Nathan Race

Nathan Race asked for help with the starting point for the net interest margin (NIM) in Q1, inquiring about the mix of loans in the strong pipeline and how that might translate into the margin. He also asked about deposit pricing competition, specifically if it has become more rational following recent rate cuts and M&A activity by larger competitors. Finally, Race asked CEO Corey Chambas about potential M&A opportunities, given the bank's unique model and focus on organic growth.

Answer

President and COO Dave Seiler noted that pipelines are strong across business lines, with a mix of commercial real estate (CRE) and C&I, highlighting particularly good activity in asset-based lending (ABL), which typically involves higher-margin deals. CFO Brian Spielmann explained that excluding the 10 basis points of non-accrual interest reversal in Q4, the NIM would reset to 3.63% in Q1, within the target range of 3.60%-3.65%, supported by the favorable loan mix. Dave Seiler stated that deposit pricing competition, while still very competitive, has eased 'just maybe a little bit' compared to 6-12 months prior. CEO Corey Chambas indicated that M&A opportunities aligning with their unique model are scarce, and the bank prioritizes organic growth as the best way to drive shareholder value without dilution.

Nathan Race asked for insights into the Q1 margin starting point, considering the mix of loans in the pipeline. He also inquired about current deposit pricing competition following recent rate cuts and whether the bank is seeing M&A opportunities that align with its unique model.

Answer

President and COO Dave Seiler noted strong pipelines with a mix of commercial real estate and C&I, highlighting particularly good activity in higher-margin asset-based lending. CFO Brian Spielmann added that excluding the non-accrual interest reversal, the Q4 margin was 3.63%, providing a strong starting point for Q1 within the 3.60%-3.65% target range. CEO Corey Chambas stated that deposit pricing remains very competitive but has eased slightly. He reiterated the bank's focus on organic growth, citing its unique model and lack of interest in branch networks, thus seeing no suitable M&A opportunities.

Nathan Race of Piper Sandler Companies asked about the outlook for core deposit growth, long-term targets for the wholesale funding mix, the current competitive landscape for deposits, and the bank's net interest margin sensitivity to potential Fed rate cuts.

Answer

CEO Corey Chambas stated the long-term goal is a 75/25 mix of in-market deposits to wholesale funding. President & COO David Seiler expects core deposit growth to continue matching loan growth. CFO Brian Spielmann described the deposit market as 'competitive as ever' but manageable. He also noted the balance sheet is slightly asset-sensitive but will be effectively neutral once short-term cash is deployed, protecting the margin from rate cuts.

Nathan Race asked about the potential impact of recent SBA rule changes on deal volumes, whether macroeconomic volatility was slowing loan activity, and the trend in criticized and classified assets. He also inquired about the outlook for deposit costs and the bank's target loan-to-deposit ratio.

Answer

President and COO Dave Seiler stated that SBA volume is driven more by their sales team than rule changes and that loan pipelines remain strong, with equipment finance applications even increasing. Chief Credit Officer Bradley Quade described credit migration trends as 'benign.' CFO Brian Spielmann noted that remaining deposit cost leverage would be 'nominal.' Regarding the loan-to-deposit ratio, CEO Corey Chambas and CFO Brian Spielmann explained they don't manage to a specific target but focus on a core funding ratio of 70-80%, while also aiming to keep the loan-to-deposit ratio below 100% for investor optics.

Nathan Race asked about the trajectory of funding betas if the Federal Reserve remains on hold. He also inquired about capital deployment priorities for the year, weighing organic growth against share repurchases and dividend increases. Finally, he asked about the long-term trend for the efficiency ratio, considering the bank's technology investments and strong operating leverage.

Answer

President and COO David Seiler explained that the bank is relatively matched on the variable side of the balance sheet and aims to maintain consistent betas to achieve net interest margin neutrality. Executive Corey Chambas outlined capital deployment priorities as: first, funding 10% organic balance sheet growth; second, consistent dividend increases; and third, opportunistic share buybacks. He added that the efficiency ratio is expected to continue its 'march downward' as the bank consistently achieves positive operating leverage.

Nathan Race of Piper Sandler questioned the near-term net interest margin (NIM) trajectory given recent and anticipated Fed rate cuts. He also asked about the outlook for operating leverage and pretax pre-provision (PPNR) earnings growth into next year, and sought color on why wealth management fees declined sequentially despite growth in assets under management (AUM).

Answer

CFO Brian Spielmann reiterated confidence in the bank's 3.60%-3.65% NIM target range, noting the main pressure would be competition for deposit volume. Both Spielmann and Executive Corey Chambas projected continued positive operating leverage, driven by 10% revenue growth against lower headcount growth enabled by technology. Regarding wealth management, they explained the Q2 fees were elevated by annual tax-related fees and that there is a lag, as current quarter fees are based on the prior quarter's ending AUM.

Nathan Race from Piper Sandler asked about the impact of interest reversals on First Internet Bancorp's Q4 margin and whether the 2026 credit cost outlook incorporates additional interest reversals. He also sought clarification on embedded net charge-off expectations relative to the $50 million-$53 million provision guidance for the year, and where the allowance for credit losses (ACL) is projected to end up given the loan growth target. Finally, Race inquired about the expected tax rate within the 2026 EPS guidance.

Answer

EVP and CFO Ken Lovik confirmed that interest reversals, estimated at $300,000-$400,000 in Q4, were modeled into NII assumptions and contributed to margin impact, alongside higher average cash balances. He explained that the provision guidance includes assumptions for both charge-offs and additional specific reserves, with the bulk expected in Q1 and Q2. President and COO Nicole Lorch elaborated on the use of Lumos and Redwood data, along with vintage analysis, to inform these projections. Lovik projected the ACL balance could increase by $20 million-$30 million by year-end. For the tax rate, Lovik indicated a lower rate of 7%-8.5% in Q1 and Q2, ramping up to 10%-12% in Q3 and Q4 as earnings improve.

Nathan Race inquired about the impact of interest reversals on the fourth-quarter margin and whether the 2026 credit cost outlook accounts for additional interest reversals. He also sought to understand the embedded net charge-off expectations relative to the $50 million-$53 million provision guidance, considering the projected 15%-17% loan growth, and asked for the expected tax rate within the full-year EPS guidance. Additionally, he asked about the funding strategy for the strong loan growth outlook, specifically if deposit growth would largely follow, and the expected starting point for the margin in Q1.

Answer

Executive Vice President and CFO Ken Lovik confirmed that interest reversals are modeled into NII assumptions, estimating $300,000-$400,000 in Q4, consistent with prior quarters, which partly explains the NII margin shortfall along with higher cash balances. He indicated that about half of the provision guidance is for charge-offs and specific reserves, with the bulk expected in Q1 and Q2, moderating later in the year. President and COO Nicole Lorch elaborated on using Lumos, Redwood data, and vintage analysis to forecast potential losses, noting that pain is expected from 2024 and 2025 vintages under previous guidelines. Ken Lovik projected the Allowance for Credit Losses (ACL) to grow by $20 million-$30 million by year-end. For the tax rate, he guided to 7%-8.5% in Q1/Q2 due to depressed earnings, ramping to 10%-12% in Q3/Q4. Regarding funding, Ken Lovik stated a combination of 8%-10% deposit growth, deploying excess cash, and securities cash flows. Chairman and CEO David Becker highlighted the low loan-to-deposit ratio and flexibility with off-balance sheet BaaS deposits. Nicole Lorch mentioned the award-winning small business checking account. Ken Lovik anticipated Q1 margin expansion of 10-15 basis points, with more in Q1 due to rate cuts, and clarified that the bank does not expect to be unprofitable in Q1 due to healthy non-interest income from SBA loans held for sale.

Inquired about the underlying assumptions for the provision and charge-off outlook, the breakdown of recent charge-offs between SBA and franchise finance, the deposit growth strategy, and the rationale for pursuing loan growth over share buybacks at the current stock valuation.

Answer

The company stated the provision outlook is conservative, though leading indicators like deferrals are improving. Recent charge-offs were split 54% from franchise and 46% from SBA. Strong, low-cost deposit growth from fintech partners is allowing them to reprice maturing CDs downward. Management is prioritizing building capital ratios through profitable loan growth before considering buybacks.

Inquired about changes to SBA loss assumptions, the outlook for charge-offs in Q2 and the rest of the year, the potential for share buybacks, and a confirmation of expense guidance.

Answer

The company stated that SBA loss assumptions are tied more to economic uncertainty than interest rates and they feel they've made progress on problem loans. Q2 delinquencies and charge-offs are trending lower than Q1. They will consider share buybacks if the stock price remains low (e.g., below 50% of book). Expense guidance of 10-15% annual growth over 2024's $90 million base was reiterated.

Nathan Race inquired about changes to SBA loss assumptions, the expected trend for charge-offs, the company's stance on share buybacks, and requested a reminder of the full-year expense guidance.

Answer

Executive Kenneth Lovik stated that while higher rates have an impact, economic uncertainty is the larger driver for SBA loss content. He noted a slowdown in new delinquencies in Q2 and reiterated the full-year noninterest expense growth guidance of 10% to 15% over 2024. Executive David Becker confirmed that if the stock price remains low, the company would "definitely get back into a buyback situation."

Nathan Race sought more clarity on the Q4 SBA charge-offs, noting they seemed surprising after prior commentary suggested delinquencies had peaked. He also asked about the expected cadence of net interest margin expansion throughout 2025.

Answer

Executive Kenneth Lovik explained that some charge-offs were on loans with existing reserves where the outlook for recovery diminished. Executive David Becker added that the bank had the earnings capacity to be aggressive and 'get it out of the way,' and he expects future SBA charge-offs to normalize in the 30-40 basis point range for that portfolio. Regarding the NIM, Kenneth Lovik projected a more significant expansion in the second quarter and back half of 2025, driven by the timing of CD repricing and the paydown of expensive brokered deposits.

Questioned the timing of the large SBA charge-offs, given previous commentary that delinquencies had peaked. He also asked for the expected normalized charge-off rate for the SBA business and the quarterly cadence of the net interest margin expansion expected in 2025.

Answer

The executives clarified that the charge-offs were a proactive measure to clean up loans where the outlook had worsened, allowing them to start 2025 with a clean slate. They agreed that a normalized quarterly charge-off rate of 30-40 basis points on the SBA portfolio is a reasonable expectation. The margin expansion is expected to be progressive, with a notable increase in Q2 and continued growth in the back half of the year.

Nathan Race from Piper Sandler sought clarification on the Q4 loan growth outlook and preliminary 2025 balance sheet expectations. He also asked about the strategy of slowing balance sheet growth to focus on profitability and capital building, as well as the outlook for 2025 expense growth and the effective tax rate.

Answer

Executive Kenneth Lovik confirmed Q4 loan growth guidance of 1.5-2.0% (quarterly) and projected 2025 expense growth of 7-8%. CEO David Becker agreed with the strategy to remix the balance sheet for higher yield rather than grow for growth's sake, utilizing existing liquidity. Becker noted a stock buyback is less likely in 2025, preferring to build capital or pay down sub-debt. For the tax rate, Lovik expects it to rise from a high 8% to as high as 11-12% by the end of 2025 due to higher pretax earnings.

Asked for clarification on Q4 loan growth, expectations for 2025 balance sheet growth, the strategy of slowing growth to focus on profitability and capital, the 2025 expense outlook, and the future tax rate.

Answer

Q4 loan growth is 1.5-2% for the quarter (not annualized). The balance sheet may shrink in Q4 and grow modestly in 2025, with a focus on remixing for profitability rather than sheer size. They agree with building capital over buybacks. 2025 expense growth is estimated at 7-10%, and the effective tax rate is expected to rise toward 11-12% by the end of 2025.

