MOFG - MidWestOne Financial Group Inc. Reports Financial Results For The First Quarter Of 2023

~Announces Strategic Plan and Financial Targets~

~Repositioning of the Company's Balance Sheet Provides Earnings, Margin and Return Accretion~

IOWA CITY, Iowa, April 27, 2023 (GLOBE NEWSWIRE) --  MidWest One Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported results for the first quarter of 2023.

First Quarter 2023 Highlights ¹

• Net income of $1.4 million, or $0.09 per diluted common share, compared to net income of $16.0 million, or $1.02 per diluted common share, for the linked quarter. Excluding the loss from the balance sheet repositioning, adjusted earnings for the first quarter were $11.2 million ² , or $0.72 per diluted common share.
• Executed the sale of $231 million in book value of available for sale debt securities as part of a balance sheet repositioning, resulting in a pre-tax loss of $13.2 million.
• Total uninsured deposits, excluding collateralized municipal deposits, represent approximately 18.5% of total deposits.
• Strong liquidity position, with $1.7 billion of available borrowing capacity from the FHLB, Federal Reserve Discount Window and Bank Term Funding Program, and unsecured sources.
• Annualized loan growth was 8.6% and remains centered in our targeted metro markets of the Twin Cities, Denver and Metro Iowa.
• Nonperforming assets ratio improved 1 basis point ("bps") to 0.23%; net charge-off ratio of 0.03%.
• Efficiency ratio was 62.32% ² .
• Common equity tier 1 capital to risk-weighted assets ratio improved 11 bps.
• Subsequent to quarter end, the Board of Directors declared a cash dividend of $0.2425 per common share.
  

¹ First Quarter Summary compares to the fourth quarter of 2022 (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.

CEO COMMENTARY

Charles (Chip) Reeves, Chief Executive Officer of the Company, commented, "Despite a difficult operating environment, exacerbated by March’s banking turmoil, we made significant progress executing on our initial strategic priorities. After the actions taken in the fourth quarter of 2022 to improve our credit, our asset quality metrics further improved in the first quarter of 2023, positioning the Bank well for the uncertain macroeconomic outlook. Importantly, we have low exposure to the higher risk areas in the market, such as the office sector of commercial real estate. Additionally, we took strategic action in late February to reduce the Company’s liability sensitivity as we executed the sale of $231.0 million of available for sale debt securities, resulting in $220.0 million of proceeds used to pay off high-cost FHLB borrowings and reinvest in higher yielding, floating rate securities. The transaction positions our balance sheet more favorably, improves our future earnings profile, enhances our already strong liquidity profile, and, importantly, our capital ratios still improved as compared to the linked quarter.”

Mr. Reeves continued, “Our core, granular deposit franchise also performed well given the concerns that swept the sector in the aftermath of Silicon Valley Bank’s ("SVB") failure. While we experienced $154.0 million of deposit outflows, excluding brokered deposits, in the quarter, $120.0 million occurred in January, which is a typical, seasonal low. Subsequent to the SVB failure and through the end of the first quarter, deposits grew $3.7 million. At quarter end, our total uninsured deposits, excluding collateralized municipal deposits, were approximately 18.5% and we have $1.7 billion of available borrowing capacity through the FHLB, Federal Reserve and the Bank Term Funding Program, and unsecured sources, which covers our uninsured deposit base. We believe we are in a strong liquidity position.”

Mr. Reeves concluded, “Looking forward, I could not be more excited for what lies ahead for our Company, employees, customers, and shareholders. Today, we have launched a strategic plan designed to unleash the potential that exists within MidWest One as we strive to become a high performing bank with consistent performance. Importantly, none of this would be possible without our talented team members and their continued focus on our customers and communities. I am so proud of their hard work through what has been a very challenging two months in our industry."

Strategic Plan

The Company has launched a strategic plan focused on five pillars designed to improve the performance of the Bank, including (1) driving a performance-oriented culture, (2) protecting the Bank’s core community bank franchise, (3) accelerating the growth of the Bank’s commercial and wealth management businesses, (4) expanding into specialty commercial segments, and (5) optimizing the Bank’s operational effectiveness and efficiency. Management will remain prudent through the execution of the plan with a strict focus on risk management with further investments in credit administration, a key enabler to the plan.

