Q4 2021 Midwestone Financial Group Inc (IOWA) Earnings Call
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Welcome to the Midwest Finance out of group incorporated fourth quarter 2021 earnings conference call. My name is one and I will be coordinating your call. Today. This presentation contains forward looking statements relating to the financial condition results of operation and business ease of Midwest, One finance out of group incorporated.
Speaker 1: Welcome to the Midwest Financial Group Incorporated for Quarter 2021 Ernest Conference call. My name is Juan and I will be coordinating your call today. This presentation contains forward-looking statements relating to the financial condition, results of operation, and businesses of Midwest 1 financial group incorporated. Forward-looking statements, denoted include words such as beliefs, anticipated, and other similar expressions.
Forward looking statements do not include the words that I believe expect anticipate and similar expressions are there.
Our results could differ materially from those indicated among the important factors that could cause the results of the fed materially our interest rates, taking something that makes up a company b, it's nice competitive pressures getting out economic conditions and the risk factors detailed in the company's periodic report on race to play in the statements.
Speaker 1: Actual results could differ materially from those indicated.
Speaker 1: among the important factors that cool calls actual results to the fair. Materially, our interest rate tends to be the mix of a company business, competitive pressures, general economic conditions and the risk factors detail in the company's periodic report and registration statements filled with the securities and exchange commission.
Would they get Securities and Exchange Commission meet the West One finance had a group incorporated undertakes no obligation to publicly release or update. These forward looking statements to reflect events or circumstances. After the date there'll be presentation.
Speaker 1: Midwest One Financial Group Incorporated undertakes no obligation to publicly repeat or update these forward-looking statements to reflect events or circumstances after the date of this presentation.
If you would like to ask a question during the presentation you may do so by pressing the star one on your telephone keypad or the flag icon. If you'll have joined US online I will now hand over to your host Charlie Funk cheapest secretive office at the beginning with Bliss Charlie go ahead.
Speaker 1: If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad or the flag icon if you have joined us online. I will now hand over to your host, Charlie Fung, Chief Executive Officer to begin with. Please Charlie, go ahead.
Thank you Juan and good morning, or good afternoon to all who've joined US. This morning, and we certainly thank you for joining us on our call I'll make a few introductory remarks and wood.
Speaker 2: Thank you, Juan, and good morning or good afternoon to all who've joined us this morning, and we certainly thank you for joining us on our call. I'll make a few introductory remarks, and I would tell you that I'm joined in the room by Linda Vesher, our president, Barry Ray, our Chief Financial Officer, Gary Sims, our Chief Credit Officer, and our Treasurer and Chief Investment Officer, Jim Cantrell.
I would tell you that I'm joined in the room by Linda <unk>, Our President Barry Ray, Our Chief Financial Officer, Gary Sims, Our Chief Credit Officer at our Treasurer, and Chief Investment Officer, Jim Cantrell.
I'd begin with stating the obvious 2021 was a record year for Midwest, one with earnings of six.
Speaker 2: I begin with stating the obvious 2021 was a record year for Midwest One with earnings of
$69 $5 million and $4 37, a share and we would be the first to acknowledge that we did have tail winds during the year from P. P. P. And also from continued asset quality improvement, which allowed us to release credit reserves during the year.
Speaker 2: $69.5 million and $4.37 a share. And we would be the first to acknowledge that we did have tailwinds during the year from PPP and also from continued asset quality improvement, which allowed us to release credit reserves during the year.
Fourth quarter earnings were driven by loan growth and solid trends in noninterest income and that includes especially well in wealth management.
Speaker 2: Fourth quarter earnings were driven by loan growth and solid trends and non-interest income, and that includes especially well in wealth management.
I think we're making excellent progress with our commercial loan origination despite very high payoff levels in quarter, four almost unprecedented payoff levels for us and we still were able to.
Speaker 2: I think we're making excellent progress with our commercial loan origination, despite very high pay off levels in quarter four, almost unprecedented pay off levels for us. And we still were able to e-cout again in commercial loans and in loans overall, XPPP. And we start 2022 with a very strong pipeline as we look forward to what happens later this year.
You've got a game.
Commercial loans than in loans overall X P. P. P and we start 2022 with a very strong pipeline as we look forward.
To what happens later this year.
We did take a very small provision during the.
Speaker 2: We did take a very small provision during the quarter, and that was almost entirely due to the loan growth that we saw during the quarter.
For the quarter and that was almost entirely due to the loan growth that we saw during the quarter.
We're certainly excited continue to be excited about the growth potential in our wealth management area and we think the talent. We've added over the last 18 months will show a bear significant fruit in 2022 and beyond.
Speaker 2: We're certainly excited, continue to be excited about the growth potential in our wealth management area. And we think the talent we've added over the last 18 months will show a very significant fruit in 2022 and beyond.
I also have to note that asset quality continues a three year improvement and we expect more improvement in early to mid 2022, and our in our asset quality.
Speaker 2: I also have to note that ASSEC quality continues a three year improvement, and we expect more improvement in early to mid-2022 in our ASSEC quality.
We continue to invest in technology and I would highlight a few notable developments in technology, we continue enhancement in our retail digital platform.
Speaker 2: We continue to invest in technology, and I would highlight a few notable developments in technology. We continue enhancement in our retail digital platform. We've continued to integrate enterprise work close solutions that have saved literally hundreds of hours, back office hours during 2021.
We've continued to.
Integrate enterprise work flow solutions that are saved literally hundreds of hours back office hours during 2021.
Speaker 2: We are in the process of streamlining our business lending platform, and that's something that we will continue to work on over the balance this year. And we're also integrating a new trust system. Since our AP merger, we've been running with two trust systems, and during 2022, we will merge those systems. It'll be more efficient for our staff and much better for our customers once integrated.
We are in the process of streamlining our business lending platform and that's something that we will continue to work on over the balance of this year and we're also integrating a new trust system since our AP merger, we've been running with two trust systems in during 2022, we will merge those systems.
It'll be more efficient for our staff and much better for our customers once integrated.
