MidWestOne Financial Group Q4 2024 Earnings Call Transcript

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January 24, 2025
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Operator

Good morning, ladies and gentlemen, and welcome to the Midwest Corporation's 4th Quarter 20 24 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 Rae, Chief Financial Officer of Midwest One Financial Group.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone 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 Rees, our Chief Executive Officer Lynn DeVacher, 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.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

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 1 Financial Group, Inc.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone 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.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

Thank you, Barry. Good morning, and we truly appreciate everyone joining for this quarter's call. Today, I'll provide a high level overview of our Q4 results as well as highlights regarding the continued execution of our strategic initiatives. Len will provide an update on our lines of business, and Barry will conclude with a more detailed review of the Q4 and the impact of October's balance sheet repositioning. We're very pleased with our 4th quarter results, which exhibited the dramatic impact of the Baum portfolio repositioning and the pay down of higher cost borrowings.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

Those actions combined with lower deposit costs drove a 92 basis point improvement in our net interest margin, leading to a 30% quarter over quarter increase in net interest income. This along with continued focus on our strategic initiatives led to net income of $16,300,000 and a return on average assets of 1.03%. Turning to the continued execution of our strategic initiatives, our premium deposit franchise showed its strength with total deposits increasing 2% compared to the linked quarter. And importantly, non interest bearing deposits grew 4% on a linked quarter basis, aided by our year long investments in treasury management. In April of 2023, we laid out a strategic plan with emphasis on driving wealth management and establishing an SBA vertical.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

The results of these initiatives are seen in our Q4 and full year financial results, which Len will discuss further in his comments. For the quarter, loan growth was flat primarily due to elevated payoffs, many of which were loan resolutions and you see the classified assets decreased substantially. We're pleased with our 2024 asset quality metrics and remain focused on problem loan resolutions while we continue with our disciplined growth strategy. Thank you to our team members who have been resolute in the transformation of Midwest 1 and in their commitment to our customers. Together, we've positioned the bank to become a consistent high performing company and we look forward to the opportunities in 2025 and beyond.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

Now I'll turn the call over to Glenn.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Thank you, Chip. We are pleased with the 2% increase in total deposits from the linked quarter. The true power of our deposit franchise was on display with an improving mix. Continued strength in our commercial and consumer deposit segments has allowed us to assume a more conservative pricing posture on public funds. For the year, public funds in total were down 14%, while public funds CDs were down 14%.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Meanwhile, consumer balances were up 2% and commercial balances were up 6%. This mix improvement reflects an intentional strategy to optimize our funding base. As Chip pointed out, non interest bearing deposits increased 4% in the quarter. This is the 2nd consecutive quarter of increase in this important category and the increase was across all customer segments. For the year, commercial non interest bearing deposits increased 7%.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

The growth in commercial non interest bearing reflects our treasury management focus where fees were up 12% in 2024 from the prior year. While reported loan balances were flat from September 30, we were pleased that pass rated loan balances grew at a 4% linked quarter annualized rate and that our 4th quarter commercial originations exceeded 3rd quarter originations by 8%. Favorable borrower sentiment and growing pipeline activity position us well for 2025. We anticipate mid single digit loan growth in the Q1. As Chip pointed out, the 54 basis point decline in our classified loan ratio, 150 basis point improvement from a year ago, a decline in past due loans and a modest CRE ratio at 2 24 percent of capital reflect our vigilant focus on asset quality.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Congruent with our strategic plan initiatives, our SBA team generated more than $1,600,000 of SBA gain on sale revenue in 2024, with $630,000 occurring in the Q4. The momentum in this business remains strong as we enter 2025. Another strategic plan initiative is a focus on wealth management. The 11% increase over the linked quarter and the 18% increase over the same period last year demonstrate continued momentum from our private wealth and investment services teams. Our team based planning driven approach is working and we see runway in that business, particularly in our growth markets.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Deposit growth was an improving mix, green shoots in loan demand with plenty of capacity, momentum in our fee businesses including wealth, SBA and treasury management. Indeed, MidwestOne's business lines are well positioned as we launch into 2025. So with that, I'm pleased to turn the call over to Barry.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Thank you, Lynn. Starting with the balance sheet

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

on Slide 11, total assets declined $316,000,000 from September 30, 2024, due primarily to the deleveraging of

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

our balance sheet from the repositioning executed early in Q4. As a reminder, net repositioning included the sale of $1,000,000,000 of securities, primarily in corporates, munis and CMOs that had a book yield of 1.58%. Proceeds

