MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q4 2023 Earnings Call Transcript
MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q4 2023 Earnings Call Transcript January 26, 2024
MidWestOne Financial Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the MidWestOne Financial Group Incorporated Fourth Quarter and Full Year 2023 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions and instructions to follow at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Barry Ray, Chief Financial Officer of MidWestOne Financial Group.
Barry Ray: Thank you, everyone, for joining us today. We appreciate your participation in our earnings conference call this morning. With me here on the call are Chip Reeves, our Chief Executive Officer; Len Devaisher, our President and Chief Operating Officer; and Gary Sims, our Chief Credit Officer. Following the conclusion of today's conference, a replay of this call will be available on our website. Additionally, a slide deck to complement today's presentation is also available on the Investor Relations section of our website. Before we begin, let me remind everyone on the call that 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 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. I would now like to turn the call over to Chip.
Charles Reeves: Thank you, Barry, and good morning. On today's call, I'll provide a high-level overview of our fourth quarter results and an update on the significant progress that we've achieved executing our strategic plan over the last year. Len will then provide an update on our lines of business, and Barry will conclude with a more detailed review of our fourth quarter financial results. Starting on slide three of our earnings presentation, we delivered net income of $2.7 million or earnings per diluted share of $0.17. During the quarter, we sold $115 million of securities, resulting in a net pre-tax loss of $5.7 million as we continue to address our liability-sensitive balance sheet. We also recorded $438,000 in costs related to our previously announced voluntary early retirement program, $245,000 of merger-related costs and $105,000 reduction to the fair value of our MSR.
Adjusting for those four items, adjusted net income was $7.7 million or $0.49 per diluted common share. Now looking deeper at our results, I'm pleased with our balance sheet trends. We delivered 6.1% annualized loan growth for the fourth quarter and 7.5% loan growth for the full year as we continue to benefit from the expansion of our major market banking teams. Additionally, we achieved a modest core deposit growth in the fourth quarter and remain cautiously optimistic we can continue to grow our core deposit franchise through the year ahead. While our balance sheet trends are encouraging, we do remain liability sensitive and the interest rate environment continued to pressure our NIM and NII through the fourth quarter. That said, we have continued to see a moderation in the rate of our NIM decline and expect our margin will trough through the first half of 2024.
Importantly, we continue to control what we can control and execute quite well on our strategic initiatives to transform MidWestOne Bank and position this institution to deliver financial results at the median of our peer group by the end of 2025. As I've said on previous calls, we're working hard to become a top-performing bank and believe we are firmly on track given the substantial progress we've achieved over this past year. A key accomplishment was the realignment of our geographic footprint announced in September with the sale of our Florida operations and the proceeds to be reinvested in a highly attractive Denver MSA through our merger with Denver Bankshares, the long-established $272 million asset bank. During the fourth quarter, in that mark, we hired an SBA officer and a treasury management officer, as we continue to further expand our platform and accelerate growth in this large commercially robust MSA.
Looking forward, we've received all regulatory approvals and expect the merger to close on January 31st. At closing, we'll have approximately $640 million in loans and $400 million in deposits in the Denver marketplace and firmly believe we're on the path to building this MSA into a $1 billion plus franchise in the coming years. We also continue to expand and up-tier our commercial banking and wealth management businesses and have enjoyed robust loan and assets under management growth in our major metro markets of the Twin Cities, Denver and Metro Iowa. Our plan is to continue to add bankers as we target middle-market companies with $20 million to $150 million in revenue and individuals with investable assets of $3 million to $20 million. Importantly, we're excited about the hiring of our new Head of Wealth Management, a seasoned leader with extensive super regional experience in the Midwest.
We look to achieve double-digit annual revenue growth in this business segment in the years to come. Additionally, we added two experienced commercial bankers in our Metro Iowa markets, one in Des Moines and one in Dubuque. Overall, we've made significant progress growing our product and talent capabilities in both our core markets and our specialty verticals of Agribusiness and SBA. Accordingly, we expect an acceleration in loan growth to the high single digits for the full year 2024. We're also extremely pleased with our 2023 expense discipline. As part of this, we outlined a plan to reduce our operating expense base by 5% and then reallocate 2.5% into more productive, profitable markets and partners. Through 2023, we've exceeded that stated plan and remain focused on the appropriate balance of cost containment and growth reinvestment.
To conclude, we've made substantial progress transforming MidWestOne and positioning the bank for improved earnings power and returns for when the interest rate cycle abates. While our liability-sensitive balance sheet has challenged current earnings, the execution of our strategic initiatives is progressing better and faster than what we've expected and I remain very optimistic on what the future holds for our employees and shareholders. At this time, I'd also like to thank our employees for their continued hard work, combined with our commitment to our company, customers and communities. This journey would not be possible without their unwavering support. Now I'd like to turn the call over to Len.
