Good morning, ladies and gentlemen and welcome to the Q2 2020 Midland States Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Tony Rossi from Financial Profiles..

Thank you, Whitney. Good morning, everyone and thank you for joining us today for the Midland States Bancorp second quarter 2020 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 of Midland’s Investor Relations website to download a copy of the presentation.

Before we begin, I would 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 website.

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 website 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 would like to turn the call over to Jeff.

Jeff?.

Good morning, everyone. Welcome to the Midland States earnings call. As we always do on these calls, I am going to start on Page 3, but I want to go somewhat out of order for a minute because of the heightened focus on asset quality and loan loss reserves during this pandemic.

The good news is that for now we are just not seeing the type of asset quality deterioration that some might have expected and our diversified revenue helped maintain total revenue.

The bad news of course is that we are not fully through the pandemic and sitting here today it is hard to know if things are going to get better or worse in the coming months. Also, given that some states are now delaying or cancelling their reopening plans, we believe it is prudent to take a more cautious view of our seasonal modeling.

In broad terms, it now appears that the slower recovery is far more likely than a quick V-shaped return to more normalized economic activity.

Principally, based on that more cautious view, we have increased our reserves by 22 basis points to 1.21% of total loans, excluding loans with government guarantees for other credit enhancements, such as our GreenSky portfolio.

We will address these topics in greater detail as we go through the deck, including providing a good look at our loan portfolio.

Getting back to the beginning of Slide 3 and the highlights of the second quarter, our team has been able to execute well under challenging conditions and is doing an excellent job of servicing our clients, capitalizing on new business development opportunities and maintaining disciplined expense control.

As a result, we saw positive trends in a number of key areas, including significant balance sheet growth, increasing revenue and lower expense levels. These trends combined to produce a strong quarter of earnings as we generated $12.6 million or $0.53 per diluted share.

During the second quarter, most of our loan production focused on helping clients access funding through the Paycheck Protection Program. Our PPP production efforts drove strong growth in both total loans and deposits.

Within our existing portfolio, we continue to implement a heightened loan monitoring program to get regular updates on financial performance of our borrowers. Overall, credit quality is holding up well, with just a slight increase in non-performing loans in the quarter.

While a great deal of uncertainty remains regarding the duration of the pandemic, we are seeing some encouraging signs across our markets and customers and we continue to see strong pipelines across our business units. And with improved performance in the markets, we saw a strong increase in assets under management in our wealth management business.

Our commercial lenders have reached out to more than 75% of borrowers who have COVID-related deferrals. Between 60% and 65% of the loans that we granted deferrals on in April and May have either resumed making payments or are expected to do so.

In the pockets of the economy, where we are seeing solid loan demand, we are doing a good job of capitalizing on the new business development opportunities, which led to strong quarters from a number of our different business lines.

Our equipment finance group had $122 million of loan and lease originations, which represents the largest quarter of loan production since we expanded this group in 2018. Driving this increase was an uptick in our core markets of construction and manufacturing.

Our commercial FHA group had $135 million in rate locks with rate modifications accounting for about half of the rate locks in the quarter.

Our residential mortgage banking group had its most productive quarter in 3 years as it capitalized on an increasing demand for refinancing, which represented approximately 65% of total residential loan production in the quarter.

Regarding our strategic initiatives, before the pandemic hit, we have laid out a number of issues that we would be focused on this year. To some extent, the environment created by the pandemic has helped our progress in a number of these areas.

We have been able to continue to improve our deposit mix as all the deposit growth we have seen has come in our lower cost categories and the expense discipline we have maintained combined with our positive trends in revenue generation produced strong improvement in our efficiency ratio to 58.5% in the second quarter.

While our primary focus remains on helping our clients and communities manage through the impact of the pandemic, we are very pleased that we have been able to make solid progress on the long-term initiatives that we have in place to enhance our returns and drive shareholder value. Moving to Slide 4, I wanted to review our efforts in the PPP program.

Through the end of June, we have originated more than 2,300 PPP loans for $313 million to companies that employs an aggregate workforce of more than 28,000 people. We had some clients return their PPP funds. So, our balance at the end of the quarter was down to $276 million. We have collected $9.7 million in fees with our average fee being 3.5%.

The PPP program had a significant impact on our financial results in the quarter. So, on the slide, we have provided a summary of the effects it had both positively and negatively on various line items and metrics. Turning to Slide 5, we will provide some additional information on our loan deferrals.

