MidWestOne Financial Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Midwest One Financial Group, Inc. first quarter 2023 earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will begin or will be opened for questions with 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 Midwest One Financial Group.

Thank you, everyone, for joining us today. We appreciate your participation in our first quarter 2023 earnings conference call. With me here on the call are Chip Reeves, our Chief Executive Officer, and Lynn DeBasher, our President and Chief Operating 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 Midwest One Financial Group Inc. Forward-looking statements generally include words such as believe, expect, anticipate, 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. Midwest One 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.

Thank you, Barry, and good morning. On today's call, I'll review our high-level financial results and then spend a majority of my time outlining our strategic plan designed to unleash the potential that exists within Midwest One as we strive to become a high-performing bank with consistent performance. Len will then provide an update on our major markets, and Barry will conclude with a more in-depth review of our first quarter results. Despite the difficult operating environment, I'm pleased with the progress that we made this quarter on our initial strategic priorities. When I joined the bank in November, it was clear that two immediate challenges faced our team, which were MOFG's credit profile and a primarily fixed rate balance sheet in a rapidly rising rate environment. In the fourth quarter of 2022, we took strategic actions to improve our asset quality metrics and position as well for 2023's uncertain economic conditions. As outlined on slide three of our earnings presentation, First quarter asset quality metrics prove out the effectiveness of our actions. As our NPL and MPA ratios decline further, charge-offs were only three basis points, and delinquencies remained at low levels. Turning to our balance sheet, in order to reduce our liability sensitivity and improve the future earning power of our company, In late February, we executed the sale of $231 million in book value available for sale securities, which resulted in a pre-tax loss of $13.2 million. We received $220 million in proceeds, which were used to pay off our wholesale borrowings and to purchase higher-yielding floating-rate securities. The transaction is expected to be accretive to our earnings, net interest margin, ROA, and tangible common equity. THESE ARE TWO VERY IMPORTANT AND IMMEDIATE STEPS THAT NEED TO BE TAKEN AS WE FOCUS ON IMPROVING OUR OPERATIONS AND RESULTS. TURNING TO SLIDE 4, OUR GRANULAR CORE DEPOSIT FRANCHISE ALSO PERFORMED WELL GIVEN THE CONCERNS THAT SWEPT THE SECTOR IN THE AFTERMATH OF SILICON VALLEY AND SIGNATURE BANKS FAILURES. WHILE WE EXPERIENCED 154 MILLION OF NET DEPOSIT OUTFLOWS IN THE QUARTER, EXCLUDING BROKERED DEPOSITS, 120 MILLION OCCURRED IN JANUARY, WHICH IS A TYPICAL SEASONAL LOW. Subsequent to the SVB failure and through the end of the first quarter, total deposits, excluding brokered, grew $3.7 million. At quarter end, our total uninsured, less collateralized municipal deposits were approximately 19% of total deposits, and our average deposit account size was only $29,000. Due to the granular nature and even split of consumer and business deposits, our cycle-to-date interest-bearing deposit beta was 24% through the first quarter of 2023. Amidst significant deposit competition, we protected our relationship-driven deposit franchise and will continue to do so. Despite our positive deposit franchise metrics, our name compressed further in the first quarter, primarily attributable to our aforementioned fixed-rate balance sheet composition. Turning to slide 5, our quarter end liquidity position was also very strong with essentially no overnight borrowings and borrowing capacity of $1.7 billion, which provides 165% coverage of our uninsured deposits excluding collateralized municipal deposits. Importantly, our results this quarter speak to the strong foundation and improving financial position that exists here at Midwest One. We're fortunate to operate in compelling markets and have a diverse line of businesses. We're the largest headquartered bank in Iowa, having scaled from $1.8 billion in assets in 2014 to $6.6 billion today. Our granular core deposit franchise has performed well and provides a stable source of funding for growth. And we've seen a significant expansion of our talent base, resulting in solid customer acquisition and loan growth momentum. While we have a solid foundation and accomplished much over the last few years, will be for the first to admit that our results have been inconsistent and performances lag peers. To solve this, we formulate a strategic plan designed to improve our performance and deliver financial results at the median of our peer group as we exit 2025. Let's put some numbers around that. Our goal is to achieve 12% annual earnings per share growth, an ROA of 1.1 to 1.2%, annual tangible book value growth of 10%, and an efficiency ratio between 55% and 57% exiting 2025. This is a journey and not a destination. We'll continue to drive improvement as we work to become a top performing bank over time. To achieve our goals, we've developed a strategic plan outlined on slide six with five key pillars focused on our culture, our strong local banking franchise, expanding our commercial banking and wealth management businesses, expanding into specialty business lines, and improving our efficiency in operations. Importantly, continuing to enhance our credit risk management capabilities and investing in our digital infrastructure are key enablers to the successful achievement of our plan. While we're working to become a top-tier bank, I assure you that we will grow prudently. Turning to our plan, as outlined on page 7, the first strategic pillar is centered on our award-winning culture, focused on team member and customer engagement. Our employees have a strong team orientation focused on supporting our customers as well as one another. We're very proud of our top workplace's recognition and being named the best bank in Iowa by Newsweek Magazine. Importantly, we will continue that legacy as we also enhance our cultural focus on performance and financial results. As an organization, we need to be results-driven, supported by performance metrics and compensation with the goal of delivering financial results and shareholder value. We'll do this while remaining committed to our team and customers. I'm a firm believer that engagement and results go hand in hand and are not mutually exclusive. Our second