Q3 2021 Midwestone Financial Group Inc (IOWA) Earnings Call
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Good day and welcome to the mid West One financial group incorporated third quarter 2021 earnings call. All participants will be in a listen only mode should you need assistance. Please signal 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.
One on your Touchtone phone and to withdraw your question. Please press Star then two.
This presentation contains forward looking statements relating to the financial condition results of operations and business I've met mess mid West One financial group incorporated forward looking statements generally include words, such as believes expects anticipates and other similar expressions.
Actual results could differ materially from those indicated among the important factors that could cause actual results to differ materially our interest rates changes in the mix of the company's business competitive pressures.
Generic excuse me general economic conditions, and the risk factors detailed in the company's periodic reports and registration statements filed with the Securities and Exchange Commission.
Minimal Midwest one find out your financial group incorporated undertakes no obligation to publicly revise or update these forward looking statements to reflect events or circumstances. After the date of this presentation.
And please note. This event is being recorded I would now like to turn the conference over to Mr. Charlie Funk. Please go ahead Sir.
Thank you very much Chuck and good morning, or good afternoon, as the case may be to all of you and thank you for joining us.
On the call. This morning in the room in Iowa City, we have Gary Sims, our Chief Credit Officer, Barry Ray, Our Chief Financial Officer, Jim Cantrell, Our Treasurer, and Chief investment Officer, and Linda <unk>, our president.
Just an overview of the quarter and then the acquisition that we announced yesterday.
You know I think in summary.
We're very pleased that we had loan growth X P. P. A a little bit more than a 1% linked quarter. We continue to see good deposit growth and I'm happy to report about 75% of that deposit growth was core deposits.
Clearly that has a negative impact on the margin, but a positive impact on our net interest income asset quality continues to improve and I think we will give you a positive outlook going forward as well I think we have an excellent an excellent story in our company on wealth management.
Both legacy and perspective.
We did have a few one time expenses that distorted our non interest expense run rate and I'll cover that in my comments. It was also covered in the earnings release.
We also announced what we believe is a solid and welcome saved acquisition.
And yesterday also announced.
A wealth management team from Eastern Iowa has opted to join our company so with that if I go over the quarter.
You know very pleased despite the headwinds that we face that we were able to increase our loans X P. P. P <unk>.
Your line of credit usage continues to be low at 32% that did tick up a bit during the quarter, but that's about 10% to 15% below what we would consider to be normal in terms of L. O see usage.
In terms of markets.
It seemed to be producing in terms of our lending activity.
We will start as we have in the past with Denver, which continues to hit on all cylinders and continues to enjoy a very good pipeline going forward.
We are starting to develop a good pipeline in the twin cities and very pleased with the commercial bankers, we've been able to hire in that market and I think over the next six to nine months you will see a very good growth from the twin cities footprint. We also have seen good activity in southwest, Florida, Naples, and Fort Myers as well as the Iowa City.
Market and the rest of the remainder of our company tends to be flat to slightly down in terms of loan activity. We do see some payoffs coming in the fourth quarter and all of the payoffs. We see right now are from the sale of businesses either.
Commercial industrial businesses that have been sold or commercial real estate properties that have been sold.
It's really hard to say, what the fourth quarter will bring but as I said earlier I think the six to nine month outlook is pretty good from our perspective in terms of loan growth.
We feel.
As I said very good about our hires in our commercial banking hires in the twin cities in terms of PPP we.
We would expect most of that to be out of the bank in the fourth quarter there'd probably be some stragglers as we go into the first quarter, but essentially we expect a.
A high percentage of the PPP loans to be forgiven and off our balance sheet by year end.
Turning to noninterest income mortgage had a good quarter by by traditional standards. It was down from from prior from the boom of prior quarters, but still very solid and we expect that to continue in the fourth quarter. We do note a negative mortgage servicing rights adjustment of 400000.
And if interest rates.
