MidWestOne Financial Group, Inc. Reports Financial Results for the Second Quarter of 2023

IOWA CITY, Iowa, Aug. 01, 2023 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported results for the second quarter of 2023.

Second Quarter 2023 Highlights¹

• Net income of $7.6 million, or $0.48 per diluted common share, compared to net income of $1.4 million, or $0.09 per diluted common share, for the linked quarter.
• Annualized loan growth of 10.6%.
• Expenses of $34.9 million included $1.4 million of costs stemming from a voluntary early retirement program and executive relocation.
• Nonperforming assets ratio improved 1 basis point (“bps”) to 0.22%; net charge-off ratio was 0.09%.

Subsequent Events

• On July 25, 2023, the Board of Directors declared a cash dividend of $0.2425 per common share.
  

CEO COMMENTARY

Charles (Chip) Reeves, Chief Executive Officer of the Company, commented, “On our first quarter earnings call, we introduced a comprehensive strategic plan designed to transform our operations and become a higher performing bank over the medium term. Though we are facing a challenging operating environment driven by rising interest rates, we have made solid progress across the five pillars of our plan highlighted by 10% loan growth, annualized, that we achieved in the quarter. We have been adding bankers in our major markets of the Twin Cities, Denver, and Metro Iowa, which has been a major factor in this strong loan growth. So far this year, we have added bankers in the Twin Cities and we will continue to add bankers in our major markets as we continue to build scale and take market share. Late in the second quarter, as part of our specialty commercial loan growth initiative, we recruited an established agribusiness team from a regional bank as we strive to ‘up-tier’ in this attractive segment of the market. This team has already started to bring full relationship business to MidWestOne. We are also starting to see momentum in our governmental lending group, where we have improved our focus and execution. Lastly, we are seeing a nice increase in our wealth management assets under management and revenues, as compared to the first quarter, driven by the teams recruited in 2021 and 2022.”

Mr. Reeves concluded, “I’m very pleased with the early results that we are achieving as we execute our strategic plan. We are beginning to make investments in talent and our platform to drive growth, while keeping our noninterest expense relatively steady from the first quarter. We are driving significant change across our organization, and I would like to thank our employees for their hard work and dedication to our Company, customers, and communities. Our results would not be possible without their tireless efforts. I remain confident that we are on a strong path to significantly improved financial results.”

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1} Second Quarter Summary compares to the first quarter of 2023 (the “linked quarter”) unless noted.

REVENUE REVIEW

Total revenue for the second quarter of 2023 increased $9.7 million from the first quarter of 2023 as a result of increased noninterest income, partially offset by lower net interest income. Compared to the second quarter of 2022, total revenue decreased $6.4 million due to lower net interest income and noninterest income.

Net interest income of $37.0 million for the second quarter of 2023 decreased from $40.1 million in the first quarter of 2023, due primarily to higher funding costs and volumes and lower interest earning asset volumes, partially offset by higher interest earning asset yields. Compared to the second quarter of 2022, net interest income decreased $2.8 million as a result of higher funding costs and volumes, partially offset by higher interest earning asset yields and volumes.

The Company’s tax equivalent net interest margin was 2.52% in the second quarter of 2023 compared to 2.75% in the first quarter of 2023, as higher earning asset yields were more than offset by increased funding costs. The cost of interest bearing liabilities increased 39 bps to 1.98%, due to interest bearing deposit costs of 1.79%, short-term borrowing costs of 2.91%, and long-term debt costs of 6.38%, which increased 41 bps, 9 bps and 19 bps, respectively from the first quarter of 2023. Total interest earning assets yield increased 12 bps primarily as a result of an increase in loan yield of 10 bps, partially offset by a decrease in investment security yield of 5 bps, respectively. Our cycle-to-date interest bearing deposit beta was 31%.

