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

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MidWestOne Bank
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