And I think the bottom line on that is we are embracing change we know change is necessary to remain relevant to our customers and that is our goal in 2022 and beyond.
Speaker 2: And I think the bottom line on that is we are embracing change. We know change is necessary to remain relevant to our customers and that is our goal in 2022 and beyond.
I would conclude by saying that with a five 5% increase in our dividend. We continue to exhibit a modest payout percentage, we think our capital levels are adequate, especially on a risk adjusted basis, where we've fallen only slightly year to year and would also note that our CET one regulatory ratio.
Speaker 2: I would conclude by saying that with a 5.5% increase in our dividend, we continue to exhibit a modest payout percentage. We think our capital levels are adequate, especially on a risk-adjustive basis, where we've fallen only slightly year to year, and would also note that our CET-1 regulatory ratio just under 10% at 9.94%, which we regard as more than adequate for our level of risk at Midwest 1.
Under 10% at $9, 94%, which we regard as more than adequate for our level of risk at Midwest one.
I now want to let Barry Ray our Chief Financial Officer offer some comments and that'll be followed by our President Lynne Divesture.
Speaker 2: I now want to let Barry Ray, our Chief Financial Officer, offer some comments, and that'll be followed by our President, Linda Vaish.
Thank you Charlie.
Speaker 3: Thank you, Charlie. Fourth quarter, 2021 earnings of 14.3 million were down from 16.3 million in the linked quarter. Higher revenue in the current quarter was offset by higher.
Fourth quarter 2021 earnings of $14 3 million were down from $16 $3 million in the linked quarter.
Revenue in the current quarter was offset by higher expenses and Australia alluded to we also recognize the small credit loss expense of $622000 in the fourth quarter compared to a recapture of $1 1 million in the third quarter with the linked quarter.
Speaker 3: And as Charlie alluded to, we also recognize a small credit loss expense of $222,000 in the fourth quarter, compared to a recapture of 1.1.
On a per share basis fourth quarter diluted earnings per share at <unk> 91, since we're down to $1 three linked quarter lower earnings described.
Speaker 3: On a per share basis, fourth quarter by Lutherans for share of 91 cents. We're down for $1.3 in a link's quarter. The lower earnings described.
Above earlier, partially offset by a reduced share count from share repurchase repurchases during the quarter.
Speaker 3: of earlier, partially off-bed by reduced share count from sharey purchases.
Also as Charlie alluded to for the year 2021 earnings were a company record of $69 $5 million.
Speaker 3: Also is Charlie Lutitou for the year 2021 earnings or a company record of 69.
Moving onto net interest income and margin net interest income of $38 8 million in the fourth quarter was down $1 5 million from 43 in the linked quarter.
Speaker 3: Moving on to net interest income in the margin. Net interest income of 38.8 million in the fourth quarter was down 1.5 million.
PPP fee income of $2 million in the fourth quarter was down $1 $6 million from the linked quarter.
Speaker 3: GPTC, income of $2 million in the public order was down 1.6 million.
It was $3 6 million.
PPP loans were $30 8 million at year end 2021, and below the rate of forgiveness tapering in the fourth quarter, we do expect.
Speaker 3: PPP loans were 30.8 million a year in 2021 and they'll have a rate of forgiveness tapered in the
Speaker 3: do expect most of that will be forgiven by the end of the first quarter, but very likely snow will still remain, some small balance will likely remain throughout the year.
Most of that will be forgiven by the end of the first quarter, but very likely some will still remain.
Some small balance will likely remain throughout the year.
<unk> DPP fees at year end 2021 were <unk> 9 million.
We reported a net interest margin of 283% in the fourth quarter, 2021, which was down 17 basis points from the linked quarter.
Speaker 3: We reported a net interest margin of 2.8, 3% in the fourth quarter 2021, which was down to 17 basis points from the late quarter.
We break that into the earning asset yield and the cost of fund, earning asset, earning asset yields were down 19 basis points from the cost of funds went down.
Speaker 3: and break that into the earning asset yields and the cost of fund earning assets, earning asset yields were down 19 basis points and the cost of funds was down to basis points.
Two basis points.
Moving to the earning asset yield.
Eight basis points of that decline was attributable to PPP fee accretion two basis points from loan purchase discount and the balance being a combination of mixed shift in the earning assets and lower coupons and loan origination.
Speaker 3: be accretion, two basis points from loan purchase discount, and the balance being a combination of mixed shift in the earning assets and lower coups.
With respect to funding cost deposit costs were down two basis points as I said and that was principally from time deposit repricing at lower rates.
Speaker 3: With respect to funding costs, deposit costs were down two basis points as I said and that was principally from time deposit repricing at lower rates.
Moving under our credit risk profile and credit loss expense.
Nonperforming assets were $31 9 million at year end, 2021, which was down six 6% on a linked quarter and 29% in the prior year end.
Speaker 3: Non-performing assets were 31.9 million in year in 2021, which was down 6.6% from the late quarter and 29% from the prior year.
If credit quality measures continued to improve and economic forecast do not deteriorate and thus drive an increase in expected credit losses.
Speaker 3: Credit quality measures continue to improve and economic forecasts do not deteriorate and thus drive an increase in expected credit.
We believe the allowance coverage ratio will drift downward over the course of 2022.
Speaker 3: We believe the allowance coverage ratio will drift down would over the course.
Having said that I will note the potential impact to 2022 credit loss expense from our plant our first acquisition and additional credit loss expense Debbie will like likely recognized from this so-called diesel double count.
Speaker 3: Having said that, I will note the potential impact of the 2022 credit loss expense from our planned Iowa First acquisition and additional credit loss expense that we will
Fee income noninterest income was $11 2 million in the fourth quarter of 2021 up from $9 2 million linked quarter mortgage business finished 2021 strong, though 2022 mortgage origination forecast or approximately 30% lower than 2021.
Speaker 3: Fee income, non-interest income was $11.2 million in the fourth quarter of 2021, up from $9.2 million in the linked quarter. Mortgage business finished 2021 strong, though 2022 mortgage origination forecasts are approximately.
Positively.