Nathan Race with Piper Sandler inquired about West Bancorporation's loan growth dynamics, including elevated payoffs and the loan pipeline heading into the new year, particularly regarding opportunities in the Twin Cities and southern Minnesota. He also asked about fixed-rate loan repricing, deposit growth trends, the potential for further securities portfolio repositionings, and the net interest margin outlook for the first quarter.

Answer

Brad Winterbottom, President, explained that loan payoffs were driven by a specific customer selling medical office buildings (over $50 million) and other customers refinancing multifamily assets. Brad Peters, Minnesota Group President, noted ongoing M&A opportunities from competitors like Bremer and Alerus contributing to the pipeline. CFO Jane Funk stated that nearly $400 million in fixed-rate loans are repricing in 2026, with an expected yield pickup of 1.5%-2% from current low-four rates. She indicated deposit growth outlook is uncertain due to public fund volatility from bond offerings, potentially offsetting retail and commercial growth. Funk added that the company regularly evaluates further securities portfolio repositionings based on liquidity needs and deployment opportunities, with no set plans for 2026. She projected a starting net interest margin of around 2.5% for Q1, with room for improvement throughout the year.

Nathan Race asked about the loan growth dynamics in the fourth quarter, including elevated payoffs and the loan pipeline heading into the new year, particularly regarding opportunities in the Twin Cities and surrounding Minnesota geographies. He also inquired about the fixed-rate loan portfolio repricing in 2026 and its potential yield pickup, the drivers and outlook for core deposit growth, the company's appetite for further securities portfolio repositionings, and the expected net interest margin starting point for the first quarter of 2026.

Answer

Bank President Brad Winterbottom explained that loan payoffs in Q4 were driven by a specific customer selling medical office buildings (over $50 million) and other customers refinancing large multifamily assets, with similar activity expected in Q1. Minnesota Group President Brad Peters noted ongoing opportunities from competitor M&A activity (Bremer merger, ALRS transaction) continuing into 2026. CFO Jane Funk stated that nearly $400 million in fixed-rate loans are repricing in 2026, with an expected yield pickup of 1.5%-2% from current low-four rates. Regarding deposits, Ms. Funk mentioned uncertainty due to anticipated outflows from public funds related to bond offerings in 2026, potentially offsetting retail and commercial growth. She added that the company regularly evaluates further securities portfolio repositionings based on liquidity needs and alternative deployment opportunities, with no set plans for 2026. Finally, Ms. Funk indicated a net interest margin starting point of around 2.5% for December/January, with expectations for improvement throughout 2026 even without rate environment changes.

Nathan Race with Piper Sandler inquired about West Bancorporation's loan growth dynamics, including elevated payoffs and the current loan pipeline, particularly in the Twin Cities area. He also asked about the volume of fixed-rate loans repricing in 2026 and the expected yield pickup, as well as the sustainability of core deposit growth given public fund volatility. Additionally, Race questioned the potential for further securities portfolio repositionings and sought clarity on the net interest margin's starting point for Q1 2026, considering deposit cost reductions.

Answer

Brad Winterbottom, President, attributed loan payoffs to a large medical office building sale and multifamily refinances, while Brad Peters, Minnesota Group President, highlighted ongoing opportunities from competitor M&A. Jane Funk, CFO, stated that just under $400 million in fixed-rate loans would reprice in 2026, expecting a 1.5%-2% yield pickup. Funk also noted that deposit growth might be volatile due to public fund outflows in 2026 but confirmed ongoing evaluation for additional securities repositionings based on liquidity needs. She projected a Q1 2026 net interest margin around 2.5%, with potential for further improvement.

Nathan Race inquired about West Bancorporation's loan growth pipeline, specifically asking for an update on current pipeline strength and growth expectations for the remainder of the year and into 2026, noting opportunities in Minnesota. He also asked about the strategy for funding future loan growth, deposit beta assumptions for future Fed rate cuts, the go-forward effective tax rate, and capital management and deployment priorities.

Answer

Brad Peters, Minnesota Group President, indicated that the loan pipeline in Minnesota is good but less robust due to increased selectivity, with expectations to maintain a mid-single-digit growth pace. Jane Funk, CFO, confirmed the objective is to fund growth through deposit gathering and investment portfolio cash flows, while acknowledging potential short-term needs for wholesale funding. She highlighted ongoing repricing opportunities in the fixed-rate loan portfolio (4.86% weighted average rate) but cautioned that future deposit betas might be less aggressive than a year prior due to competitive pricing pressures. Jane Funk also clarified that the go-forward effective tax rate is anticipated to return to levels seen in the first half of the year (22-23%), with the third quarter's 19% rate being an anomaly. For capital management, she stated that while there are no specific plans, the focus is on leveraging good loan opportunities and supporting organic growth.

Nathan Race of Piper Sandler Companies inquired about client sentiment and the loan growth pipeline for the second half of the year. He also asked about the net interest margin trajectory with and without potential Fed rate cuts, opportunities arising from M&A disruption in Minnesota, the outlook for deposit growth, and whether the Q2 expense run rate is a reliable baseline for future quarters.

Answer

Harlee Olafson, EVP & Chief Risk Officer, described the loan pipeline as 'pretty robust.' Jane Funk, EVP, CFO & Treasurer, projected margin improvement from asset repricing regardless of Fed actions, with deposit costs expected to be relatively flat. She also confirmed the Q2 expense run rate is a good indicator for the back half of the year. Brad Peters, EVP, affirmed that the bank has capacity to capitalize on M&A-related disruption in its Minnesota markets.

Nathan Race asked for the dollar amount of purchase accounting accretion in Q4 2025 and a starting point for the core margin ex-accretion for Q1 2026. He also questioned the timeline and headcount for doubling wealth management advisors, and Katie Lorenson's optimism regarding retirement platform acquisitions. Finally, he asked about the run rate for occupancy expenses after the Fargo facility opening.

Answer

CFO Al Villalon stated that 2025 had approximately $20 million in purchase accounting accretion, with $8 million expected for 2026, spread relatively evenly. He suggested using the Q4 2025 core margin of 3.17% as a starting point for growth. Chief Banking and Revenue Officer Jim Collins noted Alerus has 26 wealth advisors and plans to add 6-7 more in 2026, focusing on larger markets like the Twin Cities, Phoenix, and Wisconsin. President and CEO Katie Lorenson reiterated consistent capital priorities, including M&A in the retirement and HSA space, confirming expanding conversations with potential partners. Al Villalon clarified that Q4 occupancy expenses included a new facility opening, advising to grow from the Q4 exit rate of approximately $51 million for low single-digit expense growth.

Nathan Race sought clarification on the dollar amount of purchase accounting accretion in Q4 2025 and a starting point for the core margin ex-accretion for Q1 2026. He also asked about the timeline and current headcount for doubling wealth management advisors, potential M&A opportunities for the retirement platform, and the expected run rate for occupancy expenses.

Answer

CFO Al Villalon stated $20 million in accretion for 2025 and projected $8 million for 2026, with Q4 2025's 3.17% as a core margin starting point. Chief Banking and Revenue Officer Jim Collins noted 26 current advisors, with plans to add 6-7 more in 2026, focusing on larger markets. President and CEO Katie Lorenson reiterated M&A in the retirement/HSA space remains a priority, with an active pipeline. CFO Al Villalon indicated occupancy expenses would tick up due to a new Fargo facility, suggesting growing from the Q4 expense run rate of approximately $51 million.

Nathan Race from Piper Sandler Companies asked how recent technology upgrades could boost client capture and wallet share, and inquired about the resolution timeline for large non-performing loans. He also asked about balance sheet sensitivity to a Fed rate cut and the potential for hiring producers amid market disruption.

Answer

President & CEO Katie Lorenson and EVP & Chief Banking and Revenue Officer Jim Collins detailed how new platforms enhance client experience and analytics. EVP & COO Karin Taylor projected a first-half 2026 resolution for the two large non-performing relationships. EVP & CFO Al Villalon estimated a 5 basis point NIM improvement from a 25 bps rate cut. Management also noted they have capacity with the current team but remain opportunistic on hiring.

Nathan Race inquired about the trajectory of the core net interest margin for the first half of 2025, the primary opportunities and challenges with the Home Federal integration, capital management priorities for the upcoming year, and any planned balance sheet optimization initiatives.

Answer

CFO Al Villalon projected the core margin would benefit from an increasing deposit beta and loan repricing. CEO Katie Lorenson highlighted that integration priorities focus on organic growth in C&I, private banking, and wealth management across all markets. She also stated that capital levels are expected to rebuild throughout 2025, with priorities on organic growth and dividends. Al Villalon added that while balance sheet optimization is always under review, no immediate actions are planned to avoid client disruption.

Nathan Race from Piper Sandler & Co. requested a pro forma Q4 net interest income (NII) starting point including the Home Federal acquisition. He also asked about potential balance sheet optimization strategies, the rate sensitivity of the combined company, trends in criticized and classified loans, and updated thoughts on capital management priorities such as M&A and share repurchases.

Answer

CFO Alan Villalon estimated a starting Q4 NII of around $32-33 million, excluding deal marks, and noted the combined company will be more liability sensitive. He mentioned they are contemplating some loan sales and have already acted on the securities portfolio. Executive Karen Bohn explained that while criticized and classified loans increased, the levels are consistent with pre-pandemic norms, with the nonperforming increase driven by a few large credits. Executive Katie Lorenson reiterated that capital priorities are organic growth and the dividend, with share repurchases serving as a defensive tool, and that the company remains open to M&A, particularly in the retirement space.

Nathan Race from Piper Sandler asked for clarification on the starting point for earning assets in Q1, considering the Q4 securitization and wholesale borrowing paydowns. He also questioned the current stage of digital transformation investments, their impact on the expense run rate for Q2 and beyond, and opportunities for deposit gathering, including potential share gains from recent M&A in Iowa.

Answer

President and CEO Todd A. Gipple and CFO Nick W. Anderson clarified that Q1 earning assets would start consistent with the 12/31 balance, as the loan sale occurred late in Q4. They detailed that the $55M-$58M NIE guidance for Q1 2026 includes digital transformation and $10B infrastructure costs, aiming for operating leverage post-2027. Todd Gipple outlined strategies for deposit growth (retail checking, private banking, treasury management) and confirmed active pursuit of clients from the MOFG sale in Iowa.

Nathan Race inquired about the starting point for earning assets in the first quarter, the current stage of digital transformation investments and their impact on the expense run rate, deposit gathering opportunities, and potential share gains from recent M&A in Iowa.

Answer

Todd A. Gipple, President and CEO, and Nick W. Anderson, CFO of QCR Holdings, clarified that earning assets would start consistent with the year-end balance, as the Q4 loan sale occurred late in the quarter. They detailed that the increased expense guidance reflects continued digital transformation investments and infrastructure build-out for surpassing $10 billion in assets, aiming for operating leverage in future years. Gipple highlighted strategies for core deposit growth, including retail checking, private banking, and treasury management, and expressed confidence in gaining market share from the recent MOFG sale in Iowa.

Nathan Race asked for an update on QCR Holdings' plans for additional LIHTC securitizations, including the timing and size of the next large permanent loan securitization. He also questioned the potential net interest income (NII) impact from these securitizations and construction loan sales, and the gross loan growth expectations for the upcoming year, excluding these sales.

