Good morning, and welcome to the Mercantile Bank Corporation second quarter 2022 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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. 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 property 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 14.
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 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 non-interest income categories. As was expected this year, rising mortgage rates have significantly dampened the production volumes experienced over the last two 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 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 continue to perform in 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 hiring new staff and replacing existing staff, while managing payroll costs continue to challenge management teams.
Higher 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 two-plus years with the COVID-19 pandemic, the Mercantile client base continues to adroitly manage their business and personal finances and maintain a steady performance. As the FOMC acts to slow the rate of inflation in the U.S. economy, we believe we're 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, yet 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 and 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 2022 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, non-interest income, and branch optimization activities. We reported annualized core commercial loan growth of 10% for the second quarter and 11% for the first six 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 12-18 months totals $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 non-performing 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 borrower's 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 one year ago. Refinance activity is 36% of last year's comparable quarter. Net interest 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 seven-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 six 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 six months of 2021.
Higher net interest income stemming from an 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 low mortgage loan rates and results in refinance activity. Our earnings performance in the 2021 periods also benefited from large negative loan loss provisions reflecting improved economic conditions and expectations. Turning to slide 11, interest income on loans increased during the 2022 periods compared to the prior year periods, reflecting growth in core commercial and residential mortgage loans.
The yield on loans during the 2022 periods was relatively similar to that of the 2021 periods, as an increased interest rate environment during the first six months of 2022 mitigated the significantly higher level of PPP net loan fee accretion recorded during the 2021 periods. 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 million and $4.9 million higher during the second quarter and first six months of 2022 when compared to the respective time periods in 2021. Interest expense on deposits declined during the 2022 periods compared to the prior year periods, 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 million and $0.1 million higher during the second quarter and first six months of 2022 when compared to the respective time periods in 2021.
Net interest income increased $3.5 million and $4.8 million during the second quarter and first six months of 2022 respectively, compared to the respective time periods in 2021. We recorded a credit loss provision of $0.5 million and $0.6 million during the second quarter and first six months of 2022 respectively, compared to a negative provision expense of $3.1 million 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. Continue 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 six 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 to a leased 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 periods, which was achieved despite a significant reduction in PPP loan fee accretion. During the first six 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 on a 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 equals 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 advance 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 capital 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 downstream 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 six 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 two quarters with fee income, overhead costs, and our tax rates 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. That concludes management's prepared comments. We'll now open the call up for the question and answer period.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, guys. How are you?
Good morning, Brendan.
Good. Maybe just to start out on the margin outlook you provided. First, thanks for offering the detail again on your rate expectations there. I guess kind of looking at year-end 3.80%-3.90% margin, assuming another 150 basis points of federal funds rate 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?
Yeah, sure. Brendan, this is Chuck. In regards to the excess liquidity, we think we'll be down to an excess of probably somewhere between $50 million and $100 million by the end of this year. Again, most of that being funded 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. That gets our balances down a little, you know, 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 we just went ahead and stuck with that for the rest of this year. We do know that there's still a lot of stimulus sitting in the deposit accounts of our customers. At least to date, we haven't seen any significant movement. Definitely on an overall basis. We certainly have seen movements within every customer. Any customers that we've had some relatively significant withdrawals, you know, we continue to grow our deposit base in large part because of the ongoing growth in the commercial loan portfolio as those borrowers bring, you know, rather significant deposit balances with them. That's kind of the overall assumption that goes into our margin expectations.
Got it. I may not have caught it, but did you mention kind of what deposit betas you're using? I heard the balance part.
You know, the deposit rates, besides the provision expense, are probably the two biggest items that could potentially have the biggest impact on our forecast. To date, any increases in deposit rates have been quite limited. That's not only us, but that's all the banks in our market area. 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.
That is in our assumptions. We basically have used our historical beta assumptions for the rest of this year, which range generally 40%-60% of the Fed increases.
Got it. That's super helpful. Maybe one more from me, I guess 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. You know, 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 the 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?
Yeah, this is Chuck again. I think you know you hit 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, you know, 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.
As we look at our particular forecast that we use as well as that of the others, to date, we just have not seen any significant impact on the unemployment rate. The GDP, while they're coming down, they're still relatively unchanged on a bigger scale. I think those are the two driving factors, the unemployment one by far for sure, when it comes to these, you know, how these models work.
Yeah, understood. Thank you for taking the questions.
You're welcome.
The next question will be from Daniel Tamayo from Raymond James. Please go ahead.
Hey, good morning, everyone.
Good morning, Danny.
Maybe I can just start a follow-up on the NIM conversation. The 3.80%-3.90% is a big number, especially relative to where you were last year or last quarter. Obviously, there's been a lot of rate hikes since then. You know, 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-$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, you know, NII at that point or the margin?
Yeah. 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 net interest income and on the net interest margin. You know, who knows what they're going to be doing next year. They certainly seem like they're going to stay aggressive for the remainder of this year, and that's our expectation. You know, 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. As I mentioned, I think as there's less liquidity in the system and the banks, you know, 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, you know, 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, you know, 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 2023, would stay relatively consistent with our projection for the fourth quarter of this year.
Okay. All right. Thank you. You know, on the loan pipeline, you talked about that remaining strong. You know, are you seeing any impact from the rate hikes on demand now? What's your overarching thought going forward as we continue to see higher rates, how that may impact loan demand?
