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spk20: Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2021 Conference Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today, Kelly Polonis of Investor Relations.
spk01: Good afternoon, and thank you for joining us for our fourth quarter 2021 earnings call. This is Kelly Polonis, Investor Relations for Great Southern Bancorp. The purpose of this call today is to discuss the company's results for the quarter ending December 31, 2021. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected. For a list of some of these factors, please see the disclosure in our earnings release and other public filings. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call with me today. We'll get started right now and I'll turn the call over to Joe.
spk07: All right. Thanks, Kelly. Good afternoon and thanks to all of you for joining us today. We ended 2021 in a strong financial position and have good momentum as we enter 2022. We're really pleased with our fourth quarter and full year earnings for 2021 and we believe they reflect our Associates ongoing commitment and resilience and taking care of our customers and each other during a challenging time. As is typical, I'll provide some brief remarks about our performance and then turn the call over to Rex who will get into more detail on our financial results. Then we'll open it up for questions. In the fourth quarter of 21, we earned $15.3 million or $1.14 per diluted share compared to $17.8 million or $1.28 a share during the same period in 2020. Hopefully, you've had a chance to look at our news release. We did highlight the fact that we had $5.3 million of unusual expenses, $4.1 million related to money that we paid a consultant who was engaged to assist us in evaluating core and ancillary software systems, and ultimately assisted us in negotiating pricing and contract terms for the contract that was ultimately signed at the end of 2021. The remaining $1.2 million was related to contract termination fee for our current core and ancillary system provider. We have some other significant income statement items that Rex will cover. Earnings performance ratios for the quarter were solid with return on assets of 1.13 and return on equity of 9.74. Obviously, those numbers, if not for those unusual expenses, would have been substantially higher, probably both at least 25% higher. For the year, our loan production activity for the year was quite brisk, but obviously our loan growth was challenged by the significant payoffs we saw during the year. Our multifamily portfolio alone was down $307 million. The loan originations were extremely strong during the year, excluding to-be-sold mortgages or mortgages to be sold in the secondary market. our originations were over $2 billion in 2021, and that is a very strong year of production for us. Our pipeline, and this portends good things for the future, our pipeline of commitments and unfunded loans also is extremely strong at this point. It grew $270 million during the fourth quarter and is up $409 million from the end of 2020. As we've told you on past conference calls, we are actively looking for two to three new loan production offices, and I would just say we believe our efforts are bearing fruit, and hopefully we'll have more to talk about in the coming months on that. As a status update with respect to Paycheck Protection Program, we did Obviously, the first round loans are all fully forgiven. Second round, we did 1,650 loans, $58 million in principal balance, and we have received forgiveness on all but $10 million of those, and we would expect to receive that forgiveness in the first quarter of 2022. With respect to CARES Act modifications, again, We have no remaining modifications to commercial loans, CARES Act modifications to commercial loans. We do have $1.2 million of CARES Act modifications on consumer and mortgage loans. Asset quality continues to be historically strong for us. In 21, we ended the year with $116,000 of net recoveries. And our levels of non-performing assets excluding FDIC assets are at $3.8 million, down $1.4 million from the end of the third quarter, including FDIC assets worth $6 million, which would yield a non-performing asset to period end asset ratio of 0.11%. Capital also continues to be very strong. From the end of 2020, our common stockholders' equity decreased by about $13 million and to $617 million. That was because of our adoption of CECL, the dividends we paid, and also we did repurchase a substantial amount of our common stock during the year. Of course, those decreases were offset by strong earnings during the year. Specifically, on the stock repurchase, We repurchased 266,000 shares of common stock at an average price of $57.72 during the fourth quarter. And for the full year, we repurchased 715,000 shares at an average price of $54.69. We currently have 1.2 million shares available in our stock repurchase authorization. That concludes my prepared remarks. I'll turn the call over to Rex at this time.
