MidWestOne Financial Group, Inc. Reports Results for the First Quarter 2020

First Quarter Summary¹

• Through April 28, 2020, approved approximately $332 million of PPP loans for 2,190 customers.
• Net Loss of $2.0 million, or a Loss of $0.12 Per Diluted Share
  °  Credit Loss Expense of $21.7 million
  °  Pre-tax, Pre-provision Net Revenue² of $17.6 million, an increase of $5.4 million
  °  Noninterest Income increased 12% to $10.2 million
  °  Noninterest Expenses decreased 18% to $30.0 million
• Ending deposit balances rose $131.2 million, or 4%, from year-end 2019

IOWA CITY, Iowa, April 30, 2020 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq - MOFG) ("we", "our", or the "Company") today reported net loss for the first quarter of 2020 of $2.0 million, or $0.12 per diluted common share, compared to net income of $13.4 million, or $0.83 per diluted common share, for the fourth quarter of 2019 (the "linked quarter"). Credit loss expense for the first quarter was $21.7 million, which reduced diluted earnings per common share by approximately $0.99 for the first quarter of 2020.

Charles Funk, President and Chief Executive Officer, commented, "The quarter was dominated by the activity, which accelerated in March, to prepare and deal with the effects of the COVID-19 pandemic on our employees, customers and communities. We had many bankers in April working 18 hour days to assure that our customers with PPP applications were promptly served. We also implemented CECL as a means of calculating our necessary credit loss expense. Our credit loss expense of $21.7 million is related to the worsening forecast for the U.S. and our regional economy due to the significant slowing we've seen in current and forecasted economic activity. We saw a number of positive elements during the quarter, including excellent deposit growth, very good fee income across our footprint, and improved expense management."

MIDWESTONE'S RESPONSE TO COVID-19

MidWestOne has activated our Business Continuity Plan and taken actions to support the health, safety, and well-being of our communities, customers, and employees.

SUPPORTING OUR EMPLOYEES

MidWestOne has taken steps to support our employees:

• Ensuring the safety of our workforce through social distancing throughout our locations, servicing customers via drive-up and closure of bank lobbies, significant expansion of work from home capabilities, increased cleaning services, and implementation of business travel restrictions.
  
  
• Providing financial assistance by providing pandemic pay benefits to employees to care for children due to school or daycare closures and for COVID-19 self-isolation, and by providing accommodations for employees with pre-existing health conditions through pandemic pay benefits or remote work arrangements.

SUPPORTING OUR CUSTOMERS

To assist our consumer and business clients during this time of need, MidWestOne is providing relief in several ways:

• Implementing loan payment deferral program. Through April 28, 2020, we have approved approximately $346 million in loan payment deferrals.
  
  
• Aiding our clients through administration of the Small Business Administration's Paycheck Protection Program (PPP). Through April 28, 2020, we have approved approximately $332 million in total loan volume through the PPP for 2,190 customers.
  
  
• Aiding our clients through administration of the CARES Act SBA payment forgiveness program. Through April 23, 2020, over 120 loans have been enrolled with monthly payment relief totaling more than $600,000.
  
  
• Digitally enabling our customers. Online banking user sessions and online account openings increased 26% and 34%, respectively^1.

SUPPORTING OUR COMMUNITIES

MidWestOne is committing an additional $150,000 to our annual charitable giving to help meet the needs of our communities impacted by COVID-19. As a community bank, MidWestOne takes pride in making these contributions. In addition, MidWestOne has focused on supporting our local businesses, including by using local restaurants to provide food for employee recognition lunches for MidWestOne employees working on-site.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased in the first quarter of 2020 to $37.4 million from $39.6 million in the linked quarter, reflecting net interest margin compression and lower loan purchase discount accretion. The tax equivalent net interest margin decreased 19 basis points ("bps") to 3.60% for the first quarter of 2020 from 3.79% in the linked quarter. Loan purchase discount accretion added $3.0 million to net interest income in the first quarter compared to $3.9 million in the linked quarter. The Company's core net interest margin, which excludes loan purchase discount accretion, compressed 11 bps from the linked quarter as lower asset yields were only partially offset by reduced funding costs. Finally, an asset-side mix shift contributed to the decrease in net interest income.

