MSBI - NASDAQ

Good morning, ladies and gentlemen, and welcome to the Second Quarter Midland States Bancorp, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Tony Rossi. Please go ahead.

Thank you, Deb. Good morning everyone and thank you for joining us today for the Midland States Bancorp second quarter 2021 earnings call. Joining us from Midland’s management team are Jeff Ludwig, President and Chief Executive Officer; and Eric Lemke, Chief Financial Officer. We will be using a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Webcast and Presentations page at Midland’s Investor Relations Web site to download a copy of the presentation. Before we begin, I’d like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Midland States Bancorp that involve risks and uncertainties, including those related to the impact of the COVID-19 pandemic. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company’s SEC filings, which are available on the company’s Web site. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the Web site contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I’d like to turn the call over to Jeff. Jeff?

Good morning, everyone. Welcome to the Midland States earnings call. We’re going to start on Slide 3 with the highlights of the second quarter. We continue to see the higher level of profitability that we targeted through the strategic initiatives we implemented over the past couple of years to focus more of our attention and resources on higher return businesses, creating a more consistent revenue mix and improving efficiencies. On a GAAP basis, we generated net income of $20.1 million or $0.88 per diluted share. As we announced last month, we had a number of items that impacted our second quarter results, both positively and negatively. These include a tax benefit related to a settlement of a prior tax issue, stemming from the treatment of gains on FDIC-assisted transactions, the professional fees we incurred in pursuing the tax benefit, and an FHLB advance prepayment penalty. When these items are excluded, we had adjusted earnings of $19.8 million or $0.86 per diluted share, which still represents the highest quarterly earnings in the history of the company. We're also seeing improvement in our level of returns with return on equity coming in at 12.6% and return on tangible common equity coming in at 17.9% for the quarter, both of which were higher than the prior quarter and significantly above the levels that we have historically generated. The improved profitability has enabled us to make significant progress on our goal to strengthen our capital ratios. During the second quarter, our tangible common equity ratio increased 45 basis points and is now back above 7%. While loan demand is improving, we continue to have significant excess liquidity. So we took the opportunity to use a portion of the excess liquidity to eliminate some of the higher costs funding sources, including an $85 million long-term FHLB advance that had an interest rate of 2.54% and 31 million of sub debt that has an interest rate of 4.54%. In aggregate, the elimination of this higher cost funding will reduce our interest expense by $3.6 million annually and have a positive impact on our net interest margin of approximately 10 basis points. With economic conditions steadily improving, we are seeing higher levels of loan demand, which positively impact our production of equipment finance, commercial real estate, and construction loans during the second quarter. And we continue to utilize our GreenSky partnership to give us the flexibility to add high quality loans with attractive risk adjusted yields to offset runoff we are seeing in other portfolios, most notably our residential real estate portfolio, where we continue to see a high level of refinancing activity. Excluding PPP loans and commercial FHA warehouse lines of credit, our total loans increased at an annualized rate of 6%, which was at the high end of our expected range. We are seeing a strong increase in non-interest income, which increased nearly 18% over the prior quarter and accounted for 26% of our total revenue. A portion of the increase is attributed to more debit cards that we are issuing through our online account opening platform. The increase in debit card issuance, combined with the increase in general economic activity, is driving a higher level of interchange fees. During 2019, the last normalized year, our interchange revenue is typically in the range of about $3 million per quarter. During the second quarter of 2021, we had 3.8 million in interchange revenue, which is a run rate that will result in more than $3 million per year in incremental revenue. This is just one of the areas where we are seeing a strong return on the investment we have made in expanding and enhancing our digital banking capabilities. Our non-interest income was also positively impacted by a 10% increase in wealth management revenue, which was largely due to the one month contribution we received from the ATG Trust Company after completing this acquisition in the beginning of June. This acquisition brought our assets under administration to more than $4 billion, and our wealth management revenues to $6.5 million for the quarter. And our wealth management revenue should further increase as we get the full quarter impact of ATG and also begin leveraging their strong referral sources to enhance our business development efforts. Moving to Slide 4, we've provided an update on our PPP efforts and the impact that these loans had on various line items in the second quarter. As the forgiveness process continued, our PPP loans declined by about $65 million and brought our total balances to $147 million at the end of the second quarter. We recognize $2 million in fees during the second quarter, down a bit from the $2.1 million that we recognized in the prior quarter. As of June 30, we still had 5.6 million in fees to be recognized. Turning to Slide 5, we’ll provide an update on our loan deferrals. As you may recall, we had a bit of an increase in loan deferrals last quarter as we granted additional three-month deferrals to help certain hotel borrowers get through the soft part of their year. Most of those deferrals have now expired, while we have seen a significant number of borrowers resume scheduled payments. This resulted in a 51% decrease in total deferrals with just 107 million remaining at June 30, or 2.2% of total loans. And borrowers have been able to make their partial payments with 79% of the loans deferred making interest-only or some other form of partial payment, up from 40% at the end of the prior quarter. At this point, I'm going to turn the call over to Eric to provide some additional details on the second quarter performance.