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

from

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

the sales were used to pay in full for an $18,700,000 of Federal Reserve Bank Term Funding Program borrowings that were costing 4.77 percent and to purchase $590,000,000 of Agency CMO and pass through securities yielding 4.65%. Lynn covered the loan and deposit changes, so I'll touch on shareholders' equity, which decreased $2,500,000 from September 30, 2024 to $560,000,000 as an unfavorable $14,000,000 adjustment accumulated other comprehensive loss was only partially offset by an $11,000,000 increase in retained earnings. The company's consolidated CET1 ratio was 10.73% at year end 2024, up 82 basis points from September 30, 2024, reflecting in part benefits from the balance sheet repositioning. Turning to the income statement on Slide 13, we reported net income of $16,300,000 or $0.78 per diluted common share. Net interest income increased $11,400,000 in the 4th quarter to $48,900,000 as compared to the linked quarter due primarily to higher earning asset yields and lower funding volumes and costs, partially offset by lower earning asset volumes.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Loan interest income in the Q4 of 2024 included $2,500,000 of loan purchase discount accretion compared to $1,400,000 in the linked quarter. We expect quarterly loan purchase discount accretion in 2025 to be closer to $1,000,000 Our tax equivalent net interest margin increased 92 basis points to 3.43 percent in the 4th quarter compared to 2.51% in the linked quarter as earning asset yields increased 60 basis points and the cost of interest bearing liabilities declined 35 basis points. The average loan portfolio yield for the 4th quarter was 5.86%, flat from the linked quarter, while the average yield on Loom's loan originations during the Q4 was 7.10%. On the liability side, the cost of interest bearing deposits decreased 17 basis points from the linked quarter to 2.41%. We expected the balance sheet repositioning would add about 70 basis points to our net interest margin and we were pleased to exceed that expectation as our core interest margin, which excludes loan purchase discount accretion, expanded to 3.26 percent for the 4th quarter, 85 basis points greater than the linked quarter.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Non interest income in the Q4 of 2024 was $10,800,000 compared to a loss of $130,400,000 in the linked quarter. Adjusting for securities gains and losses and mortgage servicing right valuations, non interest income was down $300,000 as outperformance from our wealth management business was more than offset by declines in other BOLI loan and card revenue. Finishing with expenses, total non interest expense of $37,400,000 in the 4th quarter was up $1,600,000

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

from

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

the linked quarter. Driving the unfavorable variance was a $575,000 increase in medical claims paid, a $400,000 increase in non merger related legal costs and a $300,000 increase in property tax accruals. We do not believe such costs will continue at those levels in 2025 and thus expect our 2025 annual expenses will be in the range of $145,000,000 to $147,000,000 And with that, I'll turn it back to the operator to open the line for questions.

Operator

Thank you. We will now open the call for questions. Our first question today will be from the line of Brendan Nosal with Hovde Group. Please go ahead. Your line is open.

Brendan Nosal
Director - Equity Research at Hovde Group

Hey, good morning, everybody. Hope you're doing well.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

We're good, Brendan. Hi.

Brendan Nosal
Director - Equity Research at Hovde Group

Maybe just start off here on capital. None of the balance sheet restructuring is behind you. You're back to building capital in a pretty decent clip here. So just wondering how you're thinking about deployment options over the course of the

Brendan Nosal
Director - Equity Research at Hovde Group

year?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes, I'll start with that, Brendan. This is Barry. I like to talk about the use of capital waterfall. So starting with supporting loan growth, supporting balance sheet growth and then the cash dividend, the shareholders, share repurchase and then finally M and A.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

We are approaching we're at our kind of approaching a target of 11% CET1. We think that's a good ratio for the risk profile of our organization. And I expect that waterfall that I just walked through is how we're thinking about it. Obviously, we kept the for example, we kept the dividend flat this quarter. As we move forward throughout the year and build capital, we'll see where we land with respect to opportunities, but and what we want to do with capital deployment as we go through the year.

Brendan Nosal
Director - Equity Research at Hovde Group

Got it. Okay. Maybe moving to the margin. I mean, as you noted in your prepared remarks, quite a bit more expansion than you or we were expecting, which was great to see. Just kind of curious about the path from here, especially as rate cut expectations have eased off a little bit.

