MidWestOne Financial Group, Inc. Reports Financial Results for the Third Quarter of 2019

IOWA CITY, Iowa, Oct. 25, 2019 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq - MOFG) ("we", "our", or "the Company") today reported its financial results for the third quarter of 2019. Charles Funk, President and Chief Executive Officer commented, "We are beginning to realize the operational efficiencies stemming from the ATBancorp acquisition. The continued improvement in our financial results reflected the hard work put in by so many to make that transaction a reality."

Net income for the third quarter of 2019 was $12.3 million, or $0.76 per diluted common share, compared to net income of $10.7 million, or $0.72 per diluted common share, for the second quarter of 2019 (the "linked quarter"). Mr. Funk continued, "This was the best quarter in our history. Notably, merger-related expenses of $2.5 million lowered our third quarter earnings per share by $0.12."

FINANCIAL HIGHLIGHTS

Acquisition of ATBancorp

On May 1, 2019, we acquired ATBancorp. The table below summarizes the amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed:

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income increased in the third quarter of 2019 to $43.3 million from $34.8 million in the linked quarter due to both higher average earning asset volumes and higher tax equivalent net interest margin ("NIM"). Average earning assets increased $334.7 million as the linked quarter balances reflected only two months of acquired ATBancorp assets. Further, discount accretion from acquired loans added $7.2 million to net interest income in the current quarter compared to $2.2 million in the linked quarter. Acquired loan prepayment and renewal activity added approximately $2.3 million to discount accretion this quarter.

The tax equivalent net interest margin increased to 4.15% for the third quarter of 2019 from 3.68% in the linked quarter as increased loan yields, driven by loan purchase discount accretion, and marginally lower funding costs. The loan yield was 5.59% for the third quarter of 2019 compared to 5.10% for the linked quarter. Loan purchase discount accretion added 81 bps to loan yields and 69 bps to the NIM in the current quarter compared to 28 bps and 23 bps, respectively, in the linked quarter. The cost of average total deposits in the third quarter of 2019 was 0.89% compared to 0.92% in the linked quarter. The decrease reflects the 4 basis point reduction attributable to deposit purchase accounting accretion related to the merger.

Mr. Funk continued, "While loan discount accretion income boosted our margin in the quarter, our 'core margin' also held up very well, aided by the asset mix change after acquiring ATBancorp."

Noninterest Income

Noninterest income for the third quarter of 2019 decreased $0.8 million, or 9%, from the linked quarter. The decrease was due primarily to ‘Other' income in the linked quarter reflecting a gain of $1.1 million from the sale of assets of MidWestOne Insurance Services, Inc. In addition, ‘Loan revenue' included a $657 thousand negative valuation adjustment to the Company's mortgage servicing right this quarter compared to a $507 thousand adjustment in the linked quarter. Partially offsetting these decreases, ‘Investment services and trust activities' increased $449 thousand due to increased trust income following the full integration of the ATBancorp operations.

"Trust and investment services are having very good years and we are also benefiting from increased mortgage loan activity," said Mr. Funk.

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

Noninterest Expense

Noninterest expense for the third quarter of 2019 increased $2.4 million, or 8.27%, from the linked quarter as the linked quarter reflected only two months of ATBancorp results. Pre-tax merger-related expenses were $2.5 million for the third quarter of 2019 compared to $3.1 million in the linked quarter.

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 effective income tax rate was 20.9% for the third quarter of 2019 and 23.2% for the linked quarter. The effective tax rate for the third quarter of 2019 was lower due primarily to the impact from certain non-deductible merger related expenses and other merger-related items in the second quarter of 2019.

BALANCE SHEET HIGHLIGHTS

Loans Held for Investment

Loans held for investment, net of unearned income, increased $1.13 billion, or 46.9%, to $3.52 billion, from December 31, 2018, primarily due to the merger. At September 30, 2019, commercial real estate loans comprised approximately 52% of the loan portfolio. Commercial and industrial loans was the next largest category at 25% of total loans, followed by residential real estate loans at 17%, agricultural loans at 4%, and consumer loans at 2%.

"Our loan portfolio has continued to experience higher than expected pay downs in 2019, and this continued in the third quarter," stated Mr. Funk.

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

Provision and Allowance for Loan Losses

For the third quarter of 2019, the provision for loan losses was $4.3 million, an increase of $3.6 million from the linked quarter. The increased provision in the third quarter of 2019 was primarily due to the application of the Company's standard loss reserve factors to the agricultural portfolio loans and renewal of non-agricultural loans acquired in the merger.

