MidWestOne Financial Group, Inc. Reports Financial Results For the Second Quarter of 2022

MidWestOne Bank

Second Quarter Summary¹

• Completed acquisition of Iowa First Bancshares Corp ("IOFB").

• Annualized adjusted core loan growth (excluding IOFB and PPP) of 10.53%².

• Nonperforming assets ratio improved 10 basis points (bps) to 0.43%; net charge-off ratio improved 25 bps to 0.03%.

• Net interest margin (tax equivalent) expanded 8 bps to 2.87%².

• Net income for the second quarter was $12.6 million, or $0.80 per diluted common share.

  • Total revenue, net of interest expense, of $52.1 million, including a $1.4 million bargain purchase gain recognized in connection with the IOFB acquisition.

  • Credit loss expense of $3.3 million stemming from the acquired IOFB loan portfolio.

  • Noninterest expense of $32.1 million, including $0.9 million of merger-related expenses.

  • Effective tax rate of 24.5%, reflecting a $0.8 million charge related to an Iowa tax law change.

• Efficiency ratio improved to 56.57%².

IOWA CITY, Iowa, July 28, 2022 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported net income for the second quarter of 2022 of $12.6 million, or $0.80 per diluted common share, compared to net income of $13.9 million, or $0.88 per diluted common share, for the linked quarter.

CEO COMMENTARY

Charles Funk, Chief Executive Officer of the Company, commented, "This was a quarter of solid progress for MidWestOne. Annualized adjusted core loan growth of 10.53%, which excludes the impact from the acquisition of IOFB and PPP, represents strong work by our bankers. Our asset quality continues to show improvement, with total non-performing loans falling to 0.76% of total loans and net charge-offs falling to 0.03% of total loans. The 8 bps increase in our tax equivalent net interest margin was also a key to the Company's performance this past quarter.

We were pleased to enter the Muscatine, Iowa market and expand our Fairfield presence with the close of the Iowa First Bancshares transaction."

________________
_{¹ Second Quarter Summary compares to the first 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.}

FINANCIAL HIGHLIGHTS		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
(Dollars in thousands, except per share amounts)			2022				2022				2021				2022				2021
Net interest income		$	39,725			$	37,336			$	38,505			$	77,061			$	77,122
Noninterest income			12,347				11,644				10,218				23,991				22,042
Total revenue, net of interest expense			52,072				48,980				48,723				101,052				99,164
Credit loss expense (benefit)			3,282				—				(2,144	)			3,282				(6,878	)
Noninterest expense			32,082				31,643				28,670				63,725				56,370
Income before income tax expense			16,708				17,337				22,197				34,045				49,672
Income tax expense			4,087				3,442				4,926				7,529				10,753
Net income		$	12,621			$	13,895			$	17,271			$	26,516			$	38,919
Diluted earnings per share		$	0.80			$	0.88			$	1.08			$	1.69			$	2.43
Return on average assets			0.83	%			0.95	%			1.18	%			0.89	%			1.38	%
Return on average equity			10.14	%			10.74	%			13.24	%			10.44	%			15.10	%
Return on average tangible equity(1)			13.13	%			13.56	%			16.75	%			13.35	%			19.10	%
Efficiency ratio(1)			56.57	%			60.46	%			54.83	%			58.46	%			52.76	%
(1) Non-GAAP measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.

IOWA FIRST BANCSHARES CORP. ACQUISITION

On June 9, 2022, we completed our acquisition of IOFB, the parent company of First National Bank of Muscatine (“FNBM”) and First National Bank in Fairfield (“FNBF”). The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the June 9, 2022 acquisition date, net of any applicable tax effects. The Company considers all purchase accounting estimates provisional and fair values are subject to refinement for up to one year after the close date.

The table below summarizes the amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed:

(In thousands)		As of June 9, 2022
Merger consideration
Cash consideration						$	46,672
Identifiable net assets acquired, at fair value
Assets acquired
Cash and due from banks		$	10,192
Interest earning deposits in banks			67,855
Debt securities			119,230
Loans held for investment			281,470
Premises and equipment			7,363
Core deposit intangible			16,500
Other assets			12,218
Total assets acquired							514,828
Liabilities assumed
Deposits			(463,638	)
Other liabilities			(3,117	)
Total liabilities assumed							(466,755	)
Identifiable net assets acquired, at fair value							48,073
Bargain purchase gain (reported in Other noninterest income)						$	1,401

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased to $39.7 million in the second quarter of 2022 from $37.3 million in the first quarter of 2022, due primarily to a higher volume of interest earning assets in addition to an expansion in the net interest margin. These increases were partially offset by decreased Paycheck Protection Program ("PPP") loan fee accretion stemming from loan forgiveness. Net PPP loan fee accretion was $0.1 million in the second quarter of 2022 compared to $0.8 million in the linked quarter, and we expect this amount to continue to be negligible as remaining PPP loans are forgiven.

