Good morning and welcome to the MidWestOne Financial Group’s Fourth Quarter 2020 Earnings Call. Please note that this event is being recorded. Also this presentation contains forward-looking statements relating to the financial conditions, results of operations and businesses of MidWestOne Financial Group, Inc.

Forward-looking statements generally include words such as believe, expects, anticipate 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 any events or circumstances after this date of presentation..

Thank you very much, Nick and thanks to all of you for joining the call today. In the room that I was sitting with me are Gary Sims, our Chief Credit Officer; Barry Ray, our Chief Financial Officer; our President, Len Devaisher and Jim Cantrell, our Treasurer and Chief Investment Officer. I will begin with a few opening remarks.

First of all, I would say that we think it was certainly a good quarter for our company. There were a lot of positives in our numbers 1.22% ROA, a little over 17% return on tangible equity, earning $1.04 per share.

Also and I will talk a little bit more about this later, but certainly we think that our asset quality have stabilized and maybe even a little bit better, to improving. Excellent quarter for non-interest income and we note that our commercial loan growth in the quarter was good. In terms of the balance sheet, as I said, we did show modest loan growth.

We had pay-downs in our residential and consumer as they refinanced into the secondary mortgage market. So, the commercial loan growth was right in the 6% annualized neighborhood. And we will take that. In terms of the outlook, we think the first quarter will be flattish is probably the best word.

We have some takeouts from construction lines that will be occurring during the quarter. We do continue to project a budget of 4% to 5% loan growth for the calendar year 2021.

Strongest regions in terms of loan growth and the outlook for loan growth, Denver continues to do well, Florida is steady to improving, the Twin Cities market has strengthened recently, and we are starting to have a nice pipeline there. We also think the Iowa City market could show positive loan growth in the first quarter and for the year.

We also would note a better outlook in rural America and specifically in the rural regions that where MidWestOne has offices and we know we just recently hired a new banker in Southwest Wisconsin and we are developing a little bit of a pipeline there as well. We do continue to see very, very strong deposit inflows. And we saw that during the quarter.

It’s very difficult for us to predict what the deposit outlook will be in 2021, because we have a lot of moving parts, specifically in the first quarter. We typically see deposit outflows that are seasonal and then towards the end of the quarter they build back.

We have also got PPP forgiveness, which is in place and we expect some of that money at least will stay on our balance sheet for a period of time. And now, we have another round of PPP. So, it’s very, very hard to forecast deposit growth in terms of PPP demand for the second round. We do have significant demand.

We think the dollar volume will not be as robust as it was the first time around, but we do know that there is enhanced eligibility for our ag borrowers. So we do expect to see a little bit more activity from our agricultural customers..

Thank you. First question is from Brendan Nosal, Piper Sandler. Please go ahead..

Hey, good morning, everybody. Hope you are doing well..

Good morning, Brendan..

Good morning, Brendan..

I just want to start off here on some of the liquidity dynamics in the quarter. So you, like many others continue to see very strong liquidity inflows. But it looks like this quarter, you opted to deploy that into securities rather than let it sit in cash.

So just discuss that strategy of how you are going to manage those excess funds over the course of the year?.

Yes, Brendan, this is Jim. I will take that, I think you are on to it. I think we have decided to invest in relatively short-term cash flowing securities, ones where we are going to buy that. We are not going to put the long-term interest rate risk as a company in jeopardy, but it’s just really costly to leave that money in cash.

I think we had $200 million on average in excess liquidity that had we left it in cash would have been 10 basis points. So we are investing in a combination of mortgage-backed securities, hybrid municipal bonds.

And I think that’s a strategy that we finally caught up and got us – got ourselves into a Fed Funds purchase position, albeit a small one at the end of the period. But that’s really been the strategy that we have employed for most of the years..

Sure. That’s helpful. And then one more from me and I’ll step back. Charlie, you alluded to the expense run-rate being a little bit in the quarter, a couple of items that might not persist like the higher incentive comp.

Can you guys just help frame up what you think a reasonable run into the new year?.

Brendan, this is Barry. I think, what we will anticipate for the expense run-rate will be back into the $29 million to $30 million per quarter range is what we expect..

Fantastic. Thank you for taking the questions..

Thank you. Next question we have from Jeff Rulis of D.A. Davidson. Please go ahead..

Thanks. Good morning..

Good morning..

So, Charlie, I’d love to know and also maybe for Gary, just the optics of reserve release and higher NPAs and understand that that’s overly simplistic as if you have setup reserves and kind of allocate towards the hotel movement they were migrating.