Mr. Funk continued, "Part of the decrease in net interest income compared to the prior quarter was attributable to loan purchase discount accretion. In addition, core net interest margin compression reflected a timing difference between the market reduction in interest rates on variable rate loans and the repricing of our deposit portfolios. Certain variable rate loans repriced lower twice during the month of March as a result of the decreases of 50 bps and 100 bps in the target federal funds rate by the Federal Reserve Board's Federal Open Market Committee. However, certain deposit rates were not adjusted until the end of the month. We expect to see net interest margin improvement in the second quarter as our funding costs are adjusted."

_{¹Online banking user sessions data compares April 25, 2020 to March 1, 2020. Online Account openings data compares March 2020 to February 2020.}

Noninterest Income

Noninterest income for the first quarter of 2020 increased $1.1 million, or 12%, from the linked quarter. The increase was due primarily to an increase of $1.6 million in the ‘Other' income line item. The 'Other' line item reflected an increase from the linked quarter of $2.0 million in income from our commercial loan swap program. Partially offsetting this increase, loan revenue declined $634 thousand due primarily to a $447 thousand decrease in the fair value of mortgage servicing rights.

"It was a strong quarter throughout our lines of business that generate fees. Wealth management had consistent performance throughout the quarter, as did our Home Mortgage Center. Commercial banking swap revenues had the best quarter since we implemented this product for our customers. The biggest negative in this segment was the fair value adjustment in mortgage servicing rights," said Mr. Funk.

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

Noninterest Expense

Noninterest expense for the first quarter of 2020 decreased $6.4 million, or 18%, from the linked quarter due primarily to a decrease in compensation and employee benefits. The decrease in compensation and employee benefits is primarily attributable to the decrease in merger-related expenses related to the Company's prior merger with ATBancorp. In addition, other noninterest expense decreased primarily due to a reduction in tax credit partnership investment amortization, which was $401 thousand in the first quarter of 2020 compared to $3.9 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 Company recognized a net income tax benefit of $2.2 million in the first quarter of 2020 compared to a net income tax benefit of $1.8 million in the linked quarter due primarily to the net loss during the first quarter of 2020 and the recognition of $383 thousand of tax credits during the the first quarter of 2020.

Loans Held for Investment

Loans held for investment, net of unearned income, decreased $25.5 million, or 1%, to $3.43 billion from December 31, 2019, primarily due to continued pay downs. At March 31, 2020, 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 16%, agricultural loans at 4%, and consumer loans at 2% of total loans.

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

"Although total loans fell from year-end, commercial and industrial loans showed a large increase and agricultural loans showed an increase as lines of credit were drawn on in anticipation of spring planting. Construction and development loans were down, which is partially seasonal, and pay-downs occurred in the multi-family portfolio. The largest decrease occurred in the 1-4 family residential portfolio as in-house loans were refinanced into the secondary market due to historically low interest rates," stated Mr. Funk.

Credit Loss Expense and Allowance for Credit Losses

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

Effective January 1, 2020, the Company adopted the Financial Instruments - Credit Losses (CECL) accounting guidance. The adoption of this guidance established a single allowance framework for all financial assets carried at amortized cost and certain off-balance sheet credit exposures. The framework requires that management's estimate reflects credit losses over the full remaining expected life of each credit and considers expected future changes in macroeconomic conditions. The adoption resulted in the recognition on January 1, 2020 of cumulative effect adjustments of $4.0 million related to the allowance for credit losses (ACL) and $3.4 million related to the liability for off-balance sheet credit exposures.

