Q1 2022 Midwestone Financial Group Inc (IOWA) Earnings Call
Okay.
Hello, and welcome to today's Midwest, One financial group incorporated first quarter 2022 earnings call. My name is Elliot and I'll be coordinating your call today.
If you would like to register a question. During your presentation you may do so by pressing star followed by one on your telephone keypad.
This presentation contains forward looking statements relating to the financial condition results of operations and business of Midwest, One financial group incorporated.
Forward looking statements generally include words, such as believes expects anticipates another similar expressions.
Actual results could differ materially from those indicated.
Among the important factors that could cause actual results to differ materially our interest rates change changes in the mix of the company's business competitive pressures general economic conditions and the risk conscious detailed in the Companys periodic reports and registration statements filed with the Securities and Exchange Commission.
Midwest One financial group incorporated undertakes no obligation to publicly revise or update these forward looking statements to reflect events or circumstances. After the date of this presentation.
I would now like to hand over to Charlie Funk CEO to begin. Please go ahead.
Thank you Elliot and good day, everyone in the room today are in Iowa City with me Barry Ray, Our Chief Financial Officer, Gary Sims, Our Chief Credit Officer, Jim Cantrell, our Treasurer, and Chief investment Officer, and our President Linda of Asia.
I'll give a brief overview of the quarter and then let Barry and let him speak to some of the specifics as we did have a few unusual items in the report this quarter, we're very happy to report a fourth consecutive quarter of loan growth, which.
Was around the 5% Mark a linked quarter annualized and we feel like there's a good pipeline in store for us as we go through the rest of the year. It's notable that we did swing and Miss on a number of deals.
Because competition again is very very keen to give you an idea we lost a fairly sizable loan that was in our portfolio about a month ago.
And the term was $3 30 fixed for 10 years.
And we and in some markets not all we do see the loan to values being pushed out as well.
As I said, we have a a good portfolio of construction loans funding as the year progresses.
And in terms of the growth that we saw in the quarter I would specifically highlight the twin cities market.
Our des Moines, Iowa City markets in Iowa, and southwest, Florida stood out in our quarter, but we also were able to hire a senior commercial banker to at a senior management level in our Iowa footprint well.
Well known throughout eastern Iowa, and we feel like that will be a huge benefit to our company going forward.
As I said, we have a good pipeline to start the second quarter and I would include Denver in that.
Group is having a very strong pipeline.
We did report a sizable MSR adjustment and that clearly helped our earnings during the quarter I think.
Several years ago, when we consciously decided to build our servicing portfolio. It was for times such as these when production.
<unk> production would be down.
Usually due to rising interest rates and that would be partially offset by positive MSR adjustment. So it worked pretty well at least in this quarter.
We thought our wealth management was pretty steady despite the negative markets pricing in the markets are LPL brokers continue with good production, we have a good pipeline and our trust department, but we know from experience that.
When portfolios move it can often take several months to move our portfolio, but we do guide to the back half of this year and we think we will see.
Increasing revenues from our wealth management group.
In terms of expenses I have a few comments on expenses expenses were much higher than in a normal quarter at Midwest. One we did have significant legal fees as well as some personnel procurement.
Elevated costs that contributed to that one of the things. Our company has always been solid on is our expense management and we expect that to continue going forward and our normal run rate is definitely lower than it was this quarter.
We do continue to spend significant dollars on technology, because we realize that technology the right technology.
Well constructed as a key to our future and one other comment on on expenses, we do continue to <unk>.
Monster.
Appropriate number of offices and we will continue to accept to assess that going forward.
We note just an interesting sidelight that in the first quarter, our branch teller transactions were down 11% from 2021.
And our mobile logins were up double that 22%. So clearly fewer people are coming into our offices at Midwest, one and we expect that trend to continue.
Asset quality stable to improving.
Net charge offs of 28 basis points those were loans that had been identified and we decided to move on and.
