Charles Funk - President, CEO & Director James Cantrell - Interim CFO, CIO, Principal Accounting Officer, VP & Treasurer Kent Jehle - Executive VP & Chief Credit Officer.

Jeff Rulis - D.A. Davidson Andrew Liesch - Sandler O'Neill Damon DelMonte - KBW Nathan Race - Piper Jaffray Brian Martin - FIG.

Good afternoon, and welcome to the MidWestOne Financial Group, Inc. First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charles Funk, President and CEO. Please go ahead..

Thank you very much, Rochelle, and good morning or good afternoon to everyone, and thank you for joining us on the call. We will begin with our forward-looking statement message to keep our regulators and attorneys happy.

This presentation contains forward-looking statements relating 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 SEC.

MidWestOne Financial Group undertakes no obligation to publicly revise or update these forward-looking statements to reflect the events or circumstances after the date of this presentation. And with that, a few comments before we get to the Q&A. It was, for us, a good quarter overall, and especially after the way we ended 2017.

One of the better - it was one of the better loan growth quarters we've had, and the loan growth, I think, was primarily driven from C&I - good C&I traffic in Denver and also strong commercial real estate origination in the Twin Cities Metro. Deposits ended positively.

Deposits were below planned for most of the quarter, but we have a lot of tax money in the bank whenever the quarter ended, and that money started to flow out a little bit, but should stay at the bank for 30 to 45 days. But that said, we had solid deposit growth pretty much throughout our footprint, and I've been very pleased about that.

The - in our financial results, for those of you who have been on these calls or talked to us over the years, you will remember that we've talked about an ag loan in Iowa that went TDR in 2012, and we've always said that we expected a recovery, it just took a lot longer than we thought.

We got a partial recovery in 2017 fourth quarter, but we recovered in full in all our legal expenses this past quarter and - so that is also in these results, and I wanted to close the loop on that. They always take longer than they should. In terms of noninterest expense. Wealth management had a decent quarter.

Our investment services area, which is our brokerage unit hurt somewhat by market volatility, but they think they're getting beyond that, and they seem to have a much better pipeline as we enter the second quarter. And we've also, in wealth management, had a number of discussions with revenue producers elsewhere in our footprint outside of Iowa.

These would not be game-changing moves, but add-ons, and we're hopeful in the next quarter to we might be able to add a couple of revenue producers outside of Iowa, which will really help investment services.

Mortgage did not have a particularly strong quarter in terms of production, but they benefited from the servicing rights adjustment as our servicing portfolio continues to grow and interest rates continue to go up. We do expect much better mortgage production in quarter two. Expenses, I think, on-track and good.

I still think that there could be a slight acceleration as the year goes on in our noninterest expenses, and that's primarily because we will be continuing to invest in fintech and we really haven't made many of those investments yet, but I would expect a little bit of that as the year goes on.

Efficiency ratio at the holding company level, has climbed above 60, and we do have a large tax-exempt portfolio relative to other banking organizations and we figure that's worth about 120 basis points in our efficiency ratio. So it affects us a little bit more perhaps than other companies.

That said, we recognize that it is an important goal to drive that back down below 60, where we were much of last year. In terms of credit, I would say much better. Our NPAs were down significantly from a year ago. We had nominal charge-offs. Our 30- to 89-day past dues were about as low as they're going to be in a company this size.

I'm sure that people are interested in agriculture and the ag renewal season was a tough season as borrowers met with the bank. But I think as we've previewed in the past, we did see more downgrades to watch in the substandard. Many of these loans were past loans, three or four years ago. They're now watch or substandard.

Ag is about 8.5% of our total loan portfolio, and of our entire ag portfolio right now, 23.6% is either watch or substandard, and the breakdown on that is 9.5% substandard and a little over 14% watch. I want to repeat what I've said, and for the last 18 months, we expect higher reserving, but not large losses in this portfolio.

We still have good collateral margins on most of the loans. The margins are narrower than they have been, but they're still pretty good. We had a couple of borrowers that came through the renewal season and we asked them to sell land - a little bit of land to really protect them and protect the bank.