Len Devaisher: Thanks, Chip, and good day, everyone. Deposits have remained a consistent focus in 2023, and the results are showing. We're especially pleased at the improving quality of the segment mix with consumer and commercial deposits, muting a decline in high-cost lumpy public funds. Our positive net new deposit accounts in 2023 and strong growth in services per household, which are up from 3.40% to 3.48% reflect our focus on a proactive relationship approach. Looking forward, we remain cautiously optimistic, having generated another quarter of core deposit growth, as highlighted on slide six. Our commercial banking team continues to drive strong growth on the asset side of the balance sheet too. Our $50 million of commercial loan growth in the fourth quarter was driven by our focused markets, particularly Iowa Metro.
We continue to see growth in CRE and ag balances. And in terms of new commitments, we see strong momentum in C&I. Our long story is about growth but also profitability and risk. We are pleased that our weighted average coupon of new commercial originations in December was up to 7.76%, an increase from 7.27% in September. Our renewal rate averaged 8.37% in December, up from 8.26% in September. As outlined on slide eight, our nonperforming assets ratio is stable. During the fourth quarter, we did see three relationships migrate from special mention to classified. Two in the senior living space and one in the office CRE space. Importantly, we saw only a de minimis amount of credit exposure migrate from past to special mention. The credit risk profile of our portfolio remains solid with low net charge-offs of only nine basis points for the full year and the leading indicator of 30-plus day delinquency at a low 26 basis points.
Our portfolio remains well reserved with an allowance for credit losses of 1.25%. As slide nine shows, we are well positioned with a diversified loan portfolio without outsized concentration in CRE and only 3.8% in non-owner-occupied office. Turning to slide 10, the talent investments in wealth also continue to bear fruit. Year-to-date, the team has been entrusted with new assets of $195 million, which represents a nearly 60% increase compared to 2022. As Chip mentioned, we see an opportunity to further grow our wealth business and are excited to have named a new head of our wealth business this past week. With that, I'm pleased to turn the call over to our CFO, Barry Ray, to discuss our financial results.
Barry Ray: Thank you, Len. I'll walk through our financial statements beginning with the balance sheet on slide 12. Starting with assets, loans increased $61 million or 6.1% annualized from the linked quarter to $4.13 billion. Strength in the fourth quarter was led by commercial real estate loans, which increased $49.3 million or 9.3% annualized from the linked quarter. The overall portfolio yield was 5.34%, a 15 basis point improvement from the linked quarter. During the quarter, the allowance for credit losses decreased $100,000 to $51.5 million or 1.25% of loans held for investment at December 31st. The small decrease reflected loan growth in portfolio segments with expected credit loss rates that are lower than other segments.
Turning to deposits. Excluding brokered, deposits increased $31.4 million or 0.6% from the linked quarter. This is the second sequential quarter of deposit growth, which points positively to continued growth in the year ahead as our deposit franchise stabilizes. For the fourth quarter, total deposits increased $32.3 million to $5.4 billion at December 31st as compared to September 30th. This increase, combined with our security sales, positioned us to reduce higher cost FHLB borrowings. During the quarter, total borrowed funds decreased $74.9 million to $423.6 million. As Chip touched on, the rising interest rate environment continued to pressure deposit costs and our total funding costs in the fourth quarter. Specifically, the cost of interest-bearing liabilities rose 32 basis points to 2.65% comprised of increases to our interest-bearing deposits, short-term borrowing and long-term debt costs.
Finishing the balance sheet, total shareholders' equity increased $19 million to $524.4 million driven primarily by a decrease in accumulated other comprehensive loss. Turning to the income statement on slide 15, net interest income declined $2 million in the fourth quarter to $32.6 million as compared to the linked quarter, due primarily to higher funding costs partially offset by lower volumes of interest-bearing liabilities, higher volumes of interest-earning assets and higher interest-earning asset yields. Our tax equivalent net interest margin declined 13 basis points to 2.22% in the fourth quarter as compared to 2.35% in the linked quarter. Our net interest margin in the fourth quarter continued to be impacted by the increase in our funding costs which significantly outpaced the increase of 12 basis points in our total interest-earning asset yields.
Noninterest income in the fourth quarter decreased $6 million, primarily due to the $5.7 million net loss on our security sale in the fourth quarter and $554,000 unfavorable change in loan revenue. As Chip touched on, we sold $115.2 million of securities in the quarter, resulting in $6.7 million in losses, partially offset by a $1 million gain on the sale of Visa Class B shares. The decrease in loan revenue was due primarily to a $388,000 quarter-over-quarter change in the fair value of our MSR and $108,000 quarter-over-quarter change in revenue from mortgage originations. Excluding the loss on security sales and the change in MSR, our noninterest income was stable as compared to the linked quarter. Finishing with expenses, total noninterest expense in the fourth quarter was $32.1 million, an increase of $587,000 or 1.9% from the linked quarter.
As we discussed on last quarter's call, we expect that our noninterest expense to gradually rise as we continue to invest in our business. Importantly, and as Chip alluded to earlier, we exceeded our expense savings target in 2023 and as a result, our go-forward annual expense base will be at least $3.25 million lower than had we not undertaken those cost savings measures. Expense control remains a key focus of our management team, and we are very pleased with our execution. And with that, I'll turn it back to the operator to open the line for questions.
Operator: Thank you. [Operator Instructions] Our first question today comes from the line of Terry McEvoy with Stephens. Please go ahead, Terry.
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