Horizon Bancorp (NASDAQ:HBNC) Q3 2021 Earnings Call

0:00 Good morning, everyone, and welcome to Horizon Bancorp conference call to discuss financial results for the three months ended September 30th, 2021. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. 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 limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue. Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's current 10-K and later filings.

1:03 In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during this call. If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the company's website, www.horizonbank.com. Representing Horizon today are Chairman and Chief Executive Officer Craig DeWitt and Executive Vice President and Chief Financial Officer Mark Seeker. They will be joined for the question and answer session by President Jim Nuff, Executive Vice President and Chief Commercial Banking Officer, Dennis Kuhn, and Senior Vice President for Customer Banking, Noe Nakar.

2:01 At this time, I'd like to turn the call over to Horizon's Chairman and CEO, Greg DeWitt. Please go ahead. Thank you, Emily. Good morning, and thank you for participating in Horizon Bancorp's third quarter earnings conference call. Our comments today will follow the investor presentation we published yesterday, October 27. Horizon's third quarter exemplifies that we are a company on the move and represents perhaps the busiest quarter in our company's 148-year history. We consolidated 10 offices during the quarter, acquired 14 Michigan branches, and sold our ESOP trustee accounts as we focus on more profitable growth opportunities. Horizon's third quarter represents our efforts to allocate resources and capital to where we can achieve better returns, and the results are proving to be successful, with organic loan growth and record earnings during the quarter.

2:59 The momentum taking us into 2022 and 2023 is due in part to the new associates and customers we welcomed from the 14 Michigan branches we acquired on September 17th. This logical extension of our franchise includes adding approximately 50,000 new households, three commercial lenders, and low-cost and stable core deposits. Horizon has already proven that the mass and scale work to drive shareholder value, and our recent branch acquisition only contributes to that momentum. In addition, the 10 branches we closed on August 27th is a continuation of our ongoing effort to maximize the efficiency of our retail franchise. This focus results in our consistently low non-interest expense to average asset ratio, which was just 2.09% in the third quarter, down from 2.18% in the second.

3:51 We expect to continue to improve efficiency even as we redeploy employees from the closed branches to fill open positions and reinvest much of the savings into technology designed to enhance sales and customer experience. As far as building for the future, We increased the number of commercial lenders since December 2020 by approximately 20% with additional offers pending. And we've added capacity to our in-market indirect auto lending program in our new Michigan footprint. Horizon is well positioned to seize upon future opportunities and increase returns as we shift earning assets from the investment portfolio into higher yielding loans. Starting on slide four, company highlights. Horizon completed the third quarter reporting record quarterly earnings at $23 million, or $0.52 per share. Driving the quarterly results were record net interest income, organic commercial and consumer loan growth, and continued focus on efficiency.

4:50 Given the size of our balance sheet, Highly efficient operations and talented workforce, we believe Horizon is well positioned to capitalize on significant organic and strategic growth opportunities within our attractive Midwestern markets. So why invest in Horizon? Our investment thesis is simple. We are a high-performing company in growth markets. Horizon has a disciplined operating culture. We accomplish goals, get things done. This is best represented by a return on average assets of 1.41% and a return on average equity of 12.64% for the quarter. In effect, we continue to focus on efficiency as evidenced by consolidating 35 branches over the past six years. Horizon is a compelling value play as represented by trading multiples at quarter end of 1.51% price to tangible book value and 9.2 times price to earnings for the trailing 12 months.

5:46 We operate in attractive Midwest markets. As we like to say, we are on the right side of Chicago. Finally, our risk profile is lower than most Midwest banks as our operating model in loan mix consistently performs well in varying economic cycles. As you'll see on slides 7 and 8, we are clearly demonstrated consistent growth over the last 18 years. Compounded annual growth rate for total assets, 13.5%, and compounded annual growth rate for net income, 18.8%. For the past five years, 2016 through 2020, the compounded annual growth rate for assets was 18%, which is 5.5 times the rate of change to our gross domestic product, and 2.9 times the average growth rate for community banks.

6:35 Horizon is a growth company. On slide 9, we remind you that Horizon's expansion and growth has occurred primarily in college and university towns, in the state or county government seats. Therefore, a majority of our footprint has an economic base that is traditionally more stable than other areas of Indiana and Michigan. Our recent branch acquisition expands our presence into college towns, and an eight of the 11 counties where the acquired branches are located. Horizon will either be number one, two, or three in deposit market share. Horizon remains positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit, dense living spaces, high taxes, increase in crime rates, and a high cost of living.