spk11: All right. Thank you, Joe. I'm going to start out talking about net interest income. And in the fourth quarter of 2021, that decreased about $353,000 to $44.2 million compared to $44.6 million in the fourth quarter of 2020. And then also in the third quarter of 2021, our net interest income was about $44.9 million. The income, as Joe mentioned about our PPP loans just a minute ago, Our income does include some accretion of net deferred fees there in both 2020 and 2021 periods. We had about $1.6 million of accretion income in the 2021 fourth quarter versus about $1 million in the 2020 fourth quarter. The amount of deferred fees that we recognized in income was $5.5 million and $2 million, and the years ended December 31, 2021. and 2020, respectively. At the end of December 2021, we still had remaining net deferred fees of about just over $500,000. And as Joe mentioned, we believe that the majority of that $10 million of PPP loans that remained outstanding at the end of the year will go through the forgiveness process Most likely most of it in the first quarter. Some of it will be a little bit up to the borrowers, obviously, but we are trying to work with them and encourage them to go ahead and get those things processed. The net interest margin in the fourth quarter was 3.37%. That was down slightly from 3.41% in the fourth quarter 2020. The three months ended September 30, 2021. Net interest margin was 3.36%. So we were at one basis point, Q3 versus Q4. In comparing the fourth quarter of 21 and 20, the average yield on loans decreased about seven basis points, while the average rate on interest-bearing deposits declined by 35 basis points. The 2021 net interest margin continued to be impacted by changes in our asset mix. And while we had some additional liquidity in the 2020 period, we had additional liquidity in the 2021 period. And so our cash and cash equivalents increased by about $366 million on an average basis. And our average investment securities increased about $26 million. And that was offset by average loans decreasing by about $388 million, fourth quarter 21 compared to fourth quarter of 20. So the additional liquidity definitely, without it, we would have had higher net interest margin in the fourth quarter period and also for the year. The one last thing I'll mention too, the FDIC yield accretion that we've had for quite some time, a number of years, that's just about run to an end. The impact to our net interest margin was about six basis points less in Q4 21 versus Q4 20 and at the end of the year we've only got about $429,000 remaining of this accretion to take the interest income and we expect that that's all going to be recognized sometime during 2022. Our overall funding costs continue to decline somewhat during the fourth quarter of 21 as time deposits continue to reprice lower at maturity. We may see our cost of time deposits decrease a little more, but the magnitude of the rate decrease overall will be more muted than it has been. Our recent new and renewed overall average time deposit rate has been about 35 to 40 basis points. While our net interest margin percentage has been somewhat impacted by the increased deposits and resulting change in our asset mix, In terms of actual dollars, net interest income was $177.9 million in 2021, and that's up slightly from $177.1 million in the year 2020. We had about $4 million left in FDIC accretion income in comparing those two years, and then as I mentioned, we did recognize about $3.5 million more in deferred PPP loan fees in 2021 versus 2020. Non-interest income decreased, and we're looking at the fourth quarter of this year versus fourth quarter of 20. Non-interest income decreased $759,000 to $9.2 million. A lot of that decrease was from net gains on our loan sales of mortgage loans. That's down about $960,000. In the second half of 2020, and really the first half of 21, we had more significant origination of fixed-rate single-family loans, which we typically sell in the secondary market, and those origination volumes in the second half of 2021 started to come down to more similar to historic averages for our company. Other income decreased about $576,000, 2021 Q4 versus 2020. A lot of difference there was related to fee income that we generate on new interest rate swaps that we have with our customers and counterparties. We just had less volume of that in the fourth quarter, 21 versus 20. And then a positive thing or an increase in income was our point of sale and ATM fees increased $662,000 compared to the prior year period. That increase is really due to somewhat of a reduction in customer usage in the fourth quarter of 2020 pandemic-related and things of that nature. And then in 21, we saw a higher level of debit card usage by our customers, and that got us back to kind of more normal levels and, in some cases, increased levels of activity. Non-interest expense increased $4.7 million to $35.8 million when you compare Q4 21 versus Q4 2020. Joe already mentioned the $5.3 million that was related to some one-time expenses that we had there. So partially offsetting those increases, we did have about $924,000 less in expenses on other real estate owner