We had just under $900 million in deferred loans, which represented 18.6% of total loans. 57% of these loans were commercial real estate, 33% were commercial loans, and 7% were consumer loans.

We had just under $800 million in deferred, commercial and commercial real estate loans as of June 30, which represented 22.7% of our total commercial and commercial real estate loans.

By industry, the largest area of deferrals have been in the hotel motel and real estate rental and leasing sectors, with no other industry accounting for more than 10% of total deferrals. As I mentioned earlier, between 60% and 65% of our deferred commercial loans have either resumed making payments or expected to do so.

And in preparation for the evaluation of deferral extension requests, we are gathering current financial data and cash flow forecasts from our borrowers. Based upon our analysis of the data, we have collected at this point we estimate that approximately $299 million of loans will need a second deferral.

So, it’s possible that we will show a substantial reduction in loan deferrals when we report our third quarter results.

If a second round of deferrals is needed, we estimate that more than half will be in the hotels and motels and transit and ground transportation business as those borrowers continue to see revenue and occupancy use trends below normalized levels.

At this point, I am going to turn the call over to Eric to provide some additional detail around our second quarter performance.

Eric?.

Thanks, Jeff and again good morning everyone. Before I begin, I would like to mention that we have updated the data for a number of slides that we have provided in the earnings deck last quarter, but we have included them in the appendix this time since that information hasn’t changed a great deal.

On today’s call, we will focus primarily on the second quarter trends and some new disclosures that we have provided. Starting on Slide 6, we will take a look at our loan portfolio. Our total loans increased $463 million or 10.6% from the end of the prior quarter. The PPP loans contributed $276 million to our loan growth.

Outside of the PPP program, the primary drivers of loan growth were equipment finance loans and leases, consumer loans and a $104 million increase in the utilization of a credit line that we extend to an originator of commercial FHA loans. On Slide 7, we have provided some additional data about our equipment finance portfolio.

Through this business, we provide financing solutions on a national basis to equipment vendors and end-users. We had total outstandings of $751 million at June 30 with a weighted average interest rate of 4.84%. The average loan or lease size is just about $130,000 and the largest credit in the portfolio is $1.6 million.

It’s a well-diversified portfolio across industries, with trucking and manufacturing being our two largest concentrations at about 20% each. At June 30, we had $233 million of deferrals in that portfolio, which represented about 32%.

These deferrals are weighted towards borrowers in the transit and ground transportation, trucking, manufacturing and healthcare industries. And from a geographic perspective, the two states with the most deferrals were California and Florida, comprising 16% and 14% of the deferrals respectively, with no other states accounting for more than 10%.

In the first round of equipment financing deferrals, we generally granted each borrower’s request if it seemed clear, their business was likely to be hurt by the pandemic. For any second deferrals, we plan to do additional analysis for each request.

At this point, based on our customer surveys, we are expecting about $77 million of the equipment finance portfolio or approximately 10% will need a second deferral and will be weighted heavily to the transit and ground transportation sector. On Slide 8, we have provided an overview of our hotel motel portfolio.

Including both the commercial real estate and commercial loans in this industry, we had $173 million of loans outstanding as of June 30. We have 57 loans in this portfolio with an average loan size of $3 million. The largest loan in the portfolio is $11 million and that loan has an LTV or a loan to value of 56%.

Overall, it is a very conservatively underwritten portfolio, with an average LTV of 54% and more than 90% of the properties are national chains. We extended deferrals on $146 million of these loans.

And given that business and leisure travel remained below a normalized level at this point, we estimate that approximately $124 million of these loans will require a second deferral. Looking at Slide 9, we have provided some information on the consumer loan portfolio that we have through our relationship with GreenSky.

Most of these credits are low dollar instalment loans used for home improvement projects. At June 30, we had $681 million outstanding in this portfolio, with an average loan size of just under $2,300. The average FICO score of these borrowers is 746.

The portfolio has proven to be a very strong performer throughout the pandemic as the delinquency rate has declined every month this year and stood at just 34 basis points at June 30. The structure of our agreement with GreenSky provides for very strong credit enhancements in this portfolio.

The first enhancement is a cash flow waterfall structure, under which the cash flow from the overall portfolio is applied to loan servicing fees, credit losses in an agreed upon target margin for all loan originations. Only any excess cash flow is payable to GreenSky as an incentive fee.

And due to the strong performance of the portfolio, GreenSky has earned incentive fees in 17 of the past 18 months, including every month this year. The second enhancement is the escrow funds held by Midland, which are available to cover any deficiency in Midland’s principal or target margin.