7:24 Both Indiana and Michigan continue to show improving economies as evidenced by low unemployment rates in an increase in total workforce. As a result of the tight labor market, we are starting to see some wage inflation. On slide 10, you'll see highlights at primary markets where we are engaged in some exciting economic events creating new business opportunities for Horizon. Moving on to digital transformation, Horizon's average monthly transactions continue to shift away from branches to our digital and virtual channels. As of last month, 76% of all transactions took place through our digital channels compared to 44% in 2018. The good news is that since our branch network's second reopening in January 2021, the online activity has stayed relatively constant.

8:15 Horizons embraced this shift before the pandemic, which of course, accelerated the trend. It was a key consideration in our annual branch review in the consolidation of 10 branches in August. Horizon's focus on our retail network's efficiency has helped increase our average deposit per branch over the last four years from $46 million to $72 million. Horizon manages and deploys its capital well, as evidenced by our recent acquisition, stock buybacks for the quarter, and increase in our quarterly dividends. Year-to-date, we increased our quarterly dividend twice for an aggregate year-to-date increase of 25% and a dividend yield of 3.3% at quarter end. Now for the financial updates, my privilege to introduce to you Horizon Bank's Executive Vice President and Chief Financial Officer, Mark Secor.

9:05 Mark? Thank you, Craig. Horizon had its second consecutive quarter of record net income with new records for net interest income and pre-tax, pre-provision net income. We're very pleased with these results and the positive core trends demonstrated in the third quarter. Starting with slide 15, the company's third quarter results were impacted by two one-time events, the transaction costs for the branch acquisition and the sale of the ESOP trustee accounts. We recorded a $2.4 million gain for the sale of the ESOP trustee accounts and recorded $2.8 million of transaction costs from the branch acquisition. Those include direct transaction costs and one-time credit loss expense for the acquired loans.

9:53 The record net interest income was partially due to a higher level of interest-earning assets with cash continuing to move to the investment portfolio along with maintaining a steady net interest margin. Continuing to grow net interest income is still one of Horizon's key objectives. Non-interest income reflected an increase over last quarter primarily due to the $2.4 million gain on sale of the ESOP trustee accounts and also a recovery of $867,000 from an acquired charged-off loan. These were partially offset by lower mortgage revenue. We had a $1.1 million increase We had a $1.1 million expense for credit loss compared to a $1.5 million release from the allowance for credit losses in a linked quarter.

10:42 The day one credit losses allocated to the acquired loans was $2 million. Without that transaction, there would have been another small release of the allowance for credit losses. We see continued strong credit performance, low net charge-offs, and improving econometrics We continue to believe we are appropriately reserved given the current state of our portfolio, the recovering economy, and our CECL modeling. Slide 16, the adjusted margin declined only one basis point during the quarter and was positively impacted by 16 basis points from PPP income as net deferred fees were recognized for loan forgiveness. This was offset by 16 basis points of margin compression from high cash balances held during the quarter. The 13 basis point increase in the loan yield and the 7 basis point decrease in the cost of funding helped manage the impact of the increase in the average balance of lower yielding investments during the quarter.

11:48 Earning assets averaged $6 billion during the third quarter and reached $7 billion at September 30, 2021. Starting the fourth quarter with an additional $1 billion in earning assets is expected to contribute to an increase in net interest income but may also put pressure on our margin as the majority of the earning assets increase are in lower yielding assets. Slide 17. The loan yield increased for the third consecutive quarter to 4.56% due to PPP loan income recognized and the reduction in the loan mix of lower-yielding PPP and mortgage-related loans. Without the impact from PPP loan income recognized during the quarter, the loan yield would have decreased five basis points compared to the second quarter loan yield without the impact of PPP loan income.

12:43 As loans continue to reprice, The remaining PVP loan forgiveness or loan fees are recognized and new product is originated at lower rates. Additional downward pressure on the loan yield is expected in the fourth quarter and going into 2022. Slide 18, the investment portfolio was $2.4 billion at the quarter end and has increased $1.1 billion since the end of 2020. 630 million of this growth is directly related to the low-cost liquidity onboarded with our September branch acquisition. During the quarter, deposits grew 1.2 billion, which included 846 million from the branch acquisition and 352 million organically.

