MidWestOne Financial Group provided an update on their strategic plan and financial performance during their Q3 2023 earnings call. The company announced the sale of its Florida operations and the acquisition of Denver Bankshares, aiming to accelerate growth in the Denver market. The company also revealed plans to expand its wealth management business and agribusiness lending, while emphasizing a focus on reducing operating expenses and diversifying its loan portfolio.
Key takeaways from the call include:
- MidWestOne sold its Florida operations and acquired Denver Bankshares to accelerate growth in the Denver market.
- The company made progress in the Twin Cities by recruiting a seasoned banker and expanding their product offerings in treasury management.
- An experienced agribusiness lending team was hired, with the aim of becoming a leading bank 7A lender.
- MidWestOne is actively recruiting talent for its wealth management business and looking to grow through team liftouts.
- The company expects mid-single digit loan growth in Q4 2023, followed by high single digit growth in 2024 and 2025.
- Efforts are underway to reduce operating expenses by 5% and reallocate savings into more profitable areas.
- The company's net interest margin declined due to rising interest rates and higher funding costs, but noninterest income increased due to expense management efforts.
During the call, MidWestOne reported a $4.1 million increase in total shareholders' equity to $505.4 million, driven by third-quarter net income. Net interest income declined by $2.4 million to $34.6 million due to higher funding costs and volumes, and lower interest-earning asset volumes. However, noninterest income increased by $1.1 million, primarily due to a favorable change in loan revenue and an increase in other revenue. Total noninterest expense decreased by $3.4 million to $31.5 million, reflecting the company's focus on expense management.
The company expects its non-interest expense to gradually increase while reducing its annual expense run rate by approximately $3.25 million. Loan growth is projected to be in the mid-single digits, and deposit growth is projected to be 2-3% in 2024. MidWestOne anticipates some margin compression in the fourth quarter but expects it to start to trough in the first half of 2024.
One commercial relationship has gone into non-performing status, and the company has taken a reserve against the asset. The provision for credit losses is expected to remain at a similar level in the coming quarters. The company also expects increased fee income from swap income customer hedging programs and gain on sale from SBA activity. The efficiency ratio is expected to rise as the company reinvests in its franchise, with expenses projected to increase to $33.5 million to $34 million in the beginning of 2024.
The company provided updates on various aspects of its business during the earnings call, including an increase in office exposure to $151 million, representing 3.7% of the company's loans. The company expects a significant increase in fee income from the swap income customer hedging program and the sale of SBA and government guaranteed loans in Q4 2024. The company is also taking measures to improve efficiency, including a voluntary retirement program and branch closures.
During the call, Charles Reeves, a member of the management team, discussed the company's noninterest expense run rate and reinvestment plans. He stated that they expect to overachieve on their strategic plan of a 5% reduction in expenses. However, he mentioned that the efficiency ratio will be influenced by the overall interest rate environment in 2024. Barry Ray, another member of the management team, provided the September net interest margin of 2.31% and stated that around 60% of the loan portfolio is fixed, with approximately $2.5 million repricing over the next three years. The call concluded with the management team expressing gratitude for the participants' support and indicating that the next earnings report will be released in January.
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