Q1 2021 Midwestone Financial Group Inc (IOWA) Earnings Call
Home home. It's a good day and welcome to the mid midwestone Financial Group. First quarter 2020, earnings call. All participants will be in a listen-only mode. Should you need <expletive>istance? Please signal conference specialist by pressing down by 0.3, sensation. There will be an opportunity to ask questions to ask a question, your first store. Then one, please note that this event is being recorded. This presentation contains forward-looking statements relating to the financial condition results of operations and business of midwestone Financial Group, Inc, or looking statements, generally include where it's such as believes expects, anticipates, and other similar Expressions dead,
Actual results could differ materially from those indicated among the important factors that could cause actual results to differ materially or interest rates changes in the mix of the company's business competitive pressures. General economic conditions and the risk factors. Detailed in the company's periodic reports and registration. Statements filed with the Securities and Exchange Commission. Midwestone Financial Group undertakes job, application to publicly, revise or update. These forward-looking statements, to reflect events, or circumstances after the date of this presentation. And now, I would like to turn the conference over to Charlie phone chief executive officer. Please go ahead sir.
Thank you very much, coal and good afternoon, or good morning. As the case may be to everyone, and thank you for joining us today in the room with me and Iowa City. I have our chief officer. Barry Real Chief credit Officer Gary Sims, president, Linda Baker, and treasure and chief investment Officer, Jim Cantrell, excuse me, a few opening, I would just say that clearly, it was a great bottom line quarter for midwestone the best in our company's history and it's fair to say that we've never quite gotten to a result, such a wuss us. And the way we did and we'll talk about that a little bit more as the call goes on, first thing I should say is that our listeners will recall that we did take a very very large provision for credit loss. In the first quarter of 2020 that was related primarily to our adoption of Cecil as well as the pandemic and the economic forecast off.
Caused by the pandemic.
And other than the negative provision, and there's more of that to come later. I think the biggest stories of the quarter were continued, influence deposits. Were clearly Awash in cash in our company, and in our economy. So we have solid not interest income, led by our mortgage center and and wealth management and the PPP ramp up and of course the negative provision which is somewhat makes up and counteract, the large provision that was taken in the year ago quarter.
On the balance sheet.
You know, deposits as I've said continue to flow in and it's very apparent to all of us that a Porsche and maybe even a large portion of the stimulus payments and the PPP forgiveness wage must have you have to be spent and are sitting in our bank in core deposit accounts. In terms of loans loans, xpp we're down roughly 4%, linked quarter. You know, we noted in the earnings release that our line usage fell by almost a third from the prior-year Thursday. We're seeing brutal price competition and to give you an idea of some of the price competition. We're seeing we're seeing two handles on 5-year loans, in parts of our footprint wage for for strong credits. We're also seeing fixed rates that are in the low threes, if not 3% for 10 years and in some cases, fifteen years, and we're seeing a little dog.
For relaxation in underwriting standards. And I would just say that this is the banking industry's response to in trying to put all of these excess deposits to work. So, um, nothing unusual there. But it is. It's brutal competition for good loans right now, in terms of our Outlook and the pipeline right now, we, we have about sixty million dollars, maybe a little bit more than that up, loans that have been approved and are ready to close. And we have several times that number in the, in the pipeline that are in various stages of birth of process. And quite frankly, we know that not all of those will close, but we do have a fairly good pipeline of activity. We don't have any big pay Downs that we know of that are on the edge, Verizon. And one other thing that I would add is that we didn't just named this past week, a new head of Commercial Banking came from within our company and we think that's very positive birth.
The Outlook going forward in terms of PPP, you'll recall that we did roughly $345 million dollars of PPP loans in round one, we stand right now in about a hundred and fifty two million. And as we understand it, the money could run out in the next week or so. So that's probably about what we're going to do. Maybe a little bit more than that depending on what comes in and what were able to get through the system.
