MidWestOne Financial Group, Inc. Q4 FY2023 earnings call

Key Points from Chip Reeves

• Net income was $2.7 million or $0.17 earnings per diluted share. Sold $115 million of securities with a net pre-tax loss of $5.7 million. Adjusted net income was $7.7 million or $0.49 per diluted common share.
• Delivered 6.1% annualized loan growth in Q4 and 7.5% for the full year. Modest core deposit growth in Q4. Liability-sensitive balance sheet pressured NIM and NII, but margin expected to trough in first half of 2024.
• Strategic initiatives: Realigned geographic footprint by selling Florida operations and merging with Denver Bankshares (closing Jan 31, 2024), expanding commercial banking and wealth management, hiring in key markets.

From Len Devaisher

• Deposits showed improving segment mix with consumer and commercial deposits. Commercial loan growth in Q4, with $50 million growth driven by Iowa Metro. Weighted average coupon of new commercial originations up, renewal rate up. Credit risk profile solid with low net charge-offs and delinquency. Wealth management assets under management up 60% year-to-date.

From Barry Ray

• Balance sheet details: Loans up $61 million, allowance for credit losses decreased $100,000. Deposits increased, total borrowed funds decreased. Noninterest income decreased due to security sale loss and change in MSR fair value. Exceeded expense savings target in 2023, with expense base expected to be lower going forward.

Loans increased $61 million or 6.1% annualized to $4.13 billion in the fourth quarter, with commercial real estate loans up $49.3 million or 9.3% annualized. Excluding brokered deposits, deposits increased $31.4 million or 0.6% from the linked quarter, and total deposits rose $32.3 million to $5.4 billion. The tax equivalent net interest margin declined 13 basis points to 2.22% in the fourth quarter.

Forward-Looking Statements

• Expect loan growth to accelerate to high single digits in 2024.
• Merger with Denver Bankshares expected to close Jan 31, 2024, bringing ~$640 million in loans and ~$400 million in deposits to Denver market, aiming to build it into a $1 billion+ franchise.
• Expense base expected to be in the $33 million to $35 million range per quarter by end of 2024.
• Margin expected to trough in the first half of 2024, with benefit from Denver merger in 2024 providing a couple million dollars of net interest income tailwind.

• Interest rate fluctuations.
• Changes in the mix of business.
• Competitive pressures.
• General economic conditions.
• Credit risks in senior living and office commercial real estate sectors, with some relationships migrating from special mention to classified in Q4.

Q: Terry McEvoy asked about balancing expense control and future investment in 2024 and expense outlook.

A: Barry Ray said in Q1, two months of Bank of Denver coming on and Florida not rolling off until end of second quarter, expecting to be in $33 million to $35 million range per quarter by end of 2024.

Q: Damon DelMonte asked about loan growth outlook and margin impact of Denver merger.

A: Len Devaisher said loan growth is balanced with C&I momentum, agribusiness vertical, and CRE; Barry Ray said Denver merger will provide incremental margin benefit, with net interest margin of Denver higher than MidWestOne's, and benefit of interest rate marks, expecting ~$2 million net interest income tailwind in 2024.

Q: Brian Martin asked about margin, credit risk, and fee income outlook.

A: Barry Ray said December net interest margin was ~2.15% but closer to 2.20%, with ~$2 million interest income benefit from bond sale in 2024; Gary Sims discussed credit risk in senior living and office CRE, noting de minimis migration from special mention; Chip Reeves talked about fee income outlook, expecting noninterest income growth led by wealth management, government/SBA group, and treasury management, with assets under management in wealth up 60% year-over-year and expecting high single-digit to double-digit growth in noninterest income by end of 2024