Answer

President and CEO Todd Gipple stated that a large permanent loan securitization of around $350 million is anticipated in the first half of next year, delayed to build a bigger inventory for greater profitability. He explained that while NII impact from construction loan sales is difficult to quantify precisely, any NII give-up is expected to be more than replaced by improved capital markets revenue, as the strategy aims to free up capacity for more profitable permanent financing. CFO Nick Anderson added that these are loan participations, transparent to clients. Todd Gipple projected double-digit gross loan growth for next year, building on the 10-15% Q4 guidance.

Nathan Race asked for an update on QCR Holdings' plans for additional LIHTC securitizations, including the timing and size of a larger permanent loan securitization. He also questioned the net interest income (NII) impact of construction loan sales and securitizations, and the gross loan growth expectations for the upcoming year, considering new LIHTC developer relationships.

Answer

President and CEO Todd Gipple indicated a large permanent loan securitization of around $350 million is anticipated in the first half of next year, delayed to build a larger inventory for better profitability. He noted that construction loan sales aim to free up capacity for more profitable permanent financing, expecting any NII give-up to be offset by increased capital markets revenue. For loan growth, he projected double-digit gross production for next year, with more precise net figures available in January. CFO Nick Anderson added that loan sales would be structured as participations, minimizing client impact.

Nathan Race from Piper Sandler Companies asked about the company's appetite for share buybacks given its capital accumulation and the potential impact of recent affordable housing legislation on the LIHTC business pipeline and future capital markets revenue.

Answer

President & CEO Todd Gipple indicated that with the TCE ratio approaching 10% and a clear path to higher CET1 levels post-securitization, the company will evaluate capital deployment options, including buybacks, in the second half of the year. Regarding the legislation, Gipple explained it is a significant long-term positive that could grow LIHTC allocations by 20%, but the impact on volumes and revenue is not expected until 2026 or 2027.

Nathan Race asked about the company's appetite for share buybacks given its capital accumulation and the potential impact of recent affordable housing legislation on LIHTC deal volumes and capital markets revenue.

Answer

President & CEO Todd Gipple explained that with capital ratios like TCE and CET1 growing, the company will evaluate capital deployment, including buybacks, in the second half of the year. He noted that the next securitization, which includes selling the B-piece, will better align GAAP and regulatory capital. Regarding legislation, he stated that while the impact is over a year away, it is very significant long-term and could increase LIHTC allocations by over 20% by 2026-2027.

Nathan Race asked about the company's appetite for stock buybacks given its capital accumulation and the potential impact of recent affordable housing legislation on the LITEK business and capital markets revenue.

Answer

President & CEO Todd Gipple explained that while capital levels like TCE (9.92%) and CET1 (10.43%) are growing, a decoupling between GAAP and regulatory capital has limited buybacks. He noted the next securitization, which includes selling the B-piece, will help align these metrics, and capital deployment will be evaluated in H2 2025. Regarding legislation, Gipple stated the long-term implications are very significant, potentially growing LITEK allocations by over 20% in the coming years, which reinforces the durability of the business.

Nathan Race inquired about the potential for share buybacks given capital levels, the drivers behind the quarterly increase in charge-offs, the expected normalized charge-off range, and sought clarification on the margin outlook for the second half of the year.

Answer

Executive Larry Helling stated the company would be 'deliberate' about buybacks due to economic uncertainty but has 760,000 shares remaining on its authorization. Regarding credit, management suggested that a normalized charge-off level would be in the high-$3 million to low-$4 million range per quarter. Executive Todd Gipple clarified that the margin outlook for the second half of the year depends more on the shape of the yield curve than on Fed rate cuts, noting a steeper curve is needed to significantly expand the margin toward historical highs.

Nathan Race of Piper Sandler asked about the funding plan for the 8-10% gross loan growth guidance, the static impact of a 25 basis point rate cut on NIM, the full-year expense outlook, and expectations for the charge-off range in 2025.

Answer

Executive Todd Gipple stated that loan growth will be funded by core deposits, with a goal of lowering the loan-to-deposit ratio into the low 90s. He confirmed a 25 bps rate cut would lift NIM by 2-3 basis points and suggested the Q1 expense guidance of $52-$55 million should be fairly static for the year. Executive Larry Helling added that credit is normalizing from historic lows and expects manageable charge-offs, with key credit metrics remaining well below the 20-year average.

Nathan Race asked for a breakdown of the drivers for the Q4 margin expansion, the improving economics of loan securitizations, the rationale behind the conservative capital markets revenue guidance, and the strategy for managing excess capital.

Answer

Executive Todd Gipple stated that the expected Q4 margin expansion is driven roughly half by deposit repricing and half by the benefits of securitizations. He confirmed that securitization economics are improving, citing a smaller-than-expected loss in Q3 and a guided gain for Q4. Executive Larry Helling explained the conservative capital markets guidance is due to inherent variability, though the pipeline remains strong. Regarding capital, Helling prioritized supporting organic growth, followed by potentially retiring sub-debt, and then considering buybacks, with M&A being a low priority.

Nathan Race from Piper Sandler & Co. questioned whether the record gross loan production could continue to step up in the coming year or if additional hiring would be necessary for a significant increase. He also asked for clarification on the first-quarter expense guide and any offsets to the expected second-quarter relief, and about the appetite for acquiring non-bank entities to boost fee income.

Answer

Chairman and CEO Mariner Kemper expressed confidence that the bank could maintain its strong loan production on a larger base without necessarily needing a step change in hiring, citing the team's consistency, low turnover, and significant market penetration opportunities. CFO Ram Shankar reiterated that the $10 million Q2 expense decline is specific to seasonal payroll items, with no dramatic change in overall expense trajectory unless revenue growth exceeds expectations, leading to higher commissions. Mariner Kemper emphasized that fee income growth is measured by absolute growth, not percentage of total revenue, and that the bank focuses on small, additive lift-outs and talent acquisition for institutional teams rather than large non-bank acquisitions. President and CEO of UMB Bank Jim Rine added that talent acquisition has been key for institutional fee income growth.

Nathan Race from Piper Sandler & Co. inquired if the record gross loan production could continue to step up in the coming year or if additional hiring would be needed for a significant increase. He also asked about the Q1 expense guide, potential offsets in Q2, and the appetite for acquiring non-bank entities to boost fee income proportion.

Answer

Chairman and CEO Mariner Kemper expressed confidence that the company can maintain its loan production pace on a larger base, citing a 13% 20-year CAGR, low market penetration, and consistent team tenure, expecting Q1 production to be as strong as Q4. CFO Ram Shankar clarified that the $10 million Q2 expense step-down is solely from seasonal payroll expenses, with no dramatic change in overall expense trajectory unless revenue growth exceeds expectations, potentially leading to higher sales commissions. Regarding non-bank M&A, Mariner Kemper emphasized focus on organic growth, noting that the company replaced over $100 million in fees from a prior divestiture organically in 12 months. He prioritizes absolute fee income growth over percentage of total revenue and confirmed the company is always open to smaller, additive "tuck-in" deals or talent lift-outs, particularly for institutional teams, where control is maintained. President and CEO of UMB Bank, Jim Rine, added that institutional growth has mainly been through talent acquisition.

Nathan Race sought clarification on UMB Financial's Q4 margin outlook (core vs. reported) and asked about factors influencing next year's margin, including opportunities to reduce cash levels, bond portfolio cash flow, and the impact of Fed rate cuts. He also inquired about desired acquisition size, geography, earn-back period, and intangible book dilution in M&A.

Answer

Ram Shankar, CFO, clarified that the Q4 margin outlook refers to the 2.78% core margin, excluding accretion. He detailed positive margin impacts from $2.1 billion in securities cash flows repricing at higher yields and $3 billion in fixed-rate loans repricing, alongside 50% of deposits indexed to short-term rates. He noted that 2/3 of the loan book reprices with a lag, resulting in a neutral rate positioning. Mariner Kemper, Chairman and CEO, declined specific M&A guidance but mentioned awareness of market norms for payback periods, seeking high-quality partners, and the ability to handle 'bank parlance size' deals, while acknowledging regulatory complexities.

Nathan Race from Piper Sandler sought clarification on UMB Financial's Q4 margin outlook (core vs. reported) and inquired about future margin drivers, including cash level reduction, bond portfolio churn, and deposit betas, and the impact of short-end rate cuts. He also asked for details on UMB's M&A acquisition criteria, such as size, geography, earn-back period, and tangible book dilution.

Answer

CFO Ram Shankar clarified the Q4 margin outlook refers to the 2.78% core margin, highlighting positive future drivers from bond portfolio cash flows repricing at higher yields, fixed-rate loan repricing, and indexed deposits, while noting UMB's balance sheet is 'pretty neutral' to rate changes over a two-year horizon. Chairman and CEO Mariner Kemper declined specific M&A guidance on size or geography, emphasizing discipline around market acceptance, payback periods, and regulatory complexities.

Nathan Race from Piper Sandler Companies asked if there is an upward bias to the net interest margin in Q4 and beyond, assuming the Federal Reserve remains on pause. He also questioned the sustainability of the high single-digit growth rate in the fund services fee income line.

Answer

CFO Ram Shankar responded that a margin uplift is 'potentially' possible but noted that a pause in rate cuts is neutral to slightly negative as deposit costs would not decline. He highlighted offsetting factors like fixed-asset repricing and seasonal DDA declines. CEO Mariner Kemper stated that the fund services growth is 'absolutely' sustainable, citing strong tailwinds, superior service, a strong tech stack, and a dominant position in the private fund space.

Speaking for Nathan Race, Adam Butler asked about future loan growth opportunities from the Heartland acquisition and sought clarity on the forward run rate for average earning assets (AEA) and the appetite for more securities sales.

Answer

CEO J. Kemper reiterated the deal's strategic rationale: leveraging Heartland's larger footprint and low-cost deposit base to accelerate UMB's proven loan growth engine. CFO Ram Shankar provided a normalized average earning assets range of $60.5 billion to $61.5 billion, which will serve as the new baseline for future growth, and noted plans to deploy excess cash over the next 3-6 months.

Nathan Race asked whether the HTLF acquisition would be accretive to UMB's loan growth outlook, sought to confirm the combined core expense run rate for Q1 2025, and asked if the 40% cost savings target for the year was still on track.

Answer

Chairman and CEO J. Kemper projected that HTLF's loan growth would likely slow in 2025 pending system conversion, but UMB's standalone growth engine remains strong, with the combined entity expected to hit its stride in 2026. CFO Ram Shankar generally confirmed the logic for the Q1 combined expense estimate, noting cost saves would begin to trickle in. Both executives affirmed that the 40% cost save target for 2025 remains their expectation.

Nathan Race asked if net interest income (NII) growth would accelerate in Q4, sought confirmation on the HTLF acquisition cost-save targets, inquired about the rate sensitivity of 12b-1 fees, the sustainability of fund services growth, and whether a recent FDIC proposal could delay the HTLF deal closing.

Answer

CFO Ram Shankar confirmed that NII growth should be stronger in Q4 than in Q3, citing balance sheet growth and the full-quarter impact of deposit repricing. He also affirmed comfort with the 27.5% cost-save target for the HTLF deal and noted that 12b-1 fees would not be materially impacted until another 300-350 bps of rate cuts. Chairman and CEO J. Kemper and UMB Bank CEO Jim Rine both expressed strong confidence in the sustained growth of fund services, corporate trust, and wealth management, citing strong pipelines and new service launches like CLO trustee services. Regarding the FDIC proposal, Kemper stated they do not expect any delays to the planned Q1 closing.

Nathan Race asked about the drivers of deposit growth in the quarter, specifically the increase in non-interest-bearing deposits, any seasonality, and the impact of M&A disruption on the deposit gathering pipeline. He also inquired about the cadence and lumpiness of the $743 million in fixed and adjustable-rate loans repricing higher, and its role in achieving the 3% net interest margin target. Additionally, he sought clarification on the 2026 expense outlook, asking if it would be high single-digit or low double-digit, and whether it accounts for additional production-related hires due to M&A disruption, including any non-solicit clauses for recent hires.