Hold where they are at the present time, we would expect a positive adjustment in the fourth quarter, but there is still.
Some some time to go before we measure that.
Great story in my opinion in wealth management a.
Top line revenue continues to grow.
Investment services area, which is R. L. P. L. Brokerage unit continues to set all time records. It seems each quarter and they will have an all time record year. This year and I believe that's the third in a row for them.
Our Trust Department has also continued to see a topline revenue growth and also some organic growth, perhaps that we haven't seen as much of an and.
In the past.
You will recall a year ago, we hired a three professionals in the twin cities.
To help us in wealth management and they work for our Trust Department and they have produced according to expectation in the first year despite being.
Hampered somewhat by non solicitation agreements those are almost over now and we expect really good things from them, even better things in 2022.
During the last quarter, we began talking to a team of five wealth professionals for trust professionals and one private banker.
Who were operating for the most part in the Cedar Rapids market. These wealth professionals had.
Have about 120 years of combined experience and today I'm happy to report is their second day of employment at Midwest, One bag for them will be working in Cedar Rapids, one on the Iowa City market for our trust professionals and one.
As a private banker.
We see significant upside from this acquisition of talent over the next 12 to 24 months and we think it'll be a good catalyst for even better revenue growth from wealth management in 2022 and beyond.
The early returns on.
This team coming to our bank have been very very good and we could not be more excited about this acquisition of talent. The other components of noninterest income have been good and I would just say that card revenue continues to surprise us pleasantly on the upside.
Turning to the net interest margin or not and to the net interest margin and net interest income the margin continues to be problematic for us 3% for the quarter, we calculate the core at $2 94, and would note that that core includes the P. P. P revenues that come in.
As we've said before they expect the expanded balance sheet does mean higher net interest income, but that's at the expense of a little bit narrower margin.
I believe on the last quarterly update quarterly call that I referred to a pricing competition on good loans as brutal and I would echo that this quarter and to give you an idea of that just in the last couple of weeks.
We saw a.
10 year loan a 10 year fixed rate loan priced at two 5%.
And one of our markets for a very very solid credit.
And yet Oh.
At the time, probably a less than 100 basis points over the 10 year Treasury fixed we would call that brutal competition.
We think the rise in the two to five year area of the yield curve really continues to help us and we continue to invest our excess cash into.
Into shorter cash flow instruments, which give us a lot of liquidity, but certainly.
<unk> beat the the return that we get on.
Cash held at the fed.
Turning to noninterest expense, our I would highlight three themes. The first would be that we did have.
Some one time expenses, we had building.
Building write downs and building write offs of about 290000 during the quarter, we had litigation settlements of around 700000 during the quarter, we don't expect those to be recurring themes.
And looking forward the second theme would be that we.
We continue to see pressure on salaries and benefits as most businesses in America do today, but would also note that we expect our vacancy factor probably to be a little bit higher going forward just because.
It's very very competitive whenever we hire a new people into our company. So we expect salary increases could be up a little bit going forward compared to the past.
Maybe one positive element of that is that we continue to have what I would call very very good success at hiring at the officer level in our company and some of the people we've been able to attract to our company in 2021, I think will really help us in the years ahead. So.
We have a good story to tell a Midwest one and that's reflected in the people we're hiring.
The third theme would be that we did just note that we did close announced the closing of one office and we expect that office to be closed before the end of the year.
A positive element in that office closure is that all of the employees were offered jobs with our company.
We continue to evaluate our offices and would note that since 2019, we've closed five offices and one loan production office. So that continues to be an ongoing going focus for us and something that we will continue to analyze going forward.
A very positive story to tell and asset quality I would highlight that we had a net recovery for the quarter.
If you look at our nonperforming assets, they were down six basis points quarter to quarter, and they're down 15 basis points year over year, and notably we expect continued progress on the N P. As in the in the quarter and quarters ahead.
Commend our special assets.