repossessions. The decrease was we did have some write-downs and valuation allowances in the fourth quarter of 2020 leading up to the sale of some of our foreclosed properties. and didn't have that kind of activity in the fourth quarter of 21. The efficiency ratio for the fourth quarter was 66.98%, and that compared to 56.98% in the same quarter in 2020. And if you exclude those $5.3 million of one-time expenses that we talked about, the efficiency ratio in the fourth quarter of 21 would have been about 57%. I'll move on now to the provision. We did have, you know, based on our assumptions, we did have a negative provision for loan losses or credit losses on our outstanding loan portfolio. As Joe mentioned, our unfunded loan commitments and the unfunded portion of loans that we've already originated grew quite a bit during the year, and so a reserve for those unfunded commitments went up by, or we added $1.3 million of expense to that in the fourth quarter. So the net was an effect of a negative $1.7 million in Q4 of 21 to credit-related items. For the full year, you know, quite a bit different. We had negative provision expense of about $6.7 million on our outstanding portfolio compared to $15.9 million of provision expense recorded in 2020. And obviously, you know, we did add to our reserves in 2020 due to the pandemic. But as Joe mentioned earlier, our credit has been very good throughout 21 with a small amount of net recoveries for the year. Last thing I'll mention is income taxes. You can see that our effective tax rate in the fourth quarter of 21 was 21.1%, that compared to 19% in the fourth quarter of 2020. Those things are impacted by the level of overall income that we have, also the level of tax-exempt investments and loans that we have, and a lot of it relates to tax credit investment activity that we have, and I'd say in 21, that level was down some from where it was in 2020. So we think going forward that we kind of expect our effective tax rate to be somewhere between 20.5% and 21.5% in near-term future periods. So that concludes the remarks that I had today, and at this time we will entertain questions. So let me ask our operator to once again remind the attendees of how to queue in for questions.
spk20: And thank you. As a reminder to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while you compile the Q&A roster. And once again, that is star one if you'd like to ask a question. And our first question comes from Andrew Leash from Piper Sandler. Your line is now open.
spk08: Hey, good afternoon, everybody. Hi, Andrew. Question on the potential LPO expansion. Joe, can you remind us how you think about that? Like, do you look at different markets and think this is where we want to go, and then you go find the lenders? Or are you examining several markets, and if you find the right team in one of those, that's how you choose where to go? Just your process on this LPO expansion that seemed to work pretty well over the last several years.
spk07: We're examining a few different markets. I think we've mentioned on here before, you know, that a few markets that we're looking at is our Phoenix, Charlotte, Nashville, and Houston. And then, you know, we have different people within our company assigned to trying to – we always try to staff the office with a local lender. You know, so that's what we've done in the past, and that's what we're doing right now.
spk08: Got it. Okay. That's helpful. Thank you for the reminder there. And then, Rex, on the margin, even with all that liquidity that's come on over the last several quarters, you've done a really good job defending it since the Fed cut rates in 2020. So certainly getting some good deposit price improvement. But how do you think the margin is going to react if we do start to see some rate hikes, assuming we are here later on this year?
spk11: Yeah, I mean, as we've said in our previous filings, we believe that we are asset sensitive. And so it should help us. I don't expect that we're going to see cost of deposits increasing substantially right off the bat. We do have loans that are at some at four rates, and so those will not reprice maybe immediately either. But I think throughout the course of of the year, if we start getting rate hikes in March, which it seems like is what the market's believing right now, those will be helpful moderately throughout the rest of this year. If you get three rate hikes or whatever in 2022, we would anticipate that that would really help for more so in 2023 and moving forward from there. But it should be positive for us based on our analysis right now.
spk08: Got it. All right, thank you. Thanks for taking the questions. I'll step back.
spk20: Thanks, Andrew. And thank you. And our next question comes from Damon Del Monte from KBW. Your line is now open.
spk03: Hey, good afternoon, guys. Hope everybody's doing well today. Hi, Damon. Hi. So first question just regarding loan growth and the outlook for growth. Obviously origination activity has been very strong for you guys. I'm kind of wondering what your thoughts are on, on the pace of the paydowns. Do you think that that's going to slow and, you know, thus allow for net growth as we go into 2022?