Answer

Nick Place, Chief Banking Officer, explained that Q4 is seasonally high for deposit growth, with some balances trickling out in Q1, but the overall deposit pipeline remains strong, supported by talent acquisition. Joe Chybowski, President and CFO, added that brokered deposits would be used to supplement if needed. Nick also confirmed that the loan repricing is well laid out without significant lumpiness and is the primary driver for the 3% NIM target. Regarding expenses, Nick stated that high single-digit growth is expected, aligning with asset growth, and while they will be opportunistic with hiring, they also seek operational leverage from the existing team. He noted that most recent hires surprisingly did not have non-solicit clauses.

Nathan Race inquired about Bridgewater Bancshares' loan growth outlook, asking if recent hires and strategic initiatives could lead to a significant step change in growth trajectory, potentially returning to pre-2022 levels for both loans and deposits. He also sought clarification on where these new hires would impact the balance sheet, the bank's desired cash levels, the trajectory of securities yields, and the status of specific reserves for both the non-accrual office loan and the recently downgraded multifamily loan.

Answer

Nick Place, Chief Banking Officer, stated that while the potential for faster growth exists, the bank aims for loan growth consistent with core deposit growth for profitability, leveraging M&A disruption in the Twin Cities and opportunistic hiring across various roles, including C&I and niche business lines. Joe Chybowski, President and Chief Financial Officer, indicated that higher average cash balances in Q3 were due to strong core deposit growth, with liquidity maintained to fund loan growth, and securities yields benefited from opportunities to add longer-duration paper mid-quarter, with ongoing redeployment. Katie Morrell, Chief Credit Officer, confirmed the specific reserve for the office loan remains just under $3 million with no charge-off planned, and the multifamily loan moved to substandard does not currently have a specific reserve, as the borrower is actively seeking a new buyer.

Nathan Race asked about the expected net interest margin exit rate for 2025 assuming potential Fed rate cuts, recent pricing trends on new loan production, whether a specific reserve was allocated to the newly migrated nonaccrual office loan, and the current M&A environment.

Answer

President and CFO Joseph Chybowski explained that while rate cuts would be beneficial for the margin, the primary focus is on growing net interest income through both margin expansion and balance sheet growth. Chief Banking Officer Nicholas Place noted new loan originations are priced around 6.5%, with the affordable housing vertical commanding higher yields. Chief Credit Officer Jeffrey Shellberg confirmed a specific reserve for the office credit was allocated in Q1. CEO Gerald Baack commented that M&A discussions with smaller local banks are ongoing, but nothing is imminent.

Nathan Race of Piper Sandler asked about the expected replacement rates for the 14-15% of the funding base that is set to reprice lower over the next year. He also sought to quantify the expected magnitude of Net Interest Income (NII) growth for 2025 and inquired about specific areas where the bank is looking to add talent to capitalize on market disruption in the Twin Cities.

Answer

President and CFO Joseph Chybowski noted that replacement funding rates, such as for short-term CDs, are now in the high 3% range and that the bank has flexibility to call higher-cost brokered deposits. He projected that NII growth could reach the low double-digit range in 2025. Chairman and CEO Gerald Baack added that the bank is actively looking to hire talent across all departments, including risk, treasury, and lending, to take advantage of opportunities from recent local bank acquisitions.

Nathan Race sought clarification on the Q4 margin outlook, asking if the guided expansion was driven by the acquisition. He also asked for the weighted average rates on loan payoffs versus new originations, feedback from regulators on CRE concentration following the acquisition approval, the outlook for share repurchases, the size of the problematic office loan, and the bank's sensitivity to future Fed rate cuts.

Answer

President and CFO Joseph Chybowski clarified that the modest margin expansion outlook is more dependent on the pace of future Fed cuts than the acquisition, noting payoffs were in the low-to-mid 6% range while new loans were in the low-to-mid 7% range. Chairman and CEO Gerald Baack confirmed positive regulatory feedback from a recent exam. Chybowski stated that share repurchases are paused to rebuild the CET1 ratio post-acquisition. Chief Credit Officer Jeffrey Shellberg provided details on the charged-off office loan, which is under contract to be sold. Chybowski concluded by reiterating the focus on NII growth rather than providing a specific bps-per-cut sensitivity.

Nathan Race inquired about the two loans totaling $28 million that moved to non-accrual in Q4, asking about the impairment taken and the expected resolution timeline. He also sought clarity on the outlook for SBA gain on sale revenue and tax credit revenue for 2026, following Q4's government shutdown impact and Q3's noise.

Answer

Doug Bauche (Chief Banking Officer) identified the loans as a retail center in Riverside, CA ($22M-$23M) and a residential property in San Diego ($6M), stating that valuations suggest good loan-to-value and very little loss content is expected. He noted active negotiations for the retail center's exit, with the residential property's exit timing less clear. Keene Turner (CFO and COO) expected SBA gain on sale revenue to grow modestly (around 5%) from 2025 levels in 2026, and tax credit revenue to be relatively flat at $7M-$7.5M, acknowledging potential volatility. Jim Lally (President and CEO) added that overall balance sheet growth is targeted at 6%-8%, with deposit gathering exceeding loan growth, and the spot rate on deposits was 1.6% coming out of December.

Nathan Race inquired about the two loans totaling $28 million that migrated to non-accrual in Q4 2025, seeking details on impairment taken and resolution timing. He also asked for expectations regarding SBA gain on sale revenue growth for 2026, clarification on the tax credit revenue forecast for 2026, and whether deposit gathering is expected to keep pace with mid-single-digit loan growth, along with the spot rate of deposit costs at quarter-end.

Answer

Doug Bauche, Chief Banking Officer, identified the non-accrual loans as a retail center in Riverside, California ($22M-$23M debt) and a residential property in San Diego ($6M loan), both with favorable loan-to-value ratios, expecting very little loss content. Keene Turner, CFO and COO, projected modest SBA gain on sale revenue growth (around 5%) for 2026 and a relatively flat tax credit revenue of $7 million to $7.5 million for 2026. Jim Lally, President and CEO, stated that overall balance sheet growth is targeted at 6%-8%, with deposit gathering expected to exceed mid-single-digit loan growth. The spot rate of deposit costs at the end of Q4 2025 was 1.6%.

Nathan Race inquired about the company's specific deposit beta assumptions used for calculating ECR (Earnings Credit Rate) costs within non-interest expenses. He also asked for Jim Lally's updated thoughts on capital deployment priorities, specifically the appetite for M&A versus share repurchases, given the strong capital position. Additionally, Race sought details on the core deposit, tangible, and goodwill impact from the branch acquisition to understand the pro forma tangible book value in the fourth quarter.

Answer

Keene Turner (CFO and COO) stated the deposit beta assumption is 40%, translating to roughly $1 million quarterly for every 25 basis point rate change. Jim Lally (President and CEO) outlined capital priorities: first, funding organic growth; second, buybacks; and third, M&A if a suitable opportunity arises to improve the balance sheet, emphasizing that the company is not actively chasing M&A. Turner clarified the branch acquisition's impact, estimating a 5% dilution to tangible book value from deal math, with roughly $70 million in intangibles, but noted that Q4 profitability might mitigate any actual diminution of tangible book value.

Nathan Race asked about the spreads on new loan production and the weighted average rate relative to the portfolio yield, the drivers of strong Q4 deposit growth (seasonality vs. organic), and how the capital/liquidity raised in the IPO is being managed.

Answer

CFO Jim Iroli stated that spreads on new loan production remained stable at around 300 basis points over comparable Treasuries, noting the portfolio's granular nature and higher fixed-rate exposure. He explained that Q4 deposit growth included significant seasonality from public funds due to year-end property tax collections, with non-public deposits growing 1.7% quarter-over-quarter and 6% year-over-year. Regarding IPO liquidity, Jim Iroli confirmed M&A as the primary focus for capital deployment, while excess cash is being held patiently in risk-free opportunities, given the current curve and expected rate cuts in the second half of the year.

Nathan Race sought an update on how Central Bancompany is managing the liquidity raised from its recent IPO, specifically whether it is being held in cash or invested in short-term treasuries.

Answer

CFO Jim Iroli clarified that while M&A remains the primary focus for deploying excess capital, the company is managing IPO liquidity by keeping appropriate cash reserves to account for deposit seasonality. Given the current curve and the Fed's overnight rate, there is no immediate imperative to deploy cash longer-term. Chief Customer Officer Dan Westhues added that they anticipate rate cuts in the second half of the year and will patiently deploy excess cash into safe, relatively risk-free opportunities.

Nathan Race asked about First Merchants Corporation's fee income growth opportunities for 2026, the impact of recent Midwest M&A on loan pipelines and talent acquisition, and the expected pace of share buybacks.

Answer

CFO Michele Kawiecki projected double-digit (10%) non-interest income growth for 2026, even on a standalone basis, driven by wealth and treasury management. President Michael Stewart added contributions from derivative products and post-integration opportunities from First Savings. CEO Mark Hardwick views Midwest M&A as an opportunity for client and talent acquisition, particularly in Michigan. He also stated the company intends to be aggressive with share buybacks at current valuation levels, as the capital base remains strong post-acquisition (TC decreasing from 9.40% to 8.70-8.80%, still above 8% target).

Nathan Race inquired about First Merchants Corporation's opportunities to grow fee income in 2026, considering the momentum from the fourth quarter.

Answer

CFO Michele Kawiecki projected double-digit (10%) non-interest income growth for 2026, even on a standalone basis, driven by momentum in wealth management and treasury management. President Michael Stewart added that derivative products, consumer positioning, and post-integration opportunities from the First Savings acquisition, including mortgage and specialty group products, would also contribute.

Nathan Race asked about the competitive landscape for deposit pricing following recent rate cuts and the volume of managed or exception rate deposits available for repricing. He also questioned the strategy for First Savings' triple net lease portfolio, including potential growth or sale, and any plans to reposition the legacy First Merchants Securities portfolio. Additionally, he sought insight into First Merchants' future M&A strategy and opportunities in the Detroit MSA, clarifying the appetite for share repurchases given the pending First Savings acquisition.

Answer

EVP and CFO Michele Kawiecki noted that deposit competition remains high despite rate cuts but expressed hope for more rationality. She indicated about $2.5 billion in indexed deposits available for repricing. CEO Mark Hardwick highlighted the optionality of the triple net lease portfolio, balancing it against core loan growth and yield differentials, and mentioned ongoing evaluation of the balance sheet for higher-yielding assets. He stated that M&A is not a priority currently, with focus on organic growth and the First Savings integration, particularly leveraging disruption in the Detroit MSA. Mark Hardwick clarified that while there's interest in buybacks given valuation, no repurchases are anticipated between now and the First Savings closing.

Nathan Race inquired about the competitive landscape for deposit pricing following recent rate cuts and the volume of managed or exception rate deposits available for repricing. He also asked about the strategy for First Savings' lower-yielding single-tenant lease finance loans and future M&A ambitions, particularly in the Detroit MSA. Finally, he sought clarification on share buyback appetite given the pending First Savings acquisition.

Answer

Michele Kawiecki, EVP and CFO, noted that deposit competition remains high but expressed hope for more rationality with future cuts, identifying about $2.5 billion in indexed deposits for repricing. Mark Hardwick, CEO, explained that the triple net lease portfolio offers optionality, depending on core loan growth and yield differentials, and confirmed no immediate M&A priority beyond the First Savings integration, but highlighted opportunities in the Detroit MSA due to competitor consolidation. He clarified that while active in buybacks, no repurchases are anticipated before the First Savings closing.

