MOFG MidWestOne Financial Group

IOWA CITY, Iowa, Oct. 25, 2018 /PRNewswire/ -- MidWestOne Financial Group, Inc. (Nasdaq - MOFG) today reported its financial results for the third quarter of 2018. Net income for the third quarter of 2018 was $6.8 million, or $0.55 per diluted common share, compared to net income of $8.2 million, or $0.67 per diluted common share, for the second quarter of 2018 (the "linked quarter") and net income of $6.3 million, or $0.52 per diluted common share for the prior year period. The decrease in net income from the linked quarter was primarily due to higher noninterest expense partially offset by higher noninterest income and a lower provision for loan losses. The increase from the prior year period was primarily due to a lower provision for loan losses partially offset by lower net interest income and higher noninterest expense. Noninterest expense during the quarter was negatively impacted by the following:

• $605 thousand of professional fees related to our planned merger with ATBancorp;
• $585 thousand of occupancy expenses related to the write-down of a former branch facility; and
• $274 thousand in compensation costs stemming from the retirement of the Company's Chief Credit Officer, which was effective August 31, 2018.

The combination of those charges reduced diluted earnings per share by approximately $0.10.

"Third quarter results were impacted by several items - some were related to the recently announced ATBancorp transaction and others were non-recurring expenses," Charles Funk, President and CEO, commented. "Our underlying business fundamentals remain solid. Although we experienced lower than expected loan growth in the third quarter, we expect a rebound in the fourth quarter."

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income decreased slightly in the third quarter of 2018 to $26.4 million from $26.6 million in the linked quarter and $26.5 million in the prior year period. Loan interest income increased primarily due to the effect of higher loan volumes but was negatively impacted by the reversal of $313 thousand from nonaccrual loans, which resulted in a 4 basis point drop in the quarter's net interest margin. In addition, discount accretion from acquired loans decreased to $605 thousand from $783 thousand in the linked quarter and $1.3 million in the prior year period.

The cost of average total deposits in the third quarter of 2018, was 0.70% compared to 0.62% and 0.46% in the linked and prior year periods, respectively. The increase reflects the higher rates paid to attract and retain deposits in light of recent market rate increases and the competitive market for deposits.

The tax equivalent net interest margin decreased to 3.56% from 3.65% in the linked period and 3.85% in the prior year period as increases in the cost of interest-bearing liabilities outpaced the benefit from higher average loan rates. In addition, the current year margins reflect the impact from the reduction in the federal income tax rate from 35% to 21%.

Mr. Funk commented, "Deposit competition remains intense. That said, our new business development activity in deposit generation has increased over the past thirty days. The net interest margin was negatively impacted by a reversal of interest, primarily from two loans placed on nonaccrual during the period."

Provision for Loan Losses

For the third quarter of 2018, the provision for loan losses was $950 thousand, a decrease of $300 thousand and $3.4 million from the linked and prior year periods, respectively. The decreased provision from the prior year period was primarily due to the recognition of individual impairments against certain large credits last year with no similarly large impairments in the third quarter of 2018.

Noninterest Income

Noninterest income for the third quarter of 2018 increased $497 thousand, or 9.1%, from the linked quarter and was flat from the prior year period. The increase from the linked quarter was primarily due to gains recognized in connection with the sales of certain tax-exempt municipal securities and certain foreclosed assets. The investment security sales were completed to take advantage of favorable market pricing for those securities. From the prior year period, trust, investment and insurance fees increased $72 thousand, or 5.0%, to $1.5 million for the third quarter of 2018 primarily from increased trust services activity. Service charges and fees on deposit accounts decreased $147 thousand, or 11.4%, to $1.1 million primarily from lower overdraft charges on deposit accounts. Loan origination and servicing fees reflected the lower level of mortgage loans originated and sold on the secondary market which was a result of the general decrease in mortgage activity in the Company's markets.

