MOFG - MidWestOne Financial Group Inc. Reports Financial Results for the First Quarter of 2022

First Quarter Summary ¹

• Net income for the first quarter was $13.9 million, or $0.88 per diluted common share.
  • Total revenue, net of interest expense, of $49.0 million.
  • Noninterest expense of $31.6 million.
• Core commercial annualized loan growth of 5.4% to $2.71 billion ² .
• No credit loss expense in the first quarter 2022 and the allowance for credit losses ratio declined to 1.42%.
• Nonperforming assets ratio remained stable at 0.53% and the annualized net charge-off ratio was 28 bps.
• Efficiency ratio was 60.46% ² .
  

IOWA CITY, Iowa, April 28, 2022 (GLOBE NEWSWIRE) -- MidWest One Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported net income for the first quarter of 2022 of $13.9 million, or $0.88 per diluted common share, compared to net income of $14.3 million, or $0.91 per diluted common share, for the linked quarter.

CEO COMMENTARY

Charles Funk, Chief Executive Officer of the Company, commented, "We are pleased with the first quarter results; especially with our return on average tangible equity of 13.56% ² . Despite the first quarter historically being a softer quarter for loan growth, we showed positive momentum and have a strong pipeline of construction loans that will continue to fund as the year progresses. Further, asset quality was generally stable to improving with a 36 bps decline in the nonperforming loans ratio and a 30 bps decline in the classified loans ratio when compared to the prior year period. In addition, the 25 bps increase in March 2022 to the federal funds target rate had little impact to net interest income in the first quarter of 2022 results. Finally, we expect to close the Iowa First acquisition in the second quarter and believe this will add to our earnings per share during the remainder of 2022 and beyond."

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1} First Quarter Summary compares to the fourth quarter of 2021 (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.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased to $37.3 million in the first quarter of 2022 from $38.8 million in the fourth quarter of 2021 due primarily to decreased Paycheck Protection Program ("PPP") loan fee accretion stemming from loan forgiveness. Net PPP loan fee accretion was $0.8 million in the first quarter of 2022 compared to $2.0 million in the linked quarter.

Average interest earning assets decreased $19.1 million to $5.59 billion in the first quarter of 2022, when compared to the fourth quarter of 2021. When adjusting for the $37.6 million reduction in average PPP loan balances due to forgiveness, average interest earning assets increased $18.5 million due to the increased volume of debt securities, coupled with non-PPP loan growth, which included an increase in the revolving line of credit utilization.

The Company's tax equivalent net interest margin was 2.79% in the first quarter of 2022 compared to 2.83% in the linked quarter due to a decrease in total interest earning assets yield, partially offset by a slight reduction in funding costs. Total interest earning assets yield decreased 4 bps from the linked quarter primarily as a result of the reduced benefit from net PPP loan fee accretion described above. The cost of interest bearing liabilities decreased 1 bp to 0.42%, primarily as a result of interest bearing deposits costs of 0.29%, which declined 1 bp from the linked quarter.

Noninterest Income

Noninterest income for the first quarter of 2022 increased $0.4 million, or 3.7%, from the linked quarter. The increase was due to an increase of $1.2 million in loan revenue, which stemmed primarily from the $2.7 million increase in the fair value of our mortgage servicing rights, as compared to a $0.9 million increase in the fourth quarter of 2021. Partially offsetting the increase identified above, was a decline of $0.8 million in mortgage origination fee income. The decline in 'Other' noninterest income was primarily due to a decrease of $0.5 million in income received from our commercial loan back-to-back swap program.

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

Noninterest Expense

Noninterest expense for the first quarter of 2022 increased $1.2 million, or 3.9%, from the linked quarter primarily due to increases of $0.6 million in occupancy expense of premises, net, $0.5 million in legal and professional, and $0.4 million in compensation and employee benefits. The increase in occupancy expense was primarily attributable to a write-down of fixed assets totaling $0.4 million. The increase in legal and professional expenses was primarily attributable to executive recruitment, as well as elevated legal expenses related to litigation. The increase in compensation and employee benefits was primarily due to normal annual salary increases. Offsetting these increases was a decline of $0.3 million in equipment expense.