Otherwise.
No real story and in asset quality at 142%, we think our allowance is solid and we see more progress in store on that horizon in 2022.
Terms of capital we did move as noted in the release, one and a quarter $1 billion of securities to held to maturity that was effective.
One $1 22, and we did this with the belief and knowledge that our liquidity will continue to be strong.
TCE declined 29 basis points to seven two <unk> percent Reg.
Regulatory capital ratios remained strong and we highlight CET one down slightly from the prior year at 982%, we continue to be opportunistic with share repurchases.
And last but not least just to comment on the Iowa first transaction, we announced that deal on November 4th I believe that was the date of our announcement and also on May 4th it'll be six months since we announced the acquisition.
We've had no pushback at all from our regulators and are constantly being told that we are in the queue.
But we still don't have approval and we will admit to some frustration that a deal of this size is taking this long for approval.
And we also note that the increase in interest rates that we've seen since we announced that transaction should be a positive for 2022 and 2023 earnings accretion as a result of this transaction, we just need to close.
And with that I will turn it over to Barry Ray.
Thank you Charlie.
Walk through the financial statements beginning with the balance sheet, starting with assets core loans increased $32 8 million or four 2% annualized from the linked quarter led by commercial loans, which increased $35 million or five 4% annualized from the linked quarter.
The allowance for credit losses declined $2 $5 million due to net charge offs of $2 2 million and a credit loss benefit related to loans of <unk> 3 million and net charge offs stemming primarily from two relationships and reflected our resolution plan for those credits.
Nonperforming assets were $31 5 million at March 31, 2022 down slightly from year end 2021, and down 31% from the prior year period.
Deposits were down slightly from the linked quarter, but up 6% from the prior year period, our deposit mix improved slightly to favor non maturity deposits and our cost of total deposits and cost of funds each declined one basis point from the linked quarter.
Finishing the balance sheet total shareholders' equity equity was down $23 million from year end 2021, due to a $33 $2 million negative valuation adjustment on the debt securities portfolio as Charlie noted during the first quarter of 2022 re reclassified approximately 50% of our debt securities portfolio.
To held to maturity to mitigate the negative impact to tangible book value from rising rates.
Moving onto the income statement net interest income of $37 3 million was down $1 3 million from the prior year period, but up $2 5 million or seven 5%. If you exclude PPP fee income in loan purchase discount accretion for.
For interest income loan interest income declined from the prior year period, primarily due to less ETP benefit and loan discount accretion, but was partially offset by increased income from our debt securities portfolio.
Noninterest income was $11 6 million for the first part of 2022, which was up from the linked quarter, primarily due to loan revenue loan revenue in the first quarter reflected a $2 7 million favorable adjustment to our mortgage servicing right, whereas the linked quarter MSR increase was <unk> 9 million.
Finishing with expenses noninterest expenses were $31 6 million from the first quarter of 2022, which was up from $34 million in linked quarter.
As noted in our release and as Charlie touched upon legal and professional and occupancy extensive premises were elevated this quarter, while those costs were operating in nature and we do not believe they will recur at those same levels in future quarters.
We believe our quarterly expense run rate is closer to $30 million, but expect it to be above that level in next quarter.
With that I'll turn it over to Lynn.
Thanks, Barry speak.
Speak just a few minutes about where we are focused from a priority perspective and of course as you would expect it's all about revenue.
When we think about driving revenue in our business Charlie spoke earlier about technology and that technology spend is both about remaining relevant to our customers and efficient in our operation.
The key lever for us from a revenue perspective is always about talent the right people in the right places doing the right things.
And we're seeing encouraging results and pushing for more in that regard.
<unk> heard on this call about commercial loan growth and the number that stands out to me of which I am most proud is that our commercial production in the first quarter is up over 8% from the same period in the prior year.
Charlie spoke to the pipeline as we look forward and that includes two important components. One is new opportunities that we continue to work diligently.
