Q4 2021 Midland States Bancorp Inc Earnings Call

January 28, 2022

Good day and thank you for standing by welcome to the Q4 2021, Midland States Bancorp earnings conference call at.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

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I'd now like to hand, the conference over to your Speaker today, Mr. Tony Rossi Rafi the floor is yours.

Thank you Chris.

Everyone and thank you for joining us today for the Midland States Bancorp fourth quarter 2021 earnings call.

Joining us from Midlands management team are Jeff Ludwig President and Chief Executive Officer, and Eric Lemke, Chief Financial Officer.

We will be using a slide presentation as part of our discussion. This morning, if you've not done so already please visit the webcasts and presentations page of Midland's Investor Relations website to download a copy of the presentation.

Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of Midland States Bancorp that involve risks and uncertainties, including those related to the impact of the COVID-19 pandemic.

These factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.

These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I'd like to turn the call over to Jeff Jeff.

Thanks, Tony Good morning, everyone welcome to the Midland States earnings call I'm going to start on slide three with the highlights of the fourth quarter, we had a very productive quarter that capped an exceptional year for the company.

Thoughts improve our financial performance, while also making investments that we believe will enable us to continue improving our performance in the years to come.

In 2021, we successfully attracted new talent to the company that enabled us to substantially improve productivity of our commercial banking teams, while keeping the overall size of the teams relatively unchanged, we increased our exposure to higher growth markets in northern Illinois, and St. Louis which has had a positive impact.

On loan production.

We effectively leverage the technology investments, we have made over the past few years to increase efficiencies, while continuing to make enhancements to our technology platform that will provide additional benefits in the future.

We added new capabilities and increased our opportunities to grow our wealth management business in the future with the acquisition of Atg Trust company and.

And we used our strong liquidity to eliminate higher cost funding sources that will benefit our net interest margin going forward.

Our success in these areas enabled us to deliver a strong year of balance sheet and earnings growth and increased our tangible book value per share by more than 12%, while returning a significant amount of capital to our shareholders through our quarterly dividend and stock repurchase program.

We're very proud of what we were able to accomplish in 2021, and we want to thank the entire Midland organization for their outstanding performance in what was a challenging environment given the continuing impact of the pandemic.

Specific to the fourth quarter, we generated net income of $23 1 million or $1 <unk> per diluted share and our core earnings power continues to improve as our adjusted pre tax pre provision income was $36 $3 million in the fourth quarter, an increase of 27.

8% from the prior quarter.

This strong performance was driven by an acceleration of our business development efforts, which produced a record quarter of loan production, primarily in our commercial and commercial real estate lending areas.

The increased loan production is attributable to a few factors.

We are generally seeing a higher level of loan demand as commercial clients gained more confidence in the economic recovery.

We are seeing increases contributions from new bankers, we have added over the past year.

We are seeing more loan production from higher growth areas in northern Illinois, and St. Louis We're successfully moving up market and working with larger clients with greater financial needs and are getting the benefit from technology investments such as the Salesforce platform that have provided us with better data and insights to improve our <unk>.

Right and effectively expand our relationships with clients.

The strong loan production resulted in 25% annualized loan growth in the fourth quarter with the largest growth coming from commercial real estate portfolio, which is an area, where we have not seen much growth over the past several years.

This group does nationwide bridge lending for FHA, and HUD developments and originates loans for multifamily.

In senior living and multi use properties with retail office and residential components. This group is providing us with increased diversification in our commercial real estate portfolio.

We also had strong growth in our core C&I portfolio. Although this was masked by declines in PPP loans and commercial FHA warehouse lines.

There are also held in the commercial portfolio.

Excluding PPP and commercial FHA warehouse lines, our commercial loan and lease portfolio increased by $112 million from the end of the prior year. This was attributable to continued growth in our equipment finance portfolio as well as increase in <unk>.

Conventional commercial loans and.

Importantly, we were able to fund this loan growth was strong inflows of noninterest bearing deposits.

Our total deposits increased 9% from the end of the prior quarter with noninterest bearing deposits, increasing 34%, enabling us to continue running off higher cost deposits and lowering our cost of funds.

As we mentioned on our last earnings call a portion of the increase in.

And noninterest bearing deposits was due to commercial FHA servicing deposits added through the relationship with the white capital.

But we're also seeing strong inflows of other commercial deposits, resulting from the full banking relationships that we are generating through our business development efforts.

During the fourth quarter, we continued to execute well on our strategic initiatives and drive improvement in a number of key metrics.

Noninterest bearing deposits now represent nearly 37% of our total deposits, which is up from around 22% at the end of 2019.

And the improvement in the in our deposit base reduced our cost of deposits to just 15 basis points at the end of the year.

We also continue to see positive trends in our wealth management business with assets under administration, increasing three 9% during the fourth quarter. We are successfully scaling the Midland franchise and generating higher levels of revenue, while keeping expenses well controlled.

As a result, we continue to realize additional operating leverage with our efficiency ratio improving to 52, 6% in the fourth quarter.

<unk> to 58, 8% in the prior quarter.

Accordingly, we are generating this growth, while improving our asset quality during the fourth quarter, our nonperforming loans declined by 22% from the end of the prior quarter and our coverage of nonperforming loans increased to 120%.

As we hoped it would be the case, we are growing into the significant reserve we built during the pandemic, which has enabled us to keep our provision expense relatively low despite the strong growth we're seeing in the loan portfolio.

At this point I'm going to turn the call over to Eric to provide some additional details around the fourth quarter performance Eric.

Thanks, Jeff I'm, starting on slide four and we'll take a look at our loan portfolio our total loans.

<unk> increased $309 million from the end of the prior quarter.

As Jeff mentioned, the strongest growth came in the commercial real estate portfolio, while our commercial loan portfolio was just about flat as growth in equipment finance and conventional commercial loans, largely offset declines in PPP loans and an $88 million decline in the end of period balances on commercial FHA.

Warehouse credit lines.

Our consumer loan portfolio was also up by $74 million, which was split between growth in the green Sky portfolio and other direct consumer lending that we do.

Excluding PPP loans commercial warehouse credit lines and consumer loans added through the Green Sky partnership our total loans increased at an annualized rate of more than 40%, which reflects our improved ability to generate growth in commercial and commercial real estate loans.

Turning to slide five we've provided an update on our equipment finance portfolio. We continue to see a steady recovery of our borrowers and the transit and ground transportation industry as the trends and business and recreational travel improve as of December 31, we had just $4 million of deferrals remaining with nearly.

All of those deferrals, making some form of partial payments.

Looking at slide six we provided an update on the consumer loan portfolio that we have through our partnership with Green Sky. The portfolio has performed extremely well throughout the pandemic at December 31, we only had $500000 of deferred loans in this portfolio, which represents just 110th of 1% of the total.

Loans and.

And at just 26 basis points, the delinquency rate remains even better than the historical range that we've seen in this portfolio.

In addition to the strong performance. The escrow account is available to cover any deficiency in our principal balances the escrow account increased to $34 $8 million at the end of the fourth quarter.

Jeff will have an update on the Green Sky relationship later in the call.

Turning to slide seven we will take a look at our deposits.

Total deposits increased $509 million or nine 1% from the prior quarter. The increase was largely attributable to an increase in commercial FHA servicing deposits.

Strong inflow of noninterest bearing deposits enabled us to continue running off higher cost time deposits as our CD balances declined by $59 million from the end of the prior quarter.

Looking at slide eight we will walk through the trends in our net interest income and margin. Our net interest income increased five 7% from the prior quarter, primarily due to higher balances of interest earning assets as we utilize the inflow of non interest bearing deposits.

The increases in both the loan portfolio and the investment portfolio.

On an average basis, the investment portfolio increased by $142 million compared to the prior quarter as we added $78 million in securities with an average yield of around one 1%.

As we indicated on our last call. The addition of the new servicing deposits would create temporary excess liquidity that will put some near term pressure on our net interest margin.

We finished the year with cash and cash equivalents accounting for 10% of interest, earning assets, which is above our usual or a normal level. Excluding accretion income our net interest margin declined six basis points due to that excess liquidity and unfavorable shift in our mix of earning assets.

The pressure from the excess liquidity was partially offset by the initial benefit of paying off the higher rate <unk> advances and a decline in our cost of deposits due to the improved deposit mix.

Looking ahead in the near term the trend in our net interest margin will be largely dependent on how quickly we can redeploy our excess liquidity into a more favorable mix of earning assets. However, our end of period loan balances were $229 million higher than our average balances so that puts us in a good position.

<unk> see that favorable mix shift and generate a higher level of net interest income in the first quarter.

Turning to slide nine we will look at the trends in our wealth management business our assets under administration increased by $159 million from the end of the prior quarter, primarily due to market performance. Our wealth management revenue was essentially flat with the prior quarter as the decrease in our state and guardianship fees offset the.

The increase in assets under administration.

Compared to the fourth quarter of prior year, our wealth management revenue increased 22%, which reflects our strong progress on growing our recurring sources of fee income.

On slide 10.

I'll look at noninterest income, we had $22 $5 million in noninterest income in the fourth quarter, an increase of 48, 7% from the prior quarter.

Outside of the gain on the termination of the FHL be swap we had a couple of other items that positively impacted our noninterest income in the fourth quarter.

We recorded a $3 $9 million gain an unrealized income on equity investments.

Also had a $1 million.

Gain on bank owned life insurance.

Excluding these items most other areas of net interest income were relatively similar to the prior quarter with the exception of a $1 million decline in the impairment on our commercial mortgage servicing rights.

With interest rates, increasing and refinance refinancing volumes declining it's likely that we will see lower levels of impairment on commercial mortgage servicing rights in 2022.

Turning to slide 11, we will review our noninterest expense.

On an adjusted basis, excluding the <unk> advanced prepayment fees and integration and acquisition expenses, our non interest expense declined by approximately 300000 from the prior quarter.

This was primarily due to lower data processing costs, resulting from renegotiating a couple of vendor contracts, while we successfully kept most other areas relatively flat with the prior quarter.

On an adjusted basis, we were able to hit the low end of the 40% to $42 million run rate that we were targeting combined.

Combined with the higher level of revenue that we generated our efficiency ratio improved to 52, 6%.