Average interest earning assets increased $130.8 million to $5.72 billion in the second quarter of 2022, when compared to the first quarter of 2022. This increase reflected average earning assets acquired in the IOFB acquisition coupled with higher volumes of debt securities and growth in the legacy MidWestOne loan portfolio.

The Company's tax equivalent net interest margin was 2.87% in the second quarter of 2022 compared to 2.79% in the linked quarter due to an increase in total interest earning asset yields, partially offset by a slight increase in funding costs. Total interest earning assets yield increased 10 bps from the linked quarter primarily as a result of an increase in the loan yield, which was partially offset by a decrease in PPP fee accretion, and an increase in the yield on taxable investment securities. The cost of interest bearing liabilities increased 3 bps to 0.45%, primarily as a result of interest bearing deposits costs of 0.31% and long-term debt costs of 4.45%, which increased 2 bps and 15 bps respectively, from the linked quarter.

Noninterest Income

Noninterest income for the second quarter of 2022 increased $0.7 million, or 6.0%, from the linked quarter. The increase was primarily due to the bargain purchase gain of $1.4 million recorded related to the IOFB acquisition, in addition to an increase of $0.2 million in card revenue. Partially offsetting the increases identified above was a decline of $0.8 million in loan revenue and a decline of $0.3 million in investment services and trust activities income. The decline in loan revenue was due to a $0.4 million decrease in mortgage origination income and a $0.3 million decline in the fair value adjustment of our mortgage servicing rights, from $2.7 million in the first quarter of 2022 to $2.4 million in the second quarter of 2022.

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

	Three Months Ended
Noninterest Income	June 30,			March 31,			June 30,
(In thousands)	2022			2022			2021
Investment services and trust activities	$	2,670		$	3,011		$	2,809
Service charges and fees		1,717			1,657			1,475
Card revenue		1,878			1,650			1,913
Loan revenue		3,523			4,293			3,151
Bank-owned life insurance		558			531			538
Investment securities gains, net		395			40			42
Other		1,606			462			290
Total noninterest income	$	12,347		$	11,644		$	10,218

Noninterest Expense

Noninterest expense for the second quarter of 2022 increased $0.4 million, or 1.4%, from the linked quarter primarily due to an increase of $0.3 million in compensation and employee benefits and an increase of $0.2 million in equipment costs. The increase in compensation and employee benefits was primarily due to increased salary costs from the IOFB acquisition. The increase in equipment expense was primarily attributable to increased maintenance costs. Offsetting these increases identified above was a decline of $0.5 million in occupancy expense, which declined primarily due to a nonrecurring write-down expense in the first quarter of 2022 that did not recur in the second quarter of 2022.

The increase in net interest income and noninterest income noted above, were the primary drivers of the improvement in the efficiency ratio, which decreased 3.89 percentage points to 56.57% from 60.46% in the linked quarter.

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

	Three Months Ended
Noninterest Expense	June 30,			March 31,				June 30,
(In thousands)	2022			2022				2021
Compensation and employee benefits	$	18,955		$	18,664			$	17,404
Occupancy expense of premises, net		2,253			2,779				2,198
Equipment		2,107			1,901				1,861
Legal and professional		2,435			2,353				1,375
Data processing		1,237			1,231				1,347
Marketing		1,157			1,029				873
Amortization of intangibles		1,283			1,227				1,341
FDIC insurance		420			420				245
Communications		266			272				371
Foreclosed assets, net		4			(112	)			136
Other		1,965			1,879				1,519
Total noninterest expense	$	32,082		$	31,643			$	28,670

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

	Three Months Ended
	June 30,			March 31,			June 30,
Merger-related Expenses	2022			2022			2021
(In thousands)
Compensation and employee benefits	$	150		$	—		$	—
Occupancy expense of premises, net		1			—			—
Equipment		6			5			—
Legal and professional		638			63			—
Data processing		38			38			—
Marketing		65			7			—
Communications		2			1			—
Other		1			14			—
Total merger-related expenses	$	901		$	128		$	—

Income Taxes

The Company's effective income tax rate increased to 24.5% in the second quarter of 2022 compared to 19.9% in the linked quarter. The higher effective income tax rate in the second quarter of 2022 was due to a change in tax law in the state of Iowa, which resulted in a one-time income tax expense of $0.8 million stemming from the re-measurement of our deferred tax assets and liabilities. The effective income tax rate for the full year 2022 is expected to be in the range of 20-22%.

