Second Quarter Summary ⁽¹⁾

• Net income for the second quarter was $17.3 million, or $1.08 per diluted common share.
  • Total revenue, net of interest expense, of $48.7 million.
  • Credit loss benefit of $2.1 million.
  • Noninterest expense of $28.7 million.
• Excluding PPP loans, commercial loans were $2.61 billion,⁽²⁾ as compared to $2.56 billion⁽²⁾ for the first quarter of 2021 (the "linked quarter"), an increase of 2.2%.
• Average total deposits were $4.88 billion, as compared to $4.57 billion for the linked quarter, an increase of 6.6%, while cost of average total deposits decreased to 0.28%.
• Efficiency ratio of 54.83%⁽²⁾.
• Nonperforming assets declined 8.0% and the net charge-off ratio was 5 bps.

IOWA CITY, Iowa, July 22, 2021 (GLOBE NEWSWIRE) -- MidWestOne Financial Group, Inc. (Nasdaq: MOFG) (“we”, “our”, or the "Company”) today reported net income for the second quarter of 2021 of $17.3 million, or $1.08 per diluted common share, compared to net income of $21.6 million, or $1.35 per diluted common share, for the linked quarter.

CEO COMMENTARY

Charles Funk, Chief Executive Officer of the Company, commented, "This was another solid quarter for our Company with good core loan growth, improved asset quality, and a nice build in our tangible book value. Despite the continuation of very low credit line usage, our commercial bankers were able to produce a quarter of respectable core loan growth although potential headwinds remain."

"The low interest rate environment continues to pressure commercial bank margins, and we are not immune. Our noninterest income results reflect a decrease in mortgage gain on sale margins; however, we continue to be running at an 'above normal' rate of mortgage originations. Our wealth management group continues to produce good results as well."

"With respect to capital, we believe our stock currently represents a compelling value, and we are selectively repurchasing our stock at opportune moments. We returned $4.7 million of capital to shareholders during the second quarter of 2021, including $1.1 million from such stock repurchases."

"Finally, we commend our fine staff for closing nearly one-half of a billion dollars of PPP loans. For some borrowers, these funds were literally the difference between survival and failure. Our bankers deserve much credit for their long hours and perseverance over the past twelve months."

¹Second Quarter Summary compares to the linked quarter unless noted.
²Non-GAAP measure. See the Non-GAAP Measures section for a reconciliation to the most directly comparable GAAP measure.

COVID-19 UPDATE

Loan Modifications

As of June 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic totaled $21.0 million, an increase of 26% from $16.7 million at March 31, 2021. The increase from the end of the first quarter of 2021 was due to an additional deferral that was granted for one large commercial real estate loan. Of those modified loans at June 30, 2021, $0.7 million were in their first deferral period while $20.3 million were in a second deferral period.

SBA Paycheck Protection Program (PPP) Loans

The PPP Extension Act of 2021 set a deadline for PPP applications of May 31, 2021. The following table presents PPP loan measures as of the dates indicated:

Vulnerable Industries

We believe loans to certain industries are uniquely vulnerable to credit deterioration stemming from the COVID-19 pandemic. The following table presents our exposure to those industries as of the dates indicated.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income of $38.5 million in the second quarter of 2021 was relatively flat compared to $38.6 million in the first quarter of 2021 and reflected the income benefit from higher average earning asset balances in the second quarter of 2021 offset by lower PPP loan fee income and loan purchase discount accretion. Average interest earning assets increased $323.6 million to $5.52 billion in the second quarter of 2021, compared to the first quarter of 2021, as cash on hand and cash inflows from deposit activity was used to purchase debt securities and fund loan originations. Net PPP loan fee accretion was $2.5 million in the second quarter of 2021 compared to $3.7 million in the linked quarter. Loan purchase discount accretion was $0.9 million in the second quarter of 2021, down from $1.1 million in the linked quarter.

The Company's tax equivalent net interest margin was 2.88% in the second quarter of 2021 compared to 3.10% in the linked quarter as lower earning asset yields more than offset reduced funding costs. Total earning asset yields decreased 28 bps from the linked quarter due primarily to the decline in PPP loan fee income described above. The cost of interest bearing liabilities decreased 7 bps to 0.49%, primarily as a result of interest bearing deposit costs of 0.35%, which declined 5 bps from the linked quarter.

Noninterest Income

Noninterest income for the second quarter of 2021 decreased $1.6 million, or 14%, from the linked quarter. The decrease was primarily due to a $1.6 million decrease in loan revenue, coupled with a decrease of $0.4 million in other noninterest income. The decline in loan revenue included a $0.6 million reduction in mortgage origination fees from lower gain on sale margins as well as a $0.6 million decrease stemming from the fair value of our mortgage servicing rights. These decreases were partially offset by a $0.4 million increase in card revenue, which was primarily due to increased transaction volumes.

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

Noninterest Expense

Noninterest expense for the second quarter of 2021 increased $1.0 million, or 3.5%, from the linked quarter primarily due to increases in legal and professional, compensation and employee benefits, and other noninterest expenses of $0.6 million, $0.5 million, and $0.4 million, respectively. The increase in legal and professional expenses was due primarily to a legal insurance recovery of $0.4 million in the first quarter of 2021 that did not recur in the second quarter of 2021. The increase in compensation and employee benefits was due primarily to a $0.6 million reduction in the benefit from SBA PPP loan origination costs which are deferred and amortized over the life of the loan to which they relate. The increased noninterest expenses, as well as the decline in noninterest income noted above, were the primary drivers of the increase in the efficiency ratio, which increased 4.06 percentage points to 54.83%, as compared to the linked quarter efficiency ratio of 50.77%.

