Transcript
Coming up, three tall guys talking shop on this new episode of Plugged In. I'm your host, Al Dominick, joined as usual by my good friend Steve Williams, along with one of my favorite bankers to spend time with, MidWestOne CEO Chip Reeves. What's happening, Chip?
Hey, Al. Steve, great to be with you guys. I'm 6'7", but shrinking every year right now.
That's why I barely made the club, Chip. I'm 6'2" on a good day, 6'5" with the afro.
This is already getting off the tracks, but for all you Miami University fans, you might remember the 6'7" forward soaring through the paint and dropping some nasty dunks back in his college basketball days. Chip, while I couldn't get any RedHawks gear delivered in time for today's episode, I did pull out the Hawkeye zip you gifted me last year.
Excellent.
Everyone always asks, "Where the heck is MidWestOne?" I just say it's the land of Caitlin Clark. Now everyone knows.
Coming to us from the land of Caitlin Clark, with Steve in Scottsdale and me in Washington, D.C., one benefit of being distributed like this is that we can bring some props. If we were in Iowa City, we'd probably be grabbing a few beers at Big Grove Brewery. Since we're not, I brought my Crocker & Starr bottle because Chip and I have been known to share one or two when we're together and trying to be a little fancier.
What we can enjoy is the conversation. I think this will be fascinating for people looking at the Midwest and trying to understand the franchises being built and the people running them. Steve, are we ready to get Plugged In with Chip?
Absolutely. I love talking to entrepreneurial CEOs in the Midwest. You see a lineage of people from Fifth Third, National City and PNC who spread into the territory and create entrepreneurial banks. Chip is a great example.
That's part of why we wanted to have him on. I was getting warmed up for today's conversation with a very happy song from 1986. Baltimore's Tarzan Boy came on the '80s channel, and I didn't change it. I cranked it up.
I thought we could use some '80s music to talk about banking today. So I pulled five songs: Tarzan Boy, Bananarama's Cruel Summer, Simple Minds' Don't You (Forget About Me), Violent Femmes' Blister in the Sun, and the Rolling Stones' Beast of Burden.
I don't even know Tarzan Boy, and I'm an '80s expert.
You know the "oh, oh, oh" part.
Oh, yeah. That one. It was on commercials and stuff. I'm good.
I apologize for trying to sing. Chip hasn't run off yet, so we're going to use these songs and lyrics to keep the conversation moving.
Chip has been at the helm of a roughly $6.5 billion commercially focused bank for the past two and a half years, with operations in Iowa, Minnesota, Wisconsin, Colorado and Florida and close to 60 branches. Major lines of business include commercial banking, consumer banking and wealth management.
I've spent time in Iowa City with Chip and his team, and their story is interesting. If we walk it back to the beginning of your journey, you'd been CEO of a bank in Northwest Florida and somehow convinced your wife to move from Florida to Iowa. That's the reverse of what a lot of people were doing.
Channel your inner Cruel Summer mindset and talk about that conversation, first with your wife and then with the team you wound up leading.
The first conversation with Michelle, my wife, was simple. I came home one day and said, "What do you think of Iowa?" She said, "I don't." We progressed from there.
We're both Midwesterners at heart. I grew up in Cincinnati. Michelle grew up in Chicago. I was with Fifth Third Bank for 22 years, primarily in Cincinnati and Chicago. So this was really coming back home to what we know and love. MidWestOne was an outstanding opportunity to do that.
I know you guys are happy there, and you've got a strong group of people doing interesting things. Let's build on that and talk about the strategic planning process you went through.
How do you take an institution with brand equity and a strong foundation but perhaps some maintenance needed in the infrastructure and organizational model? How do you realign around a clearer definition of who you are, who you want to be and the target segments where you can win?
You hit the nail on the head. I was fortunate to join an organization with 90 years of history and a very strong foundation. MidWestOne grew quickly from around $1.8 billion to $6.5 billion between roughly 2015 and 2020 and had a wonderful, granular core-deposit franchise.
The foundation was strong, but we'd grown so quickly that some of the organizational alignment had not kept pace with the asset growth. We took the executive team and board through a strategic planning process focused on a few basic questions: Who are we? Who do we aspire to be? Where can we win? Then we started identifying the strategic initiatives needed to reach that vision.