Speaker 3: Positively, it's really alluded to we expect recent investments in wealth management teams to provide some buffer to the mortgage revenue.
<unk> alluded to we expect recent investments in wealth management teams to provide some buffer to the mortgage revenue decline.
With respect to the expenses and efficiency noninterest expenses were $30 4 million for the fourth quarter 2021 of $29 8 million in the linked quarter.
Speaker 3: With respect to expenses and efficiency, non-existent expenses were $30.4 million for the fourth quarter of 2021, up from $29.8 million in the late quarter.
With the <unk> acquisition planned for early in 2022, we expect the fourth quarter of 2020 to really be the next clean quarter for expenses.
Speaker 3: With the Iowa first acquisition plan for early in 2022, we expect the fourth quarter of 2022 to really be the next clean quarter for expenses.
And we expect the efficiency ratio will be elevated in 2022 compared to 2021, just based upon the revenue.
Speaker 3: and we expect the efficiency ratio will be elevated in 2022 compared to 2021 just based upon.
With respect.
Speaker 3: We expect the capital are tangible common equity ratio with 7.49% at December 31, 2021, and that's down from 7.71 at September 30th. The company's target tangible common equity ratio remains in the eight and a half percent range. We have a negative impact from AOCI adjustment, which we expect to increase given higher market interest rates and larger available for sale debt securities portfolio compared to prior years.
To capital our tangible common equity ratio was 749% at December 31, 2021, and that's down from 771 at September 30, the company's target tangible common equity ratio remains in the eight to eight 5% range, we have a negative impact from OCI adjustment, which we expect to increase given higher market interest rates and <unk>.
Larger available for sale debt securities portfolio compared to prior years.
In addition, the island first acquisition will put some additional downward pressure on near term capital levels are at an all cash deal but.
Speaker 3: In addition to the Iowa First acquisition, we'll put some additional downward pressure on near-term capital levels, and that's an all-cash deal. But we do.
But we do expect to build back capital levels thereafter.
Finally, with respect to Iowa first a brief update integration activities continue still awaiting regulatory approval.
Speaker 3: Finally, with respect to Iowa first, the brief update, integration activities continue. Still awaiting regulatory approval, but as of today, we don't expect any issues with that. And we're on track for a late first quarter, early second quarter close. And with that, Iowa.
As of today, we don't expect any issues with that and we're on track for a late first quarter early second quarter close.
And with that I'll turn it over to Lindsay.
Thanks, Barry I would say for 2021, the headline for Midwest, One financial group is really a year of advancing our sales culture emphasizing two themes.
Speaker 4: Thanks, Barry. I would say for 2021, the headline for Midwest One Financial Group is a really a year of advancing our sales culture, emphasizing two themes.
First execution.
Speaker 4: First, execution, second, town.
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We are pleased that that combination is driving our growth in households, both consumer and business and a growth in referral activity all of that leading to a growth in revenue.
Speaker 4: We are pleased that that combination is driving a growth in households, both consumer and business, and a growth in referral activity, all of that leading to a growth in revenue.
I'd like to share with you a little bit of what we're thinking about and what we see on the revenue drivers.
Speaker 4: So I'd like to share with you a little bit of what we're thinking about and what we see on the revenue driver.
Core commercial loan balances remain a top priority and we're pleased with the progress.
Speaker 4: core commercial loan balances remain a top priority, and we're pleased with the progress.
As you know first quarter marked a low point in our balances, but since then we've seen three quarters of growth.
Speaker 4: As you know, first quarter marked a low point in our balances, but since then, we've seen three quarters of growth.
The biggest drivers.
Growth markets in Denver, and the twin cities, the latter of which Youll recall, we've made some key talent investments.
Speaker 4: growth markets in Denver and Twin Cities, the latter of which you'll recall we've made some key talent investments.
Speaker 4: But it's important to note that the growth has been broad-based and includes much of our legacy Iowa footprint, including here in our headquarters city of Iowa.
But it's important to note that the growth has been broad based and it includes much of our legacy Iowa footprint, including here in our headquarter city of Iowa City.
It's notable in the fourth quarter was our highest production quarter of the entire year generating net growth despite elevated payouts.
Speaker 4: It's notable the fourth quarter was our highest production quarter of the entire year generating net growth despite elevated payoffs.
And I would also add we are gratified to see retail loan balances increasing in the fourth quarter as well.
Speaker 4: And I would also add we're gratified to see retail loan balances increasing in the fourth quarter as well.
Barry spoke to the strength of the deposit franchise that was evident in 'twenty, one and I would say that metric. We're probably most excited about is having more than 10% year over year growth in non interest bearing deposits.
Speaker 4: Barry spoke to the strength of the deposit franchise that was evident in 21. And I would say the metric we're probably most excited about is having more than 10% year-over-year growth in non-interest-bearing deposits.
We think and talk a lot about being a primary bank for our customers and so another important related indicator of that strength of the deposit franchise is the increase in card revenue.
Speaker 4: We think and talk a lot about being a primary bank for our customers. And so another important related indicator of that strength of the deposit franchise is the increase in card revenue.
Speaking of fee income, we clearly benefited from a strong mortgage contribution across the year.
Speaker 4: Speaking of fee income, we clearly benefited from a strong mortgage contribution across the year. And while it's moderated with the rest of the industry, we are pleased that origination income was essentially level on a linked quarter basis.
And while it's moderated with the rest of the industry. We are pleased that origination income was essentially level on a linked quarter basis.
Charlie spoke about wealth managements outperformance.
Speaker 4: Charlie spoke about wealth management's outperformance.
And we see our investment in that area across our footprint as an example of why we believe our talent strategy will continue to pay dividends.
Speaker 4: And we see our investment in that area across our footprint as an example of why we believe our talent strategy will continue to pay dividends.
While we did see softness in swap revenue in 'twenty. One we are encouraged by two quarters of growth in that line and we hope that the current interest rate outlook.
Speaker 4: While we did see softness in swap revenue in 21, we are encouraged by 2 quarters of growth in that line. And we hope that the current interest rate outlook continues to follow.