13:29 With 972 million of cash on the balance sheet at the end of the third quarter, additional purchases of investments are expected as we continue to focus on increasing net interest income. Slide 19, margin compression was tempered by our continued improvement in funding costs, which reflect Horizon's valuable and growing core deposit franchise. The CDs portfolio 15 basis point decrease in pricing reduced total funding costs as higher cost term deposits matured during the quarter. 162 million of CDs with an average cost of 50 basis points will mature during 2021 and continue to reduce our cost of funds. The 4% growth in non-interest-bearing deposits also contributed lower funding costs in the third quarter.

14:16 In addition, the acquired deposits from the branch acquisition will help to reduce deposit costs as their average cost is lower than ours. As total deposits continue to grow, we are also strategically pricing deposits to manage liquidity and stem inflows from transactional and transient sources. This, of course, is balanced against our commitment to stand by our longstanding customer relationships and high potential new opportunities in our growth markets in Indiana and Michigan. Slide 20. Mortgage revenue from gain on sale of mortgage-related income continued to support non-interest income, but at a lower level than in the third quarter of 2020. Year-to-date gain on sale of mortgage-related income was $2.1 million higher in the same period in 2020, as last year's mortgage servicing right impairment was partially offset by mortgage servicing right recovery so far this year. The continued high level of mortgage production, with 61% coming from purchase activity and strong percentage gains, are the primary contributors to our non-interest income for the quarter.

15:26 Based on local and national refinancing activity, we expect strong line contributions to continue from the mortgage business in 2021 and into 2022. Slide 21, during the third quarter operating expenses increased as we had 799,000 transaction related costs and an increase in salary and benefits costs. Reflecting our investments in talent and higher bonus expense accruals as our team continues to achieve incentive targets. Core operating expenses continue to be leveraged as we saw non-interest expense to total average assets decline to 2.09% or 2.05% when excluding transaction costs. We anticipate with the ability to leverage the asset growth from the branch acquisition that we will be under 2% of non-interest expense to average assets in the fourth quarter or on into the first quarter of 2022.

16:22 Now for some additional comments on our loan portfolios, I'll turn it back over to Craig. Thank you, Mark. The recent branch acquisition increased Horizon's low-cost deposits and lowered our loan-to-deposit ratio from 85% as of December 31, 2020. to 61% as of September 30, 2021. In Horizon's previous 10 years, our average loan-to-deposit ratio was 91.5%, so we do know how to manage for loan growth. As a result of this competitive pricing advantage with the new branch acquisitions, Horizon's focus for the next two years will be loans, loans, and more loans. Looking at the chart on slide 20, Horizon's $3.7 billion in total loans are well diversified, with 59% in commercial and 41% in residential mortgage and consumer.

17:12 The table on the right provides the granularity within our commercial loan portfolio, which itself is well diversified. Our single largest sector is the residential multifamily housing loans at 6% of total loans, and this segment continues to perform well. All pandemic-related distressed business sectors have seen considerable improvements over the prior year's operating results, including the hotel, restaurant, hospitality, and leisure industries. Horizon's non-owner-occupied real estate portfolios also exhibit strong cash flow and low delinquency rates. Horizon's consumer loan portfolio continues to reflect strong underwriting standards as evidenced by low delinquency at 38 basis points at quarter end and year-to-date net charge-offs at four basis points. Consumer loans for the quarter, excluding acquired loans, increased by 11.1 million, or 1.7 percent, for the quarter.

18:11 Looking ahead, the consumer loan area is well positioned for continued growth as we added 34 new and direct dealerships in our expanded Michigan footprint, and we experienced an increase in home equity line utilizations for the first time this year as consumers spend through their stimulus money. Horizon's commercial loan portfolio continues to reflect strong underwriting standards as evidenced by quarter-end low delinquency at two basis points and year-to-date net charge-offs at one basis point. Commercial loans reflect a 9% annualized growth rate for the third quarter as a result of new loan volume, increase in line of credit utilization, and a slowdown in payoffs. The addition of new lenders during the year in growth markets in western and eastern Michigan and northwest Indiana is beginning to show results. And we expect our lending team to have significant impact in the quarters ahead.

19:05 We are also pleased to report that Horizon's commercial pipeline is robust with $133 million in loans approved, not yet closed. This is the highest level for pending closings in 2021. Hotels represent 3.9% of total loans, and this segment has been a significant pickup in the occupancy in average daily roommates through the third quarter of 2021 compared with the first quarter. As of August 2021, the occupancy rate was 70% for our borrowers, which reflects 96% of Horizon's total hotel loan dollars outstanding, and is an increase over August 2020 occupancy rates of 55%. Hotel occupancy gains are primarily attributed to increase in consumer leisure travel, along with a smaller increase in business travel.