BALANCE SHEET, LIQUIDITY AND CAPITAL HIGHLIGHTS	As of or for the Three Months Ended
	June 30,				March 31,				June 30,
(Dollars in millions, except per share amounts)		2022				2022				2021
Ending Balance Sheet
Total assets	$	6,442.5			$	5,960.2			$	5,749.2
Loans held for investment, net of unearned income		3,611.2				3,250.0				3,330.2
Total securities		2,402.8				2,349.8				2,072.5
Total deposits		5,537.4				5,077.7				4,792.7
Average Balance Sheet
Average total assets	$	6,079.0			$	5,914.6			$	5,851.7
Average total loans		3,326.3				3,245.4				3,396.6
Average total deposits		5,181.9				5,044.0				4,875.3
Funding and Liquidity
Short-term borrowings	$	193.9			$	181.2			$	212.3
Long-term debt		159.2				139.9				169.8
Loans to deposits ratio		65.21	%			64.01	%			69.48	%
Equity
Total shareholders' equity	$	488.8			$	504.5			$	530.3
Common equity ratio		7.59	%			8.46	%			9.22	%
Tangible common equity(1)		392.5				423.3				445.4
Tangible common equity ratio(1)		6.18	%			7.20	%			7.86	%
Per Share Data
Book value	$	31.26			$	32.15			$	33.22
Tangible book value(1)	$	25.10			$	26.98			$	27.90
(1) Non-GAAP Measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.

Loans Held for Investment

Loans held for investment, net of unearned income, increased $361.1 million, or 11.1%, to $3.61 billion from March 31, 2022. This increase reflected loans acquired in the IOFB acquisition, coupled with growth in the legacy MidWestOne loan portfolio during the second quarter of 2022.

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

Loans Held for Investment	June 30, 2022						March 31, 2022						June 30, 2021
	Balance			% of Total			Balance			% of Total			Balance			% of Total
(dollars in thousands)
Commercial and industrial	$	986,137		27.3	%		$	898,942		27.7	%		$	982,092		29.5	%
Agricultural		110,263		3.1				94,649		2.9				107,834		3.2
Commercial real estate
Construction and development		224,470		6.2				193,130		5.9				168,070		5.0
Farmland		181,820		5.0				140,846		4.3				134,877		4.1
Multifamily		239,676		6.6				259,609		8.0				255,826		7.7
Other		1,213,974		33.7				1,130,306		34.8				1,147,016		34.4
Total commercial real estate		1,859,940		51.5				1,723,891		53.0				1,705,789		51.2
Residential real estate
One-to-four family first liens		430,157		11.9				331,883		10.2				332,117		10.0
One-to-four family junior liens		148,647		4.1				131,793		4.1				136,464		4.1
Total residential real estate		578,804		16.0				463,676		14.3				468,581		14.1
Consumer		76,008		2.1				68,877		2.1				65,860		2.0
Loans held for investment, net of unearned income	$	3,611,152		100.0	%		$	3,250,035		100.0	%		$	3,330,156		100.0	%
Total commitments to extend credit	$	1,117,754					$	1,034,843					$	959,696

Credit Loss Expense & Allowance for Credit Losses

The following table shows the activity in the allowance for credit losses for the periods indicated:

	Three Months Ended												Six Months Ended
Allowance for Credit Losses Roll Forward	June 30,				March 31,				June 30,				June 30,				June 30,
(In thousands)		2022				2022				2021				2022				2021
Beginning balance	$	46,200			$	48,700			$	50,650			$	48,700			$	55,500
PCD allowance established in acquisition		3,371				—				—				3,371				—
Charge-offs		(440	)			(2,631	)			(840	)			(3,071	)			(1,843	)
Recoveries		159				409				434				568				1,121
Net charge-offs		(281	)			(2,222	)			(406	)			(2,503	)			(722	)
Credit loss (benefit) expense related to loans		3,060				(278	)			(2,244	)			2,782				(6,778	)
Ending balance	$	52,350			$	46,200			$	48,000			$	52,350			$	48,000

As of June 30, 2022, the allowance for credit losses ("ACL") was $52.4 million, or 1.45% of loans held for investment, net of unearned income, compared with $46.2 million, or 1.42% of loans held for investment, net of unearned income, at March 31, 2022. Credit loss expense for the second quarter of 2022 was $3.3 million. No credit loss expense was recorded in the first quarter of 2022. Credit loss expense in the current quarter reflected $3.1 million related to the acquired non-purchase credit deteriorated (PCD) loans and $0.2 million related to unfunded loan commitments established in the acquisition. The allowance for credit losses also included the initial allowance for credit losses of $3.4 million recorded for the PCD loans acquired.