Unit for doing a really good job of bringing many of these troubled credits to conclusion, our reserve coverage seems to be very appropriate for our risk profile at this point in time and I would note that.
We reported in the earnings release that our classified assets were up slightly and that's really due to one hotel that's located in Florida and the problem. There is not with occupancy but that the hotel is undergoing a remodel and they are caught in the supply.
Main issues right now and so really not able to operate at full capacity. We think the management of this particular hotel chain is very good and we don't expect it to be a long term problem, but we did move it to a classified status during the quarter. So.
Short term a little short term pain long term, we think it will be just fine.
AG Agriculture has had a very good year. This year, we don't really see anything.
Negative on that horizon, as we entered 2022 and I do commend, our chief Credit Officer, Gary Sims, and our bankers for staying on top of our asset quality and I think thats reflected in the last 18 months or so of results. I also think it will be reflected in improved results.
Over the next six to 12 months.
Turning to capital.
Tangible tangible equity sits right now at seven 7% that suits us just fine I think given our risk profile and especially our improved credit outlook, 8% to 9%.
Remains our preferred comfort zone, but it's so long as we continue to.
Build equity each quarter, we think we're fine with current levels and we think the acquisition that was announced will fit in in terms of adding equity to our to our capital deck.
Regulatory capital is in good shape.
Do note that we repurchased stock on almost each available day during the last quarter and bought back 235000 shares just over tangible.
Book value at the 29, and a quarter and that's roughly one 5% of our shares that were purchased during the last quarter. We will continue to repurchase when we think that the conditions warrant that.
Turning now to the the Iowa first acquisition, just a small recap or a short recap.
I will first operates two banks first national Bank of Muscatine, Iowa, which is the larger of the two banks and first National Bank in Fairfield, Iowa.
Where are we at Midwest one are already in the Fairfield market and the Fairfield market has been one of the better growth markets for us in rural Iowa over the past five or six years first national Muscatine has long been one of the leading community banks in southeast, Iowa, Theyre, just south of the Quad cities.
And we are already in Muscatine County in West Liberty, Iowa, and and have an office about 20 miles from our Muscatine win.
The acquisition is completed the transaction is completed we will have the number one deposit market share in Muscatine County, Iowa, and also in Jefferson County, Iowa, which is where Fairfield is located.
We see a good cultural fit and we see a good strategic fit this folds right into our existing footprint, we did use a.
What we thought were conservative assumptions whenever we modeled this particular transaction and I will also note that we did.
Thorough thorough if not more than thorough credit due diligence.
Okay.
Clearly we've had to be selective at Midwest, one as we've evaluated acquisitions and make sure that whatever we evaluated was something that we could pay for that in a way that would be beneficial to our shareholders. We're very pleased that we did not give up any of our currency in this transaction and I.
I think also this gives us much better earnings visibility as we look to.
2022 and 2023.
One last thing about first National Bank of Muscatine, and I think a key to this transaction was that we were able to retain a 30 year employee Wayne Johansen to be our market President going forward Wayne is respected both inside and outside of the bank. He's a community leader. He is a leader in the bank and <unk>.
We think that wanes assistance will be invaluable to us as we seek to go through merger integration.
And we do expect timely approval from the regulatory authorities.
So in summary.
I think a very good outlook for our company again, the fourth quarter is probably a little bumpy in terms of our loans and.
Because of the payoffs that are coming but we think the six to nine month outlook is very promising as we have a growing pipeline.
In Denver and in the twin cities.
We think that the wealth acquisition bolsters, an already strong our wealth management unit and our company and I would just remind everyone on the call that two years ago, We had no wealth management presence in the twin cities or in Cedar Rapids, Iowa, and which is the second largest city in our state and now.
We have a strong a strong presence in both markets asset quality continues to improve with a good outlook and I think we're folding in a manageable acquisition.
During 2022, which as I have said gives us a.
