Earnings Call Transcript - MSBI Q4 2021

Operator, Operator

Good day, and thank you for being here. Welcome to the Q4 2021 Midland States Bancorp Earnings Conference Call. At this moment, all participants are in listen-only mode. Following the speakers' presentations, we will have a question-and-answer session. I would now like to turn the call over to your speaker today, Mr. Tony Rossi. Mr. Rossi, the floor is yours.

Tony Rossi, CEO

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 regarding the future performance and financial condition of Midland States Bancorp, which 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?

Jeff Ludwig, CEO

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 capped an exceptional year for the company, which saw us improve our financial performance while also investing in ways that we believe will enable us to continue improving in the years to come. In 2021, we successfully attracted new talent to the company that enabled us to substantially enhance the productivity of our commercial banking teams while keeping the overall size of those teams relatively unchanged. We increased our exposure to higher growth markets in Northern Illinois and St. Louis, which positively affected our loan production. We effectively leveraged the tech investments we've made over the past few years to increase efficiencies while continuing to enhance our technology platform, which will provide additional benefits in the future. We added new capabilities and increased our opportunities to grow our wealth management business, particularly with the acquisition of ATG Trust Company. Moreover, we utilized our strong liquidity to eliminate higher-cost funding sources, benefiting our net interest margin going forward. Our success in these areas enabled us to deliver a strong year of balance sheet and earnings growth, increasing 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 accomplished in 2021, and we want to thank the entire Midland organization for their outstanding performance in what was a challenging environment due to 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. 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 primarily driven by an acceleration of our business development efforts, which produced a record quarter of loan production, especially in our commercial and commercial real estate lending areas. The increased loan production is attributable to several factors, including a generally higher level of loan demand as commercial clients gain more confidence in the economic recovery, increased contributions from new bankers we added over the past year, and more loan production from rapidly growing areas in Northern Illinois and St. Louis. We are successfully moving upmarket and working with larger clients with greater financial needs, benefiting from technology investments such as the Salesforce platform that have provided us with better data and insights to enhance our win rate and extend our relationships with clients. This strong loan production resulted in 25% annualized loan growth in the fourth quarter, with the largest growth coming from our commercial real estate portfolio, an area where we had 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 we’ve invested in over the past couple of years and are now seeing positive results. This group does nationwide bridge lending for FHA and HUD developments, originates loans for multifamily, assisted and senior living, and multi-use properties with retail, office, and residential components. This group is offering increased diversification in our commercial real estate portfolio. We also experienced strong growth in our core C&I portfolio, although this is somewhat masked by declines in PPP loans and commercial FHA warehouse lines 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 growth is attributable to continued progress in our equipment finance portfolio, along with increases in conventional commercial loans. Importantly, we managed 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 surging by 34%, allowing us to keep reducing 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 via our relationship with Dwight Capital. However, we are witnessing strong inflows of other commercial deposits due to the full banking relationships we are developing through our business development efforts. During the fourth quarter, we continued to execute well on our strategic initiatives, driving improvements in several key metrics. Non-interest-bearing deposits now represent nearly 37% of our total deposits, up from around 22% at the end of 2019. This improvement in our deposit base has reduced our cost of deposits to just 15 basis points at the year's end. We also continue to observe positive trends in our wealth management business, with assets under administration increasing by 3.9% during the fourth quarter. We are successfully scaling the Midland franchise and generating higher levels of revenue while effectively controlling expenses. Consequently, we are realizing additional operating leverage, with our efficiency ratio improving to 52.6% in the fourth quarter, compared to 58.8% in the prior quarter. Most importantly, we are generating this growth while improving our asset quality. In the fourth quarter, our non-performing loans decreased by 22% from the previous quarter. Our coverage of non-performing loans increased to 120%. As we anticipated, we are growing into the significant reserve we built during the pandemic, which has kept our provision expense relatively low, even with the strong growth we are seeing in the loan portfolio. Now, I will turn the call over to Eric to provide additional details about our fourth-quarter performance. Eric?

