MidWestOne Financial Group, Inc.

Good morning, ladies and gentlemen, and welcome to the Midwest One Financial Group Incorporated first quarter 2025 earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open 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 earnings conference call this morning. With me here on the call are Chip Reeves, our Chief Executive Officer, Lynn Devasher, 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 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 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. Midwest One Financial Group 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. Good morning, and we appreciate everyone joining for this quarter's call. Today, I'll provide a high-level overview of our first quarter results, as well as highlights regarding the continued execution of our strategic initiatives. Glenn will provide an update on our lines of business, and Barry will then conclude with a more detailed review of the first quarter. We're pleased with many aspects of our first quarter financial results, which led to net income of $15.1 million and a return on average assets of 1%. Discipline balance sheet management and deposit pricing initiatives led to a 10 basis point increase in our core net interest margin. While loan growth was flat, it was due primarily to elevated payoffs. Loan origination activity remained solid despite the latter quarter economic uncertainty. Current second quarter pipelines and activity quarter to date indicate a return to our previously guided mid single digit loan growth rate. Asset quality metrics improved significantly with criticized assets decreasing 24 million, or 9%, and the non-performing assets ratio improving seven basis points to 0.33%. Charge-offs increased to 29 basis points for the quarter. However, the majority of the increase was due to the partial charge-off of a previously reserved for CRE loan as we prepare for resolution. Our allowance for credit loss remains ample at 1.25% of loans. Turning to the continued execution of our strategic initiatives, we remain committed to building out the talent base and technology platforms necessary to become a consistent, high-performing company. The first quarter saw new commercial banker hires in the Twin Cities and Denver and treasury management officers hired in Metro Iowa and the Twin Cities. In addition, strategic platform and technology investments continue in 2025. The first will align with our commercial banking up-tiering strategy as we move to the Aperture commercial banking online platform. Project work is commenced with a conversion date early in the fourth quarter. The second is ServiceNow, a back-office workflow management platform that will greatly enhance our operational effectiveness and efficiency. Even as we invest for the long term, we remain focused on our expense discipline and we're pleased with our first quarter non-interest expense results. I'd like to close with thank you to our team members who continue to execute well on our strategic initiatives and always take outstanding care of our customers. I'm encouraged by our continued strategic initiative progress and the solid foundation of our company, which positions us well for the second quarter and the remainder of 2025. Now I'd like to turn the call over to Len. Thank you, Chip.

Deposits were essentially flat in the quarter, but we are pleased with the behavior of the deposit franchise overall. given the seasonal fluctuations typical in the first quarter. In the year-ago quarter, deposits declined, net of acquired deposits, so the stability of this most recent quarter reflects our continued focus in this area. As Chip pointed out, loan growth in the first quarter was more muted than we expected. We are pleased with the 4.9% linked quarter annualized growth in C&I loan balances. Our ag balances also displayed a seasonal uptick. Those two categories helped mitigate softness in CRE and consumer. As slide five indicates, our growth markets continue to contribute to forward momentum, with Denver a particular highlight. Overall, first quarter commercial originations were up 4% from the year-ago period and 37% from the linked quarters. Even with that pickup in production, the pipeline remains strong. Chip highlighted the improving credit metrics, and I would add that we're very pleased with exceptionally low delinquencies as well. The credit risk profile is also bolstered with notable reductions in construction and development and non-owner-occupied commercial real estate office loans. While wealth management fee income was down from the linked quarter, It shows an increase from the year-ago quarter, and our wealth team continues to execute on their strategic plan to uptier our offerings and grow revenue. We expect more growth from this business in the balance of the year, yet we acknowledge that volatile markets are a headwind. Speaking of fee income, SBA gain-on-sale income is up 52% from the year-ago period, and that business enjoys a strong pipeline. Mortgage production was up 23%, and gain on sale income was up 33% from the year-ago quarter. All in all, while it was a softer revenue quarter than we expected, we are pleased with the leading indicators of pipeline and the team's proactive stance as we look to accelerate our progress in the coming quarters. With that, I'm pleased to turn the call over to Barry.

