Q3 2022 Midwestone Financial Group Inc (IOWA) Earnings Call
Okay.
Good morning. Thank you for attending today's mid West One Financial Group, Inc. Third quarter 2022 earnings call. My name is Anna and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star 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 Inc. Forward looking statements generally include words, such as believes expects anticipates and other 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 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 Midwest, One financial group eat 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 pass the conference over to our host Lynn Derbyshire interim CEO of Midwest One financial group. Please proceed.
Thank you Hannah and thanks to all of you for joining us for the call today I'm joined in this call by our CFO , Barry Ray Our Chief Credit Officer, Gary Sims, Our Treasurer, Jim Cantrell, and the chairman of our board Kevin months.
With that I'm pleased to turn it over to Kevin.
Good morning, and good afternoon, everyone.
And thank you Linda for the introduction.
I joined the call today too.
Continue our announcement of our new CEO , who.
Who will be starting with the company November 1st Charles Chip Reeves.
Is joining us.
Yeah.
Very excited to have them become part of our leadership team.
And I'm also happy that Charlie funk.
Ken continue to work for the company as a special advisor to chip during this transition period.
It's very exciting to have new leadership.
Chip brings.
Long 32, a year broad based experience to the bank.
<unk> has been in Iowa City. This week, even though he doesn't start until November one.
He's getting a jumpstart and was able to participate in several meetings as well as get to know our staff so well.
With that I just wanted to see.
To make sure you are all aware of it which I am sure you were and to celebrate the opportunity that.
Chip will bring to our continued growth.
Yeah.
Future West Midwest, One financial group.
And also one last word I'd like to thank <unk> for his service as interim CEO in this difficult time between.
Charlie's serious bike accident than today.
And we wish Charlie all the best moving forward as well so let me take it from here. Thanks.
Thanks, Kevin.
As Kevin shared ship was able to spend a lot of time with the Midwest. One team. This week and I can just tell you that the energy and the excitement are contagious.
It is already clear that he is a great fit and is well equipped to take us forward.
In particular chip commercial background, I think will be an added accelerant on the significant commercial momentum we're already experiencing.
We see good things ahead.
As we look at our third quarter results were gratified to witness the outcomes of the strategic initiatives, we've put in place across the last several quarters, we feature it in our investor presentation, and you've heard about it on prior calls.
It leaves with attracting and retaining talented and productive employees.
The right people in the right places doing the right things.
It is a focus on the heart of our business customer relationships.
And it's built on the foundation of a strong core deposit franchise.
The fruit of that focus is what you see in the third quarter accelerating commercial loan growth improving the earning asset mix of our balance sheet combined with improving credit metrics.
For the next few minutes I'll highlight a few of our key business drivers and then Barry Ray our CFO , who will provide some additional color on our net interest margin our expenses and capital.
So let's begin by just highlighting that commercial lending is clearly exceeding expectations. After a strong second quarter, we gained even more traction in the third quarter with 16% linked quarter annualized growth.
What's most gratifying is not only the volume, but how we feel about the quality of these loans.
For the last several quarters we've.
We've taken a very deliberate actions to mature our commercial banking line of business.
As we've said, it's really about talent and process.
And we're seeing the fruit of those efforts.
This loan growth resulted from a solid production quarter fewer payoffs and increased line utilization.
And what's really exciting to us is that the production is broad based.
From Denver to Dubuque, Iowa City, each of the twin cities to southwest Florida.
Looking ahead, we continue to enjoy a strong commercial pipeline and we see another strong quarter to close out 2022.
Like many we suspect the rate of growth could moderate in 2023, depending on the economic conditions.
But our focus is in maintaining.
Our discipline on client selection prudent structure and proactive business development.
While commercial has driven the bulk of the loan growth our consumer franchise has been a good contributor as well and both the mortgage portfolio and the HELOC lines, both of which show up in the residential real estate line on our balance sheet.
And thinking about loans.
We continue to realize good progress in terms of credit quality.
With only six basis points of net charge offs.
Classified loans ratio down over 104 basis points year over year.
And our nonperforming assets ratio of only 40 basis points.
We are pleased with how our portfolio is performing.
Just as important as these trailing indicators.
We are closely monitoring leading indicators of credit weakness and we're pleased to report that we are not seeing that weakness at this time.