And in the case of at least one of our substandard credits, it's about to be refinanced out of the bank with another - into another institution. So there is still some demand out there for ag loans. But overall, I don't think the story has changed.

We downgraded a few credits, but we still do not expect losses, but there will be higher reserves going forward. In terms of economic conditions elsewhere in our footprint, I think everybody knows, the Twin Cities, Denver and Southwest Florida, enjoy robust economies right now.

The Iowa City market has slowed a little bit, although I did note that at 2.5% unemployment, the Iowa City market has the fifth lowest unemployment rate in the United States and - but it is slow.

Procter & Gamble has announced they'll be reducing 500 jobs in our community over the next couple of years, and the University of Iowa due to state budget cutbacks has halted all the new construction and that does have a trickle-down effect into the economy. That said, the Iowa City economy is still okay.

It's just not as robust as it might've been a couple of years ago. In terms of the loan-loss provision, we did guide to a $5 million, 2018 provision as a run rate. We were higher in quarter 1, and I think we will probably exceed that target a little bit this year.

But that said, we are still not forecasting significant charge-offs based on what we see right now.

And I would also note - I wouldn't take this to the bank, but I do think the - there is the potential for some positive surprises within the provision this year when you look at the loan portfolio, but those are things still to be worked out, and I would conclude by saying, we had a much better feeling than we did six months ago in terms of the overall portfolio and whether or not we're properly reserved.

Capital, fine. Just fine. We did - you might have noticed, we did use the market weakness to buyback a small amount of our stock early in the quarter. We will continue to evaluate those opportunities going forward as we do have an active buyback plan in place.

In terms of the net interest margin, we would guide to the same outlook as we've said in prior calls, is that we're cautious. We've had a number of promotions to keep or attract new deposit dollars into our bank, and I do note that we saw something in the Twin Cities market that we haven't seen for a long time.

One of the larger banks - one of the large banks in the Twin Cities moved their CD - all their CD rates to market, and we haven't seen that from the large banks in a long time. That was a first, and if you have more questions on the margin, Jim is happy to cover that as we get into the Q&A.

Looking forward into the second quarter and the rest of 2018, we do expect a few larger-than-normal paydowns in our loan portfolio in the second quarter, and that includes a loan that currently is on our watchlist and has a little over $5 million of outstanding, we expect that to be paid off in full.

And we also, as I've mentioned, have the potential for a substandard paydown in the ag portfolio as well, we'll see on that. So that might temper our quarter two loan growth a little bit, but we do still expect 4% to 6% for the year, and I think our budget is between 5% and 6%. We feel okay about that.

It will be led, I think, by Denver and the Twin Cities and Southwest Florida, although we do have some pretty good sized loans in the works in Iowa City as well.

We just announced - I don't - I'm not sure we've announced it yet, but we do have a commitment from a new banker in Denver coming from one of the large banks, and he will cover an area of specialty that we don't currently have in that market, and we're very excited about that.

And we're up to 11 persons in Denver, and May 1 will be the first anniversary of opening our office there. We started out with four employees. So they are doing very, very well in that office, and certainly, have grasped our culture very well.

Deposits continue to be the name of the game in banking, and I think we're just scratching our surface in the Twin Cities, but I do note that most of our offices in the Twin Cities have nice increases in year-over-year deposits, and we still think that our 88% loan-to-deposit ratio works to our advantage.

One other thing that we will be doing, I think, that's of note, in our company, is we'll be rolling out Zelle in - late in the second quarter, and as I understand, it will be one of only 70 banks in the United States that are able to offer this, and probably one of only 40-or-so community banks that are able to offer Zelle.

That's probably not a game changer, but it will be a welcome addition to our arsenal in retail banking. A brief comment on M&A, we've continued to look at that.

There are banks out there that are for sale, and I think it's just a matter of working out buyers expectations with seller's expectations and we understand that we need to do what's right for our shareholders.

I think organic growth and top line revenue growth is what's most important for us right now, but we continue to have our eyes open relative to M&A. I would end by saying that we did have a completed safety and soundness bank examination, which was - seemed to be very routine during the quarter.

And with that, I would say that I have our Chief Credit Officer, Kent Jehle; and our Chief Investment and interim Chief Financial Officer, Jim Cantrell in the room. And we would be ready for the Q&A right now, Rochelle..