Looking ahead to the first quarter of 2022, we expect expenses to range between $40 5 million and $41 5 million.

Turning to slide 12, we will review our asset quality trends are nonperforming loans decreased $12 million from the end of the prior quarter, primarily due to the payoff of two non accrual loans and the charge off of a third one.

We had $4 6 million in net charge offs in the quarter or 37 basis points of average loans.

Most of the charge offs related to one acquired loan and charge offs in the equipment finance portfolio as a few of the credits impacted by the pandemic have now moved to loss overall.

Overall, though the losses in this portfolio have been well below the level of reserve that we established during the pandemic and as we mentioned earlier the trends we are seeing are generally positive.

Deferred loans also continued to decline at December 31, we had $13 3 million of loans remaining on deferral or just 30 basis points of total loans with nearly all of them, making some form of partial payment.

At the end of the year, we also had no hotel loans remaining on deferral.

We recorded a provision for credit losses of approximately $500000, which was largely related to a build in our reserve for unfunded commitments, resulting from our strong commercial loan production at December 31, approximately 94% of our allowance for credit losses was allocated to general reserves.

On slide 13, we show the components of the change in our ACO from the end of the prior quarter. Our ACL decreased by approximately $4 6 million. The decrease was primarily driven by favorable changes in the portfolio. This was partially offset by small additions related to specific reserves and economic forecasts.

On slide 14, we show, our ACL broken out or segmented by portfolio given the positive trends. We are seeing we brought down our coverage ratio in most areas of the portfolio.

And with that I will turn the call back over to Jeff Jeff Alright, Thanks, Eric will wrap up on slide 15, with an update on our Green Sky partnership and a few comments on our outlook and priorities for 2022.

Based on recent discussions we now expect to remain in the Green Sky program at least through 2023.

We also intend to diversify our fintech partnerships, which will allow us to maintain our consumer loan balances going forward.

Along these lines we are in the final stages of establishing a new fintech partnership with the originator of consumer loans, we expect the commitment of between 200 $250 million in loans from this partnership with loan balances building to that level over the next couple of years.

Now looking at our expectations for 2022, we believe we are well positioned to deliver another strong performance this year.

Based on the more productive commercial banking teams, we have built our current pipeline and improving loan demand, we expect to generate high single digit loan growth in 2022.

The primary drivers of the growth will continue to be commercial loans, including equipment finance and.

And commercial real estate and we continue to have strong pipelines in each of these areas.

Organic loan growth will also be driven by opportunities to continue adding commercial banking talent, particularly in high higher growth markets. One of these markets will be the Chicago land area with the amount of merger activity in the Chicago market. We believe there are good opportunities to take advantage of the disruption and add <unk>.

Banking talent and clients over the long term.

Another priority of the bank in 2022 is increasing our level of asset sensitivity given the outlook for higher interest rates. The improved commercial banking platform. We have built is generating more variable rate loans and noninterest bearing deposits, which is making us more asset sensitive.

We saw an increase in our asset sensitivity during the second half of 2021, as we generated higher levels of production from our commercial banking group. The improvement we have made in our deposit base over the past couple of years should enable us to see a low deposit beta as interest rates rise.

Given the trends, we're seeing in deposit flows and our level of liquidity, we believe our deposit beta will be close to zero for the first two rate increases.

Another priority in 2022 will be the continued investment in technology.

Though we will shift the focus of this investment.

For the past few years, our technology investments were largely foundational enabling us to run the bank more efficiently.

And we're seeing.

And we're seeing the target results of those investments.

Going forward more of our technology investment will be focused on areas that can positively impact revenue generation and enhance client service along these lines late in 2021, we rolled out a new online SBA loan application portal to select customers and will be expanding the use of.

The portal throughout 2022, we've also invested in search engine optimization to drive potential clients to the portal.

We believe these investments will ultimately help to build our SBA business into a meaningful contributor to our noninterest income as well as to create opportunities to develop deposit relationships with these small business customers.

Part of our technology strategy includes making investments in Fintech funds. These funds have performed well and were partially responsible for the equity gains recorded in the fourth quarter, but more importantly, they provide us with good insights on the latest innovations and inform the development of our technology roadmap.

So that we can continue to remain competitive in a rapidly evolving area.

We are also focused on keeping our expense levels relatively flat compared to 2021, while we are continuing to continuing our investment in technology and also seeing the upward pressure on compensation expense that is impacting the entire banking industry.

We believe we have other cost savings opportunities.

Some of which relate to the continuing benefits of past technology investments that we believe can help us keep expenses relatively stable moving forward.

And finally with respect to M&A transactions, we will continue to have the very tight set of criteria.

We are open to smaller strategic deals that can further improve our deposit base <unk>.

Increase our presence in attractive markets or grow our wealth management business without disrupting our focus on the strategies and execution that are generating strong organic growth and improved financial performance.

The transaction, we announced earlier this week to acquire the loans and deposits of two branches of <unk> Bank and trust fit this tight set of criteria.

With this transaction that we expect to be immediately accretive to earnings we will add approximately $86 million of low cost deposits.

And by adding a branch in Makena, we will further increase our exposure to faster growing markets in northern Illinois, and improve our ability to grow our presence in the Chicago MSA.

There were a number of items that positively impacted our financial results in 2021 that won't occur again in 2022, most notably income derived from PPP loans and reserve releases as the economy recovered from the pandemic with.

With the continued organic balance sheet growth that we expect a full year of higher wealth management revenue following the atg acquisition and.

And further improvement in operating leverage we believe that we can deliver a similar level of earnings in 2022.

Although from the perspective of core performance of the company, we believe our earnings will be higher than last year.

And we expect to continue that earnings growth in 2023, as we continue to capitalize on our stronger commercial banking platform and increased presence in higher growth markets.

Over the past few years, we believe we have made steady progress in transforming our company to create a more valuable franchise, we have exited or deemphasize volatile low return businesses, we have reduced expenses by rationalizing our branch network and corporate facilities, which helped to fund the improvements in our <unk>.

Technology platform.

And we have substantially improved our commercial banking group, which has now become the primary driver of our loan and deposit growth.

As a result, we are now a bank with a balance sheet that has shifted more towards relationship based loans.

Funded by low cost deposits combined with a wealth management business.

<unk> provides a large consistent source of noninterest income.

We believe the model that we that we have now and we will continue to build going forward is capable of generating a higher level of returns that we have historically that we have historically produced and will consistently create value for shareholders as we continue to generate profitable growth in the future.

With that we'll be happy to take any questions that you might have operator, please open the call.

Okay. Thank you.

And as a reminder to ask them.

You will need to press star one on your telephone to withdraw your question. Please press the pound key.

And as we compile the Q&A roster.

And our first question comes from Terry Mcevoy Stephens. Your line is open.

Hi, good morning, everyone.

Good morning, Terry.

Maybe first off the extending the green sky partnerships through at least 2023.

How should we think about just the balances. They ended the year at 875 do they continue to grow over the next several years or.

Will there be run off consistent with your prior guidance last quarter.

We think it's going to be relatively stable, maybe down slightly but as we as we also said.

We'll be adding a couple new well at least one new fintech partner and looking at others. So that.

We're well positioned if the green Sky portfolio does start.

To go down.

Quicker or maybe more like what we disclosed at the end of the third quarter, but.

But we think relatively stable going forward at least for a couple of years.

Okay.

And on the expense outlook.

I thought a real positive run rate and just to put a clarity Eric you said that run rate on page 11 here for the first quarter of 'twenty two whereas the presentation says I guess in 2022. So is that the quarterly run rate you expect just in the first quarter of the year or as you think about the full year.

Level.

Yes, Terry good question as I think about it.

Guidance for really the four year.

For the full year for all of the quarters will be on the lower end in the first quarter and we could see some expense increase over the course of the year as we deal with compensation in some of those other pressures from the inflationary environment. So starting on the low end and then probably moving to that high end as we get through the year.

Thanks for clearing that up and then maybe last one.

When we think about Chicago and Chicago land over the next three to five years.

Hum.

How much how important is that market going to be do you think for for Midland and.

Relative to St. Louis in your core market. So I guess said another way is that the primary focus right now when you think about expanding the franchise.

No I would say, it's St Louis and that.

Sort of.

Caller County, Southern Caller County, Chicago land is sort of how we think of it and looking for opportunity in both of those areas now we think that.

In the Chicago land might provide some opportunity more in the short term with a lot of disruption going on up there with bank M&A.

But if we see opportunities in St. Louis we're going to be looking there too.

Perfect. Thanks, Jeff and thanks, Eric I appreciate it.

Thanks.

Thank you.

Our next question comes from Damon Delmonte of KBFG. Your line is open.

Hey, good morning, guys hope everybody is doing or not doing well today.

Wanted to ask a little bit about the interest rate sensitivity with the margin.

How much of the loan portfolio is variable and how much of that would actually begin to reprice immediately with a 25 basis point hike in the fed.

Hey, Damian, yes, I'd be happy to answer that so our portfolio, particularly when you look at the equipment finance and when you look at Green Sky. It's been running about 70, 30, 70% fixed 30% variable that changed slightly during this past quarter and we're now roughly around $65 35. So when you look at the very.

<unk>, we've got about $1 billion portfolio give or take that is will change rates either immediately or within 30 days.

So we do have some floors on that portfolio.

So we won't see the full benefit of a rate increase immediately.

But it roughly about $1 billion will change rates pretty quickly.

Okay and.

You feel like your core margin is kind of.

Reached the bottom here.

Maybe it's flattish in the first quarter and then start to trend up as we go through the year is that fair.

Yes, I think I think that's fair, we still have about a six basis point impact from PPP loans and I think as we look into 2022 that obviously is going to go away as we get the rest of that portfolio forgiven and then our accretion number.

That impact on our margin has been sliding as well, we expect that to decrease a little bit next year, but with the loan growth that we've had and with the potential for those.

Great. So as we've kind of all talked about I think considering both of those things. We can look at it to see a flat margin or maybe a little bit of upside.

Got it Okay and then just one more question on the expenses.

Could you just elaborate a little bit more on.

One of your goals is to maintain a stable expense levels, while continuing to invest in technology.

Other areas in the.