A little bit better earnings visibility.
We think we are leveraging our capital appropriately which is important to our shareholders and again I would argue that the risk profile of our company has improved significantly during the past two years, so with that Chuck I think we are ready for Q&A and we will take any questions you might have.
Yes, Sir we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning folks how are you doing.
Good morning, Brendan Brennan.
Okay, maybe just to start off on M&A here I think.
In the past year approach to deals, but could you larger transaction, but with a good bit more time in between those deals.
This marks a bit of a smaller deal.
A little bit sooner after the last one so I'm just kind of curious if that was the.
Starting with purposeful strategic shift in the M&A playbook or if this is just more of an opportunistic chance to add a smaller partner in those markets.
I think it would be the latter Brendan and.
I had intended to say this in my opening remarks, but we've had discussions on and off with Io a first for the last 10 years and.
And so we know them very well and I think the timing was appropriate for them and appropriate for us and I think the fact that we've done larger acquisitions has been more that that's kind of what you know what came to pass I don't know that we set out to avoid smaller transactions, but.
It's just the ones we the prior three that we had done tended to be a little bit larger relative to our size but.
I think that we were always willing to evaluate any opportunity in this one seemed to be the best one that was in front of us.
Alright.
That's very helpful color. Thanks.
One more for me.
Maybe just a little bit more color from you folks on asset quality in Iowa first I guess.
Smaller deal in terms of your size overall, but it does seem like they're kind of working through a few credit issues and trying to resolve those there I don't know that you mentioned a very thorough diligence process can you just walk us through what you saw in their portfolio and any cleanup efforts that you folks thinking might have to undertake once the deal closes.
Hey, Brendan Gary here.
No.
You recognize what clearly recognized as well given some challenges that they have had on the credit side.
In the past.
Couple of three or four years.
A pretty.
Proactive approach to the due diligence our initial due diligence request from them.
For file review, while we were still in the initial due diligence before we signed the LOI Nguyen.
Credits down relationship down to $7 50. This is obviously on the commercial side.
And then once we signed the LOI.
So that was the initial.
Due diligence and ran through that and then once we signed the LOI, we took a more in.
In depth approach to our due diligence and engaged with the leadership of both of the banks in Muscatine and Fairfield and did.
Okay.
A very thorough review of all of the watch list credits as well as which which would obviously include the non accrual credits and based on that.
That was a one on one review of each credit based on that review that really is what drove our.
Development of the credit marks that you see in <unk>.
On the transaction end and based on that work, we feel very comfortable that we've identified the problem credits in the portfolio and then b.
Mark them Accordingly to what we believe the ultimate resolution of those credits are and.
I'll say, one last thing before I stop talking on the subject.
Throughout the process one of the things that impressed us was even though we did recognize they've had credit issues and.
They acknowledged that we acknowledge it what we've seen is an ability on them.
Our leadership team.
From the acquired banks their ability to recognize the problems.
Dilutions in place and work towards resolution.
We've actually got they they have actually got a COO.
Couple of resolutions in between signing the LOI on the definitive agreement. So all told we recognize that there is some problems that will we'll partner with them to work through but we feel good about the direction, we're going there.
Alright fantastic Thanks for taking the question Gary.
Yes, Sir.
The next question will come from Jeff <unk> with D. A Davidson. Please go ahead.
Thanks, Good morning, Good morning, Charlie I wanted to start.
Maybe on the.
Just following up on the timing of the transaction.
Did I Miss a convergent data expectation there it sounds like you are.
Fairly positive with.
The regulator.
Outlook to get this done by well in the first quarter, but just just timing of.
When you convert.
Well that can that can always change, but right now we would expect.
The closing to be sometime.
Around the end of the first quarter give or take could be could be April could be February but we've used the end of the first quarter to close the transaction.
We're still talking about how we might convert the two banks on to our system, but I think the conservative.