Thanks, Jeff, and again good morning, everyone. I'm starting on Slide 6, and we'll take a look at our loan portfolio. Our total loans decreased $75 million from the end of the quarter. This was due to the continued runoff we are seeing in the residential real estate portfolio due to refinancing activity, the forgiveness of PPP loans and a $75 million decline in period end balances on commercial FHA warehouse lines. This offset increases in the equipment financing, commercial real estate and construction portfolios resulting from the higher level of loan production in these areas during the quarter. As Jeff mentioned, we added to the consumer portfolio through our GreenSky partnership to help offset the runoff in the residential real estate portfolio. At June 30, our balances of PPP loans were down to $147 million. Excluding PPP loans and commercial warehouse credit lines, total loans increased by $66 million, or 1.5% for the quarter, an annualized growth rate of 6%. On Slide 7, we've provided an update on our equipment finance portfolio. As of June 30, we had $36 million of deferrals, which represents the decline of 23% since the end of the last quarter. We continue to see a steady recovery of our borrowers in the transit and ground transportation industry as the trends in business and recreational travel improve. We've seen more borrowers return to schedule payments, as well as others that remain on deferral starting to make some form of partial payment, and 92% of the borrowers on deferral in this portfolio are now making a partial payment. On Slide 8, we've provided an overview of our hotel/motel portfolio. At June 30, we had $39 million of loan deferrals in this portfolio, which is down 66% from the end of the prior quarter. Along with the decline in deferrals, we're also seeing a higher percentage of borrowers making interest-only or some other form of payment. And at June 30, 77% of the remaining deferrals were making a partial payment, up from 21% at the end of the prior quarter. Looking at Slide 9, we've provided an update on the consumer loan portfolio that we have through our relationship with GreenSky. This portfolio has performed extremely well throughout the pandemic. At June 30, we only had $600,000 of deferred loans in this portfolio, which represents just one-tenth of 1% of the total loans. The delinquency rate has also declined to just 23 basis points to total loans, even better than the historical range that we've seen in the portfolio. In addition to the strong performance, the escrow account is available to cover any deficiency in our principal balances. And that escrow account increased to $32.7 million at the end of the second quarter. Turning to Slide 10, we'll look at our deposits. Total deposits decreased $144 million, or 2.7% from the prior quarter. This decline was largely attributable to a decrease in commercial FHA servicing deposits and retail deposit outflows as consumers spend the latest round of stimulus payments. Looking ahead to the third quarter, we will have additional opportunities to reprice higher cost time deposits. We have $163 million of CDs maturing at a weighted average rate of 1.47%. As these deposits renew at current rates, we should see a positive impact on our deposit costs. Looking at Slide 11, we'll walk through the trends in our net interest income and margin. Our net interest income decreased 3.4% from the prior quarter, primarily due to lower prepayment fees, an unfavorable shift in the mix of earning assets and the recovery of interest on a previously charged-off loan that we recognized back in the first quarter. As we indicated we would do on our last earnings call, we added to the investment portfolio to help support net interest income and reduce our excess cash balances. As a result, the investment portfolio increased by $66 million from the end of the prior quarter. We also did a little repositioning in the investment portfolio as we identified a few mortgage-backed securities and collateralized mortgage obligations that we thought had the potential to prepay in the short term. So we harvested the gains we had in those securities and reinvested those proceeds at what we felt was a good time in the market. Excluding accretion income, our net interest margin declined 17 basis points, primarily due to that unfavorable shift in the mix of earning assets. The mix shift reflects the increase in investment portfolio as well as a higher level of cash and cash equivalents we held for most of the quarter, prior to deploying it for the prepayment of the FHLB advance and the redemption of our subordinated debt. Our net interest margin for the quarter, excluding the impact of PPP income, was 3.23%. We believe that we have seen the low end in our net interest margin at this point, and we'll see the benefit of the elimination of the higher cost funding sources starting in the third quarter. So we believe we're well positioned to see some expansion in our net interest margin over the second half of the year with an increase in loan growth, also providing additional benefit to the margin. Turning to Slide 12, we'll look at the trends in our wealth management business. We had a $517 million increase in our assets under administration, primarily due to the acquisition of ATG Trust Company. On an organic basis, our assets under administration increased by approximately $100 million. The higher assets under administration and the one-month contribution of ATG resulted in a 10.1% increase in our revenue compared to the prior quarter. On Slide 13, we'll look at non-interest income. We had $17.4 million in non-interest income in the second quarter, up 17.6% from the prior quarter. We recorded impairments on commercial mortgage servicing rights in both quarters, with the impairment in the second quarter about $200,000 lower than the prior quarter. Excluding these impairments, our non-interest income increased 15.4% from the prior quarter, primarily due to higher levels of wealth management and interchange revenue, as well as gains on the sale of investment securities and other real estate owned. Our residential mortgage banking revenue held fairly steady with the prior quarter, as a decline in refinancing volumes was offset by higher purchase production as we entered the seasonally stronger period for the housing market. Turning to Slide 14, we'll take a look at our non-interest expense. The $48.9 million of non-interest expense in the second quarter included $3.6 million in professional fees incurred as part of our tax settlement, which is classified under acquisition and integration expense, and a $3.7 million prepayment penalty for the FHLB advance. Excluding these amounts and the small amount of acquisition and integration expense that we've incurred in the quarter, our non-interest expense increased by $2.4 million. This was primarily driven by an increase in salaries and benefits expense resulting from higher incentive compensation. Going forward, with the addition of ATG Trust Company, we would expect our operating expense run rate to be between $40 million and $42 million during the second half of the year. However, as we fully integrate ATG and eliminate some costs from that business, and also realize some additional efficiency enhancements from technology rollouts later in the year, we would expect to see expenses be closer to the low end of that range by the end of 2021. Turning to Slide 15, we'll look at our asset quality trends. Our non-performing loans increased $8.6 million from the end of the prior quarter, primarily due to the addition of three loans from our hotel/motel portfolio. All of these loans are borrowers that operate hotels that largely cater to business travelers in the Chicago area. With business travel taking longer to pick up in Chicago, we put these loans on non-accrual to reflect the prolonged recovery period for these borrowers. Two of the loans are well collateralized and we believe the potential for loss is minimal. We recognized a specific reserve on the third loan of $1.2 million due to deterioration of the collateral value. We were able to sell a number of OREO properties during the second quarter for a small gain. As a result, despite the $8.6 million increase in our non-performing loans, our non-performing assets only increased by 1.9 million due to the decline in OREO. We had 4 million in net charge-offs in the quarter, or 33 basis points of average loss. Approximately half of the charge-offs this quarter related to the specific reserve held against one commercial relationship that was placed on non-accrual during the first quarter. We recorded a negative provision for credit losses of $500,000. And in terms of the various buckets that make up the provision, we reported a zero provision for credit losses on loans due to favorable changes in our portfolio mix, improved economic forecasts and a negative $500,000 of provision for credit losses on unfunded commitments and available for sale securities, which was also primarily driven by improvement in those same economic forecasts. At June 30, approximately 92% of our ACL was allocated to general reserves. On Slide 16, we show the components of the change in our ACL from end of prior quarter. Our ACL decreased $4 million, which was driven by a combination of charge-offs on specific reserves, favorable changes in the portfolio and improvement in economic forecasts. And on Slide 17, we show our ACL broken out by portfolio. We continue to keep elevated reserves in the portfolios most impacted by the pandemic, particularly equipment financing and commercial real estate portfolio where the hotel/motel loans are held. The reserve release this quarter came in other portfolios where credit trends remained strong. And with that, I'll turn the call back over to Jeff. Jeff?