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

Noninterest Expense

Noninterest expense for the third quarter of 2018 increased $2.3 million, or 11%, from the linked quarter. Linked quarter increases were driven by salaries and employee benefits, occupancy charges and professional fees. Salaries and employee benefits increased $826 thousand primarily from increased incentives and commissions of $272 thousand, approximately $274 thousand related to the retirement of the Company's Chief Credit Officer, and employee relocation costs of $100 thousand. Occupancy and equipment, net reflected the $585 thousand write-down of a former Minnesota branch facility. Finally, professional fees were impacted by $605 thousand of costs related to our planned merger with ATBancorp and increased credit-related legal fees.

Noninterest expense increased $3.1 million from the prior year period. Salaries and employee benefits increased $1.0 million, or 8.4%, due to annual salary adjustments and the compensation-related items described above. Professional fees increased $928 thousand, or 99.5%, from the prior year period mainly due to the $605 thousand of ATBancorp merger-related charges, and credit-related legal fees. Occupancy and equipment expense, net, increased $965 thousand, or 32.3%, to $4.0 million from the third quarter of 2017, due primarily to increased building rental and depreciation expenses as well as the aforementioned branch facility write-down. Partially offsetting these increases, amortization of intangible asset expense decreased $212 thousand between the two periods as those intangibles are amortized on an accelerated basis.

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

Income Taxes

Income tax expense was $1.8 million for the third quarter of 2018 compared to $1.9 million for the same period in 2017. The decrease in income tax expense was primarily due to the reduction in the maximum corporate federal income tax rate to 21% for 2018 compared to 35% for 2017 as a result of the Tax Cuts and Jobs Act enacted by the U.S. government on December 22, 2017.

BALANCE SHEET HIGHLIGHTS

Loans Held for Investment

Loans held for investment, net of unearned income, increased $91.0 million, or 4.0%, from $2.29 billion at December 31, 2017, to $2.38 billion at September 30, 2018. Loan portfolio segments experiencing the largest increases were commercial real estate and commercial and industrial. As of September 30, 2018, commercial real estate loans comprised approximately 53% of the loan portfolio. Commercial and industrial loans was the next largest category at 22% of total loans, followed by residential real estate loans at 19%, agricultural loans at 4%, and consumer loans at 2%.

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

Allowance for Loan Losses

The following table shows the changes to the allowance for loan losses for the periods indicated:

Deposits and Borrowings

Total deposits at September 30, 2018, were $2.63 billion, an increase of $26.9 million from December 31, 2017. The mix of deposits saw increases between December 31, 2017 and September 30, 2018 of $23.4 million, or 3.3%, in certificates of deposit, and $8.8 million, or 0.7%, in interest-bearing checking deposits. These increases were partially offset by a decrease of $3.4 million, or 0.7%, in non-interest-bearing demand deposits, and $1.8 million, or 0.9%, in savings deposits between the two dates.

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

Between December 31, 2017 and September 30, 2018, federal funds purchased rose $18.1 million, to $19.1 million compared to $1.0 million, while securities sold under agreements to repurchase declined $27.3 million, due to normal cash need fluctuations by customers. FHLB borrowings rose $28.0 million or 24.3%, between the two dates. The overall increase in borrowings was the result of growth in the loan portfolio exceeding deposit growth. At September 30, 2018, long-term debt had an outstanding balance of $8.8 million, a decrease of $3.8 million, or 30.0%, from December 31, 2017, due to normal scheduled repayments.

CREDIT QUALITY

Nonaccrual loans increased $6.1 million between December 31, 2017 and September 30, 2018, primarily due to $8.7 million being added to nonaccrual status, partially offset by $1.8 million of payments and net charge-offs of $0.8 million. The balance of loans modified in a troubled debt restructuring ("TDRs") decreased $1.5 million from year-end 2017, primarily due to payments of  $1.2 million, and $265 thousand of performing TDRs transferred to non-disclosed status. Loans 90 days or more past due and still accruing interest were largely unchanged between December 31, 2017, and September 30, 2018. At September 30, 2018, net foreclosed assets totaled $549 thousand, down from $2.0 million at December 31, 2017. During the first nine months of 2018, the Company had a net decrease of 17 properties from foreclosed assets. As of September 30, 2018, the allowance for loan losses was $31.3 million, or 1.32% of total loans, compared with $28.1 million, or 1.23% of total loans at December 31, 2017.