And the expense base that you could try to basically say, the one area and reallocate to another or what's the approach for trying to keep.

<unk>.

France is stable.

We've been looking all all across sort of our operations and looking at how do we drive more efficiencies with the things that we do so part of our technology.

Investments has been in <unk> and <unk>.

Order to drive those efficiencies and then we've gone back through and looked at our other technology spend and other vendors all throughout the organization and have looked for potential savings or reductions in cost there and then we're able to allocate those efficiencies and those costs back into other technology <unk>.

<unk> such as the SBA portal that Jeff mentioned and I think another important piece there is we've built.

Good really good.

Team and so we're sort of they've been working on.

Some foundational things and we're not we're going to point them in different directions. So a lot of that technology spend is in the run rate in our people here that are going to be also appointed elsewhere.

Got it that's great color. Thank you very much I appreciate it.

Thank you.

And again to ask a question. Please press star one on your telephone please ask your.

A question please press the pound key.

Our next question comes from Nathan race of Piper Sandler Your line is open.

Hi, guys. Good morning, good morning.

Question, just going back to the loan growth discussion I appreciate the high single digit guidance for.

2022.

Like from what we saw in the fourth quarter a lot of that was commercial driven and so would just love to get some color on just the specific drivers within your commercial team that's driving a lot of that growth and does that high single digit outlook for this year include.

Some of the fundings from that new.

Fintech partnership that was described on slide 15 in the deck.

Yes, so color on growth.

We're sort of seeing we're seeing the growth sort of across the footprint we saw.

And for the whole year saw really nice growth.

In the St. Louis market.

We're also seeing very good growth in that first Chicago land through Rockford area.

We're putting effort and then.

Mentioned on the call are our specialty finance group that we've sort of been building over the last several years.

Around the FHA bridge.

We were doing that with our with our love funding unit when we had it and now we're doing it with some other partners. So the combination of all those.

Really what's driving the growth.

Got it.

The high single digit outlook for this year doesn't necessarily include.

Rich nations stemming from the new <unk>.

Tech partnership.

I think the way, we the way I am thinking of it right now as these this partnership is going to help us offset if green Sky does does go down it's going to help offset some of that.

It will probably come on late this year were not quite quite there to the finish line with them and it will again it will start slow in and.

Originations at a lower level to start with and then we'll raise them as we move forward.

So it would be probably more of a 'twenty three.

Impact, but the way I would look at it right now is with Green Sky in these partnerships is to hold our consumer balances relatively stable.

Yes.

Understood I appreciate that thank you, Jeff and then just lastly on loan growth.

Payoffs somewhat lower in the quarter that helped drive that really strong growth this quarter.

And uncertainty around future payout levels.

It resulted in you guys, maybe you've taken a more conservative stance mid high single digit outlook for this year versus what we saw in the fourth quarter.

Yes, I will say that this past year we.

We got a lot more focused on the attrition side of the equation and <unk>.

Trying to get ahead of ahead of some of that to see if we can slow attrition down I think.

As the year went down sort.

Sort of moved on.

I think we got better at the attrition side.

So it's hard to it's hard to predict attrition, but.

I think we've seen seen our attrition slow down and we don't expect it to pick back up in the near term.

Got it.

Very helpful. And then maybe just one last one for me on core fee income ex mortgage is it fair to expect some growth.

Fee income just as you guys continue to gain client wallet share.

Yes.

The shift that you guys have put in place over the last several quarters.

Yes, I think Thats fair Nate So we've continued to really focus on increasing wallet share we've really.

Focused on debit cards getting more debit cards out there and increasing usage. So we saw strong fee income in those interchange fees. During 2021, I don't think we will grow at that same rate in 2022, but we expect to see some going forward and then we're continuing to focus on our wealth business and seeing growth there.

Well and those are two of our key drivers in that noninterest income.

Got it that's great color really appreciate all the insights and thank you for taking the questions.

Thanks Nate.

Yes.

Thank you.

And next we have Keith Haines of D. A davidson.

Your line is open.

Hey, guys.

Got it.

I'm here on behalf of Manuel matters, but.

I jumped in the queue and he just told me he was that.

In the Q, so I might just back out of here, but let him answer the question.

<unk>.

Yeah.

Sorry about that yes.

Yes.

Okay.

Thank you.

Okay.

Next we have a follow up from Nathan race of Piper Sandler.

Your line is open.

Yes, thanks for taking a follow up perhaps while we wait there, but we just wanted to ask on the outlook for the reserve going forward, obviously nice credit quality improvement in the fourth quarter.

Charge offs were maybe a little elevated.

What we discussed last quarter. So it would just be curious to kind of get your thoughts on needs to provide for that high single digit organic growth outlook for 2022.

And kind of where you see the reserve settling out over that timeframe.

Yes. Good question. So we're kind of modeling out net charge offs somewhere in that 20% to 25 basis point range.

Well, maybe right at the low end for sort of our commercial portfolio and then more at the high end for our Midland equipment Finance portfolio.

The new loan growth is going on at say 120 to 130 basis points, maybe a little bit higher than that it fits in the equipment finance portfolio. So.

So I think based on this growth, we will see a little bit of the reserve building and then we will see us providing for any charge offs, we have gone through in 2022.

Okay.

Okay got it so probably stable ish.

Relative basis as a percentage of loans.

Sure Eric.

I think I think that's right.

<unk>.

Yes, I think based on what we see now I think thats right.

Okay, great well mixed matters right. So.

The new mix is going to be at a higher reserve level then.

Green Sky and our warehouse lines are being reserved at a fairly low level. So the new production coming on it's going to be reserved at a higher level.

Overall, I expect the reserve percentage probably to go up.

Understood.

Maybe just one last one changing gears just within the context of the asset sensitivity equation that Eric described earlier.

With all the improvement in the deposit franchise over the last several quarters.

Is your expectation that you guys.

Perhaps have a lower deposit beta than what we saw during the 2015 to 2018 tightening cycle or how are you guys kind of thinking about the need to.

<unk>.

New loan growth, obviously, you guys have the flexibility with your loan deposit ratio, where it is at today around 85%. So just curious how you kind of think about the funding equation.

Deposit base will react to higher rates going forward.

Yes, I think we've performed pretty well in the last up cycle with betas I think our deposit base is probably stronger today than it was before so.

Our expectation is probably will perform better than than before.

Although.

We do have good loan demand in.

And it's sort of hard to hard to predict what others around us are going to do as well.

It sounds like it's kind of probably lag as much as they can so.

I do think that would probably be better.

Awesome good.

Good stuff guys I appreciate you taking the follow ups. Thanks again thanks.

Thanks.

Thank you.

And again to ask a quick question. Please.

Please press star one on your telephone to withdraw your question press the pound key.

Our next question comes from Manuel Novack of D. A Davidson your line is open.

Hey, good morning.

I appreciate all the color on the loan guidance I'm, just wondering with the.

The high single digits.

Will it be as back half.

Our ice season fourth quarter seasonality as it was this year.

I don't think so I think it'll be a little more balanced.

As we talked a lot about last year quarter in quarter out.

At the end of 'twenty 'twenty, we really began to focus on our commercial banking team.

Bringing new folks in through through the year.

Building pipelines and all that started materialize towards the back part of the year and we saw some good growth in the third quarter and we really saw a lot of nice growth in the fourth quarter.

Just on a seasonal basis typically our first quarter is a little slower.

In the middle part of the year in the back of the year. It gets it gets better but I don't I don't.

See it.

Loan growth this year it should be different than it was last year because last year, we had a decrease in loans in the first quarter had some growth in the second quarter, a little more than a third and a lot in the fourth this year B I think there'll be more balanced.

Now our equipment finance business, usually their best quarter every year is the last quarter of the year as companies are rushing to buy their equipment before the end of the year.

So the fourth quarter typically we do typically have better better fourth quarters.

I appreciate that thank you.

Thank you.

And I'm seeing no further questions in the queue I will turn the call back over to the management team for closing remarks.

Thanks for joining was a really really good 2021, and we're real excited about 'twenty two.

We will.

Look forward to the next call in May.

In April thanks, everybody.

Thank you. This concludes today's conference call. Thank you all for participating you may now disconnect have a pleasant day and enjoy your weekend.

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Speaker 1: I you.

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Speaker 2: Good day and thank you for standing by. Welcome to the Q4 2021 Midland State Bank Call earnings conference call. At this time, all participants are in a listen only mode. After the speakers presentation, there'll be a question and answer session. To ask a question during that session, you'll need to press star one on your telephone. Please be a survivor today's conference is being reported. And if you require any assistance during the call, please press star two.

Good day, and thank you for standing by and welcome to the Q4 2021 Midland States Bancorp earnings Conference call. At this time, all participants are in a listen only mode.

The speaker's presentation there'll be a question and answer session to ask a question during that session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded and if you require any assistance during the call. Please press star.

Speaker 2: I would now like to hand the conference over to you or speak today the Shtonirasi. It's the Rasi, the floor is yours.

I would now like to hand, the conference over to your Speaker today, Mr. Tony Rossi, It's rafi the floor is yours.

Speaker 3: Thank you, Chris. Good morning, everyone, and thank you for joining us today for the Midland Saints Band Corps, Fourth Quarter 2021 earnings call. Joining us from Midland's Management Team are Jeff Ludwig, President and Chief Executive Officer, and Eric Lemke, Chief Financial Officer. We will be using a slide presentation as part of our discussion this morning. If you've not done so already, please visit the webcast and presentations page of Midland's Invest Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that you have to...

Thank you Chris.

Morning, everyone and thank you for joining us today for the Midland States Bancorp fourth quarter 2021 earnings call.

Joining us from Midlands management team are Jeff Ludwig President and Chief Executive Officer, and Eric Lemke, Chief Financial Officer.

We will be using a slide presentation as part of our discussion. This morning, if you've not done so already please visit the webcasts and presentations page of Midlands Investor Relations website to download a copy of the presentation.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward. Looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call.

Speaker 3: The company disclains any obligations to update any forward-looking statements made during the call.

Speaker 3: Additionally, management may refer to non- GAAP measures which are intended to supplement, but not substitute.