Thank you, Len. Starting with the balance sheet on slide 10, total assets were up slightly from December 31, 2024, as increased cash balances were only partially offset by lower securities and loan volumes. Lynn covered the loan and deposit changes, so I'll touch on shareholders' equity, which increased $20 million from December 31, 2024 to $579.6 million due to a $10 million increase in retained earnings and a favorable $10 million adjustment to accumulated other comprehensive loss. The company's consolidated CET1 ratio was 10.97% on March 31, 2025, up 24 basis points from year-end 2024, reflecting strong earnings partially offset by the quarterly cash dividend. Turning to the income statement, on slide 12, we reported net income of $15.1 million, or 73 cents per diluted common share. Net interest income decreased $1.5 million in the first quarter to $47.4 million as compared to linked quarter due primarily to lower earning asset volumes and yields partially offset by lower funding volumes and costs. Loan interest income in the first quarter of 2025 included $1.2 million of loan purchase discount accretion compared to $2.5 million in the linked quarter. Our tax equivalent net interest margin increased one basis point to 3.44% in the first quarter while our core net interest margin, which excludes loan purchase discount accretion, expanded 10 basis points to 3.36% in the first quarter. The increase in core net interest margin was due to expansion in core earning asset yields of two basis points, coupled with an 11 basis point decline in the cost of interest-bearing liabilities. The core loan portfolio yield for the first quarter was 5.60%, a decrease of three basis points from the linked quarter, while the average yield on new loan originations during the first quarter was 6.7%. On the liability side, the cost of interest-bearing deposits decreased 10 basis points from the linked quarter to 2.31%. Non-interest income in the first quarter of 2024 was $10.1 million compared to $10.8 million in the linked quarter. Adjusting for securities gains and losses in mortgage servicing right valuations, Non-interest income was down $200,000 due to the decline in our wealth management business and SBA gain on sale revenue compared to the linked quarter. Finishing with expenses, total non-interest expense was $36.3 million in the first quarter, a decrease of $1.1 million from the linked quarter. Driving the improvement was a $300,000 decrease in fraud and operating losses, a $300,000 decrease in property tax accrual, a $300,000 decrease in legal and professional driven primarily by lower litigation-related legal costs, and a decrease in customer deposit costs of $0.1 million. Personally offsetting these favorable decreases was an increase in compensation and employee benefits primarily driven by equity compensation and payroll taxes. We believe our 2025 annual expenses will be in the range of $145 to $147 million. And with that, I'll turn it back to the operator to open the line for questions.

Thank you, Barry. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind and would like to exit the queue, please dial star followed by two. And finally, when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today will be from the line of Brendan Nossel with Hoveta Group. Please go ahead. Your line is now open.

I think we're just starting off here with kind of a bigger picture question. You know, I think the quarter came in super close to expectations for most major line items, maybe outside of long growth, which you already addressed. Just kind of curious, as you sit here three months into the year, you know, what are the upside and downside risks to the outlook you provided last quarter, you know, both in terms of what you can control as well as environmental factors?

Well, Brendan, we could spend the next 30 minutes on that one with what's going on in the economic uncertainty now. But I'll give you, this is Chip, I'll give you what we can see, which really probably goes out into the second quarter, Brendan. And then I would say that uncertainty beyond that is difficult to ascertain. But in the second quarter, we feel pretty positive in terms of our loan pipelines and actually current activity to date in the quarter to return to our previously guided mid single digit loan growth rates. In terms of our fee businesses, we believe there's additional opportunity momentum in them in comparison to the first quarter and would anticipate that those line items to be increased in the second quarter as well. Expenses mentioned and reaffirmed our guidance for 145 to 147 for the full year. And then I'll tell you what, we're very pleased with the hires that we've made in the market. What we are seeing is some of our customers beginning to say there's too much uncertainty in the environment for us to invest or to move forward with some plans. And so that gives us perhaps some pause for the latter half of the year. But I will say that's moving on a daily and sometimes weekly basis. And we're just going to keep our proactive value proposition approach as we speak to our customers and to ones that should be. And we'll see how the economy continues to move here throughout the second quarter.

Yeah, no, I appreciate the top level thoughts there. Maybe moving to wealth management specifically in the C line, you know, last quarter you said the expectation for 10% growth, obviously markets are not helping anybody with a while operation so far this year. Maybe just kind of speak to within that prior 10% outlook, how much of like an organic net new business component was embedded in that just so we can get a sense of the underlying momentum you were looking for X markets?

Yeah, Brendan, this is Len. You hit the nail on the head, right, about what market valuations do because, of course, a big emphasis on our business is not on transactional revenue but is more on managed assets approach. So market valuation shifts certainly impact revenue. That being said, the model we had for 10%, growth would be a mix of net new assets, as well as some fee and revenue initiatives that are underway here in the business. And I don't have a number for you in front of me about what the net new asset number is, but it would be less than the 10% growth number because of the two levers there.

Yeah, okay. Maybe I'll sneak one more in here. Just on the overall base of earning assets, you totally get the loan piece this quarter and what you're saying about next quarter. But I guess the non-loan average earning asset piece kind of is still moving around quite a bit quarter to quarter. So can you help us with where the average earning asset base lands in the second quarter based on what you can say? Thanks.