Brendan Nosal
Director - Equity Research at Hovde Group

And more or less wondering if this quarter was a pull through of margin expansion you had expected to persist throughout 2025 or if there's more left in the

Brendan Nosal
Director - Equity Research at Hovde Group

tank as we move through the year? Thanks.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. I think there's a little bit more left in the tank, Brandon, and the kind of data points I can give you is, we highlighted that our core margin in the Q4 was 3.26%. If you look at the month of December, the core margin was 3.29%. So, I think we've got a little bit more gas in the tank with respect to margin expansion, particularly we're getting some benefit from the shape of the yield curve, which is really, I'd say, mostly flat here. But, yes, I think we still have some benefit here.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

And Brandon, this is Chip. I think, the back book loan repricing, frankly, continues as well. Our loan yields are 5.86 that includes some accretion in that 5.86, but we're originating in the Q4 in the low 7s. So, we believe that will continue. And so, we have a fair amount of maturities still coming at us in 'twenty five, 'twenty six.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

So we believe there's still some, you call it, gas in the tank margin expansion to come.

Brendan Nosal
Director - Equity Research at Hovde Group

Okay, fantastic. That's helpful. Thank you for taking the questions.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Thanks, Brendan.

Operator

The next question today will be from the line of Terry McEvoy with Stephens. Please go ahead. Your line is open.

Terry Mcevoy
MD & Research Analyst at Stephens Inc

Thanks for taking my questions. In 2024, commercial loan growth was 5%, wealth management revenue 16% year over year. I know you said 5% loan growth for the Q1, but is that a good run rate to use for full year loan growth? And what are your thoughts on the outlook for fee income and specifically that wealth management line?

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Terry, this is Len. Thanks for the question. Yes, as we look at 2025, I think the mid single digit number is how we're modeling the year just based on what we're seeing overall. And with respect to wealth, in particular, we are targeting the double digit growth to continue in that line of business. So, and the key strategy there for us is the talent story of where we're adding and particularly in the growth markets.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

And Terry, this is Jim on the loan growth side. So mid single digits and that belly of the curve with where it is today and obviously increased in the Q4, slight pullbacks here in January, but still relatively high. We're just not seeing really commercial real estate projects penciling out at this juncture. So where I could see that potentially moving higher is if the value of the curve comes down a little bit. But right now, that's negating some of the potential growth that's out in the system.

Terry Mcevoy
MD & Research Analyst at Stephens Inc

And then as a follow-up, just given the tariff talk and some of the volatility in commodity prices, could you share with us your thoughts on how your ag customers and portfolio is holding up?

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

Yes, Terry, this is Gary Sims. Thanks for the question. We are thinking through that as well as you relative to our ag producers. And as a reminder, not an overwhelming part of our portfolio, but certainly something that we monitor. As we look into well, first of all, 2024, pretty solid year for our producers.

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

Prices were somewhat moderated, but very good yields. And as we go into 2025, we see pressure as a result of some of these issues. But one thing that we really gained confidence in is that over the course of the past 5 or 6 years, the portfolio of our producers that we do business with is a pretty resilient bunch. So we feel pretty confident that we can help our customers manage through this if, in fact, there are negative results

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

from

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

it.

Operator

The

Operator

next question today will be from the line of Damon DelMonte with KBW.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Just wanted to start off with a little bit on credit and kind of I know Gary was just kind of touching on the ag sector there, but just kind of your thoughts on where the portfolio sits today, if there's any areas of concern and kind of how you think about the reserve level at this point. I think the reserve was up a few basis points quarter over quarter. So do you feel like you're at an adequate level or do you feel you need to maybe add a little bit more going forward? Thanks.

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

Thanks for the question, Damon. And what I'm seeing from the portfolio today in terms of pressure points really hasn't shifted much over the course of 2024 and going into 2025. Office still has deterioration that we have identified in it. Our senior living portfolio has deterioration, but we're actually seeing improvement operational improvement in those borrowers that have struggled. And realistically, our largest senior living troubled asset we were able to liquidate over the course of 3rd and 4th quarters.

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

So not a lot of shift in terms of what I'm seeing with pressure points. As we move into 2025, as we saw in 2024, as we identified the credits, we worked through them, we created resolutions and we saw the results that we got for the Q4. 1st quarter and beyond, we're going to continue to see resolutions of those assets that we have identified. You mentioned the reserve. We did move that up a little bit.

