MidWestOne Financial Group, Inc. Reports Financial Results for the Third Quarter of 2022

Third Quarter Summary¹

• Net income for the third quarter was $18.3 million, or $1.17 per diluted common share.
• Net interest margin (tax equivalent) expanded 21 basis points (bps) to 3.08%².
• Annualized core loan growth (excluding PPP) of 15.72%².
• Nonperforming assets ratio improved 3 bps to 0.40%; net charge-off ratio of 0.06%.
• Efficiency ratio improved to 53.67%².
  

IOWA CITY, Iowa, Oct. 27, 2022 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported net income for the third quarter of 2022 of $18.3 million, or $1.17 per diluted common share, compared to net income of $12.6 million, or $0.80 per diluted common share, for the linked quarter.

CEO COMMENTARY

Len Devaisher, Interim Chief Executive Officer of the Company, commented, "We are gratified by our momentum: improving earnings driven by strengthening fundamentals. The combination of accelerated loan growth, improving credit metrics, and a balanced approach to deposit costs and retention efforts has us positioned well for the future."

_{^{____________________
1} Third Quarter Summary compares to the second quarter of 2022 (the "linked quarter") unless noted.
² Non-GAAP measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.}

IOWA FIRST BANCSHARES CORP. ACQUISITION

On June 9, 2022, we acquired Iowa First Bancshares Corp ("IOFB"). The table below summarizes the amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed:

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased to $45.7 million in the third quarter of 2022 from $39.7 million in the second quarter of 2022, due primarily to a higher volume of interest earning assets in addition to an expansion in the net interest margin.

Average interest earning assets increased $332.0 million to $6.05 billion in the third quarter of 2022, when compared to the second quarter of 2022. This increase reflected the full quarter benefit from earning assets acquired in the IOFB acquisition, as well as organic loan growth.

The Company's tax equivalent net interest margin was 3.08% in the third quarter of 2022 compared to 2.87% in the linked quarter. The increase in tax equivalent net interest margin reflected an increase in total interest earning asset yields, partially offset by increased funding costs. Total interest earning assets yield increased 37 bps from the linked quarter as loan yields increased 42 bps and taxable investment securities yields 18 bps. Sixteen basis points of the loan yield increase was attributable to loan purchase discount accretion. The cost of interest bearing liabilities increased 19 bps to 0.64%, due to interest bearing deposits costs of 0.46%, short-term borrowing costs of 1.34%, and long-term debt costs of 4.70%, which increased 15 bps, 87 bps and 25 bps respectively, from the linked quarter.

Noninterest Income

Noninterest income for the third quarter of 2022 increased $0.2 million, or 2.0%, from the linked quarter. The increase was primarily due to increases of $2.0 million and $0.4 million in other income and service charges and fees, respectively. The increase in other income stemmed primarily from a one-time settlement and the increase in service charges and fees reflected the full quarter benefit from the IOFB acquisition. Partially offsetting the increases above was a $1.8 million decline in loan revenue, which reflected a smaller increase in the fair value of our mortgage servicing rights.   

The following table presents details of noninterest income for the periods indicated:

Noninterest Expense

Noninterest expense for the third quarter of 2022 increased $2.5 million, or 7.9%, from the linked quarter, primarily due to increases of $1.1 million, $0.5 million, and $0.5 million in compensation and employee benefits, amortization of intangibles, and data processing, respectively. These increases primarily reflected a full three months of costs associated with IOFB as well as increased merger-related data processing expenses. Offsetting the increases identified above was a decline of $0.4 million in legal and professional expenses, primarily due to a decrease in legal and professional merger-related expenses.

The increase in net interest income and noninterest income, partially offset by the increase in noninterest expense noted above, were the primary drivers of the improvement in the efficiency ratio, which decreased 2.90 percentage points to 53.67% from 56.57% in the linked quarter.

The following table presents details of noninterest expense for the periods indicated:

The following table presents details of merger-related expenses for the periods indicated:

Income Taxes

The Company's effective income tax rate decreased to 20.6% in the third quarter of 2022 compared to 24.5% in the linked quarter. The lower effective income tax rate in the third quarter of 2022 was due to the one-time income tax expense of $0.8 million recognized in the second quarter of 2022 stemming from a change in the tax law in the state of Iowa. The effective income tax rate for the full year 2022 is expected to be in the range of 20-22%.

Loans Held for Investment

Loans held for investment, net of unearned income, increased $135.1 million, or 3.7%, to $3.75 billion from June 30, 2022. This increase was driven by new loan production and higher volumes of line of credit usage during the third quarter of 2022.

The following table presents the composition of loans held for investment, net of unearned income, as of the dates indicated:

Credit Loss Expense & Allowance for Credit Losses

The following table shows the activity in the allowance for credit losses for the periods indicated:

As of September 30, 2022, the allowance for credit losses ("ACL") was $52.1 million, or 1.39% of loans held for investment, net of unearned income, compared with $52.4 million, or 1.45% of loans held for investment, net of unearned income, at June 30, 2022. Credit loss expense for the third quarter of 2022 was $0.6 million, compared to $3.3 million in the second quarter of 2022, and was primarily attributable to a reserve taken to support loan growth.

Deposits

Total deposits declined $60.7 million, or 1.1%, to $5.5 billion from June 30, 2022. This decline reflected the competitive market for deposits driven by the rapid rate of increase in the federal funds target rate over the course of this year.

The following table presents the composition of our deposit portfolio as of the dates indicated:

CREDIT RISK PROFILE

During the third quarter of 2022, overall asset quality improved. The nonperforming loans ratio declined 7 bps from the linked quarter and 34 bps from the prior year to 0.69%. In addition, the classified loans ratio declined 16 bps from the linked quarter and 104 bps from the prior year to 2.52%.