spk07: Well, you know, that's a little bit hard to guess on. Um, Damon, obviously, you know, I think our multifamily portfolio dropped from 900 to 600. So that's a 33% decrease. In real terms, it's going to be hard for that portfolio to decline as much, you would think. But it's a bit of a guess. There still does seem to be a lot of demand out there by banks to acquire good assets. So I think it will continue to be a competitive environment. But, you know, we like where we're at with our, you know, our level of unfunded commitments that we think we'll fund over the next year or 18 months. And then, you know, as we're expanding our territory, that should help as well.
spk03: Got it. Okay. That's good. And then with regards to your outlook for expenses, Are you anticipating any cost savings from the contract renegotiations on the core processing that you went through this past quarter?
spk07: From current expense levels, I don't think there will really be savings. I mean, we're going to have what we believe is a much more robust system for us to use internally, and we think it will be better for our customers as well. So that's kind of where we were going. There's not going to be a lot of expense saves there.
spk04: Got it. Got it. Okay.
spk11: Hey, Damon, we'll still be under our existing contract all through 2022, so there's not going to be anything going on differently there. We expect to start the new system in 2023, midway through the year or so.
spk03: Got it. Okay. So then as we look at like the year-over-year change in expenses, do you feel like you could kind of keep it in a low single-digit range for annual growth?
spk07: You know, again, we don't give forward guidance. You know, I think we've done a fairly good job of controlling our expenses, you know, particularly over the last, I mean, really historically we have, but certainly over the last, five or six or eight years, you know, that's a focus we have. I will say, you know, one thing that's challenging right now is, you know, on the employee side, there's just a real demand for employees and there does seem to be some wage inflation. So, you know, that may filter through our results, you know, in 2022 a little bit.
spk02: Okay.
spk07: Fair enough.
spk02: Okay. That's all that I had for now. Thank you.
spk20: All right. Thanks, Damon. And thank you. And our next question comes from John Rodas from Janie. Your line is now open.
spk10: Hey, good afternoon, guys. Hey, John. Hope you guys are doing well. Joe, maybe just a question for you. Since the last quarter, one of your local competitors, GFED, announced plans to sell. Just wondering if you see any opportunities there going forward?
spk07: You know, I don't know that there will be a ton of opportunity. I'm sure there will be some. You know, I think M&A typically does cause at least some dislocation, you know, either, you know, loan officer dislocation or customer dislocation. So, you know, I wouldn't be surprised if there's some. There may not be a ton there, but, you know, I would think there would be some probably.
spk10: And as far as Quad Cities was already in the market, I mean, would you characterize them as being pretty rational competition for you guys?
spk07: Yeah, I would say so. You know, I think they do a pretty good job.
spk10: Okay, okay. And then just as far as, you know, you mentioned you guys have been, you know, pretty aggressive buying back your own stock, which makes a lot of sense. Do you think just as we look to for this year, 2022, do you think from a capital management standpoint, does, you know, buying back stock probably still make more sense versus looking to do external acquisitions?
spk07: Yes, I would say so for us, John. I mean, the way, you know, As we've mentioned before, we feel like where external acquisitions get hard is as you look out three and four and five years, are you going to be able to grow the acquired franchise at the same clip as you're growing your business? Buying back your stock, you just don't have that kind of analysis. You don't have that kind of headwinds. So, you know, I think it, you know, where we're able to buy back our stock at, you know, whatever, book and a quarter or whatever we're able to buy it back for right now, you know, that's accretive, you know, all day long. And I think it makes lots of sense for us.
spk14: Yep.
spk07: I agree with you. Okay.
spk10: Thanks, everybody.
spk20: And thank you. And I am showing no further questions. I would now like to go ahead and turn the call back to Kelly Polona for closing remarks.
spk01: Well, thank you for joining us today. If you have further questions, please feel free to reach out to us. We hope you have a great evening. See you next quarter.