I am trying to get a sense for the credit tone sounds more positive, and I think particularly on the ag side, I guess the question to be specific is it seems like is it fair to say you pivoted that the outlook today that you are more positive on the ag side than potentially not ag credits in the portfolio?.

Yes. Hey, Jeff. Gary here. I will start to answer the question and Charlie add in if you have something additional. So really, the quarter what you see in the quarter is a good story around resolution of our existing non-performing book taking place in the quarter.

But also at the same time that migration of the vulnerable industries portfolio specifically, as we have pointed out that particular hotel kind of overshadowing a lot of good work that happened in the quarter and most of that good work that happened in the quarter in terms of resolutions were on agriculture credits.

But I would say generally speaking in terms of our pre-pandemic book of non-performers, we have seen a very positive movement towards resolutions as credits.

And so that’s kind of what gets us in a position where we think we are really going in the right direction in terms of our management of that book kind of that pivot that you were talking about, Jeff..

You want to talk a little more about ag?.

Yes, I sure will. As Charlie said in his remarks, good prices solve a lot of challenges that we have in the ag space and we are experiencing very good prices where we are experiencing corn prices and soybean prices that we have not seen since 2013-2014. And that makes a big difference.

And when you combine that with the government assistance that our farmers have experienced over 2019 and 2020, it’s a good story right now for our ag space in Eastern Iowa..

Alright.

And maybe just housekeeping for Barry, just on the tax rate, obviously, be 2020, but any expectations for that going forward?.

Yes, Jeff, we do expect for 2021 that the tax rate will be 19% to 21%..

19% to 21%?.

Yes..

Okay. I will step back. Thank you..

Thanks, Jeff..

Thank you, Jeff..

Thank you. Next question will be from Terry McEvoy of Stephens. Please go ahead..

Hi, good morning, everyone..

Good morning..

Good morning..

I just want to circle back to the commentary on the margin it kind of – it sounded like bump around plus or minus but remains stable.

And I am just trying to take that into consideration with the PPP fees of like $3 million and likely kind of decline over the next few quarters? And then also the commentary in the press release which kind of said indicated that it might be under some – it was a challenging environment, which to me suggested ongoing compression.

So, I guess my question is, ex, some of the noise accretion and PPP, does the core margin compressed from here and then there is some offsets on some of the other variables?.

We have a – yes, and some of it will also depend on the mix and when loan demand comes in to the equation, but I think the unknown is all the liquidity. And we don’t know how much liquidity will come in.

If there is a significant amount more of liquidity comes in, then you are probably going to see some margin compression if the PPP money to spend forgiven doesn’t stand our bank very long and we know that a number of customers will pay dividends, they will make payouts and the money may leave our bank, then the margin probably hangs in there or improves a little bit, but I think the big question mark is how much liquidity will there be on our balance sheet and how quickly will the loan demand emerge during the year, because we do think that we will have loan growth this year, we may not have quite as much as the first quarter, but we still anticipate a pretty good year for loan demand.

Do you have anything to add to that, Jim?.

No, I think you could watch our – maybe you could watch our loan to deposit ratio and it is significantly lower today than it was say a year ago and as the loan to deposit ratio goes in-depth to Charlie’s point, it’s just a more efficient use of resources if we can move some of those liquid assets like securities into loans.

And when that begins to happen, that will help the margin. Although the yield curve steepness is in 0 to 5 wouldn’t hurt either or even a rising rate environment, we are slightly asset sensitive, so not hugely so that we benefit from a little uptick in rates as well..

Okay. We will continue to watch that part of the yield curve.

And then just as a follow-up, I don’t think in the last couple of quarters, you have maybe updated us on just what you are doing with the digital platform and some of your fin-tech initiatives that you had outlined earlier last year as it relates to kind of third, fourth and even some thoughts on what you are going to do here in early ‘21.

So an update there would be helpful? Thanks..

Sure. We rolled out the – our core providers products in the last – I lose track of time, but 90 to 120 days. And we have had some bumps with that, but no, not significant bumps. I think if they were all – they would all be normal.

And I think we believe that this platform as we get used to it and as we use the enhancements that it offers will be very, very competitive with other financial institutions and will really help us. We also are in the process.

So, this is a 2021 initiative of streamlining our small business banking initiative and we will try to automate a lot of the application and approval process, but we will start out small, but ultimately would go up into the $200,000, $300,000 and $400,000 range.