Nathan Race from Piper Sandler Companies requested more detail on the net interest margin outlook, questioning the potential for compression given strong loan growth and cash flows from the bond portfolio. He also asked about loan pipeline status and the outlook for the 'other fee income' line.

Answer

EVP & CFO Michele Kawiecki explained that intense deposit competition could still cause modest margin compression, and noted each 25 bps Fed cut would compress NIM by about 2 bps annually. President Michael Stewart confirmed commercial loan pipelines remain consistent. CEO & Director Mark Hardwick added that strong loan growth should continue to drive net interest income growth. Kawiecki clarified the 'other fee income' line was impacted by an unusual $900,000 CRA investment valuation adjustment.

Nathan Race from Piper Sandler inquired about the net interest margin (NIM) outlook for Q2 and the latter half of the year, considering scenarios with and without Fed rate cuts. He also asked about current loan growth trends and the outlook for the allowance for credit losses.

Answer

CFO Michele Kawiecki expects the NIM to remain relatively stable around the Q1 normalized level (approximately 3.27% after adjusting for day count). She added that successful deposit repricing could help offset asset yield pressure from potential Fed cuts. Executive Mark Hardwick and President Michael Stewart confirmed strong loan pipelines and reiterated mid- to high single-digit growth guidance. Chief Credit Officer John Martin stated the bank targets a reserve ratio around 1.50% and will provide for growth as needed.

Nathan Race asked about the company's appetite for share repurchases, the expected run rate for fee income growth in 2025, the forward-looking tax rate, and whether the outlook for normalized charge-offs remains below 20 basis points.

Answer

Executive Mark Hardwick stated that share repurchase interest is tied to the stock trading below historical valuation multiples. Chief Financial Officer Michele Kawiecki projected mid-to-high single-digit growth for noninterest income in 2025, driven by double-digit growth in wealth management and mortgage, and guided for a 13-14% tax rate. Chief Credit Officer John Martin confirmed that a normalized charge-off range of 15 to 20 basis points remains a reasonable expectation.

Nathan Race inquired about the loan growth outlook for Q4 and 2025, the net interest margin trajectory for Q4 amid potential Fed cuts, and the reasons for the increase in classified loans. He also asked for color on the growth in shared national credits, the impact of the branch sale on intangibles, and the forward-looking tax rate.

Answer

President Mike Stewart and CEO Mark Hardwick projected mid-single-digit loan growth for 2025, with solid C&I growth offsetting paydowns in investment real estate. CFO Michele Kawiecki expects a stable NIM in Q4, aided by proactive deposit cost management and the bond sale. Chief Credit Officer John Martin attributed the rise in classified loans to rate pressure on some larger real estate projects and C&I names. Regarding the follow-up questions, Michele Kawiecki confirmed no goodwill impact from the branch sale and guided for a 13-14% tax rate going forward.

Nathan Race asked about Byline Bancorp's key growth verticals and efficiency opportunities, particularly in technology. He also inquired about the company's capital allocation strategy, including the absence of the 8-9% TCE target, implications for M&A, and plans for shareholder returns. Additionally, he sought clarification on efforts to reduce asset sensitivity and its potential impact on the net interest margin amidst anticipated Fed rate cuts.

Answer

Alberto Paracchini (President) highlighted the commercial payments team's strong performance in growing deposits and transaction volumes, and the significant opportunity to gain market share in Chicago's commercial banking sector. He explained that the bank maintains higher capital for strategic flexibility, but will return excess capital through a recently announced 20% dividend increase and a new share repurchase authorization of up to 5% of outstanding shares. Tom Bell (CFO) detailed strategies to reduce asset sensitivity, including issuing CDs and managing interest-bearing accounts, alongside disciplined deposit pricing to maintain a stable and growing net interest income.

Nathan Race inquired about Byline Bancorp's broad company outlook, identifying key areas and verticals for scaling up, and opportunities for efficiency improvements, particularly on the technology front.

Answer

President Alberto Paracchini expressed excitement about the commercial payments team, noting its growth in deposits, transactions, and fees since its April launch. He highlighted Byline's strong competitive position in Chicago's commercial banking market, anticipating it will become the largest local commercial bank after crossing the $10 billion asset threshold. Regarding capital strategy, Mr. Paracchini explained the company's preference for flexibility, maintaining higher capital levels to seize market opportunities. He affirmed a commitment to returning excess capital to shareholders through dividends (including a recent 20% increase) and share repurchases, while also ensuring flexibility for M&A. CFO Tom Bell addressed asset sensitivity, stating the goal is to maintain a stable and growing net interest income (NII) by disciplined deposit pricing and managing the balance sheet, noting that year-end activities to stay below $10 billion would lead to some Q1 adjustments.

Nathan Race of Piper Sandler Companies inquired about the drivers behind Byline's strong loan growth prospects, seeking to understand the balance between market share gains and improved client sentiment. He also asked for updated thoughts on M&A opportunities, capital management priorities like buybacks, and clarification on the increase in nonaccrual and classified loans during the quarter.

Answer

President & Director Alberto Paracchini explained that the healthy loan pipeline is a combination of both ongoing customer activity and new client acquisition, not a resumption after a pause. Regarding capital, he stated that all options, including M&A and buybacks, are on the table due to the bank's strong capital flexibility. EVP & General Counsel Brian Doran addressed credit quality, noting that the increase in non-performing loans was granular, not concentrated in a single business line, and reflected real-time risk management decisions.

Nathan Race inquired about current loan activity amid economic uncertainty, the impact of recent SBA regulatory changes, and the M&A landscape as Byline approaches the $10 billion asset threshold.

Answer

President Alberto Paracchini confirmed strong Q1 credit demand and healthy pipelines, maintaining mid-single-digit loan growth guidance while noting clients are taking a 'wait-and-see' approach to tariffs. He stated that tighter SBA underwriting standards in the market could be a long-term benefit as Byline's own standards have not changed. On M&A, he confirmed that conversations with potential partners, particularly private institutions, remain active. CFO Thomas J. Bell clarified that the provided NII and expense guidance for Q2 did not include the impact of the First Security acquisition.

Nathan Race inquired about the credit quality and delinquency trends within the SBA portfolio, the bank's derisking efforts, and the outlook for Net Interest Income (NII) and margin under various Fed rate scenarios, including the repricing dynamics of the CD portfolio.

Answer

President Alberto Paracchini explained that the bank has been proactively managing the SBA portfolio since the pandemic, resulting in a significant reduction of the unguaranteed exposure from nearly 15% of the loan portfolio in 2016 to about 6.1% today. CFO and Treasurer Thomas J. Bell added that the NII outlook is generally flat to slightly up, noting the bank has reduced its asset sensitivity. He also detailed the repricing gap, with CDs repricing lower and significant loan and securities portfolios set to reset at higher yields.

Nathan Race of Piper Sandler inquired about the sources of management's optimism for 2025, both organically and on the M&A front. He also asked about the bank's preparedness for crossing the $10 billion asset threshold and sought clarification on the Q4 Net Interest Income (NII) and 2025 expense guidance.

Answer

President Alberto Paracchini expressed strong optimism, citing Byline's market position as the largest publicly traded commercial bank in Chicago under $10 billion, which provides a significant runway for growth. He confirmed M&A opportunities similar to the recent First Security deal remain attractive. Regarding the $10 billion threshold, Paracchini noted that preparations have been ongoing, with a projected crossing timeline between H2 2025 and H1 2026, manageable with some flexibility. CFO Thomas J. Bell confirmed the Q4 NII guidance of $85-$87 million and the 2025 expense guidance of $54-$57 million both exclude the impact of the First Security acquisition.

Nathan Race asked for an update on the projected cash flow runoff from the bond portfolio and the volume of loans expected to reprice higher, including the associated yield pickup. He also inquired about the bank's appetite to utilize excess capital for repositioning the securities portfolio (AFS or HTM) and sought insights into normalized charge-off expectations given the provision guidance and historically low recent charge-offs.

Answer

Gavin Mohr, EVP and CFO, detailed a $120 million bond portfolio runoff for 2026 and an average quarterly loan repricing of approximately $105 million at a 550 exit rate, with total commercial repricing around $220 million at 563 for the year. Brad Kessel, President and CEO, stated that while the securities strategy is regularly revisited, the bank does not currently plan to accelerate sales by taking losses. Joel Rahn, EVP, Head of Commercial Banking, expects charge-offs to remain similar to recent years, though Brad Kessel added that the recent low levels are likely unsustainable, with a slight increase from recent history being a more realistic expectation, primarily driven by consumer loan portfolio events.

Nathan Race requested an update on the quarterly cash flow expected from the bond portfolio and the magnitude of loans repricing higher, including the associated yield pickup. He also asked about the company's appetite to utilize excess capital for repositioning the securities book (AFS or HTM) and for insights into normalized expectations for charge-offs going forward.

Answer

Gavin Mohr, EVP and CFO, stated that the bond portfolio runoff for 2026 is forecasted at $120 million, with an average quarterly fixed-rate portfolio cash flow of $105 million at an exit rate of 550, and commercial loans repricing around $220 million for the year at 563. Brad Kessel, President and CEO, indicated that while they regularly review the strategy, they do not currently plan to accelerate securities sales by taking losses. Joel Rahn, EVP, Head of Commercial Banking, expects charge-offs to be similar to recent years, while Brad Kessel added that recent low levels are likely unsustainable, with consumer loans being the primary driver of past charge-offs.

Nathan Race from Piper Sandler asked about the potential for further reductions in deposit costs, cash flow from the securities portfolio, the repricing schedule for fixed-rate loans, and opportunities for non-interest income growth beyond mortgage banking.

Answer

EVP and CFO Gavin Mohr explained that while competitive pressures are limiting further deposit cost reductions, a modest positive spread still exists on maturing CDs. He noted about $100 million in cash flow is expected from the bond book for the rest of the year. President and CEO William Kessel added that outside of the core, consistent fee income lines, the primary source for potential upside to non-interest income guidance would be from mortgage banking gains.

Nathan Race asked if there would be any further charge-offs related to the commercial real estate (CRE) loan discussed in the December quarter and sought insight into a more normalized charge-off range for the upcoming quarters, excluding additional recoveries.

Answer

Chairman and CEO Greg Steffens anticipated charge-offs to return to historical averages in upcoming quarters, not expecting a significant tailwind. CFO Stefan Chkautovich specifically added that no material further charge-offs are anticipated for the particular CRE relationship mentioned.

Nathan Race inquired about the expected increase in personnel costs for the March quarter due to annual merit increases, seeking guideposts for the run rate over the next couple of quarters. He also asked about the company's appetite for continued share buyback activity, balancing it against capital building for potential acquisition opportunities. Finally, he questioned if there was any additional tail to the charge-offs on the commercial real estate loan and what a more normalized charge-off range might look like absent further recoveries.

Answer

CFO Stefan Chkautovich stated that the increase in compensation expense for the March quarter is a seasonal adjustment for annual merit increases, expected to be in the mid-single-digit range, consistent with historical 4%-5% adjustments, with no other material deviations expected. Regarding buybacks, Mr. Chkautovich explained that activity would be price-dependent, balancing the deployment of capital against retaining it for better acquisition opportunities, maintaining a disciplined approach similar to evaluating external acquisitions. Chairman and CEO Greg Steffens added that they anticipate charge-offs to return to historical averages in upcoming quarters, not expecting a significant tailwind, and specifically for the mentioned CRE relationship, they do not anticipate anything materially further.