Eric Lemke, CFO

Thanks, Jeff. I'm starting on Slide 4, where we'll take a look at our loan portfolio. Our total loans increased by $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 nearly 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 also rose by $74 million, split between growth in the GreenSky portfolio and other direct consumer lending that we engage in. 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%, reflecting our improved ability to generate growth in commercial and commercial real estate loans. Moving to Slide 5, we’ve provided an update on our equipment finance portfolio. We continue to witness a steady recovery of our borrowers in the transit and ground transportation industry as trends in business and recreational travel improve. As of December 31, we had just $4 million of loans in deferral remaining, with nearly all of those borrowers making some form of partial payment. Evaluating Slide 6, we've updated our consumer loan portfolio that we maintain through our GreenSky partnership, which has performed exceptionally well throughout the pandemic. At December 31, we only had $500,000 of deferred loans in this portfolio, representing just 1/10th of 1% of the total loans. Furthermore, at merely 26 basis points, the delinquency rate remains better than the historical range we have observed in this portfolio. In addition to the strong performance, the escrow account is available to cover any deficiencies in our principal balances. The escrow account increased to $34.8 million at the end of the fourth quarter. Jeff will provide an update on the GreenSky relationship later in the call. Next, on Slide 7, we’ll review our deposits. Total deposits increased by $509 million, or 9.1%, from the prior quarter. This increase was largely attributed to an uptick in commercial FHA servicing deposits. The strong inflow of non-interest-bearing deposits allowed us to continue running off higher-cost time deposits, evidenced by a $59 million decline in our CD balances from the end of the prior quarter. On Slide 8, we illustrate the trends in our net interest income and margins. Our net interest income increased by 5.7% from the prior quarter, primarily due to higher balances of interest-earning assets as we leveraged the non-interest-bearing deposit inflows 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 previous 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 created temporary excess liquidity, putting some near-term pressure on our net interest margins. We finished the year with cash and cash equivalents accounting for 10% of our interest-earning assets, which is above our standard level. Excluding accretion income, our net interest margin declined by six basis points due to that excess liquidity and the unfavorable shift in our earning assets mix. 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. Looking ahead, in the near term, our net interest margin trend will heavily depend 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, positioning us well to see that favorable mix shift and generate a higher level of net interest income in the first quarter. Moving to Slide 9, we'll evaluate the trends within our wealth management business. Our assets under administration rose by $159 million from the end of the previous quarter, primarily due to market performance. Our wealth management revenue was essentially flat compared to the prior quarter, as a decrease in estate and guardianship fees offset the increase in assets under administration. Compared to the fourth quarter of the previous year, our wealth management revenue increased by 22%, reflecting our strong progress on growing sources of recurring fee income. On Slide 10, we’ll review our non-interest income. We recorded $22.5 million in non-interest income during the fourth quarter, an increase of 48.7% from the prior quarter. Aside from the gain on the termination of the FHLB swap, we had several other items positively impacting our non-interest income in the fourth quarter, including a $3.9 million gain in unrealized income on equity investments and $1 million gain on bank-owned life insurance. Excluding these items, most other areas of net interest income were relatively consistent with the prior quarter, apart from a $1 million decline in the impairment on our commercial mortgage servicing rights. With interest rates increasing and refinancing volumes declining, we expect to see lower impairment levels on commercial mortgage servicing rights in 2022. Moving to Slide 11, we’ll analyze our non-interest expense. On an adjusted basis, excluding the FHLB advance prepayment fees and integration and acquisition expenses, our non-interest expense decreased by approximately $300,000 from the prior quarter. This decline was mainly due to lower data processing costs as a result of renegotiating a couple of vendor contracts, while keeping most other areas relatively flat in comparison to the previous quarter. On an adjusted basis, we achieved the low end of the $40 million to $42 million run rate we were targeting. For the first quarter of 2022, we expect expenses to range from $40.5 million to $41.5 million. Turning to Slide 12, we’ll assess our asset quality trends. Our non-performing loans decreased by $12 million compared to the end of the prior quarter, chiefly due to the payoffs of two non-accrual loans and the charge-off of a third loan. We recorded $4.6 million in net charge-offs during the quarter, or 37 basis points of average loans. Most charge-offs related to one acquired loan and some in the equipment finance portfolio, where a few credits affected by the pandemic have now resulted in losses. Overall, the losses in this portfolio have been well below the reserve levels established during the pandemic. Deferred loans also continued to decline. At December 31, we had $13.3 million of loans remaining on deferral, equating to just 30 basis points of total loans, of which nearly all were making partial payments. At year's end, we had no hotel loans still on deferral. We recognized a provision for credit losses of approximately $500,000, which primarily related to building our reserve for unfunded commitments due to our strong commercial loan production. As of December 31, approximately 94% of our allowance for credit losses was allocated to general reserves. On Slide 13, we show the components of the changes in our allowance for credit losses (ACL) from the end of the previous quarter. Our ACL decreased by roughly $4.6 million, primarily driven by positive shifts in the portfolio, which was somewhat offset by small additions tied to specific reserves and economic forecasts. Finally, on Slide 14, we exhibit our ACL segmented by portfolio. Given the favorable trends we're observing, we reduced our coverage ratio in most areas of the portfolio. With that, I will turn the call back over to Jeff.