Continues to follow that increasing trend.
So I would just close by emphasizing where we're focused for 'twenty two.
Speaker 4: So I would just close by emphasizing where we're focused for 22 to deliver a return.
To deliver a return for our shareholders.
Number one is revenue.
Speaker 4: Number one is revenue. We're focused on loan growth, especially commercial, and continued core deposit growth. In the feline.
We're focused on loan growth, especially commercial and continued core deposit growth in the fee line.
We look to realize return on our investments in the wealth business and pursue continued momentum in card and swap income.
Speaker 4: We look to realize return on our investments in the wealth business and pursue continued momentum and card and swapping.
We expect to continue our trend of strengthening the credit risk profile.
Speaker 4: we expect to continue our trend of strengthening the credit risk profile.
The teams are progressing well and preparing for the integration of our first as Barry mentioned.
Speaker 4: The teams are progressing well and preparing for the integration of Iowa First.
And finally, we know that thoughtful expense management is paramount.
Speaker 4: And finally, we know that thoughtful expense management is paramount.
Speaker 4: We're clear-eyed about losing the tailwind of PPP fees.
We're clear eyed about losing the tailwind of PPP fees.
We know that expense discipline is a non negotiable for us that means reducing expenses and finding efficiencies, where we can so that we can continue to invest in the business, where we can drive growth just as you heard from Charlie consistent with what you've heard from US all along priorities for those investments would be talent.
Speaker 4: So we know that expense discipline is a non-negotiable. And for us, that means reducing expenses and finding efficiencies where we can so that we can continue to invest in the business where we can drive growth. Just as you heard from Charlie, consistent with what you've heard from us all along. Priorities for those investments would be talent and technology. And with that, Juan, we'd like to thank you for your time.
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And with that one would be pleased to take questions.
Thank you as a reminder, if you would like to ask a question. Please press the star followed by one on your telephone keypad or their flag icon have you'll have joining us online. If you turn your mind. Please press the star followed by non metal when PREPA into ask a question. Please <unk> your phone is on mute it locally.
Speaker 1: Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad or the flag icon if you have joined us online. If you change your mind, please press star followed by number two. When preparing to ask a question, please ensure your phone is unmuted locally. And the first question comes from Brendan Nozal from Piper Sandler. Please, Brendan, your line is now open.
Your first question comes from Brendan Nosal from Piper Sandler. Please Brandon Your line is now open.
Hey, good morning, everybody how are you doing.
Good morning, Brennan good morning.
Speaker 4: Maybe just to start off on the loan growth side of things, as you guys alluded to, you know, you guys struck together three quarters of nice mid-single-digit growth, and it sounds like the kind of the gross activity this quarter outside of paydowns was stronger than it even has been in some time. So just kind of curious about the puts and takes within loan growth as we move through 2022, and what do you think is a reasonable expectation for loan growth for the year?
And maybe just to start off on the loan growth side of things.
As you guys alluded to you guys start to get three quarters of nice mid single digit growth and it sounds like the kind of the gross activity. This quarter outside of pay downs was stronger than even has been in some time. So just kind of curious about the puts and takes within loan growth as we move through 2022, and what do you think is a reasonable expectation.
For loan growth for the year.
Sure Brendan this is Len I would start the response there by saying one of the reasons, we have for optimism would be a lot of the production. We're seeing include some construction.
Speaker 4: Sure, Brendan, this is Len. I would start the response there by saying one of the reasons we have for optimism would be a lot of the production we're seeing includes some construction development type loans so that we see those drawing up across the year.
Development type well and so that we see those drawing up across the year of course, we continue to see elevated payoff activity as we referenced in the fourth quarter, but as we sit here today with our pipeline remaining steady.
Speaker 4: Of course, we continue to see elevated payoff activity as we referenced in the fourth quarter, but as we sit here today with our pipeline remaining steady, we continue to expect and push for growth across the year.
We continue to expect to push for growth across the year.
Got it that's helpful color.
Speaker 5: Got it. That's helpful, Culler. Maybe one more for me. I'm just kind of looking at the security portfolio, and you guys have put so much liquidity to work in that book already. So just give us some color on your ability to reinvest that book as rates move higher. You know, how much is that portfolio cash flowing per quarter, things like that?
Maybe one more for me on just kind of looking at the securities portfolio.
You guys have put so much liquidity to work in that book already.
So just give us some color on your ability to reinvest that booked as rates move higher.
How much is that portfolio cash selling per quarter it seems like.
Yeah, Brandon this is Jim I'll take that one.
Speaker 6: Yeah. Brandon, this is Jim. I'll take that one.
You're absolutely right, we've got a little over $2 billion in the investment portfolio and it is supplying a good deal of cash flow in the current.
Speaker 6: You know, you're absolutely right. We've got a little over $2 billion in the investment portfolio, and it is supplying a good deal of cash flow in the current, you know, in its current form. So, my expectation is it will be, it'll, the portfolio will generate in the neighborhood of $300 million.
In its current form so my expectation is it will be it will.
The portfolio will generate in the neighborhood of $300 million of cash flow. This year in 2022, maybe a little bit less than that next year. So it gives us I think some flexibility to answer your question it sort of depends on what happens on the liability side and how quickly we grow loans.
Speaker 6: Cash flow this year in 2022 maybe a little bit less than that next year
Speaker 6: So it gives us, I think, some flexibility to answer your question. It sort of depends on what happens on the liability side and how quickly we grow loans. My hope would be that we could let almost all of the investment portfolio run off and those balances will be replaced by loan growth. If that is not the case...
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My hope would be that we could.
All of the investment portfolio run off and those balances will be replaced by loan growth.
That is not the case if loan growth.
Or if we continue to see deposit growth.
Speaker 6: or if we continue to see deposit growth at a pretty rapid pace and we don't have a long growth, we would invest slowly in the investment portfolio. But I think that's kind of the range of outcomes that I see as most like.
At a pretty rapid pace and we don't have loan growth, we would invest slowly.
In the investment portfolio.
That's kind of a range of outcomes that I see is most likely.