strategic pillar on slide eight is our solid local banking model that provides a consistent, stable funding source for our company. We protect and enhance our dominant community bank franchise. through our engaged employees who are incredibly active in their communities and through additional product expansion for both consumer and commercial clients in the communities we serve. In fact, consumer loans grew 10% in 2022, and our newly designed business banking center now has a 24-hour turnaround for commercial requests under $500,000. We expect the small business space to grow 10% annually during our planning cycles. Our third strategic pillar on slide nine is focused on expanding and moving up tier in our commercial banking and wealth management businesses, especially as we lean into our major metro markets of the Twin Cities, Denver, and Metro Iowa. This is a continuation of the strategy we've been executing for several years, where we've been hiring experienced relationship bankers and wealth management professionals to drive organic growth. With that said, we'll be doubling down in these markets with a plan to add bankers and expertise targeting revenue companies from 20 to 100 million. Cognizant of a slowing economy, for the remainder of 2023, we expect to deliver the upper end of mid-single-digit loan growth. For the following years of the planning cycle, we are targeting upper single-digit loan growth. We also see treasure management as a strategic imperative to our C&I up-tearing commercial strategy. and we'll be investing to expand our platform, our product offerings, and our talent. Ultimately, a more robust treasury management solution are needed for increased customer acquisition that will drive our deposit growth, improve our non-interest-bearing deposit mix, and increase our associated fee income. Turning to wealth management, we're beginning to see the results of our Twin Cities and Cedar Rapids team liftouts, as linked quarter fees grew 10% with sizable new AUM acquisitions. Reflective of our up-tier strategy, our new average account size from these two groups has been $4 million in comparison to our overall average account size of $1 million. We'll continue to look for additional team lift-out opportunities in our metro markets as we further drive asset growth and fee income. Key to team member and customer acquisition has been a more robust investment strategy platform, and we'll continue to add these offerings throughout the planning cycle. Our fourth strategic pillar on slide 10 is the expansion and development of specialty commercial banking markets, or verticals, where expertise in customer solutions will drive additional customer acquisition, full relationships, and drive our company's profitability. Our plan calls for immediate verticals in commercial real estate, government-guaranteed lending, and agribusiness. The CRE vertical will initially be designed for consistency, robust portfolio management, and client selection. and will evolve to prudent growth. Our current Twin Cities commercial banking leader has extensive super regional bank experience in this space and will lead the segment. Government-guaranteed lending is also a natural fit for our local and metro bank markets, and our desire is to become one of the leading bank 7A lenders in our footprint. Our SBA leader joined in the fourth quarter of 2021, and our sales team is being developed. We're already seeing momentum building here in 2023, and anticipate this initiative will be a meaningful fee income contributor in 2024 and beyond. Lastly, we've been in the ag business for a long period of time, primarily focused on small farms here in our home state of Iowa. We're missing significant business opportunities with larger growers and producers, as well as suppliers to this industry. We are well along in our recruitment of a leader for this space, as well as an additional banker, and look forward to their industry expertise and relationships. In the future, we will review and develop additional specialty lines that are complementary to our strategy, our experience, and our markets. Underpinning our commercial expansion is a focus on risk management expertise and capabilities. As such, we've recently expanded our credit administration team with the hire of a seasoned credit executive whose responsibilities will include our Iowa banking footprint as Gary Sims, our Chief Credit Officer. We'll have direct responsibility for our major metro markets and our evolving specialty lines of business. Our fifth strategic pillar, on slide 11, is focused on improving our operational effectiveness and efficiency. To accomplish this, we've engaged a third-party strategic consulting firm. We'll assist our review to identify areas for efficiency gains and cost reduction. Our expectations are to reallocate 2.5% of our operating expense base into more productive, profitable markets and departments, and then to reduce an additional 2.5% of our Q4 2022 operating expense run rate that will improve our go-forward operating expenses. After a thoughtful and intentional review, we expect these actions to take place throughout 2023. We initiated the first action in mid-April as we scaled back our mortgage operations, reflecting the current macro environment as well as a sharpened focus on mortgage originations from current Midwest One customers. We'll also be investing into our digital capabilities and infrastructure. We've created a three-year technology and digital roadmap focused on improving our customer experience and enabling our company to achieve our strategic plan efficiency priorities. To conclude, I'm very excited about the opportunity that lies ahead for our employees, our customers, and our shareholders. We have a terrific foundation, we operate in compelling markets, and we have an outstanding group of employees. The plan I've laid out will unleash the potential that exists within MLSG. From a timing perspective, I see 2023 as a transformational year. We will expand our team, reduce our expenses, and drive operational improvements. As a result, our financials are likely to have a little bit of noise in them, not to mention the macro backdrop is uncertain. As outlined on slide 12, I do believe that 2024 will be a clean year and expect to exit the fourth quarter of 2024 with an ROA of 90 to 100 basis points, deposit growth of 2% to 4%, loan growth of 7% to 9%, and an efficiency ratio of 58% to 60% as we track to our goals of delivering 12% annual EPS growth, an ROA of 1.1 to 1.2%, tangible book value growth of 10% annually, and a 7% exiting 2025. Importantly, we have lofty longer-term goals, and this is just the starting point as we strive to become a top-performing bank. Now I'd like to turn the call to Len.