Jeff Ludwig, CEO

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, enabling 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 a consumer loan originator. 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, regarding 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 growth drivers will continue to be commercial loans, including equipment finance, and commercial real estate, and we still possess robust pipelines in each of these areas. Our organic loan growth will also be supported by our efforts to continue adding commercial banking talent, particularly in high-growth markets. One of these markets will be the Chicagoland area. Given the amount of merger activity occurring in the Chicago market, we believe there are favorable opportunities to take advantage of the disruption and to add both banking talent and clients in the long term. Another priority for us in 2022 is to increase our asset sensitivity in light of the outlook for higher interest rates. The enhanced commercial banking platform we have built is generating more variable rate loans and non-interest-bearing deposits, allowing us to become more asset-sensitive. We observed an increase in our asset sensitivity during the latter half of 2021, as our commercial banking group generated higher levels of production. The improvements we have made in our deposit base over the last couple of years should enable us to maintain a low deposit beta as interest rates rise. Based on current trends in deposit flows and liquidity, we anticipate our deposit beta will be close to zero for the first two rate increases. Another priority in 2022 is our continued investment in technology, with a shift in focus for these investments. For the past few years, our technology investments were largely foundational, enabling us to operate the bank more efficiently, and we’re now starting to see the targeted results of those investments. Going forward, a greater portion of our technology investment will center on areas that can positively impact revenue generation and enhance client service. To this end, late in 2021, we rolled out a new online SBA loan application portal to select customers, with plans to expand the use of this portal throughout 2022. Additionally, we have invested in search engine optimization to attract potential clients to the portal. We believe these investments will help us build our SBA business into a meaningful contributor to our non-interest income, as well as create opportunities to develop deposit relationships with these small business customers. Our technology strategy also includes investing in fintech funds, which have performed well and contributed to the equity gains recorded in the fourth quarter. More importantly, these investments give us valuable insights into the latest innovations and guide the development of our technology roadmap, helping us to remain competitive in a rapidly evolving sector. We are also focused on keeping our expenses relatively flat compared to 2021. While we continue our investment in technology, rising pressures on compensation expense are affecting the entire banking industry. We believe we have potential cost-saving opportunities, some of which stem from the benefits of past technology investments, enabling us to maintain stable expenses moving forward. Lastly, regarding M&A transactions, we will maintain a very strict set of criteria. We remain open to smaller strategic deals that can further enhance our deposit base, strengthen our presence in attractive markets, or grow our wealth management business without detracting from our focus on strategies and executions that are driving 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 fits this criteria. This transaction, which we expect will be immediately accretive to earnings, will add approximately $86 million of low-cost deposits. Further, by adding a branch in Mokena, we will increase our exposure to faster-growing markets in Northern Illinois and improve our ability to grow our presence in the Chicago MSA. We recognize that a number of factors that positively affected our financial results in 2021 will not occur again in 2022, most notably income derived from PPP loans and reserve releases as the economy recovered from the pandemic. However, with the continued organic balance sheet growth expected, a full year of higher wealth management revenue following the ATG acquisition, and further improvement in operating leverage, we believe we can deliver a similar earnings level in 2022. From the perspectives of core performance, we anticipate that our earnings will exceed last year’s results. We also expect continued growth in earnings in 2023 as we capitalize on our enhanced commercial banking platform and greater presence in high-growth markets. Over the last few years, 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 has helped fund improvements in our technology platform. Most importantly, we have substantially augmented our commercial banking group, which is now the primary driver of our loan and deposit growth. As a result, we have transitioned into a bank with a balance sheet tilted toward relationship-based loans, funded by low-cost deposits, complemented by a wealth management business that provides a consistent source of non-interest income. We believe that the model we have established, and will continue to build going forward, is capable of generating a higher level of returns than we have historically produced and will consistently create value for shareholders as we continue to generate profitable growth in the future. Having said that, we are happy to take any questions you may have. Operator, please open the call.

