MOFG - MidWestOne Financial Group Inc. Reports Financial Results for the Second Quarter of 2020

Second Quarter Summary¹

• Net income for the second quarter of $11.7 million, or $0.73 per diluted common share.
  • Pre-tax, Pre-provision Net Revenue² of $18.9 million, an increase of $1.4 million or 8%.
  • Credit Loss Expense of $4.7 million, a decrease of $17.0 million or 78%.
• Average deposit balances increased $405.6 million  or 11%.
• Allowance for Credit Losses as a percentage of loans held for investment, net of unearned income, increased to 1.55% (1.70% when adjusted for $327.6 million of Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") loans)².

IOWA CITY, Iowa, July 30, 2020 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq - MOFG) (“we”, “our”, or the "Company”) today reported net income for the second quarter of 2020 of $11.7 million, or $0.73 per diluted common share, compared to net loss of $2.0 million, or $0.12 per diluted common share, for the first quarter of 2020 (the “linked quarter”). Credit loss expense for the second quarter was $4.7 million, which reduced diluted earnings per common share by approximately $0.22 for the second quarter of 2020.

Charles Funk, Chief Executive Officer, commented, “We are pleased with our results in the second quarter, particularly our bankers’ efforts in the origination of SBA PPP loans during a period of unprecedented challenges for our customers, employees, and communities. The commitment of our employees combined with our business continuity planning efforts and digital service offerings provided our customers continued access to banking services despite COVID-19’s far-reaching impacts. While we believe there will likely be volatility in earnings in this economic environment, the quarterly return on average equity of 9.21% and a return on average tangible equity of 13.50% represents solid performance."

¹ Second Quarter Summary compares to the linked quarter unless noted.

² Non-GAAP measure. See the separate Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.

COVID-19 RESPONSE

Branch Operations

The Company commenced re-opening selected bank branch lobbies on June 1, 2020 and continues to actively manage lobby access based on local COVID-19 community spread conditions. Mr. Funk noted, "We have continued to encourage and practice proper protocols to keep our employees and customers safe. Recently, we have temporarily closed lobbies in communities where COVID cases saw marked increases. The MidWestOne team remains resilient and together."

SBA PPP Loans

The Company remains committed to supporting its customers and communities during these difficult times. This commitment includes offering PPP loans as authorized by the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020, as amended. As of June 30, 2020, the Company had funded 2,534 PPP loans totaling $345.4 million with an average loan size of $136 thousand. These loans earn a 1% annual interest rate plus an origination fee from the SBA based upon loan size. At June 30, 2020, the amortized cost basis of PPP loans was $327.6 million and the unamortized net fees were $9.3 million. The fees will be recognized over the term of the respective loans.

Loan Modifications

The Company continues to offer payment deferrals and mortgage forbearance to customers, which totaled $474.9 million as of June 30, 2020. Approximately 32% of the modifications were interest only payments and 68% were full payment deferrals, with both modification types generally three months in length. As of July 24, 2020, 16 loans, totaling $31.2 million, were either in or being processed for a second deferral period.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased in the second quarter of 2020 to $38.7 million from $37.4 million as larger volumes of interest earning assets more than offset net interest margin compression. The tax equivalent net interest margin decreased 22 basis points ("bps") to 3.38% for the second quarter of 2020 from 3.60% in the linked quarter. Interest earning assets yields decreased 47 basis points from the linked quarter, approximately 8 basis points of which was attributable to PPP loans, which have a coupon rate of 1%. Net fee accretion for PPP loans in the second quarter of 2020 was $1.1 million. Partially offsetting the lower asset yields was a 26 bps reduction in cost of funds.

The Company's core net interest margin (a non-GAAP measure, see the separate Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure), which excludes loan purchase discount accretion, decreased 15 bps from the linked quarter as lower asset yields were only partially offset by reduced funding costs. Loan purchase discount accretion added $2.6 million to net interest income in the second quarter compared to $3.0 million in the linked quarter.

"Our margin suffered from an asset mix change whereby loans were paid off and were reinvested into lower yielding securities," stated Mr. Funk.

Noninterest Income

Noninterest income for the second quarter of 2020 decreased $1.9 million, or 19%, from the linked quarter. The decrease was due primarily to decreases of $1.8 million and $0.5 million in the ‘Other’ income and 'Service charges and fees' line items, respectively. The 'Other' line item reflected a decrease from the linked quarter of $1.6 million in income from our commercial loan back-to-back swap program. The decrease in 'Service charges and fees' was primarily driven by a $0.5 million decrease in overdraft fees, which reflected lower customer overdraft activity coupled with increased waivers of such fees. The net decrease in noninterest income was partially offset by an increase in loan revenue of $0.8 million, which was driven by increased volume in home mortgage loans.

"We enjoyed solid performance from our home mortgage business as low mortgage rates continued to drive refinance and purchase activity," noted Mr. Funk.

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

Noninterest Expense

Noninterest expense for the second quarter of 2020 decreased $2.0 million, or 6.5%, from the linked quarter due primarily to a decrease in compensation and employee benefits of $0.9 million. The decrease in compensation and employee benefits was primarily attributable to a $1.4 million benefit from SBA PPP loan origination costs which are deferred and amortized over the life of the loan to which they relate.

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

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

Income Taxes

The Company recognized a net income tax expense of $2.5 million in the second quarter of 2020 compared to a net income tax benefit of $2.2 million in the linked quarter. The resulting net income tax expense during the second quarter of 2020 was primarily due to the net income earned during the quarter, which was offset by the recognition of $771 thousand in tax credits. 

Mr. Funk noted, "Our borrowers tended to be cautious in the second quarter as lines of credit were paid down and liquidity was used to pay down loans. In addition, several projects we agreed to fund were put on hold due to the uncertainty surrounding the economy."