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson..

A question on the expenses, Charlie. You mentioned some acceleration on the fintech side possible. I did see - was it a big jump, with the occupancy number sequentially was up.

Was there anything that happened in the quarter? Or was that just sort of a seasonal blip, particularly that line item, I guess, expense growth rate, what are you seeing?.

Jeff, this is Jim. I'll take that one. I noticed the same thing, about 9% on a quarter-over-quarter basis. I would think - I would tell you that our fourth quarter number was probably a little bit low.

I looked back to a year ago, when we were three point - almost $3.3 million even on that line item, so we're down ever so slightly on a year-over-year basis. Some of these smaller line items do show a little bit of volatility, so I don't have anything in particular for you, but I did note that I can go back and look.

But I think that the first quarter run rate is probably more representative for you than the fourth quarter..

Yes, and I would only add to that, that in this quarter, and it probably wouldn't be fully in the numbers, we moved into our new office in South St. Paul, Minnesota, and next quarter, we'll be moving into our office in Fort Myers, Florida. So there will be a modest uptick, but....

Those haven't started to hit yet..

Yes. Those haven't hit yet, but there - so there might be a modest uptick from where we are right now..

So if we broaden it, the - just discussion on just overall expenses and for the balance of the year end, you guys were at $20.4 million this quarter.

I guess the suggestion is that you can see some growth for the balance of the year?.

Yes, I would say, at the end of the - at the beginning of the year, we do see our normal salary increases, so we'll probably have a little bit bigger increase in the salary line item than I would expect to see going forward because of the year-end increases for everybody.

But, you're exactly right on some of the other line items, particularly on net occupancy, and really that's the other one where I think we've budgeted, but haven't yet spent some additional dollars on fintech and some other things. So I do think that, overall, we're going to see a little bit of increase from where we were in the first quarter here..

Got it.

And then, Charlie, you mentioned - well, you've got about a 14 basis point increase in deposit costs in the quarter, was it? Are you surprised by that number? You mentioned some rate movement in the Twin Cities, but was there anything particularly lumpy there to where you think that's going to level off? Or is this kind of the environment we're in?.

Well, the realistic answer, I think, some of that is the CDs are more popular than they have been. We have not really moved our core rates on transaction and savings accounts, and so one of the things we rolled out was a 45-day CD that pays more - a little bit more of a market rate for larger balances. So there's been some traffic there.

But realistically, to get large chunks of money into your bank, you're going to probably pay something around the Fed funds rate, give or take, 30 or 40 basis points. And we've also noticed that some of the - some of our regional competitors have become a little bit more aggressive, whereas two years ago we might not have seen them.

They're in there bidding for money right now because their loan-to-deposit ratios are higher than ours, and they need to fund their loan growth.

So I don't know, Jim, if you want to add to that?.

Yes. The color I would add would be from a kind of a year ago perspective to today and versus last quarter. So I look at funding cost or deposit cost simply by dollars of expense divided by total dollars of deposits.

And when I do that calculation from a year ago, a year ago, first quarter '17, I show our funding costs were 43 basis points, cost us, 43 basis points. I roll forward three quarters of the fourth quarter of '17, and I show an increase of six basis points to 49. So six basis points increase in deposit costs over three quarters.

Go forward one more quarter then, one more quarter to the first quarter this year, the most recent quarter, and we're up another six basis points to 55 basis points in costs. So, clearly, there is an acceleration going on.

And as Charlie mentioned, I look at it, and we're - the mix explains a big chunk of that too, because if I look year-over-year, the CD category, which was clearly the most expensive category in the deposit mix, has grown, and the other sectors have stayed pretty flat.

So rates are up and the mix is working against this a little bit on the cost of funding..

Got it. I had one quick housekeeping.

Was there a margin impact or a benefit on the ag loan recovery? The calculation this quarter?.

It was small. Some less than $100,000, I think, got into interest income of that recovery. So some of it - it wound up in a couple of different places. A tiny bit of it did wind up in the margin..

The next question comes from Andrew Liesch with Sandler O'Neill..