30 day delinquencies continue to decline and the number of deposit accounts and overdraft remained flat.
On the other side of the balance sheet, we are pleased with the strength of our deposit franchise.
In times like these we see the virtues of our diverse market footprint.
Which provides more granular pricing power.
And more deposit gathering lever support.
Our increased commercial traction is also showing up in the growth in non interest bearing balances with a linked quarter annualized growth rate exceeding 9%.
Well deposit balances in total were down slightly we are very pleased with a 10% deposit beta in the third quarter and.
In fourth quarter to date, we are seeing deposits slightly up from the quarter end.
Shifting over to a fee income we're pleased to report growth from our wealth unit as well as solid momentum in both service charges and card revenue.
On a core basis noninterest income is improving.
As noted in our release loan revenue moderated with a much more modest mortgage servicing right adjustment this quarter.
The other income line did create a lot of noise this quarter and so we would direct you to our first quarter of 2022 for a closer approximation of the run rate of this line item.
With that I am pleased to turn the call over to Barry Ray.
Thank you Lynn.
The company's tax equivalent net interest margin expanded 21 basis points to 3.0% for the third quarter of 2022.
Earning asset yields improved 37 basis points, while the cost of interest bearing liabilities increased only 19 basis points.
With respect to the former the improvement reflected a favorable shift to higher yielding loan as well as higher coupons on loan originations and repricing.
New loans were brought on at an average coupon of 494%, which was up from $4 37 in the second quarter of 2022.
And higher than the overall portfolio yield of 444%.
On the liability side of the balance sheet interest bearing deposit costs rose 15 basis points, which reflected cycle to date beta of 7%.
The direction of the Companys net interest margin will obviously depend on several factors, but future margin expansion may be muted as asset betas hold steady while deposit betas increase the levels experienced in previous of rate cycle.
Moving to expenses total noninterest expense was up $2 five to $34 6 million.
Adjusting for merger related expenses of 763000 in the third quarter and 901000 in the second quarter noninterest expense increased $2 7 million.
This increase reflected a full quarter of expenses associated with the former Iowa First Bancshares Corp, which we acquired on June 19 2022.
Having now completed the core system conversion for each of the two former Iowa first banking subsidiary in the third quarter of 2022, we are on track to recognize the previously announced cost savings in connection with that transaction.
Looking forward, we're in the middle of our 2023 budget process and we'll have better line of sight on 2023 expenses later this year.
Moving to capital.
The continued rise in interest rates resulted in a negative fair value accounting Mark on our debt securities classified as available for sale.
Which is reflected in accumulated other comprehensive income.
While the tangible common equity ratio declined to five 9% at September 32022, primarily from the OCI adjustments.
We were pleased with the increase in their risk based regulatory capital ratios at both the company and its bank subsidiary.
And with that I'll turn it back to you Hannah for any questions.
Secondly, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Or any reason you'd like Germany. If that question. Please press star followed by two again to ask a question has star one.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking a question.
The first question is from the line of Brendan Nosal with Piper Sandler. Please proceed.
Hey, good morning folks how are you.
Hi, good morning Brendan.
Maybe just to start off here.
Do you have the amount of the fair value MSR benefit in the third quarter, which I think last quarter. It was like $2 4 million, but just curious for the third quarter number.
Oh, yes, it's 465000.
Great.
465.
Correct Okay.
And then maybe one more from me just on <unk>.
Certainly an exceptional quarter for you folks on the growth front and I think in your prepared remarks, you noted expectations for a strong finish to the year could you help maybe put a finer point on that should we expect something similar to the third quarter's pace or are still good, but perhaps not quite as strong.
Yes, it's a good question you know there are several Brendan this is Len there are several.
Deals of size that we're in the midst of competing for right now so our range it and what I would say is I.
Would think we'd see something between what we saw in the second quarter and the third quarter. That's how it's my expectation today.
Okay.
Got it got it okay.
One more for me.
Could you just talk a minute about the deposit pricing pressure is just kind of across the various markets, where there may be some more pressure, whereas there may be less pressure.
A couple of comments.
Barry and Jim comment as well, but I would say, what we see as the mix changes right.
Evidence of that so we see those money.
Money market and savings accounts interest bearing checking shifting with time, increasing which has been part of our tool set to defend the deposit base in.
In terms of market pressure.
Happy to have.
Barry or Jim comment further.