Is that a lot of our production is in construction loans that will fund up across the balance of the year.
And we look at the consumer side of the balance of the loan balance sheet net production is basically level on a year over year basis, but we're seeing less cannibalization a year ago. This quarter with the mortgage refi business being what it was we saw cannibalization of consumer balances, but in the <unk>.
First quarter of this year, we're basically staying level as opposed to a 4% decline in the same period last year.
On the deposit front, while it's a flat essentially flat quarter in deposit balances. We are pleased that retail deposit sales so new money coming from new retail households is up 12% compared to the same period last year and.
And importantly, we continue to enjoy net new accounts on both the consumer and the business side.
We're growing and we're focused on continuing to grow.
Wealth management revenue is up 6%.
Quarter over quarter basis over the same period last year with assets under management up 5%.
And as Charlie spoke to at the top of the call. We're certainly continuing to drive for and expect wealth management income in the latter part of this year to be a growing contributor.
I would also point out just in terms of noninterest income that we look forward to filing industry best practice and keeping our customer at the center of our operation by enhancing our deposit offerings with respect to NSF fees.
The good news as we drive our business in that way is that we think this positions us well competitively it serves our customers and communities.
Alignment with our mission and purpose.
And we've been able to make other fee adjustments.
To balance out the fee outlook for the rest of the year.
Finally, I would just.
Supplement Charlie's comments about our new commercial banking executive here in Iowa, and we see that not only is a great add for the company, but a real complement to the wealth management team we spoke of in the Cedar Rapids market in earlier calls.
And with that I'm pleased to open it up for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad now if you change your mind. Please press star followed by chip.
When preparing to ask a question. Please ensure your finance unused to directly.
Yes.
Our first question today comes from Brendan Nosal from Piper Sandler Your line is open.
Hey, good morning folks how are you.
Good morning, good morning.
Okay, maybe just to start off here on the securities portfolio.
The move to held to maturity was clearly.
A very prudent move given what we've seen so far in the yield curve this year.
I am curious about two things one.
Would you consider making another move in that book.
Two HCM and then two can you just remind us how much of that portfolio.
<unk> are adjustable rate.
Brennan This is Barry I'll start and say the answer to your first question is we do not expect to make any further adjustments with respect to reclassifying Ava.
Available for sale to held to maturity securities.
And I think it's fair to say that we don't necessarily expect to add a whole lot more to the held to maturities portfolio.
While our current thinking is.
Jim can you speak to the fixed and variable.
I will we do own a few variable rate securities.
And our LIBOR and silver base.
Corporate securities the amount is somewhere in the neighborhood.
$125 $150 million variable rate securities.
Got it okay. That's helpful.
And then I just want to make sure.
That I heard Charlie's comments on expenses correctly, it sounded like that the underlying run rate you think is closer to $30 million, but it might be elevated a little bit again in the second quarter before kind of dropping off to that level later in the year of course apps that the deal.
You've got the important part there at the end there Brennan extra deal correct, yes, yes.
That's what we.
That's what we expect right now.
Yes.
Understood.
Thanks for taking the questions.
Thanks Brandon.
Our next question comes from Terry Mccafferty from Stephens. Your line is open.
Hi, good morning, everyone.
Good morning, good morning.
Maybe a question on deposits overall could you just talk about deposit pricing competition in your marketplace.
Do you think expectations are.
And then just looking at your average balance sheet, you've got $884 million of average time deposits at 49 basis points maybe.
You could discuss the opportunities to reprice that lower this year.
Yes, Terry this is Jim I'll start out on that one I wish I believe that we had a lot of opportunity to reprice, the Cds lower I suspect that we're probably close to that.
The trough.
Does it cost.
<unk> seen some local market competition here in eastern Iowa already mostly credit Union competition start to rate CD rate.
Not appreciably, but they are probably sitting at 50 basis points, maybe 70, Monica, both where we are.