Charlie, the release pension, the couple of large deposit accounts that came in, in Iowa City late in the quarter.

Any details you can provide on these? Are they commercial accounts, municipalities? And then, what - I guess, what deposit types and what rate might they be? Just trying to get a sense on how they could affect funding costs going forward?.

Yes. Mainly public funds. We have strong public funds relationships in the Iowa City market. I don't know, Jim, you can talk about the rate..

Well, I was thinking a little bit about, when you said big increase at the end of the quarter, I was thinking at the end of fourth quarter, we took in, it was close to $40 million or $45 million from a single depositor who had issued a bond and held the proceeds with us that, starting in the fourth quarter, we'll start to run out on a ladder.

That's probably nine months long, so we'll start to see that decline.

In the first quarter now, we do see more operating accounts, just money market accounts, checking accounts, balances increased for seasonal reasons, not really any discrete or known increase in deposits, but just kind of normal - a normal flow based on tax received in tax payments..

Okay.

And then, it does look like you did get a nice pick up in the loan yield? Maybe that's a little bit masked by what you saw on the funding cost, but what are your thoughts - I mean, should that continue to increase, but maybe not as fast as the - as funding costs?.

Yes. I'll start with that. I didn't bring it into the room, but I've had a sheet that was provided to me. If you look at the new loans that are coming on the books, they're roughly 50-50 between fixed and variable. And we count variable, anything that has a repricing of one year or less, we consider that to be variable.

So not necessarily prime floating, but - so we - that part is good, but yes, we've got a fair amount of loans that reprice every time the Fed moves..

Yes, you're right. The Fed moved, I think, it was March 21, the Fed raised interest rates another 25 basis points. I went back and looked at the rate change report. I think, the next day, we had $425 million or thereabouts that repriced that following day, and then, we'll have some follow-on to that based on monthly reprice and quarterly reprice.

So I expect that - and that happened right at the end of the first quarter. So we'll get a little bit of a kick from that in the first quarter, and the trick will be how quickly will we need to respond off on the deposit side, as we talked about on this call before.

There's one other thing that I would mention when it comes to loan yields, and nobody's asked the question, but I'll say that we have a purchase accounting amortization that is decreasing over time. And so, we're losing a little bit of yield.

I think, when I looked at last year, we were probably close to upper-teens, 20 basis points, nearly 20 basis points in accretion of that discount, and we're, I think, down to 15 or maybe less and heading lower is the point as we move forward. We're going to be fighting a decrease in that loan amortization..

The next question comes from Damon DelMonte with KBW..

So I guess, just to kind of follow-up on the last comment there by Jim with the accretable yield marks that are included in the margin calculation.

So if we were to identify how much it was this quarter, did I read in the release that there's around $900,000? Is that correct?.

Just under $900,000, yes..

And then, we should expect that to trend down in the coming quarters?.

That's correct..

Okay. So if we look at that component of the margin, and then, you hear the commentary about likely higher deposit costs, and you have, hopefully, a little bit more expansion on the loan yields as the rates go higher.

How do we think about the margin from this quarter as the overall margin was, call it, [$369 million]? Do you think you can at least hold that flat? Or even maybe see some expansion?.

My personal view, and this is me, I think it is going to be a challenge to maintain it in the current environment, given the trends we see in the mix, which we're working against just a little bit.

The overall trends, and kind of the acceleration we're seeing on the overall cost side for liabilities and just general rising interest rates, it won't be dollars for dollar. We're going to get some benefit on the loan side. I just think as we balance it out, it's going to be pretty difficult to maintain. We may do it, but we may not..

Yes. As you all know, because you've been on the call every quarter, I've been cautious on the margin for quite sometime, and I think Jim's exactly right.

The other thing that is interesting is, when you look at the market for loans, especially for some of the commercial real estate, it's gotten pretty tight, the treasuries, and certainly, tighter than we've seen for a while in terms of spread.

I think, as the Fed continues to raise, and if they continue to be aggressive, that may get loosened up a little bit, but we just need to understand that - and I've seen that in other commentaries as well, that the other banks are noticing the same thing. So we fight that. We let some deals go, because of price.