Speaker 3: Press release available on the website contains the financial and other quantitative information to be discussed today as well as the

Speaker 4: Thanks Tony. Good morning everyone. Welcome to the Midland State Learnings Call. I'm going to start on slide three with the highlights of the fourth quarter. We had a very productive quarter that capped an exceptional year for the company that saw us improve our financial performance while also making investments that we believe will enable us to continue improving our performance in the years to come.

Thanks, Tony Good morning, everyone welcome to the Midland States earnings calls I'm going to start on slide three with the highlights of the fourth quarter, we had a very productive quarter that capped an exceptional year for the company.

Thoughts improve our financial performance, while also making investments that we believe will enable us to continue improving our performance in the years to come.

Speaker 4: In 2021, we successfully attracted new talent to the company that enabled us to substantially improve productivity of our commercial banking teams while keeping the overall size of the teams relatively unchanged. We increased our exposure to higher growth markets in Northern Illinois and St. Louis, which has had a positive impact on loan production.

Our loan production.

Speaker 4: We effectively leverage the technology investments we have made over the past few years to increase efficiencies while continuing to make enhancements to our technology platform that will provide additional benefits in the future. We added new capabilities and increased our opportunities to grow our wealth management business in the future with the acquisition of ATG Trust Company. And we used our strong liquidity to eliminate higher cost funding sources that will benefit our net interest margin going forward.

We added new capabilities and increased our opportunities to grow our wealth management business in the future with the acquisition of Atg Trust company and.

And we used our strong liquidity to eliminate higher cost funding sources that will benefit our net interest margin going forward.

Speaker 4: Our success in these areas enabled us to deliver a strong year of balance sheet and earnings growth and increase our tangible book value per share by more than 12% while returning a significant amount of capital to our shareholders through our quarterly dividend and stock repurchase program.

Speaker 4: We're very proud of what we were able to accomplish in 2021. And we want to thank the entire Midland organization for their outstanding performance and what was the challenging environment given the continuing impact of the pandemic.

Speaker 4: Specific to the fourth quarter, we generated net income of $23.1 million or $1.2 per diluted share. And our core earnings power continues to improve as our adjusted pre-tax, pre-provision income was $36.3 million in the fourth quarter. An increase of 27.8% from the prior quarter.

Specific to the fourth quarter, we generated net income of $23 $1 million or $1 <unk> per diluted share and our core earnings power continues to improve as our adjusted pre tax pre provision income was $36 $3 million in the fourth quarter, an increase of 27.

8% from the prior quarter.

Speaker 4: The strong performance was driven by an acceleration of our business development efforts, which produced a record quarter of loan production, primarily in our commercial and commercial real estate lending areas.

The strong performance was driven by an acceleration of our business development efforts, which produced a record quarter of loan production, primarily in our commercial and commercial real estate lending areas.

Speaker 4: The increased loan production is attributable to a few factors.

The increased loan production is attributable to a few factors.

Speaker 4: We are generally seeing a higher level of loan demand as commercial clients gain more confidence in the economic recovery. We are seeing increases contributions from new bankers. We have added over the past year.

We are generally seeing a higher level of loan demand as commercial clients gained more confidence in the economic recovery.

We're seeing increases.

Contributions from new bankers, we have added over the past year.

Speaker 4: We are seeing more loan production from higher growth areas in Northern Illinois and St. Louis. We're successfully moving up market and working with larger clients with greater financial needs and are getting the benefit from technology investments such as the Salesforce platform that have provided us with better data and insight to improve our win rate and effectively expand our relationships with clients.

We are seeing more loan production from higher growth areas in northern Illinois and St. Louis We are successfully moving upmarket and working with larger clients with greater financial needs and are getting the benefit from technology investments such as the Salesforce platform.

That it provided us with better data and insights to improve our win rate and effectively expand our relationships with clients.

Speaker 4: The strong loan production resulted in 25% annualized loan growth in the fourth quarter, with the largest growth coming from commercial real estate portfolio, which is an area where we have not seen much growth over the past several years.

Speaker 4: A portion of the increase in commercial real estate loans is coming from our specialty finance group, which is an area that we've invested in over the past couple of years and are now seeing good results.

A portion of the increase in commercial real estate loans is coming from our specialty Finance group, which is an area that we've invested in over the past couple of years and are now seeing good results. This group does nationwide bridge lending for FHA and HUD developments and originates loans for multifamily.

Speaker 4: This group does nationwide bridge lending for FHA and HUD developments and originates loans for multi-family, assisted in senior living and multi-use properties with retail office and residential components. This group is providing us with increased diversification in our commercial real estate portfolio.

Assistant and senior living and multi use properties with retail office and residential components. This group is providing us with increased diversification in our commercial real estate portfolio.

Speaker 4: We also have strong growth in our core CNI portfolio, although this is masked by declines in PPP loans and commercial FHA warehouse lines. They're also held in the commercial portfolio.

We also had strong growth in our core C&I portfolio. Although this is masked by declines in PPP loans and commercial FHA warehouse lines. There are also held in the commercial portfolio.

Speaker 4: Excluding PPP and commercial FHA warehouse lines, our commercial loan and lease portfolio increased by $112 million from the end of the prior year. This was attributable to continued growth in our equipment finance portfolio, as well as increase in conventional commercial loans.

Conventional commercial loans.

Importantly, we were able to fund this loan growth was strong inflows of noninterest bearing deposits.

Speaker 4: Our total deposits increase 9% from the end of the prior quarter, with not interest varying deposits increasing 34%, enabling us to continue running off higher cost deposits and lowering our cost of funds.

Speaker 4: As we mentioned on our last earnings call, a portion of the increase

As we mentioned on our last earnings call a portion of the increase.

Speaker 4: And non-intersparing deposits was due to commercial FHA servicing deposits added through the relationship with the White Capital.

And noninterest bearing deposits was due to commercial FHA servicing deposits added through the relationship with the right capital, but we're also seeing strong inflows of other commercial deposits, resulting from the full banking relationships that we are generating through our business development efforts.

Speaker 4: But we are also seeing strong inflows of other commercial deposits resulting from the full banking relationships that we are generating through our business development effort.

Speaker 4: During the fourth quarter, we continue to execute well on our strategic initiatives and drive improvement in a number of key metrics. Non-interesting deposits now represent nearly 37% of our total deposits, which is up from around 22% at the end of 2019.

During the fourth quarter, we continued to execute well on our strategic initiatives and drive improvement in a number of key metrics noninterest bearing deposits now represent nearly 37% of our total deposits, which is up from around 22% at the end of 2019.

And the improvement in the <unk> and our deposit base reduced our cost of deposits to just 15 basis points at the end of the year.

Speaker 4: As a result, we continued to realize additional operating leverage with our efficiency ratio improving to 52.6% in the fourth quarter compared to 58.8% in the prior quarter.

As a result, we continued to realize additional operating leverage with our efficiency ratio improving to 52, 6% in the fourth quarter compared to 58, 8% in the prior quarter.

Speaker 4: Importantly, we are generating this growth while improving our asset quality. During the fourth quarter, our non-performing loans declined by 22% from the end of the prior quarter, and our coverage of non-performing loans increased to 120%.

Speaker 4: As we hoped would be the case, we are growing into the significant reserve we've built during the pandemic, which has enabled us to keep our provision expense relatively low despite the strong growth we are seeing in the last portfolio. At this point, I'm gonna turn the call over to Eric to provide some additional details around the fourth quarter performance. Eric.

At this point I'm going to turn the call over to Eric to provide some additional details around the fourth quarter performance Eric.

Speaker 4: Thanks Jeff. I'm starting on slide four and we'll take a look at our one portfolio. Our total loans increase $309 million from the end of the prior quarter.

Thanks, Jeff I'm, starting on slide four and we'll take a look at our loan portfolio. Our total loans increased $309 million from the end of the prior quarter as.

Speaker 4: As Jeff mentioned, the strongest growth came in the commercial real estate portfolio, while our commercial loan portfolio was just about flat as growth and equipment finance and conventional commercial loans largely offset declines in PPP loans, and an $88 million decline in the end of period balances on commercial FHA warehouse credit line.

Warehouse credit lines.

Speaker 4: Our consumer loan portfolio was also up by $74 million, which was split between growth in the green sky portfolio and other direct consumer lending that we do.

Our consumer loan portfolio was also up by $74 million, which was split between growth in the green Sky portfolio and other direct consumer lending that we do.

Speaker 4: Excluding PPP loans, commercial warehouse credit lines, and consumer loans added through the Green Sky Partnership, our total loans increased at an annualized rate of more than 40 percent, which reflects our improved ability to generate growth in commercial and commercial real estate loans.

Speaker 4: Turning to slide five, we've provided an update on our equipment finance portfolio. We continue to see a steady recovery of our borrowers and the transit and ground transportation industry as the trends in business and recreational travel improve. As of December 31st, we had just $4 million of deferrals remaining with nearly all of the deferrals making some form of partial payment.

All of the deferrals, making some form of partial payment.

Speaker 4: Looking at slide 6, we've provided an update on the consumer loan portfolio that we have through our partnership with GreenSky. The portfolio has performed extremely well throughout the pandemic. At December 31st, we only had $500,000 of deferred loans in this portfolio, which represents just one-tenth of 1% of the total loan.

Speaker 4: And at just 26 basis points, the delinquency rate remains even better than the historical range that we've seen in this portfolio. In addition to the strong performance, the escrow account is available to cover any deficiency in our principal balances. The escrow account increased to $34.8 million at the end of the fourth quarter.

Loans and at just 26 basis points, the delinquency rate remains even better than the historical range that we've seen in this portfolio in.

In addition to the strong performance. The escrow account is available to cover any deficiency in our principal balances that escrow account increased to $34 $8 million at the end of the fourth quarter.

Speaker 4: Jeff will have an update on the Green Sky relationship later in the call.

Jeff will have an update on the Green Sky relationship later in the call.

Speaker 4: Turning slide seven, we'll take a look at our deposits. Total deposits increased $509 million or 9.1% from the prior quarter. The increase was largely attributable to an increase in commercial FHA servicing deposits. The strong inflow of non-intersparing deposits enabled us to continue running off higher cost time deposits as our CD balances declined by 59 million from the end of the prior quarter.