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

And we feel like what we have on task for Q1 and beyond for resolutions, we are adequately reserved to be able to execute those resolutions. So I think what you saw in 2024, you're going to continue to see in 20 20

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Okay. That's helpful. And then I guess just kind

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

of a broader based question on your approach for driving sustainable organic growth. You guys have made a lot of investments in commercial bankers and kind of ventured into some other business lines. Chip, can you just give us an update as to the plans for 'twenty five? Are you guys still actively looking to add new bankers and potentially physical locations and other parts of your footprint?

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

So, Damon, the answer to that one is would be yes, and I'll quantify the yes, probably more from geographic areas or areas of focus for you. Twin Cities and Denver and then Iowa Metro are high focus areas for us. And I think you'll continue to see us invest in those geographies. You'll also see us continue to invest, frankly, in what I call our infrastructure and our acquisition readiness. And there, from technology, from platform to talent, risk management, platform talent, operational talent, as we prepare ourselves for 'twenty five being a year of execution.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

But between our capital levels, our newfound earnings profile, organic growth that we're expecting, I believe we're positioning ourselves to become a little bit bigger when the time is right.

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Okay. Appreciate that color. That's all that I

Damon Delmonte
Managing Director at Keefe, Bruyette & Woods (KBW)

had for now. I'll step back. Thank you.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Thanks, Damon.

Gary Sims
Gary Sims
SVP & Chief Credit Officer at Midwestone Financial Group

Thanks, Damon.

Operator

Our next question will be from the line of Nathan Race with Piper Sandler. Please go ahead. Your line is open.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Good morning, guys. Thanks for taking the questions. Going back to the margin discussion, Chip, you mentioned some of the back book repricing. I was wondering if you could kind of frame up just in terms of how much in loans you guys have kind of repricing over the course of this year?

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

Yes. Nate, I'm going to swing that one to Barry. He has the detailed statistics.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. Nate, we've got $386,000,000 of fixed rate loans that we expect to reprice in over the course of the next 12 months. The coupon on those is 4.57%. So, $386,000,000 at $457,000,000 is what we expect to reprice.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Okay. And then just generally, what are new loans coming on the portfolio at today on a blended basis?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. 4th quarter, we put them on at 7.1%, so low 7s.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Got you. Yes. And if the Fed remains on pause this year, can you kind of just talk us through kind of the CD repricing gaps that you have that could aid in deposit costs continue to come down? And if there's any opportunities to lower pricing on non CD products as well, at least over the next quarter or 2?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. Most of our CD book, Nate, is less than 1 year. And so, yes, we see opportunity even if the Fed remains on pause to lower the cost of that book as that comes due. And then to the second part of your question, we continue to look at our other non maturity interest bearing deposits and where we have opportunity to lower there. And so, we're still actively looking at those costs and looking for pockets to where we could perhaps lower costs even if the Fed remains on pause.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Okay. And

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

just one last one, Barry, can you just update us in terms of kind of the balance sheet sensitivity and margin impact from each if the Fed does cut this year?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Well, right now, our balance sheet models as assets sensitive with the shock scenarios made. And so and again, that's plus or minus 100 parallel shock. And so, we model that as if so. If the rates cut, that suggests that our net interest income would go down in that shock scenario. However, as I talked about earlier, what we're observing is actual oil, the yield curve flattening out.

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

And so, I think there's still opportunity for margin expansion, but the balance sheet model is asset sensitive on a shock scenario.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

And

Operator

the next question will be from the line of Brian Martin with Janney Montgomery Scott. Please go ahead. Your line is open.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Barry, if you covered this, I apologize. Did you give some thoughts on kind of the I know you talked about the 4th quarter expenses, but just how to think about the expense run rate as we kind of head into 'twenty five here and just the puts and takes there?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. In my prepared remarks for this script, Brian, I did talk about what we expect for 2025 expenses to be in the $145,000,000 to $147,000,000 range for the year, which suggests $36,000,000 to $37,000,000 per quarter for the expense run rate.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. Okay. Apologize for that. And then just in terms of fee income, Chip, I don't know, you give it sounds like the SBA really had a nice year here, kind of embedded in the mortgage line or the loan line there. I mean, it also kind of seems like that the mortgage side, the traditional mortgage, maybe it's kind of been flattish.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

So I guess just trying to understand if I'm thinking about that right. And the other real question is just kind of the areas you talked about in terms of initiatives on the fee side as far as expanding fee income going forward. Can you just talk about outside of you've talked about the wealth and the SBA kind of the other business lines you've added this year, kind of what they've contributed or just kind of where the opportunity is as we think about fee income next year outside of wealth that you've already covered, but just be in SBA, but the other line items are potential that we have that gets in pickup here?