Yeah. non-loan average earning asset base. I think the average earning asset base, well, we had $5.7 million for the quarters where we were. I would anticipate that the securities portfolio, Brendan, we haven't really been actively buying, so I expect that to continue to run off. So I would say the non-loan piece would trend down somewhat from an average earning asset base. Okay. Fantastic.

Thanks for taking the questions this morning.

Thanks, Brandon. The next question today will be from the line of Terry McEvoy with Stevens Inc. Please go ahead. Your line is open. Terry McEvoy, your line is now open. If you'd like to proceed with your question, please make sure you're unmuted. Yep. Yep.

Sorry about that. Good morning, everybody. Yeah, maybe just take a step back. Could you just talk about the medium-term opportunities to improve the efficiency ratio off that 59.4? And I asked that question after reading the bottom of page four with some of the recent investments you've made, which could drive a more efficient operating structure.

Yeah, certainly it is. Very, Terry. Yeah, I think that we feel really good whenever we look at our expenses, we look at both the efficiency ratio and the overhead ratio, Terry. And I think that we feel really good about our expense control efforts, and I think that was reflected in our first quarter results. Thus, as I think about the efficiency ratio and the direction of it, probably mostly going to be driven by the revenue component, and we talked a little bit about that earlier today. So, you know, I think that we're probably somewhere in the 55% to 59% efficiency ratio probably for our organization right now.

Thanks, Barry. And maybe another one for you on the net interest margin. If you could just talk about updated rate sensitivity, if we get a few more rate cuts this year, and your thoughts overall on the trajectory of the margin.

Yeah, certainly if we get those rate cuts that the market is expecting to the Fed funds target, I think that will prove to be obviously a tailwind to our deposit costs. We measure our interest-bearing deposit data for the cycle at 29% in the current down rate cycle, 29%. That's a little bit better even than whenever we were making our plans. So we feel good about our cost management on the funding side. If I think about the margin overall, Terry, I do think we were at 3.36% core margin for the first quarter. I think we'll continue to have opportunity to, I'll use the word, grind that margin upward with the combination of potentially lower deposit costs, but also the benefit from asset repricing.

Perfect. Thanks for taking my questions. Have a nice weekend.

Thank you, Barry. The next question today will be from the line of Nathan Race with Piper Sandler. Please go ahead. Your line is open.

Hey, guys. Hope you're doing well. Thanks for taking the questions. Just going back to Terry's last question, Barry, can you remind us in terms of some of the at-series pricing tailings they have going on over the balance of 2025 in terms of the magnitude? I can, yes.

Yeah, absolutely. And these are going to be next 12 months. So in the loan book, it's $349 million of fixed rate loans. Those loans have a yield of 4.47%. So that's $349 million for the next 12 months on loans. Security is $228 million repricing. Gotcha.

If I'm interpreting the margin commentary correctly, you know, it sounds like there's still an upward bias here in the St. Gorgias with some ongoing deposit cost relief and some of the asset repricing that you talked about. But is it fair to say that the margin expansion should be more pronounced in the back half of the year based on how the balance sheet sensitivity aligns today?

I think that's a fair assessment, Nate, very much so, yes.

Okay, great. And you guys are continuing to build capital at pretty strong clips, particularly coming out of the first quarter. You know, the stock trades around 1.2 times the annual book. And it seems like, you know, you're on track to hit all the targets that you laid out last year along with the capital raise. So, Chip, maybe a question for you just on buybacks. Curious what you need to see maybe from a macro perspective or where you want certain capital ratios to get to or certain profitability targets to. achieve in order to maybe get back in the market, buy back some shares?

And a good question that, you know, Barry walks through in many conversations, a terrific what we call capital waterfall for ourselves. And first it's support, organic growth, then the dividend, then buybacks and M&A. And what I'd say is that in this environment, One, we're obviously at CET1 close to 11% here at the end of the first quarter. We project that to continue to build in our targets between 11 and 11.5. With where we're trading at this juncture, we are actively – reviewing now do we move into the markets in the second quarter as an efficient use of our capital and a return to shareholders.

Okay. Really helpful. And then if I could just ask one more from a credit perspective, you know, obviously you had to clean up with the one commercial real estate loan that was previously flagged. Just any visibility on how you guys are thinking about charge-offs you know, over the balance of this year. I know it's difficult to predict with all the macro uncertainties out there, but we'd be curious to hear how you guys are thinking about, you know, what charge-offs could look like over the balance of 2025.

Good. Nate, Gary Sims, our chief credit officer, is here with us, too, and we'll have him answer that.

Yeah, Nate, Gary here, and good question, and I think your context is appropriate there, given the The uncertainty that exists, it did get a little bit harder to answer that question than it was maybe a month ago. But, you know, we continue to be proactive in managing down, you know, our office portfolio, in managing down our non-performing assets, and you see the results of that. That's going to continue, but we don't see that coming at the cost of elevated charge-offs at this point in time.