Thanks, Eric. We'll wrap up on Slide 18 with a few comments on our outlook. We believe that we are very well positioned to deliver a strong second half of the year. Economic conditions are steadily improving, and we expect this trend to continue borrowing any setbacks related to the emergence of the Delta variant. This should lead to reductions in problem loans, a continued decline in deferrals and increased loan demand. And with a higher level of loan growth, we believe we will see a favorable shift in the mix of earning assets and further increases in profitability. One potential tailwind for future loan growth should be a return to a more normalized utilization rate on our commercial lines of credit. At the end of the second quarter, we had $1.96 billion of credit line commitments, excluding commercial FHA warehouse lines. The utilization rates stood at 56% compared to a historical average in the 62% to 64% range. As the economy continues to recover, and the utilization rates return to a more normalized level, this could add another $100 million to $130 million of loans to our balance sheet, independent of our new loan production. Looking at the current pipeline after a seasonally slow start to the year, production in the equipment finance is starting to pick up. We're also seeing more opportunities in commercial real estate, including our specialty finance group. Overall, within the community bank group, the loan pipeline is about 14% higher than it was at the end of the first quarter. This reflects the higher level of loan demand that we are seeing, as well as the contributions being made by new bankers that we have added over the past several months. We've previously talked about the additions we have made in the areas of SBA, agribusiness, and specialty finance. More recently, we've added some new bankers to increase our business development activity in St. Louis, and other high growth areas in Northern Illinois. We're about a $500 million bank in St. Louis. And given the size of the market, there's a lot of opportunity for us to grow market share. We have a new market president in St. Louis, and we have added experienced commercial bankers in order to build a larger, more productive team. As a result, we are seeing more lending opportunities in that market, and we are having more success in cross selling our wealth management services. It's still early in this initiative, but the initial results are positive. And we think that our results in building our St. Louis presence can help drive a higher level of organic growth in the future. We are seeing the benefits of improved efficiencies from our technology investments. We continue to leverage technology. And we have some additional rollouts scheduled later this year that will help us take out some other costs and move down towards the bottom of the targeted expense range that Eric provided earlier. On a final note, since the beginning of 2020, we indicated that our priority would be to focus internally on improving our operations and optimizing our business model, while building our capital ratios. We've made significant progress on the goals we set, which is reflected in our higher level of profitability and increased capital ratios. While we still have many internal initiatives we are working on to further improve our performance, we are now at a point where we believe that we can resume evaluating small M&A opportunities. It's an active market for M&A. The low rate environment, low growth environment is pushing more banks to consider selling. And we want to be a participant in the consolidation where it makes sense for us. So where there are opportunities that present a compelling strategic and economic rationale, and would not disrupt the positive momentum we have built, we are open to executing on small scale transactions that we believe could enhance the value of our trend, of our franchise and generate a good return for our shareholders. With that, we'll be happy to answer any questions you might have. Operator, please open the call.

