MidWestOne Financial Group, Inc. Reports Financial Results for the Fourth Quarter and Full Year of 2023

IOWA CITY, Iowa, Jan. 25, 2024 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported results for the fourth quarter and full year of 2023.

Fourth Quarter 2023 Summary¹

• Net income of $2.7 million, or $0.17 per diluted common share, including, on a pre-tax basis, securities net losses of $5.7 million, merger-related costs of $245 thousand, voluntary early retirement program costs of $438 thousand, and a negative mortgage servicing right valuation adjustment of $105 thousand.
• Sold $115.2 million of securities in a balance sheet repositioning, proceeds were utilized to purchase higher yielding debt securities and reduce short-term borrowings.
• Annualized loan growth of 6.1%.
• Deposits, excluding brokered deposits, increased $31.4 million, or 0.6%, the second sequential quarter of deposit growth.
• Nonperforming assets ratio remained stable at 0.47%; net charge-off ratio was 0.20%.
• Received all regulatory approvals for the previously announced acquisition of Denver Bankshares, Inc, which is expected to close early in the first quarter of 2024.

Full Year 2023 Summary¹

• Net income for the full year was $20.9 million, or $1.33 per diluted common share.
• Sold $346.9 million of securities to reposition the balance sheet, proceeds were utilized to purchase higher yielding debt securities and reduce short-term borrowings.
• Net charge-off ratio declined 10 basis points ("bps") to 0.09%.
• Tangible book value of $27.90², an increase of $2.30 or 9%.

Subsequent Events

• On January 23, 2024, the Board of Directors declared a cash dividend of $0.2425 per common share, payable on March 15, 2024 to shareholders of record as of the close of business on March 1, 2024.
  

CEO Commentary

Charles (Chip) Reeves, Chief Executive Officer of the Company, commented, “I'm pleased with our balance sheet trends, as we delivered 6.1% annualized loan growth during the fourth quarter of 2023, and continue to benefit from the expansion of our major market banking teams. We also achieved core deposit growth in the quarter, and remain cautiously optimistic that we can grow our core deposit franchise through the year ahead. That said, we remain liability sensitive, and funding cost pressure continued to impact our margins and earnings through the fourth quarter, though that pressure has been moderating.”

Mr. Reeves concluded, "More importantly, we are well ahead of plan in executing our strategic initiatives designed to improve our performance and position the Bank to deliver financial results at the median of our peer group by the end of 2025. Highlights from 2023 include outstanding expense discipline and re-allocation, our geographic repositioning with the Denver Bankshares merger expected to close on January 31st, key new hires in our Iowa Metro and Twin Cities markets, the hiring of a talented executive to lead our wealth management business, and the expansion of our specialty business lines with the recruitment of an agri-business team. We are rapidly scaling in our core markets while adding new business lines, which taken together, provide visibility to improved growth and returns."

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¹ Fourth Quarter Summary compares to the third quarter of 2023 (the "linked quarter") unless noted. Full Year 2023 Summary compares to the full year 2022 unless noted.
² Non-GAAP measure. See the separate Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.}

REVENUE REVIEW

Total revenue for the fourth quarter of 2023 decreased $8.0 million from the third quarter of 2023 and decreased $18.1 million from the fourth quarter of 2022 due to lower net interest income and noninterest income.

Net interest income of $32.6 million for the fourth quarter of 2023 decreased $2.0 million from the third quarter of 2023 primarily due to higher funding costs, partially offset by lower volumes of interest bearing liabilities, higher volumes of interest earning assets, and higher interest earning asset yields. When compared to the fourth quarter of 2022, net interest income decreased $11.0 million primarily due to higher funding costs and volumes and lower interest earning asset volumes, partially offset by higher interest earning asset yields.

The Company's tax equivalent net interest margin was 2.22% in the fourth quarter of 2023, compared to 2.35% in the third quarter of 2023, as higher earning asset yields were more than offset by increased funding costs. The cost of interest bearing liabilities increased 32 bps, to 2.65%, due primarily to interest bearing deposit costs of 2.39% and short-term borrowing costs of 4.91%, which increased 34 bps and 62 bps, respectively from the third quarter of 2023. Total interest earning assets yield increased 12 bps from the third quarter of 2023, as a result of an increase in loan yield of 15 bps. Our cycle-to-date interest bearing deposit beta was 40%.