Approach right now would be to say that that would happen for each bank in the third quarter of 2022.
Great.
And then Charlie you touched on the capital side the comparability on on TCE.
8% to 9% the preferred area.
How do you view the buybacks as you as you.
You've got a pending transaction here yet pumped the brakes you continue on staying active.
I think we will continue to be active repurchasing our shares but the.
The question might be what to what degree would be active but.
We don't expect to.
Discontinue buying back our shares at these levels during the quarter. However.
Maybe not quite as many shares in recognition of the TCE that's moving.
In the seven 5% range to seven and three quarters range.
Okay.
Last one for me just on the core margin I think you mentioned $2 94.
Includes pvp.
Either specific or just broad level as PPP winds down expectations on the core margin.
And as that trends into <unk> into 'twenty two.
Okay.
Jeff This is Barry I'll start.
Yes, we've got we've got the information in the earnings release that includes all the PPP information as Charlie said, we ended 294 in there.
I view it as if you take out all of the PPP and the purchase accounting we landed at 273 I think is what we would call a true core margin and that was up a little bit from the from the prior quarter or a couple of basis points.
Reflective of the fact that the cost of fund, earning assets was down about four basis points.
On earning assets was down too.
No.
What we're seeing on the liability side is really the benefit from time deposits continuing to reprice lower.
And so that's been helpful. The pressure with respect to the go forward margin could be.
What we see obviously on the on the asset side, because the benefit on the liability side.
Ultimately start to attenuate.
What happens on the on the asset side.
And.
So to the extent that we continue to see.
Downward pressure on the asset side and I would say that currently we are originating loans for example, and a little bit below our portfolio coupon.
There could continue to be pressure on the margin.
I would say.
Okay.
And I think you had mentioned the brutal pricing on loans, so maybe that.
It continues on for a bit.
Reinvesting I guess, it's more of a mix question on earning assets. Then if you kind of deploy some of that cash, but overall it sounds like a net pressure in the interim.
That's how I would view it yes, yes.
This is Jeff this is Jim.
I don't have a whole lot to add I think barry's right on and if you look at what's gone on in the loan yields.
Slight downward movement on the loan yield slight downward movement on the investment portfolio yield.
And there is in the last quarter, we were down four basis points on cost of fund, earning assets. So that's good I worry that we are running out of runway on how low we can move that really the only category on the deposit side, It's moving east CD book.
And there is a terminal value that I have in my mind was probably 30 basis points and as we get closer to that it's just going to slow down the rate of decrease though it may turn into an asset.
Charlie mentioned in the next quarter, we may have a little bit of a challenge on the loan production side, but beyond that I think.
And if I look at net interest income if I look at net interest income I think will be.
It will be flat to up a little bit margin itself.
A couple of basis points down, possibly but income probably flat to up a little bit.
Okay. Thanks for the detail.
Thank you Jeff.
The next question will come from Terry Mcevoy with Stephens. Please go ahead.
Hi, good morning, everyone.
Morning, maybe.
Maybe start with a question on expenses, if I back out the items noted in the press release and in Charlie's prepared remarks, something about $28 $8 million for the third quarter, how should we think about the next few quarters.
The commentary on wage inflation, the hiring of the new wealth management team, maybe it maybe help to help us on that topic. Thanks.
Gary I would say.
What we've talked about in the past I think if you back out those items that we highlighted in the earnings release, you get to a run rate that we think is.
A good run rate to utilize adding onto that the fact that we do expect there could be some pressure on.
Compensation side as Charlie alluded to that.
It could increase that that number a bit.
That's kind of what I can.
That's what I would share with you I feel like the core expense number backing out those items.
Highlighted in the press release, and adjusting upward a bit for normal merit increases, but those the size of those normal merit increases could be larger.
Understood and then.
On the acquisition news when I looked at the 73% efficiency ratio and I believe that was just a third quarter I was a little bit surprised that the cost saves were just 30%.