spk20: This concludes today's call. Thank you for participating. You may now disconnect. Thank you. Bye. Thank you. Thank you. music music Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2021 Conference Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today, Kelly Polonis of Investor Relations.
spk01: Good afternoon, and thank you for joining us for our fourth quarter 2021 earnings call. This is Kelly Polonis, Investor Relations for Great Southern Bancorp. The purpose of this call today is to discuss the company's results for the quarter ending December 31, 2021. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected. For a list of some of these factors, please see the disclosure in our earnings release and other public filings. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call with me today. We'll get started right now and I'll turn the call over to Joe.
spk07: All right. Thanks, Kelly. Good afternoon and thanks to all of you for joining us today. We ended 2021 in a strong financial position and have good momentum as we enter 2022. We're really pleased with our fourth quarter and full year earnings for 2021 and we believe they reflect our associates ongoing commitment and resilience in taking care of our customers and each other during a challenging time. As is typical, I'll provide some brief remarks about our performance and then turn the call over to Rex who will get into more detail on our financial results. Then we'll open it up for questions. In the fourth quarter of 21, we earned $15.3 million or $1.14 per diluted share compared to $17.8 million or $1.28 a share during the same period in 2020. Hopefully, you've had a chance to look at our news release. We did highlight the fact that we had $5.3 million of unusual expenses, $4.1 million related to money that we paid a consultant who was engaged to assist us in evaluating core and ancillary software systems, and ultimately assisted us in negotiating pricing and contract terms for the contract that was ultimately signed at the end of 2021. The remaining $1.2 million was related to contract termination fee for our current core and ancillary system provider. We have some other significant income statement items that Rex will cover. Earnings performance ratios for the quarter were solid with return on assets of 1.13 and return on equity of 9.74. Obviously, those numbers, if not for those unusual expenses, would have been substantially higher, probably both at least 25% higher. For the year, our loan production activity for the year was quite brisk, but obviously our loan growth was challenged by the significant payoffs we saw during the year. Our multifamily portfolio alone was down $307 million. The loan originations were extremely strong during the year, excluding to-be-sold mortgages or mortgages to be sold in the secondary markets. Our originations were over $2 billion in 2021, and that is a very strong year of production for us. Our pipeline, and this portends good things for the future, our pipeline of commitments and unfunded loans also is extremely strong at this point. It grew $270 million during the fourth quarter and is up $409 million from the end of 2020. As we've told you on past conference calls, we are actively looking for two to three new loan production offices, and I would just say we believe our efforts are bearing fruit, and hopefully we'll have more to talk about in the coming months on that. As a status update with respect to Paycheck Protection Program, we did Obviously, the first-round loans are all fully forgiven. Second round, we did 1,650 loans, $58 million in principal balance, and we have received forgiveness on all but $10 million of those, and we would expect to receive that forgiveness in the first quarter of 2022. With respect to CARES Act modifications, again, We have no remaining modifications to commercial loans, CARES Act modifications to commercial loans. We do have $1.2 million of CARES Act modifications on consumer and mortgage loans. Asset quality continues to be historically strong for us. In 21, we ended the year with $116,000 of net recoveries, and our levels of non-performing assets excluding FDIC assets are at $3.8 million, down $1.4 million from the end of the third quarter. Including FDIC assets, we're at $6 million, which would yield a non-performing asset to period end asset ratio of 0.11%. Capital also continues to be very strong. From the end of 2020, our common stockholders' equity decreased by about $13 million. to $617 million. That was because of our adoption of CECL, the dividends we paid, and also we did repurchase a substantial amount of our common stock during the year. Of course, those decreases were offset by strong earnings during the year. Specifically, on the stock repurchase, We repurchased 266,000 shares of common stock at an average price of $57.72 during the fourth quarter. And for the full year, we repurchased 715,000 shares at an average price of $54.69. We currently have 1.2 million shares available in our stock repurchase authorization. That concludes my prepared remarks. I'll turn the call over to Rex at this time.