Brendan Nelson.
Start and say that.
I think it's probably very.
A common story to what we very likely be talking about here with respect to deposit pricing pressure in our various markets.
Eastern Iowa, obviously has what I believe to be some of the.
Highest deposit pressure given the credit Union presence I think it's fair to say that if you go to our other markets we would call those a.
A bit more rational with respect to their pricing competition.
That's helpful.
Yes, yes. It certainly is alright, thank you for taking the questions.
Thank you.
Thank you Mr. Paul.
The next question is from the line of Jeff <unk> with D. A Davidson. Please proceed.
Thanks, Good morning.
Good morning, Jeff Good question.
And just a question on the.
The expense outlook.
I understand sort of more visibility to come here, but there are with the conversion of of the.
The acquired banks.
A couple of branch closures.
Can we kind of poke around just kind of get to.
Again kind of maybe linked quarter or broadly speaking.
Where that expense if we back out.
<unk> costs, where we are.
Where we.
Settle in here.
And Jeff This is Barry.
I would say that probably if I look this quarter, so fourth quarter of 2022.
As I think about it perhaps somewhere in the $33 33, and a half million dollar range.
That also knowing that.
We could have some year end adjustments.
For an incentive comp type items, but I would say somewhere in that range.
What I would think.
Okay and the <unk>.
He said you're on track for for recognizing cost saves safe to assume that.
Yes.
No.
In 2003 would you expect any sort of tailwind to offset any any increases with with cost savings is there in other words is there still.
To be achieved cost stage that you would imagine into 'twenty three.
I think we pretty much achieved the cost saves I think we're going to get Jeff and so.
I'm hesitant to say there is a tailwind too.
Further cost saves for 2023, yes. This is Glenn I would just say I think.
The differential from Q3 to Q4 would reflect those but I don't see it.
Go forward differential after Q4.
Got it Okay. That's helpful. I didn't know if there was a lag, but youre getting them quicker than maybe you had assumed so.
Just switching gears.
On perhaps the margin.
Again.
Barry you mentioned kind of a muted.
Margin from here at least deposit pricing expected to mute what was it.
Decent expansion can I, just nailed down so are we kind of looking stable from here or.
Do you still see some earning asset yield momentum that may not yet be outstripped by funding pressures.
I think there are certainly earning asset yield momentum.
It's difficult to quantify is the.
The pricing on the deposit side and what we expect will be.
Betas on the deposit pricing side, they are going to ramp up.
As the <unk> reaches its terminal fed funds rate and so we will continue to lag that so I guess my outlook, Jeff in response to your question is.
My comments were helping muted I E. If I look at the rate of increase in the margin that we experienced this quarter would we expect that type of increase next quarter.
Probably not.
Okay.
And then just the last one a pretty remarkable growth and I know that you addressed a couple of times, but just wanted to see in the quarter. It wasn't really anything significant I think you mentioned.
Fewer payoffs increased line utilization, so sort of coming together I didn't know if there was any kind of pull forward or you just had.
Pretty significant third quarter net increase this.
Wanted to double back because it seems like a big number relative to historical run rates.
It is it is Jeff and it's it's really a function of I think some of the key talent moves that we've made and so we see those folks bringing relationships that they have had.
Over the years to Midwest, one, but as I look at it commercial production.
If I look at the first three quarters of 'twenty, one versus the first three quarters of 'twenty. Two production is up about 22% fee income is up almost 48% of more than 48%. So it's just a matter of.
The right people that are I think fishing in better places and we're seeing the results of that.
Great. Thanks.
Thank you Mr. It really is.
The next question is from Terry Mcevoy with Stephens. Please proceed.
Hi, good morning, everyone.
Good morning, Jerry Good morning, Barry maybe if I could just maybe just start with a question just talk about how you're managing the securities portfolio over over the near term what the cash.
Cash flow was off the portfolio and whether that will be reinvested in the portfolio or used to support loan growth.
Terry This is Jim I'll take that.
We have been.
Really curtailing our reinvestment since the second quarter and my my expectation is.
That is a trend that will likely continue we've had substantial loan growth.
Tiny.
Many better deposit runoff as Glen alluded to and the result has been really not much demand for securities purchases.
Again, my expectation is we're going to be in kind of a run off mode for the next quarter or so and we will see how that plays out.