The tax equivalent net interest margin was 2.22% in the fourth quarter of 2023, compared to 2.93% in the fourth quarter of 2022, driven by higher funding costs and volumes and lower interest earning asset volumes, partially offset by higher interest earning asset yields. The cost of interest bearing liabilities increased 157 bps to 2.65%, due to interest bearing deposit costs of 2.39%, short-term borrowing costs of 4.91%, and long-term debt costs of 6.79%, which increased 156 bps, 237 bps and 125 bps, respectively from the fourth quarter of 2022. Total interest earning assets yield increased 59 bps from the fourth quarter of 2022, primarily as a result of an increase in loan yields of 68 bps.

Noninterest income for the fourth quarter of 2023 decreased $6.0 million from the linked quarter, primarily due to investment securities losses, net, of $5.7 million in the fourth quarter of 2023, coupled with a $0.6 million unfavorable change in loan revenue. Investment securities losses stemmed from a balance sheet repositioning in the fourth quarter of 2023, in which $115.2 million of securities, yielding 2.26%, were sold and sale proceeds of $109.5 million were utilized to purchase $63.3 million of securities, yielding 5.62%, with the balance utilized to reduce short-term borrowings. Loan revenue primarily reflected an unfavorable quarter-over quarter change in the fair value of our mortgage servicing rights of $0.4 million and a decline of $0.1 million in revenue from our mortgage origination business.

Noninterest income for the fourth quarter of 2023 decreased $7.1 million from the fourth quarter of 2022 due to investment securities losses, net, of $5.7 million and a $2.0 million decline in other revenue, partially offset by an increase of $0.5 million in investment services and trust activities revenue. Investment securities losses stemmed from the balance sheet repositioning previously described. Other revenue in the fourth quarter of 2022 benefited from a nonrecurring bargain purchase gain of $2.5 million recognized in connection with the acquisition of Iowa First Bancshares Corp., which was partially offset by an increase of $0.5 million in swap origination fee income. The increase in investment services and trust activities revenue was driven by higher assets under management.

EXPENSE REVIEW

Noninterest expense for the fourth quarter of 2023 increased $0.6 million from the linked quarter primarily as a result of increases of $0.6 million and $0.5 million in legal and professional and other, respectively. The largest offset to increases in noninterest expense was a decline of $0.7 million in compensation and employee benefits. The increase in legal and professional expenses stemmed primarily from higher executive recruitment and merger-related expenses. The increase in other noninterest expense was driven by various changes, including increases in loan expenses, travel, meals and entertainment, and operating losses. The largest driver in the decrease in compensation and employee benefits was a reduction in incentive and commission expense.

Noninterest expense for the fourth quarter of 2023 decreased $2.3 million from the fourth quarter of 2022 due primarily to a $2.6 million decline in compensation and employee benefits, which reflected a $1.6 million reduction in incentives and commissions, and a $0.6 million decline in employee benefits. The $0.3 million decrease in occupancy expense reflected a write-down of assets held for sale in the fourth quarter of 2022, which did not recur in the fourth quarter of 2023. Partially offsetting the decreases in noninterest expense was an increase of $0.5 million in FDIC insurance expense and an increase of $0.4 million in legal and professional expense, which stemmed primarily from higher recruitment and merger-related expenses.

The Company recognized a tax benefit in the fourth quarter of 2023 to reduce the full-year 2023 effective income tax rate to 16.0%, as compared to 20.6% in the prior year. The decrease in the 2023 annual effective income tax rate reflected lower taxable income and a larger benefit from tax exempt investment income. The effective income tax rate for 2024 is expected to be 20-22%.

BALANCE SHEET REVIEW

Total assets were $6.43 billion at December 31, 2023, compared to $6.47 billion at September 30, 2023 and $6.58 billion at December 31, 2022. The decrease from September 30, 2023 was primarily driven by lower securities balances as a result of the balance sheet repositioning, partially offset by higher loan balances. Compared to December 31, 2022, the decrease was primarily due to lower securities balances resulting from balance sheet repositioning in the first and fourth quarters of 2023, partially offset by higher loan balances.