"At the beginning of 2019 we gave guidance of a $4 to $6 million provision for loan losses at legacy MidWestOne. We believe the Company will be well within that range at year-end," said Mr. Funk.

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

Deposits

Total deposits at September 30, 2019, were $3.71 billion, an increase of $1.10 billion from December 31, 2018, due primarily to the merger. The mix of deposits reflected increases between December 31, 2018 and September 30, 2019 of $241.0 million, or 35.2%, in interest checking deposits, $234.6 million, or 53.4%, in noninterest bearing deposits, $234.2 million, or 32.4%, in time deposits, $207.8 million, or 37.4% in money market deposits, and $179.2 million, or 85.2%, in savings deposits.

Mr. Funk noted, "The decline in deposits from the linked quarter stemmed principally from net runoff experienced in the legacy ATBancorp footprint. That net runoff reflected, in part, our efforts at rationalizing our deposit costs in those markets to defend our net interest margin. Notably, that net runoff was partially offset by excellent net deposit growth elsewhere in the Company. Thus, we were generally pleased with our deposit performance through the first nine months of 2019."

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

CREDIT QUALITY

The following table presents a roll forward of nonperforming loans as of the dates indicated:

At September 30, 2019, net foreclosed assets totaled $4.4 million, up from $535 thousand at December 31, 2018, primarily due to the merger. As of September 30, 2019, the allowance for loan losses was $31.5 million, or 0.89% of loans held for investment, net of unearned income, compared with $29.3 million, or 1.22% at December 31, 2018.

"We recorded a $4.3 million provision for loan losses this quarter, $3.0 million of which was related to the acquired ATBancorp loan portfolio. Notably, the provision related to the ATBancorp loans was not the result of deterioration in the overall quality of that portfolio, but rather a function of transitioning from the initial measurement of the acquired loans to our standard allowance methodology. We continue to make progress in identifying and resolving our problem loans," concluded Mr. Funk.

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

CORPORATE UPDATE

Share Repurchase Program

During the third quarter of 2019 the Company repurchased 41,426 shares at an average price of $29.37 and a total cost of $1.2 million. At September 30, 2019, $4.5 million remained available to repurchase shares under the Company's current share repurchase program.

Cash Dividend Announcement

On October 22, 2019, the Company's board of directors declared a quarterly cash dividend of $0.2025 per common share. The dividend is payable December 16, 2019, to shareholders of record at the close of business on December 2, 2019. At this quarterly rate, the indicated annual cash dividend is equal to $0.81 per common share.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m., CDT, on Friday, October 25, 2019. 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 January 25, 2020, by calling 877-344-7529 and using the replay access code of 10126193. A transcript of the call will also be available on the company's web site (www.midwestone.com) within three business days of the event.

ABOUT MIDWESTONE FINANCIAL GROUP, INC.

MidWestOne Financial Group, Inc. is a financial holding company headquartered in Iowa City, Iowa. MidWestOne Financial 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.com. MidWestOne Financial 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) 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 provision for loan losses, and a reduction in net earnings; (2) the risks related to mergers, including our pending merger with ATBancorp, 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; (3) our management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income; (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) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators and changes in the scope and cost of Federal Deposit Insurance Corporation insurance and other coverages; (8) the ability to attract and retain key executives and employees experienced in banking and financial services; (9) the sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio; (10) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (11) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (12) 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, and other financial institutions operating in our markets or elsewhere or providing services similar to ours; (13) the failure of assumptions underlying the establishment of allowances for loan losses and estimation of values of collateral and various financial assets and liabilities; (14) volatility of rate-sensitive deposits; (15) operational risks, including data processing system failures or fraud; (16) asset/liability matching risks and liquidity risks; (17) the costs, effects and outcomes of existing or future litigation; (18) changes in general economic or industry conditions, nationally, internationally or in the communities in which we conduct business; (19) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board; (20) war or terrorist activities which may cause further deterioration in the economy or cause instability in credit markets; (21) cyber-attacks; (22) the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and (23) other risk factors detailed from time to time in Securities and Exchange Commission filings made by the Company.

Certain reclassifications have been made to prior periods' consolidated financial statements to present them on a basis comparable with the current period's consolidated financial statements.

Non-GAAP Measures

This earnings release contains non-GAAP measures for tangible book value per share, tangible equity to tangible assets ratio, return on average tangible equity, net interest margin (tax equivalent), loan yield (tax equivalent) and the efficiency ratio. Management believes these measures provide investors with useful information regarding the Company's profitability, financial condition and capital adequacy, consistent with how management evaluates the Company's financial performance. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP measure.