Operator, Operator

Thank you. Our first question comes from Terry McEvoy of Stephens. Your line is open.

Terry McEvoy, Analyst

Hi. Good morning, everyone. Maybe first off, extending the GreenSky partnership through at least 2023, how should we think about the balances at 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?

Jeff Ludwig, CEO

We think it's going to be relatively stable, maybe down slightly. As we also mentioned, 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 decline quicker or align more with what we disclosed at the end of the third quarter. But we think it will remain relatively stable going forward, at least for a couple of years.

Terry McEvoy, Analyst

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?

Eric Lemke, CFO

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 increases 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 progress through the year.

Terry McEvoy, Analyst

Okay. Thanks for clearing that up. And then maybe last one, when you consider Chicago and Chicagoland over the next three to five years, how important do you think that market will be for Midland relative to St. Louis in your core market? Put another way, is that kind of the primary focus right now when you think about expanding the franchise?

Jeff Ludwig, CEO

No. I would say it's St. Louis and the collar counties, Southern Collar Counties of Chicagoland, is sort of how we think of it, and we're looking for opportunities in both of those areas. Now, we think that Chicagoland might create more opportunities in the short term with a lot of disruption happening there due to bank M&A, but if we see promising opportunities in St. Louis, we're going to pursue those as well.

Damon DelMonte, Analyst

Hey, good morning, guys. Hope everybody's doing well today. Just wanted to ask a little bit about the interest rate sensitivity regarding 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?

Eric Lemke, CFO

Hey, Damon. Yes, I'll be happy to answer that. Our portfolio, particularly when you look at equipment finance and the GreenSky partnership, has been around 70/30, with 70% fixed and 30% variable. That shifted slightly during this past quarter, and we're now approximately at 65/35. Therefore, looking at the variable side, we've got about a $1 billion portfolio that will change rates either immediately or within 30 days. 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 relatively quickly.

Damon DelMonte, Analyst

Got it. Okay. Do you feel like your core margin has reached the bottom here and that it might trend flat in the first quarter and then start to increase as we go through the year?

Eric Lemke, CFO

Yes, I think that's fair. We still have about a six-basis point impact from PPP loans, and as we look into 2022, that will obviously fade away as we get the rest of that portfolio forgiven. Additionally, our accretion number's been declining as well. We expect that to decrease a little next year, but with the loan growth we have had, and the potential for those upward rates that we've discussed, it’s reasonable to expect a flat margin or potentially slight upside as we progress.

Damon DelMonte, Analyst

Great. Just one more question on the expenses. Could you elaborate a bit more on your goal to maintain stable expense levels while continuing to invest in technology? Are there other areas in the expense base that you could potentially save in one area and reallocate to another? What's your approach to keeping expenses stable?

Eric Lemke, CFO

We've been reviewing our operations thoroughly to drive efficiencies in everything we do. Part of our technology investments have included RPA to enhance those efficiencies. We've thoroughly scrutinized our other technology spend and other vendors throughout the organization to identify potential savings. We're able to allocate those costs back into other technology investments, like the SBA portal that Jeff mentioned.

Jeff Ludwig, CEO

Yes. Another important aspect is that we've built an excellent IT team. They've focused on foundational improvements, and now we're directing them in different areas. A lot of that technology spend is becoming part of the regular run rate, and our people here will also be pointed toward future initiatives.

Nathan Race, Analyst

Yes. Hi, guys. Good morning. I wanted to revisit the loan growth discussion. I appreciate the high single-digit guidance for 2022. It sounds like, as observed in the fourth quarter, much of that growth was commercial-driven. I'd love to get some insights into the specific drivers within your commercial team that are fueling that growth. Also, does the high single-digit outlook for this year incorporate some funding from the new Fintech partnership described on Slide 15?

Jeff Ludwig, CEO

Yes. In terms of growth, we are seeing it across our footprint—we observed strong growth in the St. Louis market. We're also seeing noteworthy growth in the Chicagoland area through Rockford, where we're directing efforts. Additionally, our specialty finance group that we've been developing over the last few years around FHA bridge loans has contributed to this growth. The combined progress from all these areas is driving our loan growth.

Nathan Race, Analyst

Got it. So, the high single-digit outlook for this year doesn’t necessarily include originations stemming from the new Fintech partnership?

