MidWestOne Financial Group, Inc. (MOFG) Earnings Call Transcript & Summary

Good day, and welcome to the 2020 Annual Meeting of the Shareholders of MidWestOne Financial Group, Inc. Conference Call. [Operator Instructions] This presentation contains forward-looking statements related to the financial condition, results of operations and business of MidWestOne 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 are 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, Inc. undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Please note that this event is being recorded. I would now like to turn the conference over to Kevin Monson, Chairman of the Board. Please go ahead, sir.

Thank you. The annual meeting of the shareholders of MidWestOne Financial Group, Inc. convened at the Downtown Iowa City Branch of MidWestOne Bank in the Summerwill Room, Iowa City on Thursday, April 16, 2020, at 2 p.m. Central Time, Kevin W. Monson, Chairman of the meeting, presiding. Welcome, everyone. This is unprecedented times. I want to say that we have no shareholders other than bank executives in the room. And our few staff members and Charlie are all separated by the social distancing required by our governor. Good afternoon, ladies and gentlemen. Welcome to the 2020 Annual Meeting of the Shareholders of MidWestOne Financial Group, Inc. I'm Kevin Monson, Chairman for this annual meeting. This meeting will be recorded for playback purposes. At this time, I call the meeting to order and will introduce the directors of the company and the bank. In addition to myself, our current directors are Larry Albert, Charles Funk, Douglas Greeff, Jennifer Hauschildt, Nathaniel Kaeding, Charles Schrup, III, Douglas True, Richard Donohue, Janet Godwin, Richard Hartig, Matthew Hayek, Tracy McCormick, Ruth Stanoch and Kurt Weise. Additionally, our current directors emeriti are John S. Koza and W. Richard Summerwill. Our 5 director candidates that we are voting on today are Larry Albert, Douglas Greeff, Douglas True, Charles Funk and Jennifer Hauschildt. We are very proud of these Board members and are grateful for their dedicated service. This is your annual meeting. We want it to be as informative as possible. And now to the business of the meeting. Your voting instructions will be carried out this afternoon by the appointed proxies. They are Charlie Funk and Barry Ray. This year, we use the SEC's notice and access rule that allows us to furnish our proxy materials over the Internet to our shareholders instead of mailing paper copies of those materials to each shareholder. Notice of this meeting, containing the instructions on how to access our proxy materials and vote, was mailed on or about March 6, 2020, to all shareholders of record as of the record date, February 20, 2020. The polls have been open for voting on the matters listed in the notice since March 6, 2020, and will close for voting on any item when discussion has been completed on that item. Since no shareholder nominations or proposals were filed in advance of this meeting, the business of this meeting is limited to the matters listed in the notice in accordance with the provisions of the bylaws. The notice of the meeting and affidavit of distribution of a notice will be inserted in the company's minute book. Ken Urmie, the secretary of this meeting, has reported that there are in excess of 13,169,000 common shares represented at this meeting, which constitutes approximately 81.45% of the outstanding shares entitled to vote here today. Because the majority of the voting shares are represented here today, a quorum is present. As Chairman of this meeting, I declare a properly constituted meeting, duly organized and ready for business. We will now proceed with the business of the meeting. The minutes of the prior meetings. The prior annual meeting of shareholders was held on April 18, 2019. I will entertain a motion that we dispense with the reading of the minutes of this meeting. We have a motion that's been moved and seconded. Is there any discussion? If not, all those in favor, say aye? [Voting]

Opposed? [Voting]

No? Okay. The motion is carried. Ken Urmie has been appointed to act as inspector of election. Ken has been duly sworn in as inspector of election, and his oath will be filed with the records of this meeting. That completes the necessary formalities. Our first proposal today is the election of directors. The first matter is the election of 5 Class 1 members of the Board of Directors, who will each serve a 3-year term. As listed in the company's proxy statement, the Board of Directors has nominated Larry Albert, Charles Funk, Douglas Greeff, Jennifer Hauschildt and Douglas True to serve as Class 1 directors for 3-year terms ending in 2023 and until their successors are duly elected and qualified. The nominations are already before the meeting, so no further action with respect to them is required. We shall now proceed to take the vote for the election of directors. [Voting]

The polls are hereby closed on this matter. The second proposal today is the advisory vote on executive compensation. The next item of business is a nonbinding advisory resolution regarding the compensation of the company's named executive officers, a description of which was contained in the proxy statement for this meeting. Accordingly, I now will entertain a motion to approve the following resolution. Resolve that MidWestOne Financial Group, Inc.'s shareholders approve on an advisory basis the compensation of the company's named executive officers as described in the section caption Compensation Discussion and Analysis and the tabular disclosure and narrative discussion regarding named executive officers' compensation under Executive Compensation contained in the company's proxy statement dated March 6, 2020. Is there a motion?