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

Income Taxes

The effective income tax rate was 22.2% in the second quarter of 2021 compared to 21.2% in the linked quarter. The effective income tax rate in the second quarter of 2021 reflected an increase in income taxes based on the statutory rate and state income taxes, net of federal income tax benefits, primarily due to the net income earned during the quarter, offset by benefits related to tax-exempt interest and bank-owned life insurance. The effective income tax rate for the full year 2021 is expected to be in the range of 20-22%.

Loans Held for Investment

Loans held for investment, net of unearned income, decreased $28.0 million, or 1%, to $3.33 billion from March 31, 2021, driven primarily by PPP loan forgiveness and lower line utilization.

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

Credit Loss Expense & Allowance for Credit Losses

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

As of June 30, 2021, the allowance for credit losses ("ACL") was $48.0 million, or 1.44% of loans held for investment, net of unearned income, compared with $50.7 million, or 1.51%, at March 31, 2021. After excluding net PPP loans, the ACL as a percentage of loans held for investment, net of unearned income, decreased to 1.53%⁽¹⁾ as of June 30, 2021, from 1.63%⁽¹⁾ at March 31, 2021. The decline in the ACL during the second quarter reflected overall improvements in the economic forecast and an improved credit profile outlook when compared to the linked quarter.

⁽¹⁾Non-GAAP Measure. See the Non-GAAPMeasures section for a reconciliation to the most directly comparable GAAP measure.

Deposits

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

CREDIT RISK PROFILE

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

CAPITAL

Effective March 31, 2020, we elected the 5-year phase-in option allowed under the interim final rule (IFR) issued by the federal banking regulatory agencies that delays the estimated impact on regulatory capital stemming from the implementation of the current expected credit losses (CECL) accounting standard. 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.

CORPORATE UPDATE

Share Repurchase Program

For the period April 1, 2021 through June 22, 2021, under the prior repurchase program that was announced on August 20, 2019, which allowed for the repurchase of up to $10.0 million of common stock, the Company repurchased 20,985 shares of its common stock at an average price of $29.66 per share and a total cost of $0.6 million, leaving $2.1 million of shares that were available to be repurchased under that repurchase program.

On June 22, 2021, the Board of Directors of the Company approved a new share 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, 2023. For the period June 23, 2021 through June 30, 2021, the Company repurchased 17,790 shares of its common stock at an average price of $29.53 per share and a total cost of $0.5 million. At June 30, 2021, $14.5 million remained available to repurchase shares under the Company's new share repurchase program.

Cash Dividend Announcement

The Board of Directors of the Company declared a cash dividend of $0.2250 per common share on July 20, 2021. The dividend is payable September 15, 2021, to shareholders of record at the close of business on September 1, 2021.

Subordinated Debenture Redemption

On May 31, 2021, the Company exercised its option to redeem, in whole, $10.8 million of outstanding subordinated debentures (the "ATB Debentures") that were assumed upon the Company's acquisition of ATBancorp. The ATB Debentures had a stated maturity of May 31, 2023 and bore interest at a fixed annual rate of 6.5%. The amount of ATB Debentures qualifying as tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m. CT on Friday, July 23, 2021. 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 November 4, 2021, by calling 877-344-7529 and using the replay access code of 10157115. 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.

MidWestOne Financial Group, Inc. is a financial holding company headquartered in Iowa City, Iowa. MidWestOne 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.bank. 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 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) government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Coronavirus Aid, Relief, and Economic Security Act, the Consolidated Appropriations Act, 2021 and the American Rescue Plan; (3) the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges; (4) 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; (5) the effects of interest rates, including on our net income and the value of our securities portfolio; (6) 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; (7) fluctuations in the value of our investment securities; (8) governmental monetary and fiscal policies; (9) 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; (10) legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators; (11) the ability to attract and retain key executives and employees experienced in banking and financial services; (12) the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio; (13) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (14) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (15) 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; (16) the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities; (17) 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; (18) volatility of rate-sensitive deposits; (19) operational risks, including data processing system failures or fraud; (20) asset/liability matching risks and liquidity risks; (21) the costs, effects and outcomes of existing or future litigation; (22) changes in general economic, political, or industry conditions, nationally, internationally or in the communities in which we conduct business; (23) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board; (24) 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; (25) the effects of cyber-attacks; (26) the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; 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 AND YEAR TO DATE CONSOLIDATED STATEMENTS OF INCOME

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL STATISTICS

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

(1)  Average balance includes nonaccrual loans.
(2)  Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)  Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $2.3 million, $3.5 million, and $748 thousand for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. Loan purchase discount accretion was $873 thousand, $1.1 million, and $2.6 million for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. Tax equivalent adjustments were $519 thousand, $531 thousand, and $507 thousand for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)  Interest income includes tax equivalent adjustments of $647 thousand, $648 thousand, and $482 thousand for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)  Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)  Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.

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

(1)  Average balance includes nonaccrual loans.
(2)  Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)  Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $5.8 million and $626 thousand for the six months ended June 30, 2021 and June 30, 2020, respectively. Loan purchase discount accretion was $2.0 million and $5.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Tax equivalent adjustments were $1.0 million and $1.0 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)  Interest income includes tax equivalent adjustments of $1.3 million and $0.9 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)  Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)  Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.

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), core yield on loans, efficiency ratio, adjusted allowance for credit losses ratio, core loans, and core commercial loans. 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.

(1)  Tangible common equity divided by shares outstanding.
(2)  Tangible common equity divided by tangible assets.