That reminds me of Simple Minds' Don't You (Forget About Me), with the idea of telling me your troubles and doubts and putting everything on the table. That's what teams have to do when they're positioning themselves for future growth.
There are always levers you can pull to grow, but they aren't necessarily the right levers. Steve, we saw a lot of commercial banks grow aggressively in the period Chip mentioned, right before what you call the great tightening, when the Fed raised rates by more than five percentage points. Loans that felt well-priced during the growth period later became anchors.
The strategic plan Chip developed had to bring the board along and socialize some ideas that were thorny at the time. One of those was the balance sheet and the idea of restructuring it in a meaningful way.
Chip, walk us through how the team evaluated the balance-sheet restructure and how you communicated it to investors so they maintained confidence in the direction you were heading.
Let me set the table. We came out of our strategic planning process at the beginning of 2023 with concrete goals. We wanted to become much more commercially centric, enhance wealth management and realign geographically. We sold Florida and bought into Denver.
We also strengthened the organization from a talent standpoint. Of our top 100 roles, roughly 46 people are new to the organization over the last two to two and a half years. A large part of the existing team stepped up, while we also brought in fresh ideas and experience from larger institutions as we became a larger institution ourselves.
By the spring and summer of 2024, we saw that roughly one-third of our balance sheet was a bond portfolio that was simply too large and too low-yielding. All the work being accomplished across the organization was being overshadowed by that situation. Our net interest margin suffered, profitability suffered and our stock price suffered.
We had the foundation and team in place. We'd done substantial recruiting. Commercial banking was progressing well, wealth management was progressing well, operational efficiency was improving, and technology platforms were being enhanced.
The question became whether we could reach our aspirational vision in a reasonable period of time with the 800-pound gorilla of that bond portfolio sitting on the balance sheet.
The first question in a decision like that is what it means for current shareholders. Ultimately, we serve customers, team members and shareholders. The board and executive team determined that our shareholders were already suffering. We were in what I call bank purgatory, and we weren't going to be released without doing something that transformed the financial trajectory of the company.
It's important to remember the environment in late 2023 and early 2024. A balance-sheet restructuring wasn't simply an economics question. People worried about how the market would react and whether customers or communities would interpret it as a sign of trouble.
The results have been compelling. Your efficiency ratio was in the 70s in the first quarter of 2024, and now you're down around 59. You took the pain, but at the time plenty of people would have preferred to heal slowly instead of ripping off the Band-Aid.
We tried to simplify complexity. We spent about five months preparing for the capital raise and restructuring, but when we took it to the investment community, the story was straightforward: in a matter of weeks, we could transform the financial trajectory of the company.
There was no credit cleanup. It was simply selling bonds, buying bonds and paying down debt, things banks have done throughout their history.
We were able to show that the transaction would increase net interest margin and profitability, and that those results would show up almost immediately.
In late September 2024, we raised $125 million in capital. The raise was roughly three times oversubscribed and very well received in the marketplace. On the first two days of trading, our stock price increased rather than dropping.
The following week we sold bonds. The week after that, we bought bonds and paid down debt. In the fourth quarter, our net interest margin increased by 92 basis points. Return on average assets moved from roughly 0.55% to above 1%, and our efficiency ratio dropped below 60%.
Now the question is what we're going to do with the franchise after essentially hitting a transformational reset in the balance sheet.
What I find interesting is that you took control of your destiny. Plenty of people want to do that, but execution is much harder.
I was fortunate to spend some time with your board before all this went public. Your outside directors asked honest and provocative questions, stress-tested assumptions and ultimately locked arms with management. They gave the team confidence that this was a direction they believed in.
That is an engaged board doing its job well. Taking control of your destiny isn't something one person does. You have to communicate exceptionally well over an extended period of time.
Before we move to technology, I'd add one more thing about the balance-sheet restructure. This is where relationships matter, and it's something community banks and MidWestOne have done well over 90 years.
We had the investment community, but we also had the people who matter every day, our customers. We explained what we were doing to our top 100 clients, and they were incredibly supportive. We didn't lose a single client during the transition.
That's a key point because at Silicon Valley Bank, customers took a very different narrative. Getting your concentration of liquidity and key clients on board matters.