I move.

Second?

I second that.

Motion has been made and seconded. The polls are hereby closed on this matter. The third proposal is the ratification of the appointment of our public accounting firm. The final item of business is the ratification of the appointment of RSM US LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020, a discussion of which was contained in the proxy statement for this meeting. Accordingly, I now will entertain a motion to ratify such appointment.

I move.

I second that.

Motion has been made and seconded. The polls are hereby closed on this matter. That concludes the voting at this meeting. While the votes are being tallied, we would like to make some comments regarding the company. I am pleased to introduce our President and CEO, Charlie Funk.

Thank you very much, Kevin, and thank you for everyone who joined us remotely today. It's my privilege to have the opportunity to speak with you today. And obviously, the circumstances today are unique and far different from any of the previous 84 annual meetings in our company's history. For those who normally attend this meeting, you'll likely be relieved not to have to endure the series of graphs and statistics that normally accompany this presentation. But what follows is a brief summary of our 2019 results, which provide most measures the best financial year in our company's history. I will then turn to the current situation of pandemic as it relates to MidWestOne. 2019 was a full year, a very busy year. It was a year of highs and, yes, a few lows. But when the final tally was made, the results were good: net income of $43.6 million, up from $30.4 million in 2018; earnings per share of $2.93, up 19.4% from the $2.48 earned in 2018. And as noted before, both of these are all-time records for MidWestOne. Return on average assets climbed above 1% to 1.04%. And more importantly, our return on average tangible shareholder equity climbed to 13.98%. We believe the return on tangible equity and growth in earnings per share are the 2 most important measures of profitability in our company. We're also pleased to see our efficiency ratio, a measure of the cost of generating a dollar's worth of revenue, fall to just above 57.5%. This is also a solid number for MidWestOne. As longtime shareholders are aware, our company has struggled since 2016 with lesser asset quality than our Midwestern peers. And while our metrics remained below our peers, we did see some improvement in asset quality in 2019, and this improvement was one reason for our record earnings year. A large percentage of our nonperforming loans reside in the Iowa portion of our economy and many, though not all, are the result of a continued weak agricultural economy. I will speak more on this topic in a few minutes. The biggest event for our company in 2019 was the May 1 acquisition of ATBancorp, a $1.4 billion bank holding company headquartered in Dubuque, Iowa. There were 2 bank subsidiaries in the AT structure: American Bank in 5 Wisconsin communities; and American Trust, which was headquartered in Dubuque but also had offices in Dyersville, Farley and Des Moines, Iowa. Shortly after the close, we converted the Wisconsin bank to MidWestOne's operating systems, so this conversion was relatively uneventful. The July 15 conversion of the Dubuque bank, however, was more difficult. From the start, we had the conversion problems, and this created stress for our customers as well as our staff, both frontline employees as well as operations and other support personnel. The problems that occurred were not from a lack of hard work or planning. Sometimes technology just refuses to cooperate. But most impressive to me is that no one ever gave up, and we continued to work together to make things right for our customers. Today, that is behind us, and the results from the former ATSB continue to improve. At this point, I would like to cite 2 significant and immediate contributors to MidWestOne from this acquisition and they merit commendation. The MidWestOne Home Mortgage Center had an outstanding year in 2019, fueled in part by the drop in interest rates. Results throughout our company were strong, and they were fueled by the addition of the Dubuque-based mortgage team. This team in Dubuque continues to produce. And in the first quarter of 2020, MidWestOne was the strong #2 in the home mortgage origination market in Dubuque County, narrowing trailing the largest credit union in that market. Our home mortgage team throughout the company fought through the merger, survived the workload of a strong market and had a stellar year. In early 2019, we were already set up to have a good year in mortgage in Minnesota and in the Iowa legacy MidWestOne markets, and adding the folks in Dubuque made it that much better. Very well done. And then the MidWestOne Trust Department. When we announced the acquisition, we were excited to triple the size of the existing trust department in MidWestOne. As of year-end 2019, we now manage more than $1.6 billion of assets. One of our operating principles is to work as one team, and these 2 departments have come together very nicely. There have been few merger-related customer defections, and our 2019 investment results were strong. We see a bright future in Dubuque and in Iowa City. And when the current economic situation improves, we hope to expand our wealth management into the twin cities. We are much stronger as a company with the Dubuque trust operations integrated into MidWestOne. In summary, there is no doubt that the addition of American Trust, ATBancorp to MidWestOne was the big factor in our record 2019 performance. And as I conclude my 2019 review, I will go around the company and offer a few very short observations about the year. I will start with the geographic tour of the footprint. Our Western outpost in Denver had another very strong year. We have a great team in Denver. And after less than 3 years in operation, we had more than $50 million in deposits and over $115 million in commercial loans. And most of those loans are commercial and industrial loans, not commercial real estate. We have added bankers in Denver, and we expect further growth in 2020 and beyond. Our Twin Cities operations lagged a better 2018 in terms of results. But nevertheless, the Twin Cities had a strong year with growth in both loans and core deposits. We have excellent leadership in both commercial and retail banking in the Twin Cities. And most significantly, the asset quality of this loan portfolio was outstanding as of year-end 2019. And I would also note, the asset quality of the Twin Cities has been outstanding since we purchased Central Bank in 2015. We continue to see great potential for our Twin Cities operations. In Iowa, every region of Legacy MidWestOne had nice increases in deposit balances during the year. Our loan totals suffered in these regions primarily due to the poor ag economy and also due to a significant number of low paydowns from our customers. The current economy notwithstanding, there appears to be a good growth pipeline in Iowa in 2020. When we acquired AT, we also acquired talented banking teams in the Dyersville and Des Moines, Iowa markets and also in Southwest Wisconsin. Our teams in Dyersville and Southwest Wisconsin have long-standing and good commercial and ag banking relationships and solid teams. We have good bankers in Des Moines with prospects for growth in 2020. Our Dubuque bank is the largest in Iowa in loans and is second to the Iowa City region in deposits. This team has come in together and is off to a good start in 2020. We have a lot of potential in the Dubuque market as we market our strengths and our