I also would say that you'll notice in the in our balance sheet that the Investment Portfolio is now north of two billion dollars. So with that kind of a an Investment Portfolio, any slope increasing slope. We get to the 3 months of 5-year, part of the interest rates curve as welcome and for those who and you asked us time to time and I'll just tell you a higher investment strategy, hasn't changed. We continue to buy a combination of high cash flow, shorter-term Investments, that that throw off month, cash flow on the first two or three years of of their investment Horizon. And also, we're buying some longer municipal bonds, high-quality municipal bonds, generally, double a and a girl to take advantage of the slope and the curb. I think it's
An understatement to say we have ample liquidity in our company right now.
In terms of the margin, the the core margin hung in there for the quarter 302 vs301, the, the prior quarter, we need to see loan growth and Thursday for you or to offset the the pressures that we see on the net interest margin, I don't think it's much more complicated than that in terms of non-interest income you know the horn mortgage center continues to be very very strong. It's a bright spot. In our company. The the former American Trust in Dubuque is off right now, providing about 50% of the volume in our home mortgage center at which is a a credit to them and a credit to the merger integration that took place there to give you a little bit of a black perspective on the mortgage production in our company.
First quarter 2020. We did $63 in mortgage loans that had grown to a hundred and twenty eight million by the fourth quarter of 2020 and took it back to $94 million in the first quarter of 2021. So, 63 to 128 back to ninety-four. There's still a pretty good pipeline but we definitely see a slowing down on nevertheless. I think the next couple of quarters are at least the next quarter should be above average. In terms of mortgage production, we did record, a positive MSRP of $900,000 and it's always good to see a black number and not a red number. When we talk about the MSR, also positive are wealth management which consists of Investment Services and and Trust up 12 and 12.6% in in terms of revenues linked quarter and up 11.8% on a year-over-year basis. Yep.
Strong results. There there is some potential for for lone swap Revenue in the second and third quarters of this year. But I, you know, you never know until the loans closed on Thursday of thing. But there are some discussions that we feel somewhat optimistic that we can incorporate some swap Revenue into our fee income, for the second, and third quarters.
I don't know.
We have a lot of comments on expenses, I think they were well controlled. I would remind everyone that we had a lot of one-time expenses in the fourth quarter of 2026 would remind everyone as well. That we, we took a $600,000 charge in the fourth quarter that related to our new contract, with our core processor. And importantly we began to realize the savings from that core processor contract in this this quarter and that will be ongoing for the next few years.
In terms of <expletive>et quality, I think it's a good story. May be a better than a good story. There was a lot of cleanup and progress that was made in in terms of our <expletive>et quality of life in the quarter and that was masked by a, an a glowing that we put on in non-accrual, on the last week of the quarter that a glowing happens to be very well secured, but as long as listeners to this call will remember. It takes a long time to collect an a glow and once it goes into collection process. But with the, the the npa's were up 1.7 million again. That number M<expletive>, a lot of clean-up that happened during the quarter allows for credit losses at 1.63% off p p p. As of the end of the quarter, we think that's sufficient to withstand any challenges that we may encounter in the in the quarters ahead.
A brief bag update and the agricultural Outlook is very good compared to what you've heard over the last couple of years. Very, very good conditions and maybe all she have to to know is that corn is over $6, a bushel and beans are over $15 a bushel and that's good news for our Growers, the the land price of gas price, indexes that we see are flat year-over-year. However, we have anecdotal evidence that there are very big prices being paid for Farm ground right now. And I think these indexes will reflect that. In the quarters ahead, there is a lot of demand for for high-quality Farm ground right now in our footprint. I would also know that conditions for Life, very farmers are also better than they have been in a while as well. Also, a bit of good news if you look at our substandard agricultural loans they continue to age.