Nathan Race followed up on the commercial real estate (CRE) loans that were cleaned up, seeking confirmation that these specific loans are now marked at a level where no further charge-offs are expected, aligning with the anticipated decline in overall charge-off trajectory.

Answer

Chairman and CEO Greg Steffens reiterated the expectation for the overall charge-off trajectory to move lower, barring unforeseen circumstances, and confirmed that no known problems are anticipated.

Nathan Race sought clarity on the starting point for the Q1 margin, including accretion, and how it accounts for reducing Frontier's higher-cost funding. He also asked about visibility into Q1 loan payoffs and the expected cadence of loan growth throughout 2026. Lastly, he inquired about Equity Bancshares' buyback appetite and the governing parameters for capital deployment, considering strong capital generation and ongoing M&A discussions.

Answer

Chris Navratil, CFO, suggested a Q1 margin of approximately 4.25%, factoring in the repositioning of Frontier's debt and high-cost liabilities. Rick Sems, Bank CEO, noted a strong loan pipeline and no anticipated super high unexpected payoffs, expecting Q2 and Q3 to be strong growth quarters. Brad Elliott, Chairman and CEO, explained that buybacks are evaluated similarly to acquisitions, targeting a three-year earnback range, and capital deployment aggressiveness depends on upcoming capital needs and M&A opportunities.

Nathan Race asked for a starting point for the Q1 2026 margin, considering the opportunities to reduce higher-cost funding from Frontier. He also inquired about visibility into expected loan payoffs in Q1 and the anticipated cadence of loan growth throughout 2026. Finally, he asked about the company's buyback appetite, considering strong capital generation and ongoing M&A discussions.

Answer

Chris Navratil, CFO, suggested a Q1 2026 margin of approximately 4.25%, which includes the repositioning of Frontier's debt and high-cost liabilities. Rick Sems, Bank CEO, noted a strong pipeline and consistent production, while Brad Elliott, Chairman and CEO, added that last year's high payoffs were unusual and not anticipated to repeat. Brad Elliott reiterated that buybacks are evaluated with a three-year earnback range, similar to M&A, and the company remains active in the market when it aligns with return objectives.

Nathan Race requested a reminder on whether Equity Bancshares' floating rate portfolio includes floors that could be impacted by future Fed rate cuts.

Answer

Chris Navratil, CFO, confirmed the presence of floors in many loans, noting that the majority have over 200 basis points of capacity before these floors would be meaningfully triggered, providing a significant cushion against moderate rate cuts.

Nathan Race, a Managing Director and Senior Research Analyst at Piper Sandler Companies, asked about the initial contributions of the NBC Oklahoma team to loan growth, particularly how they are leveraging Equity Bancshares' larger hold limits and expanded product offerings. He also inquired about the drivers behind the margin guidance for next year, which implies a step down from Q4, and the inherent levers Equity Bancshares possesses to mitigate potential loan yield compression from future Fed cuts. Furthermore, Mr. Race asked about the opportunity to improve the funding mix and cost structure of Frontier Holdings post-acquisition. Finally, he sought clarification on whether any floors within Equity Bancshares' floating rate loan portfolio would be impacted by a certain number of future Fed cuts.

Answer

Bank CEO Rick Sems noted that NBC's pipeline is not yet fully integrated into reported figures but highlighted anecdotal positive signs, including requests for larger deals ($5M, $10M) and the addition of new bankers in robust markets. CFO Chris Navratil clarified that the projected margin decline is due to the Frontier acquisition's impact, not core Equity Bank margin compression from rate cuts. He outlined levers such as managing liabilities (deposits above 2%, 3%, 3.5%) and asset repricing ($425M of loans sub-prime rate by end of 2026). For Frontier, Chris Navratil explained plans to use excess cash to address high-cost funding and grow the franchise in Omaha and core markets to reposition funding. He confirmed that floors exist in many loans but typically have over 200 basis points of cushion before being meaningfully triggered by rate cuts.

Nathan Race from Piper Sandler asked about the key drivers for Horizon Bancorp's net interest margin (NIM) in 2026, the company's capital deployment priorities, and the potential for additional commercial hires given market disruptions.

Answer

John Stewart, EVP and CFO, highlighted strong new loan origination yields (above 6.5%) exceeding cash flows rolling off the book (below 6%) as a margin driver, alongside core deposit generation. Thomas Prame, CEO and President, emphasized organic growth in existing markets as the primary capital deployment focus, with a disciplined approach to future capital decisions. Lynn M. Kerber, EVP and Chief Commercial Banking Officer, stated that while the current commercial team is stellar, opportunistic hires, particularly in treasury management, might be considered due to market changes.

Nathan Race asked about the key drivers for Horizon Bancorp's net interest margin throughout the year, including asset repricing tailwinds and new loan origination yields, as well as capital deployment priorities given strong capital generation, and the expense guide's contemplation of additional commercial hires.

Answer

EVP and CFO John Stewart explained that new loan originations above 6.5% and core deposit generation are key margin drivers. CEO and President Thomas Prame emphasized organic growth in existing markets as the primary capital deployment focus, aiming to build capital to align with industry peers. EVP and Chief Commercial Banking Officer Lynn M. Kerber noted satisfaction with the current commercial team, with potential opportunistic additions to the treasury management team.

Nathan Race asked about the expected cash flow from Horizon Bancorp Inc.'s repositioned securities portfolio over the next 12 months and the repricing tailwinds for the fixed commercial real estate portfolio. He also inquired about the alignment of short-term rate-sensitive deposits with floating-rate loans and the current M&A dialogue for subscale institutions in Horizon's footprint.

Answer

EVP and CFO John Stewart stated that securities portfolio cash flow would be minimal ($10M-$15M per quarter) due to the purchase of discounted cash flows with out-of-the-money prepayment optionality. EVP and Chief Commercial Banking Officer Lynn Kerber noted that commercial real estate repricing is a minor portion, less than 5% annually for 2026. John Stewart added that while some public funds and commercial deposits have repricing downside beta, consumer balances are not expected to reprice much. CEO and President Thomas Prame observed increased M&A dialogue since late last year, with Horizon Bancorp Inc. now better positioned to execute on opportunities in Michigan and Indiana.

Nathan Race inquired about the expected cash flow from the securities portfolio over the next 12 months, the repricing tailwinds on the fixed commercial real estate portfolio, the short-term rate-sensitive deposit proportion relative to floating-rate loans, and the increase in M&A dialogue.

Answer

EVP and CFO John Stewart indicated minimal cash flow from the securities portfolio, estimated at $10 million to $15 million per quarter, due to the repositioning efforts. EVP and Chief Commercial Banking Officer Lynn Kerber noted that commercial real estate repricing is a minor portion, less than 5% per year for 2026. Mr. Stewart explained that while there are still core public funds and commercial deposits with good betas that can reprice lower, consumer balances are not expected to show much repricing downside. CEO and President Thomas Prame confirmed an increase in M&A dialogue since late last year, with Horizon Bancorp Inc. now better positioned for execution in Michigan and Indiana.

Nathan Race from Piper Sandler Companies asked about the bank's target for wholesale funding levels, the outlook for asset growth, and the net interest margin's sensitivity to potential Fed rate cuts and its trajectory for the rest of the year.

Answer

CFO John Stewart explained the long-term objective is to reduce reliance on wholesale funding, though no step-function changes are expected. He confirmed the balance sheet is positioned to be neutral to the two anticipated rate cuts. He also guided for modest NIM expansion from the Q2 core level of 3.16%, driven by asset churn and funding cost management, reaffirming a Q4 landing spot of 3.15% to 3.20%.

Nathan Race of Piper Sandler inquired about current deposit pricing dynamics and the expected trajectory of deposit costs. He also asked for details on the volume of rate-sensitive deposits and the amount of fixed-rate commercial loans scheduled to reprice higher in 2025.

Answer

EVP & CFO John Stewart noted that competitive time deposit rates are in the low 4s and that total deposit costs would likely remain stable if the Fed holds rates. He mentioned the CD portfolio has a short duration of 6-7 months, allowing for repricing flexibility. EVP & Chief Commercial Banking Officer Lynn Kerber specified that for 2025, approximately $139 million in commercial real estate loans with an average rate of 6% are set to mature, offering a potential 100-125 basis point pickup.

Nathan Race sought to clarify the cadence of the net interest margin expansion during 2025, asking if it would be front-loaded. He also inquired about current new loan pricing across portfolios and the volume and rates of fixed-rate loans scheduled for repricing in 2025.

Answer

John Stewart, EVP and CFO, responded that he expects margin expansion to be 'fairly ratable' throughout 2025, with only a minor extra lift in Q2 from a wholesale borrowing paydown. Lynn Kerber, EVP and Chief Commercial Banking Officer, detailed that new commercial fixed-rate loans are priced in the high 6% to 8% range, with leasing yields higher. She specified that approximately $139 million in commercial real estate loans with rates under 7% are set to reprice in 2025.

Nathan Race asked about the possibility of additional balance sheet actions, such as restructuring the held-to-maturity (HTM) portfolio or raising capital. He also sought to clarify the 2025 expense outlook and the company's stance on share repurchases.

Answer

Executive Thomas Prame indicated that the Q4 actions position the company well for 2025, and there is no current need to restructure the HTM portfolio or raise capital. EVP and CFO John Stewart confirmed the 2025 consensus expense outlook is in the $155-$160 million range and stated that share repurchases will be evaluated alongside other capital deployment options as the company moves into an excess capital position.

Nathan Race inquired about the drivers behind Wintrust Financial Corporation's deposit cost reductions in the recent quarter, including competitive dynamics and changes in deposit composition. He also asked about opportunities to reduce higher-cost CDs and the repricing benefit from maturing deposits.

Answer

President and CEO Tim Crane explained that effective management and a favorable trend in DDA deposits contributed to lower deposit costs, alongside continued growth in commercial deposits. He noted a minor benefit from CD book rolling in 2026 and emphasized funding loan growth with new deposits, even if at slightly higher costs, to build long-term client relationships.

Nathan Race of Piper Sandler inquired about the factors contributing to Wintrust's deposit cost reductions in the quarter, specifically asking if it was due to more rational competition in Chicago or changes in deposit composition, and also about opportunities to reduce higher-cost CDs.

Answer

President and CEO Tim Crane attributed the favorable deposit costs to effective management by the team in response to Fed movements and good growth in commercial DDA deposits. He noted a minor benefit from CD book rollovers in 2026 and emphasized funding healthy loan growth with new deposits, even if costs are slightly higher than peers.

Nathan Race sought clarification on Wintrust's M&A strategy, specifically whether the focus remains on organic growth given current market opportunities, and the preferred asset size or geographies for potential acquisitions. He also asked about recent changes in mortgage lock volumes due to rate drops and the outlook for mortgage revenue, as well as the impact of swaps and new loan production on future loan yields and NIM.

Answer

Timothy Crane, President and Chief Executive Officer, reiterated that Wintrust's track record supports bolt-on acquisitions, citing the $3 billion range as effective, and that the company is investing to serve larger clients. He emphasized that very small transactions are economically tougher, and MOEs remain complex. Dave Dykstra, Vice Chairman and Chief Operating Officer, noted a slight pickup in mortgage banking revenue in Q3 due to early rate drops but observed sluggish applications later. He anticipates mid-20s for mortgage revenue in Q4 and expects improvement in 2026 with further rate cuts. He explained that existing swaps continuously hedge variable-rate loans, and new loan rates are in the mid-6% to 7% range, with incremental deposit costs in the mid-3% range, supporting the stable 3.50% NIM.

Nathan Race of Piper Sandler Companies asked about competitive loan pricing, loan yield compression, new production yields in premium finance, the outlook for deposit costs, and the full-year expense guidance.