And we think that will certainly enhance the productivity of our commercial bankers by allowing them to focus on larger and more profitable deals, but at the same time taking care of our customers. We have also implemented in the last 6 months, a platform that’s more of an internal platform called OnBase.

And it really allows us to be more productive internally. I will give you one example, just in our deposit operations area in Iowa City I was talking to the folks who run that department last Friday and they pointed out that they have been able to save just in their department over 4,000 man hours a year by the implementation of OnBase.

And we have to continue to use those internal things that help us improve productivity. And there is a whole bunch of others in risk management and various parts of our company that the customer might not see, but they do make us a better and more efficient company.

So that would be a little bit of a snapshot, Terry, of some of the things that are on our plate right now..

Very nice. I appreciate that. Thanks and have a nice weekend..

Thank you..

Thank you, Terry..

Thank you. Next question is from Damon DelMonte of KBW. Please go ahead..

Hey, good morning, guys. Hope everybody is doing well today..

Hi, Damon..

So my first question is regarding the outlook for credit and kind of a little bit of direction here on the provision as you go through the next few quarters.

Do we kind of go back to booking a provision after this quarter’s release or do you feel that trends are strong enough where you probably can have additional reserve release as we go through the year?.

So, Damon, this is Gary and I’ll start to answer the question kind of talking about fourth quarter what you saw there was the economic factors really driving our calculation to a release. But we also had, as we have pointed out some migration to non-performers that we – non-performers that we took provisions against.

So, the net effect is what you saw in the financials.

And as we go into 2021, as the economic forecasting improves, which we think will be happening in 2021, you are going to continue to see that opportunity for a lower reserve, but you are also going to see us utilizing that opportunity for a lower reserve to provide for possible deterioration in the portfolio as we go through the year.

Does that make sense? That’s kind of the way at least in our mind, that’s the way CECL is supposed to work..

Got it, okay.

What are your expectations for charge-offs for next year?.

Let me help there.

What do we have on our budget to judge us?.

We took a conservative approach in our budget. We will get that for you..

Okay, great. And then I guess by looking that up, I guess just to kind of circle back on the margin. So if we were to kind of exclude the fair value increase in this quarter that kind of puts the core margin around 3%.

Is that right?.

That’s right. I think that includes the PPP which excludes….

That includes PPP – right. So then if we take it a step further and back out the PPP, that’s like probably 20 something basis points, 22, 24 basis points.

Is that the level that you are hoping to be plus or minus going forward?.

Yes. Damon, I don’t think it – I don’t think the PPP contributed quite that much to the margin, may have contributed that much to the loan yield, but to the margin with the earning asset based in over $5 billion, I think that was more like a 10 to 12 basis point impact..

Got it. Okay..

And so that’s really – yes. But to answer your question, yes, that is the – if you strip away the accretion and the PPP and you are getting to a number that’s in the 290 region, then that’s the number we think all else being equal, it’s going to be flat. It could be up or down a little bit, but that’s the number..

Got it. Okay. That’s very helpful. I appreciate the clarification on that. That’s all that I had in questions. So, thank you very much..

And we will – before the end of the call, we will get to the charge-off number that we have in the budget. I have got something in my mind, but I don’t trust my memory on that..

Thank you. Next question is from Brian Martin of Janney Montgomery Scott. Please go ahead..

Hey, good morning..

Good morning, Brian..

Good morning, Brian..

Hey, I appreciate that last time as Jim that’s kind of where I was going to get at it was where the core margin cut if you are thinking about some stability give or take a plus or minus the impact.

So you are thinking that the impact is about 10 to 12 basis points on the reported margin for the PPP this quarter and that include – can you remind us how much of that include of the fees this quarter?.

I am working for memory now, I want to say it was about $2.5 million..

Of PPP….

PPP – net PPP, maybe it was $3 million….

It was $3 million, this quarter we had $3.1 million of PPP loan fee accretion..

Yes..

Okay.

And the remaining piece you guys have left is about how much?.

$5.3 million Brian is what’s left for the fee..

Okay.

And is it still fair to assume that you guys are expecting most of that forgiveness to be recognized in the first half year that’s remaining $5 million or so?.

Yes, that’s the way we budgeted it..

Yes, in my mind much of it could happen in the first quarter as we look at what’s actually being forgiven and we do track that. We have seen a bit of an uptick. So yes, I think it’s safe to say we think most of it will happen in the first half anyway..

Okay. And as it sits right now, I guess PPP, Jim, just I know you have kind of already mentioned it as far as thinking about it, but your expectation would be that at least initially when that – when those get forgiven, the balance sheet will get a little bit more inflated.

