger customer, our deposit balances overall -- local deposit balances overall have been quite steady. And so we just went ahead and stuck with that for the rest of this year. We do know there's still a lot of stimulus sitting in the deposit accounts of our customers. But at least to-date, we haven't seen any significant movements definitely on an overall basis. We certainly have seen movements within every customer.

But any customers that we've had some relatively significant withdrawals, we continue to grow our deposit base in large part because of the ongoing growth in the commercial loan portfolio, as those borrowers bring rather significant deposit balances with them. So that's kind of the overall assumption that goes into our margin expectations.

Got it. And I may not have caught it, but did you mention kind of what deposit betas you're using? I heard the balance part?

Yes. The deposit rates is -- besides the provision expense, the deposit rates are probably the 2 biggest items that could potentially have the biggest impact on our forecast. Today, we haven't -- we -- or any increases in deposit rates have been quite limited. That's not only us, but that's all the banks in our market area. And as I talk to CFOs outside of our market area that's been pretty common as well.

As the Fed continues to raise interest rates, and I think on an overall basis, the system sees less excess liquidity, we do think that we'll start seeing additional pressures to raise deposit rates, as we go forward. So that is in our assumptions. And we basically had used our historical beta assumptions for the rest of this year, which range generally 40% to 60% of the Fed increases.

Got it. That's super helpful. Maybe one more for me, I guess, to -- to ask you guys about the other big hard to know piece of the outlook. I guess just conceptually on kind of the reserve level and the provision, now that you're running on CECL, I mean what does it take kind of in that CECL model to start building reserves given the expectation for a downturn at some point, in not too distant future. I mean is it simply upward movement in the stated unemployment rate? Or is there something a little more forward-looking in that model that could potentially drive that?

Yes. This is Chuck again. I think you [said it] spot on. It's all about that economic forecast, which we use a third-party forecast. And we compare that to other third-parties to make sure that the particular one that we use is in the same area, as forecasts tend to get all over the place on occasion. I think that will be the case, as we round out the rest of this year and go into next year.

I think when we look at our model and how it's reacted thus far, it would appear that the unemployment rate and probably the GDP rate has probably the biggest impact on the outcome of our CECL calculation in regards to the economic forecast. And as we look at our particular forecast that we use as well as that as the others, we just really don't have -- today we have just have not seen any significant impact on the unemployment rate. And the GDP, while they're coming down, they're still -- on a bigger scale, they're relatively unchanged. So I think those are the 2 driving factors, the unemployment [one by] for sure, when it comes these -- how these models work.

The next question will be from Daniel Tamayo from Raymond James.

Maybe I can -- I can just start, just a follow-up on the NIM conversation. The 3.80% to 3.90% is a big number, especially relative to where you were last year -- last quarter, obviously, there's been a lot of rate hikes since then. But assuming that the year plays out, as you're assuming in your guidance, how would you think about -- and I guess the excess liquidity gets to where you would expect you mentioned, it gets to $50 million to $100 million by the end of the year. How would you assume future or additional rate hikes, if we get them in 2023 would then impact NII at that point or the margin?

Yes. I think on an overall basis, it's our belief that any further increases from the Federal Reserve will result in a positive impact on the net interest income and on the net interest margin, who knows what they're going to be doing next year, but they certainly seem like they're going to stay aggressive for the remainder of this year, and that's our expectation.

Again, the big question is those deposit betas and what happens with those? Again, it's not only the increasing interest rate environment that will have pressure on deposit rates, but as I mentioned, I think as there's less liquidity in the system, and the banks -- it's certainly what we've seen so far, and us included, we've seen some really good loan growth, I think we're going to start seeing demand for deposit growth pick up. And I think that would likely have -- for sure, that will have an impact on deposit rates. It's just very difficult to know to what degree.

I would say going forward and assuming we don't get too many 75 basis point and 50 basis point increases from the Fed next year, I would venture a guess that our margin, at least for the first part of 2003 -- '23, would stay relatively consistent with our projection for the fourth quarter of this year.