[Operator Instructions]. Your first question comes from the line of Michael Perito with KBW.

Hi. Good morning.

Good morning, Mike.

A few questions for me. I wanted to start on the -- just the expense guide. I just wanted to clarify the comments there. So it sounds like the higher -- the 40 million to 42 million, which is a little higher than what you were guiding to last quarter, sounds like that more is for the third quarter where expenses could be between 41 million and 42 million. But by the exit of the year, you expect to be closer to that $40 million number. Is that I guess capturing the comments in the prepared remarks accurately?

Yes, I think that's exactly how we sort of see it right now.

Okay. And I guess just on that point, the $40 million run rate, how do you think about growth, Jeff, longer term as you continue to invest and look to add lenders and do those things? What's kind of a decent growth rate as far as you guys see it with what you have on the docket today that we should be thinking of, off of that 40 million plus or minus number?

Yes. And a lot of what we've done this year is the bankers we’re adding were sort of trading up. So we're not adding sort of net new bankers. So we're a lot more productive in our commercial staff today than we were a year ago. We have I think a better lineup of bankers and frankly, less bankers. So we haven't necessarily as we've added these bankers, added new expense which I think is a real positive. And I think as we think forward, we still -- I still think that we've got sort of -- hold expenses in line, so I wouldn't be thinking of a 3% increase in expenses going forward. It’s sort of something less than that.

Got it. That's really helpful. And then on the credit piece, on the three hotel/motel properties that I think you guys mentioned will just have kind of a longer recovery period. I was wondering if you could maybe just give a little bit more color in terms of kind of what the exposure is, like what's been charged off or hasn't yet or any reserves? And just how you -- what the performance is today, but it sounded like -- you guys can correct me if I'm wrong, but it sounds like there were still a decent amount of confidence that they will recover or just take more time, just wondering if you could expand on that a little bit further?

Yes. They're more in that business travel market, which their occupancy rates are still sort of lagging where they need to be the cash flow. So as we said, two of them we feel pretty good about. We're in good collateral positions. The third one, maybe not so much and we did put about 1.2 million aside on specific reserves. We haven't charged anything off at this point, but we feel that we're appropriately reserved to handle where these properties go in the future.