As of the first fed tightening that happen.
March we haven't we have not made CD rates.
Nor any of the rates on the deposits yet so I'm somewhat optimistic that we'll be able to hold the core account types of rates.
Savings account or checking account pretty steady.
But I think we'll see some competition move on the seating.
The question Mark in my mind.
So we will be able to move those rates.
Our plan is to move fairly slowly.
And maybe as a follow up could you talk about the health of your agricultural borrowers within your markets I know commodity prices are higher but there seems to be a lot of concerns around.
Just.
Inflation in fertilizer costs et cetera.
Sure This is Gary.
I'll start that conversation.
Charlie do you have anything to add please do.
Youre on the right track the 'twenty one.
Crop season with it Barry.
A good one.
We had good yields in eastern Iowa, where our AG exposure is and combined with the prices that you.
Mentioned it was a good 21, we're going into the 'twenty two season with our borrower group and probably the best shape. They have been in the past five six maybe even more years.
For 'twenty two.
Most of our borrowers the vast majority of our borrowers and lock in their input cost in terms of fertilizer, probably one of the main ones that we have to think about.
So we do anticipate 'twenty two being another good solid year good prices.
Input costs are under control for 'twenty.
As we look forward 'twenty three will be a.
The year that we will be challenged with having to deal with higher input costs and even more.
More specifically that fertilizer, so that's kind of our outlook at this point that out.
It does I appreciate it and thank you for taking my questions.
You bet.
Elliot are there other questions.
So connected solutions.
Hello.
This is Terry Mcevoy can you can you hear me am I still on the in the queue.
Year over year.
Hear you okay.
Yeah, I tried to step aside as hopefully the operator can move.
The call forward.
Yeah.
Okay.
Our next question comes from Jeffrey <unk> from D. A Davidson. Please go ahead.
Hi, Thank you good morning.
Hi, Jeff, Jeff, It's nice to hear from you.
Oh, Yes, just wondering if something I did.
So just wanted to check in.
Charlie on perhaps on <unk> first.
Since the early November announcement.
I wanted to kind of see about how.
Operations have gone there in terms of growth.
Expenses, just expectations on that transaction.
And as we kind of head towards a potential close in <unk>.
Well, thank you Yale.
Generally positive.
The cooperation we've got particularly from the Muscatine back which is the largest bank.
In the company.
About 70% or solve their assets has been great and as you know as anyone would know the longer these things drag out the harder it gets too to get to close because employees leave and so we're dealing with a little bit of that but overall I would say pretty part.
Positive we just found out this week that <unk>.
The Muscatine bank has increased its lending significantly.
The.
The deal was announced so I think all the trend most of the trends there are still pretty good and I think when when it does close as I said in my opening comments, we do expect to see a little bit better earnings accretion maybe than we had thought and thats, primarily driven by the higher interest rates that we have because they do have a large securities portfolio.
No.
And they've kept it very very short as they ever.
We have waited for the merger so I hope that helps a little bit.
Yes, it does and I mean, you sort of at the Mercy of regulators any idea on.
<unk>.
May or June close.
The second one would be.
Conversion timing.
Yes.
Okay.
So those are those are good questions I wish I could give you a definitive answer.
If you would've asked.
On our last earnings call, we would have thought that we could probably get this thing closed in April and.
Now, we expect to hear any day, but we've been expecting to hear any day for the last month or so.
Again, there's been no pushback no concerns expressed by the regulators. So I will guide you to mid May or June 1st as the likely day is probably as I sit here today, maybe June <unk>.
And Jeff This is Barry with respect to the conversion date.
Or if we if we hit those dates that those close date that Charlie just outlined we should still be in.
Good shape too.
<unk>.
Complete our conversion to plan, which are July and September correct.
Obviously, if it pushes beyond that at a minimum that July conversion date, a little bit more potentially problematic but.
So far.
So far we're still okay on that front.