And on the loan pipeline, you talked about that remaining strong, but even with all these -- are you seeing any impact from the rate hikes on demand now? And how was your overarching thought going forward, as we continue to see higher rates, how that may impact loan demand?

Yes. This is Ray. To-date, the rate increases have not really impacted loan demand in a material way. I'd expect that future increases would start to dampen some of the loan requests related to commercial real estate projects, in particular, that would be mitigated by the fact that housing is in such short supply, so that particular slice will probably have more resiliency than other types of projects. But I would suspect that, that would be the first place that we'd see that demand soften. But I would emphasize that to this point, that hasn't occurred.

And then last one for me. You mentioned the capital level -- capital levels still strong, but obviously have taken a bit of a hit here with the AOCI impact. Just if you could give your thoughts on kind of how comfortable you are with TCE levels in the [mid-7s] or if that's something you're just not considering too much if you're more focused on the regulatory side?

Yes. I think we're focused on both sides. It depends on who we're talking to. If you were the FDIC asking me the question, I might answer it little bit differently, but they're both important to different groups. And I think when we look at the tangible, and we see that under 8%, we know a big chunk of that reason why we're under 8% is the interest rate environment. And over time, that will take care of itself, and then we'll end up having a positive impact long-term on that capital ratio. And all things being equal, with that taking place as well as we expect to continue to remain profitable, we'll get that ratio back above 8%. It's always been our long-term goal to be somewhere around [8.25%], 8.5%, and that's what we'll continue to look forward to over time.

Is there a -- is there a level of any one of the capital ratios if rates do spike again from here that would give you pause in terms of continuing to invest in loan growth or think about raising capital?

Yes. I think -- I think that we're pretty far away from having to raise additional capital. Certainly, we supplemented our base with the subordinated notes barely 6 months ago. So I think we've got -- we have built quite a cushion, where we are as of today. So I think it would take a pretty significant hit to our capital ratios and more on an earnings basis versus an interest rate basis for us to be making significant looks at raising additional capital. But clearly, that's something as a management team we're always thinking about both short-term, long-term and certainly with the potential of some recessionary pressures coming down the road here.

Yes. This is Bob. I'll follow up on that, that in summary, we're really comfortable with our capital levels. And as Chuck said, we look at that all the time, look at it every quarter with our Board. But we feel very comfortable with the fact that our capital base will continue to allow us to have the ability to grow the loan portfolio, as we have and to continue to maintain the trajectory that we've witnessed and experienced for the last couple of years.

(Operator Instructions) The next question is from Damon DelMonte with KBW.

Hope everybody is doing well today. Just want to start off on the loan growth side of things. Another quarter of a decent amount of portfolio-ing of mortgage loans for you guys. Just wondering, is that 17% of total loans, up from 12% or 13% in the first half of last year, kind of where do you see that heading directionally? And what are some of the characteristics of those mortgages? Are they 5/1 ARMs, 7/1 ARMs, are they 15-year fixed, 30-year fixed, what kind of product that you are putting in the portfolio?

I'll stop you right there.

Yes. (inaudible) we can stop you right there, Damon. But a very significant portion of the loans that we put -- mortgage loans that we put on our books are adjustable rate. They are predominantly 7/1 and 10/1 ARMs, coming in third place [would] probably be a 5/1 ARM. We try very hard not to put any fixed rate loans on our books. And if we do, it's usually around the 10-year and 15-year mark on that.

As far as the trajectory, certainly, and you pointed it out, the percent of residential mortgage loans has been increasing, and that's -- really the increase really in the last 6 months, maybe 9 months, as we've seen market rates go up. And so those -- many customers are now looking to the adjustable rate product versus the fixed rate product. But we continue to sell all the fixed rates, certainly that we can. And then, again, repeating myself here, but if we put them on the balance sheet, a vast, vast majority are adjustable rate down the road at some point in time.

It seems to me that as far as mortgage loans, that trend would likely continue. If anything, in the back half of the second quarter, we saw mortgage rates go up even more than they were at the beginning of the year, and certainly even at the beginning of the second quarter. Clearly, volume and production is going to have a big say on that.