Jeff Ludwig, CEO

No, the way I'm considering it currently is that this partnership will help us offset some of the impacts if GreenSky does decline. It will likely not contribute significantly until late this year, as we're still finalizing details with them, with initial originations starting at a lower level and increasing over time. So it’s more of a 2023 impact for now, while the GreenSky relationship is intended to keep our consumer balances stable.

Nathan Race, Analyst

Understood. Thank you, Jeff. Just one last question about loan growth: were payoffs somewhat lower in the quarter, which helped drive this robust growth during the quarter? Is uncertainty surrounding future payoff levels prompting you to adopt a more conservative stance in your high single-digit outlook for this year, compared to what we observed in the fourth quarter?

Jeff Ludwig, CEO

Yes, I would say we have become more focused on managing attrition and getting ahead of that. I think as the year evolved, we improved our ability to handle attrition. It’s difficult to predict, but we have observed a slowdown in attrition and do not expect any significant increase in the near term.

Eric Lemke, CFO

Yes, I think that’s fair. We've been focused on increasing wallet share significantly, particularly through debit cards, improving utilization. We observed strong fee income from interchange fees in 2021. While we may not grow at that pace in 2022, we expect modest increases moving forward as we continue driving developments in our wealth business.

Unidentified Analyst, Analyst

Hey, guys. How's 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.

Jeff Ludwig, CEO

Yes, that works for us.

Nathan Race, Analyst

Yes. Thanks for taking the follow-up. I wanted to ask about the outlook for the reserve going forward. Credit quality improved in the fourth quarter, though charge-offs were a bit elevated compared to what we discussed earlier. Could you provide your thoughts on the provision necessary for the robust organic growth outlook for 2022, and where the reserves might settle out over that timeframe?

Eric Lemke, CFO

Yes, Nate, great question. We're forecasting net charge-offs to be in the range of 20 to 25 basis points, perhaps at the low end for our commercial portfolio but nearer the high end for our Midland equipment finance portfolio. New loan growth is projected at around 120 to 130 basis points, potentially a bit higher if it pertains to the equipment finance portfolio. Thus, considering this growth, we may see a slight reserve build alongside the provisions for any charge-offs we encounter throughout 2022.

Nathan Race, Analyst

Okay. Got it. So, reserve levels are probably stable, more or less, as a percentage of loans. Is that accurate, Eric?

Eric Lemke, CFO

Yes, I think that's right.

Jeff Ludwig, CEO

Yes, the mix does matter. The new mix will require a higher reserve level since the GreenSky and warehouse lines are reserved at much lower levels. Therefore, the new production will need to be reserved at a higher rate. Overall, I expect the reserve percentage to increase.

Nathan Race, Analyst

Understood. Lastly, within the framework of the asset sensitivity equation, considering the improvements in the deposit franchise over the past several quarters, do you expect that you will perhaps experience a lower deposit beta than what we saw during the 2015 to 2018 tightening cycle? How are you contemplating the necessity to support new loan growth? Your loan deposit ratio appears to afford you some flexibility at around 85%. I'm just curious about your perspective on the funding equation and how the deposit base will respond to rising rates going forward.

Jeff Ludwig, CEO

Yes, I believe we performed fairly well in the last rate cycle. Our deposit base is arguably stronger today than it was before. So, we anticipate better performance this time around, although it's somewhat unpredictable as to how other institutions will respond. However, it seems likely that funding rates will lag behind as much as possible. Overall, I believe our performance will be better this time.

Manuel Navas, Analyst

Hey, good morning. I've appreciated a lot of the details shared on the loan guidance. I'm curious if that high single-digit growth will be more weighted toward the back half of the year, or if it will follow the typical seasonality we saw in the fourth quarter?

Jeff Ludwig, CEO

I don't think so. I believe it will be a bit more balanced. As we discussed last year, we began to concentrate on our commercial banking team, hiring new personnel throughout the year to build our pipeline. All that work materialized towards the latter part of the year, evidenced by significant growth in the third quarter and even more in the fourth quarter. On a seasonal basis, typically our first quarter is quieter, and the middle and latter parts of the year are more productive. However, I don't see this year's loan growth resembling that of last year, considering that last year saw a decrease in loans in the first quarter and some growth in the second, which surged in the fourth quarter. I think this year's growth will be more even. Our equipment finance business traditionally excels in the year’s last quarter, as companies rush to acquire equipment before the fiscal year ends.

Operator, Operator

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

Jeff Ludwig, CEO

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

Operator, Operator

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.