These escrow funds are increased or decreased monthly based on their originations and payoffs and typically range in the 4% to 4.5% range of total GreenSky loans held by Midland. At June 30, this escrow account stood at $29.5 million, which represents 4.3% of the total loans in the portfolio.

This has been a very successful program for Midland as we have experienced no charge-offs in this portfolio in the 9 years that we have been partnering with GreenSky. Turning to Slide 10, we will take a look at our deposits. Total deposits increased $292 million, or 6.3% from the prior quarter.

The growth was entirely attributable to increases in core deposits primarily from commercial customers with a portion of that being PPP funds that were deposited at the bank.

The growth in our core deposits continued the positive trend in the remixing of our deposit portfolio as we use core deposits to replace $76 million of higher cost CDs that ran off during the quarter. We have also had a significant decrease in the cost of funds.

Following the Fed’s lowering of rates in March, we continued to aggressively re-price deposits into the second quarter and between CDs that matured and rolled over into lower-priced CDs or other transaction accounts and other deposits that r-priced lower, we have brought our cost of funds down from 74 basis points to 45 basis points.

Looking at Slide 11, we will walk through the trends in our net interest income and margin. Our net interest income increased 5% from the prior quarter, mostly as a result of higher average loan balances and the reduction in interest expense. Excluding the impact of accretion income, our net interest margin declined 12 basis points.

This was primarily due to excess liquidity that was invested in lower yielding earning assets, the addition of low interest PPP loans and the re-pricing of our variable rate loans. This was partially offset by a 29 basis point decline in our cost of deposits due to reductions in our deposit rates and the improved mix of deposits.

Approximately $193 million of CDs with a weighted average rate of 2.14% matured during the course of the quarter. Approximately 60% of these CDs renewed at lower rates and the remaining funds flowing into other transaction deposit accounts. And finally, on an accounting note, we are amortizing the PPP loan fees over the 24-month term of these loans.

Turning to Slide 12, I would like to provide some information on some of the factors that will impact our margin going forward. We also have a number of other opportunities to lower funding costs in the third quarter.

We have $107 million in time deposits with a weighted average rate of 1.36% that are scheduled to mature over the course of the quarter. We also have $183 million in money market accounts that have teaser rates of 1.6% that are scheduled to re-price this quarter.

Also, as we mentioned last quarter, in June, we had $30 million of sub-debt become callable, which we did not call and those notes have now moved to their specified floating rate structure, which will reduce the interest rate by approximately 130 basis points.

As an offset, we plan to continue building liquidity on the balance sheet, while we manage through the impact of the pandemic, which will continue to put pressure on our net interest margin. But when we start to see PPP loans for being forgiven, we will accelerate the recognition of the loan fees, which will benefit our margin.

Turning to Slide 13, we will look at trends in our wealth management business. Our total assets under administration increased $286 million from the end of the prior quarter, primarily due to improved market performance. Our total revenue was up slightly from the prior quarter due to the increase in total assets.

That was partially offset by lower trust fees following the larger amount we recognized last quarter related to tax preparation. On Slide 14, we will take a look at non-interest income.

We had an increase of 125.6%, this quarter following the $8.5 million impairment of commercial mortgage servicing rights that reduced our non-interest income in the prior quarter.

Excluding the impairment, the increase of 13.5% was primarily due to the strong performances of our commercial FHA and residential mortgage banking groups that Jeff previously discussed. Turning to Slide 15, we will review our non-interest expense.

We had a couple of minor adjustments this quarter to backup non-core expense items for a small loss on residential mortgage servicing rights held-for-sale and integration and acquisition expenses. After backing out the adjustments for each quarter, our non-interest expense declined by approximately $600,000 from the prior quarter.

The decrease was primarily due to lower salaries and employee benefits expense resulting from the full quarter impact of the staffing level adjustments that we made during the first quarter. With the strong revenue generation we had this quarter and the decline in expense levels, our efficiency ratio improved to 58.5% in the second quarter.

Turning to Slide 16, we will look at our asset quality trends. As Jeff mentioned, we continued to see relatively stable trends despite the impact of the pandemic.

Our non-performing loans increased by approximately $2 million during the quarter due to two loans totaling $7 million being moved to non-performing offset by transfers to other real estate owned. But as a percentage of total loans, our non-performing loans declined to 1.25% from 1.33% at the end of the prior quarter.