We've competed on price where we thought it was prudent, but it's a fine - it's a delicate balancing act we walk, and the yield curve's really not helping us very much either. We'd certainly like to see a little more slope to the yield curve..

Okay. Great. That's good color. And then, I guess, you also commented about the provision you originally guided for about $5 million this quarter - or sorry, $5 million for this year, and this quarter came in a little bit higher than run rates to meet that amount.

Are you willing to kind of quantify what your expectation is for the full year now?.

I think it would be very hard. I think that we're pretty close to getting a normalized run rate, but I think the run rate could be a little bit higher in the second quarter. And I'm not - I'd be willing to guide if I had a good number for you, but I don't think it will be more than it was this past quarter.

But right now, it's too early in the quarter to know.

I don't know, Kent, if you've got any thought on that?.

Yes. The only thing I would add to that is just since we went through the ag renewal season, we have that now behind us, so we are looking to the second quarter as more a stabilized a run rate based on the activity that we'll experience in this quarter.

So I think after this quarter, we'll have a much better feel of what the run rate will be for the rest of the year..

Yes. That's a good point. We won't have many - if any, ag downgrades, because they've already been looked at for the coming year. And again, I do want to say, to the extent we have watch-rated credits and substandard credits, they're refinanced out of the bank, that will be helpful.

So a lot of moving parts and too soon to say, but I would only guide - I don't think the provision will be as much as the first quarter, but probably more than our planned run rate..

Got you. Okay. That's helpful. And then, I guess, lastly, as I also thought you mentioned in your prepared remarks about a mortgage servicing adjustment, because of the change in rates.

Was that a meaningful amount of an adjustment?.

Well, this is Jim, it depends on what you mean by meaningful. It's meaningful to me, at least about - this is a little over $200,000, so I think that's....

That's real money at MidWestOne..

Yes..

Okay.

And that is, I guess, categorized in the loan origination and servicing fee line?.

It does. That's where it would be. So we probably saw less in income on - I don't think we had any SBA loans that sold at a gain in the first quarter, and we probably would expect to see that increase throughout the year, and I think the mortgage production we do think will increase as we go....

Yes. That's a good point that I didn't cover in my opening remarks, is that SBA did not have a particularly strong quarter, but they think they'll meet their budget for the year. And we did add a - what I think is a highly talented SBA banker in Denver who's already got some stuff primed to close. So that should give us a little lift as well.

It's a good point..

Okay. Great. And then, just one final question, if I can.

Charlie, you mentioned about the hiring of a new banker on the Denver market, and I think you said that he's going to be leading an area that you guys don't currently - is it physically operate in? Or is it a line of business that you don't currently lend in?.

It's a line of business that we don't have. He tends to focus on professional, and especially medical clinics and doctors, and we think it could be an entrance into private banking in that market as well.

And again, I'm not sure if he's formally joined our company yet, but we have a commitment from him and very - I met with him a couple months ago when I was out there, and I think it's another reason to be excited about Denver..

The next question comes from Nathan Race with Piper Jaffray..

Going back to the loan growth discussion, Charlie, it sounds like you guys are expecting some payoffs, here in the second quarter, and I imagine that's probably in the commercial real estate side of things.

So just curious, kind of what you're seeing in that asset class, specifically across each of your geographies, and if you can see that being a contributor to your growth this year more so than it's been maybe over the last year or so or you're seeing some frothiness in certain areas within commercial real estate and certain pockets of your footprint?.

Very, very few - I'll take the last part of that. Very few issues in commercial real estate, knock on wood, thus far in our footprint. And I would look at the payoffs - obviously, anytime you have substandard credits that come and are going to pay off, that's usually a good thing, and we regard it as such.

The watch rate of credit, I think, is just a normal course of business transaction, where the borrower is transitioning to longer-term financing and - to a financing package that's outside the banking industry. So....

And that's C&I..

And that's C&I, yes. So I don't know that there's any major theme on the payoffs. It's just sort of the way things have gone..

Got it.

Can you kind of speak to the growth opportunity that you're seeing within commercial real estate, within the pipeline?.