Paul is a percentage of the portfolio and they're under 7% of the portfolio and that's the best number we've seen since December of 2017 watch rated credits in the aqueduct 10.6% and and there were a number of upgrades from watch the past that happened, not just one or two but a number of different borrowers were upgraded from from watch the past during the quarter of the the app portfolio right now is seven and half percent of total loans. We'd like to make more loans and I have to get on the soapbox just a little bit of right now and tell you that the the competition were getting from Farm. Credit Services is significant and the race are able to offer because of their funding mechanisms are very, very hard to compete with so long. You know, we're seeing High twos and low threes for longer term loans from the Farm Credit system, and and I think not just midwestone, but many banks, struggle to compete with those rates. So dead.
just an acknowledgement on that, but the
Portfolios in about as good a shape as it's been for a long time into in terms of the capital, you'll note that all of the regulatory Capital ratios improved during the quarter. The tangible common Equity fell to 7.52% which is a function of more deposits and and consequently more <expletive>ets and also the AO GI adjustment which was negative from the prior quarter. This particular quarter
We were active in our share repurchase program, especially in the middle of the quarter and will continue to be active in that program when we think it makes sense for our shareholders. So to summarize, I would conclude, by saying, we do think we have our arms around <expletive>et-quality. We very much need loan growth. We will continue to focus on technology and and may I have a, a digital Focus that's ongoing and we just continue to be amazed by how long deposits have stuck around on our balance sheet, much longer before cast, whenever we got our budget together for 2021. So, cold with that. That's what I have to say. And we'd be happy to answer any questions that you might suck.
And we will now begin the question-and-answer session to ask a question. You may press *, then 1 and your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the key to withdraw your question please. Press Start into it. Once again that it started in one to ask a question and at this time we will pause momentarily to some of the roster.
My first question today, will come from Brendan nosal with fiber Sandler. Please go ahead.
Hey, good afternoon everybody. How are you doing? Hey, Brandon.
I just want to start off here on kind of the reserve is provisioning, even if it's two quarters of, you know, pretty large negative revisions, you know, you're reserved is still really, really healthy at that box. 63 x p, p p, is it kind of think about where you would have been with Cecil before covet? I think it was a 96 basis-point Reserve. After adopting Cecil was just given how the the year is shaping up. How do you think about, you know, your provisioning needs or or maybe lack thereof and kind of where the the Reserve at end of the next couple of periods?
Brendan. This is Gary. I'll start the answer, the question and then ask for my colleagues to help me out if I miss anything. I think you're seeing one of our view of the of the reserve appropriately. As as we've, you know, as the economic conditions have improved, and as our credit quality has stabilized, we've you know, we've taken the position that we're, you know, we're more comfortable with our Reserve position and adequately reserved. And as a result that's why you see the the releases I think as you look at twenty Twenty-One and subsequent quarters, you know, that trend is right now, we believe that will continue to be the case. We believe our credit quality will continue to stabilize and as the economy, you know, continues to improve so that that'll get the answer started Charlie bury any anything to add there.
Freddie.
Good. Yeah I think that's sufficient. I maybe just one more thing Brendon, we've always thought and this goes back, you know, a decade or more and and Acquisitions have skewed this from time to time. But for a bank like ours you know, under normal economic conditions, if we're in the 140 to 160 range, in terms of the the portfolio, the rise to the portfolio. That's that's usually a comfortable range for us and, you know, that's a good point, Charlie, the the range that you land and there is kind of going to going to depend upon your view on the economy at that point in time and and as the economy continues to improve our view improves as well.
All right, great, that's that's helpful. Maybe one more for me, just moving to kind of the the loan side of things. I get that, you know, demand sounded, you know, quite often this quarter. But I'm curious geography being geographically, um, what parts of the the footprint this quarter. We're, we're kind of seeing some of the more robust Demand versus what pieces were seeing wage. Um, it was offered a man.
Brendan this is Lynn. So we are continuing to see where I see pockets of strength. I see activity in the Twin Cities, continue to see consistency in Colorado and and Denver. And then I would also point to here in our home Market of Iowa City, I see some nice signs of of strep.
Thank you for taking the questions. Thank you Brenda
And our next question will come from Jeff Davidson please go ahead.
Thanks for joining or Jeff Jeff.