Mr. Funk commented, "While our nonaccrual loans increased, the necessary reserve set aside for these loans had been identified in prior periods. The allowance for loan losses to nonaccrual loans remains strong at 149%."

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

CORPORATE UPDATE

Proposed Merger with ATBancorp

On August 21, 2018, the Company entered into a merger agreement with ATBancorp, an Iowa corporation, pursuant to which ATBancorp will merge with and into the Company. In connection with the merger, American Trust & Savings Bank, an Iowa-chartered bank, and American Bank & Trust of Wisconsin, a Wisconsin-chartered bank, both of which are wholly-owned subsidiaries of ATBancorp, will become wholly-owned subsidiaries of the Company. After the merger is completed, these banks will be merged into MidWestOne Bank, which will continue as the surviving bank. The corporate headquarters of the combined company will be in Iowa City, Iowa.

Subject to the terms and conditions of the merger agreement, each share of common stock of ATBancorp will automatically be converted into the right to receive (i) 117.55 shares of common stock of the Company, and (ii) $992.51 in cash, subject to certain adjustments as described in the merger agreement. The merger is anticipated to be completed in the first quarter of 2019.

For further information, please refer to the Current Report on Form 8-K filed by the Company with the SEC on August 22, 2018.

Mr. Funk commented, "Our pending acquisition of ATBancorp is progressing on schedule. We look forward to combining these two companies together for the benefit of our customers, the communities we serve, and our shareholders by expanding our platform of financial services."

Quarterly Cash Dividend Declared

On October 16, 2018, the Company's board of directors declared a quarterly cash dividend of $0.195 per common share, the same as the dividend paid in the previous two quarters. The dividend is payable December 17, 2018, to shareholders of record at the close of business on December 1, 2018. At this quarterly rate, the indicated annual cash dividend is equal to $0.78 per common share.

New Share Repurchase Plan Approved

On October 16, 2018, the Company's board of directors approved a new share repurchase program, allowing for the repurchase of up to $5.0 million of stock through December 31, 2020. The new repurchase program replaces the Company's prior repurchase program, pursuant to which the Company had bought 33,998 shares for approximately $1.1 million since the plan was announced in July 2016. The prior program had authorized the repurchase of $5.0 million of stock and was due to expire December 31, 2018. There were no shares repurchased in the third quarter of 2018.

CONFERENCE CALL DETAILS

The Company will host a conference call for investors at 11:00 a.m., CDT, on Friday, October 26, 2018. 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 26, 2019, by calling 877-344-7529 and using the replay access code of 10114836. 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 risk of mergers, including 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 similar services; (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.

Additional Information and Where You Can Find It

The Company filed a preliminary proxy statement with the SEC in connection with the proposed transaction with ATBancorp on October 19, 2018, and will mail a definitive proxy statement and other relevant materials to the Company's shareholders. Shareholders are advised to read the preliminary proxy statement, and, when available, any amendments thereto, and the definitive proxy statement because these documents contain and will contain important information about the Company, ATBancorp and the proposed transaction. When filed, these documents and other documents relating to the proposed transaction filed by the Company can be obtained free of charge from the SEC's website at www.sec.gov. These documents also can be obtained free of charge by accessing the Company's website at www.midwestone.com under the tab "About MidWestOne Financial Group" and then under "SEC Filings - Documents." Alternatively, these documents, when available, can be obtained free of charge from MidWestOne upon written request to MidWestOne Financial Group, Inc., Attention: Barry Ray, P.O. Box 1700, Iowa City, IA 52244 or by calling (319) 356-5800.

Participants in Solicitation

The Company, certain of its directors and executive officers and other persons may be deemed to be participants in the solicitation of proxies from shareholders in connection with the proposed transaction with ATBancorp under the rules of the SEC. Information about these participants may be found in the definitive proxy statement of the Company relating to its 2018 Annual Meeting of Shareholders filed with the SEC by the Company on March 9, 2018. This definitive proxy statement can be obtained free of charge from the sources indicated above. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the definitive proxy statement and other relevant materials to be filed by the Company with the SEC in conjunction with the proposed transaction (when they become available).