Turning to slide seven we will take a look at our deposits total deposits increased $509 million or nine 1% from the prior quarter.

The increase was largely attributable to an increase in commercial FHA servicing deposits. The strong inflow of noninterest bearing deposits enabled us to continue running off higher cost time deposits as our CD balances declined by $59 million from the end of the prior quarter.

Speaker 5: Looking at slide eight, we'll walk through the trends in our net interest income and margin. Our net interest income increased 5.7 percent from the prior quarter, primarily due to higher balances of interest earning assets as we utilize the inflow of non-interest bearing deposits to fund increases in both the loan portfolio and the investment portfolio.

And the investment portfolio on an average basis, the investment portfolio increased by $142 million compared to the prior quarter as we added $78 million in securities with an average yield of around one 1%.

Speaker 5: On an average basis, the investment portfolio increased by $142 million compared to the prior quarter, as we added 78 million in securities with an average yield of around 1.1%.

Speaker 5: As we indicated on our last call, the addition of the new servicing deposits would create temporary excess liquidity that would put some near-term pressure on our net interest margin.

As we indicated on our last call. The addition of the new servicing deposits would create temporary excess liquidity that will put some near term pressure on our net interest margin.

Speaker 5: We finished the year with cash and cash equivalent to counting for 10% of interest learning assets, which is above our usual or our normal level.

We finished the year with cash and cash equivalents accounting for 10% of interest, earning assets, which is above our usual our normal level. Excluding accretion income our net interest margin declined six basis points due to that excess liquidity and unfavorable shift in our mix of earning assets.

Speaker 5: Excluding accretion income, our net interest margin declined six basis points due to that excess liquidity and unfavorable shift in our mix of earning assets. The pressure from the excess liquidity was partially offset by the initial benefit of paying off the higher rate FHLB advances and a decline in our cost of deposits due to the improved deposit mix.

The pressure from the excess liquidity was partially offset by the initial benefit of paying off the higher rate <unk> advances and a decline in our cost of deposits due to the improved deposit mix.

Speaker 5: Looking ahead, in the near term, the trend in our net interest margin will be largely dependent on how quickly we can redeploy our excess liquidity into a more favorable mix of earning assets. However, our end-of-period loan balances were $229 million higher than our average balances, so that puts us in a good position to see that favorable mix shift and generate a higher level of net interest income in the first quarter.

<unk> to see that favorable mix shift and generate a higher level of net interest income in the first quarter.

Speaker 5: Turning to slide 9, we'll look at the trends in our wealth management business. Our assets under administration increased by $159 million from the end of the prior quarter, primarily due to market performance. Our wealth management revenue was essentially flat with the prior quarter, as a decrease in estate and guardianship fees offset the increase in assets under administration.

The increase in assets under administration.

Speaker 5: Compared to the fourth quarter of prior year, our wealth management revenue increased 22%, which reflects our strong progress on growing our recurring sources of fee income.

Compared to the fourth quarter of prior year, our wealth management revenue increased 22%, which reflects our strong progress on growing our recurring sources of fee income.

On Slide 10, we'll look at noninterest income, we had $22 $5 million in noninterest income in the fourth quarter, an increase of 48, 7% from the prior quarter.

Speaker 5: Outside of the gain on the termination of the FHLB swap, we had a couple of other items that positively impacted our non-interest income in the fourth quarter. We recorded a $3.9 million gain in unrealized income on equity investments. We also had a million dollar gain on bank-owned life insurance.

Outside of the gain on the termination of the FHA will be swap we had a couple of other items that positively impacted our noninterest income in the fourth quarter.

We recorded a $3 $9 million gain an unrealized income on equity investments.

We also had $1 million.

Gain on bank owned life insurance.

Speaker 5: Excluding these items, most other areas of non-interest income were relatively similar to the prior quarter, with the exception of a $1 million decline in the impairment on our commercial mortgage servicing rights.

Speaker 5: With interest rates increasing and refinancing volumes declining, it's likely that we will see lower levels of impairment on commercial mortgage servicing rights in 2022.

With interest rates, increasing and refinance refinancing volumes declining it's likely that we will see lower levels of impairment on commercial mortgage servicing rights in 2022.

Speaker 5: Turning to slide 11, we'll review our non-interest expense.

Turning to slide 11, we will review our noninterest expense.

Speaker 5: On an adjusted basis, excluding the FHLB advance prepayment fees and integration and acquisition expenses, our non-interest expense declined by approximately $300,000 from the prior quarter. This was primarily due to lower data processing costs resulting from renegotiating a couple of vendor contracts while we successfully kept most other areas relatively flat with the prior quarter.

On an adjusted basis, excluding the FHA will be advanced prepayment fees and integration and acquisition expenses, our noninterest expense declined by approximately 300000 from the prior quarter.

This was primarily due to lower data processing costs, resulting from renegotiating a couple of vendor contracts, while we successfully kept most other areas relatively flat with the prior quarter.

Speaker 5: On an adjusted basis, we were able to hit the low end of the $40 to $42 million run rate that we were targeting.

On an adjusted basis, we were able to hit the low end of the 40% to $42 million run rate that we were targeting combined.

Speaker 5: Combined with the higher level of revenue that we generated, our efficiency ratio improved to 52.6 percent.

Combined with the higher level of revenue that we generated our efficiency ratio improved to 52, 6%.

Speaker 5: Looking ahead to the first quarter of 2022, we expect expenses to range between $40.5 million and $41.5 million.

Looking ahead to the first quarter of 2022, we expect expenses to range between $40 5 million and $41 5 million.

Speaker 5: Turning to slide 12, we'll review our asset quality trends. Our non-performing loans decreased $12 million from the end of the prior quarter, primarily due to the payoff of two non-accrual loans and the charge-off of a third loan.

Speaker 5: We had 4.6 million in net charge-offs in the quarter, or 37 basis points of average loan.

We had $4 6 million in net charge offs in the quarter or 37 basis points of average loans.

Speaker 5: Most of the charge-offs are related to one acquired loan and charge-offs in the equipment finance portfolio as a few of the credits impacted by the pandemic have now moved to loss.

Most of the charge offs related to one acquired loan and charge offs in the equipment finance portfolio as a few of the credits impacted by the pandemic have now moved to loss overall.

Speaker 5: Overall, though, the losses in this portfolio have been well below the level of reserve that we established during the pandemic. And as we mentioned earlier, the trends we are seeing are generally positive. Deferred loans also continue to decline. At December 31st, we had 13.3 million of loans remaining on deferral, or just 30 basis points of total loans, with nearly all of them making some form of partial payment.

<unk> loans also continued to decline at December 31, we had $13 3 million of loans remaining on deferral or just 30 basis points of total loans with nearly all of them, making some form of partial payment.

Speaker 5: At the end of the year, we also had no hotel loans remaining on deferral.

At the end of the year, we also had no hotel loans remaining on deferral.

Speaker 5: We recorded a provision for credit losses of approximately $500,000, which was largely related to a build in our reserve for unfunded commitments resulting from our strong commercial loan production. At December 31st, approximately 94% of our allowance for credit losses was allocated to general reserves.

Speaker 5: On slide 13, we show the components of the change in our ACL from the end of the prior quarter. Our ACL decreased by approximately 4.6 million. The decrease was primarily driven by favorable changes in the portfolio. This was partially offset by small additions related to specific reserves and economic forecast.

On slide 13, we show the components of the change in our ACL from the end of the prior quarter. Our ACL decreased by approximately $4 6 million. The decrease was primarily driven by favorable changes in the portfolio. This was partially offset by small additions related to specific reserves and economic forecasts.

Speaker 5: On slide 14, we show our ACL broken out or segmented by portfolio. Given the positive trends we are seeing, we brought down our coverage ratio in most areas of the portfolio.

On slide 14, we show, our ACL broken out or segmented by portfolio given the positive trends. We are seeing we brought down our coverage ratio in most areas of the portfolio.

Speaker 4: And with that, I will turn the call back over to Jeff. Jeff. All right. Thanks, Eric. We'll wrap up on slide 15 with an update on our green sky partnership and a few comments on our outlook and priorities for 2022, based on recent discussions. We now expect to remain in the green sky program, at least through 2023.

And with that I will turn the call back over to Jeff, Jeff Alright, Thanks, Eric who will wrap up on slide 15, with an update on our Green Sky partnership and a few comments on our outlook and priorities for 2022.

Based on recent discussions we now expect to remain in the Green Sky program at least through 2023.

Speaker 4: We also intend to diversify our FinTech partnerships, which will allow us to maintain our consumer loan balances going forward. Along these lines, we are in the final stages of establishing a new FinTech partnership with the originator of consumer loans. We expect a commitment of between 200 and 250 million in loans from this partnership, with loan balances building to that level over the next couple of years.

We also intend to diversify our fintech partnerships, which will allow us to maintain our consumer loan balances going forward.

Speaker 4: Now, looking at our expectations for 2022, we believe we are well positioned to deliver another strong performance this year.

Now looking at our expectations for 2022, we believe we are well positioned to deliver another strong performance this year.

Speaker 4: Based on the more productive commercial banking teams we have built, our current pipeline, and improving loan demand, we expect to generate high single-digit loan growth in 2022. The primary drivers of the growth will continue to be commercial loans, including equipment finance.

Based on the more productive commercial banking teams, we have built our current pipeline and improving loan demand, we expect to generate high single digit loan growth in 2022.

The primary drivers of the growth will continue to be commercial loans, including equipment finance and.

Speaker 4: and commercial real estate, and we continue to have strong pipelines in each of these areas.

And commercial real estate and we continue to have strong pipelines in each of these areas.

Speaker 4: Our organic loan growth will also be driven by opportunities to continue adding commercial banking talent, particularly in higher growth markets. One of these markets will be the Chicagoland area. With the amount of merger activity in the Chicago market, we believe there are good opportunities to take advantage of the disruption and add banking talent and clients over the long term.

Our organic loan growth will also be driven by opportunities to continue adding commercial banking talent, particularly in high higher growth markets. One of these markets will be the Chicago land area with the amount of merger activity in the Chicago market. We believe there are good opportunities to take advantage of the disruption and add back.

<unk> talent and clients over the long term.