I appreciate it thanks.
Maybe Barry wanted to.
Interrelated PPP and margin do you have a core margin.
If you ex PPP and accretion linked quarter.
I do Jeff core margin ex PPP and accretion one second please.
269 is what I've got for the core margin for the first quarter, Jeff and $2 66 would have been the linked quarter core margin ex PPP in purchase accounting.
Okay, and one follow on the PPP interested fees.
Quarter.
Or just that the reduction.
Or if you have the absolute balances thats great but.
I have to ask the PPP interest and fees in the first quarter at 834000.
The fourth quarter 2.128 million.
Yes.
Great.
And last one.
While we are housekeeping here the line utilization I think you mentioned that was up what was that linked quarter.
Did you have debt at the end of this is land at the end of March we were at 35%.
Okay.
Up from sub number.
Turning higher I suppose excuse me, yes up from 33 at the end of December .
Okay Fair.
Fair enough I'll step back thank you.
Thank you Jeff Thanks, Jeff.
Okay.
Our next question comes from Damon Delmonte from <unk>. Please go ahead.
Good morning, guys about what he is doing well today.
Hi, D'amato first question just to kind of.
Hey, Charlie just to circle back on for.
Jeffs question about the core margin so Barry if $2 69 is that the core margin here in the first quarter.
Can you just give a little perspective on how you think that reacts with like each 25 basis point move by the fed.
And if not that specific than just kind of some of the puts and takes as you look out over the next few quarters.
Okay.
Yeah, I'll start with that Damon and Jim jump in here.
You feel compelled.
We've kind of been talking about in terms of.
Every 100 basis point increase impacted the margin and we believe the margin may benefit five to 10 basis points for every 100 basis points.
Okay.
Of rate increase.
The color I would add there is.
Thats sort of is presuming.
Pretty successful and lagging our deposit.
Increases our models would say we're fairly neutral.
That assumes kind of a normal beta which for us would be 20% to 25% we think for the first 100.
For the first 100 basis points of increase will likely be able to.
Raise rates at or below beta normal beta historic data right. So.
I think Barry right at a 100 basis point move by the time, we get to the end of the year, we might be five to 10 better than.
And then we are today.
Okay, and Jim can you just remind us what percentage of the portfolio is floating and what percentage has floors.
They are relative to those for us.
Yes.
Yes.
Some of floating versus fixed.
On the on the loan book, we're looking at between <unk>.
30%, 40% of the.
Portfolio is variable rate.
Many of those do not have floors. Those that are with floors. After the first 25 basis point increase I would say, we havent about another.
150 million $100 million to $150 million in loans, but still have some amount of floor. If we if we get 50 basis points next week is the market expect.
It'll just be a very few loans that are left.
Below their floor rates.
Yeah.
Got it okay.
Okay. That's helpful. Thank you and then.
I think Glenn you made the comment about kind of moving to reduced NSF NSF fees kind of as a best practice.
Could you.
Clarify that the timing of that are you able to quantify what the expected impact is to that line item.
Sure David we are actually will be formally announcing the program on Monday. So you can see the details of it I can tell you from a financial statement impact perspective, we model that on an annualized run rate at 400000.
<unk> been able to identify offsetting fee adjustments.
From loan fees non customer ATM fees.
As well as some treasury management other deposit fees that we feel like we'll offset that impact so net neutral.
Got it okay.
That's good.
Okay. That's all that I had for now thanks, Thanks, a lot guys.
Thank you Damon.
Our next question comes from Brian Martin from Janney. Please go ahead.
Hey, good morning, everyone.
Hello, Brian .
Maybe one yeah.
Yeah, maybe maybe just one for me just on the back to the last one on margin just for a minute I mean Gemini.
Are you, suggesting that the when you say, 30% is variable is that.
It's probably about $1 billion, maybe a little bit less is that moving immediately with with rates are there is that just variable theyre going to be price over time.