Understood. Thank you for your thoughts there I appreciate taking the questions.
Speaker 5: Understood. Yeah. Thank you for your thoughts there. I appreciate taking the question.
Thank you. Our next question comes from Jeff released from D. A Davidson. Please Jeff Your line is now open.
Speaker 1: Thank you. Our next question comes from Jeff Rulis from D.A. Davidson. Please, Jeff, your line is now open.
Thanks, Good morning.
Hi, Jeff Jeff on the loan growth front I did.
Hi, there.
Speaker 7: there I didn't quite hear a number of expectations on 22 I guess we'll keep it optimistic and and monitor payoff activity but maybe one you could speak to is the historical or performance of Iowa first any
I didn't quite hear a number of expectations on 'twenty, two I guess, we'll keep it optimistic.
Monitor payoff activity, but maybe one you could speak to that.
Historical our Q4 performance of Iowa, first any any high level or specific comments about their gross credit margin how they did.
Speaker 7: High level or specific comments about their growth, credit, margin, how they did in the fourth quarter on that end. And guess with that impact, it starts on accretion. If you're more confident in the figures that you announced that.
Did it in the fourth quarter.
On that end.
Yes would that impact any thoughts on accretion if youre, if youre more confident figures this year.
You announced that at announcement thanks.
Yeah, I'll start on that Jeff.
Speaker 2: Yeah, I'll start on that, Jeff. Good question.
Good question.
I think our guidance all along has been mid single digit.
Speaker 2: I think our guidance all along has been mid-single digit in the 4 to 6 percent range on loan growth. And right now, from what I see, I think it might be at the higher end of that. But as you know, payoffs are going to determine a lot of that, and obviously we saw a lot of payoffs in the past.
4% to 6% range on loan growth and right now from what I see I think it might be at the higher end of that but.
As you know pay offs are going to determine a lot of that and obviously, we saw a lot of pay offs in the.
In the fourth quarter <unk> has been very consistent they were they were profitable in the fourth quarter. It's no secret that one of the two banks and I will first is has some asset quality problems, but those seem to have been addressed pretty well at least to our satisfaction and.
Speaker 2: in the fourth quarter. Iowa First has been very consistent. They were profitable in the fourth quarter. It's no secret that one of the two banks in Iowa First has had some asset quality problems, but those seem to have been addressed pretty well, at least to our satisfaction, and they had a solid fourth quarter of earnings.
They had a solid fourth quarter of earnings.
Great. Thanks, Charlie and Barry maybe just for you that expense run rate I guess, if we exclude the moderate.
Speaker 7: Great. Thanks, Charlie. And Barry, maybe just for you, the expense run rate, I guess if we exclude the moderate merger costs.
<unk> costs.
Now that you said, you probably don't get back to clean number till the fourth quarter of <unk>.
Speaker 7: Another you said you probably don't get back to clean number till the fourth quarter of 20 of the coming year or this year, but any any sort of thoughts on you know back down to 11 and change and then you know we just take on Iowa first from there
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Of the coming year or this year.
But any any sort of thoughts on that.
Back down to 11 and change and then.
We just take on I will first from there.
Yes, my thought on that Jeff is that.
Speaker 3: Yeah, my thought on that Jeff is that, you know, we do our
We do our we do our.
Full company salary increases on January one of each year, so the $30 million.
Speaker 3: whole company's salary increases on January 1st of each year, so the $30 million is probably excluding Iowa first.
It's probably excluding Iowa.
Not a bad estimated go forward run rate for quarterly expenses.
And then.
Excluding the merger related costs and other types of things I would expect that the Iowa furniture is going to add around two to $2 $5 million per quarter, starting in the second quarters again, obviously merger related expenses in there.
Speaker 3: the merger-related cost and other types of things, I would expect that the Iowa Furnaces is going to add...
As well.
Got it I think I misquoted that expensive.
Speaker 7: I think I may have misquoted that. So you said kind of 30 run right and then add on tack on.
<unk> said kind of 30 million run rate and then add on tack on.
Okay.
Thanks and last one.
Yeah.
On the tax rate.
Speaker 3: on the tax rate any kind of 22 and change for 21, but seem a little higher than historic. But is that kind of the new, is that a good run rate for tax rate? Yeah, we had a pick in the tax rate based upon a true up of our tax expense at year in 2021 to your question. I think the effective tax rate in 2022.
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Kind of 'twenty, two and change for 'twenty, one but.
Even a little higher than historic but is.
Is that kind of the new is that a good.
Run rate for.
Tax rate.
Yes, we had and we had an uptick in the tax rate based upon a true up of our tax expense at year end 2021.
To your question I think the effective tax rate in 2022.
Barring some action from the federal government or otherwise is probably going to be in the 20% to 21% rate Jeff.
Speaker 3: barring some action from the federal government or otherwise is probably going to be in the 20 to 21% of
Okay. Thank you.
Yes, Jeff.
Speaker 2: And Jeff, this is Charlie, and I might just also interject, I think we're no different from most companies that there's certainly upward pressure in an inflationary environment on expenses. I don't know that we can forecast what that will be, but I think all of us in the industry are dealing with almost every line item of our expense budget is under some pressure. So I think we all need to allow for that.
This is Charlie and I might just also interject I think we're no different from most companies that there's certainly upward pressure.
An inflationary environment on expenses I don't know that we can forecast what that'll be but I think all of us in the industry are dealing with almost every line item of our expense budget is under some pressure. So I think we all need to allow for that.
Thanks, Charlie.
Thank you. Our next question comes from Terry Mcevoy from Stephens. Please <unk>. Your line is now open.
Thank you good morning, everyone.
Hi, Terry Terry.
Within the press release, you talked about the continued low credit line usage in the fourth quarter. I was wondering if you could put some numbers behind that in within your outlook for 2022 would you expect a usage rates to increase.
Speaker 8: Within the press release, you talked about the continued low credit line usage in the fourth quarter. I was wondering if you could put some numbers behind that and within your outlook for 2022, would you expect usage rates to increase?
Okay.
Please go ahead.
Yes, so that we have seen some.
