Q4 2022 Midwestone Financial Group Inc (IOWA) Earnings Call
Ladies and gentlemen, welcome to the Midwest, One financial Group, Inc. Fourth quarter two earnings call. My name is Glenn and I'll be the Margaret to today's call. If you would like to ask a question. During the presentation. You may do so by pressing star one tack on.
Key pad.
I will now hand, you over to your host Barry Ray CFO off mute the best one to begin Berry. Please go ahead.
Thank you everyone for joining us today, we appreciate your participation in our fourth quarter 2022 earnings conference call.
With me here on the call. This morning is chip Reeves, our Chief Executive Officer, and Lynn <unk>, our President and Chief operating Officer.
Following the conclusion of today's conference a replay of this call will be available on 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 Midwest, One financial Group Inc.
Forward looking statements generally include words, such as beliefs expects anticipates and other similar expressions.
Results could differ materially from those indicated.
Among the important factors that could cause actual results to differ materially our interest rates change 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.
Midwest <unk> 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 Kim.
Thank you Barry and good morning, everyone I'm excited to be here today and thankful for the opportunity to succeed Charlie is Midwest ones next CEO .
So Charlie is 22 years of leadership and vision Midwest, one has grown to $6 6 billion in assets, while expanding our geographic footprint to five states.
Charlie has also developed an enduring culture focused on our employees communities and customers. That's firmly position this company for future success.
I'm honored to succeed and Charlie and grateful for his wisdom and counsel during my first 90 days.
I'd also like to acknowledge Linda <unk>, our president and COO, who did quite simply and all that.
Ending job as interim CEO .
For those who don't know me I've spent my banking career at both Super Regional and community banks in both rural and Metro markets building organic growth engines, while developing new lines of business through a combination of a disciplined strategic process and talent acquisition I've.
I've been fortunate to work with outstanding bankers and teams that executed on strategic priorities ultimately delivering improved financial results and shareholder value.
Here at Midwest, One I see a bank with a strong foundation compelling markets and diverse business lines or.
Our commercial banking franchise has benefited from initiatives implemented 18 to 24 months ago, which can be seen in our fourth quarter and full year results. We.
We also have a significant wealth business that during 2022 is strategically added talent and AUM in.
Our growth markets.
All year over year revenue in the business is muted due to equity valuations. This.
This business line is prepared for substantial growth.
In addition, Midwest one enjoys dominant community bank market share in many of our core banking markets.
We now need to translate these foundational strengths into our operating performance.
Looking at our fourth quarter results in more detail. They reflected many of these initiatives with loan growth exceeding 10% annualized for the third consecutive quarter.
This growth driven by talent acquisition and our relationship banking model occurred primarily in our select metro target markets of the twin cities, Denver and Metro Leila.
Turning to credit quality through expertise and fourth quarter strategic actions, our asset quality metrics improved measurably with a nonperforming assets ratio decreasing 16 basis points to point at two 4%.
Our allowance coverage ratio is at one point to 8%.
Our 30 to 89 day delinquencies remained at historically low levels.
We've now remedied, our organization's legacy credit issues and are positioned well for 2020 three's uncertain economic conditions.
Our fourth quarter results, however were impacted by higher funding costs and are primarily fixed rate, earning asset composition, leading to net interest margin compression.
In addition, noninterest income was impacted due primarily to lower mortgage origination volumes.
Both pressured our profitability and earnings.
Looking forward I believe there is an opportunity to improve our operations, while enhancing and further developing our growth engines with the ultimate goal of becoming a top performing bank.
To accomplish this we've commenced the development of our strategic plan that will position Midwest wanted to achieve this goal.
While we outline more details of the plan in our late April 1st quarter 2023 earnings call.
Share some high level thoughts on our review.
First a clear area of focus is to more actively manage the banks balance sheet given that we're liability sensitive.
We are reviewing a broad range of initiatives to address this challenge.
Second we will review our business lines and the geographies in which we operate we must ensure that we are in businesses and markets that provide opportunity for scale and profitable responsible growth third as we review our business lines are commensurate review of our operating expense base will occur.
This will likely lead to a reallocation of resources to drive growth as well as efficiency.
You'll hear me say this often we want to be a high performing bank with an organic growth engine to power our results.