Charlie, you alluded to in, in makes sense, the margin Direction, pretty dependant on yield curve and Loan growth, but I don't I don't know if environment you've had a stable margin last, couple of quarters. So you know the thought is are you, are you, you have some confidence that it kind of bouncing along the bottom and, and from here, but you do see further yield curve, Improvement or, um, won't go pick up. It's it's more of an expansion. And until that point, it's, it's kind of holding the line on margin. Just want to make sure I get your expectations on the margin side. You know, I would repeat what I said and then, I'll let Jim dive into that a little bit, but I really do think that month, loan growth is key and the, you know, I don't think we've watched the slope of the yield curve as closely as we do now for for many years and years.
Specifically, we're looking at that, you know, three months to two five-year portion of the curve. And when it's steepened, maybe a month ago or six weeks ago, that was really a good thing for us when it comes back in it, it does make a difference in terms of the yields were able to buy but I'll let Jim expand on that a little bit sure. Jeff, I would say you were right on it. I had a tremendous shift in the <expletive>et mix and that has had implications on our margin. I think on the go forward view, I could see. It's bumping along the bottom here for a little bit, but that would be credited on a couple of things. One is that we don't see additional deposit growth in that deposit. Growth is really forced us to put on <expletive>ets at a much lower margin than we would normally do in the last year or so <expletive>uming that we see sort of a stability on the deposit side of things, then I think we're into age.
Period where we could see it a fairly Stable Market. Um, the one, uh,
The one item that I know that's coming due that will have an impact on that and this kind of gets away from Court margin a little bit, but we do have some PPP loans on the books that will be forgiven a little sort of offset some of the loans that were expecting to come on. So it depends on that how that interplay works out a little bit but it's kind of a long-winded answer to. I think we're in for practice ability on the margin.
Okay, I appreciate it and maybe a question on the the the income front, a pretty strong wealth management result, just look it over the balance of the year off Charlie referenced. You know, I think we all think that that Mortgage Banking has been strong and and maybe it's still got a tail but maybe that paid the bit, I think you talked about some swap potential later in the year, so bomb that all up a strong wealth management is that connect continue. Um, but as you see the it's a pretty good job number on the income for this quarter in the thoughts of the sustainability. Yeah. Well mortgage, you know any of us can guess on mortgage. That's just depended on Thursday and interest rates and affordability and all those things in terms of you know our trust and wealth management. We typically budget in the 5 to 8% range in terms of Phoebe. Yep.
Umbral and more often than not, they're able to hit that, sometimes they do a little better, sometimes they do a little worse but that's kind of you know what we expect from them each year and and of course the direction of equity markets has a big impact on that. So that's what I would offer Jeff on wealth management. And and I do think there will be some commercial swap activity, you know, at some point this year. But that's dependent upon us. Getting to the finish line on the loans.
That's good. Thank you.
Thank you. Thank you.
And our next question will come from Terry McEvoy with Stevens. Go ahead. Hi, thanks. Good afternoon. Everyone. One question is, is there any indication out there that deposit growth is slowing? And then, if I look at the deposit balances and the first quarter, I'm just curious the jumbo deposits up. Call it ninety million dollars and given the choice percent loan-to-deposit ratio just curious where that jump came from and maybe why there wasn't some thought pudding and put into may be shrinking some of those higher costing funds.
Terry. This is Jim. I'll take a crack at that one. There has been a little bit of growth in the first quarter. I think what we've seen in the latter part of the quarter is now into a second quarter is is sort of a slow down to some of that growth specifically some of that growth took place on the public funds side. We've been able to to bid on public funds and we've continued to bid on some of our local public fund depositors. But it it rates that are very what I would consider attractive Thirty basis points for 1GB money is an example and so we've we we have maintained a bid for for that type of deposit in terms of, you know, kind of an on maturing business or consumer deposits. I think they've been relatively flat in the latter part of the first quarter. And so my expectation, you know, based on that short period of time is it will see a flashing
we had originally thought that the
Business might cause a little bit of Exodus of deposit. There's some of those businesses took some of those excess funding and distributed them haven't seen that yet. That's still, you know, in the back of our mind that that could be a coming event later this year.