So the $1.2 million, is that specific reserve on the one property?

Yes.

And what's the size of that property, Jeff, or of that credit rather?

It's probably a $5 million, $6 million loan balance.

Got it. Okay, helpful. And then on the loan growth side, I was curious if you could just -- all the comments at the end of the prepared remarks they were helpful in terms of the line utilization and the potential upside. I was wondering if you could just comment on kind of the appetite and pipeline for additional consumer lending, and if we should continue to expect that to contribute kind of similarly to what it did in the second quarter. And then also just the commercial FHA lines, is that something that could normalize back up and be a tailwind or was it elevated and this is a better kind of level set figure for us to consider moving forward?

Yes. That's a hard one for us to sort of forecast. I would -- in that business, we really look at sort of where the average balances for the quarter. And I think the average did come down quarter-over-quarter. I think our average was probably in that $125 million range in the second quarter. I think where we're at right now is probably a good spot. I don't -- maybe there could be a little bit of tailwind. We have a drop in interest rates that could create some more refinancing with our partners that are going to need to draw on that line some more. But the net income or the margin impact is fairly small, right? As we look quarter-over-quarter, we're looking at hundreds -- a few $100,000 difference in margin dollars as those balances move around. So it's not -- it looks like it should have a bigger impact when they move on the balance sheet, and you're only looking at spot balances at the end of the quarter. And maybe what we could do is provide some average disclosure to give you a better sense of what that looks like. So, I wouldn't say a significant tailwind, even if it goes back to where it was last quarter in terms of averages, the margin would be up a few $100,000.

Got it. And then in terms of GreenSky?

Yes. So I think what we talked about last quarter was we were going to increase that position between 75 million and like 125 million over the course of the remaining part of this year. I think GreenSky was up roughly $40 million this quarter. So we still have more and more increases as we move forward. So that will be some tailwind. But we -- I sort of looked at that as it's offsetting a lot of the residential runoff. Residential consumers are sort of consumer lending and it's really offsetting that runoff. It would be nice if the resi would slow down, but I'm not sure what's going to happen either with where rates are.

Got it, helpful. Thank you, guys, for taking my questions. I appreciate it.

Thanks, Mike.

And your next question comes from the line of Nathan Race with Piper Sandler.

Yes. Hi, guys. Good morning.

Good morning, Nathan.

Maybe just starting on fee income in the quarter. With ATG in the quarter for only about a month, and assuming kind of equity market valuations remain where they are, is it just fair to assume that we should layer on another 200,000 or so in related revenue in that wealth line for the back half of this year on a quarterly basis?

Yes, I think that's a fair position.

Okay, great. And then just on the card line, obviously, nice growth sequentially there. How much of that is just attributable to just some pent-up spending, stimulus efforts and so forth? And do you kind of expect that card revenue line to revert back to maybe what we’ve seen going back to the back half of '19 that's maybe on a more normalized environment basis?

We don't think so. I do think there's probably some pent-up demand going there. But we've had a lot of effort going on within this company to get on the retail front, get cards in consumers’ hands that might not have a card attached to their checking account. And with the online account opening, there's -- I think we see a higher level of card activation and usage. So I think we do see here that we've got a lot more cards activated and being used. So I think that bodes well for even if spending comes down. We do think that we've made some really good progress since the end of '19. And that over '19, the revenue is going to be higher.

Understood. That's helpful. Thanks, Jeff. And maybe just changing gears on the margin outlook and kind of the core spread revenue growth expectations to the back half of this year. It sounds like we've hit a trough on the core net interest income ex-PPP. Just curious if you guys kind of frame up expectations in terms of growth from this level here in 2Q? It sounds like the loan pipeline is obviously pretty strong compared to the end of March. They obviously see some variability in the warehouse lines and so forth from a bottom line loan growth perspective. But I'm just curious how we should kind of layer on NII growth with some ongoing redeployment of the elevated excess liquidity, both into loans and I imagine to some extent into securities as well going forward?

Yes. Nathan, I’ll take the first shot at it. But the liability restructure that we did should add -- ex-PPP should add $1 million a quarter or fairly close to that. We had nice loan growth in the second quarter, which is going to help going into the third quarter and we've got good pipelines heading into the third quarter, so we should see some nice loan growth. So we -- that's sort of the PPP forgiveness, we think it's a 1 million plus in margin dollars.