relationship bankers. And finally, our Naples and Fort Myers, Florida, offices had strong years. While loans were up only marginally in these markets, core deposits increased more than 10% and our employee engagement in these markets is high, thanks to the strong leadership that we have in those markets. Also noteworthy is a record year from our Iowa investment services brokerage operations. This group operates with integrity, and they combine that with good recommendations and hard work. Of course, we should also mention the several hundred employees in our company who operate in support functions. The achievements just cited would not be possible without the support from so many departments, and I will miss a few of them. I can't mention them all, but they range from various deposit and loan operations areas to IT and information security to risk management to credit analysis and support the special assets, which works with problem loans, to finance and accounting to property management. We have strong support functions within our company. Our capital position is strong, well in excess of regulatory requirements and with the tangible equity to tangible assets ratio of 8.48% as of year-end 2019. Finally, our shareholders were rewarded with a 46% gain in our share price in 2019, and this outpaced the bank index averages as well as our Iowa peers. With that said, it has been a rough year for almost all bank stocks to date in 2020 and the significant decline that began on February 24 continues today. MidWestOne Financial Group has slightly trailed our peers in the averages thus far in 2020. For those that are interested in viewing our 2019 Annual Report, it can be found on the MOFG Investor Relations website under the SEC Filings tab in the Financial Documents section. I now turn to the current situation of pandemic and the rapidly weakening economy. Just as your individual situations have changed, so too has MidWestOne had to rapidly pivot and adapt to a radically new world. Much of what we have done has been replicated in one way or another in most financial institutions throughout our country. Our employees' safety and good health has been at the forefront of all decisions. As such, our lobbies have been appointment-only for several weeks and most business is being conducted via drive-up windows, ATMs and digital channels. Our customers seem to be adapting very well. We have approximately 1/3 of our workforce working remotely, i.e. from their homes. This took enormous effort from our IP and information security department. But as usual, they answered the bell with professional and good work. We have many more conference calls now and far fewer in-person dealing. We've offered loan payment relief to our consumer and business customers. We will continue to work with all who will work with us. And interestingly, to date, we've had very few consumer loan requests for payment relief, but that could change quickly. We've had a significant number of businesses request 3-month payment deferrals. We expect this to continue in the months ahead. When possible, and this is something I'm very proud of, we've stepped up our support of local businesses. We know that if a restaurant can serve an extra 10 to 15 carryout meals on a given day, it makes the difference, and all of our local advertising has emphasized buying local. We will continue to do that. We've also answered the call to assist our communities via the SPA's PPP program. This is the U.S. government's small business relief package that is being distributed through banks and was just capped today. So we now await for Congress to appropriate more money, so we could continue this program. I'm very proud to say that MidWestOne was set up and ready to go the first day program applications were available. As with any large-scale government effort, there were numerous problems and inconsistencies, especially in the first few days, but this company and its employees persevered. We have strong leadership, and we had even stronger teamwork to take applications, get them in, and now we're in the process of getting the funds out the door to those in need. As of last night, we had taken 1,735 applications for a total of $337.5 million. Let me repeat that, 1,735 applications for $337.5 million. I would also note that the application process was stopped this morning whenever the government reached its $349 billion limit. And we had employees working last night at midnight to continue to input applications so that those customers would receive money today before the funds ran out. As I said, very proud of our employees. One further note, unlike many other banks in our region, our balance sheet is strong enough to take this additional volume, and this is noteworthy. We're going to take all this on our balance sheet. We're proud of that fact, and we will continue to take applications whenever the program opens up again. My concluding remarks on the pandemic and the economy can be summarized in one sentence. We really don't know what's going to happen, and we can only prepare to face difficult times. So that's the lead-in. Here's what we do know. We do know that we will have borrowers who were in good situations on March 1, who are now struggling and may continue to struggle. We will work with those borrowers. We know that it's unlikely the economy will return to the normal 2.5% to 3% growth path anytime soon. What does this mean? It means fewer people working, fewer dollars in circulation to support the strong consumer-led economy that the United States had prior to this downturn. This will hurt. We know that when we get to the other side of this, the world will look different and some changes will not be reversed. We are thinking a lot about that these days, how will MidWestOne respond to that new world, whatever it looks like. We also know that the banking industry in America, that includes this company, is much more prepared for this difficult time than it was in 2008. As an industry, we have more capital and liquidity that's also true in this company. But we're realistic. There will be winners and losers, and our capital bases will be tested. I feel very good about the management team we've assembled at MidWestOne and that's especially true in the management of our troubled loans. This is where the game will be won or lost. We have good processes and people, and we are ready for the challenges ahead. I conclude, easily the best part of my job is the tremendous group of persons with whom I'm privileged to work and they reside throughout our company. We have effective leaders. And in each corner of our company, there is commitment and excellence. There is also a collective pride in going to work each day that represent an institution that does noble and good work in its community that has never been more apparent than during the rollout of the aforementioned PPP program. And finally, thank you to the directors who serve our company and represent our shareholders. Our directors take their job seriously, and they continue to serve you, our shareholders, very well. This company has endured many difficult stretches since its founding in 1934, and we will endure this one as well. We will use the difficulties encountered and the lessons learned to become an even better company. And as always, we will do so remembering our compass, our operating principles: Take care of our customers; hire and retain excellent employees; always conduct ourselves with the utmost integrity; work as one team; and learn constantly, so we continually succeed. Thank you, and thank you for joining us on this call today. And as always, I would say, stay safe and stay healthy.