Once again I'm honored to be a part of Midwest. One bank. This is a special place with a strong foundation compelling markets and talented bankers and we look forward to creating a high performing organization.
With that I'll turn the call over to Lynn, who will provide line of business comments.
Thank you chip and good morning, everyone.
With Chip's arrival the leadership team is aligned.
And we are committed to the acceleration of our journey to build Midwest one into a high performing bank.
While that journey has begun.
We're just getting started.
Looking back over the past year.
Im proud of our accomplishments as we executed on our strategic priorities, including number one driving loan growth, while improving the risk profile of our portfolio.
Number two scaling up our wealth business.
And number three integrating the <unk> acquisition.
I'll offer some high level perspective on each of these focus areas.
Looking at our commercial loan growth Denver, and twin cities led the way each growing more than $120 million in 2022.
We are very pleased that twin cities commercial portfolio now exceeds $1 billion.
Iowa Metro has also been a strong contributor to growth des Moines growing more than $25 million.
These are different markets, but with one common thread.
Recruiting new talent.
Talent investments have driven increased volume, but just as importantly, an improving risk profile.
Nonperforming assets are down by more than half of nearly $16 million reduction while 30 day past dues have followed the same trend.
Finally.
I should point out that while commercial is the needle mover in our loan growth engine. Our retail team continues to deliver high quality consumer growth across our footprint with balances up $33 million in consumer and $38 million and mortgage.
Looking forward, our commercial pipeline remains solid.
In the current environment, we feel mid single digits is an appropriate growth range to target.
At the same time, given the new talent we've on boarded.
And our low loan to deposit ratio.
We will continue to add new customer relationships opportunistically, when the risk and return profile is a shareholder win.
Our belief is that some of the uncertainty of 2023 could present opportunities for our credit disciplined relationship approach.
Take advantage and gain share, especially in our growth markets.
The wealth business is the same talent story.
While the revenue growth has been slower to materialize than we planned the momentum over the back half of 2022 bodes well for the future.
We are pleased that we saw.
Grow materially faster than the S&P 500, with our wealth teams, bringing on $180 million of new AUM.
As we look forward.
We are encouraged with our pipeline of similar magnitude.
And we will be opening our new Cedar Rapids wealth and commercial office in the next 90 days.
Finally I.
<unk> has performed according to plan with expense Takeouts realized an earnings contribution evident.
With Iowa, <unk> now fully integrated we are positioned to focus on our technology and operations capacity on strategic initiatives in the year ahead to drive growth and efficiency.
Let me now turn the call to Barry to discuss our financial results.
Thank you Lynn.
I'll walk through our financial statements beginning with the balance sheet.
Starting with assets loans increased $94 2 million or 10, 4% annualized from the linked quarter to $3 8 billion.
Strength in the fourth quarter was led by commercial loans, which increased $82 5 million or 11, 2% annualized from the linked quarter.
In the quarter, new loans were brought on at an average coupon of 6.6% and at a premium for 494% in the third quarter of 2022.
Overall portfolio yield was $4 six 6%, resulting in a 20 basis point improvement in interest, earning asset yields as compared to the linked quarter.
As chip discussed we took strategic actions through the fourth quarter to improve the credit profile of our loan portfolio, which positions the bank for an uncertain economic outlook.
During the quarter the allowance for credit losses declined $2 9 million to $49 2 million or $1 two 8% of loans held for investment at December 31.
The decline was due to net loan charge offs of $3 5 million, partially offset by credit loss expense of <unk> 6 million.
Deposits were down slightly from the linked quarter, but up six 9% to $5 5 billion as compared to year end 2021.
During the quarter, we experienced increased competition for deposits, which required us to raise our rates to maintain deposit relationships.
Looking at this more closely the cost of interest bearing liabilities increased 44 basis point to 1.08% comprised of increases to our interest bearing deposits short term borrowing costs and long term debt costs.
Finishing the balance sheet total shareholders equity rose 26 million to $492 8 million driven primarily by net income of $16 million and a favorable change in OCI of $7 6 million, partially offset by cash dividends of $3 7 million.
Turning to the income statement net interest income declined $2 1 million in the fourth quarter to $43 6 million as compared to the linked quarter due primarily to the higher cost of funds combined with the increased level of high cost borrowings and partially offset by the increase in interest, earning asset levels and yields.