We know that, that will remain under pressure, especially given the significant decline in refinance. But I think as Ray mentioned, on the purchase side, we actually saw an increase, and so we're very pleased to see that. So we certainly expect some level of production, but it's hard to -- that's one of those things that's pretty hard to predict. But we don't really see a change in keeping floating adjustables and selling fixed.

Also as a percent of total loans, again, the big part there would, of course, be the commercial loan growth. And we did see -- and we have seen throughout this year, but especially in the second quarter, a fairly large dollar amount of payoffs. And as we mentioned, most of that comes from selling the businesses or selling the underlying assets. And we do know that activity continues. Last year, when we grew commercial loans 20%, the volume of payoffs was quite a bit lower. And I think this year, maybe a little bit higher than average, but closer to average this year.

And our overall growth of how you want to slice and dice it 9% to 11%, it's kind of more -- it's actually above our historical normal closer to 7% or 8%. But we think that, that 10%, 11% is some -- on the commercial side is something that we'll continue to enjoy for the remainder of this year. But again, payoffs is always going to be the big question.

So long-winded answer to your relatively short question. I would expect that given what we saw in the second quarter and assuming that there's not going to be a lot of change going forward in the rest of this year is that we would expect some increase in residential mortgage loans, as a percent of total loans, but I don't think it's going to be anything that -- that's substantial.

This is Bob. I'll add that and point out that, as Ray mentioned in his comments, we have seen good increases in construction lending in our residential portfolio because a lot of people that are wanting to buy a house can't find an existing house to buy, so they're resorting to constructing new houses. And so our construction portfolio is up quite significantly over what it was in the last couple of years. So that will give us certainly a tailwind over the next 12 months, 18 months as those construction loans fund.

I think a third component would be the fact that as the 41% increase in the money, supply works its way into our customers' receivables and inventories that will drive our commercial line of credit usage upward, and that will be somewhat of a balance on a proportional basis to the increase that we see in the residential portfolio as well.

And Ray, you had mentioned that the line utilization was 34% this quarter. And what was that versus -- was it either last quarter or the year ago quarter? I missed that number.

It was 30% a year ago compared to 34% today.

And then, I guess, as we look at the margin, this is a pretty sizable jump from this quarter to what you're projecting for the back half of the year, and it sounds like a lot of that's going to be kind of the remixing of earning assets and liquidity going out the door. What was the excess "excess liquidity" for this quarter, as a starting point?

On the margin, I think it was 23 basis points.

And you expect that to be flushed out basically, Chuck, by the -- by the end of the year?

Yes. At the very end of the year. I mean we'll still have some of that through [into] the fourth quarter itself. So -- so my answer prior was talking about right at year-end, I think there'll still be some pressures in the fourth quarter. But I think the third will be less than the second quarter and the fourth would be less of an impact in the -- than the third quarter.

And then just kind of directionally here, if you look at the $0.74 you guys reported this quarter and you kind of take the midpoint of your guidance, obviously, not including the impact of a provision, which shouldn't be too, too much, you're still looking at like anywhere from a 35% to 45% increase off of second quarter earnings. Does that seem reasonable? Is that kind of what your expectation is?

Yes. I think based on your comment about provision expense, and we're going to -- you're going to guarantee that, right?

Yes. And so you're going to let the economists know that the forecast is going to continue to be very rosy and that there won't be any impact on the reserve.

But -- but having said all that Damon, I think that, that makes sense. We're going to -- we're standing here prepared and hopefully, we'll see a very significant increase in our margin both from increase in interest rates, which will help net interest income, we'll see growth in the commercial loan portfolio, we'll [see a] healthier margin decline impact on excess liquidity. All that adds up to some -- some notable increase in overall earnings performance. But again, those deposit rates and provision definitely are 2 big question marks out there.

Thanks, Damon.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.

Yes. Thanks, Chad, and thank you all for your interest in our Company. We look forward to speaking with you next at the end of the third quarter. This call has ended.

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