Speaker 4: Another priority of the bank in 2022 is increasing our level of asset sensitivity given the outlook for higher interest rates. The improved commercial banking platform we have built is generating more variable rate loans and non-interest bearing deposits, which is making us more asset sensitive.

Speaker 4: We saw an increase in our asset sensitivity during the second half of 2021 as we generated higher levels of production from our commercial banking group. The improvement we have made in our deposit base over the past couple of years should enable us to see a low deposit beta as interest rates rise.

Speaker 4: Given the trends we are seeing in deposit flows and our level of liquidity, we believe our deposit beta will be close to zero for the first two rate increases.

Given the trends, we're seeing in deposit flows and our level of liquidity, we believe our deposit beta will be close to zero for the first two rate increases.

Speaker 4: Another priority in 2022 will be the continued investment in technology, although we will shift the focus of this investment.

Another priority in 2022 will be the continued investment in technology.

Although we will shift the focus of this investment.

Speaker 4: For the past few years, our technology investments were largely foundational, enabling us to run the bank more efficiently.

For the past few years, our technology investments were largely foundational, enabling us to run the bank more efficiently and.

And we're seeing.

Speaker 4: and we're seeing the target results of those investments.

And we're seeing the targeted results of those investments.

Speaker 4: Going forward, more of our technology investment will be focused on areas that can positively impact revenue generation and enhance client service. Along these lines, late in 2021, we rolled out a new online SBA loan application portal to select customers. And we'll be expanding the use of the portal throughout 2022. We've also invested in search engine optimization to drive potential clients to the portal.

The portal throughout 2022, we've also invested in search engine optimization to drive potential clients to the portal.

Speaker 4: We believe these investments will ultimately help to build our SBA business into a meaningful contributor to our non-interest income, as well as to create opportunities to develop deposit relationships with these small business costs.

Speaker 4: Part of our technology strategy includes making investments in Fintech funds. These funds have performed well and were partially responsible for the equity gains recorded in the fourth quarter. But more importantly, they provide us with good insight on the latest innovations and inform the development of our technology roadmap so that we can continue to remain competitive in a rapidly evolving area.

So that we can continue to remain competitive in a rapidly evolving area.

Speaker 4: We are also focused on keeping our expense levels relatively flat compared to 2021. While we are continuing our investment in technology and also seeing the upward pressure on compensation expense that is impacting the entire banking industry.

Speaker 4: We believe we have other cost-saving opportunities, some of which relate to the continuing benefits of past technology investments that we believe can help us keep expenses relatively stable moving forward.

We believe we have other cost saving opportunities.

Some of which relate to the continuing benefits of past technology investments that we believe can help us keep expenses relatively stable moving forward.

Speaker 4: And finally, with respect to M&A transactions, we will continue to have a very tight set of criteria. We are open to smaller strategic deals that can further improve our deposit base, increase our presence in attractive markets, or grow our wealth management business without disrupting our focus on the strategies and execution that are generating strong organic growth and improved financial performance.

And finally with respect to M&A transactions, we will continue to have the very tight set of criteria.

We are open to smaller strategic deals that can further improve our deposit base increased our presence in attractive markets or grow our wealth management business without disrupting our focus on the strategies and execution that are generating strong organic growth and improved financial performance.

Speaker 4: The transaction we announced earlier this week to acquire the loans and deposits of two branches of FNBC Bank and Trust fits this type set of criteria.

The transaction, we announced earlier this week to acquire the loans and deposits of two branches of NBC Bank and trust.

This tight set of criteria.

Speaker 4: With this transaction that we expect to be immediately accreted to earnings, we will add approximately 86 million of low cost deposits.

With this transaction.

And that we expect to be immediately accretive to earnings we will add approximately $86 million of low cost deposits.

Speaker 4: and by adding a branch in Mosquina, we will further increase our exposure to faster growing markets in Northern Illinois and improve our ability to grow our presence in the Chicago, I must say.

And by adding a branch in Makena, we will further increase our exposure to faster growing markets in northern Illinois, and improve our ability to grow our presence in the Chicago MSA.

Speaker 4: There were a number of items that positively impacted our financial results in 2021 that won't occur again in 2022, most notably income derived from PPP loans and reserve releases as the economy recovered from the pandemic.

There were a number of items that positively impacted our financial results in 2021 that won't occur again in 2022, most notably income derived from PPP loans and reserve releases.

As the economy recovered from the pandemic.

Speaker 4: With the continued organic balance sheet growth that we expect, a full year of higher wealth management revenue following the ATG acquisition, and further improvement in operating leverage, we believe that we can deliver a similar level of earnings in 2022.

With the continued organic balance sheet growth that we expect a full year of higher wealth management revenue following the atg acquisition and.

And further improvement in operating leverage we believe that we can deliver a similar level of earnings in 2022.

Speaker 4: Although from the perspective of core performance of the company, we believe our earnings will be higher than last year.

Although from the perspective of core performance of the company, we believe our earnings will be higher than last year.

Speaker 4: And we expect to continue that earnings growth in 2023 as we continue to capitalize on our stronger commercial banking platform and increased presence in higher growth markets.

And we expect to continue that earnings growth in 2023, as we continue to capitalize on our stronger commercial banking platform and increased presence in higher growth markets.

Speaker 4: Over the past few years, we believe we have made steady progress in transforming our company to create a more valuable franchise. We have exited our deemphasized volatile low return businesses. We have reduced expenses by rationalizing our branch network and corporate facilities, which helped to fund the improvements in our technology platform.

Over the past few years, we believe we have made steady progress in transforming our company to create a more valuable franchise, we have exited or deemphasize. The volatile low return businesses, we have reduced expenses by rationalizing our branch network and corporate facilities, which helped to fund the improvements in our <unk>.

Speaker 4: and we have substantially improved our commercial banking group, which has now become the primary driver of our loan and deposit growth.

Technology platform.

And we have substantially improved our commercial banking group, which has now become the primary driver of our loan and deposit growth.

Speaker 4: As a result, we are now a bank with a balance sheet that has shifted more towards relationship based loans funded by low cost deposits combined with a wealth management business. That provides a large, consistent source of non-interesting income.

As a result, we are now a bank with a balance sheet that has shifted more towards relationship based loans.

Funded by low cost deposits combined with a wealth management business that.

Provides a large consistent source of noninterest income.

Speaker 4: We believe the model that we have now and will continue to build going forward is capable of generating a higher level of returns that we have historically produced and will consistently create value for shareholders as we continue to generate profitable growth in the future.

We believe the model that we that we have now and we will continue to build going forward is capable of generating a higher level of returns.

That we have historically that we have historically produced and will consistently create value for shareholders as we continue to generate profitable growth in the future.

Speaker 4: With that, we'll be happy to take any questions that you might have, operator, please open the call.

With that we'll be happy to take any questions that you might have operator, please open the call.

Speaker 2: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To fulfill your question, please press the pound key. Stand by as we come...

Okay. Thank you.

And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key standby.

Standby as we compile the Q&A roster.

Speaker 2: And our first question comes from Tilly McIvoy of Stevens. Your line is open. Hi, good morning.

And our first question comes from Terry Mcevoy.

Steven Your line is open.

Hi, good morning, everyone.

Good morning, Terry.

Speaker 6: Thank you, First off, the extending the Greens Guy partnership through at least 2023. How should we think about just the balances that they ended the year 875? Do they continue to grow over the next several years or will there be runoff consistent with your prior guidance last?

Maybe first off the extending the green sky partnerships through at least 2023.

How should we think about just the balances. They ended the year at 875 do they continue to grow over the next several years or.

Will there be runoff consistent with your prior guidance last quarter.

Speaker 4: We think it's going to be relatively stable, maybe down slightly, but as we also said, the, you know, we'll be adding a couple new, well, at least one new FinTech partner and looking at others so that we're well positioned if the Green Sky portfolio does start to go down.

We think thats going to be relatively stable, maybe down slightly but as we as we also said.

We'll be adding a couple new well at least one new fintech partner and looking at others. So that.

We are well positioned if the green sky portfolio does start.

To go down.

Speaker 4: quicker or maybe more like what we disclosed at the end of the third quarter. But we think relatively stable going forward at least for a couple of years.

Quicker or maybe more like what we disclosed at the end of the third quarter, but.

But we think relatively stable going forward at least for a couple of years.

Okay.

And on the expense outlook.

Speaker 6: I thought a real positive run rate. And just a point of clarity, Eric, you said that run rate on page 11 here for the first quarter of 22, whereas the presentation says, you know, I guess in 2022. So is that the quarterly run rate you expect just in the first quarter of the year, or as you think about the full year?

Speaker 5: Terry, good question. As I think about it, that's our guidance for really the four year, for the four year for all of the quarters. We'll be on the lower end in the first quarter, and we could see some expense increase over the course of the year as we deal with compensation and some of those other pressures from the inflationary environment. So starting on the low end and then probably moving to that high end as we get through the year. Okay, thanks for clearing that up.

Level.

Yes, Terry good question as I think about it our guidance were really the four year.

For the full year for all of the quarters will be on the lower end in the first quarter. Then we could see some expense increase over the course of the year as we deal with compensation in some of those other pressures from the inflationary environment. So starting on the low end and then probably moving to that high end as we get through the year.

Thanks for clearing that up and then maybe last one.

Speaker 6: We think about Chicago and in Chicago land over the next three to five years. How much how important is that market going to be do you think for for midland and relative to St. Louis in your core market? So I guess that another way is that kind of primary focus right now when you think about expanding the franchise.

When we think about Chicago and Chicago land over the next three to five years.

How much how important is that market going to be do you think for for Midland and <unk>.

Relative to St. Louis in your core market. So I guess said another way is that the primary focus right now when you think about expanding the franchise.

Speaker 4: No, I would say it's St. Louis and that sort of color county, Southern color county, Chicago land is sort of how we think of it. And looking for opportunity in both of those areas now we think that the Chicago land might provide some opportunity more in the short term with with a lot of disruption going on up there with bank M&A. But if we see opportunities in St. Louis, we're going to be looking at.

No I would say it's St. Louis.

That's sort of.

Caller County, Southern caller counting Chicago land is sort of how we think of it and looking for opportunity in both of those areas now we think that.

In the Chicago land might provide some opportunity more in the short term with a lot of disruption going on up there with bank M&A.