The tax equivalent net interest margin was 2.52% in the second quarter of 2023 compared to 2.87% in the second quarter of 2022, driven by higher funding costs and volumes, partially offset by higher interest earning asset yields. The cost of interest bearing liabilities increased 153 bps to 1.98%, due to interest bearing deposit costs of 1.79%, short-term borrowing costs of 2.91%, and long-term debt costs of 6.38%, which increased 148 bps, 244 bps and 193 bps, respectively from the second quarter of 2022. Total interest earning assets yield increased 92 bps primarily as a result of an increase in loan and securities yields of 103 bps and 22 bps, respectively.

Noninterest income for the second quarter of 2023 increased $12.8 million from the linked quarter due primarily to $13.2 million of investment security losses recognized in the linked quarter, partially offset by a $0.5 million unfavorable change in loan revenue. Loan revenue reflected an unfavorable quarter-over-quarter change in the fair value of our mortgage servicing rights of $0.9 million, partially offset by a $0.5 million favorable change in loan sale gains generated by our governmental lending and mortgage origination businesses. Noninterest income decreased $3.6 million from the second quarter of 2022. The largest driver was a $0.6 million decrease in the fair value of our mortgage servicing rights in the current quarter compared to a $2.4 million increase in the second quarter of 2022.

EXPENSE REVIEW

Noninterest expense for the second quarter of 2023 increased $1.6 million, or 4.8%, from the linked quarter with overall increases in all noninterest expense categories except occupancy, legal and professional, amortization of intangibles, and communications. The increase in compensation and employee benefits reflected severance expense of $1.2 million in the current period, as compared to $0.1 million in the first quarter of 2023. The largest driver in the increase in ’other’ noninterest expense was executive relocation expenses of $0.2 million.

Noninterest expense for the second quarter of 2023 increased $2.8 million, or 8.8%, from the second quarter of 2022. The increase primarily reflected costs associated with the acquired operations of Iowa First Bancshares Corp. ("IOFB"), which closed in the second quarter of 2022. Partially offsetting the increases above was a decline of $0.8 million in legal and professional expenses, primarily due to a decrease in legal and professional merger-related expenses.

The Company’s effective income tax rate decreased to 17.4% in the second quarter of 2023 compared to 21.4% in the linked quarter. The decrease reflected an adjustment to full-year 2023 estimated taxable income in the Company’s annual effective tax rate calculation. The effective income tax rate for the full year 2023 is expected to be in the range of 18% - 20%.

BALANCE SHEET REVIEW

Total assets were $6.52 billion at June 30, 2023 compared to $6.41 billion at March 31, 2023 and $6.44 billion at June 30, 2022. The increase from March 31, 2023 was driven by higher loan balances from organic growth and an increase in cash and cash equivalents, partially offset by lower investment security balances. In comparison to June 30, 2022, the increase was primarily due to higher loan balances from organic growth and an increase in cash and cash equivalents, partially offset by lower security balances as a result of the balance sheet repositioning executed in the first quarter of 2023.

Loans held for investment, net of unearned income, increased $99.3 million, or 2.5%, to $4.02 billion from $3.92 billion at March 31, 2023. This increase was driven by new loan production in the second quarter of 2023.

Investment securities at June 30, 2023 were $2.00 billion, decreasing $68.7 million from March 31, 2023 and $399.7 million from June 30, 2022. The decrease from the first quarter of 2023 was primarily due to paydowns, calls, and maturities. The decrease from the second quarter of 2022 was primarily due to the balance sheet repositioning completed in the first quarter of 2023.

Total deposits declined $109.7 million, or 2.0%, to $5.45 billion from $5.56 billion at March 31, 2023. Brokered deposits decreased $0.9 million from $366.5 million at March 31, 2023. Total uninsured deposits were estimated to be $1.68 billion, which included $591.8 million of collateralized municipal deposits at June 30, 2023. Total uninsured deposits, excluding collateralized municipal deposits, represented approximately 20.0% of total deposits.

Total borrowed funds were $487.8 million at June 30, 2023 an increase of $205.8 million from March 31, 2023 and $134.7 million from June 30, 2022. The increase was primarily due to Bank Term Funding Program borrowings of $225 million, as compared to no borrowings in the prior periods, and increased Federal Home Loan Bank overnight borrowings.