Yes. This is Kent, and I can answer that. Again, the Twin Cities is a very strong market, a very competitive market, on the non-owner-occupied commercial real estate. And then we are seeing a little lift on the owner-occupied commercial real estate out of our Denver footprint as they bring on new clients.

So again, competitive, but we see those two main areas, and a little bit in the Iowa City market that we can augment as well..

Got it. That's helpful color. And just changing gears, as we think about mortgage banking. I know you guys have been working hard in that area trying to improve efficiency and production capabilities.

So just curious on how much of a lift you're expecting in terms of production volumes, as we get into the kind of the summer-spring seasons here?.

Well, they feel good about meeting their budget for the year. I'm not sure about a number..

I'm not sure about - this is Jim, I'm not sure about a number either. I do think they are challenged right now.

We're coming into a good season, but rates are a little higher, so clearly, the volume that they've been able to refinance in the past year or 2, those refi numbers are going to come down and so I think the overall production, it's going to - we're going to have a hard time replicating the total production.

I think the other thing is that we're building the servicing book a little bit faster than we had been in the past. So some of those returns will come in through the servicing portfolio..

Yes. And Nathan, the - just so - the servicing book is right at the $300 million mark, which is up substantially from a couple of years ago. So we think that's a good hedge against if mortgage production doesn't increase..

Indeed. And just if I could sneak one last one in for Jim, just on the tax rate. It was a little lower than I think what you're guiding to last quarter, around 21%.

Is 21% still a good rate to use going forward?.

Yes. It's a - we did guide to 21%. We came in just a little under that, I think 20.3%. And as I look forward, it's going to depend on the mix of tax exempt income to regular income. I would think, my best guess is 21% is going to be a better number than where we were this quarter as we go forward.

I just think we'll have a little - the ratio is going to skew a little bit toward more taxable income in the second quarter as compared to the first quarter. So I'd go with the 21%. It could be a hair under, it could be a hair over. But I think that's a good estimate..

[Operator Instructions] The next question comes from Brian Martin with FIG Partners..

Just a couple of things for me. Maybe just going back to the provision for a minute, Charlie, can you - or maybe it's more Kent. Can you just reconcile - I mean, I know it's higher than you kind of guided to and for various reasons, but reconcile what was - what piece - because you just talked about ag for a while.

Just reconcile, what was growth driven versus what was ag or other driven, just kind of how we're thinking about - how you guys were thinking about that this quarter? It seemed like there's an element of both, obviously, with the growth being a little bit better..

Yes. Brian, this is Kent. I think I would point to the increase to budget being driven by the ag portfolio.

When you look at the budgeted number and you look at our growth, and just the overall mix move that we had during the quarter, there - what we identified as the need for the additional provision from budget would have been primarily driven by ag, specifically, as we - including the quarter..

Okay.

And just kind of as you think about it going forward, I mean, if you're still comfortable with kind of the mid - low- to mid-single digit loan growth, which is a little bit lower than it was this quarter, and the ag downgrades are done, it just feels like - and you kind of alluded to some comments whether it was in the verbiage of the report or in your comments today, Charlie, you're looking through some positive things kind of on the horizon.

It just feels like that number should go lower.

But am I missing something with how you're thinking about it, being a little bit lower from the current run rate? Is that kind of what you're suggesting?.

Yes - no, no. Full disclosure, we've got a - it's not a large loan, but we've got a loan in the Twin Cities that it's a commercial loan that we'll probably have a little impairment on this quarter, and that was unexpected.

Typically, the Twin Cities has been very, very clean as far as our portfolio, but this particular one popped up, and we'll have to deal with that. And absent any positive surprises, that might drive things a little bit north of where we guided.

The flip side of that is if we get some payoffs that - of some substandard credits, which we're told we're going to get. That could mitigate that a little bit, but it's - as I said in my response to another question, it's just too early in the quarter, really, to know for sure..

Yes. Okay. I got it.

And just in general, you characterized it, if things kind of go in big picture you're thinking about them, this may be the high point for the year on the provision?.

We would hope so. Hope is not a strategy, but we would hope so..

Yes. I got you. Okay. I appreciate it. And just a couple of other things, just going back to the mortgage for a minute.