Could you just talk about maybe the third quarter. There were some elevated expenses at Iowa, first, but where do you where do you come up with that 30% cost savings.
I'll ask you being conservative in your outlook there.
Yes, certainly.
We believe that that 30% is a very achievable number of cost savings with respect to where we come up with that.
More than half of that is going to be personnel based costs and then the rest of it kind of goes down from there with respect to things you would anticipate in a typical acquisition legal and professional.
We're processing et cetera, and so the story is we believe that 30% that we disclosed is very achievable.
And then lastly, if I could it just looks like both of the banks owned by by the seller have some OCC outstanding actions that I pulled up.
Maybe expand I guess do those present, a risk to closing the deal or anything between now and when the deal closes. Thank you.
We are we have done our diligence on that and we do not expect delays in approval.
Thanks again appreciate it.
Thank you Sir.
The next question will come from Damon Delmonte with K B W. Please go ahead.
Hey, good afternoon, guys hope everybody's doing well today.
Hi, David Hi, My first question regarding the loan growth outlook.
So Charlie is the message here that youre expecting loan balances it probably be flat to slightly down in the fourth quarter just to give given the elevated payoffs.
Yes.
I didn't know how to give guidance on that because we do have.
A decent pipeline, but we also see some payoffs coming so.
Maybe minus two to plus two for lack of a lack of better guidance and flat is right in the middle of that.
Got it Okay, and then you've seen us optimistic looking out six to nine months.
Do you think you can get back to that mid single digit growth rate that we've seen in the last couple of quarters.
Yes, I think.
I think what we'd like to see for the company as a whole in 2022 and of course, a lot depends on the economy, but we'd like to see anywhere from 4% to 5% loan growth in our company and again I.
I can't emphasize enough that the bankers we've hired in the twin cities.
Our good bankers with proven track records and we.
We're still looking to hire a couple more but I think the early returns are going to be really good from that market, which has underperformed the last couple of years.
Got it okay.
And then with regards to the wealth management team that you hired.
Roughly how much.
<unk> of our book of business that they have and is there any non competes associated with that.
What was the last part of your question Damon if there any noncompete associated with that book of business.
Yes for the five have non solicitation agreements.
And.
I'd hesitate to give you an amount of their book of business other than to say that.
In the long tenure they had at this particular institution they had a.
We had a nice book of business and it's.
It's interesting that even before our company made an announcement the word was out in the Cedar Rapids market and I think the response is going to be very very good over the next year.
Clearly they will honor their non solicitation agreements, but I think.
Again as I said for the next six months to 24 months, the needles, pointing up for eastern Iowa and wealth management.
Got it Okay, and then just lastly kind of going back to the deal.
Looking at the expected accretion in 2022, its pretty sizeable in the BPL gain.
Bargain purchase gain of $3 3 million.
Okay, Barry just explain that a little bit.
David Yes. This is Barry Damon.
Yes, we're paying below below book value and so that so that.
Im understanding Youre correct. Your question correctly, that's what that's what's driving.
The gain rather than typically you would record goodwill in that gain is what's driving their 14, 4%.
<unk> our COO.
Portion of the accretion that we referenced in the related press release.
Why in the future periods. It goes down from the 14% to closer to 10% does that answer your question.
It does exactly I just wanted to clarify that point I, probably didnt ask it clearly, but you explain it clearly so we're all set okay. Thanks, Thats all I had thank.
Thank you Damon.
The next question will come from Ross Haberman with R. L. H. Please go ahead.
Hey, gentlemen, thanks for the for taking my call I just had two questions on your is there much room going forward over the next quarter or two to further lowered deposit rates or like many banks you guys are very much close to where the bottom is out.
That's my first question. Thanks.
Ross This is Jim I would answer that I think in terms of the non maturing types of accounts like checking accounts savings accounts.
