MidWestOne
Financial Group, Inc. (MOFG, $37.20): “MidWest-Won Bank”
By:
Brendan Hopkins, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• MidWestOne Financial Group, Inc. (NYSE:MOFG) operates as a bank
holding company that provides consumer and commercial banking services through
its three subsidiaries: MidWestOne Bank, MidWestOne Insurance Services, and
Central Bancshares.
• The bank has 23
locations in Iowa, 18 in the Twin Cities area in Minnesota and western
Wisconsin, 2 locations in southwest Florida, and has recently decided to expand
into Denver, Colorado with the hire of four seasoned bankers and the
anticipation of a full service bank office to open later this spring.
• In 2016, there were
much larger than expected credit provisions that were driven by 5 write-offs.
This fiscal year is essentially the first time in the history of the company
that ended with concerns regarding credit quality.
• Expenses have improved,
reaching the goal that management set at the time of the merger with Central
Bank and are expected to continue in this direction.
• Return on Equity declined
from 10.28% to 6.7% in 2016, which is below the sector average of 7.9% and the
market average of 11.2%.
Key
points: Management’s earnings call for the fourth quarter was
appropriately optimistic, but reading between the lines it is clear that 2016
was not a great year for their business and that certain underlying issues may
be persistent moving forward. Representing their 3rd consecutive quarter
of disappointing results, their agricultural, light manufacturing, wealth
management, and home mortgage activity all stand out as underperforming. While
the other business lines listed are anticipated to bounce back quickly, the agricultural
economies they are exposed to (Iowa especially) appear to be deteriorating as
clients that once had superb credit are now being moved to credit watch lists
and there is an emerging trend of weakness in all states for light
manufacturing.
The best news of 2016 and
moving forward is the firm’s expense control. Since their merger with Central
Bank, management has reached their expense benchmark and has hired a consultant
who believes they can reduce expenses by an additional $600,000. Moving
forward, declining operating expenses and a reduction in credit losses will
result in improved operating leverage and profitability for MOFG.
Looking toward the
future, MOFG’s loan pipeline appears to be modest or middle of the road – not robust
or weak – but management has declared the growth of loan and deposits as a main
priority and set an expectation for growth of 4-6% for 2017. Beyond this, the 5
(3 of which being total surprises) large credit provisions that occurred in
4Q16 are set to be resolved and could potentially provide nice tailwind in this
upcoming year. With credit quality still being a strength outside of agriculture
in Iowa and light manufacturing, favorable trends in local economies will play
out nicely for the bank as it looks to increase its activities, especially in
home mortgages and loan and deposits.
What
has the stock done lately?
Over the course of the
last three months, MOFG has traded between $34.11-39.20 and has experienced little
volatility other than a sharp decline and then immediate rise in early February.
Currently floating near its all-time high, it is clear that investors have been
bullish on the stock.
Past
Year Performance:
MOFG has increased more
than 40% in value over the past year with a 52 Week Range of $25.49-39.20 and is
currently trading near its high at $37.20. MOFG essentially started at its low
of $25 and traded between that and $30 until November, where it sprung up to
$35 and then as high as $39.20. I would accredit these price increases to the
realization of their successful merger and their continued focus on growth –
specifically with the announcement of creating an office in Denver.
Source: FactSet
My
Takeaway
MOFG was originally
pitched at $26.26 with an intrinsic value of $32.19, representing a 22.6%
upside, and is currently trading at $37.20 – a premium of 15.5%. In terms of
our portfolio, I believe it would be appropriate to chalk this one up as a
winner. Although the merger with Central Bank is just beginning to realize its
potential and growth is anticipated in several key business functions, it seems
to be an appropriate time to replace it with a fresh idea because of their
underperforming business lines, disappointing credit performance, and declining
fundamentals. Earnings for 1Q17 will be released on April 27th. Looking at other regional banks for more upside.