19:57 Horizon's hotel portfolio is primarily located along interstate highways and resort locations frequented by the consumer travelers. We're not located in entertainment or convention venues such as large metropolitan areas. To summarize Horizon Bancorp's key franchise highlights, we are positioned well for earnings growth going into 2022 and 2023 as a result of our recent acquisition of 14 new branches. 10 branch closures, a pickup in loan demand, an increase in commercial loan officers, an expansion of our consumer loan dealer network, and leveraging excess capital. We are a seasoned management team who has a history of managing through multiple economic cycles and delivering growth far exceeding the banking industry's average growth rates. We have a robust capital position and excess cash to the holding company in excess of $120 million, which gives us considerable future optionality.

20:53 Horizon has maintained a solid historical compounded annual earnings growth rate of 18% over the past 18 years. And the company has paid 30 years plus of uninterrupted cash dividends on our common shares and raised the dividend for the second time this year for an aggregate increase year-to-date of 25%. We conclude our prepared remarks today. by asking that you save the date for Horizon's Virtual Investor Day on Thursday, December 2nd. Our senior operations, credit, commercial, and consumer leaders will be sharing their perspectives on Horizon's 2022 growth plans, the integration of a recent branch acquisition, and truing up the forecast in our bank's retail experience.

21:40 We will publish details on how to access a two-hour virtual event, and we hope that you'll be able to join us for the Investor Day. With that, I'll ask the operator to please open the lines for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star, then 2. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. The first question comes from Nathan Race from Piper Sandler.

22:33 Please go ahead. Yep. Hi, everyone. Good morning. Good morning, Nate. Thanks for taking the questions. Maybe just to start off on the outlook for loan growth in the fourth quarter, if we exclude the mortgage warehouse and the ongoing PPP runoff, and I appreciate, you know, you guys have put a lot of pieces in place in terms of personnel additions on the commercial lending side of things over the last 18 months or so. So how should we be thinking about, you know, the outlook for additional commercial banker hires going forward and just expectations for Loan Growth Expo's items in the fourth quarter and into 2022 as well. Nathan, thank you for the question.

23:19 I'll have Jim Neff answer the outlook for mortgage warehousing and Dennis Kuhn talk about the commercial loan outlook as well as the PPP program. Jim? Thank you, Craig. Good morning, everyone. On the mortgage warehouse side, we expect that to track with the MBA refinance forecast. And as you've seen, our balances are tracking down quarter by quarter. Our normalized level, we feel, will be somewhere between $140 and $160 million is where it will normalize going into 2022. Good morning. This is Dennis Kuhn with regard to commercial and PPP.

24:10 Again, as Craig had mentioned, we're entering the quarter in our strongest pipeline position at over $130 million. That is building, I can say, on a weekly basis, so we're seeing really good activity, including our newer additions to the lending staff. I will note that Three of those joined in the last 60 days. So again, they've got to get in, get acclimated, and these are all highly experienced, connected lenders in their markets. So we expect to see continued ramp up in those pipelines through the balance of the year and certainly into 2022.

24:57 From a PPP standpoint, we will continue to process forgiveness. We're hopeful that most of that will be completed in the fourth quarter. So again, going into 2022, that noise will quiet down. Okay, thank you. So perhaps just to clarify, just on the commercial side alone and excluding the PPP runoff, is it kind of a load of mid-single-digit outlook, or do you guys feel more like in the Thank you. Thank you. Some really good growth markets, including Grand Rapids, Troy, and Holland in particular, and then in Indiana, South Bend, and Lake County.

26:12 So good, strong markets, and we've built our presence there and expect to see continued growth. Got it. That's great to hear. And if I could just ask one more on just the operating expense outlook. Obviously, there's some moving pieces to think about with the legacy branch consolidations that were completed in the quarter. Then you also have the locations coming on board from TCF. So, Mark, maybe any thoughts on just kind of the near-term operating expense run rate from about $33.5 million that we saw in the third quarter and how that trajects into the fourth quarter and perhaps into early 2022 as well? Yeah, Nate.

26:57 We're going to see some increase because of the additional costs from the branches, and I think that's been modeled in for you in the past. What we anticipate seeing, because of the way that the savings comes from the branches that we close, the 10 branches, it's going to come over time because, as we've stated, we kept the people... The employees from those branches to help, one, with the transaction, and two, we know we're going to need to have an employee pool and we'll absorb those over time here over the next nine to 12 months. But the operating expenses are still there. We've been successful in getting rid of some locations, but until we get rid of the actual buildings, there's still costs.