But if we see opportunities in St. Louis we're going to be looking there too.

Speaker 6: Perfect. Thanks Jeff and thanks are appreciated.

Perfect. Thanks, Jeff and thanks, Eric I appreciate it.

Thanks.

Thank you.

Speaker 2: Our next question comes from Damon D'Amonte of KB. You're line is open.

Our next question comes from Damon Delmonte of <unk> your.

Your line is open.

Speaker 7: Hey, good morning, guys. What everybody's doing well today. Just wanted to ask a little bit about the interest rate sensitivity with the margin. How much of the loan portfolio is variable? And how much of that would actually begin to reprise immediately with a 25 basis point hike in the fed?

Hey, good morning, guys hope everybody is doing or not doing well today.

Just wanted to ask a little bit about the interest rate sensitivity with the margin.

How much of the loan portfolio is variable and how much of that would actually begin to reprice immediately with a 25 basis point hike in the fed.

Speaker 5: Hey, Jamie, yeah, we have to answer that. So our portfolio, particularly when you look at the equipment finance and when you look at at Green Sky, it's been running about 70, 30, 70% fix, 30% variable. That changed slightly during this past quarter and we're now roughly around 65, 35. So when you look at the variable, we've got about a billion dollar portfolio give or take that is will change rates either immediately or within 30 days.

Hey, Damon, yes, I'd be happy to answer that so our portfolio, particularly when you look at the equipment finance and when you look at Green Sky. It's been running at about 70, 30, 70% fixed 30% variable that changed slightly during this past quarter and we're now roughly around $65 35. So when you look at the <unk>.

Variable, we've got about $1 billion portfolio give or take that is will change rates either immediately or within 30 days.

Speaker 5: So we do have some floors on that portfolio. So we won't see the full benefit of a rate increase immediately, but roughly about a billion will change rates pretty quickly.

So we do have some floors on that portfolio.

So we won't see the full benefit of a rate increase immediately.

But roughly about $1 billion will change rates pretty quickly.

Speaker 7: OK. And you feel like your core margin has kind of reached the bottom here?

Okay and.

You feel like your core margin is kind of.

Reached a bottom here.

Speaker 7: Maybe it's flatish in the first quarter and then starts to trend up as we go through the year. Is that fair?

Maybe it's flattish in the first quarter and then start to trend up as we go through the year is that fair.

Speaker 5: Yeah, I think that's fair. You know, we still have about a six basis point impact from PPP loans.

Yes, I think I think that's fair, yes, we still have about a six basis point impact from PPP loans and I think as we look into 2022 that obviously is going to go away as we get the rest of that portfolio forgiven and then our accretion number.

Speaker 5: And I think as we look into 2022, you know, that obviously is going to go away as we get the rest of that portfolio for given. And then our creation number, you know, that impact on our margin has been sliding as well. We expect that to decrease a little bit next year, but with the long growth that we've had and with potential for those up up rates, as we've kind of all talked about. I think we considering both of those things we can look at to see a flat margin or maybe a little bit outside.

That impact on our margin has been sliding as well, we expect that to decrease a little bit next year, but with the loan growth that we've had and with the potential for those upgrades as we've kind of all talked about I think considering both of those things. We can look at it to see a flat margin or maybe a little bit of upside.

Speaker 7: Got it. Okay. And then just one more question on the expenses. To just elaborate a little bit more on, you know, one of your goals is to maintain stable expense levels, but continuing to invest in technology. So there are other areas in the

Got it Okay and then just one more question on the expenses.

Could you just elaborate a little bit more on.

One of your goals is to maintain a stable expense levels, but continuing to invest in technology.

The areas in the.

Speaker 7: in the expense base that you could try to basically save in one area and reallocate to another, or what's the approach for trying to keep the expenses stable? Thanks.

And the expense base that you could try to basically say, the one area and reallocate to another or what's the approach for trying to take.

Keith.

It is stable.

Speaker 5: You know, we've been looking all across sort of our operations and looking at how do we drive more efficiencies with the things that we do. So part of our technology investment has been an RPA.

We've been looking all all across sort of our operations and looking at how do we drive more efficiencies with the things that we do so part of our technology investments has been in RP.

Speaker 4: in order to drive those efficiencies. And then we've gone back through and looked at our other technology spend and other vendors all throughout the organization and have looked for potential savings or reductions in costs there. And then we're able to allocate those efficiencies and those costs back into other technology investments such as the SBA portal that Jeff mentioned. Yeah, and I think another important piece there is we've built a good, a good, a good, a good, a good,

In order to drive those efficiencies and then we've gone back through and looked at our other technology spend and other vendors all throughout the organization and have looked for potential savings or reductions in cost there and then we're able to allocate those efficiencies and those costs back into other technology.

Investments such as the SBA portal that just mentioned and I think another important piece. There is we've built a good.

Speaker 4: They're a really good IT team. And so we're sort of, they've been working on sort of some foundational things and we're now we're gonna point them in different directions. So a lot of that.

Good.

<unk> team and so we're sort of they've been working on sort of some foundational things and we're now we're going to point them in different directions. So a lot of that technology spend is in the run rate in our people here that are going to be also appointed elsewhere.

Speaker 4: technology spend is in the run right in our people here that are going to be also pointed elsewhere.

Got it that's great color. Thank you very much I appreciate it.

Speaker 2: Thank you. And again, to ask a question, please press star one on your telephone, to answer your question, please press the pounce.

Thank you.

And again to ask a question. Please press star one on your telephone.

A question please press the pound key.

Speaker 2: Next question, come on from Nathan Rays of HyperSandler. Your line is open. Yes. Hi guys. Good morning.

Our next question comes from Nathan race of Piper Sandler Your line is open.

Yes, hi, guys. Good morning, good morning.

Speaker 8: Question, just go back to the low growth discussion. I appreciate the high-final digit guidance for 2022. And it sounds like from what we saw in the fourth quarter, a lot of that was commercial driven. And so we're just loving it some color and just the specific drivers within your commercial team.

Question, just going back to the loan growth discussion I appreciate the high single digit guidance for.

2022.

Sounds like from what we saw in the fourth quarter a lot of that was commercial driven and so would just love to get some color on just the specific drivers within your commercial team that's driving a lot of that growth and does that high single digit outlook for this year include.

Speaker 8: driving a lot of that growth. And does that high steel visit outlook for this year include some of the fundings from the new Fintech partnership that was described on slide 15 in the deck.

The fundings from that new.

Fintech partnership that was described on slide 15 in the deck.

Speaker 4: Yeah, so color on growth, we're sort of seeing, we're seeing the growth sort of across the footprint. We saw, and for the whole year, saw really nice growth in the St. Louis market. We're also seeing very good growth in that sort of chagoland through rockford area, where we're putting effort. And then we mentioned, Dahan the call, our, especially finance group that we've sort of been building over the last several years.

Yes, so color on growth.

Sort of seeing we're seeing the growth.

Sort of across the footprint we saw.

And for the whole year saw really nice growth.

The St. Louis market. We're also seeing very good growth in that sort of Chicago land through Rockford area, where we're putting effort and then we mentioned on the call our specialty finance group that we've sort of been building over the last several years around the FHA bridge.

Speaker 4: around the FHA bridge. And we were doing that with our with our law funding unit when we had it. And now we're doing it with with some other partners. To the combination of all those is really what's it's driving.

We were doing that with our with our love funding unit when we had it and now we're doing it with some other partners. So the combination of all those.

Is really what's driving the growth.

Speaker 8: Got it. So the high-final visit outlook for this year doesn't necessarily include rigid nations coming from the new FinTech part.

Got it.

The high single digit outlook for this year doesn't necessarily include.

Rich nations stemming from the new.

Speaker 4: Now, I think the way I'm thinking of it right now is this partnership's gonna help us, you know, Hofstad, if Green Sky does go down, it's gonna help offset some of that. It'll probably come on late this year, you know, we're not quite there to the finish line with them, and it will, again, it'll start slow. And, you know, with the originations at a lower level to start with, and then we'll raise them as we move forward. So it'll be probably more of a 23. Impact, but the way I look at it right now.

Fintech partnerships.

I think the way, we the way I'm thinking of it right now as these this partnership is going to help us offset if green Sky does does go down it's going to help offset some of that.

It will probably come on late this year were not quite quite there to the finish line with them and it will again it will start slow in and.

Originations at a lower level to start with and then we'll raise them as we move forward.

So it would be probably more of a 'twenty three.

<unk> impact, but the way I would look at it right now is with Green Sky in these partnerships is to hold our consumer balances relatively stable.

Speaker 4: with GreenSky and these partnerships is to hold our consumer balances relatively stable.

Speaker 8: Understood. I appreciate that. Thanks, Jeff. And then just just lastly, I'm long growth. We're pay off somewhat lower in the quarter that health drive, you know, the really strong growth is quarter and that uncertainty around future pay off levels, kind of resulting you guys maybe taking a more conservative stance that high single digit outlook for for this year versus what we saw in the fourth quarter.

Yes.

Understood I appreciate that thanks, Jeff and then just lastly on loan growth.

Pay offs somewhat lower in the quarter that helped drive that really strong growth this quarter.

And uncertainty around future payout levels.

Kind of resulted in you guys, maybe you've taken a more conservative stance that high single digit outlook for this year versus what we saw in the fourth quarter.

Speaker 4: Yeah, I'll say that this past year, we got a lot more focused on the attrition side of the equation and trying to get ahead of some of that to see if we can slow attrition down. I think as the year went down, sort of moved on, I think we got better at the attrition side.

Yeah, I'll say that this past year we.

We got a lot more focused on the attrition side of the equation and <unk>.

Trying to get ahead of ahead of some of that to see if we can slow attrition down I think.

As the year went down sort.

Sort of moved on.

I think we got better at the attrition side.

Speaker 4: You know, it's sort of hard to predict the tradition, but

So it's hard to it's hard to predict attrition, but.

Speaker 4: You know, I don't, I think we've seen, seen our attrition slow down and we don't expect it to pick back up in the near term.

I think we've seen seen our attrition slow down and we don't expect it to pick back up in the near term.