Just the volumes and the gain on sale margins in the quarter, where they - how were they? And I guess, how are you thinking about that going better? It sounds like you're still optimistic on mortgage being a bigger contributor here going forward?.

We are optimistic. I agree with what Jim said about the rates, the interest rate environment being a headwind, but what I've heard from our mortgage people is they feel confident in our abilities to meet their goal, and they were under-goal in the first quarter.

But we're coming into a seasonably - a seasonal time where we should see an acceleration in revenues. It's interesting, there was an article in the Twin Cities - the Minneapolis paper last week about the fact that housing is in short supply in that market, and a lot of houses are being sold at $20,000, $30,000, $40,000, $50,000 over the asking price.

So if that - if it's harder to buy houses, that probably has a little bit of a negative impact up there as well, but it's hard to know how that affects MidWestOne, but certainly, in that market, it's tough to buy a house right now..

I got you. Okay. That's helpful. And maybe just as it relates to the fee income, I think, this quarter, I mean, you called out the one - kind of the one-timer, Jim, as far as what was the benefit on the MSR.

I guess, is there more that we capture on that? Or are you kind of done with that at this point?.

I think the only thing I can think of is that our insurance agency would have had their contingency payments, which is paid in the first quarter. I believe that was $100,000 or less, and that's not a, probably, a huge number. So other than that, I can't think of any.

Can you, Jim?.

No. That was a positive for the quarter, yes. A little bit more than the....

Yes. Right. Less than last year, but that would be a nonrecurring event..

Okay.

But you - but I guess, my bigger picture was the - if you back off the couple of things that are in there, but you also allow for some pickup in mortgage and the SBA, how do we see this quarter pie isn't a bad way to look at the coming quarters just within a band of a certain percentage, does that seem fair to think about it?.

That would be the way I would think about it, Brian, and maybe even slightly higher run rate. But that'd be the way I would think about it..

Okay. All right. And then, maybe just the last one, Charlie. Just you talked about the M&A, it sounds like there's still a little disconnect out there with expectations from the buyers and sellers.

But I guess, more specifically, to you guys, I mean, is there an area geographically that you have more interest in? Is it just all of your markets? Or if it's not a geographic area, just more of a dynamic you're looking for of a target as far as would it be applying - supplying more growth, or better deposits, or just in general, if you could just give a little color on those two things, it would be helpful..

I think the most likely would be in the Twin Cities and Iowa, and there are companies for sale in both those footprints or will be in both those footprints.

I think the one difference - I think, I've said this before on calls, is that there are a number of smaller - by smaller, I mean, $150 million, $200 million, $250 million banks, that maybe selling - that have lower loan-to-deposit ratios and all of a sudden the deposits are worth quite a bit more than they were a couple years ago, especially in our company, where we seem to have the ability to make loans.

So I think, not only MidWestOne, but I think other companies might have a little more interest in those companies.

And during the first quarter, we looked at a company that would match those characteristics and - but there's nothing to the table, there's nothing that's imminent, but I think the lower loan-to-deposit companies in non-growth areas have more appeal than they have for a long time..

I got you. Okay. And last one was for Jim.

Just on the margin, Jim, you've given a lot of good color, but just some understanding and correctly, I mean, the core margin, when you take out the piece - the accretion piece, it sounds as though where we're at today, your hope would be to maintain it, but if anything, it could have a touch of a negative bias from where we sit today, I guess, is how we should think about it? Is that....

That's how I think about it. You're right. The accretion - the reduced accretion is going to be a headwind, that's going to work against us, and I just think that our beta on deposits has been below models for so long. We're now starting to see an acceleration.

So we're probably, in the next 25 or 50 or 75 basis points move up, I suspect we're going to be above model in terms of our beta on our deposit response.

So I don't think we're going to be hugely lopsided in our margin, that expenses are going to get increased a lot faster than we'll see increases on the loan side, but I do think that is a risk, and that's probably where there's a little bit of pressure..

This concludes our question-and-answer session. I would like to turn the conference back over to Charles Funk for any closing remarks..

Thank you to everyone who joined us on the call this morning, and we wish everyone a good weekend, and hopefully the weather is good where you are as it is in Iowa City. Thanks for being on the call..

Bye-bye..

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