Yeah, 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. I would suspect that that would be the first place that we'd see that demand soften. I would emphasize that to this point, that hasn't occurred.
Okay. Okay. Terrific. Last one for me. You know, you mentioned the capital levels, you know, still strong, but obviously have taken a bit of a hit here with the AOCI impacts. Just if you could give your thoughts on kind of how comfortable you are with TCE levels in the mid-sevens, or if that's something you're just not considering too much, if you're more focused on the regulatory side.
Yeah. I think we're, you know, we're focused on both sides. You know, it depends on who we're talking to. You know, if you were the FDIC asking me the question, I might answer a little bit differently. You know, they're both important to different groups. I think when we look at the, you know, the tangible and we see that under 8%, we know a big chunk of that reason why we're under 8% is the, you know, the interest rate environment. Over time, that will take care of itself, and then we'll end up having a positive impact long term on that capital ratio. All things being equal, with that taking place as well as, you know, 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 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, you know, think about raising capital?
Yeah, I think that we're pretty far away from having to raise additional capital. You know, certainly we supplemented our base with the subordinated notes, you know, barely six months ago. I think we have built quite a cushion where we are as of today. 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. You know, 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.
Yeah, this is Bob. I'll follow up on that in summary, we're really comfortable with our capital levels. As Chuck said, we look at that all the time. Look at it every quarter with our board. 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.
Okay, great. I appreciate all that color. Thanks, guys.
Thank you.
Welcome, Danny.
Again, if you have a question, please press star then one. The next question is from Damon DelMonte with KBW. Please go ahead.
Hey, good morning, guys. Hope everybody's doing well today. Just wanted to start off on-
Morning, Damon.
Morning. Just want to start off on the loan growth side of things. You know, another quarter of a decent amount of portfolioing of mortgage loans for you guys. Just wondering, you know, it's that 17% of total loans, you know, up from 12% or 13%, you know, in the first half of last year. Kind of where do you see that heading directionally? 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're putting in the portfolio?
We'll stop you right there.
Yeah, we're gonna stop you right there, Damon.
A very significant portion of the mortgage loans that we put on our books are adjustable rate. They are predominantly 7/1 ARMs 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, you know, certainly, you pointed it out, the percent of residential mortgage loans has been increasing, and that's really an increase really in the last six months, maybe nine months as we've seen mortgage rates go up.
You know, many customers are now looking to the adjustable rate product versus the fixed rate product. We continue to sell all the fixed rates certainly that we can. Again, repeating myself here, but if we put them on the balance sheet, a vast majority are adjustable rate, you know, down the road at some point in time. It seems to me that, you know, as far as mortgage loans, that trend would likely continue. You know, 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.
You know, clearly volume and production is going to have a big say on that. You know, we know that will remain under pressure, especially given the significant decline in refinance. I think as Ray mentioned, you know, on the purchase side, we actually saw an increase. We're, you know, very pleased to see that. We certainly expect some level of production. It's hard to predict. You know, that's one of those things that's pretty hard to predict. We don't really see a change in, you know, 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.
You know, we did see, and we have seen throughout this year, but especially in the second quarter, a fairly large dollar amount of payoffs. As we mentioned, most of that comes from selling the businesses or selling the underlying assets. We do know that that activity, you know, continues. Last year, when we grew commercial loans 20%, the volume of payoffs was quite a bit lower. I think this year, maybe a little bit higher than average, but closer to average this year. Our overall growth of, you know, how you want to slice and dice it, 9%-11% is actually above our historical norm of closer to 7% or 8%.
We think that 10%, 11% on the commercial side is something that we'll continue to enjoy for the remainder of this year. Again, payoffs is always going to be the big question. 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, 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's that substantial.
You know, 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. Our construction portfolio is up quite significantly over what it was the last couple of years. That'll give us certainly a tailwind over the next 12-18 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'll drive our commercial line of credit usage upward. That will be somewhat of a balance on a proportional basis to the increase that we see in the residential portfolio as well.
Got it. Ray, you had mentioned that the line utilization was 34% this quarter. 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.
Got it. Okay. That's helpful. All right, great. Then I guess, you know, as we look at the margin, you know, this is a pretty sizable jump from this quarter to what you're projecting for the back half of the year. It sounds like, you know, 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.
Okay. You expect that to be flushed out basically, Chuck, by the end of the year?
Yeah. At the very end of the year. I mean, we'll still have some of that through into the fourth quarter itself. 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 will be less of an impact than the third quarter.
Okay. Just kind of directionally here, you know, 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 much. You know, you're still looking at like a anywhere from a 35%-45% increase off of second quarter earnings. Is that reasonable? Is that, like, kind of what your expectation is?
Yeah. I think based on your comment about provision expense, you're gonna guarantee that, right? Yeah. 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.
Yeah.
Having said all that, Damon, I think that makes sense. You know, we're gonna. You know, 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, declining impact on excess liquidity. All that adds up to, you know, some notable increase in overall earnings performance. Again, those deposit rates and provision, you know, definitely are two big question marks out there.
Got it. Okay. That's all that I had. Thanks a lot. Appreciate the color.
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.
Yeah. Thanks, Chad. 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.