As of March 31, 2020, the ACL was $51.2 million, or 1.49% of loans held for investment, net of unearned income, compared with $29.1 million, or 0.84%, at December 31, 2019. The increase in the ratio was due to an increased credit loss expense driven by deterioration in current and forecasted economic conditions, largely as a result of the COVID-19 pandemic.  

As of March 31, 2020, the liability for off-balance sheet credit exposures was $5.8 million and was included in 'Other liabilities' on the balance sheet. The increase in the liability for off-balance-sheet credit exposures was due to credit loss expense of $2.4 million in the first quarter driven by deterioration in current and forecasted economic conditions, largely as a result of the COVID-19 pandemic.

Deposits

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

Mr. Funk noted, "Once again, it was a very strong deposit quarter for the bank. Some of this growth is seasonal, but real progress is being made in developing long-term core funding relationships."

CREDIT QUALITY

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

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

Mr. Funk noted, "Total nonperforming assets (NPAs) were relatively flat quarter to quarter. During the first quarter, we did make progress in our collection efforts on several large NPAs, but unfortunately we expect that the current pandemic crisis will likely stall collection efforts that were scheduled to occur in the second quarter."

CAPITAL

Effective March 31, 2020, we elected the 5-year phase-in option allowed under the interim final rule (IFR) recently issued by the federal banking regulatory agencies that delays the estimated impact on regulatory capital stemming from the implementation of CECL. 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. This cumulative amount will then be reduced from capital over the subsequent three-year period.

The following table presents the regulatory capital ratios of the Company and its banking subsidiary as of the dates indicated:

CORPORATE UPDATE

Share Repurchase Program

During the first quarter of 2020, the Company repurchased 95,340 shares of its common stock at an average price of $27.32 per share and a total cost of $2.6 million. At March 31, 2020, $6.4 million remained available to repurchase shares under the Company's current share repurchase program.

"We discontinued repurchases of our stock in mid-March and currently have no near-term plans to resume repurchases until we have more clarity on the economic outlook," Mr. Funk concluded.

Cash Dividend Announcement

On April 29, 2020, the Company's board of directors declared a quarterly cash dividend of $0.22 per common share. The dividend is payable June 15, 2020, to shareholders of record at the close of business on June 1, 2020.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, May 1, 2020. 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 July 31, 2020, by calling 877-344-7529 and using the replay access code of 10136657. 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.

INVESTOR PRESENTATION

MidWestOne has prepared presentation materials (the "Investor Presentation") that management intends to use during its First Quarter 2020 conference call on May 1, 2020. These materials have been furnished to the U.S. Securities and Exchange Commission concurrently with this press release, and are also available on MidWestOne's website at www.midwestonefinancial.com.

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 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 potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic; (2) 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; (3) the effects of 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 benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR; (8) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators; (9) the ability to attract and retain key executives and employees experienced in banking and financial services; (10) the sufficiency of the allowance for loan 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 loan losses and estimation of values of collateral and various financial assets and liabilities; (15) the risks of mergers, 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; (16) volatility of rate-sensitive deposits; (17) operational risks, including data processing system failures or fraud; (18) asset/liability matching risks and liquidity risks; (19) the costs, effects and outcomes of existing or future litigation; (20) changes in general economic, political, or industry conditions, nationally, internationally or in the communities in which we conduct business; (21) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board, such as the implementation of CECL; (22) 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; (23) the effects of cyber-attacks; (24) the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and (25) other risk factors detailed from time to time in Securities and Exchange Commission filings made by the Company.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF INCOME

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

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

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
AVERAGE BALANCE SHEET AND YIELD ANALYSIS

Non-GAAP Measures

This earnings release contains non-GAAP measures for tangible common equity, tangible book value per share, tangible common equity ratio, return on average tangible equity, net interest margin (tax equivalent), core net interest margin, loan yield (tax equivalent), efficiency ratio, and pre-tax pre-provision net revenue. 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.