Answer

Vice Chairman & Chief Lending Officer Richard Murphy acknowledged some margin compression but stated the firm remains disciplined. President, CEO & Director Timothy Crane said new premium finance yields were in the mid-7% range and expects deposit costs to be stable. EVP & CFO David Stoehr guided for quarterly expenses to remain near the Q2 level of approximately $380 million.

Nathan Race of Piper Sandler asked about the potential for lowering non-maturity deposit costs, competitive dynamics in new loan pricing, and the drivers behind the increase in criticized loans.

Answer

CFO David Dykstra noted there is some room for deposit costs to decline amid rational competition, balanced by the need to fund strong anticipated loan growth. Executive Richard Murphy described loan pricing as generally consistent, with more pressure in leasing and CRE, but not "overly disconcerting." He also clarified that the rise in criticized loans was nominal, had no common theme, and was considered a "one-off" event.

Nathan Race questioned the potential for net interest margin expansion if the Fed pauses rate hikes, the trajectory for mortgage gain-on-sale margins, and the company's strategy for its preferred stock series that are approaching their call dates.

Answer

Executives Timothy Crane and David Dykstra stated that while a steeper yield curve could provide some upside, they expect a relatively stable margin around 3.50% due to offsetting competitive pressures. Dykstra noted that mortgage gain-on-sale margins could approach 2% if activity picks up but the business is a small part of earnings. Regarding the preferreds, he indicated they would likely be replaced with a new instrument if market conditions are favorable.

Nathan Race of Piper Sandler questioned the cause of the significant gain-on-sale margin compression in the mortgage business and asked for a Q4 outlook. He also sought confirmation on NII growth potential and inquired about capital management priorities, including M&A.

Answer

David Stoehr, CFO, attributed the lower gain-on-sale margin to market volatility from falling rates but expects it to rebound closer to 2% in Q4. He also confirmed that with a stable NIM and mid-to-high single-digit asset growth, NII should grow at a similar rate. Timothy Crane, President and CEO, added that the company is comfortable gradually building capital.

Nathan Race from Piper Sandler asked about the future direction of Bank7 Corp.'s deposit costs, specifically inquiring about the leverage to reduce non-maturity deposit costs and the implications for deposit competition. He also sought insights into the current deposit pricing competition observed in the market and the company's strategy regarding excess capital, including the potential for share buybacks given the stock's 2025 performance relative to peers.

Answer

CFO Kelly Harris noted the current cost of funds dipped to 2.40% post-Q4, influenced by balance sheet growth and new deposits, indicating an ebb and flow. Kelly Harris and EVP and COO Jason Estes described deposit pricing competition as challenging, with recent rate cuts not translating into typical deposit betas as depositors are highly rate-aware. President and CEO Thomas L. Travis addressed capital, stating the company prioritizes producing top-tier results over share buybacks, believing long-term performance will drive stock value, and that Bank7 consistently outperforms major exchange-traded banks and the KBW Index over time.

Nathan Race asked about the future direction of deposit costs, particularly the leverage Bank7 has to reduce non-maturity deposit costs, and the current state of deposit competition. He also inquired about the company's strategy regarding excess capital, specifically considering share buybacks to support the stock.

Answer

Kelly Harris (CFO) stated the current cost of funds dipped to 240, influenced by balance sheet growth and new deposits, noting it ebbs and flows. Jason Estes (EVP and COO) added that recent rate cuts haven't translated strongly into typical deposit betas due to increased depositor awareness and competition. Thomas L. Travis (President and CEO) emphasized focusing on top-tier results, believing the market will eventually recognize their performance. He highlighted Bank7's strong total shareholder return compared to peers and stated that while buybacks are a lever, they are not the primary objective.

In a follow-up question, Nathan Race of Piper Sandler Companies inquired about recent credit quality trends, specifically regarding criticized and classified asset migration and the outlook for charge-offs.

Answer

President & Chief Credit Officer Jason Estes described a consistent trend of improving credit quality, with a declining non-performing asset (NPA) balance and very clean past dues. He attributed the stability to strong local economic conditions and disciplined underwriting, noting no significant changes in the credit environment over the last six to nine months.

Nathan Race of Piper Sandler & Co. inquired about the potential for further deposit cost reductions if the Fed pauses rate cuts. He also asked for current new loan pricing, the expected expense run rate for 2025, and an update on capital deployment strategies, particularly regarding M&A activity.

Answer

Thomas Travis (Executive) explained that opportunities to lower CD costs are limited due to the portfolio's small size and rate-sensitive customers, noting it becomes harder to maintain deposit betas after initial rate cuts. Jason Estes (Executive) stated that new loan pricing is in the 7.5% range. Kelly Harris (Executive) projected Q1 noninterest expense at $9.6 million. On M&A, Thomas Travis confirmed they are actively pursuing opportunities and feel the timing is right given their strong capital and stock value, but they remain disciplined buyers after not closing any deals in 2024.

Nathan Race from Piper Sandler asked about the outlook for Net Interest Income (NII) growth amid falling rates, current credit quality trends, future provisioning levels, and the M&A environment. He also followed up on the financial impact of oil and gas assets and the trajectory of noninterest-bearing deposits.

Answer

Executive Jason Estes addressed NII, noting that reduced lending competition has supported margins, though they may gradually decline as the market normalizes. On credit, Estes reported stable nonperformers with successful resolutions on older problem assets and expects provisioning to remain consistent. Executive Thomas Travis described a robust M&A environment where Bank7 is positioned as an opportunistic acquirer, and he emphasized the bank's strong capital cushion. Executive Kelly Harris provided Q4 guidance for oil and gas-related income and expenses and projected flat trends for noninterest-bearing deposits.

Nathan Race asked for a broader perspective on the commercial client base's exposure to international economies through supply chains and exports. He also questioned the future trajectory of oil and gas-related revenues and expenses, and sought current thoughts on the M&A environment.

Answer

Executive Jason Estes stated that while broad tariffs would be challenging, clients are creatively sourcing from non-impacted regions, a trend Executive Thomas Travis noted was accelerated by COVID-era reshoring. On oil and gas, Executive Kelly Harris advised using the Q1 run rate as a template, noting the segment's contribution is declining as projected. Regarding M&A, Travis described the environment as challenging for disciplined buyers, citing a recent instance where their 'phenomenal' offer for a quality bank was not close, and noted that AOCI marks remain an overhang for potential sellers.

Nathan Race asked about the expected run rate for non-interest expense over the next one to two quarters, considering cost savings from the acquisition and legacy growth expectations. He also sought clarity on the overall net interest margin (NIM) expectations and the company's positioning for potential Fed rate cuts, as well as the charge-off trajectory and go-forward outlook, particularly regarding loss content from legacy Old Second loans.

Answer

Bradley Adams, COO and CFO, anticipated non-interest expense to remain stable, with cost saves offsetting inflationary impacts, particularly in employee benefits. He expressed optimism about the NIM, stating it would likely not fall below 4.50% even with a 3% Fed funds rate, and that the company is well-prepared for falling rates. James Eccher, President and CEO, added that PowerSport coupons would remain robust in a declining rate environment. Adams also noted that while PowerSport losses were slightly higher than modeled, yields were much higher, and he expects a combined loss rate of around 30 basis points for Old Second.

Nathan Race inquired about the expected run rate for non-interest expense, considering legacy growth expectations and acquisition-related cost saves. He also asked for overall net interest margin expectations, particularly regarding positioning for potential Fed rate cuts, and the go-forward outlook for charge-offs and loss content from legacy loans.

Answer

Bradley Adams, COO and CFO, anticipated non-interest expense to be a wash between legacy growth and cost saves, remaining stable around the Q3 core run rate of $52 million. He expressed optimism about the margin, expecting it not to fall below 4.50% even with a 3% Fed funds rate. James Eccher, President and CEO, added that PowerSport coupons remain robust, aiding in a down-rate scenario. Adams noted that non-performer movement was administrative, and while PowerSport losses were slightly higher than modeled, yields were also much higher, with 30 basis points likely for intermediate/long-term loss rates.

Nathan Race of Piper Sandler Companies questioned the outlook for charge-offs, considering the higher-risk powersports lending from Evergreen. He also asked how the net interest margin would respond to a potential 25 basis point rate cut and requested a margin forecast for the third quarter.

Answer

COO & CFO Bradley Adams acknowledged that loss rates in the powersports portfolio could be higher but are offset by high-yield coupons around 9%. He expressed strong skepticism about a rate cut but estimated a potential 4 basis point margin impact per 25 bps cut, which is less sensitive than previously thought. For Q3, he projected a flat margin, plus or minus 10 basis points. CEO & Chairman James Eccher added that deposit levels from Evergreen have been remarkably stable post-close.

Nathan Race asked about the future trajectory for charge-offs following the Q1 cleanup of a large C&I credit and how the incoming Evergreen portfolio might affect this. He also sought clarification on the full-year expense growth outlook.

Answer

Executive James Eccher explained the Q1 charge-off was a strategic decision to resolve a specific C&I bankruptcy and that declining criticized loan levels bode well for future credit performance. He acknowledged Evergreen's historically higher loss rates but noted they are offset by significantly higher contribution margins on its loan book. Executive Bradley Adams confirmed the bank is hopeful it can maintain its expense growth target in the 4% range for the year, implying a decrease from Q1's run-rate.

Nathan Race from Piper Sandler & Co. requested a detailed net interest margin (NIM) forecast, including a Q1 starting point and the cadence with potential Fed cuts. He also asked about bond portfolio cash flows, M&A strategy, share repurchases, and the expected charge-off range for 2025.

Answer

Executive Bradley Adams projected a Q1 2025 NIM around 4.62%, with a potential decline of 2-3 bps per quarter, plus an additional 7 bps impact per Fed rate cut. He noted the bond portfolio will generate about $250 million in cash flow. Executive James Eccher confirmed M&A discussions are active and estimated a 2025 charge-off range of 10-20 basis points. Adams added that share buybacks remain an option.

Nathan Race requested details on a $14 million loan that moved to nonperforming, inflows to classified loans, the outlook for provisioning, the margin impact from a pending branch acquisition, and the target size for potential M&A partners.

Answer

Executive James Eccher explained the nonaccrual was a single C&I credit and that inflows to classifieds were offset by greater outflows, particularly in the office portfolio. He suggested a $2 million quarterly provision is a reasonable future run rate and identified an M&A target size of $500 million to $3 billion. Executive Bradley Adams added that the margin benefit from the branch deal is highly dependent on how the acquired deposits are deployed.

Nathan Race from Piper Sandler asked about Mercantile Bank's ability to aggressively reduce deposit rates on its $3.8 billion funding base, referencing slide 18, and inquired about the spot rate of deposits at quarter-end compared to the 2.20% all-in cost in Q3 2025. He also sought insights into potential opportunities for talent acquisition and commercial client growth following a significant M&A transaction among competitors in their home state, and asked for expectations on potential losses and timing for a commercial credit with a $3 million specific allocation that moved to non-performing in Q2.

Answer

EVP and CFO Chuck Christmas explained that money market account rates are adjusted basis point for basis point with Fed funds rate changes, providing immediate matching. He noted that time deposits maturing within one year could see an average reduction of about 50 basis points. President and CEO Ray Reitsma stated that historically, competitor M&A has created opportunities for talent and business development, and they anticipate similar trends. Regarding the specific commercial credit allocation, Ray Reitsma indicated it's too early to determine potential loss or timing, but Chuck Christmas confirmed they have been aggressive with specific allocations.