Speaker 4: Yes, so that we have seen some positive signs at the tail end of the fourth quarter, but they're still historically low, Terry. So our line usage rate at the end of the fourth quarter was at 32% as I recall.
Positive signs at the tail end of the fourth quarter, but theres still historically low Terry so.
Our line usage right at the end of the fourth quarter was at 32% as I recall.
And but we did see again some uptick.
Speaker 4: And but we did see again some uptick, you know, quarter over quarter just because of the loan production. So kind of holding constant in usage, but additional production driving some, some balance gain. So our outlook would be as we move through 22 that we would continue to see that number gradually move, move upward and, and these some tailwind for us on balance.
Quarter over quarter, just because of the loan production, so kind of holding constant in usage, but additional production driving some some balance gain so our outlook would be as we move through 'twenty. Two that we would continue to see that number gradually move move upward.
A tailwind for us on balances.
Understood. Thank you and then as a follow up I'm wondering if you could just update us on your interest rate sensitivity and specifically.
Speaker 8: Understood. Thank you. And that is a follow up. But one of you just update us on your interest rate sensitivity and specifically deposit repricing it as rates rise. Do you think you'll be able to lag your deposits, particularly in your, get in your presentation, your rural core deposit base that you reference in the presentation?
Deposit repricing as rates rise do you think you'll be able to lag.
Your deposits, particularly in your I guess in your presentation. Your rural core deposit base that you referenced in the presentation.
Yes, Terry this is Jay and I will I'll take first shot at that question and I guess I would start by saying when we look at Alco and the models.
Speaker 6: Yeah, Terry, this is Jim. I will take first shot at that question. And I guess I would start by saying, when we look at Alco and the models,
And we do.
Speaker 6: And we do a fair amount of modeling, what we see in a rising rate environment, at least in the first year is pretty neutral. I mean, the model results would show fairly neutral in the first year and then some benefits as you move through time. So in the late in the first year, starting in the second year, we would start to expect to see benefits.
A fair amount of modeling what we see in a rising rate environment at least in the first year is pretty neutral I mean, the model results would show fairly neutral in the first year and then some benefits as you move through time. So in the late in the first year starting in the second year, we would start to expect to see benefits as some of the fixed rate assets.
Speaker 6: some of the fixed rate assets reprice up. I do think there's the potential, as you suggest, for some unmodeled, what I would call unmodeled benefit in that we'll lag our deposit increases more than, say, the model would indicate we will. So there's a small amount of potential upside in the front quarters of a rate increase, but it's not, I don't wanna oversell it, it's not a lie.
Price up.
I do think there is the potential as you suggest for some and modeled what I would call on modeled benefit in.
Will will lag our deposit increases more than say the model would indicate we will so there's a small amount of potential upside in the near in the front quarters of a rate increase but its not I don't want to oversell. It is not a lot in terms of basis points on the margin it's measured in terms of basis.
Speaker 4: in terms of, you know, basis points on the margin. It's measured in terms of basis points on the margin, not tens of basis points on the margin in the early stages. So, the margin is measured in terms of basis points on the margin in the early stages.
Points on the margin not tens of basis points on the margin in the early stages.
Thank you for that and have a nice weekend everyone.
Thank you Barry.
Thank you. The next question comes from Damon Delmonte from K B W. Please name on your line is now open.
Speaker 1: Thank you, the next question comes from Damon Del Monte, from KBW, please Damon, your line is now open.
Hey, good afternoon, everyone just to kind of follow up on Terry's question with the <unk>.
Speaker 9: Hey, good afternoon, everyone. Just to kind of follow up on Terry's question with the interest rate sensitivity. So as we look at the core margin, you know, over the upcoming couple quarters here, with the expectation that rates, you know, maybe at one hike in March and then a couple more towards the middle to the back half of the year, do you think you can keep that core margin flat from this quarter's level, or do you think there's still some downward pressure before it actually inflects and begins to rise up?
Interest rate sensitivity. So as you look at the core margin over the upcoming couple of quarters here with the expectation that rates maybe at one hiking in March and then a couple more towards the middle to the back half of the year do you think you can keep that core margin flat from this quarter's level or do you think theres still.
Some downward pressure before it actually in flex and begins to rise up.
Yes.
Speaker 6: Yeah, Damon, I think this is Jim again.
David I think this is Jim again.
I think there are a couple of factors that may work in our favor and one we just talked about is I do think.
Speaker 6: I think there are a couple of factors that may work in our favor, and one we just talked about is I do think...
Rates, we get those first of those rate hikes that are expected in the marketplace coming as early as March we will see some increases in our floating rate prime based loan portfolio.
Speaker 6: As rates, you know, we get those first of those rate hikes that are expected in the marketplace coming as early as March.
Speaker 6: We will see some increases in our floating rate, our prime based loan portfolio.
And there is a very very few of our liabilities that will move up immediately some Cds will start to reprice, but that will take place over time.
Speaker 6: And there's a very, very few of our liabilities that will move up immediately. Some CDs will start to reprice, but that will take place over time. But most of our non-maturing type deposit money market savings.
But most of our non maturity type deposit money market savings DDA and the like I think for the first couple of increases fed increases will be likely to hold those fairly steady. So I do think that will work in our favor and the other factors I'm starting to see signs that we talked about maybe letting the.
Speaker 6: DDAs and the like, I think for the first couple of
Speaker 6: increases, Fed increases will be likely to hold those fairly steady. So I do think that will work in our favor in the other factors. I'm starting to see signs that we talked about maybe letting the portfolio run off. Now that PPP forgiveness has sort of run its course, I think the composition of the balance sheet will shift more towards loans and less towards security. And that will also, I think contribute to a little, maybe a little bit better than flat margin as we move.
Portfolio runoff now.
PPP forgiveness is sort of run its course, I think the composition of the balance sheet will shift more towards loans and less towards securities and that will also I think contribute to maybe a little bit better than flat margins as we move forward.
Okay. Thanks very.
Speaker 9: Okay, thanks. That's very helpful. And then, you know, with regards to, to see income.