Loans held for investment, net of unearned income, increased $61.0 million, or 1.5%, to $4.13 billion from $4.07 billion at September 30, 2023 and $286.4 million, or 7.5%, from December 31, 2022. This increase from the third quarter of 2023 was driven by new loan production in the fourth quarter of 2023 and higher line of credit usage. The increase from the fourth quarter of 2022 was due to new loan production.

Investment securities at December 31, 2023 were $1.87 billion, decreasing $88.2 million from September 30, 2023 and $412.6 million from December 31, 2022. The decrease from the third quarter of 2023 was primarily due to the balance sheet repositioning previously discussed, as well as principal cash flows received from scheduled payments, calls, and maturities. The decrease from the fourth quarter of 2022 was primarily due to balance sheet repositioning in the first and fourth quarters of 2023.

Total deposits increased $32.3 million, or 0.6%, to $5.40 billion from $5.36 billion at September 30, 2023. Core deposits increased $16.4 million from September 30, 2023. Total deposits decreased $73.3 million, or 1.3%, from $5.47 billion at December 31, 2022. Brokered deposits increased $94.3 million from $126.8 million at December 31, 2022, with core deposits declining $112.9 million from December 31, 2022.

Total borrowed funds were $423.6 million at December 31, 2023, a decrease of $74.9 million from September 30, 2023 and a decrease of $107.5 million from December 31, 2022. The decrease when compared to the linked quarter was due to lower Federal Home Loan Bank overnight borrowings and securities sold under agreements to repurchase, partially offset by higher Bank Term Funding Program borrowings. The decrease when compared to December 31, 2022 was primarily due to lower Federal Home Loan Bank overnight borrowings and securities sold under agreements to repurchase, partially offset by Bank Term Funding Program borrowings of $285 million, as compared to no such borrowings in the prior year.

Total shareholders' equity at December 31, 2023 increased $19.0 million from September 30, 2023, driven by a decrease in accumulated other comprehensive loss. Total shareholders' equity at December 31, 2023 increased $31.6 million from December 31, 2022, driven by a decrease in accumulated other comprehensive loss and an increase in retained earnings.

Accumulated other comprehensive loss at December 31, 2023 decreased $19.7 million compared to September 30, 2023, primarily due to an increase in available for sale securities valuations and the recognition of the loss from the fourth quarter sale of securities. Accumulated other comprehensive loss decreased $24.1 million from December 31, 2022.

On January 23, 2024, the Board of Directors of the Company declared a cash dividend of $0.2425 per common share. The dividend is payable March 15, 2024, to shareholders of record at the close of business on March 1, 2024.

No common shares were repurchased by the Company during the period September 30, 2023 through December 31, 2023 or for the subsequent period through January 25, 2024. The current share repurchase program allows for the repurchase of up to $15.0 million of the Company's common shares.

CREDIT QUALITY REVIEW

Compared to the linked quarter, the nonperforming loans ratio declined 7 bps and the nonperforming assets ratio increased 2 bps. The classified loans ratio increased 120 bps from the linked quarter, primarily due to the downgrade of three larger commercial relationships. When compared to the prior year, the nonperforming loans and assets ratios both increased 23 bps, to 0.64% and 0.47%.

As of December 31, 2023, the allowance for credit losses was $51.5 million and the allowance for credit losses ratio was 1.25%, compared with $51.6 million and 1.27% at September 30, 2023. When compared to the linked quarter, credit loss expense of $1.8 million in the fourth quarter of 2023 was primarily attributable to loan growth, with the increase compared to the prior year stemming from loan growth and individually evaluated loans.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, January 26, 2024. To participate, you may pre-register for this call utilizing the following link: https://www.netroadshow.com/events/login?show=0492f968&confId=59127. 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 827546 at least fifteen minutes before the call start time. If you are unable to participate on the call, a replay will be available until April 25, 2024 by calling 1-866-813-9403 and using the replay access code of 572754. 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 or branch sales (including with Iowa First Bancshares Corp. and Denver Bankshares, Inc.), 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 recent and potential additional 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 Israeli-Palestinian conflict and the Russian invasion of 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 or our third-party vendors' 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) potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election; (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

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

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, and efficiency ratio. 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.