Got you. Okay, that's helpful. And maybe just one last one, just curious on the charge-off in the quarter. I believe it was tied to the credit that moved to non-performing in the first quarter. So just any additional details on that one would be helpful?

Yes, it was an acquired loan as an operating business had what we think could have a little bit of fraud going on in the company where the inventory receivables at some level wasn't there. And we put it on non-accrual. We've now dug in and thought that at this point, it's appropriate to take the charge-off. I think we feel that we've taken the losses on that credit as of now, but we're continuing to work on that to sort of work that credit out.

Got it, very helpful. I will step back for now. Thank you, guys.

Thanks.

[Operator Instructions]. Your next question comes from Terry McEvoy with Stephens.

Good morning. It’s Brandon Rood [ph] on for Terry. A couple of questions quick. The first one, following your last comments there was about M&A. It kind of seemed like you might be open to maybe some smaller bank acquisitions as well as fee generating. Can you just kind of maybe talk a bit more about that?

Yes, I think we feel like we've made -- in the last 18 months made a lot of progress internally on efficiencies, sort of streamlining the businesses we want to be in, exiting the businesses we didn't want to be in, and building out sort of our commercial line, right, to really begin to build pipelines. And there's some more things we've got planned on technology and efficiencies for the back part of this year and into next year. But we're getting to the end and feel that -- we did ATG and it was small, not very impactful internally. So our folks could continue to work on the initiatives we had internally, and sort of are looking at banking the same way. It will still be small, and there will be in market that are sort of less disruptive to the company.

Okay. Thank you for that. Another one here. The impairment on your commercial servicing rights, they kind of bounced around the past couple of quarters. Is that just tied to wherever interest rates finish the quarter at, or how I guess looking forward can we model that out?

Yes. Well, when you figure that out, you let me know. So it is tied to -- I think it's tied to interest rates, right. These are commercial mortgage servicing rights. And when rates are low, there's more loan modifications going on in the portfolio and more refinancing going on in the portfolio. So when rates are lower, there's an opportunity for borrowers to sort of refinance to a lower rate. And so what we're seeing mostly is a higher level of payoffs that are happening within that book that's driving the valuation. We amortize that asset off, but that the amortization or the estimate of what we think the paydowns are going to be, the paydowns have been running higher, so then we have to further write that asset down. Since we're not in the Love Funding business anymore, we're not adding to the book to sort of offset some of that that might be going on.

Sure. Okay. Thank you. One last one on deposits. You said they came down about 2.5% this last quarter due to the commercial FHA deposits and retail deposits. Can you maybe quantify a little bit between the two? How much was driven from the retail deposits versus the FHA?

The vast majority of it was the servicing book.

Okay.

I would say the servicing book was north of $100 million and retail is probably in that maybe $40 million range.

Okay, got it. All right. Thank you.

And you have a follow-up question from the line of Nathan Race with Piper Sandler.

Yes. I appreciate you taking the follow-up question. Just want to go back to just the credit discussion a little bit just in terms of thinking about provisioning charge-off and kind of where the ACL is going to trend over the next couple of quarters? It doesn't sound there's much loss content expectations with the hotel credits that were placed on non-accrual in the quarter. And I imagine maybe there's some need to provide for growth, but you also have some excess unallocated reserves. So just any expectations just in terms of charge-off levels of provisioning over the next couple of quarters would be helpful?

Yes. I think we feel good on the charge-off front. I think we've sort of pushed through this quarter what we thought we probably have losses in. And on the provision side, there's still -- the economic forecast I think can still get better. So that potentially could offset any growth that we would need to fund the reserve. So I think that maybe somewhat similar to this quarter as I sit here and just think about next quarter. I don't think it's going to be -- it won't be as high as the first quarter. I think it will be closer to what it was in the second quarter. Maybe I’ll just say that.

Okay, got it.

And very well could be zero again. That could very much be the case.

Got you. So as soon charge-offs come down and provisioning remains pretty muted maybe near the level that we saw here in the second quarter, it's probably fair to expect a reserve to come down albeit to a lesser degree than we saw in 2Q just with charge-offs coming down?

Yes.

Okay. Perfect. I appreciate all the color, guys. Thanks, again.

Yes.

I’m showing no further questions in queue. I would like to turn the call back over to management for closing comments.

Thanks for joining the earnings call today, and we'll see and talk to everybody next quarter. Thanks.