Clarify a little bit on that or can you give any any additional color.
And I know various looking at his screening EMEA some fresh numbers, but my recollection is you are right.
Not all of that prices instantaneously. So it may be right around $1 billion, maybe a little maybe a little more of a fight count if you count the term CMT adjustable loans. It may not reprice for some time, but immediately adjustable is probably about I'm guessing I'm not guessing I think it's about half of that amount.
Then we have some again.
CMT.
<unk> loans, which are going to price over the course of the next year.
No.
Even some of our even some of our prime loans don't price instantaneously reprice once a month a few of them even prices just once a quarter but.
Most of them are going to be repricing in the next three months.
Gotcha Okay.
Alright, and then how about just.
Maybe I don't know maybe for Barry just on the on the fee income.
I guess when you guys talked about the <unk>.
<unk> being up maybe a little bit, but you've got that.
The impact of a higher rates can you just talk a little bit about how you're thinking about fee income in aggregate I.
I guess, a couple of items, how theyre going to ebb and flow and kind of the run rate of how we should think about that.
Going forward in that I don't know that theres much.
Far as mortgage recapture that remains but is that a potential that there's more of that to come.
Brian This is Barry I'll start.
I think with respect to fee income in the aggregate.
I'm thinking about it really with respect to you know.
Nine to $9 $5 million per quarter and this is exclusive of the exclusive of the acquisition, Brian I'm kind of thinking about it on that type of run rate.
Where I am thinking about it with respect to the.
Mortgage servicing right if that's your question.
That's a that's a non linear function. So we've captured a good chunk of that.
We've captured a good chunk of that in the first quarter and we do not expect that kind of magnitude.
The increase in future periods.
Gotcha Okay.
Maybe just wanted to expenses it sounds as though you may given the branch visits are lower that may be something that's on the table later in the year I guess, if we think about potential that occurs is that a yes.
As most of that savings potentially if you announce something.
It reinvested in the company is that how you would think about something along that front.
That's how I would think about it yes, I think that we would.
Reinvest those proceeds into continued technology investments.
Yes to give you some perspective Brian .
You go back to 2019, we had 62 offices in the company.
We have 55 and as I think we've said.
On past calls we have a lot of we're in a lot of markets, where we just have one office in the market. So we don't we don't perhaps have the density.
A company that would be located primarily in metro markets. So we just need to be thoughtful about this and we don't see anything that's.
It's huge and <unk>.
Terms of numbers on the horizon, but we do think we've got some room to continue to trim around the edges.
Got you, Okay and just.
As far as the last one for me is just on the rate.
Sensitivity guidance just the acquisition.
How that how you're thinking about that to impact the March.
Margin in kind of your rate Youre right conversations.
Brian This is Jim I will take that first of all the acquisition is in terms of balance sheet size is relatively small and I would say that.
Balance sheet.
Similar in composition to ours in terms of deposit makeup in terms of loan to terms of the asset mix.
In terms of loans versus securities. So, we're going to look a little bit like us coming over.
I would expect that.
They have a little bit of liquidity and we will convert some of their securities into securities that look a little bit more like ours. So I think we will get a little bit of <unk>.
Increase in net interest income.
I think that will be positive on the margin it may be a slight drag to the margin.
I think they probably hold a little more cash and securities and we do so mix is probably a little less favorable but again, it's a 10% of our.
The legacy bank asset so it won't have a huge impact.
On the margin.
Yeah Okay.
Got you Okay perfect well. Thank you for taking the questions guys I appreciate it.
Thank you Brian .
We have no further questions I'll now hand back to China Fox for closing remarks.
Yes, Thank you Elliot and thanks to everyone, who joined the call today as always if any of you have further.
Questions or need further clarification. Please contact any of us would be happy to respond to wish everyone, a great day and a great weekend.
Sure.
Today's call is now concluded I would like to thank you for your participation you may now disconnect your lines.
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