Speaker 8: Got it. Very helpful. And then maybe just one last one for me on core key income. X mortgage is a fair to expect some growth in the income, you know, just as you guys continue to gain client wall chair with a lot of the issues that you guys have put in place over the last couple of quarters.

Got it.

Very helpful. And then maybe just one last one from me on core fee income ex mortgage is it fair to expect some growth.

Fee income just as you guys continue to gain client wallet share.

The initiatives that you guys have put in place over the last several quarters.

Speaker 5: Yeah, I think that's fair Nate. So, you know, we've continued to really focus on increasing wallet share. We really can, and focused on debit cards, getting more debit cards out there and increasing usage. So we saw strong, being coming those interchange fees in 2021.

Yes, I think Thats fair.

So we've continued to really focus on increasing wallet share we've really focused.

<unk> focus on debit cards getting more debit cards out there and increasing usage. So we saw strong fee income in those interchange fees. During 2021, I don't think we will grow at that same rate in 2022, but we expect to see some going forward and then we're continuing to focus on our wealth business and seeing growth there.

Speaker 5: I don't think we'll grow at that same rate in 2022, but we expect to see some going forward. And then we're continuing to focus on, you know, our wealth business and seeing growth there as well. And those are two of our key drivers and that not interesting come.

Well and those are two of our key drivers in that noninterest income.

Speaker 8: I really appreciate all the insights and thank you for taking the questions.

Got it that's great color really appreciate all the insights and thank you for taking the questions.

Thanks Nate.

Yes.

Thank you.

Speaker 2: Next we have the Plays changed.

And next we have Keith Haines of D. A davidson.

Your line is open.

Hey, guys.

Got it.

Speaker 9: I'm here on behalf of Manuel Navas, but I jumped in the queue and he just told me he was back in the queue. So I might just back out of here and let him ask the question. Sorry about that.

I'm here on behalf of Manuel matters, but.

I jumped in the queue and he just told me he was.

Back in the queue, so I might just back out of here.

Matt.

Question.

Sorry about that.

Yes.

Okay.

Thank you.

Speaker 2: And next we have a follow up from Nathan Ray, so Piper Sandler. Your line is open.

Okay.

Next we have a follow up from Nathan race of Piper Sandler.

Speaker 8: Yes, I think it's taking a follow-up press while we wait there, but we just wanted to ask on the outlook for the reserve going forward. Obviously, nice credit quality improvement in the fourth quarter. Charge also may be a little elevated from what we discussed last quarter. So it would just be curious to kind of get your thoughts on needs to provide for that high-stay-old disease organic growth outlook for 2022.

Your line is open.

Yes.

Taking a follow up perhaps while we wait there, but we just wanted to ask on the outlook for the reserve going forward.

Really nice credit quality improvement in the fourth quarter.

Charge offs were maybe a little elevated from what we discussed last quarter. So it would just be curious to kind of get your thoughts on needs to provide for that high single digit organic growth outlook for 2022.

Speaker 8: and kind of where you see the reserves settling out over that timeframe.

You kind of where you see the reserve settling out over that timeframe.

Speaker 5: Yeah, I think good question. So we're kind of modeling out net charge offs somewhere in that 20 to 25 basis point range. A little maybe right at the low end for sort of our commercial portfolio and then more at the high end for middle and equipment finance portfolio.

Yes. Good question. So we're kind of modeling out net charge offs somewhere in that 20 to 25 basis point range.

Well, maybe right at the low end for sort of our commercial portfolio and then more at the high end for our Midland equipment Finance portfolio.

Speaker 5: New loan growth that is going on at say 120 to 130 basis points, maybe a little bit higher than that if it's in the equipment finance portfolio.

New loan growth is going on at say 120 to 130 basis points, maybe a little bit higher than that it fits in the equipment finance portfolio.

Speaker 5: So I think based on this growth we'll see a little bit of the reserve building and then we'll see us providing for any charge offs we have going through in 2022

Based on this growth, we will see a little bit of the reserve building and then we will see us providing for any charge offs, we have gone through in 2022.

Okay.

Speaker 8: Okay, got it. So probably stable-ish on a relative basis as the percentage of...

Okay got it so probably stable ish.

Relative basis as a percentage of loans.

Speaker 5: that's there. Yeah, I think that's right. You know, I think based on what we see now, I think that's right.

Yes, I think I think that's right.

Yes, I think based on what we see now I think thats right.

Speaker 4: Yeah, the migraine, the next matter is right. So the new mix is going to be at a higher reserve level than the green sky and our warehouse lines are being reserved at a fairly low level. So the new production coming out is going to be reserved at a higher level. So overall, I expect the reserve percentage probably to go up.

Okay, great well mix matters right.

The new mix is going to be at a higher reserve level then.

Green Sky and our warehouse lines are being reserved at a fairly low level. So the new production coming on is going to be reserved at a higher level.

Overall, I expect the reserve percentage probably to go up.

Speaker 8: Understood and maybe just one last one changing gears just you know within the context of the assets sensitivity equation that Erick described earlier you know just with all the improvement in the deposit franchise Over the last several quarters. Is your expectation that you guys

Thank you.

Understood.

Maybe just one last one changing gears just within the context of the asset sensitivity equation that Eric described earlier.

With all the improvement in the deposit franchise over the last several quarters.

Is your expectation that you guys.

Speaker 8: Perhaps had a lower deposit rate than what we saw during the 2015 to 2018 tightening cycle or how you guys kind of think about the need to support new loan growth. Obviously you guys have a flexibility with your loan deposit ratio where it's at today around 85%. So just curious how you kind of think about the funding equation, how the deposit base will react to a higher rates going forward.

Perhaps have a lower deposit beta than what we saw during the 2015 to 2018 tightening cycle or how are you guys kind of thinking about the need to.

Supports new loan growth, obviously, you guys have the flexibility with your loan deposit ratio, where it is at today around 85%. So just curious how you kind of think about the funding equation.

Deposit base will react to higher rates going forward, yes.

Speaker 4: Yeah, I think we performed pretty well in the last up cycle with with betas. I think our deposit base is probably stronger today than it was before. So, you know, our expectation is probably we'll perform better than before.

Yes, I think we performed pretty well in the last up cycle with betas I think our deposit base is probably stronger today than it was before so.

Our expectation is probably will perform better than than before.

Speaker 4: Although, you know, we do have good loan demand and

Although.

We do have good loan demand.

Speaker 4: and it's sort of hard to predict what others around us are going to do as well. But it sounds like he's going to probably lag as much as they can. So I do think it'll probably be better.

And it's sort of hard to hard to predict what others around us are going to do as well, but it sounds like it's kind of probably lag as much as they can so.

I do think that would probably be better.

Speaker 8: Awesome. Good stuff guys. I appreciate you taking the follow ups. Thanks again.

Awesome.

Good stuff guys I appreciate you taking the follow ups. Thanks again thanks.

Speaker 2: Thank you. And again, to ask a question, please press start one on your telephone. To withdraw your question, press the pound.

Thanks.

Thank you.

And again to ask a question. Please press star one on your telephone to withdraw your question press the pound key.

Speaker 2: Our next question comes from Manuel Navas of DA Davidson. Your line is up.

Our next question comes from Manuel Novack of D. A Davidson your line is open.

Speaker 3: Hey, good morning. I appreciate a lot of the color on the, on the loan guidance. I'm just wondering with that high single digit.

Hey, good morning.

I appreciate all the color on the loan guidance I'm just wondering with.

That high single digits.

Speaker 5: Will it be as back half or as season fourth quarter senality as it was this year?

Will it be as back half.

Season fourth quarter seasonality as it was this year.

Speaker 4: I don't think so. I think it'd be a little more balanced, as we talked a lot about last year, quarter in and quarter out at the end of 20.

I don't think so I think it'll be a little more balanced as we as we talked a lot about last year quarter in quarter out.

At the end of 2000.

Speaker 4: 20, you know, we really were began to focus on our commercial banking team.

<unk>.

We really began to focus on our commercial banking team.

Speaker 4: bringing new folks in through the year, building pipelines, and all that sort of materialized towards the back part of the year. And we saw some good growth in the third quarter, and really saw a lot of nice growth in the fourth quarter. You know, just on a seasonal basis, typically our first quarter is a little slower.

Bringing new folks in through through the year.

Building pipelines and all of that started to materialize towards the back part of the year and we saw some good growth in the third quarter and we really saw a lot of nice growth in the fourth quarter.

Just on a seasonal basis typically our first quarter is a little slower.

Speaker 5: in the middle part of the year and the back of the year gets better, but I don't see it.

In the middle part of the year in the back of the year. It gets it gets better but.

Speaker 4: Long growth this year should be different than it was last year. Because last year we had a decrease in loans in the first quarter, had some growth in the second quarter, a little more in the third and a lot in the fourth. This year I think it'll be more balanced.

I don't see it.

Loan growth this year should be different than it was last year because last year, we had a decrease in loans in the first quarter had some growth in the second quarter, a little more than a third and a lot of for this year I think there'll be more balanced.

Speaker 4: Now, our equipment finance business, usually their best quarter every year is the last quarter of the year as companies are sort of rushing to buy their equipment before the end of the year. So, so fourth quarter typically, we do typically have better, better fourth quarters.

Now our equipment finance business, usually their best quarter every year is the last quarter of the year as companies are rushing to buy their equipment before the end of the year.

So the fourth quarter typically we do typically have better better fourth quarters.

I appreciate that thank you.

Thank you.

Speaker 2: And I'm seeing no further questions in the queue. I will turn the call back over to the management team for closing remarks.

And Im seeing no further questions in the queue I will turn the call back over to the management team for closing remarks.

Speaker 10: Thanks for joining. It was a really, really good 2021 and we're really excited about 2022 and we'll look forward to the next call in April . Thanks everybody.

Thanks for joining was a really really good 2021, and we're real excited about 'twenty two.

We will.

Look forward to the next call and.

In April thanks, everybody.

Speaker 2: Thank you. This concludes today's conference call. Thank you all for participating. Even if this connect, have a pleasant day and enjoy your weekend.

Thank you. This concludes today's conference call. Thank you all for participating you may now disconnect have a pleasant day and enjoy your weekend.

Q4 2021 Midland States Bancorp Inc Earnings Call

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