Thank you and as a follow up Lynn in your prepared remarks, you talked about the importance of your people in and in hiring and the culture I'm just wondering given kind of the interim CEO and then chip being named last month.
How where do you stand with hiring and bringing on banking teams and whether theres been a little bit of a pause and whether you think if so whether that will pick up next year.
No I would not characterize it Terry is a pause we've continued to add talent.
Recently here in the corridor and in the twin cities areas.
And I would tell you that we've got conversations ongoing at in different pieces of the footprint and.
<unk>.
We see.
Continued opportunity to.
To add folks that can again as I mentioned, a moment ago bring relationships over and continue to dial up our proactive business development.
Sales performance culture.
Okay.
That's good it's good to hear and then one last question and maybe I missed it in your prepared remarks, the one time settlement in other income.
Quantified at all on this call yet.
Terry This is Barry we did not quantify that number as is.
Typical in some of these settlements.
There is a confidentiality provision related to the actual number in.
You may recall in Lynn's comments, he did point to for the other non interest income line item in the first quarter of this year is a good measure of the go forward run rate.
Perfect I appreciate that thanks again.
Thanks Terry.
Thank you Ms Jimmie cowboy.
Our next question is from the line of Damon Delmonte with <unk>. Please proceed.
Hey, Good morning, guys Hope you guys are all doing well today.
We are thanks statements, though.
Great great to hear.
Just kind of circling back on the loan growth this quarter.
Can you I apologize if I missed this play that filed in a couple minutes late but could you just talk a little bit about where within the footprint that growth was coming both geographically and from a <unk>.
Composition standpoint.
Asset class with core plus.
Sure So one of the things.
We did talk about that we're encouraged by Damon is that it really is coming it's broad based so I mentioned, Denver Dubuque twin cities, Iowa City, and southwest, Florida as I look at third quarter production. So we see it in lots of places.
The other thing that we're seeing is some.
The projects that we brought online as they've graduated from the equity phase and now are drawing into the construction phase. So that's that's been a help.
A tailwind for us so.
What I would tell you I guess the other thing I would just say just in terms of the mix.
We see that being broad based right.
Encourage to see C&I growing as well as CRE and <unk>.
In accordance with really how we're focused.
Not becoming overly reliant on any one piece of the puzzle.
Got it great I appreciate that color.
And then with regards to the margin I think you guys disclosed about $2 million of.
Fair value accretion this quarter.
Barry do you have an outlook of what we should model going forward.
Yeah.
Yes.
I guess I'll, probably give you might at this juncture. It Damon has become a canned answer but probably the rate that we experienced this quarter.
A little bit less next quarter and it will go down from there.
I think the original the original Mark on the portfolio.
Around $11 million or so.
I would anticipate it being similar to this quarter, but going down from there we tend to think of it whenever we model that David and we model that on an accelerated basis.
Recognition.
Over a four to five year period.
Okay.
Yeah.
Okay, Great and then I guess, just lastly on the provision outlook.
Just maybe provide a little more flat around.
Our reserve level.
And how we should kind of.
Think about that and how provision factors into that equation.
Thanks.
Hey, Damon this is Gary Sims.
That conversation is dairy.
Good morning, Barry if I Miss anything please.
Help me out.
You saw in this quarter.
We experienced a pretty significant loan growth.
Would call for additional.
Provision to be put aside which we did.
However, as you also noted we continue to.
Take that reserve as a percent of our asset down as we get more comfortable with the risk profile of our portfolio.
We are comfortable moving that coverage number down and as you know we're down to $1 39 average.
With our reserve I think from an expectation perspective, as we continue to grow there will be the pressure to take provision for that growth.
And we will also continue to moderate our view of that based on our view of the risk profile.
Profile of the portfolio.
Got it okay. That's helpful. Thanks.
That's all that I had so thank you very much appreciate it.
Thanks, David.
Thank you Mr del Monte.
Our next question comes from the line of Brian Martin with Janney. Please proceed.
Hey, good morning, everyone.
Good morning, Brian Brian .
Hey, just wanted you to see if you could give a little bit more clarity on maybe it's Barry but just on the fee income just going back to that first quarter level or just how to think about some of the noise. That's been running through there just with the MSR and some of the other one timers that you guys had called out.
When you were referring to the first quarter level I guess I guess are you referring to the.