Thank you, Charlie. We would now like to answer any questions that you may have. Are there any questions at this time?

No, sir. There are no questions at this time. [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Monson for any closing remarks. Please go ahead, sir.

Thank you. If there are no more questions, I believe that the votes have now been tallied, and I will ask the inspector to present the results of the voting. Ken Urmie, inspector of elections, has presented me with the tally of the elections. The results of the vote: First, each of the nominees received a plurality of the votes cast. Accordingly, all the nominees have been elected as Class 1 directors of the company. Congratulations. Second, the company's compensation program for its named executive officers received the affirmative vote of a majority of the shares by proxy at this meeting and entitled to vote. Accordingly, the shareholders have advised our Board of Directors that such compensation program is approved. And third, the appointment of RSM US LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020, received the affirmative vote of the majority of the shares by proxy at this meeting and entitled to vote. Accordingly, the appointment of RSM US LLP as the company's independent registered public accounting firm has been ratified by the company's shareholders. A certificate of the inspector of election will be filed in the company's minute book with the minutes of this meeting. I would like to thank our shareholders for being so supportive and our employees for continuing to provide great service to our customers. They have done a fantastic job under these circumstances, and I can say for the Board of Directors, we very much appreciate their hard efforts in this trying time. And to you, our shareholders, we appreciate your support and messages, especially the kind of service that you're receiving from our great staff. That completes the items on today's agenda. If there are no further business to come before this meeting, I would entertain a motion for adjournment.

I move.

I second that.

All those in favor, say aye. [Voting]

A motion has been passed. The meeting is adjourned. Thank you very much for your attending and listening on the conference call. We hope to be able to see you all next year. Be safe and be healthy. So long.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.