Yahoo Finance MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q1 2024 Earnings Call Transcript
MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q1 2024 Earnings Call Transcript April 26, 2024
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Operator: Good morning, ladies and gentlemen and welcome to the MidWestOne Financial Group, Inc. First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. And I would now like to turn the call over to Barry Ray, Chief Financial Officer of MidWestOne Financial Group. You may proceed.
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 related 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.
Chip Reeves: Thank you, Barry and good morning. On today’s call, I’ll provide a high level overview of our first quarter results and an update on the significant progress in executing our strategic plan initiatives. Len will provide an update on our lines of business and then Barry will conclude with a more detailed review of our first quarter financial results. Looking at our quarterly highlights, I am pleased with the seamless closing and integration of Denver Bankshares, which added scale and a low cost deposit franchise to our ring Denver operations. Our Denver franchise now has loans of $673 million and deposits of $429 million. As we have stated previously, our objective is for the Denver market to be a $1 billion franchise for us in the future.
Len will speak further about our progress and our plans in this critical market. Turning to our balance sheet trends. Excluding acquired Bank of Denver balances, we delivered 8% annualized loan growth for the first quarter as we continue to benefit from the expansion of our major market banking teams and our customer value proposition, emphasizing larger bank expertise, delivered in a high-touch boutique fashion. Additionally, deposits were stable in what’s normally a seasonally slow quarter and we remain cautiously optimistic. We will grow our core deposit franchise through the year ahead. Importantly, in the quarter, because of our strategic 2023 balance sheet actions, the acquisition of Denver Bankshares and continued loan growth, our net interest margin expanded in the first quarter, rising 11 basis points and leading to a 7% quarterly increase in our net interest income.
Even if no rate cuts occur in 2024, we anticipate a slow build of margin for the remainder of the year. We continue to expand and up tier our Commercial Banking and Wealth Management businesses and have enjoyed solid loan and assets under management growth in our major metro markets of the Twin Cities, Denver and Metro Iowa. Specifically, regarding our Wealth Management business, our investments in talent and platform as well as market valuations led to first quarter revenue of $3.5 million, a 10% quarterly and 19% year-over-year increase. In January, we welcomed our new EVP and Head of Wealth Management, Steve Heimermann. And under his leadership, we look to achieve double-digit annual revenue growth in this business segment in the years to come.
The first quarter and the beginning of the second quarter of 2024 has seen significant talent acquisition across our bank as we continue to mature and expand our operations consistent with our strategic plan. These senior hires are in commercial banking, credit administration, wealth management, marketing and treasury management. Even with these talent and platform investments, we remain pleased with our expense discipline as we funded the majority of these investments by reallocating expense reductions into more productive and profitable markets and departments. To conclude, we have made substantial progress in the transformation of MidWestOne, positioning the bank for improved earnings power and returns. The execution of our strategic initiatives is progressing better than we have expected, and I remain very optimistic on what the future holds for our employees and shareholders.
I’d like to thank our employees for their continued hard work their expertise and their 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: Thank you, Chip. I’d like to provide some color on the results we are seeing in our deposit, commercial and wealth business lines. So, let’s start with deposits. We are pleased that both February and March saw customer deposit gains mitigating seasonal decline we experienced in January. These gains exclude deposits assumed from the Bank of Denver transaction. In terms of Commercial Banking, Slide 7 shows that it was Iowa Metro, Colorado and Twin Cities as our largest contributors to balanced growth. The primary drivers include draw-downs on existing CRE construction loans and an acceleration in C&I new production. This includes a nice win by our new agro business team as well as a new manufacturer we brought across both with a full relationship including treasury management.
Speaking of commercial, our government guaranty business continues to gain momentum. We see our SBA gain on sale business as a growing driver of fee income. In the first 3 months of 2024, we recognized $213,000 or 65% of what we saw in all of last year. And we believe the next couple of quarters will outpace that strong start. As Slide 8 shows, asset quality metrics for the quarter were stable, including net charge-offs and 30 to 89-day delinquency of only 2 basis points and 20 basis points respectively. Our non-performing assets ratio saw a slight increase of 2 basis points, while our allowance grew to 1.27% of total loans. As noted in our release, our classified assets ratio declined 36 basis points from the linked quarter. However, two large trucking relationships migrated from past to special mention in the quarter, driving an increase in our criticized loan balance.