The aggregate or is this the other line or just kind of how to maybe broadly how to think about the fee income line as you go into fourth quarter and maybe into next year, just kind of puts and takes.
Yes, I'll start off and ask Linda chime in the clarify whenever we were talking about pointing to the first quarter for the run rate that was really specific to the other noninterest income line item.
Lynne do you want to speak a little bit about the yeah, that's right Barry and so it's really because that line is where we've seen the most noise.
And then obviously as we've called out.
In today's conversation about the MSR.
So our focus of course is just running the business is on the core pieces. So as we think about service charge think about the wealth management group and then think about just loan revenue on its on its entirety outside of the MSR adjustments that are outside of course, our control and we see.
<unk>.
What I would call steady incremental growth and that is our outlook and plan.
In the base level today.
Or are we at where are we starting from if you kind of I guess really it was kind of getting at if you pull out some of those one timers, what's the base level do you guys view as kind of a starting point and then we can model kind of what you're talking about some of the steady growth can you give us some range on what that is here today.
Brian I think the base level is probably somewhere that where we're starting from the day is probably in the nine $5 million to $10 million per quarter range.
Got you Okay. That's the starting point perfect. Okay. Thanks, Barry and then.
Maybe just one follow up on the on the margin I know, maybe Jim or whomever, but just a very.
If you think about it sounds like Theres a bit more upside to the margin here in the short time, maybe you may not as much as we've seen but just kind of where do you guys expect or when do you guys expect the margin did kind of peak and then does it drift down a little bit from there is that how youre thinking about it today or is that is.
Is that a fair outlook.
I mean, we get what the fed does here in the fourth quarter with hang on.
On the docket.
Yeah I'll start Brian .
Difficult question to answer given there are lots of puts and takes with respect to what's going to happen to the margin but.
Yes, I would say that perhaps.
All things equal.
Perhaps the margin piece.
Pete.
Later this year in the fourth quarter and then looking from there forward is really a function of.
What happens on the.
I think the tailwind.
Tailwind that we would have would be continued favorable shift in the earning asset mix to the higher yielding loans.
Obviously as we've discussed today I think the.
The headwind would be the the repricing of our liabilities.
Closer to historical beta levels.
I'm trying to give you the best answer possible, Brian it's difficult to say, what's going to actually happen with respect to the margin given the puts and takes.
Okay, I mean, it sounds like at least for the near term you've got some upside in the fourth quarter, and then kind of see how things go from there as far as the pricing pricing takes is that fair Barry.
That's fair Brian .
And I would just add.
Just some color on the on the loan side I was just looking at for example, our commercial do you think about how things have moved in the third quarter, our weighted average yield on commercial was below well below five in July .
And in mid fives.
By September so.
Loan growth to Barry's comment about the earning asset mix.
That's a key area of our focus.
Gotcha, Okay, and then maybe just the last one for me was really given the exceptional growth. We've had mainline can you just remind us I mean, what has been a lot of discussion on just the talent and the people you've added or whatnot.
What where are the areas I guess that you've added significantly this year and if you look forward.
With the opportunities that were there continued opportunities to to add people or where you're kind of focused on adding those people today.
Sure. So definitely we've seen the most impactful ads in the twin cities market and Thats just both in terms of number of people that we have.
Attracted to Midwest, one and their contribution so that that kind of leads we continue to have.
Though incremental adds here in the corridor region I was cities Cedar Rapids area.
Dubuque, we had a key new hire in that market.
We've added some really nice talent in Denver so.
It really is broad based in what I would what I would say to you Brian as you know our attitude and posture is one of being opportunistic so folks that fit.
Our culture of disciplined credit approach and to have that proactive business development mindset. Those are the folks that we are we are looking for and we continue to be in active conversations with.
Got you, Okay that helps me and I. Appreciate you guys, taking the questions. Thanks for thanks for the time.
Thank you thanks, Brian .
Thank you Mr. Martin.
Again, if you would like to ask a question. Please press star one.
There are no additional questions waiting at this time, so I would like to turn the call over to Mr. <unk> for closing remarks.
Thank you so much Hanna and thank you again to all of you for joining us today and for your interest in Midwest. One if you have follow up questions. Please reach out directly to Barry Ray or myself and we wish you the best for the rest of the day in this weekend. Thank you.
This concludes today's Midwest, One financial Group, Inc. Third quarter 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Yes.