We have $3.1 million of net charge-offs or 26 basis points of average loans. We recorded a provision for loan losses of $11.6 million as we continue to build our level of reserves in light of the pandemic. At June 30, approximately 96% of our allowance for credit losses was allocated to general reserves.

On Slide 17, we show the components of the change in our ACL from the end of the prior quarter. Our ACL increased by $8.6 million and strengthened our reserve to 97 basis points of total loans from 88 basis points at the end of the prior quarter.

Approximately $5.4 million of this increase was attributable to changes in our portfolio largely resulting from new loans, downgrades to risk ratings and loan deferrals. The other major driver of the build was $2.9 million added as a result of a downgrade in the economic forecast. On Slide 18, we show our ACL broken out by portfolio.

Relative to last quarter, the most significant reserve builds occurred in our owner-occupied and non owner-occupied CRE portfolios, which now have allowances of 1.27% and 1.37% held against them respectively.

In addition, as previously mentioned by Jeff at the beginning of the call, when excluding loan portfolios with certain credit enhancements or government guarantees, including the PPP portfolio our GreenSky loans and a commercial FHA warehouse line, our ACL increased to 1.21% of total loans compared to 0.99% of total loans at the end of the prior quarter.

And with that, I will turn the call back over to Jeff.

Jeff?.

Alright. Thanks, Eric. We will wrap up with a few comments on our near-term outlook and priorities.

First and foremost, we will continue to operate with a conservative approach while the pandemic continues and maintain strong capital and liquidity positions and a high level of reserves and we will continue to support our clients with our loan deferral programs and by helping them apply for forgiveness on PPP loans.

While the pandemic is ongoing, there are many things outside of our control, such as loan demand, which makes it difficult to provide any projections about what sort of loan growth we might see over the second half of the year.

But we are focusing on those things that are within our control, which are consistent with strategic initiatives we outlined at the beginning of the year before the pandemic hit, namely leveraging technology investments to improve customer experience, reduce expenses and increase operational efficiencies.

We have been very productive in this area over the first half of 2020, while enabling much of our staff to work from home.

Some of the notable technology initiatives we have completed include launching a new online residential mortgage application portal, which has improved our efficiencies and profitability in this business during a time of increased activity.

Making improvements to our online and mobile banking platforms, including enabling retail customers to process wire transfers and implementing a new customer experience tool that we are using to accumulate and evaluate customer survey data, creating and launching an online portal for PPP applications in a very short period of time as well.

And we have additional projects planned for the second half of the year, including launching a new online account opening feature for retail customers.

Collectively, the progress we are making in leveraging our technology investments is resulting in significant improvements in our operations that we believe will pay dividends for years to come and enhance our ability to offer customers a superior banking experience.

Aside from the technology initiatives that produced cost savings, we also continue to evaluate all areas of our operations to identify other opportunities to reduce expenses. We have already been able to reduce expenses for certain portions of our infrastructure spending, including data and communications.

And now with the pandemic accelerating the utilization of digital banking tools by our customers and more of our back office support staff working from home, we believe we will have additional opportunities to evaluate our real estate needs going forward.

Over the long-term, we believe this could provide further opportunities to realize additional efficiencies in our operations, increase our earnings power, and improve our overall level of profitability. With that, we will be happy to answer any questions you might have. Operator, please open the line..

[Operator Instructions] Your first question is from the line of Terry McEvoy with Stephens..

Hi, guys. Good morning..

Good morning, Terry..

First off, thanks for all the extra slides, some really good data in here. So, I appreciate that. Maybe start with the outlook for the net interest margin. That seems like a lot of opportunities on Slide 12 here to reduce deposits.

But then Eric, you mentioned kind of the buildup of excess liquidity, so kind of any thoughts on the net interest margin either with – and with or without the impact of PPP over the near term?.

Yes, I will take a shot, Terry and then Eric can maybe add to it. But I think we are hopeful of where margin is today we can sort of hold with the – we have – we will have liquidity build, but we also have some opportunity on the deposit side as we laid out in that slide.

So I think we are thinking that margin could sort of hold for – with where we are at right now. That’s excluding the forgiveness of PPP that obviously will help the margin going forward. From a dollar perspective, dollar margin, we think that could - we have a good shot at holding dollars in third quarter, excluding PPP as well..

Okay.

And then follow-up, fee income, any thoughts on kind of third and fourth quarter trends, within some of the retail fees were down other areas kind of had some strength and kind of for the full year, I believe in the past, you have talked about FHA commercial and some sort of range on a full year basis, any thoughts on that business line?.