The following table presents a roll forward of nonperforming loans for the period:

CAPITAL

Effective March 31, 2020, we elected the 5-year phase-in option allowed under the interim final rule (IFR) issued by the federal banking regulatory agencies that delays the estimated impact on regulatory capital stemming from the implementation of the current expected credit losses (CECL) accounting standard. The IFR allows the add back of 100% of the capital effect from the day one CECL transition adjustment and 25% of the capital effect from subsequent increases in the allowance for credit losses through the two-year period ending December 31, 2021. The modified CECL transitional amount of $9.4 million is then reduced from capital over the subsequent three-year period.

CORPORATE UPDATE

Appointment of Chief Executive Officer

As previously announced on October 19, 2022, the Company's Board of Directors appointed Charles (Chip) N. Reeves to serve as the Chief Executive Officer of the Company and MidWestOne Bank effective November 1, 2022.

IOFB Integration Update

During the third quarter of 2022, core banking system conversions were completed for the former First National Bank in Fairfield and the former First National Bank of Muscatine. Also during the third quarter of 2022, we closed and consolidated the operations of two MidWestOne banking offices located in Fairfield, IA into the former First National Bank in Fairfield banking office.

Share Repurchase Program

Under our current repurchase program, common shares repurchased by the Company during the third quarter of 2022 totaled 14,586 shares. These shares were repurchased at an average price of $29.51 per share and a total cost of $0.4 million in the third quarter of 2022. At September 30, 2022, the total amount available under the Company's current share repurchase program was $3.0 million.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, October 28, 2022. To participate, you may pre-register for this call utilizing the following link: https://www.netroadshow.com/events/login?show=5495738f&confId=42438. After pre-registering for this event you will receive your access details via email. On the day of the call, you are also able to dial 1-833-927-1758, using an access code of 483853 at least fifteen minutes before the call start time. If you are unable to participate on the call, a replay will be available until January 26, 2023, by calling 1-866-813-9403 and using the replay access code of 684318. A transcript of the call will also be available on the Company’s web site (www.midwestonefinancial.com) within three business days of the call.

ABOUT MIDWESTONE FINANCIAL GROUP, INC.

MidWestOne Financial Group, Inc. is a financial holding company headquartered in Iowa City, Iowa. MidWestOne is the parent company of MidWestOne Bank, which operates banking offices in Iowa, Minnesota, Wisconsin, Florida, and Colorado. MidWestOne provides electronic delivery of financial services through its website, MidWestOne.bank. MidWestOne Financial Group, Inc. trades on the Nasdaq Global Select Market under the symbol “MOFG”.

Cautionary Note Regarding Forward-Looking Statements

This release contains certain “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. We and our representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than historical information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “should,” “could,” “would,” “plans,” “goals,” “intend,” “project,” “estimate,” “forecast,” “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Additionally, we undertake no obligation to update any statement in light of new information or future events, except as required under federal securities law.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have an impact on our ability to achieve operating results, growth plan goals and future prospects include, but are not limited to, the following: (1) the risks of mergers (including with IOFB), including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; (2) credit quality deterioration, pronounced and sustained reduction in real estate market values, or other uncertainties, including the impact of inflationary pressures on economic conditions and our business, resulting in an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings; (3) the effects of actual and expected increases in inflation and interest rates, including on our net income and the value of our securities portfolio; (4) changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing; (5) fluctuations in the value of our investment securities; (6) governmental monetary and fiscal policies; (7) changes in and uncertainty related to benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR and the adoption of a substitute; (8) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators, including the new 1.0% excise tax on stock buybacks by publicly traded companies; (9) the ability to attract and retain key executives and employees experienced in banking and financial services; (10) the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio; (11) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (12) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (13) the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, financial technology companies, and other financial institutions operating in our markets or elsewhere or providing similar services; (14) the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities; (15) volatility of rate-sensitive deposits; (16) operational risks, including data processing system failures or fraud; (17) asset/liability matching risks and liquidity risks; (18) the costs, effects and outcomes of existing or future litigation; (19) changes in general economic, political, or industry conditions, nationally, internationally or in the communities in which we conduct business; (20) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board; (21) war or terrorist activities, including the war in Ukraine, widespread disease or pandemic, or other adverse external events, which may cause deterioration in the economy or cause instability in credit markets; (22) the effects of cyber-attacks; (23) the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; (24) effects of the ongoing COVID-19 pandemic, including its effects on the economic environment, our customers, employees and supply chain; and (25) other risk factors detailed from time to time in Securities and Exchange Commission filings made by the Company.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
FIVE QUARTER CONSOLIDATED BALANCE SHEETS

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
FIVE QUARTER AND YEAR TO DATE CONSOLIDATED STATEMENTS OF INCOME

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL STATISTICS

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
AVERAGE BALANCE SHEET AND YIELD ANALYSIS

^{(1) Average balance includes nonaccrual loans.
(2) Tax equivalent. The federal statutory tax rate utilized was 21%.
(3) Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $35 thousand, $(31) thousand, and $3.5 million for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. Loan purchase discount accretion was $2.0 million, $528 thousand, and $774 thousand for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. Tax equivalent adjustments were $673 thousand, $569 thousand, and $507 thousand for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%.
(4) Interest income includes tax equivalent adjustments of $596 thousand, $608 thousand, and $615 thousand for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%.
(5) Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6) Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.}

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
AVERAGE BALANCE SHEET AND YIELD ANALYSIS