spk11: All right. Thank you, Joe. I'm going to start out talking about net interest income. And in the fourth quarter of 2021, that decreased about $353,000 to $44.2 million compared to $44.6 million in the fourth quarter of 2020. And then also in the third quarter of 2021, our net interest income was about $44.9 million. The income, as Joe mentioned about our PPP loans just a minute ago, Our income does include some accretion of net deferred fees there in both 2020 and 2021 periods. We had about $1.6 million of accretion income in the 2021 fourth quarter versus about $1 million in the 2020 fourth quarter. The amount of deferred fees that we recognized in income was $5.5 million and $2 million, and the years ended December 31, 2021. and 2020, respectively. At the end of December 2021, we still had remaining net deferred fees of about just over $500,000. And as Joe mentioned, we believe that the majority of that $10 million of PPP loans that remained outstanding at the end of the year will go through the forgiveness process most likely most of it in the first quarter. Some of it will be a little bit up to the borrowers, obviously, but we are trying to work with them and encourage them to go ahead and get those things processed. The net interest margin in the fourth quarter was 3.37%. That was down slightly from 3.41% in the fourth quarter 2020. The three months ended September 30, 2021. Net interest margin was 3.36%. So we were at one basis point, Q3 versus Q4. In comparing the fourth quarter of 21 and 20, the average yield on loans decreased about seven basis points, while the average rate on interest-bearing deposits declined by 35 basis points. The 2021 net interest margin continued to be impacted by changes in our asset mix. And while we had some additional liquidity in the 2020 period, we had additional liquidity in the 2021 period. And so our cash and cash equivalents increased by about $366 million on an average basis. And our average investment securities increased about $26 million. And that was offset by average loans decreasing by about $388 million, fourth quarter 21 compared to fourth quarter of 20. So the additional liquidity definitely, without it, we would have had higher net interest margin in the fourth quarter period and also for the year. The one last thing I'll mention too, the FDIC yield accretion that we've had for quite some time, a number of years, that's just about run to an end. The impact to our net interest margin was about six basis points less in Q4 21 versus Q4 20 and at the end of the year we've only got about $429,000 remaining of this accretion to take the interest income and we expect that that's all going to be recognized sometime during 2022. Our overall funding costs continue to decline somewhat during the fourth quarter of 21 as time deposits continue to reprice lower at maturity. We may see our cost of time deposits decrease a little more, but the magnitude of the rate decrease overall will be more muted than it has been. Our recent new and renewed overall average time deposit rate has been about 35 to 40 basis points. While our net interest margin percentage has been somewhat impacted by the increased deposits and resulting change in our asset mix, In terms of actual dollars, net interest income was $177.9 million in 2021, and that's up slightly from $177.1 million in the year 2020. We had about $4 million less in FDIC accretion income in comparing those two years, and then as I mentioned, we did recognize about $3.5 million more in deferred PPP loan fees in 2021 versus 2020. Non-interest income decreased, and we're looking at the fourth quarter of this year versus fourth quarter of 20. Non-interest income decreased $759,000 to $9.2 million. A lot of that decrease was from net gains on our loan sales of mortgage loans. That's down about $960,000. In the second half of 2020, and really the first half of 21, We had more significant origination of fixed rate single family loans, which we typically sell in the secondary market, and those origination volumes in the second half of 2021 started to come down to more similar to historic averages for our company. Other income decreased about $576,000, 2021 Q4 versus 2020. A lot of difference there was related to fee income that we generate on new interest rate swaps that we have with our customers and counterparties. We just had less volume of that in the fourth quarter, 21 versus 20. And then a positive thing or an increase in income was our point of sale and ATM fees increased $662,000 compared to the prior year period. That increase is really due to somewhat of a reduction in customer usage in the fourth quarter of 2020. pandemic-related and things of that nature. And then in 21, we saw a higher level of debit card usage by our customers, and that got us back to kind of more normal levels and, in some cases, increased levels of activity. Non-interest expense increased $4.7 million to $35.8 million when you compare Q4 21 versus Q4 2020. Joe already mentioned the $5.3 million that was related to some one-time expenses that we had there. So partially offsetting those increases, we did have about $924,000 less in