And then it’s just a matter of how we want to model that liquidity whether it stays or it’s still similar to what you kind of said last quarter give or take 5 or so basis points to the margin is it fair to still think about?.

Yes, I would say, on the day we have get a loan forgiven, the money is going to be invested into the – so I am not sure I see much balance sheet shrinkage due to that transaction, but over time, we do use the excess liquidity to pay-off high rate CDs, to pay-off whole loan or FHLB borrowings and other wholesale borrowings that are at a little bit higher rate.

So that maybe why we see the balance sheet come down a little bit over time. We are sort of at an all-time low I think in terms of wholesale funding at the bank level and I suspect we will continue to pay down wholesale funding and large CDs where we are paying a little bit higher rate..

Okay, it is – I guess is there a lot of opportunity to do that to maybe even prepay some things you are not really?.

FHLB, the economics of prepaying an FHLB advance are not terribly attractive, so you are better off leaving it in place and just paying it off when it matures is what we have found. So I think there is $40 million or so of FHLB advances coming off this year.

And I would hazard to guess some large CD areas $40 million or $50 million or $60 million, some of which will renew at lower rates, some of it will go out of the bank altogether..

Yes, okay. That’s fair. I appreciate that.

And then maybe just the last one or two for me just on the given mortgage in Charlie’s comments about both that in the investment area really having kind of great years, did you think about fee income next year and just high level how we should think about the contribution from fees next year given some headwinds potentially on the record mortgage here, how should we think about fee income as we go into next year at least kind of the stepping off point or is this how you guys could frame up something?.

I think the way we would start I just think you have to break it into components, Brian. And I think mortgage is going to have a strong first quarter. And you tell me what’s going to happen after that? I think none of us know, but the way that you are starting out, maybe not quite as much as 2020, but certainly strong.

I think investment services probably will continue to chart a good path of increasing fees. And I know our trust department is counting on higher revenues as well. We had a lot of swap income from commercial banking transactions, the first two quarters of last year.

I think there will be some of that in 2021, but perhaps not quite as much, because we really did see a lot of that especially before the Fed reduced the interest rates to zero, but I think potential is there to do some.

So, there is the major components, service charges probably continuing a slightly downward trend, which is true for most of the industry..

Got it. So you are not I guess is the mortgage bankers maybe association Charlie is more in the neighborhood of I thought 20% to 30% reduction in mortgage volume this year.

Maybe it sounds like you are a bit more optimistic than that not wildly, but maybe especially given the start to the year?.

Yes, I am more optimistic to that in the first quarter. But for the year, I think that’s a fair, because we all look at the same things. And I think that’s a fair way to look at it for the year. I think all I am saying is we are starting out the year better than that..

Yes, I got you. Okay. I appreciate that.

And then maybe it’s one for Barry, just the remaining accretion to be brought in, I guess, kind of the I guess how much is that or just if you can just kind of frame how you are thinking about the contribution in ‘21?.

Yes, we have at December 31 and this is not the PPP that we are talking about, Brian, this is just the purchase discount, it was $9.1 million is what’s remaining to be accreted into income. And I tend to think of that as it’s presumably frontloaded as we have observed.

And so our quarterly run-rate, which we have in our earnings release, I anticipate will continue to attenuate from there going forward..

Perfect. Okay, thank you and thanks for taking the questions, guys..

Thanks. Damon, just really quickly, with respect to the charge-offs, 53 basis points is what we are expecting with respect to charge-offs, five three, 53..

And Barry, if I could add some commentary around that too as we talk about the – we are envisioning 53 basis points of charge-offs for the year, but we don’t necessarily envision that we will have to create a provision to cover all those charge-offs for the year, because of the way we believe the reserve is going to work is as our economic forecasting improves throughout the year, reserves will be released that will cover a significant portion of those charge-offs.

So, our actual provision, we don’t really see getting to that level..

Yes, and I think – and so I can add even more. I think the way we model is in our budget is we ended the year with roughly a 1.5%..

Yes, we will actually draw-down our reserve to about 1.5% throughout the year. In other words, utilizing that reserve to cover the charge-offs that we anticipated at the beginning of the pandemic..

Hope that is clear to you, Damon..

Yes, that was Damon that asked..

Yes..

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Charlie Funk for any closing remarks..

Thanks again to everybody for joining us on the call this morning. Those of you who need follow-up, please call any of us we will be happy to respond as quickly as we can and wish all of you a safe, happy and healthy New Year and weekend. Thanks for being on the call..

Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..