And and then is a a follow-up mortgage has been strong and it sounds like that's going to continue over the near-term. I guess my question is <expletive>uming rates go higher in mortgage Revenue, declines, could you just talk about any flexibility you have on the expense side? Just so as we model out the next couple of years, we may capture some of the, the against reduction that would occur in theory of if revenue does come under pressure,
This is very very I think with respect to the flexibility that we have on the expense side. You know, part of things that we're looking at right now is really the our Branch Network infrastructure and where we have opportunity there. I would say that's going to be at least one lever that we have to pull, but I would also say that, you know, we know we're going to have to continue to invest in technology as well. And so, obviously, we continue to diligently monitor expenses and I think the first quarter results show that I would, I would add to that to specifically, to your question, you know, we might not take the the approach that some of our, some of the larger Banks take in terms of mortgage and, and with, you know, wholesale reductions off personnel. With that being said, the head of our mortgage units, been in the business for a long time, and I think that the answer is, yes, there would be some rationalisation of the expenses wage
More time, but it would be done, very thoughtfully. That makes sense Terry. And a big piece of that, this is Lynn looking piece of that, of course, is a variable, that goes with the mortgage, right? A big piece of the mortgage expense is, is directly variable with the income.
Great. Thanks everyone. Thank you.
And our next question will come from David with KBW. Please go ahead and good afternoon guys. Hope everybody's doing well today, I'm excellent. Great. My first question, just a question on the on the outlook for expenses Barry I think last quarter. You know, you guys were saying 29 to 30 million. I think that was for the first quarter. But is that how we should think about the future quarters? Even though this quarter came in much better than that?
Right. Yeah, we we tried to articulate as best, we could name it in the release, some of the, the nuances in the expense run rate for this quarter. I think, if you, if you take a look at that and you adjust for those items, that should give you a pretty good sense of of where we landed with respect to expenses this quarter. Again, for example, some of the some of the positives that we had this quarter was the origination cost which would benefit. So I think if you if you adjust for those items should have a pretty good tip and where the expense run rate will land
Got it. Okay, I'll check that out then.
With regards to the accretable yield this quarter. I think it was like one point 1 million which is down from last quarter and and down substantially from the previous quarter's in 2020. So we kind of took this as the the go forward run rate for free w help.
I think that the million dollars a year Damon is a reasonable a quarter million a year, a million dollars. A quarter is a is a reasonable <expletive>umption for the near-term. But again, that that slows over time and so probably in the latter half of this year, it may be slightly lower than that.
Okay, great. And then
I guess just you know, the Securities portfolio, it's almost double the size from the year-ago quarter. And, you know, just want to confirm like that's just the kind of reallocation of the liquidity. That's come off balance sheet, right? Or did you guys put on some additional leverage inside of that?
This is Jim. Yeah, I tell Charlie, I'm going to start charging it by the trade ticket, guys, that as opposed to just a regular salary. Yeah, that that was not a designed, you know, it was a reaction to the deposit growth that we had and that and and nothing more than that. So, it was our attempt to put to use the excess liquidity in a is thoughtful away. We could keeping in mind, the constraints of the interest rate risk that we're undertaking when we do buy Investments, which tend to be a little bit longer. So it's Charlie said, we're really trying to focus on home. Mortgage Securities that are cash flowing at this point. That's probably comprises more than 50% of the bonds that were buying and this. So they're high credit quality and just thrown off a lot of cash flow event. That we're going to need it to fund liabilities that run off at some point.
Okay. So eventually over time, we should expect that to kind of normalize as a percentage of of average earning <expletive>ets and go back to a historical level wage. Yeah, I mean, is it again? It's sort of predicated that the balance sheet kind of normalize, is you say? And, and the deposits do blow out at some point and Loan growth kicks in. And so we, you know, it's over some period of time. I don't know what. That might be, but we would expect to go back to a more normal twenty 25% of the balance sheet in the Investment. Portfolio is compared to where it is now off the caller. Thanks a lot guys.
