Good day, and thank you for standing by. Welcome to the Q4 2021 Midland States Bancorp 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. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Tony Rossi.

Mr. Rossi, the floor is yours..

Thank you, Chris. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp 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 have not done so already, please visit the Webcast and Presentations page at 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.

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. 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 a 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 3 with the highlights of the fourth quarter.

We had a very productive quarter that kept 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.

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 leveraged the tech 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.

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.

We are 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 $1.02 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.

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 increased loan production is attributable to a few factors.

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 seeing more loan production from higher growth areas in Northern Illinois and St. Louis.

We’re 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 have provided us with better data and insights to improve our win rate 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.

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, assisted 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.

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 that 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 conventional commercial loans. Importantly, we were able to fund this loan growth with strong inflows of non-interest-bearing deposits.

Our total deposits increased 9% from the end of the prior quarter, with non-interest-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 non-interest-bearing deposits was due to commercial FHA servicing deposits added through the relationship with Dwight Capital, 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 efforts.

During the fourth quarter, we continued to execute well on our strategic initiatives and drive improvement in a number of key metrics. Non-Interest-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 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 3.9% 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, compared to 58.8% in the prior quarter.

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%.

As we hoped 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 are 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 4, and we'll take a look at our loan portfolio. Our total loans 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 GreenSky portfolio, and other direct consumer lending that we do.

Excluding PPP loans, commercial warehouse credit lines, and consumer loans added through the GreenSky 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 5, we’ve provided an update on our equipment finance portfolio. We continue to see a steady recovery of our borrowers in the transit and ground transportation industry, as the trends in business and recreational travel improve.

As of December 31, we had just $4 million of deferrals remaining, with nearly all of the deferrals making some form of partial payment. Looking at Slide six, 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 31, we only had $500,000 of deferred loans in this portfolio, which represents just 1/10th of 1% of the total 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 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 GreenSky relationship later in the call. Turning to Slide 7, 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-interest-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 8, we'll walk through the trends in our net interest income and margin. Our net interest income increased 5.7% 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.

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%.

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 margins. We finished the year with cash and cash equivalent accounting for 10% of interest earning assets, which is above our usual or 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.

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 to 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 to see that favorable mix shift and generate a higher level of net interest income in the first quarter. 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. 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 non-interest income. We had $22.5 million in non-interest income in the fourth quarter, an increase of 48.7% from prior quarter. 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 $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 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’ll review our non-interest expense.

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

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 rate range between $40.5 million and $41.5 million. 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. 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, 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 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 $500,000, 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 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. 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?.

All right. Thanks, Eric. We'll wrap up on Slide 15 with an update on our GreenSky partnership and a few comments on our outlook and priorities for 2022. Based on recent discussions, we now expect to remain in the GreenSky 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 an originator of consumer loans.

We expect a commitment of between $200 million and $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 commercial real estate, and we continue to have strong pipelines in each of these areas. 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.

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.

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

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 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 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.

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, 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.

And finally, with respect to M&A transactions, we’ll 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 executions 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 FNBC Bank & Trust, fit this type 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 Mokena, 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 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.

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 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.

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 that provides a large consistent source of non-interest income.

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. With that, we'll be happy to take any questions that you might have.

Operator, please open the call..

Thank you. [Operator Instructions]. And our first question comes from Terry McEvoy of Stephens. Your line is open..

Hi. Good morning, everyone.

Maybe first off, the - extending the GreenSky partnership through at least 2023, how should we think about just the balances the end of 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?.

We think it's going to be relatively stable, maybe down slightly. But as we also said, we'll be adding a couple of new - well, at least one new Fintech partner and looking at others so that we’re well positioned if the GreenSky portfolio does start to go down 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..

Right. And on the expense outlook, 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, 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, that's our guidance for really the full year for all of the quarters. we'll be on the lower end in the first quarter, and then 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. And then maybe last one, when you think about Chicago and Chicagoland over the next three to five years how, how much - how important is that market going to be, do you think, for Midland and relative to St.

Louis in your core market? So, I guess said another way, is that kind of the primary focus right now when you think about expanding the franchise?.

No. I would say it's St. Louis and that sort of Collar Counties, Southern Collar Counties Chicagoland, is sort of how we think of it, and looking for opportunity in both of those areas. Now, we think that Chicagoland 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. Appreciate it..

Thank you. Our next question comes from Damon DelMonte of KBW. Your line is open..

Hey, good morning, guys. Hope 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 reprice immediately with a 25-basis point hike in the Fed?.

Hey, Damon. Yes, I'll be happy to answer that. So, our portfolio, particularly when you look at equipment finance, and when you look at GreenSky, 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 variable, we've got about $1 billion portfolio, give or take, that that is - will change rates either immediately or within in 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 roughly about $1 billion will change rates pretty quickly..