Yes. So I would – I think we continue to think that’s sort of a $3 million to $5 million quarter range with sort of the $12 million to $20 million annual range. And I think that we still sort of think of the business that way. Residential mortgage, we are seeing a nice uptick.

And we have done a lot of work in that business over the last year to sort of position it for actually a time like this. And so we are seeing those results.

On the fee side, residential fee – or the retail fee side and we are – we did see a nice – we had a nice quarter and interchange, which was good to see and I think on the service charges and NSF fees that was sort of down I think primarily because of stimulus payments coming into a lot of retail accounts and increasing balances.

So I am not sure – we are not quite sure where that line item is going to go. But yes, we are encouraged on all the other line items. Wealth management had a really good quarter given the market volatility that we have seen over the last 6 months.

So, yes, we are happy with how our fees came in the quarter and how fairly optimistic on the rest of the year..

And then just one last quick question within leasing, can you just run through transit and ground passenger kind of stands out here on the second deferrals being at 71%, what specifically is within that portfolio?.

Terry, this is Eric. Good question. So, sometimes internally we call that or especially vehicle industry as well, so there are charter buses in that group, there are limos in that group, there are hotel shuttles in that group.

That industry as you know has been hit incredibly hard by this pandemic and that’s where we are seeing the bulk of those deferrals. I suppose there is a possibility for additional stimulus in that industry over the course of the next month or so, but it’s hard to know if that will happen or not, but that’s the group charter buses and limos..

Perfect. Thanks, everyone..

Thanks, Terry..

The next question is from Nathan Race with Piper Sandler..

Hi, guys. Good morning..

Good morning..

Good morning..

I was hoping to start on Slide 17, just looking at the reserve increase in the drivers there.

I am just curious if you guys can kind of run through kind of the changes in criticized/classified in the quarter and how that impacted the ACL build this quarter?.

Yes, Nathan. This is Eric. I would be happy to. So, as we process deferrals and as we did triage and our various loan portfolios that had additional risks such as hotels, we had several downgrades during the course of the quarter.

So, if you look at our problem credits or special mentioned credits, they were up about $120 million over the course of the quarter. When you look at our ACL modeling, we are using probability of default loss given default metrics in that portfolio, which increase upon those downgrades.

So, we saw quite a few downgrades to that special mention category. We saw some additional downgrades to substandard, but that was less than about $20 million or so..

Okay, guys. So it sounds like the hotel portfolio drove a lot of that.

And I guess within that context, just curious if you guys have the specific reserve against the hotel portfolio at the end of the second quarter?.

Yes, I don’t think I have that in front of me, Terry. We have not put a lot of those on any sort of impaired list at this point, because they are within that COVID deferral period that we have in the SAFE Act. Those are included primarily in our non-owner occupied group in the portfolio..

Okay, understood.

And then maybe just changing gears on capital, CET1, I was thinking down the quarter with the share repurchases in the quarter, just curious – just an update on the appetite to continue on the – with share buybacks at this point just given that decline in capital sequentially?.

Yes. So yes, I think as I look at it, look at our risk-based capital ratios and they sort of held in, in the quarter both at the bank and at the holding company. We had balance sheet growth in the quarter of $430 million. It all came in zero-risk weighted assets. So, I think that we are – we like that.

So we are earning margin dollars on assets that don’t have a lot of risk in them. So, that’s good. Our program – our buyback program is still open. And we will still continue to evaluate it each and everyday and each and every quarter as we move forward, so....

Okay, very helpful. I appreciate you guys answering the questions. Thank you..

Thanks, Nathan..

Your next question is from Michael Perito with KBW..

Hi, good morning, Jeff and Eric. Thanks for taking the questions..

Good morning..

Good morning..

I want to follow-up on Nathan’s last question there a little bit can you maybe just provide a little bit more color, Jeff, on kind of what drove the appetite for share repurchases in the prior quarter? Was it simply just price just because it doesn’t seem what the comments about uncertainty and trying to be conservative, there was quite – there was some low growth, the dividend, the share purchases quite a bit of capital deployment going on at a time, when a lot of your peers are trying to preserve capital.

Just curious if you can maybe expand on that, the board’s thought process there a little bit more if you don’t mind?.

Yes. I mean, I think again, our risk weighted capital ratios were flat. So, the balance sheet growth more than came from zero risk weighted assets, so we are not taking more risk with growth on the balance sheet. So I think that’s an important part. And price to where our stock is, I think we bought shares back in the quarter at $0.81 to tangible book.