And once again, if you'd like to ask a question please press *. Then 1. Our next question will come from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning, guys. Brian, Brian. Just one a couple from me, just on just the m&a and kind of the buyback tell you to look at on the buyback and repair to Market, it just kind of m&a. I mean, there's been a lot of discussion and activity in the market and make this. Can you just give us an update on how you guys are, you know, just how you feel about them, and how dialogue is and just just remind us or give us some update on recent recent. Here.
Sure, it's a good.
I would say that. The first thing is on the buyback is, I said, the opening comments will continue to proceed there when we think it's beneficial for our shareholders to do. So in terms of m&a, there's definitely more conversation than there than there has been, you know, during 2020 there wasn't a whole lot and there's more conversation. We don't really have anything that's imminent, but, you know, there are some opportunities during the past 60 days that we've looked at and and continue to monitor. So, yeah, there is more chatter and I would say it's it's you know it's Banks of of varying sizes as well.
Okay. And and I guess just from a maybe just jumping the credit quality for a minute, the positive Trends you saw and the criticized cl<expletive> this quarter I guess what's your expectation? Be that you know it sounds as though things are are stabilizing and you know improving on the credit side that there's more of that too, as you kind of look at criticizing cl<expletive>ifieds over the next several quarters that is still see some, you know, positive migration thereof of those trending lower
Yes, Brian this is Gary. And I I think that's a that's a good way to look at it. I see I see opportunity for continued Improvement in those ratios, over the coming quarters long. As we as we look at the portfolio, we worked through the deterioration that we had and now we're kind of coming out the other end and each quarter. I think we should see some positive trends.
Got you. Okay, and then just the last two from me, just the maybe if one for Jim just on the margin on the on the when you talk about the core Mars and Jim, I think you kind of went through something last quarter but when you make your adjustments to for the the accretion and the PPP, I mean, is your belief that the core margin is somewhere in the to 275-5277 type of range, that that type of level and you just make those adjustments. And that's kind of the core level. You're talking about, you know, you just talk about, put a bouncing around at the bottom, you know, kind of absent. The noise, it's that level and they'll make our adjustments on, you know that those other two items that are a little bit more volatile.
I feel like Brian. You're looking at my piece of paper here you the numbers. Yeah. Once adjusted for PPP and and regular loan accretion, I do get a number that's in the neighborhood of between two seventy-five to eighty in that range for a core margin in the current. And again you know we'll see. The future will be of that margin would depending on a lot of things including, you know, death that makes in the things we've talked about already. Yeah, okay, okay. Try to make sure the right starting point and then just I don't know, just on the PPP. Can you guys? Do you have the how many loans were originated in in round two? And just kind of what the I guess what the remaining? You gave them any fees and total just what they work for round one and two months at this point. It's not, I can get that off line but just that would just be if you have the wrong to originations that'd be helpful. Roughly 150. Mm.
Hours of applications right now and we you know if if they run out of money in the next week that might go up a little bit but it certainly won't go up. Materially in terms of brown one that I'm looking at Gary here, I think
If we did 345, I think we're between 200 and 210. Maybe that have been forgiven. Yep. And, and, to be honest, there are two things that play their number one. We've been surprised that more folks haven't come forward for forgiveness but also the larger loans, you know, two million and over the SBA has really not acted to forgive them to any large degree if at all. So, those two factors are in play but 200-2210, out of 345, is is where we stand on round. What? Okay. And then is this Thursday meeting fees on one round. One. Do you have that?
Ballpark.
We don't have the remaining, we put the remaining fees for the whole thing and the, the really okay. That's okay, I'm okay with that, that, thank you.
Yep, thank you. Brian.
And this will conclude the question-and-answer session. I'd like to turn the conference back over to Charlie phone for any closing remarks.
Thank you everyone, for being on the call stay safe. Stay healthy and have a great weekend back to you Cole. Thank you, thank you. And the conference has now concluded, thank you for attending today's presentation this time. You may now disconnect your loan.
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