Loans Held for Investment

Loans held for investment, net of unearned income, increased $171.3 million, or 5%, to $3.60 billion from March 31, 2020 as a result of the Company's participation in the PPP, offset by the continued pay downs on loans held for investment. At June 30, 2020, commercial real estate loans comprised approximately 49% of the loan portfolio. Commercial and industrial loans were the next largest category at 30%, followed by residential real estate loans at 15%, agricultural loans at 4%, and consumer loans at 2% of total loans.

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 related to loans for the periods indicated:

Effective January 1, 2020, the Company adopted the Financial Instruments - Credit Losses (CECL) accounting guidance. The adoption of this guidance established a single allowance framework for all financial assets carried at amortized cost and certain off-balance sheet credit exposures. The framework requires that management's estimate reflects credit losses over the full remaining expected life of each credit and considers expected future changes in macroeconomic conditions. The adoption resulted in the recognition on January 1, 2020 of cumulative effect adjustments of $4.0 million related to the allowance for credit losses (ACL) and $3.4 million related to the liability for off-balance sheet credit exposures.

As of June 30, 2020, the ACL was $55.6 million, or 1.55% of loans held for investment, net of unearned income, compared with $51.2 million, or 1.49%, at March 31, 2020. When adjusted for the total amount of PPP loans, the ACL as a percentage of loans held for investment, net of unearned income increased to 1.70% as of June 30, 2020. The increase in the ACL was due to the continued deterioration in current and forecasted economic conditions from the first quarter of 2020, largely as a result of the COVID-19 pandemic.  

As of June 30, 2020, the liability for off-balance sheet credit losses was $4.2 million as compared to $5.8 million as of March 31, 2020 and was included in 'Other liabilities' on the balance sheet. The reduction in this liability from the prior quarter-end was primarily due to lower expected line utilization.

Deposits

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

CREDIT QUALITY

The following table presents selected loan credit quality metrics as of the dates indicated:

"Monitoring of our loan portfolio increased significantly and we believe our ACL, at 1.55% (1.70% excluding PPP loans) sits in a strong position," stated Mr. Funk.

CAPITAL

Effective March 31, 2020, we elected the 5-year phase-in option allowed under the interim final rule (IFR) recently issued by the federal banking regulatory agencies that delays the estimated impact on regulatory capital stemming from the implementation of CECL. 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. This cumulative amount will then be reduced from capital over the subsequent three-year period.

The following table presents the regulatory capital ratios of the Company and its banking subsidiary as of the dates indicated:

CORPORATE UPDATE

Share Repurchase Program

At June 30, 2020, the total amount available under the Company's current share repurchase program was $6.4 million. In light of the economic uncertainty, the Company has yet to resume share repurchases since discontinuing them in mid-March of 2020.   

Len Devaisher Named President and Chief Operating Officer

On July 6, 2020, following an extensive national search, the Company announced the appointment of Len Devaisher as President and Chief Operating Officer of the Company and MidWestOne Bank, effective July 27, 2020. Mr. Devaisher was most recently Vice President of Resource Development with the United Way of Dane County. Prior to that, he served Old National Bank as the Chief Executive Officer for the Wisconsin Region. Mr. Devaisher has focused expertise in commercial banking, corporate profitability, and business development that will be valuable to the Company.

Subordinated Debenture Offering

On July 28, 2020, the Company completed the private placement of $65.0 million of its subordinated notes with registration rights. The 5.75% fixed-to-floating rate subordinated notes are due July 2030. For regulatory capital purposes, the subordinated notes have been structured to qualify initially as Tier 2 Capital for the Company.

Cash Dividend Announcement

On July 29, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.22 per common share. The dividend is payable September 15, 2020, to shareholders of record at the close of business on September 1, 2020.

Branch Consolidation

Effective October 28, 2020, the Company plans to consolidate its branch office in Newport, Minnesota into its nearby branch office in South St. Paul, Minnesota. This branch consolidation is part of the Company's strategy to improve operating efficiency. The Company estimates the branch consolidation will reduce its annual operating expenses by approximately $360 thousand.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, July 31, 2020. To participate, please dial 866-233-3483 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 31, 2020, by calling 877-344-7529 and using the replay access code of 10136661. 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.

EARNINGS CALL PRESENTATION

The Company has prepared presentation materials that management intends to use during its second quarter 2020 conference call on July 31, 2020. These materials have been furnished to the U.S. Securities and Exchange Commission in a Form 8-K concurrently with this press release, and are also available on the Company's website at www.midwestonefinancial.com.

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) effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic; (2) government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms including the Coronavirus Aid, Relief, and Economic Security Act; (3) the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges; (4) credit quality deterioration or pronounced and sustained reduction in real estate market values causing an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings; (5) the effects of interest rates, including on our net income and the value of our securities portfolio; (6) 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; (7) fluctuations in the value of our investment securities; (8) governmental monetary and fiscal policies; (9) changes in benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR; (10) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators; (11) the ability to attract and retain key executives and employees experienced in banking and financial services; (12) the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio; (13) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (14) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (15) 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; (16) the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities; (17) the risks of mergers, 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; (18) volatility of rate-sensitive deposits; (19) operational risks, including data processing system failures or fraud; (20) asset/liability matching risks and liquidity risks; (21) the costs, effects and outcomes of existing or future litigation; (22) changes in general economic, political, or industry conditions, nationally, internationally or in the communities in which we conduct business; (23) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, such as the implementation of CECL; (24) war or terrorist activities, widespread disease or pandemic, or other adverse external events, which may cause deterioration in the economy or cause instability in credit markets; (25) the effects of cyber-attacks; (26) the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; 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
CONSOLIDATED BALANCE SHEETS

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

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

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