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Brian, this is Len. I'll take a stab at that. So if you look at SBA as an example, so that number was 1.6 for us in 'twenty four, about 4 times what it was in 'twenty three over 4 times what it was in 'twenty three. And if you look back, 2 thirds of that number came in the last two quarters. So, I see good momentum there.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

So, that's a key point on the loan line item, I should point out. The other thing is obviously the mortgage residential mortgage business has headwinds with the rate environment where it's been. But what I would tell you is one of the strategies tactically is to focus on leveraging our secondary market product offerings to make sure we're optimizing that as best we can. When I look at drivers, wealth obviously was a huge story for us in 'twenty four, and I've talked about that. We see more runway there.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

And then treasury management, the 12% number, which flows through the service charge line, that's 12% in 'twenty four over 'twenty three. And I see more runway for us in the treasury management line as well. Then lastly, what I would tell you is, as Chip talked about, as borrowers get a little more confidence and a little more stability relative to CRE, I think our CRE business, we've got room to go there, right, when you just look at our CRE power. And I think that can help drive our swap line because that's frankly been a modest line for us these last couple of years. And I think as the CRE business picks up, I think that can help drive the swap line from a fee perspective.

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

So those would be the drivers I would see.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. And Len, can you talk about I mean, I guess just give some color in terms of the outlook for growth in fee income, I guess, in terms of how you guys are thinking about that, given some items you just went through in terms of where the momentum may be?

Len Devaisher
Len Devaisher
President & COO at Midwestone Financial Group

Yes. So I'm going to say mid high single digits is what we would be on a total for the fee income line is what we'd be looking at for 'twenty five.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. Okay. That is helpful. I appreciate that. And Barry, just blasting back to just the margin for one moment.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

The trajectory on the margin given the steepening of the curve here and just kind of a little bit of tailwinds you have, if we don't see if we see a pretty not much activity from the Fed, the general outlook should be that given what you've outlined, maybe a gradual trajectory in the margin kind of throughout the year? Is that how to kind of frame that up?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

That's how I would frame it up, Brian, exactly like that. Yes, gradual over the course of the year.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. And maybe a bit of a step down in 1Q if the accretion I think you said the accretion goes back to around $1,000,000 a quarter. Is that I think I heard that right. So, yes, give back starts Q1?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. That's kind of how I would if I start thinking about the Q1, that's kind of where we talk about the that's why I was focusing on the core net interest margin, Brian, of $3.26 and so you start there and layer in that kind of $1,000,000 plus of discount accretion or about $1,000,000 of discount accretion per quarter and that should get you to kind of a launch point.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. Perfect. And I don't know, just big picture comment in terms of profitability. I think, obviously, you guys were above 1% on the ROA in the quarter. As we think about kind of an exit to 2025, can you kind of talk about where you think that exit is on ROA or just kind of how we should be thinking about that as we proceed through the year?

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

Yes. We're extremely focused, Brian, in terms of obviously building that throughout the year. And what we anticipate is that, that has the potential with execution to be in the $110,000,000 to $115,000,000 range as we exit 2025.

Operator

The next question will be from the line of Nathan Race with Piper Sandler.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Just curious if you can kind of frame up your deposit growth expectations for this year. I know you guys are focused on adding full relationships, but just curious if you're expecting deposit growth to follow that kind of mid single digit pace in loans?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. Nate, this is Barry. I'll take that. As we have been looking at deposit growth expectations for the year 2025, we're thinking around 3% is probably what we're looking at for deposit growth.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Okay, great. That's helpful. And then, Barry, can you just update us in terms of the amount of cash flow coming off the bond book this year following the restructuring?

Barry Ray
Barry Ray
Senior Executive VP, CFO & Treasurer at Midwestone Financial Group

Yes. Next, we expect to get around $200,000,000 of cash flows off of the portfolio in 2025, Nate.

Operator

We have no further questions in the queue at this time. So, I would now like to hand the call back to CEO, Chip Reeves, for closing remarks.

Charles Reeves
Charles Reeves
CEO at Midwestone Financial Group

All right. Thanks, everyone, for joining us today. And we truly look forward to our April call to share our continued progress in becoming that consistent high performing company that we've spoken about over the last few years and began to demonstrate even further with our Q4 results. Thanks everyone.

Executives
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Earnings Conference Call
MidWestOne Financial Group Q4 2024
00:00 / 00:00

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