The goal of the plan is to exit 2025 with:

• 12% annual earnings per share growth
• A return on average assets of 1.10 – 1.20%
• 10% annual tangible book value growth
• An efficiency ratio of 55 - 57%

Further details on the strategic plan and quarterly results can be found in the Company’s first quarter 2023 earnings supplemental presentation located on the investor relations section of the Company’s website located at www.midwestonefinancial.com.

REVENUE REVIEW

Total revenue for the first quarter of 2023 decreased $18.5 million from the fourth quarter of 2022 as a result of lower net interest income and noninterest income. Compared to the first quarter of 2022, total revenue decreased $13.0 million primarily due to lower noninterest income. When excluding the loss of $13.2 million from the balance sheet repositioning, total revenue for the first quarter of 2023 was $49.2 million, a decline of $5.3 million from the fourth quarter of 2022 and an increase of $0.2 million from the first quarter of 2022.

Net interest income of $40.1 million for the first quarter of 2023 decreased from $43.6 million in the fourth quarter of 2022, due primarily to two fewer days in the quarter and higher funding costs and volumes, partially offset by higher interest earning asset yields and volumes. Compared to the first quarter of 2022, net interest income increased $2.8 million as a result of higher interest earning asset yields and volumes, partially offset by higher funding costs and volumes.

The Company's tax equivalent net interest margin was 2.75% in the first quarter of 2023 compared to 2.93% in the fourth quarter of 2022, as higher earning asset yields were more than offset by increased funding costs. The cost of interest bearing liabilities increased 51 bps to 1.59%, due to interest bearing deposit costs of 1.38%, short-term borrowing costs of 2.82%, and long-term debt costs of 6.19%, which increased 55 bps, 28 bps and 65 bps, respectively from the fourth quarter of 2022. Total interest earning assets yield increased 23 bps primarily as a result of an increase in loan and securities yields of 29 bps and 5 bps, respectively. Our cycle-to-date interest bearing deposit beta was 24%.

The net interest margin was 2.75% in the first quarter of 2023 compared to 2.79% in the first quarter of 2022, driven by higher funding costs, partially offset by higher interest earning asset yields. The cost of interest bearing liabilities increased 117 bps to 1.59%, due to interest bearing deposit costs of 1.38%, short-term borrowing costs of 2.82%, and long-term debt costs of 6.19%, which increased 109 bps, 252 bps and 189 bps, respectively from the first quarter of 2022. Total interest earning assets yield increased 90 bps primarily as a result of an increase in loan and securities yields of 97 bps and 43 bps, respectively.

Noninterest income for the first quarter of 2023 decreased $15.0 million from the linked quarter and $15.7 million from the first quarter of 2022, primarily due to investment security losses of $13.2 million related to the Company's balance sheet repositioning. In addition, noninterest income declined from the comparative periods due to the following factors: (1) the fourth quarter of 2022 benefited from a nonrecurring bargain purchase gain of $2.5 million and (2) the first quarter of 2022 benefited from a larger increase in the fair value of our mortgage servicing rights, as well as a larger gain on sale from residential mortgage loans as a result of higher mortgage origination volumes.

EXPENSE REVIEW

Noninterest expense for the first quarter of 2023 decreased $1.1 million, or 3.3%, from the linked quarter with overall decreases in all noninterest expense categories except occupancy, marketing and FDIC insurance. These decreases primarily reflected the decline in incentive compensation and merger-related expenses. Partially offsetting these decreases was an increase of $0.3 million in FDIC insurance premiums and $0.1 million in occupancy expense of premises, net. The decreases in net interest income and noninterest income noted above, partially offset by lower noninterest expense, were the primary drivers of the increase in the efficiency ratio, which increased 4.53% to 62.32% from 57.79% in the linked quarter.

Noninterest expense for the first quarter of 2023 increased $1.7 million, or 5.30%, from the first quarter of 2022 primarily due to increases of $0.9 million and $0.5 million in compensation and employee benefits and amortization of intangibles, respectively. The increases 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 $0.6 million in legal and professional expenses stemming primarily from a reduction in legal expenses related to litigation and executive recruitment. The decline in noninterest income and the increase in noninterest expense noted above, partially offset by higher net interest income, were the primary drivers of the increase in the efficiency ratio, which increased 1.86 percentage points to 62.32% from 60.46% in the first quarter of 2022.

The Company's effective income tax rate increased to 21.4% in the first quarter of 2023 compared to 17.9% in the linked quarter. The increase was primarily due to a bargain purchase gain increase that was recorded in the fourth quarter of 2022 related to the IOFB acquisition, which did not recur in the first quarter of 2023. The effective income tax rate for the full year 2023 is expected to be in the range of 19.5% - 21.5%.