And largely money market accounts, we've reached kind of bottom terminal value in our marketplace. We are we are priced.
Pretty even with where our competitors are at those low rate the only area, where we've seen a little bit of downward movement in the book of business is CD rates.
Ah repriced maturing Cds, a little bit lower than where they are rolling off.
That's a game that probably comes to an end here is that CD book.
Memory serves I think the book yield is below 50 basis points as we get closer to 30 on the CD.
Book, I think we're going to see an end to that so that's probably in the next quarter or two.
And then we'd be bottomed out without some kind of dramatic change.
I'll just leave it there.
And just one quick two quick questions about the deal you announced.
One was it a negotiated or wasn't an auction type of process.
It was negotiated okay, and and is there any out for you.
In terms of asset quality or anything like that.
Well a lot of questions in the past.
We're on asset quality of the bank.
If it got worse between now and when you're supposed to close in the first quarter or do you have an outage even adjustment anything like that in terms of.
Of out for the deal or rich set of drops you might say.
You wanted to drop I should say.
Barry we have we do have some ounces to the deal.
Target tangible book value and a minimum tangible book value.
The extended closing tangible book value is below target areas.
Dollar for dollar reduction in their pricing.
Below a certain minimum tangible book value and Thats an out for us.
So also outs related to.
The.
Any decline in below a certain amount for past rated loans. We also have announced that as well those are a couple of examples of asking again.
Got it okay. Thank you very much.
Looks like a pretty accretive deal. Thank you guys. Thank.
Thank you.
The next question will come from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Hello, Brian.
Hey, just one question back to the margin and I don't know for whom either Barry or Jim I guess, but just on the.
And kind of the balance sheet itself, I mean, I guess, where do you how our deposit flow is trending today and I guess I'm not sure what's kind of baked in kind of how you're thinking about the margin of your comments comments earlier, but just kind of what's happening with the deposit flows and then just maybe.
When do you think and maybe the puts and takes on what when the margin could begin to inflect upwards. We've got couple of quarter. Two here, maybe some pressure, but kind of when do you think it might reach an inflection point or just kind of the drivers of that.
Brian This is Jim and I'll start this and.
Barry May have some thoughts as well he and I discuss the margin pretty regularly so.
In terms of deposit growth I think deposit growth since the end of the year.
If memory serves about 9% a big chunk of that is some public funds, but if I look at non public fund deposits.
We're probably still talking about 445% to 5% for for commercial and consumer deposits. So that's a pretty good number we don't really see I haven't seen any indication that would lead me to believe we're going to see.
A drop off in deposits. So we sit here as we sit here today, we're at high high watermark for total deposits on the balance sheet.
Part of the reason for my comment that I think net interest income in the fourth quarter and then maybe beyond is going to be.
It'll be at least as high as we were in the third quarter second and third quarters, I think positive trends for net interest income.
And we may see a basis point or two.
Deterioration in the margin, but it's almost noise.
A small amount and it would be.
Based on some fluctuation in assets the trends in the yields and the major components of the margin look.
Like loans and like Securities are pretty well established and they're pretty much canceling each other out I mean, I look at those and I'd space.
Balances stay where they are now we will have a flat margin. So any change in margin is going to be due to change in volume and we have a little down tick in the fourth quarter.
Mike.
Not enough to out.
To offset the income increased income, we'll see from the larger balance sheet.
The larger balance slightly larger balance sheet as we move forward, which is helpful.
Okay and as far as when you kind of start to see some maybe a little bit of pick up I guess, what would be the driver I guess, one when do you think thats potential.
I think Charlie said.
I think.
If we could see 4% to 5% loan growth you start to see that year over year, then we can.
And we can stop buying securities and we will see the asset mix change favorably for us and I think that would be.
The yield curve stays as steep as it is now and if we see a little rising in rates that would also be helpful, but that tends to be.
Slow in coming.
And slowly over time, but it would be positive net positive.