expenses on other real estate owner repossessions. The decrease was we did have some write-downs and valuation allowances in the fourth quarter of 2020 leading up to the sale of some of our foreclosed properties. and didn't have that kind of activity in the fourth quarter of 21. The efficiency ratio for the fourth quarter was 66.98%, and that compared to 56.98% in the same quarter in 2020. And if you exclude those $5.3 million of one-time expenses that we talked about, the efficiency ratio in the fourth quarter of 21 would have been about 57%. I'll move on now to the provision. We did have, you know, based on our assumptions, we did have a negative provision for loan losses or credit losses on our outstanding loan portfolio. As Joe mentioned, our unfunded loan commitments and the unfunded portion of loans that we've already originated grew quite a bit during the year, and so a reserve for those unfunded commitments went up by, or we added $1.3 million of expense to that in the fourth quarter. So the net was an effect of a negative $1.7 million in Q4 of 21 to credit-related items. For the full year, quite a bit different. We had negative provision expense of about $6.7 million on our outstanding portfolio compared to $15.9 million of provision expense recorded in 2020. Obviously, we did add to our reserves in 2020 due to the pandemic. But as Joe mentioned earlier, our credit has been very good throughout 2021 with a small amount of net recoveries for the year. Last thing I'll mention is income taxes. You can see that our effective tax rate in the fourth quarter of 21 was 21.1%. That compared to 19% in the fourth quarter of 2020. Those things are impacted by the level of overall income that we have, also the level of tax-exempt investments and loans that we have, and a lot of it relates to tax credit investment activity that we have. And I'd say in 21, that level was down some from where it was in 2020. So we think going forward that we kind of expect our effective tax rate to be somewhere between 20.5% and 21.5% in near-term future periods. So that concludes the remarks that I had today, and at this time we will entertain questions. So let me ask our operator to once again remind the attendees of how to queue in for questions.
spk20: And thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while you compile the Q&A roster. And once again, that is star 1 if you'd like to ask a question. And our first question comes from Andrew Leash from Piper Sandler. Your line is now open.
spk08: Hey, good afternoon, everybody. Hi, Andrew. Question on the potential LPO expansion. Joe, can you remind us how you think about that? Do you look at different markets and think this is where we want to go, and then you go find the lenders? Or are you examining several markets, and if you find the right team in one of those, that's how you choose where to go? Your process on this LPO expansion, it seems to work pretty well over the last several years.
spk07: We're examining a few different markets. I think we mentioned on here before, you know, that a few markets that we're looking at is our Phoenix, Charlotte, Nashville, and Houston. And then, you know, we have different people within our company assigned to trying to – we always try to staff the office with a local lender. You know, so that's what we've done in the past, and that's what we're doing right now.
spk08: Got it. Okay. That's helpful. Thank you for the reminder there. And then, Rex, on the margin, even with all that liquidity that's come on over the last several quarters, you've done a really good job defending it since the Fed cut rates in 2020. So certainly getting some good deposit price improvement. But how do you think the margin is going to react if we do start to see some rate hikes, assuming we are here later on this year?
spk11: Yeah, I mean, as we've said in our previous filings, we believe that we are asset sensitive. And so it should help us. I don't expect that we're going to see cost of deposits increasing substantially right off the bat. We do have loans that are at some at four rates, and so those will not reprice maybe immediately either. But I think throughout the course of of the year, if we start getting rate hikes in March, which it seems like is what the market's believing right now, those will be helpful moderately throughout the rest of this year. If you get three rate hikes or whatever in 2022, we would anticipate that that would really help for more so in 2023 and moving forward from there, but it should be positive for us based on our analysis right now.
spk08: Got it. All right, thank you. Thanks for taking the questions. I'll step back.
spk20: Thanks, Andrew. And thank you. And our next question comes from Damon Del Monte from KBW. Your line is now open.
spk03: Hey, good afternoon, guys. Hope everybody's doing well today. Hi, Damon. Hi. So first question just regarding loan growth and the outlook for growth. Obviously, origination activity has been very strong for you guys. Kind of wondering what your thoughts are on the pace of the paydowns. Do you think that that's going to slow and thus allow for net growth as we go into 2022?