So I think between those two things and our appetite is not a big appetite, but we have our program and we are going to continue to sort of look at our capital, look at our credit book and look at the price of our stock and make decisions..

Okay Thanks for the expanded thoughts there.

And then on the expense side you alluded to a few things kind of a two part question, I guess, one, just near-term here, how are you guys thinking about the quarterly expense run-rate given some of the stuff that you have already done? And then second just when you talk about kind of the real estate costs, I mean, is that just branches or are there back office things you guys are considering or can you maybe just expand a little bit more about what’s being looked at on the cost side as we kind of move forward in this low rate environment?.

Yes. I think one of the important parts of what we have gone through in the last 4 months from this, send everybody home to work is do we need all of the office real estate that we have. So we are looking at, we are looking at that. We are also looking at different branches as well.

So, I think it’s both of those, made no decisions at this point, but we are looking and studying all those right now..

And in terms of the near-term kind of view on expense, the quarterly expense run-rate?.

Yes. I think we – the expense run-rate where it’s at right now, I think there is some opportunity to go a little down from here. But I think if you think about that going forward, if you are going to model something modeling what we did in the quarter is not a bad place to be..

Okay, helpful. Jeff and Eric, thank you. Stay well..

Yes. Thanks..

[Operator Instructions] Your next question is from David Konrad with D.A. Davidson..

Hey, good morning. Nice growth on the GreenSky portfolio. I was a little surprised by that given really overall consumer debt came down in the industry with card spend and card balances.

So, I was just curious if you had any color if you bought maybe a bigger percentage of the available pool from GreenSky this quarter or is it the fact that GreenSky is an outlier given their focus on maybe home improvement stores that didn’t get shutdown during the pandemic?.

Yes. So, we talked to GreenSky fairly often. So, they are seeing – they are seeing demand in home improvement. And as I – and I look around and talk to folks, people are travelling and they are improving their home. They are putting entertainment systems here and they are putting decks on the back of their house. They are doing lots of things.

So, I think there is a good demand for home improvement in that sort of where GreenSky really plays. So, they are seeing demand. The demand is coming our way as well. We are not buying loans from GreenSky. We originate through GreenSky. So that’s an origination there.

And we are – in the quarter, we had a – we start to set some targets every quarter and we haven’t changed those targets probably in at least 6 months. So the growth to the balance at the end of this quarter was to get to sort of our top end target.

So, at this point, we – unless we decide going forward to increase the target balance if you will, we wouldn’t expect GreenSky to grow in the quarter. Now, we might change that this quarter or next quarter, but they are seeing a lot of demand.

And also – and we disclose it in the slide, I don’t think we talked about it in our comments, but we sold two tranches of GreenSky paper to others at par. And I think that also sort of validates the fact that the credit enhancements in these portfolios allow you to sell consumer credit at par..

Okay.

Just a quick follow-up, what is the yield of the portfolio?.

Yes. Our target yield is probably between 4%, maybe 4% and 5%, something like that, maybe even around 3% and 3.5% to 5%, somewhere in there depending on where the credit is in its cycle.

We get paid a little less when it’s in our promotional period, when they are sort of interest –and what we call the promotional period and then it’s a little higher once it comes on the promotional period..

And do you have – can you give us color on what the gross yield is? I am assuming then you have maybe 500 or so bps of protection from the waterfall with maybe like a plus percent?.

Yes. GreenSky had a nice – they had a nice slide on one of their decks. I don’t know if it was at an investor conference, but the example they had is, for example, let’s say that the end consumer interest rate is 12%. GreenSky servicing fees come out first call that 1%, then any charge-offs in the portfolio would come out call that 3%.

So, now we are down to 8%, we get our bank margin and then the dip whatever is left in the waterfall is sort of a performance feedback to GreenSky, which the way I look at the performance fee is their ability to reduce credit losses allows them to get a bigger part of the incentive fee.

So, they are incentivized to really one, make good credit which we provide the credit box and two, do a good job of servicing and collecting on the loans. So, I think in the quarter well, as we stated 17 in the last 18 months there was performance fees paid to GreenSky. So, there is excess cash flow in the waterfall.

And this year, we haven’t eaten through that waterfall and so we have not even gotten to the escrow balances that come next. And there is a fair – there is a lot of escrow balances that sit behind that..

Right. Perfect. Okay, thank you..

Yes..

I am showing no further questions at this time. I would now like to turn the conference back to management for any closing remarks..

Alright. Thanks everybody for joining the call today and we will talk again next quarter..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..