Absolutely. Our team simplified the message: the capital is already in the door, our capital ratios are higher, our financial trajectory is stronger, and the institution is stronger after the transaction than it was before. If you were comfortable with us before and you love your relationship manager, it should only get better from here. That message resonated.
Now, on technology, we were fortunate in June 2024 to hire a new chief information officer, Paul. He has helped transform the organization and the technology function.
We focus on three areas. First is customer experience. Second is internal operating efficiency. Third is scalability for the future, especially because part of the balance-sheet restructuring gives us the ability to move back into the M&A market, likely around 2026.
We're moving to the Apiture digital commercial online banking platform. We're implementing ServiceNow for back-office workflow automation. Digital account opening is gaining traction, and in our metro markets about 17% of accounts are now being opened online. The list keeps going.
I'm incredibly pleased with the foundation we're building through the investments we've made over the last two years.
Those investments are needed when you think about who's dropping branches in your backyard. JPMorgan has been expanding in the Midwest, including in Iowa City. I have a lot of respect for Jamie Dimon and JPMorgan, but I also believe in a strong, healthy community and regional banking system.
You've talked about the balance sheet and technology, and now you have competition from JPMorgan and plenty of other players. How does that spin up the competitive juices for the team?
It absolutely does. If you look at almost every high-performing community or regional bank, you'll find a competitive edge, a desire and a will to win. That's about winning for your team, community, customers and shareholders.
It also creates another imperative: choose the field or court where you're going to play. JPMorgan is going to try to do everything well. In mass-market consumer banking, we're probably not going to beat Chase because we don't have those resources.
But we can identify targeted segments, especially in regions where we've served for years and have significant brand and relationship equity. Now that we also have the expertise and technology platform, we can win in the targeted areas where we choose to compete.
I like that idea. If JPMorgan thinks you're playing one game and you're over here with Caitlin Clark as your first pick in another, you can create advantages.
Let's see if Jamie Dimon can guard from the logo.
Is that a challenge from our power forward? You heard it here first.
For you, investments in things like commercial treasury management are also important. When Chase comes to a town, your marketing team has to think about stepping up its game in social media and digital marketing so you keep the liquidity and relationships you have in the community. They're good at building a physical presence and supporting it with strong digital marketing.
That takes us to the final topic, inspired by the Rolling Stones' Beast of Burden. Attracting talent can become a burden for leaders because you can't simply expect people to knock on your door and say they want to work there.
As you've defined the areas where you have a right to win and built a franchise with greater stability and durability, I imagine MidWestOne becomes more attractive to people who want to come in and build with the team.
It doesn't necessarily matter where you're located. It matters what you're trying to create. How have you recruited people who weren't already in the Midwest and encouraged them to do something outside their comfort zone?
When we recruit externally, we focus on a few questions: Are you a builder? Are you an architect? Are you an entrepreneur?
If that's the case, we have a home for you. We're an organization where expertise and complexity are growing, but where an individual can still have an immediate, direct impact on the bottom line, a department or a client. That resonates extremely well.
For the most part, our executive team has come from larger institutions. Large institutions are outstanding at many things, but sometimes you don't get to run the play you want to call. Our message is: come here, call some of your own plays and see how successful we can be for the team, our communities and our customers.
My mother-in-law used to say there's a lid for every pot. Just because the big banks have open positions doesn't mean you have to work there. This is a great representation of how community banks can compete with the biggest players and with peers.
Every time I see an executive leave a big bank they grew up with and loved, a common reason is that they lost the ability to call their own plays. I think that's a good way to put it, Chip. People want some control of their destiny and the ability to build without obstacles everywhere they turn. That's a huge opportunity for entrepreneurial midsize and regional banks around the country.
Completely agree.
We see examples all around the country, and frankly, many of them have been on Plugged In.
Steve had an opportunity to sing You've Lost That Lovin' Feelin', but he declined, so we'll spare the listeners. That's probably our cue to thank Chip Reeves for getting Plugged In with Cornerstone Advisors and talking shop with Steve Williams and me, Al Dominick.
Thanks, Chip. Over 1% ROA and an efficiency ratio in the 50s. Good job.
My pleasure. Thanks for having me on, and thank you to Cornerstone and both of you for everything you do for the industry.
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