Got it. Okay.

And do you feel like your core margin has kind of reached the bottom here and maybe it's flattish in the first quarter and then starts to trend up as we go through the year? Is that fair?.

Yes, 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 up rates, as we've kind of all talked about, I think considering both of those things, we can look at 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 your - one of your goals is to maintain stable expense levels, but continuing to invest in technology.

So, are there other areas 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..

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 investments has been an RPA 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 Jeff mentioned. .

Yes. And I think another important piece there is we've built a good - 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 going to point them in different directions.

So, a lot of that technology spend is in the run rate and our people here that are going to be also pointed elsewhere..

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

Thank you. [Operator instructions]. Our next question comes from Nathan Race of Piper Sandler. Your line is open..

Yes. Hi, guys. Good morning. Question, just going back to the loan growth discussion, I appreciate the high single 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, 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 sort of Chicagoland 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. And we were doing that with our loan 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..

Got it.

So, the high single digit outlook for this year doesn't necessarily include originations stemming from the new fintech partnership?.

No. I think the way I'm thinking of it right now is, this partnership's going to help us offset - if GreenSky does go down, it's going to help offset some of that. It'll probably come on late this year. We’re not quite there to the finish line with them.

And it will - again, it'll start slow and with originations at a lower level to start with, and then we'll raise them as we move forward. So, it'd be probably more of a ‘23 impact, but the way I'd look at it right now is, with GreenSky and these partnerships, is to hold our consumer balances relatively stable..

Understood. I appreciate that. Thanks, Jeff.

And then just lastly on loan growth, were payoffs somewhat lower in the quarter that helped drive the really strong growth this quarter? And is that kind of uncertainty around future payoff levels kind of resulting in you guys maybe taking a more conservative stance in that high single digit outlook for this year versus what we saw in the fourth quarter?.

Yes. I would 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.

It's sort of hard to - it’s hard to predict attrition, but I don't - I think we've 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 from me on core fee income.

Ex-mortgage, is it fair to expect some growth in fee income just as you guys continue to gain client wallet share with a lot of the initiatives that you guys have put in place over the last several quarters?.

Yes, I think that's fair, Nate. So, we've continued to really focus on increasing wallet share. We really can - and focus on debit cards, getting more debit cards out there and increasing usage. So, we saw strong fee income in those interchange fees in 2021. 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 our wealth business and seeing growth there as well. And those are two of our key drivers in that non-interest income..

Got it. That's great color. I really appreciate all the insights, and thank you for taking my questions..

Thank you. And next, we have (indiscernible) of D.A. Davidson. Your line is open..

Hey, guys. How is it going? 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. .

Yes. That works for us..

Thank you. And next, we have a follow-up from Nathan Race of Piper Sandler. Your line is open. .

Yes. Thanks for taking the follow up perhaps while we wait there, but 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 from what we discussed last quarter.

So, would just be curious to kind of get your thoughts on needs to provide for that high single organic growth outlook for 2022, and kind of where you see the reserves settling out over that timeframe..

Yes. Nate, 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 our Midland equipment finance portfolio.

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

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

Is that fair, Eric?.

Yes, think that's right. Yes, I think, based on what we see now, I think that's right. .

Yes. The mix matters, right? So, the new mix is going to be at a higher reserve level than - the GreenSky 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. So, overall, I expect the reserve percentage probably to go up..

Understood. And maybe just one last one, changing gears, just within the context of the asset sensitivity equation that Eric described earlier.

Just with all the improvement in the deposit franchise over the last several quarters, is your expectation that you guys will 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 support new loan growth? Obviously, you guys have of 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 higher rates going forward..

Yes, I think we've performed pretty well in the last upcycle with betas. I think our deposit base is probably stronger today than it before. So, our expectation is probably we'll perform better than before, although we do have good loan demand and it's sort of hard to predict what others around us are going to do as well.

But it sounds like it’s going to probably lag as much as they can. So, I do think it'll probably be better..

Awesome. Good stuff, guys. I appreciate you taking the follow-ups. Thanks again..

Thank you. [Operator instructions] Our next question comes from Manuel Navas of D.A. Davidson. Your line is open..

Hey, good morning. I’ve appreciated a lot of the color on the loan guidance.

I'm just wondering, with that high single digits, will it be as back half or as 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 and quarter out, at the end of 2020, we really began to focus on our commercial banking team, 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. Just on a seasonal basis, typically our first quarter is a little slower, and the middle part of the year and the back of the year gets better.

But 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 the first quarter, had some growth in the second quarter, a little more in the third, and a lot in the fourth. This year will be - I think will be more balanced.

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, fourth quarter typically, we do typically have 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. It was a really, really good 2021, and we're really excited about ‘22, and we'll look forward to the next call 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..