Our net interest margin declined 15 basis points to 293% in the fourth quarter as compared to three 8% in the linked quarter.
Our NIM was impacted in the fourth quarter by an increase in our funding costs, which rose more rapidly than the increase in our total interest earning asset yields.
Noninterest income in the fourth quarter declined $1 6 million to $10 9 million as compared to the linked quarter.
The decline was primarily due to an $800000 decline in loan revenue due to a smaller increase in the fair value of our mortgage servicing rights and a decline in our mortgage origination fee income.
Combined with a $700000 decrease in other income due primarily to a onetime settlement recorded in the third quarter of 2022, which was partially offset by an increase of $2 5 million in the bargain purchase gain recorded in connection with the <unk> acquisition.
Finishing with expenses.
Total noninterest expense in the fourth quarter was $34 4 million a slight decline of $200000 from the linked quarter.
The decline was largely due to a $400000 decline in merger related expenses from the <unk> acquisition related to data processing marketing and legal and professional fees.
Partially offset by a $400000 increase in compensation and employee benefits at mfg, reflecting an increase in incentive compensation expense.
Looking forward, we believe our quarterly expense run rate will approximate the fourth quarter of 2022 level, excluding merger related costs.
And with that I'll turn it back to the operator to open the line for questions.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on telephone keypad now.
To ask a question. Please show your focus on beauty locally.
We have our first question comes from Brendan Nosal from Piper Sandler.
Brendan Your line is now open.
Just maybe start off on kind of the growth in funding equation. So it sounds like.
We're not hearing Brendan.
Can you folks hear me.
And then your lifestyle.
Brendan I think we got you now.
Hey can you guys hear me.
Yeah.
We began Brendan hi, yes, Hello.
Sorry about that so my apologies.
Maybe just to start off on the equation between kind of loan growth and funding. So it sounds like mid single digit pace on bone growth from the reasonable expectation.
Just kind of curious on how you think about funding that growth looking ahead I mean, it looks like the securities reinvestment can fund a piece, but just kind of thinking about the balance of that.
Brian This is Barry I'll start yes, the securities cash flows would fund.
Upwards of about to the mid single digits of loan growth.
To the extent that we are able to exceed that particular target then we're looking at wholesale funding sources.
We're looking at right now are broker deposits as a as an alternatives given their favorable cost over the short run and then obviously <unk> advances.
Got it got it okay.
And then maybe a second one just on kind of general deposit pricing pressures.
Assuming we get a couple more hikes out of the second year, where do you think we are in the cycle of pricing pressures at this point.
I think we're in the thick of deposit pricing pressures is how it feels brendan.
I think we I indicated in our release that our <unk>.
Cycle to date deposit beta has been 15%.
Which I think we believe is respectable when we see what's happening out there in the industry. It did ramp up in the in the fourth quarter quarter over quarter to 25%, which we also indicated in the release I expect those pressures to continue and perhaps those quarter over quarter betas to ramp up as well.
Yeah.
Got it okay. Thank you for taking the question at least until the Covid.
The F O M C.
Reaches their terminal rate whenever that maybe.
And Brandon This is Jeff actually is to through the cycle over time, we've to date through the cycle, we've been actually pretty impressed with our granular core deposit franchise in terms of a beta of only 15% and what I'll tell you is we're going to visually protect.
Core deposit franchise and the granularity of it so I would expect to Barry's point.
I beat it to rise here I hear in this deposit pressures continue.
But we also believe its sai.
A huge part of our franchise value so we're going to protect it.
Yep Yep understood alright, Thank you for taking the questions.
Thank you Brendan.
Thank you Brendan.
We have our next question comes from Kelly Mccoy from Stephens Terry Your line is now open.
Hi, Thanks, Good morning, everyone. How are you.
Hi, Jerry.
Maybe start off with.
How far along are you through the portfolio review of of.
The loan portfolio and I guess said another way should we expect additional kind of credit actions to resolve some of those legacy loan issues.
Yeah, Let me I'll go ahead and hit this first and then we also have Gary Sims, our Chief credit Officer with Us Terry.
When I first joined obviously November one one of the first pieces that we began to look at was.
Let's finish the credit job of the legacy credit issues. So we put in place obviously.
Review and then I went with the actions that we did.
Ultimately.
Anything that we did not believe we would be able to resolve in 2023.