Okay.
Perfect. That's helpful and just maybe just one on the on the reserve side, Charlie or just whomever just kind of.
Given credit quality, the positive story, and just kind of what you're kind of signaling here at least as good now is getting better.
How do we think about the reserve levels.
As we as we move forward here.
This is Gary.
I'll take it.
I'll start to answering the question Barry.
Step in.
If I start talking accounting.
Out of school.
But.
What <unk> seen from our reserve is really a reflection of as we manage through the pandemic.
Large reserves that we took at the beginning of the pandemic we've recognized that the economic conditions have improved and then leave.
Release, those reserves as we don't.
Deemed appropriate of course, we have a model a seasonal model that we utilize and.
It guides the direction that we go.
And so based on what we're seeing in the portfolio today.
In terms of its Charlie was saying continued.
Improvement momentum and the asset quality, we do expect that trend to continue on a go forward basis.
But a lot of it will continue to be driven by what.
What the economic forecasting.
Turns out to be in the model itself.
Okay. Okay, Okay, Yeah, I guess just.
Targeting if you kind of go back to <unk>, where that was in or is it kind of trended.
Trend is back toward is how you would view it today given things are.
Assuming the economy continues to recover.
Yes, I mean our hour.
Kind of perspective on it right now is that.
Sure.
The economy is really not where it was pre pandemic and so I think that youre going to see us.
Really kind of have a bias towards carrying a bit more reserves than we had pre pandemic.
Brian traditionally we've been in the 120 to $1 50 range in terms of reserve coverage in.
You know when you when you perform an acquisition, sometimes those drop below those levels, but.
Absolutely.
Circumstances, such as that I think 120 to $1 50 is probably a good place given where we are right now yes, yes, yes, okay perfect understood and then just maybe the last one or two just for maybe for Barry just on the on the fee income outlook or maybe Charlie ways in but just kind of how we should think about that baseline.
On the fee side and then just.
Maybe the contribution.
From the new wealth team I guess, how do we think maybe help frame up how we should think about that progressing over the next 12 months.
I'll start Brian I think with respect to fee income.
Really I anticipate that we're still a little bit above what I would call historical levels with respect to mortgage banking and so.
That could potentially be a headwind for us for fee income over the over the near term, but we've also as Charlie alluded to we're getting good performance from wealth management as well.
Card revenue and so there are some puts and takes there and obviously this this quarter in fee income was impacted by the mortgage servicing rights.
Anyway, I think the level that we're at or probably.
Pretty good levels to contemplate going forward acknowledging that the mortgage servicing the mortgage revenue.
It's probably still a little bit elevated compared to historical levels.
Okay and as far as you see the ramp up is the wealth team. It comes on board I mean is it is it.
More back half of this year I guess, if you're starting to see it sounds like you're starting to see some.
Good things early on potentially but.
Yes, I'd say, Brian that you.
You probably won't see much in the fourth quarter, because we sit here on November 2nd.
There's probably a little bit in the first quarter of.
2022, and I think where you'll see the bigger boost will be in the twin cities because.
Non solicitation agreements are gone there.
Those folks are free to call on whoever they wish so.
I think we would hope and foresee it being a gradual upward sloping trend in terms of topline revenue in 2022.
Got you Okay, perfect and then last one just for me. This is kind of accretion Barry I guess, that's going to continue you should continue to creep lower that.
Nothing else to expect on that line item.
Yes, no no real new story on that.
Brian Okay perfect. Thanks for taking the questions in that congrats on the transaction guys.
Thank you Brian.
This concludes our question and answer session I would like to turn the conference back over to Mr. Charlie Volk for any closing remarks. Please go ahead.
Well, we're excited about what's happening at Midwest, one and we thank all of you for joining the call. This morning, we think the question all the questions we received.
Wish everyone a.
Good rest of this month, a great Thanksgiving season, and I'll send it back to you Chuck.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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