Very helpful.
And then with regard to fee income.
Obviously mortgage banking.
Speaker 9: Obviously mortgage banking is a sensitive area in the industry right now with rates moving around and stuff But you know, how do you how do you kind of look at your your core run rate? Based off of what you've seen over the last you know two quarters here
Sensitive area in the industry right now with rates moving around and stuff, but how do you. How do you kind of look at your core run rate.
Based off of what you've seen over the last.
Two quarters here.
Damon this is Barry.
Speaker 3: Damon, this is very, yeah, as I look at it and I look back, I would say that probably the, and I wanna exclude the mortgage servicing right adjustment out of this.
Yeah as I look at it.
I look back I would say that.
Probably the and I'm going to exclude the mortgage servicing right adjustment out of this team and I would say that.
Probably the third quarter of 2021.
Speaker 3: Probably the third quarter of 2021 run rate of around nine to nine and a half million dollars is probably a good run rate
Run rate of around nine to $9 5 million probably yet.
A good run rate for fee income going forward.
And then.
Obviously that also has a core run rate excluding Iowa.
Right right.
Speaker 9: And that, I mean, they don't contribute too much, right? Maybe like a million bucks.
All contribute too much right, maybe like a million bucks.
I think I have a first would be yes. That's a number that I have is about 1 million Bucks a quarter Damian.
Speaker 3: I think I will first be, yeah, that's a number that I have is about a million bucks to All right,
Okay Alright.
Speaker 9: All right, great. Everything else has been asked to answer. Thank you very much.
Alright, great everything else has been asked answered thank you very much.
Thank you thank you Damon.
Thank you. The next question comes from Brian Martin from Janney Montgomery. Please Brian Your line is now open.
Speaker 1: Thank you, the next question comes from Brian Martin from Janie Motkomerie, please Brian , your line is now open.
Hey, good morning, guys.
Good morning, Brian Brian Haney, Jim maybe one more just maybe just one more on the margin Jim just on the variable rate loans, what what percentage of your loans are variable today.
Speaker 9: Maybe, Jim, maybe one more, maybe just one more on the margin, Jim, just on the variable rate loans. What percentage of your loans are variable today that would kind of reprice?
It would it would kind of be price upward.
Speaker 6: Yeah, and depending on the timing of that variability, some of it happens right up front, those are prime-based loans. But I would say the general answer is 40% of the loans maybe a touch less, you know, between a third and 40, a third of the loans and 40%.
And depending on the timing of that variability some of it happens right upfront those are prime based loans.
But I would say the general answer is 40%.
The loans, maybe a touch less between a third and 40, a third a third of the loans and 40%.
Our variable rate to some degree some will have a floor. So it'll take a little bit of time.
Speaker 6: variable rate to some degree some will have more
To get off the floors.
Got you, Okay, and the benefit from probably 25 basis point rate hike on.
Speaker 9: Gotcha. Okay, and in the benefit from a 25 basis point rate hike on each rate hike, I mean, how would you think about that benefit to the margin when it does begin to accrue as you kind of get through some of those floors?
Each rate hike I mean, how would you think about that benefit to the margin. When it does begin to accrue as you kind of get through some of those floors. I mean, just in total I guess or how just how would you characterize it how youre thinking about there.
Speaker 10: in total, I guess, or how just how do you characterize it, how you're thinking about the rate increases and what's seemingly going to get.
Increases that we are seemingly going to get here.
Yeah, Bryan I do think there is some benefit.
Speaker 6: Yeah, Brian , I do think there's some benefit in the early quarters of a rate heights hiking cycle, but it's small in terms of basis points. I think over time, you know, a year after the first hike, you know, it's probably up, you know, in the tens of basis points expansion, but you know, it's one or two basis points per quarter.
In the early quarters of our rate heights, hiking cycle, but it's small in terms of basis points I think over time.
A year after the first hike.
Probably up in the tens of basis points expansion, but one or two basis points per quarter.
So it's small incremental in the early stages.
Speaker 6: You know, it's a small incremental in the early stage.
I think it builds momentum over time, but the early stages I don't expect to see big margin changes with the fed increase small ones.
Speaker 6: I think it builds momentum over time, but the early stages, I don't expect to see big margin changes with the Fed increase.
Okay.
Speaker 10: Okay, gotcha. And then your core margin today, Jim, as you sit and kind of talk about it, maybe being flatish here in the near term.
Okay Gotcha, and then your core margin today, Jim as you sit and kind of talk about it maybe being flattish here in the near term.
What what kind of reference point from a core standpoint, you are looking at.
Speaker 10: What kind of reference point from a course fan point you're looking at?
Are you just taking PPP out of that or I guess, what are you kind of removing from there. It can take a look at your core level.
Speaker 10: Are you just taking PPP out of that or I guess are what are you kind of removing from that or kind of take a look at your core level?
And the margin whats reported what the $2 83.
Speaker 3: In the margin, which reported what the 283. We reported the margin of 283, right? So if you back out of that, the PPP, that would put, I have it around 270. Yep. We got about 8 basis 20.
Reported a margin of two <unk> right. So if you back out of that the PPP.
That would put I have it at around $2 70.
We got about eight basis points on PPP, but I recall, a couple of basis points two basis points on purchase accounting.
Okay, So kind of $2 70, as we are.
Yes, I guess you are seeing the margin kind of stabilize and then trend upwards from there that's big picture, how you're thinking about it.
Speaker 10: You're, I guess, you're seeing the margin kind of stabilized and then, you know, trend upwards from there. That's a big picture how you're thinking about it.
That's how I view it yet.
Yes, okay.
Speaker 10: Perfect, that's helpful. And then maybe, I don't know who for whom, but Charlie, you referenced maybe a little bit better credit quality outlook. Hey.
That's helpful and then maybe.
I don't know hope for whom by Charlie you referenced maybe a little bit better.
Credit quality outlook as you go into 'twenty two here, but.
