MidWestOne Financial Group, Inc. Q3 FY2024 earnings call

• The common equity offering was oversubscribed 3 times, resulting in a gross capital raise of almost $125 million. Proceeds were used to pay off high-cost borrowings and purchase higher-yielding securities. - The balance sheet repositioning involved selling $1 billion of securities, paying off Fed borrowings, and purchasing Agency CMO and pass-through securities. Reclassified held-to-maturity securities to available-for-sale and recognized $140.4 million impairment in the third quarter. - The deposit franchise showed strength with minimal increase in deposit costs and 4% linked-quarter noninterest-bearing deposit growth. - Commercial banking led loan growth at 4% annualized, with C&I growth at 11% and CRE at 3%. Asset quality improved, and SBA lending had its best quarter. Net interest margin expanded 10 basis points, and net interest income increased 3% quarterly. - Maintained expense discipline, funding investments by reallocating expense reductions.

Deposit Franchise: Deposit costs increased minimally, with noninterest-bearing deposits growing 4% linked-quarter. Core deposits increased $40.5 million, noninterest-bearing deposits $35.2 million. Consumer and commercial deposits are up year-over-year, with over 1,200 net new accounts generated organically in consumer and commercial segments. Commercial Banking: Led loan growth at 4% annualized. C&I loan growth was 11% in the third quarter, CRE growth was 3%. Commercial loan balances excluding substandard loans increased at 6.9% on a linked-quarter annualized basis. SBA lending had its best quarter to date. Wealth Management: Assets under management were up quarter-over-quarter, while fee income was down 3% from the linked-quarter but remains up 15% year-over-year. Added a new wealth adviser in the Twin Cities and a new private banker in Denver. Loan Portfolio: Total loan growth was 1% in the third quarter. Nonperforming assets declined $5.7 million, representing the second consecutive quarter of declines in this category.

• The capital raise and balance sheet repositioning are expected to add about 70 basis points to the net interest margin and be a $35 million boost to annualized net interest income. - Anticipate continued margin expansion based on yield curve expectations. - Expect the reserve level to remain in the mid to high 120s for the foreseeable future. - Outlook for 2025 ROA is above 1%, potentially ending Q4 in a certain range.

• Interest rate changes could materially affect actual results. - Changes in the mix of the company's business can impact financial performance. - Competitive pressures may affect market position. - General economic conditions influence operations. - Specific risks detailed in periodic reports filed with the SEC. - Two C&I credits downgraded to special mention due to potential weaknesses.

Q: Could you help us understand how the pro forma balance sheet is positioned for additional Fed cuts?

A: Yes, we believe there is opportunity for continued margin expansion based on yield curve expectations, and the transaction makes the balance sheet more asset-sensitive.

Q: Regarding the wealth business, why were fees down sequentially despite AUM being up?

A: The wealth business has different components: private wealth has ongoing recurring fees, trust business has episodic revenue, and investment services has lumpiness due to annuities.

Q: Which markets (Denver or Twin Cities) have better opportunities and which product sets are successful?

A: Both markets have robust opportunities. Growth is C&I-driven, and there's increasing interest in CRE.

Q: Thoughts on the 4Q earning assets and margin outlook?

A: Average earning assets for 4Q expected around $5.7 million, with potential upside to the 3.18% margin estimate.

Q: Thoughts on credit trends and reserve level?

A: Nonperforming assets declined, with resolution efforts continuing. Reserve level expected to stay in mid to high 120s.

Q: Competitors' reaction to rate cut and upcoming cuts?

A: Competitors front-run the expected cut, and betas are expected to be around 40% on the way down.

Q: Comments on the two downgraded C&I credits?

A: The $17 million credit is in higher education, $21 million in gasoline retail/wholesale; both are longtime customers with potential weaknesses but management believed in their ability to recover.

Q: Margin outlook with different yield curve scenarios?

A: A flat yield curve presents challenges, but there's still opportunity for asset repricing.

Q: Outlook for SBA fee income and 2025 ROA?

A: SBA fee income expected to continue as a contributor, and 2025 ROA expected above 1%.