Deposits

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

Deposit Composition	June 30, 2022						March 31, 2022						June 30, 2021
(Dollars in thousands)	Balance			% of Total			Balance			% of Total			Balance			% of Total
Noninterest bearing deposits	$	1,114,825		20.1	%		$	1,002,415		19.7	%		$	952,764		19.9	%
Interest checking deposits		1,749,748		31.7				1,601,249		31.5				1,414,942		29.6
Money market deposits		1,070,912		19.3				983,709		19.4				936,683		19.5
Savings deposits		715,829		12.9				650,314		12.8				596,199		12.4
Total non-maturity deposits		4,651,314		84.0				4,237,687		83.4				3,900,588		81.4
Time deposits of $250 and under		547,427		9.9				501,904		9.9				538,331		11.2
Time deposits over $250		338,700		6.1				338,134		6.7				353,747		7.4
Total time deposits		886,127		16.0				840,038		16.6				892,078		18.6
Total deposits	$	5,537,441		100.0	%		$	5,077,725		100.0	%		$	4,792,666		100.0	%

CREDIT RISK PROFILE

	As of or For the Three Months Ended
Highlights	June 30,				March 31,				June 30,
(Dollars in thousands)		2022				2022				2021
Credit loss expense (benefit) related to loans	$	3,060			$	(278	)		$	(2,244	)
Net charge-offs	$	281			$	2,222			$	406
Net charge-off ratio(1)		0.03	%			0.28	%			0.05	%
At period-end
Pass	$	3,402,508			$	3,041,649			$	3,102,688
Special Mention / Watch		111,893				106,241				115,414
Classified		96,751				102,145				112,054
Total loans held for investment, net	$	3,611,152			$	3,250,035			$	3,330,156
Classified loans ratio(2)		2.68	%			3.14	%			3.36	%
Nonaccrual loans held for investment	$	25,978			$	31,182			$	40,764
Accruing loans contractually past due 90 days or more		1,359				—				665
Total nonperforming loans		27,337				31,182				41,429
Foreclosed assets, net		284				273				755
Total nonperforming assets	$	27,621			$	31,455			$	42,184
Nonperforming loans ratio(3)		0.76	%			0.96	%			1.24	%
Nonperforming assets ratio(4)		0.43	%			0.53	%			0.73	%
Allowance for credit losses	$	52,350			$	46,200			$	48,000
Allowance for credit losses ratio(5)		1.45	%			1.42	%			1.44	%
Adjusted allowance for credit losses ratio(6)		1.45	%			1.42	%			1.53	%
Allowance for credit losses to nonaccrual loans ratio(7)		201.52	%			148.16	%			117.75	%
(1) Net charge-off ratio is calculated as annualized net charge-offs divided by average loans held for investment, net of unearned income, during the period.
(2) Classified loans ratio is calculated as classified loans divided by loans held for investment, net of unearned income, at the end of the period.
(3) Nonperforming loans ratio is calculated as total nonperforming loans divided by loans held for investment, net of unearned income, at the end of the period.
(4) Nonperforming assets ratio is calculated as total nonperforming assets divided by total assets at the end of the period.
(5) Allowance for credit losses ratio is calculated as allowance for credit losses divided by loans held for investment, net of unearned income, at the end of the period.
(6) Non-GAAP Measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.
(7)Allowance for credit losses to nonaccrual loans ratio is calculated as allowance for credit losses divided by nonaccrual loans at the end of the period.

During the second quarter of 2022, overall asset quality was improved. The nonperforming loans ratio declined 20 bps from the linked quarter and 48 bps from the prior year to 0.76%. In addition, the classified loans ratio declined 46 bps from the linked quarter and 68 bps from the prior year to 2.68%. Further, net charge-offs declined $1.9 million from the linked quarter.

The following table presents a roll forward of nonperforming loans for the period:

Nonperforming Loans	Nonaccrual				90+ Days Past Due & Still Accruing				Total
(Dollars in thousands)
Balance at March 31, 2022	$	31,182			$	—			$	31,182
Loans placed on nonaccrual or 90+ days past due & still accruing		1,679				1,243				2,922