The decline in net interest income and the increase in noninterest expense, partially offset by the increase in noninterest income noted above, were the primary drivers of the increase in the efficiency ratio, which increased 3.72 percentage points to 60.46% from 56.74% 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 19.9% in the first quarter of 2022 compared to 24.9% in the linked quarter. The lower effective income tax rate in the first quarter of 2022 reflected income tax expense based on the statutory rate and state income taxes, net of federal income tax benefits, primarily due to net income earned during the quarter, offset by benefits related to tax-exempt interest and bank-owned life insurance. The effective income tax rate for the full year 2022 is expected to be in the range of 19.5-21.5%.

On January 1, 2022, the Company transferred, at fair value, $1.25 billion of mortgage-backed securities, collateralized mortgage obligations, and securities issued by state and political subdivisions from the available for sale classification to the held to maturity classification. The net unrealized after tax loss of $11.5 million associated with those re-classified securities remained in accumulated other comprehensive loss and will be amortized over the remaining life of the securities. No gains or losses were recognized in earnings at the time of the transfer.

Loans Held for Investment

Loans held for investment, net of unearned income, increased $5.0 million, or 0.2%, to $3.25 billion from December 31, 2021, driven primarily by new loan production in the first quarter of 2022 and increased revolving line of credit utilization and partially offset by PPP loan forgiveness. The revolving line of credit utilization was 35% in the first quarter of 2022, an increase of 3 percentage points from the linked quarter.

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

PPP Loans

The following table presents PPP loan measures 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 March 31, 2022, the allowance for credit losses ("ACL") was $46.2 million, or 1.42% of loans held for investment, net of unearned income, compared with $48.7 million, or 1.50% of loans held for investment, net of unearned income, at December 31, 2021. After excluding net PPP loans, the ACL as a percentage of loans held for investment, net of unearned income, remained consistent at 1.42% ⁽¹⁾ as of March 31, 2022, compared to 1.52% ⁽¹⁾ at December 31, 2021. There was no credit loss expense for the first quarter of 2022 compared to a credit loss expense of $0.6 million for the fourth quarter of 2021. In the first quarter of 2022, the $0.3 million credit loss benefit related to loans, which reflected continued improvement in overall asset quality and improvement in forecasted economic conditions, was offset by the $0.3 million credit loss expense needed for growth in unfunded loan commitments.

⁽¹⁾ Non-GAAP Measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.

Deposits

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

CREDIT RISK PROFILE

During the first quarter of 2022, overall asset quality was generally stable to improving. The nonperforming loans ratio declined 1 bp from the linked quarter and 36 bps from the prior year to 0.96%. In addition, the classified loans ratio declined 36 bps from the linked quarter and 30 bps from the prior year to 3.14%. However, net charge-offs increased $2.5 million from the linked quarter due to our proactive credit monitoring processes.

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 will then be reduced from capital over the subsequent three-year period.

CORPORATE UPDATE

Share Repurchase Program

Under our current repurchase program, the Company repurchased 11,500 shares of its common stock at an average price of $30.98 per share and a total cost of $356 thousand in the first quarter of 2022. At March 31, 2022, the total amount available under the Company's current share repurchase program was $5.4 million.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, April 29, 2022. To participate, you may pre-register for this call utilizing the following link: https://www.incommglobalevents.com/registration/q4inc/10493/midwestone-financial-group-inc-1st-quarter-2022-earnings-call/. After pre-registering for this event you will receive your access details via email. You are also able to on the day of the call dial 1-844-200-6205, using an access code of 329438 at least fifteen minutes before the call start time. If you are unable to participate on the call, a replay will be available until July 28, 2022, by calling 1-866-813-9403 and using the replay access code of 310793. 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 MIDWEST ONE FINANCIAL GROUP, INC.

MidWest One Financial Group, Inc. is a financial holding company headquartered in Iowa City, Iowa. MidWest One is the parent company of MidWest One Bank, which operates banking offices in Iowa, Minnesota, Wisconsin, Florida, and Colorado. MidWest One provides electronic delivery of financial services through its website, MidWest One .bank. MidWest One 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 effects on the economic environment, our customers and our operations, including due to supply chain disruptions, 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; (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) 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; (5) 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; (6) the effects of interest rates, including on our net income and the value of our securities portfolio; (7) 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; (8) fluctuations in the value of our investment securities; (9) governmental monetary and fiscal policies; (10) 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; (11) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators; (12) the ability to attract and retain key executives and employees experienced in banking and financial services; (13) the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio; (14) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (15) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (16) 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; (17) the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities; (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; (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.

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

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