We remedied through either a sale or some other resolution so with that impact we were able to reduce that nonperforming asset ratio down to 24.
This points, Gary if you want to speak to any more of those particulars or even the portfolio as a whole.
Thanks, Chip and you know what.
I see.
And that portfolio and specifically the nonperforming portfolio that we have.
Have left on the books at 12 31, there is still potential resolutions as chip identified in 'twenty three so I think that existing book will continue to.
Resolve and decline throughout 2023.
We have a.
As we've talked about before we do it.
Very thorough review of the portfolio at the end of the year.
And touch virtually every credit of material size at by the end of the year and we don't see.
Migration continued into the nonperforming book in 2023.
So generally I think you're going to continue to see that that book go down as we continue to resolve credits does that help.
It does yeah. Thanks. Thank you both for the response and then as a follow up.
I look at your shareholder value strategy slide or the third or fourth bullets down to strengthening the commercial banking franchise and should I interpret that as adding commercial bankers. If so is that in your expense outlook and what about incremental products you have the product set to compete within the commercial banking space to the.
Agree that you can be successful.
Yeah. This is chip Terry.
A couple of comments and then turn it to <unk> to really lead this effort over the last 24 months.
What youll see as we.
Begin to unveil more of our strategic plans.
For internally within the bank as well as for the external market.
We will have more of a lean into our commercial banking space than even we do today and we've made significant progress the last two years in terms of talent and.
Where it goes but we absolutely in terms of adding commercial bankers and I think we'll be adding those in our select metro markets of Minneapolis, Denver and Metro Iowa.
In terms of our product set I think some of the things that will begin to continue to accelerate as our treasury management.
Initiatives as well lend any further comments there I think chip that hits it well I think the only thing I might add is we do feel like the.
To the extent, there's any clouds of uncertainty in the macro level over this environment that there will be opportunities for companies like ours.
That can take advantage and take share when the risk profile is there the pricing makes sense.
Other folks might be on the sidelines, a little bit and we enjoy that loan to deposit ratio that positions us to do that so I think that that helps our recruiting story.
And then Terry I think the second part of your question is is that in the expense space today. So and then in terms of the guidance that that Barry mentioned, we have a a significant number of new hires built into that new base, but it will also take a reallocation of some of our current expense base too.
To ensure that we hit that guidance.
Great. Thanks for taking my questions I appreciate it.
Absolutely territory.
Thank you Tammy.
Yes.
We have our next question comes from Damon Delmonte from K B W.
Kevin Your line is now open.
Hey, Good morning, everyone Hope you guys are all doing well today.
Just wanted to dig in a little behind the margin.
Morning, just wanted to dig a little bit more on the margin I understand you're seeing some some near term pressure here, but.
You know Barry if you if you guys. There's two more rate hikes of 25 basis points by the fed just kind of given the market dynamics.
And on the funding side of the equation can you give us a little bit more perspective on where the margin can kind of bottom out.
Yeah.
Yes.
Obviously, Dave when there is a lot of puts and takes with respect to where the margin ultimately lands.
I'll do my best to answer your question I think the depth in the near term.
There will be downward pressure on the margin.
As expected the EF OFC continues to increase short term rates and our deposit betas pick up as we as we.
Discussed earlier.
So that's going to be on the liability side on the asset side, we will have some benefit on the asset side to those to those same rates is about 17% of our portfolio.
Re prices every within a quarter or so so those would be some of the positives and the reason why it's difficult to articulate where its going to bottom as there is uncertainty around what's going to happen.
What's going to happen to deposits for example.
The shape of the yield curve as a challenge so it's difficult to answer I give my best answer Damon I think theres going to be.
Some downward pressure in the near term.
Okay can you do you have the December margin.
For the month.
Yeah.
I think we're around 287.
For the month of December .
Okay. So.
Alright.
So it ended higher than for the quarter.
Okay.
Alright.
Great. Thank you and then.
Just with respect to exposure to asset classes, which may come onto may come under additional pressure.
Coming quarters, you guys could do a lot in the in the office space can you remind us what your exposure is there.
Yeah.
Yeah.
Yeah. This is Gary Sims Chief credit officers I will answer that for US. David go ahead, Gary. Thanks, Damon you know like like most.
Like most banks our size offices is not really a.
Preferred.
Asset class right now as a result, we're not overexposed, we have four 5% of our portfolio and office and.