BALANCE SHEET REVIEW

Total assets were $6.41 billion at March 31, 2023 compared to $6.58 billion at December 31, 2022 and $5.96 billion at March 31, 2022. The decrease from December 31, 2022 was driven by lower securities balances as a result of the balance sheet repositioning. In comparison to March 31, 2022, the increase was due primarily to the IOFB assets acquired in the second quarter of 2022 and higher loan balances from organic loan growth.

Loans held for investment, net of unearned income, increased $78.8 million, or 2.1%, to $3.92 billion from $3.84 billion at December 31, 2022. This increase was driven by new loan production, draws on construction loans, and higher line of credit usage during the first quarter of 2023.

Investment securities at March 31, 2023 were $2.07 billion, decreasing $211.2 million from December 31, 2022 and $278.1 million from March 31, 2022. The decrease from both periods was due primarily to the sale of $231.0 million of available for sale securities during the first quarter of 2023, as well as principal cash flows received from scheduled payments, calls, and maturities. The Company executed the sale of securities as part of a strategic balance sheet repositioning. The sale resulted in a pre-tax realized loss of $13.2 million. The proceeds of $220.0 million were redeployed towards paying off existing short-term borrowings and purchasing higher yielding, floating rate securities.

Total deposits increased $86.2 million, or 1.6%, to $5.56 billion from $5.47 billion at December 31, 2022. Brokered deposits increased $239.8 million from $126.8 million at December 31, 2022. When excluding the increase in brokered time deposits, total deposits declined $153.6 million from December 31, 2022. Total uninsured deposits were $1.72 billion, which included $692.1 million of collateralized municipal deposits at March 31, 2023. Total uninsured deposits, excluding collateralized municipal deposits, represented approximately 18.5% of total deposits.

Total borrowed funds were $282.0 million at March 31, 2023 a decrease of $249.1 million from December 31, 2022 and $39.1 million from March 31, 2022. The decrease from both periods was due to lower Federal Home Loan Bank borrowings.

Total shareholders' equity at March 31, 2023 increased $7.9 million from December 31, 2022, driven by the benefit of first quarter net income and a decrease in accumulated other comprehensive loss, partially offset by dividends paid during the first quarter of 2023.

Accumulated other comprehensive loss at March 31, 2023 decreased $10.2 million compared to December 31, 2022, due primarily to accretion of unrealized losses and the favorable impact of interest rate changes on available for sale securities valuations. Accumulated other comprehensive loss increased $36.9 million from March 31, 2022, driven by the impact of higher interest rates on available for sale securities valuations.

On April 27, 2023, the Board of Directors of the Company declared a cash dividend of $0.2425 per common share. The dividend is payable June 15, 2023, to shareholders of record at the close of business on June 1, 2023.

Due to increased economic uncertainty and recent market volatility, no common shares were repurchased by the Company during the period January 1, 2023 through March 31, 2023 or for the subsequent period through April 27, 2023. On April 27, 2023, the Board of Directors of the Company approved a new repurchase program, which replaced the prior repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2025.

CREDIT QUALITY REVIEW

During the first quarter of 2023, overall asset quality improved when compared to the linked quarter and the corresponding period in the prior year. The nonperforming loans ratio declined 4 bps from the linked quarter and 59 bps from the prior year to 0.37%. In addition, the classified loans ratio was consistent with the linked quarter at 2.52%, and declined 62 bps from the prior year. Further, the net charge-off ratio declined 33 bps from the linked quarter and 25 bps from the prior year.

As of March 31, 2023, the allowance for credit losses was $49.8 million, or 1.27% of loans held for investment, net of unearned income, compared with $49.2 million, or 1.28% of loans held for investment, net of unearned income, at December 31, 2022. Credit loss expense of $0.9 million in the first 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 Friday, April 28, 2023. To participate, you may pre-register for this call utilizing the following link: https://www.netroadshow.com/events/login?show=586c53ba&confId=49008 . 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 390276 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 20, 2023, by calling 1-866-813-9403 and using the replay access code of 126764. 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) 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 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; (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; (25) the concentration of large deposits from certain clients who have balances above current FDIC insurance limits and may withdraw deposits to diversify their exposure; (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.

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

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL STATISTICS