spk07: Well, that's a little bit hard to guess on, Damon. Obviously, I think our multifamily portfolio dropped from 900 to 600. So that's a 33% decrease. In real terms, it's going to be hard for that portfolio to decline as much, you would think. But it's a bit of a guess. There still does seem to be a lot of demand out there by banks to acquire good assets. So I think it will continue to be a competitive environment. But, you know, we like where we're at with our, you know, our level of unfunded commitments that we think we'll fund over the next year or 18 months. And then, you know, as we're expanding our territory, that should help as well.
spk03: Got it. Okay. That's good. And then with regards to your outlook for expenses, Are you anticipating any cost savings from the contract renegotiations on the core processing that you went through this past quarter?
spk07: From current expense levels, I don't think there will really be savings. I mean, we're going to have what we believe is a much more robust system for us to use internally, and we think it will be better for our customers as well. So that's kind of where we were going. It's not, you know, there's not going to be a lot of expense saves there.
spk04: Got it. Got it. Okay.
spk11: Hey, Damon, we'll still be under our existing contract all through 2022. So, you know, there's not going to be anything going on differently there. We expect to, you know, start the new system in 2023, midway through the year or so.
spk03: Got it. Okay. So then as we look at like the year-over-year change in expenses, do you feel like you could kind of keep it in a low single-digit range for annual growth?
spk07: You know, again, we don't give forward guidance. You know, I think we've done a fairly good job of controlling our expenses, you know, particularly over the last, I mean, really historically we have, but certainly over the last, five or six or eight years, you know, that's a focus we have. I will say, you know, one thing that's challenging right now is, you know, on the employee side. There's just a real demand for employees and there does seem to be some wage inflation. So, you know, that may filter through our results, you know, in 2022 a little bit. Okay. Fair enough.
spk02: Okay. That's all that I had for now. Thank you.
spk20: All right. Thanks, Damon. And thank you. And our next question comes from John Rodas from Janie. Your line is now open.
spk10: Hey, good afternoon, guys. Hey, John. Hope you guys are doing well. Joe, maybe just a question for you. Since the last quarter, one of your local competitors, GFED, announced plans to sell. Just wondering if you see any opportunities there going forward?
spk07: Um, you know, the, uh, I don't know that there will be a ton of opportunity. I'm sure there will be some, you know, I think M and a typically does cause at least some dislocation, um, you know, either, you know, loan officer dislocation or customer dislocation. Um, so, you know, I wouldn't be surprised if there's some, um, There may not be a ton there, but, you know, I would think there would be some probably.
spk10: And as far as Quad Cities was already in the market, I mean, would you characterize them as being pretty rational competition for you guys?
spk07: Yeah, I would say so. You know, I think they do a pretty good job.
spk10: Okay, okay. And then just as far as you mentioned, you guys have been pretty aggressive buying back your own stock, which makes a lot of sense. Do you think just as we look for this year, 2022, do you think from a capital management standpoint, does buying back stock probably still make more sense versus looking to do external acquisitions?
spk07: Yes, I would say so for us. John, I mean, the way, you know, as we've mentioned before, you know, we feel like where external acquisitions get hard is as you look out three and four and five years, are you going to be able to grow the acquired franchise at the same clip as you're growing your business? And, you know, buying back stock buying back your stock, you just don't have that kind of analysis. You don't have that kind of headwind. So, you know, I think it, you know, where we're able to buy back our stock at, you know, whatever book and a quarter or whatever we're able to buy back for right now, you know, that's a creative, you know, all day long. And I think make what makes lots of sense for us.
spk14: Yep.
spk07: I agree with you. Okay. Thanks everybody.
spk20: And thank you. And I am showing no further questions. I would now like to go ahead and turn the call back to Kelly Polona for closing remarks.
spk01: Well, thank you for joining us today. If you have further questions, please feel free to reach out to us. We hope you have a great evening. See you next quarter.
spk20: This concludes today's call. Thank you for participating. You may now disconnect.
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