Speaker 10: 22 here, but you know, I guess you can just talk about what you're seeing on the credit quality front It's improving and then you know kind of maybe when you talk about the reserve level I think someone mentioned maybe it it trends a bit lower just kind of when you factor in You know Iowa first I mean kind of where do you all in? I mean where do you guys kind of see yourself landing? Is it you know post Iowa first as you get later in the year? I guess Can you give any any context on just how we should think about that?
Yes.
Can you just kind of just talk about what youre seeing on the credit quality front, it's improving and then.
Maybe when you talk about the reserve level I think someone mentioned, maybe it trends a bit lower just kind of when you factor in.
Our first I mean kind of what are you all in I mean, what do you guys kind of see yourself landing is it.
Post, Iowa first as you get later in the year I guess.
Can you give any any context on just how we should think about that.
Yes, I would just say, Brian I think the biggest story for us on asset quality as if you go back a couple of years and you look at the continual progress.
Speaker 2: Yeah, I would just say, Brian , I think the biggest story for us on asset quality is if you go back a couple of years and you look at the continual progress and
I believe I'm going from memory here I believe we were down 23 basis points on NPA is.
Speaker 2: I believe I'm going from memory here. I believe we're down 23 basis points in MPAs.
Speaker 3: from the prior year. And I think that I think you will continue to see lower levels of NPAs as the year progresses. You know, in terms of specifics, I think we all benefit from hearing from Gary Sims in terms of his outlook on asset quality. So I'd give it to Gary. Sure, yeah. And.
The prior year and I think that I think you will continue to see lower levels of NPA is as the year progresses in terms of specifics I think we all benefit from hearing from Gary Sims in terms of his outlook on asset quality, So I'd give it to Gary.
Sure.
I would.
It's kind of continue what Charlie was saying in terms of.
Speaker 11: It's kind of continue what Charlie was saying in terms of the momentum that we see in the non-performers and the reductions. Really, what we're seeing is our ability to resolve
The momentum that we see in the.
Non performers and the reduction is really what we're seeing is our ability to resolve.
Existing non performers is outpacing.
Speaker 11: existing non-performers is outpacing the any deterioration if any that we're seeing in any given quarter. So over the course of the year I believe you're gonna see that trend continue and and that really equates to I believe what you're gonna see from the loan loss reserve as well I believe that over the course of the year we will have a bias towards that
Any deterioration if any that were seeing in any given quarter. So over the course of the year I believe youre going to see that trend continue.
That really equates to I believe what youre going to see from the loan loss reserve as well I believe that over the course of the year, we will have a bias towards.
That loan loss reserve migrating down.
Got you and as far as kind of where you see that trending over time kind of when you get our first kind of assimilated.
Speaker 10: catch and as far as kind of what we see that trending over time kind of when you get i will first kind of assimilated you know what you know what kind of words what you see a tracking if we if things continue to hold up you know pretty well like your expect
Whereas what do you see it tracking if we if things continue to hold up pretty well like youre expecting.
I'm going to ask Barry to help me that's that's a good question Brian .
Speaker 3: I'm going to ask Barry to help me. That's a good question. I'll try it. Well, Barry. Yes, a difficult question to answer. I would see the back through how things are going to shake out in the valuation. I would say Brian .
Yes difficult question to answer obviously, its a factor of what how things are going to shake out in the valuation.
I would say Brian .
When we looked ahead when we were doing our budgets, we were drifting our coverage ratio down probably like 10 basis points.
Right.
That's what we were thinking.
And then the impact of <unk>.
Difficult to measure the impact of the <unk> double count, but that could that could raise that coverage ratio up a little bit just mathematically right.
Speaker 3: But that could raise that coverage ratio up a little bit just mathematically.
Again, I think our bias is towards drifting down.
Okay.
Okay.
Alright.
Speaker 10: All right, and I guess maybe just, you know, you met me to come in early very, maybe I missed it, but just did you comment on what the impact from the inexpensive side from Iowa first, you know, I guess it was, it was a two and a half million dollar number, I forget what you said that you said something earlier about the expense impact from Iowa first.
Maybe just.
You bet made a comment earlier, Barry maybe I missed it but did you comment on what the impact from the on the expense side from from Iowa first I guess.
It was a $2 $5 million number I forget what you said that you said something earlier about the expense impact from.
Hi, Ofer.
Right, Yes that Brian was two to $2 5 million and that was.
Speaker 3: Right, yeah, what I said, Brian was two and a half million dollars and that was...
What I would call a clean run rate.
The additional expenses from Iowa, that's why we expect it to be.
Quarterly, Okay, and net debt, okay and that quarter, when you clean would be when.
Speaker 3: Okay, and that, that, okay, and that quarter when your clean would be when what bear maybe said that by he said I apologize No, it's probably the earliest one.
What Barry maybe you said that you said I apologize.
It's probably the earliest one thing would be the fourth quarter of this fourth quarter of 2022 would be the earliest clean quarter I expect.
Gotcha, Okay alright.
Speaker 10: Okay, all right, that's all I had guys, I appreciate it, thanks.
That's all I had guys I appreciate it thanks.
Thank you Brian .
Thank you as a reminder to ask any further question. Please press the star followed by one on your telephone keypad now all the Flack icon, if you'll have joining us online.
Speaker 1: Thank you as a reminder to ask any further questions please press the staff followed by one on your telephone keypads now or the flag icon if you have join us online.
Yeah.
We currently have no further questions I will hand over back to Charlie funk for any final remarks.
Speaker 1: We currently have no further questions, I will hand over back to Charlie Fang for any final remarks.
Yes. Thank you one and thanks to everyone who has joined US today on the call. We appreciate your listening for participation and your active participation and since we are in the Midwest, we are going to say stay warm and stay healthy and thanks again.
Speaker 2: Yes, thank you, Juan. And thanks to everyone who's joined us today on the call. We appreciate your listening participation and your active participation. And since we're in the Midwest, we are going to say, stay warm and stay healthy. And thanks again.
This concludes today's call. Thank you so much for joining you may now disconnect your lines.
Speaker 1: This concludes today's call. Thank you so much for joining. You may now disconnect your line.
Yes.
Speaker 12: Kannuk tremendous
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