Nathan Race with Piper Sandler inquired about Mercantile Bank Corporation's strategy for reducing deposit rates on its $3.8 billion funding, asking how aggressive they can be and what the spot rate of deposits was at quarter-end compared to the 3Q all-in cost. He also asked about potential opportunities to attract production talent or high-quality commercial clients following a notable M&A transaction involving two large competitors in their home state. Additionally, he sought expectations regarding potential loss and timing for the $3 million specific allocation on a commercial credit that moved to non-performing in Q2.

Answer

Ray Reitsma, President and CEO, explained that money market account rates are managed relative to Fed funds rate changes, with some legally tied, allowing for immediate adjustments. He noted that most time deposits mature within one year, with an average reduction of about 50 basis points based on current rates. Regarding M&A opportunities, Ray Reitsma stated that historically, such combinations have been fertile ground for business development and talent attraction, and they anticipate similar opportunities. For the specific allocation, Ray Reitsma indicated it's too early to tell the exact loss and timing, as it's an ongoing process, but Chuck Christmas, Executive Vice President and CFO, added that they have been very aggressive in allocating specific reserves against that credit.

Nathan Race of Piper Sandler Companies inquired about the future outlook for deposit and loan growth, plans for the securities portfolio, and C&I lending opportunities. He also asked about the net interest margin's sensitivity to rate changes and the bank's future M&A appetite following the Eastern Michigan Bank deal.

Answer

EVP & CFO Charles Christmas stated that strong deposit growth remains a priority to fund loan growth and replace brokered deposits, and he quantified margin sensitivity at a 3-4 basis point reduction for every 25 bps Fed rate cut. President & CEO Raymond Reitsma noted abundant C&I opportunities across the entire footprint and reiterated that the bank will maintain its highly disciplined M&A strategy, which led to the uniquely strong partnership with Eastern Michigan Bank after an eleven-year hiatus.

Nathan Race of Piper Sandler asked about the target size of the securities portfolio, the trajectory of loan yields if the Fed remains on pause, and the bank's comfort level with allowing capital to build before considering deployment.

Answer

EVP and CFO Chuck Christmas projected the securities portfolio could grow to the 15-17% range as the loan-to-deposit ratio settles in the mid-90s. He affirmed the bank's discipline in loan pricing to ensure rates are commensurate with risk and noted the balance sheet is structured to be interest-rate agnostic. On capital, Christmas stated the bank is comfortable with current levels, which support loan growth and dividends, and expects capital ratios to remain relatively steady.

Nathan Race of Piper Sandler sought confirmation on the stable Net Interest Margin outlook for 2025 under a gradual Fed cutting cycle. He also inquired about the strategy for money market deposit pricing, given the bank's competitive positioning, and asked about the potential for stock buybacks considering the bank's strong capital levels and valuation.

Answer

EVP and CFO Chuck Christmas confirmed a stable margin outlook for 2025 is expected if Fed cuts are gradual. He stated the bank's strategy is to remain in the top tier for deposit pricing to attract and retain full client relationships, noting that customers understand these rates move with the Fed funds rate. Regarding capital, Christmas emphasized the priority of maintaining a strong capital buffer for potential economic downturns and to support future loan growth. While the buyback plan is active, the current focus is on preserving and growing capital.

Nathan Race from Piper Sandler Companies asked about the recent commercial and wealth hires, inquiring about non-competes and their potential impact on growth. He also sought expectations for the net interest margin amid potential Fed cuts and questioned the strategy for capital deployment, including buybacks and M&A.

Answer

President & COO Len Devaisher confirmed the new hires are seasoned bankers who can contribute immediately, with a more significant impact expected in 2026. CEO Charles Reeves projected margin expansion of 4-5 basis points per quarter, even with potential Fed cuts. On capital, he prioritized stock buybacks at current levels, followed by the dividend, and noted the company is becoming M&A ready as underlying performance improves.

Nathan Race from Piper Sandler Companies asked about the near- and long-term impact of recent strategic hires, the specific outlook for net interest margin considering potential Fed rate cuts, and the company's capital deployment priorities.

Answer

President & COO Len Devaisher noted the new hires can contribute immediately but expects their full impact to materialize in 2026. CEO Charles Reeves projected quarterly margin expansion of 4-5 basis points for the rest of the year, which already accounts for potential rate cuts. He also prioritized capital use for stock buybacks at current valuations, followed by the dividend, while keeping M&A as a future possibility.

Nathan Race of Piper Sandler requested details on asset repricing tailwinds, the potential for more pronounced margin expansion in the second half of the year, the criteria for resuming share buybacks, the outlook for net charge-offs, and any recent impact of macro uncertainty on loan demand.

Answer

Executive Barry Ray quantified upcoming asset repricing, confirming that margin expansion should be more pronounced later in the year. CEO Charles Reeves stated the company is actively reviewing share buybacks for Q2. Chief Credit Officer Gary Sims noted that while proactive credit management continues, he doesn't anticipate elevated charge-offs. Sims and President Len Devaisher acknowledged hearing customer uncertainty, which could affect loan demand in the second half of 2025.

Nathan Race of Piper Sandler requested details on loan repricing volumes and yields, new loan pricing, CD repricing opportunities, balance sheet sensitivity to rate cuts, deposit growth expectations, and bond portfolio cash flows.

Answer

CFO Barry Ray specified that $386 million in loans at a 4.57% coupon will reprice over the next year, with new loans originating at 7.1%. He noted significant CD repricing opportunities exist and projected 3% deposit growth for 2025. Ray confirmed the balance sheet models as asset sensitive but sees potential for margin expansion. He also expects about $200 million in cash flows from the securities portfolio in 2025.

Nathan Race asked for a baseline figure for Q4 earning assets, clarification on the Q4 net interest margin (NIM) starting point following the balance sheet repositioning, the potential NII impact from rate cuts, the loan growth outlook for 2025, and the company's capital allocation priorities.

Answer

EVP and CFO Barry Ray suggested a Q4 average earning assets starting point of around $5.7 billion and confirmed there is upside potential to the previously guided 3.18% NIM. President and COO Len Devaisher affirmed a mid-to-high single-digit loan growth target for 2025. CEO Charles Reeves stated that the immediate priority is execution and building the CET1 ratio to around 10.5%, after which the company will evaluate options like M&A, share buybacks, or dividend increases.

Nathan Race asked about opportunities to reduce non-maturity deposit pricing, the drivers of the stable margin guidance, the cadence of equipment leasing charge-offs, and the company's appetite for share buybacks.

Answer

Kathryn Bailey, CFO, and Tyler Wilcox, President, responded. Ms. Bailey highlighted meaningful opportunities to reprice CDs downward as short-term specials mature and noted the investment portfolio provides $15-20 million in monthly cash flow for redeployment. Mr. Wilcox confirmed that leasing charge-offs are expected to continue ramping down through the year. Regarding capital return, Ms. Bailey stated that the company has a buyback plan in place and was active in the market during April when the stock price became more volatile.

Nathan Race asked about current new loan pricing, the target for the allowance for credit losses ratio, expectations for 2025 accretion income, and the current M&A environment.

Answer

Executive Tyler Wilcox noted the blended loan yield was 7.14% and is expected to remain strong. CFO Kathryn Bailey projected the reserve ratio would stay in the 1.0% to 1.25% range and guided to $10-$15 million in 2025 accretion income. Tyler Wilcox confirmed active M&A discussions, stating a preference for a larger, strategically-fit deal to surpass the $10 billion asset mark, while maintaining patience.

Nathan Race asked how the net interest margin (NIM) would trend with more than 50 basis points of rate cuts, the impact of loan growth on this dynamic, and for guidance on accretion income and provisioning for 2025.

Answer

CFO Kathryn Bailey quantified the impact as a 2-4 basis point hit to NIM for an additional 50 bps of cuts. She provided specific guidance for quarterly accretion income, expecting it to be 20-25 basis points in early 2025 before trending down to 15-20 bps in the back half of the year. She also expressed confidence that current reserve levels are adequate for expected charge-offs.

Nathan Race from Piper Sandler asked for a more detailed outlook on the net interest margin for the second half of the year, the effect of the forward-starting swap terminations, the company's progress on managing deposit costs, and expectations for normalized charge-off levels.

Answer

Executive Jeffrey Ludwig explained that the forward-starting swaps were terminated to align with a more neutral interest rate view and future liquidity from the GreenSky exit, noting the bank was proactive on deposit costs and is in the 'later innings' of rate increases. Executive Eric Lemke suggested a Fed rate cut would benefit the margin. Regarding credit, Jeffrey Ludwig stated that the historical normalized charge-off level of 25 basis points is likely 'too high' of an expectation for the coming year. Eric Lemke also noted the ACL ratio will naturally rise as the lower-reserve GreenSky portfolio runs off.

Nathan Race of Piper Sandler & Co. asked for a longer-term margin outlook, the impact of terminating forward-starting swaps, and the bank's position in the deposit cost cycle. He also inquired about the potential for margin expansion if the Fed cuts rates and whether a 25 basis point normalized charge-off level is a reasonable expectation for 2023.

Answer

Executive Jeffrey Ludwig clarified the terminated swaps were forward-starting and the decision was opportunistic. He described the bank as being in the 'later innings' of deposit repricing after being proactive early in the cycle. Executive Eric Lemke confirmed that Fed rate cuts would be beneficial to the margin. Regarding credit, Jeffrey Ludwig stated that a 25 bps charge-off level is too high, given recent performance and the focus on improving credit quality. Eric Lemke added that the ACL ratio will naturally rise as the lower-reserve GreenSky portfolio runs off.

Nathan Race from Piper Sandler Companies inquired about deposit beta expectations, the potential for a peak net interest margin (NIM), strategies for managing interest rate sensitivity, and the outlook for both deposit growth and fee income into 2023.

Answer

President and CEO Jeffrey Ludwig noted that deposit betas, currently in the high teens, are expected to accelerate as competition for deposits increases. He believes the NIM may be nearing its peak as the bank moves to a more neutral rate sensitivity position by adding duration and using variable-rate funding. He expects deposit growth to moderate to an upper-single-digit annual rate. For fee income, CFO Eric Lemke and CEO Ludwig indicated the Q3 level is a good run rate, with potential upside from a market rebound in wealth management and long-term growth initiatives.

Nathan Race from Piper Sandler asked about the future balance sheet mix, the sustainability of recent growth in card revenue and service charges, and an update on criticized and classified asset trends beyond the single CRE loan mentioned.

Answer

President and CEO Jeff Ludwig indicated that the balance sheet mix is expected to remain stable, with no significant further remixing of cash and securities into loans. He believes the positive trend in fee income is sustainable due to retail initiatives, though subject to seasonality. On credit, Ludwig noted that while nonperformers rose slightly, the substandard capital ratio declined, delinquencies were at a five-quarter low, and there were no signs of immediate, broad-based credit issues.

Nathan Race of Piper Sandler & Co. focused on funding, asking about deposit growth expectations for 2022 and the rate sensitivity of deposits from new Fintech partnerships. He also inquired about the forward-looking progression of the core net interest margin given the bank's asset sensitivity and recent swap activity. Finally, he asked about the outlook for fee income growth, excluding the mortgage business.

Answer

President and CEO Jeff Ludwig highlighted strong Q1 deposit gathering in treasury management and retail, which will be supplemented by the low-cost deposits from the upcoming FNBC branch acquisition. He noted that the impact from new Fintech partnerships is a longer-term play. CFO Eric Lemke detailed that asset sensitivity has been slightly reduced by strong loan growth and a $200 million receive-fixed swap, projecting a core NIM of around 3.50% or slightly higher by year-end. Ludwig confirmed expectations for growth in other fee income lines like card services and wealth management.