27:49 So those cost saves will get absorbed, and hopefully what we'll see is it'll just help us manage the expense levels, and we'll see just a normal inflational-type increase through 2022. and then the cost savings from the branches would help normalize expenses and the main increase would be from bringing on the 14 branches. But as we said, we do anticipate we're going to be sub 2% of average assets for our expenses. Okay, great. We'll step back for now. I appreciate you guys taking the questions in all the colors. Thank you, Nick. Our next question comes from Damian Del Monte from KBW.

28:37 Please go ahead. Hey, good morning, guys. Hope everybody's doing well today. Good morning, Damian. First question regarding the margin. Mark, I think your commentary kind of pointed to some additional headwinds on the margin given liquidity and loan yields. for new production, kind of still below the portfolio. How close are you to that gap closing on the new production and current portfolio? You know, I think it's going to take some time yet. Some portfolios will adjust quicker. Consumer portfolios adjust quicker just because their duration is less. But they are closing in.

29:22 Thank you for joining us. But the margin is going to have the pressure. I mean, ending the quarter with over $900 million of cash, we had an average cash of somewhere in $300 million for the quarter. So just having that mix is going to impact the margin here in this quarter. Okay. And then how quickly do you think you could take that $900 million and kind of reinvest that into security to get some yield pickup there?

30:14 We're not going to be able to reinvest all of it. We anticipate some cash flows coming out. We're trying to determine what some of the, especially the municipal side, some of the core. So we anticipate we're going to have to hold some of the cash and reinvest a portion of it. But we'll get what we want done with that here over this quarter and starting in the next year. What I don't know is we had still strong deposit growth just organically. So we're not seeing the runoff. So if we continue to see deposit growth, that's just going to be fighting to get that cash balance down.

31:01 Right, right, right. Okay. And just as a second question, you know, credit is obviously very, very strong for you guys. Your reserve level is still three times pre-cecil. So, you know, how do we think about the provision level going forward? Because, like, if you look at this quarter, absentee, day two cecil, it would have been a release. So can we expect a release here in the fourth quarter? Sure. Damon, the releases will probably come through in the fourth quarter next year at the level we're not sure. We're being cautious because the pandemic still exists and is ongoing, and therefore a good portion of our reserve is set aside for general losses in the distressed sectors.

31:49 I think this winter is going to be Thank you for joining us. The other part is our historical loss rates continually to fall overall, and then our econometrics continue to improve. So those two factors play into the release discussion going forward. Great. Appreciate the call, Eric. Thank you very much. Thank you, Damon. Once again, if you have a question, please press star, then 1.

32:35 Our next question comes from Terry McAlvoy from Stevens. Please go ahead. Morning, everyone. This is Daniel Thomas on the line for Terry McEvoy. My first question is, in the press release, you guys mentioned that the operating cost saves coming from the branch closures back in August are going to be redeployed into tech technology investments. I was wondering if you guys could expand on that a little bit in terms of those tech investments and maybe if we can see some potential efficiency gains from those. Thank you. This year we deployed a new mortgage software system called Encompass, which is cradle to grave for the customers. The customer has insight into the process.

33:21 It works with vendors, etc. So our mortgage team has more capacity without increasing staff. They're more efficient with their mortgage loan origination teams as well. The year before that, we added our new technology for the consumer loan platform that's similar to and both platforms are best in class. They can go to mobile to online banking. In 2022, we're looking at commercial platform. We added a data warehouse last year as well that gives us improved information and reporting. We added a new financial reporting package that Streamlines our financial reporting as well. From a customer enhancement perspective, we've added chat last year, improved the bots this year. We're answering over 85% of all inquiries through the bots today. We continue to do outreach efforts both from a digital channel in our direct channels, getting customer satisfaction surveys back. We're scoring in the 80 percentile range of customer satisfaction for both our digital and in-person.

34:31 So things are working. We continue to invest. Things that we have to add would be improvement in our customer service platform, which will be added next year. It's not as efficient as we'd like to see. And our whole strategy is our Direct branch platforms are aligned with our digital platforms. We're using the same platforms to open accounts, transfer them to Internet banking, etc. So we're just trying to align all the platforms up into next year. But the investment continues. Annually, we conduct a gap analysis of technology. We compare ourselves to best-in-class, which is typically the big banks, indoor fintech, and then we compare ourselves to other community banks of our similar size. We compare very well to our other community banks, both in treasury management platforms and in the retail platforms.