And that's down year to year, that's down from $4 seven down to $4 five and kind of give you an idea.
Stance on it when you look at our construction category.
Category, we don't have any office.
Exposure in our construction category so for the most part we're not doing new office space.
It is that that probably gives you the best idea of how we feel about office.
The existing office portfolio.
Primarily well about 60% of it is in the.
Minnesota in twin cities market, we feel that that portfolio is relatively stable right now backed up by good leases et cetera, but we're just not in the.
Market to be adding to that our exposure right now.
That helps.
Yeah, that's very helpful. I appreciate the color.
That's all that I had for now thanks a lot.
Yeah.
Thank you.
Thank you Damon.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on telephone keypad now.
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Our next question comes from Brian Martin from Janney, Brian Your line is now open.
Hi, good morning, everyone.
Good morning, Ryan.
Just maybe one last one Barry convenient dead horse on the margin, but it sounds as though without quantifying where they go it sounds like maybe the margin trough in second quarter is that how you would think about it today based on the pressure in the company.
Competitive factors that you're here.
Experiencing.
Second quarter second quarter and maybe.
Essentially flat in the third quarter and then maybe some positive benefit in the latter half of the year, Brian is how I think about it.
Okay.
And just remind me of about minus C.
The level of he talked about I think a portion that re prices.
How much of the loan book would reprice over maybe the next 12 months is that.
Do you have a handle on what that is or can you give us a little perspective on that.
It was about 35% of our earning assets.
Reprice annual or mature over the course of the year.
Okay great.
And the new the new loan yields youre, putting on today the origination rate.
I think he said that or maybe I missed it.
Yeah in my comments it was just above 6%, which was the coupon average coupon in the fourth quarter.
Gotcha, Okay cool thank you.
How about just maybe I don't know, maybe it's for EBITDA or someone else chip just on the.
The fee income outlook, I mean chip talked about the opportunities on the wealth side, and maybe being a little muted with the.
Performance in the market this year, but it sounds like a significant opportunity, maybe just kind of frame up.
The outlook on mortgage and wealth or just kind of fee income in general how we should think about that or at least maybe near term and maybe more he gets divulged.
Thank you Kevin failure plan, but any help on the fee income side with the would be appreciated.
Hey, Brian Hey, you know minus equity evaluations, we're bullish on the wealth management space here at <unk> right now.
<unk> mentioned that about $180 million of a AUM was was brought on in 2022.
We believe that number will increase and potentially increase substantially here in 2023.
Obviously equity evaluations may determined a little bit of actually what comes through the revenue line item there mortgage banking.
It is challenged.
I think when we do that from a yeah.
Earnings from the housing inventories is still low rates.
Our rates are high our pipelines in the mortgage business.
It's obviously a seasonally adjusted as well now but are are challenged and so that is a business that frankly, we do not expect.
Great momentum in 2023.
Okay, and then maybe just in general how to think about.
Is it maybe growth I don't know, whether you look at growth year over year and in fee income in aggregate or just you know there's a lot. There's a lot of puts and take last year as far as noise go going through there and even so just trying to think about what the run rate is a realistic run rate to start the year and maybe as you're progressing get some momentum but.
Fourth quarter's level kind of at that level or is it shouldn't be thinking about it being lower to start.
You know I think you know.
This is chip again, Brian you know that either.
Half to $9 million range is that I think a good range to begin the year.
Okay perfect.
Last one for me more housekeeping just on the outlook for accretion income Barry any any insight as far as how that may.
Evolve through the year I guess is it just kind of stair stepped down from where we are today is that you know how to.
Think about it absent any significant payoffs or paydowns.
It's a good level.
Okay.
Yes in a way that's the way I think about it Brian take the take the fourth quarter and stair step it down throughout the year and in future years as well.
Okay.
Okay. Okay.
That's all I had thank you for taking the questions guys.
Thanks, Brian .
Thank you Brian .
As a reminder, ladies and gentlemen, if you would like to ask a question. Please.
First off I wanted to tack on keeping them now.
We have no further questions on our benign.
I'll now hand back to the team for closing remarks.
Great. Thanks, everyone for joining today I look forward to sharing more of our strategic plan and priorities in late April as we continue our journey to becoming a top performing bank. Thanks, everyone.
Thank you ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.