Very helpful. Thank you, Gary. And actually, if I could just sneak one more in. You know, just given all the macro disruptions and uncertainties over the last month or so, you know, I'm curious if you're seeing an impact from a loan committee perspective in terms of, you know, the volume of deals you're looking at and so forth more recently.

Okay. Gary and Len, why don't you take that? Gary? Go ahead.

And, you know, Nate, Chip mentioned it earlier. We are hearing from some of our customer base that there is a level of uncertainty associated with their capital plans on a go-forward basis. We really haven't seen that impacting our current activity yet. But, you know, as we move through the second quarter into the last half of the year, we probably expect to see more of that happening. impact our activity on a go-forward basis. Len, anything to add there?

Yeah, that's exactly right. We talked this morning or this afternoon about the line of sight we have into this second quarter and feeling good about that. I call the current uncertainty more pronounced at the top of the funnel, hence our decreased clarity or certainty about the second half of the year, just given the length of the sales cycle. So that's a $64,000 question in my mind is how long does this uncertainty endure?

All right. Very helpful. I appreciate all the color. Thanks, guys. Have a great weekend. Thanks, Nick. Thanks, Nate.

As a reminder, for any further questions, please dial star followed by one on your telephone keypad now. And the next question will be from the line of Damon Del Monte with KBW. Please go ahead. Your line is open.

Hey, good afternoon, everyone. I hope you're all doing well today. I wanted to kind of come at the credit side of things a little differently. As we think about the loan loss reserve level, when you kind of factor in the loan growth and it seems like underlying trends is NPL stability is pretty good. Do you think that you need to kind of add to the reserve here at 125 basis points, or do you think there's some room to let it go, or do you just try to match charge-offs with loan growth provisioning to keep that kind of flat?

Yeah, Damon, again, good question. Kind of what we're thinking through internally as well. You know, what we saw for the first quarter as we prepared our ACL provision for the quarter. Obviously, it's mainly based on our CECL model, which is primarily based on the Moody's economic forecasting. We did not see the economic forecasting really incorporate the current uncertainty into their forecasting. Therefore, we took a proactive approach in utilizing their stress scenarios to get that coverage to 125, which we felt more comfortable with relative to what we had saw in the space, in the marketplace, and what we saw in our portfolio. And I think that's probably a good indication of what we're going to do on a go-forward basis. As the economic forecasting evolves, we're going to take that proactive approach in managing our number to meet what we see in the in the portfolio. So, I would say, I would see us being fairly consistent in trying to be in that mid-120s range.

That's great, Collin. I appreciate that. And while I have you, Gary, maybe, you know, any commentary around the ag portfolio and kind of the tone of the farmers with all the tariff talk? Is there a lot of business risk that they're facing right now or could be facing? And kind of what's the tone there?

Sure, sure, Damon. And obviously you're thinking about the same things we're thinking about. And we're actually proactively going out and communicating with our ag portfolio around what they see. You know, the 2025 crop, the input cost dynamics are pretty much baked. It's really the pricing scenarios that may change a little bit as they move through 2025. So we see 2025 being relatively stable and similar to what we saw in 2024. It's 2026 and the impact of tariffs on input costs, you know, the fertilizer, et cetera, and then what 2026 looks the tariffs will impact on the pricing as well. And there is a level of concern amongst our agricultural base of what happens next relative to those points. So I think, Damon, you're on target to be concerned about it. And I think us and our farmers are sharing your concern.

Great. And then just last question on expenses. Appreciate the guide, Barry. Would you expect sort of like a flatline cadence, or do you think there's, you know, the back half of the year kind of ramps up a little bit more, or kind of how do we think about the quarterly run rate?

I think the quarterly run rate goes up from the first quarter level, Damon, just acknowledging the kind of typical annual salary increases. So, you know, I would say a slight ramp in the latter half of the year, correct? Okay.

Great. Everything else has been asked and answered. So thanks a lot. Appreciate it.

Thank you. And this brings us to the end of the question queue. So I would now like to hand the call back to CEO Chip Reeves for some closing remarks.

Great. Thank you, everyone, for joining us here today. And we are very pleased with what I would call a solid foundation that we have transformed this company to over the last couple of years. We look forward to the second quarter where we believe some of our business momentum will show itself more in the revenue line item. And then we look forward to speaking to everybody in 90 days. Thanks, everyone. Bye-bye.

This concludes the Midwest One Financial Group Incorporated First Quarter 2025 Earnings Call. Thank you to everyone who was able to join us today. You may now disconnect.