35:19 So thank you for the question. That's great. Thank you. I appreciate the detail on that. And then just one second question, moving to capital. Do you guys have a targeted capital level that you're trying to get to, and should we expect the buybacks to continue? Thank you. We don't publish a targeted capital ratio. We continually focus on being well capitalized with some cushion to it. Stock buybacks, it depends on the price to our tangible value, and if we think there's a value there, we'll buy it, go into the market. If not, we'll hold back. Both our continued... Accumulation of cash and our strong performance from an earnings perspective, I would assume buybacks would come back in vogue again.

36:05 Mark, do you want to add to that? You have $2.4 billion of investments right now, which obviously isn't the normal design, but it's what we're given because of the liquidity in the market. We think that we have a lot less risky profile in having the tangible capital levels that we're at. So we kind of balance all of that. Got it. That's really helpful. Thanks, guys.

36:51 Appreciate it. Yeah, thank you. Our next question comes from Brian Martin from Janie Montgomery. Please go ahead. Hey, good morning, everyone. Good morning, Brian. Hey, Mark, can you maybe just give a little thought on, I appreciate the color on the margin, just thinking about the amount of cash you guys have today and just kind of how to think about or frame up the dollars of net interest income maybe just into next quarter just to kind of understand where you're thinking here. I mean, I guess It seems like the margin comes down, but the dollars of NII, I mean, I guess if you kind of strip out the PPP, do we think about the dollars of NII just continuing to increase sequentially the next three to four quarters just kind of on a clean basis and focus on that given all the efforts you're going to be taking to put this cash to work?

37:45 I think that's the right direction. I mean, with two events, you know, we did pick up over $200 million of loans in the end of the third quarter with the transaction. So that's going to generate continued net interest income. And we still had some settlements of securities, and plus we were still in the market for some securities. So we're going to see more earning assets coming on. Again, I think you're on the track of what we want you to see is that we want to continue to see the steady income of net insurance income. Also, the growth of commercial is going to also shift some of that cash. And again, the thing that we don't know and won't see is what's going to be the inflow or outflow of deposits and how that's going to impact the cash and the margin.

38:41 Okay, so a steady increase there, and I guess are you seeing into the quarter now, into the fourth quarter, deposit flows slowing at all, or are they stabilizing? It seems to have stabilized a little bit, but it's also seasonal because of tax season for the municipalities. But from a consumer and commercial side, we'll see it come down, and then we'll see it come back up. and the trajectory has been all through the quarter of continued growth. So it may change this quarter. We may start seeing more outflows. But at this point, that's not what we're seeing. Okay. Okay. And then maybe just the follow-up for me was just twofold. Maybe if you can just give a little thought on you brought up, someone brought up the point about the buyback, but just as far as deployment of capital, the The potential, Craig, maybe for how are discussions on the M&A side, or is it given all the opportunities you've talked about organically, maybe is that less of a priority, at least here in the near term? And just an outlook for Dennis, maybe on the mortgage, the gain on sale line, or Mark, how we think about that.

39:50 It sounds like it's still strong and carries into next year, maybe a similar type of level. Brian, M&As have less focus initially next year, primarily the momentum we have going into 2022. However, with that said, we are looking at opportunities for increasing loan growth and or leasing would be two primary sectors we're looking at. Obviously, we don't need another deposit franchise, so if we can acquire a loan growth franchise, that would become top of mind. On the mortgage side, I'll make a comment and see if Jim has any.

40:36 The comment I made about the two nine-month periods that we have $2 million more of mortgage revenue from gain on sale and servicing and impairment, because last year we saw that impairment hit. So we've actually seen an increase through nine months. Now, the fourth quarter of last year was really strong, so that will catch up here. But, Jim, I don't know if you want to comment on the volume. I think it's been fairly steady. Yeah, the volume has been very steady. Seasonality will come into play. I think we'll see some decrease soon. and with the refinance activity of rates do creep up next year, we're going to see overall production down, but I think it's still going to be a very strong level for next year.

41:29 Okay. I appreciate the feedback. Thanks, guys. Thanks, Brian. Thank you, Brian. This concludes our question and answer session. I would like to turn the conference back over to Greg Dwight for closing remarks. Please go ahead. Thank you for participating in today's earnings call, and we look forward to speaking with you again on December 2nd for our Investor Day, so please sign up and see you on December 2nd. Thank you. Have a good day. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.