Turning to Slide 10, the momentum in Wealth Management continues with assets under administration, up 11% and revenue, up 19% from the same period 1 year ago. We are encouraged by new talent attraction efforts in this line of business and we see that as a continuing opportunity for us in 2024. Finally, I want to commend the exceptional work by the team with the Bank of Denver acquisition. From operations to IT to retail ambassadors and learning and development, it was our smoothest conversion yet. And I can tell you from having been on the ground in Denver that our newest colleagues are settling in very nicely. As Chip mentioned, we see continued upside in Denver. In fact, in the period since our Bank of Denver announcement, we have recruited a new SBA Business Development Officer, a new Treasury Management Officer, and a new senior C&I commercial banker, as referenced in our strategic plan updates, selective talent acquisition in our target markets continues to be a focus.
With that, I am pleased to turn the call over to our CFO, Barry Ray, to discuss our financial results.
Barry Ray: Thank you, Len. I will walk through our financial statements beginning with the balance sheet on Slide 12. Starting with assets, loans increased $287.7 million or 7% from a linked quarter to $4.41 billion. Excluding the $207.1 million of loans acquired in the Bank of Denver acquisition, loan growth was $80.6 million or 8% annualized from the linked quarter. Strength in the first quarter was led by commercial and industrial loans, which increased $30.7 million or 12% annualized from a linked quarter. The overall portfolio yield was 5.51%, a 17 basis point improvement from the linked quarter. The allowance for credit losses increased $4.4 million to $55.9 million or 1.27% of loans held for investment at March 31. The increase reflected $3.2 million in credit loss expense to establish the Day 1 allowance for credit losses in connection with the Bank of Denver acquisition as well as additional allowance for credit losses for organic loan growth.
Turning to deposits. Total deposits increased $189.6 million to $5.59 billion at March 31 as compared to December 31. Excluding the $224.2 million of deposits assumed in the Bank of Denver acquisition, deposits were down $34.7 million from year end 2023. Finishing the balance sheet, total shareholders’ equity increased $3.6 million to $528 million, driven primarily by a decrease in accumulated other comprehensive loss. The tangible common equity ratio was 6.43% at March 31, 2024, down 47 basis points from year end 2023 due primarily to the all-cash Denver Bankshares acquisition. Turning to the income statement. On Slide 15, we earned net income of $3.3 million or $0.21 per diluted share. During the quarter, we completed the acquisition of Denver Bankshares resulting in merger-related expenses of $1.3 million and a day 1 credit loss expense of $3.2 million.
In addition, we recorded a negative mortgage servicing right valuation of $368,000 and incurred non-merger-related severance costs of $261,000. Adjusting for these items, adjusted net income was $7.2 million or $0.46 per diluted common share. Net interest income increased $2.2 million in the first quarter to $34.7 million as compared to the linked quarter, due primarily to higher earning asset volumes and yields, partially offset by higher funding cost and volumes of interest-bearing liabilities. Loan interest income in the first quarter of 2024 included $1.2 million of loan purchase discount accretion, $458,000 of which was attributable to the bank of Denver acquired loans. The accretable purchase discount for the Bank of Denver loans was provisionally measured during the first quarter at $8.2 million or 3.8% of acquired loans.
We expect to recognize that discount in loan interest income over the 3.1 year weighted average portfolio life. Our tax equivalent net interest margin increased 11 basis points to 2.33% in the first quarter as compared to 2.22% in the linked quarter as asset yield increases outpaced funding cost increases. Specifically, earning asset yields increased 20 basis points, partially offset by a 10 basis point increase in our funding costs. The cost of interest-bearing deposits grew much more modestly, up only 6 basis points quarter-over-quarter compared to the 34 basis point increase we experienced in the prior quarter. This outcome was a key driver in our net interest margin improvement. Non-interest income in the first quarter increased $5.9 million due primarily to the $5.7 million net loss on our security sale in the fourth quarter of 2023, which did not recur in the current quarter.
In addition, wealth management-related revenue increased $310,000 from a linked quarter. Finishing with expenses. Total non-interest expense in the first quarter was $35.6 million, an increase of $3.5 million or 11% from the linked quarter. The first quarter’s expenses included $1.3 million of merger-related costs as well as non-merger-related severance costs of $261,000. Adjusting for those charges, adjusted non-interest expense was $34 million or a 6% increase from the linked quarter. The increase was due to normal annual salary adjustments, incentive accruals and additional Bank of Denver employee costs. As a reminder, we expect to divest our Florida branches in June 2024, which will result in a reduction to our quarterly expense run rate of about $700,000 beginning in July 2024.
The 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: [Operator Instructions] And our first question is from the line of Brendan Nosal with Hovde. You may proceed.
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