Total shareholders’ equity at June 30, 2023 increased $0.7 million from March 31, 2023, driven by the benefit of second quarter net income, partially offset by an increase in accumulated other comprehensive loss and dividends paid during the second quarter of 2023.

Accumulated other comprehensive loss at June 30, 2023 increased $3.8 million compared to March 31, 2023, primarily due to a decrease in available for sale securities valuations. Accumulated other comprehensive loss increased $17.5 million from June 30, 2022, driven by the impact of higher interest rates on available for sale securities valuations.

On July 25, 2023, the Board of Directors of the Company declared a cash dividend of $0.2425 per common share. The dividend is payable September 15, 2023, to shareholders of record at the close of business on September 1, 2023.

No common shares were repurchased by the Company during the period March 31, 2023 through June 30, 2023 or for the subsequent period through August 1, 2023. The current share repurchase program allows for the repurchase of up to $15.0 million.

CREDIT QUALITY REVIEW

Compared to the linked quarter, nonperforming loans and nonperforming assets ratios remained stable and improved from the prior year period. The nonperforming loans ratio declined 1 bps from the linked quarter and 40 bps from the prior year to 0.36%. The classified loans ratio increased 35 bps from the linked quarter and 19 bps from the prior year. The linked quarter increase in classified loans was primarily due to the deterioration of two non-owner occupied commercial real estate loans. Further, the net charge-off ratio increased 6 bps from the linked quarter and 6 bps from the prior year.

As of June 30, 2023, the allowance for credit losses was $50.4 million, or 1.25% of loans held for investment, net of unearned income, compared with $49.8 million, or 1.27% of loans held for investment, net of unearned income, at March 31, 2023. Credit loss expense of $1.6 million in the second quarter of 2023 was primarily attributable to loan growth.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Tuesday, August 1, 2023. To participate, you may pre-register for this call utilizing the following link: https://www.netroadshow.com/events/login?show=c7140c96&confId=51647. 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 1-833-470-1428 using an access code of 231141 at least fifteen minutes before the call start time. If you are unable to participate on the call, a replay will be available until October 26, 2023, by calling 1-866-813-9403 and using the replay access code of 868948. 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; (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 and any changes in response to the recent failures of other banks; (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, including the risk of a recession; (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 occurrence of fraudulent activity, breaches, or failures of our information security controls or cyber-security related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools; (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; (25) the concentration of large deposits from certain clients who have balances above current FDIC insurance limits; (26) the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at other banks that resulted in failure of those institutions; and (27) 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 $79 thousand, $95 thousand, and $(31) thousand for the three months ended June 30, 2023, March 31, 2023, and June 30, 2022, respectively. Loan purchase discount accretion was $1.0 million, $1.2 million, and $528 thousand for the three months ended June 30, 2023, March 31, 2023, and June 30, 2022, respectively. Tax equivalent adjustments were $713 thousand, $716 thousand, and $569 thousand for the three months ended June 30, 2023, March 31, 2023, and June 30, 2022, respectively. The federal statutory tax rate utilized was 21%.
(4) Interest income includes tax equivalent adjustments of $431 thousand, $522 thousand, and $608 thousand for the three months ended June 30, 2023, March 31, 2023, and June 30, 2022, 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

(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 $0.2 million and $0.6 million for the six months ended June 30, 2023 and June 30, 2022, respectively. Loan purchase discount accretion was $2.2 million and $1.3 million for the six months ended June 30, 2023 and June 30, 2022, respectively. Tax equivalent adjustments were $1.4 million and $1.1 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The federal statutory tax rate utilized was 21%.
(4) Interest income includes tax equivalent adjustments of $1.0 million and $1.2 million for the six months ended June 30, 2023 and June 30, 2022, 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.

Non-GAAP Measures

This earnings release contains non-GAAP measures for tangible common equity, tangible book value per share, tangible common equity ratio, return on average tangible equity, net interest margin (tax equivalent), core net interest margin, loan yield (tax equivalent), core yield on loans, efficiency ratio, and adjusted earnings. Management believes these measures provide investors with useful information regarding the Company’s profitability, financial condition and capital adequacy, consistent with how management evaluates the Company’s financial performance. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP measure.